| Raghuram Rajan on how monetary policy is not irrelevant in curbing food inflation | ||
Dr Raghuram Rajan, Governor, Reserve Bank of India, delivered the inaugural speech at the FIMMDA-PDAI Annual Conference last week. There were some very interesting statements and insights he presented in the speech, which we believe have relevance for monetary policy expectations.
Key highlights:
· ‘We intend to bring CPI Inflation to 8% by January 2015 and to 6% by January 2016’. Note that CPI is currently at 8.8%, and our economists expect two more rate hikes of 25 bps each in the second half.
· ‘Even if we [the RBI] cut rates, we don’t believe banks which are paying high deposit rates will cut their lending rates. The reason is that the depositor, given her high inflationary expectations, will not settle for less than the rates banks are paying her’.
· An important pointer on the need to manage inflation expectations is also to keep the savings cycle going (else how will the required pick-up in the investment cycle be funded).
· The RBI Governor argues very persuasively on the role monetary policy has to play in curbing even food inflation, with some very interesting data and charts.
· The key herein is the influence of wage growth on food prices as also the impact of liquidity flowing into rural areas.
· The analysis also provokes thought on some of the key deficiencies in the agri-sector, including a distortion in cropping patterns towards rice and wheat and why perhaps the rate of price increases herein needs to be moderated.
On balance, it appears that we may have to live with high interest rates for some time to come.
Link to the complete speech: http://rbidocs.rbi.org.in/
Head of India Research and India Equity Strategist
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