In a discussion with Hitendra Dave, managing director, HSBC and Neeraj Gambhir, head -fixed income, Nomura, Prasanna says that the governor will have to be hawkish, to bring down inflation and bring back the central bank's lost credibility in doing the same.
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Monetary stability or reining in inflation; stabilising the rupee and providing overall stability of the financial sector are all at the heart of Rajan's thinking process, opines Prasanna.
Adding to what could be Rajan's long to-do list, Dave says dispelling some of the excessive doom and gloom could be the central bank's
Dave says dispelling some of the excessive doom and gloom could be yet another priority on the central bank chief's long to-do list.
"However, while he has obviously emphasised the priority of inflation over other objectives of the central bank, in the press conference as well as in earlier statements, one can clearly make out that there is a belief that if one does the right things to reinvigorate growth and investment activity, a lot of other things just fall into place thereafter as far as the financial market stability is concerned," Dave adds optimistically.
Below is the edited transcript of the discussion on CNBC-TV18.
Q: What is your sense, are you reading that Rajan is going to be much more hawkish than we are prepared for? What does his sentence of 'low and stable inflation is the primary role of the central bank' mean?
Prasanna: We are working with limited material so I would be cautioned on that. He has just released one statement, so one cannot read too much into it. However, I think he has very cleverly sited the RBI act and said that his goal is to preserve monetary stability which obviously means low and stable inflation and low and stable inflation expectations.
Given the current context where we have grappled with high inflation for the past three years and continue to grapple atleast on the retail side, I think yes there is no other choice but to be hawkish and try and bring down inflation expectations.
Q: The statement is, 'ultimately this means low and stable inflation expectations. Whether that inflations stems from domestic sources or from changes in currency, from supply constrains or demand pressures.' So are you getting a sense he is going to tell you 'I am not buying this supply side argument, I am only interested in the inflation number, is that how you will read this sentence?
Prasanna: Unfortunately, what has happened is RBI has lost a bit of credibility in its fighting credentials. Let's not forget that even in the past regimes, RBI has always said that price stability is one of its mandates. Now in order to regain the credibility, Rajan will have to be quite hawkish and try to tell the market that even if its supply side, he will be worried if inflation goes up. That is a right way to go about to achieve credibility.
Q: Would that be your interpretation that he is going to look at the inflation number much more closely than previous regimes?
Gambhir: The fact that inflation management is a primary objective of any central bank is completely obvious in his statements and the fact that he will continue to focus on inflation management as any prudent central banker would do, is clearly out there.
But my interpretation of this concept of monetary stability is a little bit wider. Obviously the concept of monetary stability has not been defined in the act anywhere. It is open to a number of interpretations.
But I feel that the concept of monetary stability could mean a number of things. Firstly, it could mean inflation; secondly it could mean the stability of the currency vis-à-vis the external sector; and yet another aspect of monetary stability could be the stability of the financial system as a whole and also the stability of the overall credit system.
Hence, I feel that monetary stability is at the heart of his thinking process. Clearly inflation is one part of it, but there could be potentially other aspects to this as well.
Q: What will you guess from Rajan on September 20?
Dave: I think he alluded to it either in the press statement that was released by the RBI or in the post statement release Q&A. The RBI's number one priority could be to just dispel some of the excessive doom and gloom which prevail.
He mentioned it, the Finance Minister also mentioned it two days back in the parliament. Very clearly, the financial markets have got to the man on the street, the business man, the consumer, the investor, the saver and everywhere.
So, what we might get at the policy date is a communication of the Indian economy going through a difficult time and there can't be any false optimism. However, we certainly should not have false pessimism either. That will be the overall construct in which the policy will be made.
In terms of specific measures we all know that the main event coming up between now and our own policy is the FOMC where we will get the much needed clarity now on details of the tapering whatever they be.
The main determinant of the policy direction in terms of any change would be how the Fx market is behaving between now and then, how the Fed lays out its plan.
However, while he has obviously emphasised the priority of inflation over other objectives of the central bank, in the press conference as well as in earlier statements, one can clearly make out that there is a belief that if one does the right things to reinvigorate growth and investment activity, a lot of other things just fall into place thereafter as far as the financial market stability is concerned.
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