RBI had to look beyond headline inflation number: Governor Urjit Patel

In an interview with CNBC-TV18, RBI governor Urjit Patel explains change in policy stance, says he is open to valid criticism


RBI governor Urjit Patel says remonetization, following the Narendra Modi government’s demonetisation move has happened at a fast pace. Photo: Bloomberg
RBI governor Urjit Patel says remonetization, following the Narendra Modi government’s demonetisation move has happened at a fast pace. Photo: Bloomberg

Unfazed by criticism of the way the note ban was handled, Reserve Bank of India (RBI) governor Urjit Patel said he has grown a thick skin on the job. He stressed that the economy will make a recovery after a short drop. “Almost everyone agrees that the impact is going to be a sharp ‘V’,” Patel said in an interview on Friday. On the change in monetary policy stance from accommodative to neutral, he added that the central bank had to look beyond the headline number. Edited excerpts:

Do you think that in your estimate, the economy will be able to shake off the negative impact of demonetization?

Almost everyone agrees that the impact is going to be a sharp “V”, that we will have a downgrade of growth for a short period of time. Remonetization has happened at a fast pace and that was part of the plan that subsequent to the withdrawal of the specified banknotes our production plans and supply processes would ensure that remonetization happened as quickly as possible.

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Looking back at the last 100 days, do you think that the principal objectives of the exercise have been met? Do you think that corruption has been reined in and counterfeiting as well?

There were several objectives behind this. For RBI, fake Indian currency notes was an important issue that needed to be addressed. The other collateral benefits from this, in terms of greater accountability, better public finance and more transparency are by definition areas that take time to fully play out. We have also had financial re-intermediation, in terms of greater financial savings going into deposits, mutual funds and insurance. So, there have been a fair number of benefits. Even the impetus given to digitization should be beneficial going forward.

Many commentators were expecting that you would go in for a rate cut given the low headline inflation rate. But you did not do that and you shifted the monetary policy stance from accommodative to neutral. What are your reasons?

Since we have committed to move closer to 4% inflation because of the legislated and notified mandate of the government, we needed to look beyond the headline number to see where the kind of disinflation that is needed to take us towards 4% would come from and the monetary policy committee (MPC) felt that inflation, excluding food and fuel, is something that has been stubborn since September-October and has shown little sign of coming decisively below 5%. That was the main reason why we had to look through headline inflation.

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The other reason is that the effects of demonetization, and now remonetization, may also impact some of the commodities where we have seen disinflation, but we do not know to what extent and for how long. It is most likely going to be short-lived.

And that was why the MPC thought that we needed to have the flexibility going forward and therefore the shift in stance from accommodative to neutral.

We also find that internationally, commodity prices have firmed up, the international food price index has gone up, the base metal price index has gone up; crude prices continue to be in the mid-50s and staying there for some time given the data of the past few months.

How should we understand and interpret the neutral stance? Does it mean that there will no rate cuts in the next three months or no rate cuts in all of 2017?

The monetary policy committee could either keep rates constant, increase them or bring them down. There are three options possible compared to when it was accommodative. So, given how the inflation outlook changes, if at all, over the next few readings in terms of the data that comes out and our projections based on that for the next fiscal year, policy changes could be either one of those three.

Under what circumstances would you consider a rate cut? Is inflation the only thing or are there other factors in the mix as well?

We have been mandated by the government and by legislation to have an inflation target of about 4%... Therefore that is our main objective in terms of the policy of the central bank, which is now determined by the MPC.

Does this stance of yours mean that the economic recovery could be sooner and sharper than what most forecasters are predicting?

If you look at our projections that were published last week as part of the MPC, we expect growth to be about 7.4% in the next fiscal year, which is about 50 basis points more than the projection for the current fiscal year. Therefore, there is a recovery compared to this fiscal year going into next year.

How do you respond to the recent criticism of the RBI? Do you personally feel upset about it?

No, I think that it is important that one grows a thick skin fast in this business and I think we have done that. We have gone about our work, we had undertaken major challenges during these past few months and valid criticism is something that we are open to.

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