RBI had to look beyond headline inflation number: Governor Urjit Patel

"We have been mandated by the government and by legislation to have an inflation target of about 4 per cent... Therefore that is our main objective in terms of the policy of the central bank, which is now determined by the MPC."

RBI had to look beyond headline inflation number: Governor Urjit Patel

Amidst demonetisation ruckus, Reserve Bank of India Chief Urjit Patel had always kept his silence, speaking only to Parliamentary Panel. However, now he has confessed that he unfazed by the criticism as he has grown a thick skin on the job.


In an interview with CNBC-TV18, Urjit Patel stressed that the economy will make a recovery after a short drop. “Almost everyone agrees that the impact is going to be a sharp ‘V’,” he added.


When asked about the economy dealing with the negative impact of demonetisation, Patel said, "Almost everyone agrees that the impact is going to be a sharp “V”, that we will have a downgrade of growth for a short period of time. Remonetisation has happened at a fast pace and that was part of the plan that subsequent to the withdrawal of the specified banknotes our production plans and supply processes would ensure that remonetisation happened as quickly as possible."


Talking about the said objectives of demonetisation and if it was success or failure, Patel said, "For RBI, fake Indian currency notes was an important issue that needed to be addressed. The other collateral benefits from this, in terms of greater accountability, better public finance and more transparency are by definition areas that take time to fully play out. We have also had financial re-intermediation, in terms of greater financial savings going into deposits, mutual funds and insurance. So, there have been a fair number of benefits. Even the impetus given to digitization should be beneficial going forward."


With the note ban impact on economy, many experts had been expecting a rate cut given the low headline inflation rate, but Patel shifted the monetary policy from accomodative to neutral. He explained his decision saying, "since we have committed to move closer to 4 per cent inflation because of the legislated and notified mandate of the government, we needed to look beyond the headline number to see where the kind of disinflation that is needed to take us towards 4% would come from and the monetary policy committee (MPC) felt that inflation, excluding food and fuel, is something that has been stubborn since September-October and has shown little sign of coming decisively below 5%. That was the main reason why we had to look through headline inflation.


The other reason is that the effects of demonetisation, and now remonetisation, may also impact some of the commodities where we have seen disinflation, but we do not know to what extent and for how long. It is most likely going to be short-lived.

And that was why the MPC thought that we needed to have the flexibility going forward and therefore the shift in stance from accommodative to neutral.

We also find that internationally, commodity prices have firmed up, the international food price index has gone up, the base metal price index has gone up; crude prices continue to be in the mid-50s and staying there for some time given the data of the past few months."


He further said, "We have been mandated by the government and by legislation to have an inflation target of about 4 per cent... Therefore that is our main objective in terms of the policy of the central bank, which is now determined by the MPC."

Patel assured of the recovery saying, "If you look at our projections that were published last week as part of the MPC, we expect growth to be about 7.4% in the next fiscal year, which is about 50 basis points more than the projection for the current fiscal year. Therefore, there is a recovery compared to this fiscal year going into next year."

Talking about the criticism he said that "one grows a thick skin fast in this business and I think we have done that. We have gone about our work, we had undertaken major challenges during these past few months and valid criticism is something that we are open to."