Mumbai: As the clamour for a rate cut by RBI grew with the US Fed leaving ultra-low rates intact, Governor Raghuram Rajan on Friday kept all guessing about his next monetary policy move saying the 'key task' is to keep inflation low.
He further said the "excessively low" level of retail inflation at 3.6 percent last month was due to "base effects", excluding which it should be around mid-5 percent.
"The key task is to keep inflation low, not just today but well into the future," the Governor said while addressing industrialists and bankers at an event here.
Rajan has been under pressure to cut the rates further, with the government and industry leaders repeatedly stressing on the need to lower the cost of capital to give a boost to the economy, especially in the wake of retail inflation hitting record low levels and wholesale inflation actually being in the negative zone for 10 months in a row.
Delivering the fourth CK Prahlad memorial lecture on the morning after the US Federal Reserve decided to keep its near zero rates on hold for the eight year in a row, Rajan said, "We have to be careful while pursuing growth and have to make it sustainable." He said that keeping inflation low on a sustained basis is key to achieving this target.
Explaining further, Rajan said, "The 3.6 (percent) we got last month is I think rendered excessively low by base effects (and) if you add back the base effects, it is about mid-5s."
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Rajan, who has cut rates thrice this year, attributed his US counterpart Janet Yellen's decision to delay a rate hike to slow growth in the US and other big economies, and sought to convey it does not change RBI's monetary policy machinations.
"Clearly, thus so far the markets seem to have reacted somewhat benignly, certainly toward us. What we'll have to do is continue doing what we've been doing, which was anyway the intention, regardless of the Fed decision," he told reporters in one of his rare comments on the sidelines of an event.
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The Fed's no-show, coupled with the inflation staying much below the RBI's projected trajectory for many months, has raised the possibility of Rajan delivering a sentiment-driving rate cut on September 29, the next scheduled review date.
To the large posse of reporters looking for hints about RBI's next move, Rajan said, "I know these cameras are here not to see me speak on core competencies but on interest rates - so let me offer my standard disclaimer.
"For any hints on what we will do in the upcoming policy statement, please read the guidance in our last policy statement," he said. At that time, Rajan had linked further cuts to inflation and said that "significant" uncertainties for the monetary policy will be ending in coming months with data on inflation, monsoons and the US Fed's actions.
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"On-hold US Fed paves way for RBI rate cuts," Singaporean brokerage DBS said in a note this morning, citing lower-than- expected headline retail and wholesale price inflation.
However, Rajan's comments keep the rate cut advocates guessing.
On transmission of earlier rate cuts by banks, which has not happened in the way the Reserve Bank wants it and is a key variable that will influence its decisions, Rajan acknowledged that deposit rates are taking time to get repriced and it is a "matter of time" before banks lower their lending rates.
With the ebbing of inflation concerns, RBI shifted its policy stance in January to being more accommodative of the concerns on the growth front. It has cut the key rate thrice by a cumulative 0.75 percent. Against this, the banks have only passed on an average of 0.30 per cent in their lending rates, resulting in the RBI asking for more.
Rajan said RBI is "nudging" lenders to adopt newer ways of calculating base rate like the move to adopt marginal cost of funding, and it is a matter of time before they are decided by benchmarks like the Libor.
On the growth front, wherein the June quarter GDP expanded at 7 percent, coming down by 50 bps from the March quarter print, making a stronger case for a stimulus from the central bank, Rajan said the key in the pursuit of growth is to make it sustainable.
The difference between the consumer price inflation and wholesale price inflation is "certainly is a source of problems", Rajan said, stressing that this differentiates between different sections of the economy.
Rajan pointed out that prices of finished goods have not fallen as much as the input commodities and therefore, even those trading in such goods are able to maintain or expand their margins in a situation of negative WPI.
The Governor also noted that consumers should not worry much as with the climb-down in inflation, as its getting a higher real interest rate.
With non-performing assets continuing to be a problem, Rajan reiterated his earlier stance, saying the process of restructuring was discontinued for ensuring that there are no delays in recognition of problems, and added that there is enough in the laws at present for the banks to lend even for a NPA account.
He also called for banks to get project evaluation skills done in-house rather than depending on external consultants, and advocated lateral hiring of specialist from the market, saying higher wages paid to them will help the state-run banks avoid more costly problems otherwise.
Rajan welcomed the Finance Ministry's move to come out with a Bankruptcy Code like in other countries, saying it will help in NPA resolution as well as in deepening the struggling corporate bond market by giving investors clarity on whose rights take precedence.
The combined bad loans, including NPAs and restructured loans, in the system has shot past 13.5 percent as of the June quarter.
Rajan also said he is all for expanding the capital base of asset reconstruction companies by getting more investors, but sounded cautious about efforts to have public private partnerships in this regard.
A bulk of risk in asset reconstruction should be taken by the private sector entities with professional expertise, rather than by state-run ones, he said, pointing out that the atmosphere on suspicion created by allegations of malafide decisions only makes it essential to have least involvement of public money in such efforts.
Stressing on customer protection, Rajan said the RBI will be spending more energies on "field checks" like ensuring that the number of ATMs cited in official data are working.
Rajan also spoke in support of more reforms in the financial sector, and chose much-criticised derivatives space to point out that there is a difference between a speculator and a market manipulator, and the presence of the former is crucial to a system.
