Indian economy truly in recovery mode, more easing ahead: Rajan

Mumbai: The economy is "truly" in a recovery mode and RBI will continue with its accommodative policy to boost growth within the space available under government's inflation target, Governor Raghuram Rajan said Tuesday even as he declined to take credit for the uptick.

"What we have is an economy which is well and truly in recovery, but with areas of weakness. Hopefully, as we go forward, some of the areas of weakness will turn around," Rajan told reporters after the 5th bi-monthly monetary policy review in the 2015-16 fiscal.

The Central Statistical Office yesterday said the economy clipped at 7.4 percent in the September quarter -- 7.2 percent in the first half of the current financial year. The government has projected 7.6-7.8 percent growth this fiscal while the RBI has pegged it down at 7.4 percent today with a negative bias.

Rajan, whose anti-inflation stance had last year earned him flak from pro-growth advocates, declined to take any credit for the economic growth though it has been nearly a year since the central bank shifted its hawkish stance.

A variety of factors, including a "feel good" environment created by the government and the surge in public investments, have helped the economy turnaround, he said.

"What causes growth? It's a mix of factors. I would be far from claiming credit for the monetary policy," he said.

When reminded of the flak he received, Rajan retorted saying "that doesn't mean I should take credit when growth takes place".

"We are all working together to ensure that growth takes place, and it is in our collective interest; and I will emphasise again, the RBI is not against growth. We need sustainable growth and we will ensure maximum sustainable growth we can get," he said, adding that the inflation limit set by the government defines what is sustainable.

Rajan asserted that the central bank under his guidance continues to be "accommodative" in its stance, but will be vigilant to pick up signs of challenges on inflation.

Earlier in the day, RBI adopted status quo on policy rate, after having cut it by a surprise 0.50 percent in the last review on September 29. 

"Our sense, which is why we cut interest rates last time, was that the balance of risks -- how much we are wanting to do for energising growth versus how much we have to be worried about inflation -- allowed us to reach the policy stance that we did last time which we have maintained this time," Rajan explained.

On challenges emanating from the implementation of 7th Pay Commission that may result in annual outgo of a whopping Rs 1.02 trillion (Rs 1.02 lakh crore), equivalent of 0.65 percent of GDP, to the central government employees, Rajan said the government will have to do budgetary tightening to ensure it adheres to the fiscal consolidation roadmap.

The comments come a day after the government said its fiscal deficit till October has already touched 74 percent of the full year target at Rs 4.11 trillion, which though is less than what it was in the same period last fiscal at 89.6 percent. The fiscal deficit is pegged at 3.9 percent or at Rs 5.55 trillion this fiscal against Rs 5.01 trillion or 4 percent of GDP in 2014-15.

Rajan also underscored that both the quantum and the quality of the fiscal deficit matter.

Deputy RBI Governor Urijit Patel said that from April there might be an impact on retail inflation as the increase in house rent allowances for the central government workers gets captured following the new wage hike, but added that the RBI will look-through this impact in its analysis.

On the US Fed's likely rate hike at its December 16 meeting, Rajan said the shift in stance to rate tightening by the world's most powerful central bank may lead to some market volatility, but exuded confidence that the domestic markets should stabilise after initial difficulties.

Rajan continued to complain against the banks' refusal to pass on the benefits of RBI's rate cuts to borrowers, saying less than half of the 1.25 percent cumulative cuts this year has only been passed on.

He further said the magnitude of the deposit rate cuts by banks has been higher than the cuts in base rates and gives banks more room to cut.

RBI will come up with changes in the base rate computation

to shift it to the marginal cost of funding-based method to ensure that borrowers benefit, Rajan said.

He said balance sheet clean-ups by banks underway will also ensure that funds are available to be invested on the productive side.

RBI is targeting to complete the clean-up process by March 2017, he said and also warned banks against misusing the leeways offered in the process through schemes like the 5/25 scheme for infra financing.

Rajan said it is "absolutely crucial" to walk on the path of reforms suggested by the PJ Nayak committee to ensure that the March 2017 target is met.

RBI Deputy Governor H R Khan said the central bank is all for a "frequent" resetting of the rate governing the small savings schemes, which if lowered, can help banks pass on the rate cuts by the central bank.

On the Rs 3.75 trillion loan restructuring scheme of various state electricity boards announced by the government recently, Rajan said RBI is still in discussions with the government clearing out the working details.

On currency movements, he said that news headlines only report about the decline of the rupee against the dollar and ignore the fact that the rupee has been appreciating against all the major currencies expect the greenback.

On inclusion of the Chinese yuan into the SDR basket of International Monetary Fund from yesterday, he said we may see more instances of devaluation by Beijing.

Talking about the rupee, which has been at the receiving end in the past many months, he said RBI cannot manipulate the rupee rate as per macro objectives and reiterated that it intervenes only to smoothen volatility in the market.

When asked if there is cartelisation by banks which are sticking to the 4 percent rate in savings bank rate despite deposit pricing deregulation long ago, Rajan said it is difficult to draw any such conjecture, but promised RBI will look into it.