Also Read: RBI policy: Rajan is making same mistakes as Subbarao
She says it is also important to have the second side of policy working which is the supply side. It is not just about controlling demand but being able to smooth out these problems with respect to supply, she says. “It is interesting that when Rajan made his first policy statement, he spent a lot of time talking about financial sector reforms because his thinking was that it is not so much about the amount of liquidity that is available in the economy, the amount of credit that is available in the economy but it is also a question of where the credit is going,” she adds.
Below is the verbatim transcript of Gita Gopinath’s interview on CNBC-TV18
Q: The first question has to be an event that is just upon us that is credit policy. We were coming out of consumer price inflation of 11.24 percent and a wholesale inflation as you would know of 7.52 percent both a good percentage above what the street was expecting and yet we didn’t get a rate hike. Your first comments, does this put Reserve Bank of India (RBI) behind the curve or is the bank justified?
A: I think this does come as something of a surprise. A lot of people were anticipating an increase in interest rates given Rajan’s strong statements earlier that he would keep his eye on the numbers and on inflation and the inflation numbers that came up were actually high. One good argument is the fact that monetary policy works with lags and so he has gone through two rate increases and so it’s possible that inflation numbers will come down in the future.
He has also been very clear in his policy statement that he is keeping his eye on the number very closely. So, if there is any reason to think that inflation is accelerating or this is not something temporary and we could see further inflation going up that he would respond very quickly to it. So, it comes as a surprise. It is also a reflection of the fact that growth is slowing down and he is concerned about the consequences of a weak growth situation in the economy and as a monetary policy authority, you have to be concerned both about inflation and growth and so while you want to be aggressive about fighting inflation, you do worry about bringing down growth to a level that might be something that the economy cannot handle at this point.
Q: It is a fair argument to say that if at all he has waited or if at all he is behind the curve, he is at best six weeks behind the curve because the next policy is on January 28. It is not a long wait in economic terms but what is your assessment of this inflation that we have seen, for the last 21 months we have been at near double digits in consumer price inflation, 9 or closer to 10. Even if it is largely food inflation, core inflation has been, non-food consumer price index (CPI) has been around 8 percent and food has its either potatoes on onions or eggs or rice after a bumper harvest still at 12 percent year on year. Is it giving you the sense that we do not need more evidence, this is rather entrenched?
A: Yes. I think this is partly the reason behind Rajan’s first policy move – to raise interest rates. That was partly reflection of the fact that we already know that inflation is a problem for the country. If you wanted to kill inflation, it can be done through monetary policy. If you raised rates high enough, you will bring inflation down and there is hardly a country in the world – I cannot think of a single country in the world that has been able to bring down inflation without some pain. Economy goes through pain, growth comes down, it is painful so there is no easy solution to bring down inflation. So, the question is how much of pain do you want and do you want now or want it later or you kind of hope for some good news either on the weather or on agriculture.
The problems that are coming from food inflation, some of it were world prices but a big problem with food inflation in India is also the kind of details of how food goes from the farm to the final retail market. There is a lot of logistics, it’s broken in so many different ways that it is not surprising that a small mistake here or there shows up spike in food prices. So, it is important to have the second side of policy working which is the supply side of policy working, it is not just kind of controlling demand but being able to smooth out these problems with respect to supply, is a crucial part which is why it is interesting that when Rajan made his first policy statement, he spent a lot of time talking about financial sector reforms because his thinking was that it is not so much amount of liquidity that is available in the economy, the amount of credit that is available in the economy but it is also a question of where the credit is going.
So, let us try to improve the allocation of those resources, it is a very Chicago way of thinking about problems of an economy – not so much about the resources that are available but making sure it is used efficiently and even his recent statement about non-performing assets, how to restructure them and how banks should interact with companies. These are all trying to have multi-pronged approach dealing with the problem as it was just coming out and talking about interest rates.