‘We are pursuing policies that will together raise growth and bring down inflation’

Why didn’t you cut rates?

Balancing growth and inflation has been a difficult challenge. There are two variables that determine the market rate of interest. One is the policy rate and the other is liquidity considerations. A rate cut by itself may not help if liquidity is tight. Looking at the current inflation numbers,we thought we must maintain the rate where it is. There are liquidity constraints — both because of structural and fictional factors. Our assessment has been that these constraints will persist in the next a few months. So our endeavour was to ensure that any liquidity tightness should not take rates higher than they would be and the liquidity should be comfortable that the transmission from policy rate to base rate and then to lending rate. We want the liquidity to be in deficit… deficit to be small enough so that there’s no inhibition to transmission.

Is there a disconnect between the RBI and the government?

I don’t think so. Both the RBI and the government have shared goals — to raise growth and restrain inflation. We have our responsibilities cut out. I believe we are pursuing policies that will together raise the growth rate and bring down inflation numbers.

The government says it “will walk alone”. Is it right to say that the shared views are not necessarily matching?

I can’t interpret the finance minister’s statement for you. I can only say that for the government and the RBI,there’s no disconnect.

How convinced are you about the commitment made by finance minister on bringing down fiscal deficit?

It is a reassuring step because we all had our own estimates about what the fiscal deficit this year might be. The finance minister reaffirmed his commitment both in the short-term and the medium-term and indicated this year it would be 5.3 per cent. He gave some broad details how it might be achieved. Beyond that,it will depend on how he will be able to deliver on those tax realisation proposals and expenditure compression. As far as the RBI is concerned,we take his statement at its value and go on that basis.

Do you think we have reached a point where growth is of more concern than inflation?

Growth is a concern. Our projected growth rate is 5.8 per cent and the potential growth rate is 7 per cent. On the other hand,inflation at 7.5 per cent and likely to go up is also a concern. We have one instrument,i.e. the interest rate,which at the same time has to support growth and bring down inflation. We have got to calibrate it carefully. So we thought this is not the time enough for signalling and softening the inflation stance.

Was there pressure from the government?

There was no pressure… except the pressure that you saw in the public.

Do you think we are moving towards slowing growth and sticky inflation,or a situation like stagflation?

Stagflation is when there is persistent high inflation and low growth. You must note that the output gap we have,has been relatively low and coming down… and is of recent origin. So to characterise the present situation when output gap is shrinking and likely to shrink further due to policy actions,as stagflation is inaccurate.

The RBI has been following a tough monetary stance for some time now,but inflation has not been coming down…

We don’t know the counterfactuals… how much the inflation would have been if the RBI had not tightened. Inflation has come down from 10.5-10.9 per cent in November 2010 to 7.5 per cent now. We expect it to come down further. Also inflation has some structural factors – both external and domestic. External is oil prices,which,because of the subsidy component is inelastic. That’s driving up inflation. There are domestic supply constraints on infrastructure,food side etc. The RBI can restrain inflation through demand management but a long-term solution has to come from supply response.

Is high rates hampering investments in the country?

We have taken a position that real interest rates are

lower than they were before the crisis when investments boomed. Interest rate is a consideration but I don’t think it’s the sole consideration. There are other inhibiting factors which need to be resolved. When the growth-inflation context permits,we will adjust the interest rate.