RBI not a cheerleader for markets: Raghuram Rajan
Mumbai: Doing some plain-speaking, Governor Raghuram Rajan today said RBI is not a 'cheerleader' and he may have "erred a bit" in lowering the policy rate to push investments as growth was not happening at the ground level.
He said GDP growth might be weaker than what the headline number suggested and questioned why an economy needed rate cut when it was growing at 7.5 per cent.
There is a "contradiction" in the higher GDP growth numbers and poor corporate earnings while there was no visible pick-up in the consumer demand, he added.
"In some sense it is a Goldilocks policy, just right given the current situation," Rajan said, while defending his third 0.25 per cent rate cut this year despite lingering concerns over the below-normal monsoons as well as steadily firming oil prices and their impact on inflation.
After two off-policy rate cuts of 0.25 per cent each since January, Rajan today reduced the short-term lending rates by 25 basis points to 7.25 per cent.
"The RBI is not a cheer leader. Our job is to give people confidence in the value of the rupee, in the prospects of inflation, and having established that confidence, create a longer-term framework for good decisions to be made.
"Every time an exporter comes to me and says that stability has been very valuable for us to make decisions, that reinforces my view that these our main role is not to act as cheer leaders," Rajan told reporters here at the customary post-policy press briefing.
His response came on a query as to why RBI chose a moderate 25 bps cut and not a "booster-dose of 50 basis points".
However, he added that he might have erred a bit to push investments in spite of higher headline growth numbers, as investments been stalled for many quarters now.
"In fact, we have sort of erred a little bit on focusing on encouraging investment, given the need to alleviate medium-term supply constraints," Rajan said, adding however that recent corporate earnings confirm that at the ground level growth is not happening nor there is any visible pick-up in the end user demand.
He termed today's policy move as neither conservative nor aggressive, but based on the current data available and underlined that "going forward, as in the past, our policy steps will be data contingent".
He also denied being under government pressure for cutting the rates, saying the decision was purely based on available data.
“If I cut the rate you will say I want to please the government, and if I don't you will say I want to pick a fight with the government,” Rajan said on a lighter note.
Explaining the rationale for rate cut to spur growth, which the RBI has revised downward to 7.6 per cent from 7.8 per cent for this fiscal, Rajan said the current growth rate is below potential which is around 8.5 per cent.
Stating there was contradiction in the higher numbers and still below trend growth and poor corporate earnings coupled with tepid consumer demand, Rajan said, “it is a sort of discrepancy in the eyes of the world that why we still think the economy needs rate cut when it is growing at 7.5 per cent.
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“Most economies growing at 7-7.5 per cent are just going gang-busters and the issue really is to restrain growth rather than to accelerate growth. We still have weak investment, it is very tepid and we haven't seen a strong pick up,” Rajan said.
Attributing the higher 7.5 per cent growth numbers to special factors like excise collection in the final month of the past year, Rajan said “there is some discussions of how much of the Q4 growth includes special factors in the last quarter, such as excise taxes and subsidies.
“So, When you subtract that the growth in the last quarter it doesn't look as strong as before and so you could point to those numbers also suggesting the growth is weaker than the headline number suggests.”
Deputy governor Urjit Patel chipped in saying using the new series, the economy's potential growth rate is 8-8.5 per cent and so we are below that at the moment.
On the poor profitability of corporates, Rajan said: “If you look at the corporate results, of course you have to adjust corporate results for the fact that inflation has come down quite a bit in some sectors. But in general corporate results have been quite weak also, suggesting that the final demand is yet to pick up very strongly, he said.
“So, these are reasons why we do feel the economy is still below potential, output gap is still somewhat negative. As the things reverse, then matters will change,” Rajan argued.
With low domestic capacity utilisation, still mixed indicators of recovery, and subdued investment and credit growth, there is a case for a cut in the policy rate, Rajan said.
It is more appropriate to front-load a rate cut today and then wait for data that clarify uncertainty, he added. He further said inflation is expected to be pulled down by base-effects till August but to start rising thereafter to about 6 per cent by January 2016- slightly higher than the projections in April. The inflation glide path is 5 per cent by January next and 4 per cent by January 2018.
Below-normal monsoons, firming crude oil prices and the volatile external environment are the upside risks to inflation, he said.
“Clearly the biggest uncertainty at this time is the out turn of the monsoons, and the policy reaction to that,” Rajan said.
He said there has been El Nino impact on the monsoons in the past with reasonable rainfalls, poor rainfall which has not led to a fall in farm production, and a fall in production which has not led to a spike inflation.
He said strong food policy and management will be important to help keep inflation and inflationary expectations contained over the near-term.
The Governor said the central bank going forward will take more action if more room is built up in either way.
“I think that the point we have always made is that we have to be on the disinflationary path that has been set out.So, whatever room builds up on the disinflationary path, we will use that to cut rate, but we are not going to move far away from the disinflationary path. That would not make sense given that we are just building up credibility to stay on that path,” Rajan said.
The Governor said foreign exchange reserves are over USD 352 billion which is “plenty” to provide for a strong second line of defence to good macroeconomic policies if the external markets turn significantly volatile following the US Fed rate hikes expected from September.