Mumbai: A day after keeping interest rates unchanged, RBI governor Raghuram Rajan on Wednesday said inflation is still a concern for the central bank and the monetary policy continues being "conventional".
"We still have concerns over inflation. So, given the deflationary environment elsewhere, it is actually easier for us because we are not fighting inflation in an environment where inflation is picking up elsewhere. I think we are still in conventional monetary policy territory," Rajan said during a conference call with analysts.
He was replying to a specific question on how an emerging market central bank formulates its monetary policy, given that many in developed world are adopting liquidity stimulus.
Rajan, who became RBI chief in September 2013, on Tuesday chose to keep interest rate unchanged for the seventh time, out of 11 monetary policy decisions announced under his regime so far. He also made it clear that he would not like to do a "flip-flop" on the same.
The emergence of satisfactory data — inflation trending low and household expecting it to cooling — had resulted into a surprise announcement of a 0.25 per cent rate cut on January 15 to stimulate growth.
Data released for December indicated a rise in the headline consumer price inflation to 5 per cent from the 4.38 per cent in the preceding month. This was still much better as compared to the RBI target of getting it at 6 per cent by January 2015.
The RBI governor on Wednesday clarified that the mid-policy action was also to assuage the concerns of some people, who were calling RBI as "tardy" in its policy formulating.
"Given that there was in some quarters, a public perception that the RBI was tardy, we wanted to say that we understood the need for action as and when we had information and we were prepared to act even outside policy dates. And it was useful to signal that," Rajan, who held the key rates at the scheduled policy announcement, said.
After signalling on Tuesday that the RBI will be keenly watching progress on fiscal consolidation, Rajan gave more details on RBI's expectations from the upcoming budget, saying it is the quality of the measures which is important.
"A movement of spending from mistargeted or poorly targeted subsidies towards more capital investment would be a good move," he said, adding that such a thing will also be good from the inflation management perspective, as supply side will benefit out of capital spending.
For increasing the saving rate, which has dipped to 30 per cent, Rajan also advocated for increasing the tax benefit for small investments in financial instruments like PPF, PF, insurance policies etc under Sec 80C.
"Remember the government increased the limits for tax benefit in savings by Rs 50,000 in the last budget. The question is -- is there room for more primarily because the real tax benefit has fallen over time because the limit was at Rs 1 lakh for a long time? May be what we have to do is increase that," Rajan said.
