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In an interview with Karan Thapar on CNN-IBN’s Devil’s Advocate show, Reserve Bank of India Governor Raghuram Rajan discusses inflation targeting, growth, interest rates and subsidies. This is the second part of the interview where Rajan talks about the Urjit Patel Committee report.
Let us come to the Urjit Patel report which if accepted will significantly change the way the RBI sees its role and how it functions. In comments that you made on Tuesday many people got the feeling that you were inclined towards accepting it. Have they correctly understood you or have they misinterpreted you?
The Urjit Patel Committee report has had the remit of looking at our entire monetary framework and suggesting changes. Some of those changes can be done immediately because they give us some technical support in what we are trying to do, some of those changes require a broader political discussion with the government, with parliament etc. So what we think is variable to what we are doing now, we can take on which is what I did when I said they have given us a glide path to bring down inflation. Our mandate is to bring down inflation. So they have told us you can do it comfortably over a couple of years, bring it down to 8 per cent at the end of this year to 6 per cent at the end of next, that seems to me something which has been done with a fair amount of analysis, well within our grasps, let us pick that up. There are more detailed recommendations on the structure of monetary policy committee who sets the inflation goal, what that should be, whether we should be moving into inflation targeting. Those are issues that we need broader debate on.
Broader debate within the bank or broader debate with the government as well?
With the government as well. Some of these things require political buy-in and we have to have that debate.
Let us for the moment first talk about the Urjit Patel's recommendations about inflation. It says that the RBI's main focus should be on inflation rather than a mix of inflation and growth. At a time when the US Federal Reserve and perhaps the European Central Bank (ECB) are increasingly focusing on both, do you agree with this recommendation or do you have certain doubts?
No, the reason the US Federal Reserve and the ECB can focus "on growth" is because inflation is very quiet. Part of the reason inflation is very quiet is because over the years they have built credibility that they will fight inflation and keep it within a low band.
Here inflation is the problem, so it has to be the central focus.
Exactly. First make it the central focus. Once inflation comes down then in circumstances like the current one when growth is very weak we will have the room to cut interest rates sharply so as to create the conditions for growth without worrying about inflation.
So Urjit Patel is not tying your hands down forever and a day on focusing on inflation. It is simply saying to you for now and until you correct the problem of inflation, inflation is our central focus, but once you have brought inflation down to acceptable levels then the bank probably will have to focus on inflation as well as growth. Growth is not ruled out thereafter.
What you want to do is maximise growth given tolerable levels of inflation. What people do not understand about inflation targeting and that is where the terms have gotten overly complicated in public, people do not really understand what it means. All it is saying is the best way I as a central bank can help the economy grow is by keeping inflation low. That then allows me to set interest rates which lets the economy grow.
On inflation itself specifically the report says that the consumer price index rather than the wholesale price index should be the main inflationary guide that the Reserve Bank of India (RBI) follows. However many people point out that the consumer price index (CPI) gives too much weightage to food prices and perhaps too little to non-food components. If you accept that CPI must be your main guide would you at the same time also redesign CPI?
It is an evolving process. We will have to look at the components of CPI and how that behaves over time. Let us put it this way it is a much better gauge of the inflation that you as an individual citizen experience than the wholesale price index (WPI).
But not perfect still.
It is not perfect. The point is you focus on something which is imperfect but captures a lot of what you experiencing or look at something which we have lot more experience about – It is little bit like the economist looking under the lamp because that is where the light is instead of where the stuff that he lost fell.
What I read in that answer is you still keep open the option of redesigning CPI to remove its imperfections?
That is an evolving process. In fact as our consumption basket changes CPI will change.
Something else that is in the Urjit Patel report is that it says that over the next 24 months CPI inflation which is presently a worrying 9.87 per cent must be brought down to 6 per cent and thereafter it suggests that your target should be 4 per cent within a band of 2 per cent on either side. If you accept that recommendation doesn’t it therefore almost automatically follow that for the next two years the bank is going to be fighting a pretty relentless battle to bring down inflation?
What we have said is over the next two years we want to bring inflation down to 6 per cent. That to my mind is a feasible target, it is a reasonable target. 6 per cent is neither extremely low nor is it extremely high.
Coming from 9.87 per cent you are coming down almost 4 per cent, so it does mean a pretty relentless battle.
It means bringing down inflation in a serious way. We will need help from the government. We believe that the government going slow for example on agricultural support prices over the last few months will help, because it will reduce the price at which food increases and remember you just said that food is the big part of the CPI index.
As you do that part will shrink and so your advice to the government is please go slow on agricultural support prices?
Please go slow on support, but give aid to agriculture so that we have more supply coming in.
Now on monetary policy the Urjit Patel report says that future decisions should be taken by a monetary policy committee rather than by the governor alone. Are you happy to see your powers diluted, even though you would be chairman of that committee?
It is a big responsibility, so I am happy if a committee is willing to share it, but the more important point is can we create an institutional structure that over time makes better decisions. I do not care about the decisions I am going to make over the next few months or years.
But thereafter you want an institution.
I would be pretty happy to let it go to an institution before then, but we need to think about what institutional structure will give the central bank credibility and also allow it to make better decisions. So it is not the whim of one person but the considered view of a group of people, all of whom are experts which brings together the best policy structure.
Urjit Patel also says that the decisions taken by the monetary policy committee would be on the basis of a majority vote and no member would have the right to abstain?
Those are details. My sense is we can work out over time what seems reasonable. Those can be debated. But really the whole concept of a monetary policy committee is the big advance and do we want to go there, do we want to go to a place where the rest of the world is, that is really the question we need to ask.
One of the comments made by the Business Standard on this concept which you call a big advance is that it would change the nature of the relationship between the bank and the government and if sometime in the future there were to be differences over monetary policy between the government, and the Finance Minister in particular, and the RBI, then you could see a certain measure of tension between the two because the monetary policy committee would not allow the RBI and the governor the flexibility to heed a hint from the minister?
I do not think it is a secret that there have been tensions in the past. It is not that having an individual resolves the problem of having tensions. What is true is that there is constant discussion between the RBI and the Finance Ministry in the same way as the chairman of the Federal Reserve has breakfast with the treasury secretary. There is constant discussion. We talk about a lot of things and there is some give and take in those discussions.
Urjit Patel recommendations would give you a red line of protection as well, which may some times be missing at the moment?
It may be useful under certain circumstances, absolutely.
That would be a positive because it would underline the autonomy of the RBI?
It would send a strong signal to the outside world that the policies that the RBI is following are according to its mandate and not according to something else. That said there will always have to be some amount of dialogue between the RBI and the government.
When will you formerly announce as governor your reaction and response to the Urjit Patel report and which bits you are accepting immediately, which bits you need to debate and discuss with the government, which bits you need to debate, analyse and discuss internally? When will we have a formal announcement?
You know the history of committee reports in this country. There is some debate that takes place, people express opinions, then you pick-up pieces that are right to take up and you start talking about them with the relevant people. I don’t think there is a special date on which we will say we accept clause A, B, C, D and reject clause E. We will debate with the government pieces of it and as time goes on start implementing.
In other words bits and pieces will be accepted as you think the time is right and when you accept them you will also let the people or the public know it has been done? It will happen from time to time.
Yes but it will be debated. Nothing is going to be done by stealth.
