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India is not convinced that inflation is really falling

Urjit Patel, governor of the Reserve Bank of India (RBI)
Dhiraj Singh | Bloomberg | Getty Images
Urjit Patel, governor of the Reserve Bank of India (RBI)

India's central bank is determined to look through headline inflation figures and focus on core trends in order to meet its medium-term target of 4 percent, Governor Urjit Patel said Friday.

Speaking in an exclusive interview with CNBC-TV18, Patel said that recent volatility in the country's food and fuel prices was likely to be "short-lived" and the monetary policy committee needed to look beyond this to achieve the government's inflation mandate.

"Since we have committed to move closer to 4 percent inflation because of the legislative and notified mandate of the government, we needed to look beyond the headline number to see where the kind of disinflation that is needed to take us towards 4 (percent) would come from," he said.

"The committee felt that inflation excluding food and fuel is something that has been stubborn since September, October, and has shown little sign of coming decisively below five (percent). That is the main reason we had to look through the headline inflation."

Many commentators were surprised last week by the RBI's (Reserve Bank of India) monetary policy committee's decision to maintain interest rates at 6.25 percent, with many expecting it to cut rates. The bank also shifted the country's monetary policy stance from accommodative to neutral given recent inflation fluctuations which saw vegetable prices fall by as much as half at the tail end of last year. India's consumer inflation rate came in at a mild 3.17 percent in January year-on-year, according to Reuters, which led to expectations of a rate cut. However, core inflation accelerated to around 5.1 percent for the same period, highlighting building price pressures in the broader economy.

Patel said there would be "short-term beneficial inflationary impacts" in the coming months but added that he expects these to reverse themselves because "inflation, excluding food and fuel, continues to be relatively high."

As such, he said the committee would need scope for flexibility going forward in order to get closer to 4 percent on a "durable basis but in a calibrated manner."

Patel would not comment on the likelihood of either a rate cut or hike in the near future but said that now, from a neutral stance, the bank would be in a position to move in either direction as needed.

Friday marks 100 days since demonetization in India, when the country replaced 500 and 1000 rupee notes ($7.49 and $14.9 respectively) with new 500 and 2000 rupee notes in an attempt to curb black money.

It will be important to watch what the effect of this demonetization and subsequent demonetization is on commodity prices and whether the disinflation seen so far continues and "for how long".

India is currently forecasting GDP (gross domestic product) growth of 7.4 percent over the next fiscal year, around 50 basis points above the previous year and "a highly respectable growth rate under the circumstances," according to Patel.