Monetary policy will be inflation data-contingent: RBI

Sarkaritel
By Sarkaritel October 1, 2014 11:03

Monetary policy will be inflation data-contingent: RBI


Mumbai, Oct 01  Given that inflation is expected to level at around 7 percent by 2016, the Reserve Bank’s monetary policy going ahead will be contingent on relevant data coming in, RBI Governor Raghuram Rajan said Tuesday after announcing the central bank’s fourth bi-monthly policy review.

“Given the modelling of inflation, which says the expected level by 2016 is 7 percent, the risks are still to the upside,” Rajan told reporters here.

“We are currently positioned to reach 6 percent by 2016, given where the rate (inflation) is. Our expectation is that we will reach that target. The (future) policy will be data-contingent,” the monetarist-inclined governor said.

“If the data come in and say that we are going to miss the 6 percent inflation target, we will have to tighten and if the data say we are going to do better than 6 percent or earlier than January, we will be more accommodative,” he added.

Saying that the country is currently positioned to reach the central bank’s inflation target of 6 percent by January 2016, Rajan Tuesday decided to keep the lending rate, or the repo rate, unchanged at 8 percent, while retaining the short-term borrowing, or reverse repo rate, at 7 percent and the cash reserve ratio (CRR) at 4 percent.

Consumer price index (CPI) -based retail inflation eased to 7.8 percent in August from 8.59 percent in April. Wholesale price index (WPI) inflation has also eased to 3.74 percent in August from 5.55 percent at the start of the current fiscal.

The RBI has set a target for CPI inflation at 8 percent by January 2015 and 6 percent by January 2016.

It had first mentioned the upside risks to the 6 percent inflation target at the August policy review.

“We are a little better than we were in August, but there are still risks in achieving the 6 percent target,” Rajan said.

While pointing to the impact of various disinflationary forces, like low oil prices, stable exchange rates and a softening in rural wages growth, the governor said: “There are uncertainties still, for instance on how food inflation has evolved. Headline (inflation) is still buffeted by food inflation.”

“There are some discrepancies between our modelling of inflation, which says it will be 7 percent and the inflation stance or the policy stance taken by all of us putting our judgement also to work. Our judgement is that given all that we know about what is happening, and some of it is models plus subjectivity, that we can still reach 6 percent by Janaury 2016 given where we are today,” Rajan explained.

On the statutory liquidity ratio (SLR), which has been increased to 5 percent from 2 percent, Rajan said the intention is to give banks with liquid securities the required flexibility in management.

He also said that as government finances improve, the SLR will be brought down further. In the past two policies, the RBI had reduced SLR to 22 from 23 percent.

Sarkaritel
By Sarkaritel October 1, 2014 11:03