Raghuram Rajan, Governor, Reserve Bank of India, fielded a series of questions from the media during the post policy conference at the Mint Street office. He spoke at length about the correct yardstick to measure inflation, the breather on quantitative easing provided by the US Federal Reserve and the growth-inflation dynamic of the central bank. Edited excerpts.

The US has deferred the tapering of quantitative easing. How do you think we should prepare to tackle this when it eventually comes?

The markets were quite prepared for a moderate tapering. The delay has again created uncertainty as the markets would have to again anticipate a tapering.

At home, a substantial number of actions have been taken already. There have been a number of growth-enhancing actions, a number of projects have been cleared and the foreign direct investment policy has been liberalised substantially. All of this will take some time to bear fruit.

The immediate concern, however, is fiscal deficit. To this end, the government yesterday announced measures to tighten expenditure. There is also anticipation that diesel price might be increased in the near future to correct the fiscal imbalance.

This is the course we have to take in order to stabilise our economy. We need the stabilisation irrespective of what the Fed does, because if it does, we are better prepared for the tapering. So let’s not lose the chance of the warning that has been given and celebrate too early as this tapering will come back. So, we must put our house in order before it comes back.

Now that the Fed has taken a U-turn, do we need to worry that the economy would be much weaker down the line?

Perhaps the dangers with any Fed policy are the signals that are read into it. My interaction with the Fed officials was that it was perhaps weaker data in recent days which led to a more accommodative stance. Nevertheless, the point that number of emerging market central banks have been talking about is that how many times we must prepare for the tapering. However, we have to prepare for it again and we will be in a much stronger position to face the tapering.

Globally, what other factors are giving you comfort?

On the external front, the noises on Syria are very comforting. The worry was if there were to be action in Syria then that would push up the price of oil considerably. Even if the oil prices were to rise for a temporary period, it would be somewhat painful for our economy. That negotiations have taken over from actual threat of action, I think is very positive.

I see growth that is picking up in Japan, Europe and the UK as very positive. It is helping our exports — both merchandise exports and services exports. I think it is allowing us to shrink our current account deficit at a faster pace than previously thought.

Will you focus more on inflation and less on growth?

We are worried about both. The emphasis changes depending on the economic situation. Our intent of the policy today was primarily to say the cost of funding is very high at this point. We needed to withdraw these liquidity tightening measures as soon as the market conditions turned favourable. Given that the market conditions have been fairly favourable in the past couple of weeks, we thought we could roll back some of these measures.

I think one emphasis that the market is not picking up is that we are trying to reduce the cost of funding to the financial sector.

On banks’ cost of funds...

The MSF cut of 75 basis points affects a significant quantum of funds that are borrowed from the markets through wholesale deposits, bulk deposits and so on. What we have done today is a significant reduction in the cost of funding. Corporates will be able to return to market borrowing as we remove these emergency liquidity measures.

Which inflation rate will the RBI look at, the WPI or the CPI?

The RBI has always looked at both rates. We have to take everything into account because remember the WPI rate does not contain a significant portion of services inflation. You can just not focus on one. We will wait for the Urijit Patel Committee Report that goes into various factors affecting monetary policy, before we can take a final call.

What is the acceptable number of WPI? Does the earlier figure of five per cent still hold?

Events over the last few weeks have definitely had an impact on what RBI’s view of what the forecast for inflation should be. Take rupee depreciation or take the temporary rise in oil prices, we have to factor these in when we calculate our inflation expectations.

On the positive side, a good monsoon should have a favourable impact on inflation.

After the repo rate hike, there would be negative impact on growth. Would you revise the growth prediction? Also, do you see more inflows after this hike?

You have to be careful in immediately associating a repo rate hike with growth implications. Sometimes, the knowledge that inflation will be lower can actually enhance growth prospects. The hike is also clubbed with a substantial reduction in MSF, which is growth positive. So I want analysts to weigh the measures together. I also believe, from the growth perspective, there are other more important factors for growth. Project completion will be an important issue, power generation in which there is positive news, kharif crops and the sentiments in rural areas will be important. So I would not overestimate the impact of repo rate hike. Of course, our intent is to signal stance against inflation but I would underestimate the negative impact of repo rate hike.

I don’t want to link inflows directly to the repo rate hike. We have taken a number of measures which will bring inflows that will stabilise the rupee.

satyanarayan.iyer@thehindu.co.in

beena.parmar@thehindu.co.in

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