RBI's 'Best Tool' to Control Inflation is Interest Rate: Raghuram Rajan

A fortnight ahead of the next bi-monthly monetary policy review, Reserve Bank of India Governor Raghuram Rajan on Friday said the "best tool" available with the apex bank to control price rise is interest rate.

"Our best tool to control inflation is interest rate," he said, adding that the government too has tools like increasing agricultural production and improving supply.

"Both need to work together and will work together. We were expecting some increase in the CPI number because of the seasonal effects from vegetable prices, but it came more than anticipated by the consensus forecast. We will study them in greater detail. What does it suggest is that inflation is high as far as food prices go," he added.

Mr Rajan was talking to reporters after the RBI's board meeting in Shimla.

He, however, said the core inflation has been coming down but though "very very gently".

Retail or consumer price index (CPI) inflation rose to a three-month high of 8.59 per cent in April.

Mr Rajan also said that the RBI is a technocratic organisation and works with the government.

"We do not use rupee as the way of managing inflation. We are not trying to rely on a particular level of rupee to help us on inflation front."

Sometimes it can prove dangerous if "you become overly reliant" on certain level of rupee, he said. Instead, what the RBI has focused on is creating conditions inside the country for reduction in inflation.

"Thus far we feel comfortable with the pace of progress. Of course, there are blips up and down...," the RBI chief added.

He said people of India want lower inflation and the apex bank "will do whatever we can on inflationary front".

He also exuded confidence that retail inflation would come down to 6 per cent by March, 2016.

"We are very comfortable with the fact that we can achieve what the Urjit Patel committee suggestion of 8 per cent inflation at the end of the. Year and 6 per cent at the end of next year."

On the challenges before the new government, Mr Rajan said slowing growth, high inflation and twin deficits would have to be tackled on a priority basis.

After slipping to a decade low of 4.5 per cent in 2012-13, the growth inched up to 4.9 per cent in 2013-14. In the current year the growth is estimated to rise to 5 per cent.

Mr Rajan further said that retail inflation would brought down to 8 per cent by March 2015 and to 6 per cent by March 2016 and the RBI would do everything possible to manage inflation.

"Our focus is on creating conditions in the country for reduction in inflation. Thus far we feel comfortable with the pace of progress ... We have worked with the government and we will work with the new government. RBI is a technocratic organisation," he said.

The WPI-based inflation has eased to 5.2 per cent, while the retail inflation is still high at 8.59 per cent in April.

Referring to the rupee, he said the RBI does not use it as a tool to control inflation.

"We are not trying to rely on a particular level of rupee to help us on inflation front. That sometimes can prove dangerous if you become overtly reliant on a certain level of rupee."

Replying to questions on black-money, Mr Rajan said the apex is not directly involved in curbing the menace and it was primarily a function of the government.

"We can detect some of these activities as a result of monitoring of foreign exchange transactions. We do certainly work with the government. But in terms of bringing back black-money that is really primarily a function of government," he added.

Responding to queries on introduction of plastic money, Mr Rajan said, "In five cities, pilot testing would be done, including Shimla. In 2015, it would be launched based on results of pilot testing."

Plastic notes have an average life span of about five years and are difficult to imitate. Also, currency notes made of plastic are cleaner than paper notes.