In an interview to CNBC-TV18, Subir Gokarn, Director of Research, Brookings India, said Governor Rajan has maintained the consistency of his message of inflation being the top priority.
There have been significant changes in inflation scenario on two accounts. One, the softening of oil prices in particular and commodities in general over the last few weeks and second being the food inflation, which has been a thorn in side for a very long time, Gokarn said.
He said the food prices have not responded as negatively to the monsoons as was expected. "So something is going on in the food economy that is helping to keep the prices in check," he added.
Gokarn said the other major factor that has contributed to overall softening of food inflation is the open markets sales of rice and wheat by the government over the last 3 months, which has helped to dampen cereal prices.
He thinks a re-orientation of incentives, away from cereals, to other crops is required to continue with the current trend and feels this softening of food inflation will help reach the "6 percent by Januray 2016 target" by the RBI.
Below is the transcript of Subir Gokarn's interview with Ekta Batra & Anuj Singhal on CNBC-TV18.
Anuj: Your comments on the Reserve Bank of India (RBI) monetary policy and the language. Do you think it was status quo or would you say it was more hawkish or more dovish than the last policy?
A: I never thought of this dovish, hawkish distinction being terribly important. The consistency with the message that has been sent out for the last several – certainly by Governor Rajan but also before that is that inflation is the primary objective of monetary policy; inflation management and inflation control and to the extent that inflation risks are still visible in the system, its policy has to respond to that and to keep that in mind in shaping both the current action and the guidance, whatever the guidance.
Now we are seeing very significant change in the inflation scenario on two counts – (1) as a result of oil prices in particular but commodities in general having softened over the last few weeks and oil very dramatically in last few weeks and (2) food inflation which has been on the side for a long time, now seven or eight years, it has not responded as negatively to the monsoons as lot of people expected. So, something is going on the food economy that is helping to keep prices in check and the most significant factor there which has contributed to this is the open market sales of rice and wheat by the government over the last three months and that has helped to dampen cereal prices which has been contributed to an overall softening of food inflation.
The concern that the RBI has expressed and this is a widespread concern is the food inflation moderation may be temporary, it may spike back up again once the true picture is known and given that has been so persistent for so long that unless we see some structural responses to it becoming visible and starting to have an impact, it is little difficult to argue that the problem has been solved. So that has been the basis of the caution, the communication that inflation risk are still very much in play and while the 2015 target of 8 percent is now certainly within reach. The subsequent target of 6 percent is still subject to risk and given that scenario caution rather than taking a chance, taking a gamble on cutting rates now only to have to raise them again at some point in the next few months. That was the decision.
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