RBI Deputy Governor Subir Gokarn gives insights into the processes of maintaining a fine balance between facilitating growth in a depressed global scenario and using the tools at its disposal to combat inflation,in a conversation with Subhomoy Bhattacharjee.
How did RBI play the announcements on FDI,oil subsidy etc made by the government just before the mid quarter policy?
Had these reforms not been taken,the expectations from RBI would not have been very strong. The inflation numbers are worrying enough not to go for a reduction in rates at this stage,but the RBI actions coming on the back of the government performance was the new factor that changed expectations somewhat.
From the analytical side,though,we felt this (not to change the repo rate) was the best reaction. Liquidity is of course a separate focus. We have been trying to delink it from monetary policy actions. The stress here is to keep a watch on the maximum extent of deficit in the liquidity conditions that would be consistent with our projections. You would notice it has been very comfortable for the past few weeks. Yet we didnt want liquidity to disrupt credit flows,so lowering the cash reserve ratio,as we did now,is consistent with the stand of not disrupting growth rate and yet managing inflation. It was one thing we felt we could do comfortably without much risk.
Since you have been using action on CRR with repo regularly now,can we assume that RBI is back to using the two instruments to meet its goals?
They both work in tandem. We wanted to put some sort of floor on the rate of credit flow,the amount the banks lend. Our position is very clear that the flow of credit should not dip. From that perspective,use of CRR is best when liquidity is slightly in deficit,because a liquidity surplus compromises the effectiveness of monetary policy transmission. In an anti-inflationary stance it is better to have it in deficit. But a large deficit too is unwelcome. So the balance to strike is to keep it in the comfort zone while allowing the repo rate to signal our stance on inflation. Each instrument has a specific role.
How do you react to the criticism that RBIs signalling has been very hawkish? That it has affected growth?
I think the basic way in which monetary policy works is through its impact on growth. To say there will be no impact on growth is to misunderstand the role of monetary policy. The question to ask is whether the interest rate is the sole reason why growth came down in the economy. That is a debate we can have. We have done some analysis recently,which shows that only about one-third of the growth deceleration is attributable to interest rates. Now one can argue whether it is one third or some other number,but what it means is there are other factors at work. What are these factors? Some of these are global the slowdown in China,for example,is also a factor and there are domestic reasons.
How do you measure impact of monetary policy actions?
We have to recognise that there is an impact of factors outside monetary policy which affect the outcome. But,to focus on monetary policy itself,we need to look at demand conditions in the economy. To assess demand conditions we look at core inflation,which possibly is the best measure. It is a good sign that it has come down sharply to a range of 5-5.5 per cent. There are other measures too which we track.
How do you decide on the timing of actions?
Decisions on when and by how much to act are based on a complete assessment of the signals that emerge from data,surveys and inputs from consultations. This assessment also has to be forward-looking,since it takes time for actions to have an impact. With this wide range of inputs,it is a matter of judgement. There are multiple outcomes and multiple scenarios to be recognised.
You have been making room for a lot of consultative practices?
We have. In the formulation of our quarterly credit policies we hold consultations with bankers,economists,businessmen and others .
The Planning Commission has recently talked of a worst case 5 per cent rate of growth of GDP. Even otherwise since 2008 our integration with the world economy has grown deeper. So is it possible to target an 8 per cent plus rate and risk making wrong adjustments where a much lower growth may be more plausible?
This is a very important point. The global economy is decelerating and in that situation,do we have the ability to off-set those global forces? This is the critical attribute of the large domestic economies,which was highlighted in the BRICs report. So,in dealing with a prolonged global slowdown,we have to look at doing things domestically that will help accelerate growth. If we do the right things,our growth outlook need not necessarily be driven entirely by the global outlook. But,even in the best scenario,the global situation will have a bearing on how economy performs.
There are question marks on household inflationary expectations survey…
Yes,I talk to my counterparts in other central banks about this. It is true that such surveys tend to capture what has just happened. Peoples immediate experience becomes a basis for their projection into the future. Nevertheless,we think this survey is useful in giving us a sense of whether recent changes in inflation rates are significantly impacting expectations,either upwards or downwards. It is one of the several inputs into the policy decision.