In an interview to CNBC-TV18, C Rangarajan, chairman, Prime Minister's Economic Advisory Council says the RBI has taken a cautious stance given the inflation. "The headline inflation continues to remain at a high level. It has shown some increase. The non-food manufacturing inflation is also sticky and has not shown any signs of decline. Therefore, under these circumstances, the RBI has decided not to touch the policy rates," he elaborates.
According to him, the central bank is waiting for an opportune time to cut repo rate. "I think RBI will start doing it only in January, unless there is some strong tendency for inflation to decline in the next four-five weeks. As of now, the RBI has made it very clear that the easing could start only from end of January," he adds.
Also read: Expert views on RBI's decision to hold repo rate
Below is the edited transcript of his interview on CNBC-TV18.
Q: The RBI is saying that more easing might be expected in January to March quarter. Do you now believe that chances of a repo rate cut are minuscule in this calendar year and any rate easing cycle will only be in 2013 now?
A: I think the RBI has given a clear indication. It has taken a cautious stance. That is warranted by the circumstances. The headline inflation continues to remain at a high level. It has shown some increase. The non-food manufacturing inflation is also sticky and has not shown any signs of decline. Therefore, under these circumstances, the RBI has decided not to touch the policy rates.
But I believe even the reduction in the CRR must be taken as a signal because reduction in the CRR puts more liquidity into the hands of the banks and also improves their profitability.
For a change in the policy rate, the RBI is perhaps waiting for a period or an opportunist moment, when there could be sustained decreases in interest rates. That is why it has indicated that perhaps in the first quarter review of next year, 2013, it should be possible to further ease the situation.
Q: One has to admit the kind of inflationary risk, which the RBI has outlined, immediately you are going to perhaps see inflation at 8 percent or so. But if that is the situation, why give even a CRR cut? We have been given about 150 basis points of CRR cut already. The current liquidity deficit is largely because of government balances with the RBI. That normally clears out in a month or so with the festive demand. Do you think it has overstepped in giving so many CRR cuts in 2012?
A: I think CRR cut is also some indication. It is not as if the inflationary situation has not eased. I think it has come down from the very high levels that we saw in 2010. But, at the same time, I believe that it is an assessment of the RBI that some little improvement in liquidity would do good. Therefore, it is balancing two considerations.
In that context, a small reduction in CRR will improve the liquidity, not to a very large extent. But somewhere in the speech, and somewhere in the report, it is also indicated that liquidity might have tightened a little bit more in the month of October.
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