‘Calibrated tightening is the appropriate stance’

As new data comes in, we would look into changing our policies, says RBI Governor
It is important that the fiscal deficit target is maintained, says RBI Governor Urjit Patel, in an interaction with the media. Edited excerpts: Is there a risk to fiscal deficit in an election year as there could be populist measures as we have seen on Thursday [cut in excise duty on petrol and diesel]?
The Central government recently committed [itself] to the fiscal deficit target, and moved some of its borrowing from the market to the NSSF [National Small Savings Fund] and other small savings instruments.
However, it is important that the fiscal deficit target is maintained not only for the reasons that you mentioned but also to mitigate the risk of further crowding out because when the Centre and States’ borrowing programmes are taken together it is of a large quantum. Therefore, I assume, that given that these two decisions were taken only in a few days in between, that was possibly internalised when the government made its commitment to the fiscal deficit target and reduce its market borrowing. So far, we have taken that at face value.
Some forecasters were expecting the RBI to take measures to stabilise the rupee. The fact that you have chosen to retain the rate, is it indicative of your comfort level on the exchange rate front?
The mandate of the monetary policy committee is a legislated one … it is a flexible inflation targeting mandate at 4% with a band of +/- 2.
To the extent that domestic and international financial conditions, including commodity prices, affect inflation outlook and the projections that is internalised in the projections with the fan charts… and in that respect, the risks that you mentioned are already baked with respect to the forecast and the decisions that we took today. Please do recall that prior to this we had two rate hikes in the space of literally two months and today’s stance of calibrated tightening essentially means that in this rate cycle, rate cut is off the table and that we are not bound to increase rate at every meeting. That is not required given our inflation outlook and forecast at this point in time. As new data comes in, we would look into changing our policies accordingly but the calibrated tightening is the appropriate stance at this point in time given the forecasts and the financial conditions.
What is the reason for cutting inflation forecast but keeping rates unchanged?
The long list of risks that we have enunciated is the reason that we have said the risks are tilted to the upside. There are one or two risks which could move in the other direction and even the commodity price risk is two-way going forward… not necessarily only oil but other commodities. The forecasts are based on data so far and given that it is an outcome of what has taken place so far, it indicates to us that there has been a 20 bps reduction in our projection in Q1 for 2019-20. Therefore, the stance for that reason has been changed since the risks are tilted to the upside. And, we are focused on inflation at 4% levels on a durable basis.
You have kept the rate unchanged but changed the stance…
The stance in not necessarily a deferred action. That could be said even with the neutral stance. What this stance indicates very clearly is that going forward there are only two actions in this particular rate cycle. Either we increase rate or we keep them steady.
Source  :  https://www.thehindu.com/todays-paper/tp-business/calibrated-tightening-is-the-appropriate-stance/article25139520.ece

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