A decisive change in stance

A decisive change in stance

Mumbai: The inflation trajectory has changed and with this there is a decisive change in the central bank’s policy stance, said Reserve Bank of India (RBI) deputy governor Subir Gokarn in an interview. Edited excerpts:

Growth is slowing, but you haven’t changed your growth projection.

We haven’t changed it because there is a range of possibilities which we considered. There may have been some tweaking in the sectoral growth patterns, which we don’t publish. So we worked bottom up—some things have gone up, some things have gone down because of whatever drivers, and so the aggregate comes out to 8%. Keep in mind the fact that although the estimate for 2010-11 is now 8.5%, based on the new IIP (Index of Industrial Production) data, we could see an upward revision. So the decline from 2010-11 to our projection of 2011-12 may be somewhat higher than is currently indicated.

The policy speaks about the absence of complementary policy responses. What do you really want the government to do?

Well, I think as a system we need to recognize that monetary policy is only one component of an anti-inflation or inflation-management strategy. It can assert a certain number of tools and it can have a certain kind of impact. We have pressures that are fuelling inflation which are outside the ambit of monetary policy. On the supply side, this relates to bottlenecks in particularly food and infrastructure, which are driving prices up as demand continues to exceed.

Without a supply response, these pressures will persist and get entrenched in the system, and it will become over time that much difficult to deal with.

When you have a combination of factors that are actually either putting price pressures from the supply side or resistant to interest rate action on the demand side, then the effectiveness of interest rate action tends to be low. It’s not that it’s not there, but it tends to fall disproportionately on one component. In order to achieve a given reduction in demand, you have to, therefore, raise the interest rate that much more because of all these other factors.

Are you hinting that the government policies may not be appropriate?

I am not hinting at anything about government policy being appropriate or not appropriate. We are just saying that there is a set of policies that have to be complementary to each other in dealing with inflation. And if one of them is not making the contribution, clearly on the supply side in terms of food and infrastructure, then others will have to take up the slack. Essentially, if you have a combination of things going on and if one or two are less than fully effective, then the others have to tack up the slack. That’s what essentially we are saying.

So far you have been saying RBI needed to have a “calibrated approach", but this time this term is missing.

No, you are wrong about “so far". That’s a wrong characterization. We took a decisive change in stance in May. Don’t confuse calibration with the current stance. This is a decisive change in stance.

Your outlook is very open-ended.

Our outlook on inflation has been very specific. We have a monthly projection; we have a fan chart.

What is the outlook on likely policy action?

We cannot make a commitment on monetary actions. We have to respond to circumstances. But our guidance is very clear, very precise and very specific. Two factors that we are watching are the dynamics of global commodity prices and the dynamics of domestic growth. The combination of two took inflation to the trajectory that we saw in the early part of 2011 and it is (in) these two factors that we will look for any change in order to give us any indication of a change in stance.

By going for a 50 basis points (bps) hike, are you front-loading your hikes?

No, I don’t think it is front loading. It is a matter of responding to a particular situation. There are two factors that we have to keep in mind, going into this decision. Inflation is high and it is likely to remain high. These two factors, the global situation, the early signs of slowdown and moderation in growth—taking all these into account, we felt that the inflation number is just too high to not to respond to aggressively.

The danger is, as we been have accused of repeatedly in the past, that in responding too mildly to inflation shock, that expectation starts to get entrenched and you just have to keep working harder and harder to address it. Now, we don’t see this as an issue as the trajectory of inflation in 2010 is quite different than the trajectory of inflation in 2011. The new trajectory warranted a new and more aggressive approach.

You have hiked the inflation projection. How confident are you on achieving it?

As confident as we are in any forecast. We always make a projection, based on certain assumptions. The critical assumptions here are that oil prices will be around $110 a barrel and we will see some moderation in growth in some sectors... If the assumptions broadly pan out, our forecast should be reasonably accurate. But if any of these assumptions change, we obviously have to rethink as we go along.