‘Growth as critical as price stability’
Reserve Bank of India Governor YV Reddy again sprung a surprise by giving interest rate hikes a pause in the annual review of the credit policy. In an interview with BS Srinivasalu Reddy after announcing the credit policy on Tuesday, the governor said the overall picture pointed to inflation slowing to 4.5 per cent in the medium term.
Q: When will inflation be back under control?
Though neutral inflation and interest rate levels are possible, theoretically, one cannot be specific about their levels. It is very difficult to define precisely. I don’t think any monetary authority will be in a position to take a call on that. Besides, it is not possible to take a view on how long we can stay at that level, even if we can identify such a level.
But for a limited point, we can discuss what is the size of reasonable stability. Growth has been high for the last four years and inflation has been at 5 per cent. Growth has been happening across emerging market economies. A reasonable level of domestic savings is funding our investments – they cover up to 98 per cent of our investments. And the current account deficit is only 2 per cent. Though there are short-term variations, the environment has generally contributed to both growth and stability.
Q: Last April you kept interest rates untouched. You hiked them later. In one year rates were hiked five times. Where are interest headed – up or down?
Whatever was the stance three months back still continues to hold good now. If there are any changes in the circumstances then I have to respond. In the case of the (US) Federal Reserve and Bank of England there are committees that decide. In our case, the decision lies as it was, with the RBI, with responsibility and accountability attached.
Q: So, at any given point in time you are free to hike the rate?
That is how the position is. That is how the process works.
Q: There seems to be a clear shift in your language this time. You seems to be shifting more towards growth than before? Is there a real shift in approach?
No, not at all. On the contrary, the RBI mandate is somewhat similar to that of the Federal Reserve, where growth and (price) stability are on an equal standing. The emphasis has to be contextual and based on circumstances. When credit growth was not strong in the past we have emphasised growth and pressed banks for increasing the credit flow. When we feel the focus should shift to price stability, we shift the emphasis. That is what is happening now. You can see the current policy has been re-stated from the past (a few years ago).
Q: How realistic is your expectation of containing inflation to 5 per cent?
Currently, the idea is to get to 5 per cent. That is, of course, subject to supply management and overall management of the capital account. Taking the overall picture into account, in the context of policy measures globally, we may see 4.5 per cent as well.
If it is above 6 per cent for a few weeks now, we want to intervene in a non-disruptive manner, that too at a time when we are going through a structural transformation. The idea is to make it non-disruptive.
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