RBI Deputy Guv warns against early celebration over inflation fallMumbai: Warning against "early celebrations" over recent fall in inflation print, RBI Deputy Governor HR Khan yesterday said there are structural issues affecting prices which are complicating the fight against price rise, but expressed optimism
Mumbai: Warning against "early celebrations" over recent fall in inflation print, RBI Deputy Governor HR Khan yesterday said there are structural issues affecting prices which are complicating the fight against price rise, but expressed optimism that better days are ahead on this front.
"Inflation still has a long way to go," Khan said, elaborating "structural issues" like input costs, wage burden, food prices, protein-driven inflation and rural areas witnessing wider inflation pressures.
"When the global recovery is also tepid and there are many geopolitical issues, we need to be cautious when we celebrate early and we cannot be an outlier, particularly, in terms of inflation from among the BRIC countries," Khan said addressing a CII-CFO summit here.
The RBI has set a retail inflation target of 8 per cent for next January and 6 per cent a year later. Price index continued its fall in September when it came down to 6.47 per cent. But of late, the finance minister and corporates and even banks have been calling for knifing the interest rates saying growth has lost momentum in the second quarter.
In the comments, which come ahead of the Reserve Bank's review of the monetary policy on December 2, Khan cited the example of milk prices being high in villages of Uttar Pradesh, saying all the produce gets diverted to the cities.
The Reserve Bank has been maintaining rates at an elevated level citing inflation and the need to fight price rise strongly, even though calls for a growth-propping cut in rates have been growing shriller. Over the past 14 months since Governor Raghuram Rajan took over the mantle, he has raised the policy rates three times.
"Growth sentiments are good, the savings-investment equilibrium is improving," Khan said, adding the country can be "cautiously optimistic" on the domestic front.
He specifically mentioned factors like a stable government which is making attempts at structural reforms as "encouraging" factors, but tempered the expectations with possible scenarios that can dent the momentum. Khan said there can be risks of a logjam even though there is a political majority or judicial interventions.
A social unrest or security threats, including physical and cyber, are the ones we need to be careful about, he said.
On the growth momentum, he pointed out that certain concerns like the capex cycle and investments are yet to pick up, while exports growth is also uneven due to the swing in global growth.
Khan noted that the country is fully integrated with the global economy and exposed to the changes in the policy making worldwide, especially the volatilities caused by the accommodative stances taken in monetary policies by advanced economies like Japan, the EU and the US, which has though tapered its bond buying but still maintains rates at near zero levels.
"In our country, we do not have that much space looking at our inflation trajectory, we don't have that much luxury of looking at an unconventional monetary policy. We are hostage to what the advanced countries do in terms of their monetary policies," he said.
With the decline in oil prices to a four-year low at the early USD 80's a barrel level and growing expectations that this is the new normal, Khan advised caution, saying no one can predict if they have reached the bottom.
Noting that the near 30 per cent fall in crude prices is a boon for the economy, he said one estimate indicates that if there is a USD 10 barrel decrease in oil prices, the fiscal deficit will come down by 1 per cent and if the fall is just USD 1 a barrel, it can bring down the CAD by 30-40 bps.
"People have now started talking that this is the new normal. But one cannot be sure, people say this is the bottom, but I don't know," he said, adding the prices can get spiked in the event of a fall in production by Libya and an increase in geopolitical tensions in the Middle East.