NEW DELHI: India needs to recalibrate its response to the price situation following disruptions in global supply chains on account of the Russia-Ukraine war, as losing the battle against inflation neither serves the government nor the central bank, former RBI governor Raghuram Rajan has said.
Known for his frank views, Rajan further said it is very important for any central bank to respect its mandate given to it by the government.
India's central bank has a mandate, which has served it well, in the sense of allowing it to react to some of the concerns during the pandemic, without raising rates, having moderate inflation," he said in an interview to CNBC-TV18.
The RBI has a mandate to keep an inflation target of 4 per cent with a +/-2 per cent tolerance band.
"And like every other central bank, as we come out of it and face new challenges, we have to recalibrate and ask whether the old playbook sort of still holds," Rajan said, adding that he thinks that's extremely important.
The eminent economist said, "Because otherwise if you lose the battle against inflation, it serves neither the government nor the RBI."
The retail inflation rate breached the 6 per cent upper tolerance limit of the RBI for the first time in seven months in January, while the wholesale-price index stayed in double-digits for the 10th month in a row.
To a question on whether current inflation is a temporary blip, Rajan said this(inflation) is coming on top of an already high level of inflation in many parts of the world.
"So when you add the additional effects of war, it gives greater weight to inflation," he said.
According to Rajan, inflation was already becoming more persistent certainly in the United States but also in Europe and with the additional boost to inflation from the war and from the shortages of commodities etc.
The Reserve Bank of India (RBI) on February 10, had lowered the inflation outlook to 4.5 per cent for the next fiscal, from 5.3 per cent in the current year, on the assumption of a normal monsoon during the year.
Asked whether he is worried about the India growth story, he said India benefited from the low crude prices from 2014 onwards and now it is payback time.
"The reality is that our growth performance has been poor for quite some time. The government keeps throwing this that against it, but we haven't really had a strong recovery, ever since the 2016 demonetization," Rajan noted.
Asia's third-largest economy is projected to grow 8.9 per cent in the fiscal year ending March 31, slower than previously anticipated 9.2 per cent, according to the recent government data.
Asked should India worry about high fiscal and current account deficit, the eminent economist said he thinks both are a concern.
"So the three sort of problems - inflation, current account deficit and fiscal deficit. So this is a time of extremely careful management, we do need to manage," he opined.
Rajan, currently a professor at the University of Chicago Booth School of Business, suggested that it is a time when certainly India should re-energise some of the asset sales that don't show up in the budget, but is something that would help if done carefully.
Ukraine war set to take sheen off diamantaires, sales seen falling by 30% in Q1: Report
The crippling economic sanctions imposed by the US and European nations on Russia following its invasion of Ukraine threaten to take the sheen off the domestic diamond industry, culling its sales by 25-30 per cent worth USD 2-2.5 billion in the next quarter alone, a report has warned.
The domestic diamond industry imports, cuts and polishes around 80-90 per cent of the world's roughs, according to a Crisil report.
The sweeping economic sanctions on Russia also covers Alrosa, the biggest Russian diamond miner that meets as much as 30 per cent of global production of roughs, and this will have a bearing on the domestic diamond polishing industry, aid the report bases on the analysis of 53 diamantaires, which contribute a third of the industry revenue.
Alrosa is a critical source for the domestic diamond industry, which imports, cuts and polishes 80-90 per cent of the world's roughs, the report added.
Though sanctions do not prohibit doing business with Alrosa, the same have severed the Russian central bank and two major banks from the SWIFT system making trade settlement difficult creating supply disruptions if the war lingers on, the report noted.
The domestic diamond industry, which is almost entirely export-oriented, is likely to clock revenues of USD 24 billion this fiscal having bounced back to pre-pandemic levels.
It was expected to log a compound annual growth of 5-7 per cent over the medium term, driven by steady demand and hardening prices that already jumped over 21 per cent before the war began.
Amid mining-side challenges, production cuts by miners, and a rapid jump in demand over the course of the pandemic, the average inventory levels of domestic diamantaires have also come down to about three months from over four months earlier.
If the trade disruption is protracted, sales in the next quarter will be down by 25-30 per cent, shaving off about USD 2-2.5 billion in sales, leading to flattish growth next fiscal, the report said, adding the loss would have been steeper but for the reasonably leaner first half when the industry generally reels in 45 per cent of its annual sales.
The operating profitability of diamantaires has been under pressure since the second half of this fiscal due to their inability to fully pass on a sharp 21 per cent increase in prices of roughs since the start of this fiscal, but prices of polished diamonds just haven't kept apace.
Prior to the war, buoyant demand meant prices of roughs would rise 10-12 per cent next fiscal and is likely to rise by another 5-8 per cent due to the supply-side constraints.
With pent-up demand almost saturated and tempering of consumer sentiment following the war, the industry may once again find it difficult, at least in the immediate term, to fully pass on the higher input prices, leading to a potential 75-100 bps drop in operating profit to 4-4.5 per cent next fiscal.
However, the credit risk profile of diamantaires is likely to remain stable as the decline in sales and profitability will be compensated by controlled leverage.