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Not out of the woods yet, says Rajan

Says RBI is still trying to understand the data and will wait till Feb 9 when the quarterly growth numbers will be released by govt

BS Reporter  |  Mumbai 

While the gross domestic product (GDP) numbers that were released by the government last week taking into account a new base year made the economic performance of the last two financial years better, the Reserve Bank of India (RBI) cautioned that it might be a bit too early to celebrate.

In the post monetary policy conference call with researchers and analysts, RBI Governor Raghuram Rajan said the central bank was still trying to understand the data and would wait till February 9 when the quarterly growth numbers would be released by the government..

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"We are still trying to understand it (the revised GDP number), we will see the February 9 releases and the end-February release before we come to strong conclusions. We are reaching the outskirts of the woods but we are not out of the woods yet. So I don't think that we will put too much weight on any data that suggests we are out of the woods at this point," Rajan said.

The revised definition of GDP and the new base year has pushed GDP to 5.1 per cent for 2012-13 and 6.9 per cent for 2013-14 as compared to 4.5 per cent in 2012-13 and 4.7 per cent in 2013-14 as part of the old series.

As part of the new definition of the economic growth, GDP is estimated at market prices, which includes indirect taxes but excludes subsidies. Earlier, GDP growth was estimated at factor cost, which excludes indirect taxes but includes subsidies.

Rajan said concerns around inflation remain though it continues to trend downwards. After cutting its key policy rate a fortnight ago, RBI left the repo rate unchanged during the sixth bi-monthly policy review announced Tuesday and decided to wait till the Union Budget, which will test the government's resolve to stick to the medium term fiscal deficit target.

"We still have concerns about inflation. Given the deflationary environment elsewhere, it's actually easier for us because we are not fighting inflation in an environment where inflation is picking up elsewhere. So, I think we are still in conventional monetary policy territory." he added in the analyst call.

The Consumer Price Index (CPI)-based inflation rose to five per cent in December from 4.38 per cent in the previous month, primarily due to a rise in food prices but has been below RBI's tolerance zone of six per cent. This was a key reason why the central bank cut repo rate by 25 basis points to 7.75 per cent in January.

Rajan said the move to cut rates before the policy was also to correct the perception of RBI being tardy in this regard.

"We respect the importance of monetary policy dates but decided to move as soon as data permitted. Given that there was in some quarters, a public perception that the RBI was tardy, we wanted to say we understood the need for action as and when we had information and we were prepared to act even outside policy dates. And it was useful to signal that," said Rajan.

He also believes that more tax sops can be provided in order to boost individual savings. "The real tax benefit has fallen over time primarily because that limit was at Rs 1 lakh for a long time. So may be what we have to do is increase that," added Rajan.

In the previous Budget, the investment limit under Section 80 C of the Income Tax (I-T) Act that qualifies for tax exemption was increased by Rs 50,000. Bankers have also been asking for more tax incentives on bank deposits.

To provide inflation-adjusted returns the government had also introduced Inflation-Indexed bonds. However, more than a year after the launch the financial instrument has failed to take off and now RBI is looking at ways to make the product more attractive.

"We have been in a dialogue with the government to improve its features for the retail investors and that is work in process. As far as institutional investors are concerned, we have also asked the government to link that, too, with retail inflation. So we are still having discussion with them," said H R Khan, deputy governor.

First Published: Thu, February 05 2015. 00:41 IST