Mumbai: Reserve Bank Governor Raghuram Rajan Tuesday said the future trajectory of the monetary policy will depend on monsoon, the way the government manages shocks, if any, emanating from it and crude prices.
"As we get more confidence on the monsoon out-turn, the government reaction and energy prices, we will have a sense of what is possible on the policy front," Rajan told analysts and researchers on a call after cutting key rates by 0.25 percent in the policy earlier in the day.
He was answering a question on forward guidance for the policy. Unlike other policy statements, the second bi-monthly statement does not explicitly make a mention on the guidance.
Elaborating on the rationale for today's cut and the move forward, the Governor said, "Going forward, a room may absolutely open up if the monsoons is better than currently expected, or if government actions mitigate any potential rise in food prices and if energy prices stay contained.
"Clearly, it is possible that more room may open up and we will take full advantage of it as and when we see room opening up," the Governor said.
Earlier, addressing reporters in the post-policy presser, the Governor had said the decision to cut is a calculative one, where the RBI has decided to "err" to boost investments and help the recovery process.
From a conservative perspective, the RBI would have waited for the monsoon to play out and then cut rate, he said.
Rajan also said the policy is formed with a view on the inflation trajectory for the future.
"We are not saying inflation today is high, that is a mistake that some people are making while looking at our commentary. We do acknowledge the fact that inflation today is below 5 percent. But we have to determine the policy in a forward-looking manner wherein we have to estimate what it would be in the future and determine policy on that basis," the Governor said.
Given the limitations posed by the explicit inflation targets adopted this year, the RBI has done its best, Rajan said, reiterating that it would be a mistake to blame the interest rates as the only stumbling block for revival.
In the policy statement, RBI has increased its January 2016 inflation forecast to 6 percent.
The Governor said timely government intervention can break the links like those between rainfall and food production and the production and inflation.
It will also be "premature" to take the higher inflation for granted, he said, pointing out to instances in the past where strong government action helped curb inflation.
He also said the lower inflation, coupled with lower growth makes it hard for a hike in the minimum support prices for grains, which has the potential to help control both inflation as well as fiscal consolidation.
On the recent unseasonal rains, deputy governor Urijit Patel said the inflation scenario has been largely immune but for one or two vegetables where there has been an increase.
The growth process will be aided by the government's refined spending plans taking effect, while more stalled projects coming on board will also help give it a leg up, Patel said.
Executive director Michael Patra said it will take up to two years to bridge the gap between GDP growth of 7.5 percent and the potential output growth of up to 8.5 percent. Rajan said the potential growth can improve with improvement in the supply side situation and the investment.
He said shortcomings on the supply-side are keeping inflation at levels higher than the desired ones and the monetary policy has to operate in such a way as to ensure that such troubles do not accentuate into wider spirals.
With China resorting to heavy liquidity-infusions, Rajan said no parallels can be drawn between us and the northern neighbour as the two countries are in different cycles of growth.
