RBI Governor Urjit Patel downplays inflation risk, harps on growth

MUMBAI: In his first interaction with ‘outsiders’ as the governor of Reserve Bank, Urjit Patel has downplayed the risk of inflation and harped on the focus on growth.
The shy central banker - who has shunned the media and refrained from making any statement since taking over from his flamboyant predecessor Raghuram Rajan on September 5 - exchanged his views with half-a-dozen senior economists last week.

Such customary chats in the past between the Reserve Bank governor and economists (or bankers) — often taking place weeks before a monetary policy announcement — rarely give a glimpse into the governor’s mind. Occasionally, such meetings have even misled the visitors.



But Patel’s free-wheeling conversation, laced with humour and his personal views on certain matters, has sent across a dovish signal to those who were invited.

Dovish stance likely
The takeaway from the closed-door meeting was simple: even if interest rates are not lowered in the October 4 monetary policy — as the outcome would now depend on the decision of the newly constituted six-member Monetary Policy Committee (of which Patel is a member) — the central bank is likely to maintain a dovish and accommodative stance on interest rates and liquidity.

“The governor is of the view that the GST (goods & services tax) regime would not harden inflation as is widely perceived. He said there will be many items whose prices would fall and therefore help in at least partially offsetting the increase in prices of other items of consumption. He also believes the weight assigned to public sector housing and the rent in the calculation of the consumer price index should be lowered. Patel informally discussed with the group of economists whether the weight (which could raise CPI following higher outgo on public sector salary and HRA) should be cut,” said a person who is aware of the discussions.

According to the latest macro numbers released by the government, inflation is moving downward while industrial production growth has slipped into negative territory (largely due to items such as electrical machinery). “It’s unclear whether RBI and MPC would prefer to wait for more data instead of cutting rates based on one month numbers. Also, present geopolitics would influence decision. However, monetary policy must be forward-looking and a rate cut in October will be well received and improve sentiments,” said a bank economist who did not attend the meeting.

To a question on whether RBI should pursue a target for ‘growth’ (just as it focusses on keeping inflation within a range), Patel said keeping in mind the growth objective was also part of MPC’s mandate.

“The governor is not dismissive of the new GDP data (which, according to many, appear unrealistic). While he thinks the GDP numbers based on the new series need a lot of explanation, the old series was even worse,” said the person.

The RBI spokesperson could not be reached over the weekend.

Many in industry fear consumer demand may dip next year as households hold back purchase of items such as automobiles in expectation of a price cut once GST is rolled out. Simultaneously, some analysts think inflation could soften with the cultivation of pulses rising significantly. As MPC and Patel examine the numbers to take a call, financial markets would try figuring out the stance of different MPC members. “Two members among the three nominated by the government are doves. We are yet to find out about the others,” said a trader with a bond house.