Global factors will determine rate cut in July: Rangarajan

Although overall inflation is in the comfort zone of RBI, food inflation, widening current account gap and a falling rupee continue to worry the Reserve Bank of India, says C Rangarajan. The RBI has refrained form cutting rates today, June 17, citing inflationary pressures, which Rangarajan says was a cautious stand.

Speaking to CNBC-TV18, chairman of PMEAC C Rangarajan said the decision on rates in the July 30 meet will depend on various global factors. Although overall inflation is in the comfort zone of RBI, it is food inflation which is worrisome. If monsoon pans out as foretold, food inflation too will moderate, Rangarajan said. Also read: Is RBI inaction cursor for govt to act on rupee, inflation? Below is the edited transcript of the C Rangarajan's exclusive interview on CNBC-TV18: Q: It is a no-change policy from the Reserve Bank of India (RBI). You would agree with that stance given the way recent things have moved on the currency etc? You think they did the right thing in waiting?

A: Yes, I think it is a difficult choice. The RBI has taken a cautious stand. From what I see in the statement, the decision has been largely influenced by the external sector consideration. The current account deficit (CAD) is high and more recently the rupee has been under pressure. This appears to have been a major factor influencing the RBI to pass this stand. Q: I would draw your attention to that statement in the guidance, which says that it is only a durable receding of inflation that will open up the space for monetary policy. They point out to risks of persistent high food inflation, dangers that come from administered price being increased including minimum support price (MSP) as well as rupee depreciation. Would you say that further cuts even on July 30 are under a cloud?

A: We do not know what the RBI will do by the end of July. There are still six weeks more. We need to look at how the economy will evolve. But on the price side, I see the current trend more or less continuing even though there are certain administered prices, which need to be revised. But even the depreciation of the rupee will have some impact on the price situation.

On the whole, I believe that what happens on the external situation in the next six weeks will again determine what the RBI will do. If the capital flows are resumed and if the rupee is not under the kind of pressure it has been in the last few weeks, the RBI would have an increased space to operate. I personally think that the external sector considerations will again be the predominant one even by the end of July.  Q: That is a fair point because immediately after announcing that there will be no cut in cash reserve ratio (CRR) or in repo, the sentence that comes from the RBI is the stance involving growth inflation dynamic as well as recent developments in the external sector. So you have read their mind as they are influenced by the external sector but nevertheless they have opened a new area of concern which was always there but is now apparently expressed more explicitly which is food inflation. Given that food inflation remains high, the inflation outlook will be influenced by the concerted efforts to break food inflation persistence. We know the last consumer price index (CPI) and WPI number would hurt by the high food inflation number, if they continued in that level in the June reading which will be available to the RBI in the July 30 policy, do you think they will be hamstrung, do they look like they are going to pay a lot of attention to food inflation and should they?

A: No, I think food inflation still remains high and perhaps as the monsoon's progress, the expectations regarding price increases in the food area might come down and therefore it can have a moderating influence on food inflation.

But you will see that in the WPI, despite a high food inflation, the overall inflation continue to remain in the comfort zone, it was only 4.7 percent and the non-food manufacturing inflation was well below that number. Therefore, we need to watch for all these numbers. But at the same time, as I have said earlier, the major factor influencing the RBI in its decision will be what happens on the external front.