Inflation still a concern, says RBI governor Rajan

RSTV Bureau
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File Photo(PTI)

A day after keeping interest rates unchanged, RBI Governor Raghuram Rajan on Wednesday said inflation is still a concern for the central bank and the monetary policy continues being “conventional”.

“We still have concerns over inflation. So, given the deflationary environment elsewhere, it is actually easier for us because we are not fighting inflation in an environment where inflation is picking up elsewhere. I think we are still in conventional monetary policy territory,” Rajan said during a conference call with analysts.

Rajan, who became RBI chief in September 2013, on Tuesday chose to keep interest rate unchanged for the seventh time, out of 11 monetary policy decisions announced under his regime so far. He also made it clear that he would not like to do a “flip-flop” on the same.

The emergence of satisfactory data – inflation trending low and household expecting it to cooling – had resulted into a surprise announcement of a 0.25 per cent rate cut on January 15 to stimulate growth.

Data released for December indicated a rise in the headline consumer price inflation to 5 per cent from the 4.38 per cent in the preceding month. This was still much better as compared to the RBI target of getting it at 6 per cent by January 2015.

After signalling on Tuesday that the RBI will be keenly watching progress on fiscal consolidation, Rajan gave more details on RBI’s expectations from the upcoming budget, saying it is the quality of the measures which is important.

“A movement of spending from mistargeted or poorly targeted subsidies towards more capital investment would be a good move,” he said, adding that such a thing will also be good from the inflation management perspective, as supply side will benefit out of capital spending.

For increasing the saving rate, which has dipped to 30 per cent, Rajan also advocated for increasing the tax benefit for small investments in financial instruments like PPF, PF, insurance policies etc under Sec 80C.

“Remember the government increased the limits for tax benefit in savings by Rs 50,000 in the last budget. The question is — is there room for more primarily because the real tax benefit has fallen over time because the limit was at Rs 1 lakh for a long time? May be what we have to do is increase that,” Rajan said.

On growth, Rajan clarified that the change in computation will not result in a change in the way RBI looks at the economy and reiterated that it is awaiting the release of the new numbers on February 9.

On real interest rate target of 1.5-2 per cent, Rajan said the positive thing from a savings perspective is that we are in the positive territory from an inflation management perspective, but sticked to the target spelt out earlier.

There would be case to expand the target beyond 2 per cent once we are in a period of sustained high growth, but given that we are only emerging out from problems, the 1.5 percent to 2 per cent band is a fair one, he said.

Deputy Governor Urjit Patel also defended the RBI move to take into account the repo rate, and not the deposit rates, while computing the real rate of interest, saying the rate set by RBI is a universal one which is relevant for the entire country.