More rate cuts possible if inflation behaves: Rangarajan

The Reserve Bank of India (RBI) could make more cuts to the repo rate if inflation remains on projected lines, the prime minister's economic advisor C Rangarajan said on Tuesday.

The central bank reduced its policy interest rate by a widely expected 25 basis points on Tuesday. The bank took comfort from cooling inflation to make the first cut in nine months, in support of an economy headed for its slowest growth in a decade. Also read: RBI's rate cut will help investment: Ahluwalia
The RBI said there was increasing likelihood of inflation remaining range bound around current levels heading into the 2013-14 fiscal year, starting April.
Going ahead, according to Rangarajan, the nature of the policy will depend very much upon how inflation behaves, but if inflation proceeds along the projected lines there is a possibility of further reductions in the rate. “ Below is an edited transcript of his exclusive interview on CNBC-TV18. Q: The Reserve Bank of India (RBI) in its guidance statement says that it expects inflation to be rangebound and therefore giving it some limited space to address growth risks going forward. Do you read it as a hint that it is ready to cut rates more often or at least in the next couple of meetings?
A: The RBI has taken a very balanced view. I welcome the decision to cut the repo rate as well as the cash reserve ratio (CRR). This will provide a stimulus to economic growth while keeping the efforts to contain inflation under control. Yes, going ahead the nature of the policy will depend very much upon how inflation behaves, but if inflation proceeds along the projected lines there is a possibility of further reductions in the rate. Q: The governor seems to suggest there isn’t much scope for inflation to fall. It is likely to remain at current levels and he states his reasons: rise in administered prices. Food is still not under control unlike non-food manufacturing and therefore you might continue to see it wedged in this 7 percent mark. How would you therefore interpret the term limited space available? Is it just one or two more cuts or what does RBI speak for limited?
A: The interpretation I would put on it is that much will depend upon how inflation will behave because there is a certain projection of inflation as of now based upon the facts available. Therefore, if inflation moves along the lines projected and if we see a significant decline in inflation perhaps there will be larger number of cuts. Therefore, I think one cannot talk about what could have happened to policy changes without looking at what is going to happen to inflation. But certainly it holds out the promise that if inflation behaves along projected lines there is a possibility of further reduction. Q: Let me come to current account deficit (CAD). The governor flags it in a limited sense as one of the key risks. But yesterday’s macroeconomic report waxed much more eloquent on the CAD. In fact, it went onto say that when you have a 4 percent CAD for two consecutive years, it is very difficult for the central bank to stimulate consumption. How do you think this might play out in the coming quarters especially if the Q3 inflation number, which we will know on March 31, comes in well above 6 percent?
A: The CAD is a serious problem. The level of the CAD has been much beyond what one had expected a few years ago. Therefore, the continuance of the CAD will also warrant policy actions. That is why we need to keep all of these things in balance: the need to stimulate growth, the need to contain inflation, the need to contain CAD. All of these are important factors, which will go into policymaking. Q: What do you think the Governor is looking forward to or as a RBI official what would you look forward to from the fiscal deficit? Do you think an announcement of 4.8 percent and an achievement of 5.3 percent will be signal enough for RBI to do more by way of rate cuts?
A: A fiscal consolidation program which aims at 5.3 percent for the current year and reducing it to 4.8 percent will be highly reassuring. If we can achieve that, it will be surely on the road to fiscal consolidation. Q: What is your own forecast for inflation next year, at least the first half and for current account deficit (CAD) for the second half of the current year?
A: As far as CAD is concerned it looks like the second half CAD may more or less be equal to what we saw in the first half. The second quarter was higher than the first quarter. Perhaps the third quarter maybe more or less in the level of the second quarter or even slightly higher. So for the year as a whole we should expect CAD which is more or less equal to last year or slightly higher than last year. As far as inflation is concerned they have indicated by March 2013 a 6.8 percent.
It could be in that range because there are some adjustments to administer prices. Therefore if you look at the overall headline inflation we should take into account the impact of the suppressed inflation becoming open. Therefore taking all these factors into account I would expect perhaps the inflation rate to go down by 1 percentage point over the next fiscal year.