Mumbai : A continuing plunge in crude oil and other commodity prices in global markets offers one of the best and the lowest-cost means to choke the inflation fangs sustainably and India must take advantage of this scenario, RBI Governor Raghuram Rajan said.
“We must take advantages of these propitious circumstances (of lower crude and global commodity prices) once and for all to get inflation down. If we can’t get it down now and say ‘Look, we will try again later’, I am not sure we will get better circumstances. And we can do it relatively low-cost now,” Rajan told analysts in the customary post-policy concall this afternoon.
Calling for more efficient supply side management, the RBI chief further said such a measure along with lower crude and commodity prices, more supply side steps must kick in more strongly to reduce the bottlenecks and reduce the pressure on inflation. “Hopefully, over the next year and and-a-half, we will see some of the measures that have been taken so far come in more strongly,” Rajan said.
In these disinflationary episodes, eventually expectations of the public get more anchored and then work their way into variety of places including wages and so on, he added.
Rajan said he is not trying a Volckerian disinflation method as interest rates haven’t gone higher than 8 per cent. “If we can bring down inflation sustainably with only a mild cost to output, I think we would have created a very important change in the economy,” the Governor said.
On the steep fall in crude prices since the Iran nuclear deal, Rajan admitted that RBI has not taken into consideration the full impact of this in its models which has oil price in the mid USD 50-levels.
“So if oil stays significantly below that, it would be a very positive factor.” Crude is trading at USD 47-49 a barrel while the 2018 WTI crude futures are quoting USD 49 a barrel indicating that oil prices will not move up too fast in medium term.
RBI’s executive director Michael Patra, who is in the monetary policy department, said when petrol and diesel are taken out of the inflation basket, one would still see that underlying inflation has not stabilised. But, it has actually picked up, which is a matter of concern, because it includes non-tradables, inflation from which is very sticky, Patra added.
This was one of the three main reasons that the Governor cited earlier in the day for adopting a status quo on the rates front, with the other two being the tricky monsoons and the banks holding onto higher rates despite a 75 bps cut by RBI since January.
On the lowering of January 2016 inflation target by 20 basis points, the Governor said,
“As we get closer to the end of the year, we need to re-adjust. “We have said that we are going to move towards 5 per cent towards the beginning of 2017. As we get closer to the end of 2016, that will become more our medium-term target.”
On the core inflation concerns and underlying demand conditions, deputy governor Urjit Patel, said at the current reckoning, the pick-up in inflationary expectations appears to be transient and should wear off.
Patra said the uptick in June inflation to 5.4 per cent is a typical pre-monsoon seasonal upturn and should disappear in the coming month. But you have to remember August is also critical for sowing. So rainfall in August will be watched very carefully.
Govt hopes RBI will cut rate next month
With inflation under control, the government hopes that RBI, which has maintained status quo in today’s monetary policy review, will cut interest rate next month to boost much-needed investments and growth.
The Reserve Bank, said Finance Ministry sources, will take into account the impact of monsoon, likely crop yield and policy action by US Federal Reserve, and in all likelihood announce a cut in the key interest rate.
Rajan not worried about Fed rate hike
Ruling out any major disruptions in domestic market as and when the US Federal Reserve hikes its record low interest rates, Raghuram Rajan said he is not worried about its impact on the Indian economy. The impact of the Fed action has already been factored in by the markets the world over as it is one of the “most awaited things in history in recent times and so nobody really reacts when it happens,” Rajan said.
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Crude oil drops below $50 again
In a repeat of the plunge at the year’s beginning, global crude oil prices dropped below the psychological $50-mark per barrel, from around $115 last year — this time in the wake of the Iran nuclear deal last month.
Indian basket of crude oil fell on Monday to $50.63 a barrel. One of the reasons for the strength of the Indian rupee is the falling price of oil which has brought down current account deficit.
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