'Our focus in terms of policy choices is to get headline inflation to 4%'

RBI increased the repo rate by 25 bps to 6.50%

Reserve Bank of India Governor Urjit Patel & other top officials spoke to the media about the decision to raise the repo rate, their views on inflation and the ongoing global trade skirmishes. Edited excerpts:

With two rate hikes and a 4 per cent-plus inflation projection till Q1 of FY20, why is the neutral stance appropriate? 

Urjit Patel: First, many of the risks that we have considered in our projections are on both sides, that is why we have said that these projections are against the backdrop of balanced risks. Second, there is a fair bit of uncertainty around the consumer price inflation and, therefore, it was important that we kept our options open depending on the prints coming over the next few months, given the volatility. That is why we have emphasised we would need to monitor the domestic inflation outlook in the coming months. 

What is the cause of rising inflationary pressures, especially in the core inflation over the medium term? 

Michael Patra, RBI executive director: It is difficult to set out exact projections for the items in core inflation for the medium term. Currently, we are seeing pressures getting generalised across services, especially in health and education, and a large number of miscellaneous services that enter the basket of the common person. There are several causes, some of them are cost-push as the governor indicated there are input costs feeding through. There are also staff costs in the organised sector that are passing through. Also, there might be demand pressures starting up.

What was the key reason for hiking the policy rate today? 

Patel: To ensure that, on a durable basis, we come to and maintain the 4 per cent (inflation) target. We have been away from the 4 per cent number for several months now. We took two steps, once in June and then in August, to maximise our chances that we don’t drift away from 4 per cent and, in fact, move towards 4 per cent on a durable basis. 

How concerned are you about core inflation, which has touched 6 per cent? And, the impact of minimum support prices is yet to come… 

Patel: Our mandate is to target headline inflation and, therefore, while we look at its components, our focus, in terms of policy choices, is to get the headline inflation to 4 per cent or thereabout. 

There are three ‘too big to fail’ banks in the country. One is in the midst of a controversy. Is there any engagement from the RBI? Is there a bigger issue of governance in the private sector banks? 

N S Vishwanathan, RBI deputy governor: It is not appropriate for us to discuss any specific bank. But, we are alive to what is happening in the system and we are dealing with those situations as they are emerging. For ‘too big to fail’ (banks), there are global standards and we have adopted many of those principles. 

What is the possible fall out of the trade war on the economy? How is RBI preparing to address that? 

Patel: We have already had a few months of turbulence behind us and it looks like this is going to continue. The trade skirmishes evolved into tariff wars and we are possibly at the beginning of currency wars. We have to ensure we run a tight ship on the risks that we control to maximise the chances of ensuring macroeconomic stability and continuing with a growth profile of 7-7.5 per cent.