“The monetary policy committee needs to be perceived as neutral”, said Shubhada Rao, an economist with Yes Bank Ltd.in Mumbai.
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In his swansong monetary policy, RBI Governor Raghuram Rajan today lambasted banks for passing on rate-cut benefits “only modestly” to borrowers on one pretext or other – the latest being dollar deposit outflows – even as he made a decision to stay put on inflation-control as priority.
Rajan took charge in September 2013 in one of the most challenging macro-environments for a central bank governor.
The RBI Governor is likely to maintain that the monetary policy stance remains accommodative, thus leaving room for his yet-to-be-named successor to reduce interest rates.
Following an inflation at a two-year high prvented Dr Raghuram Rajan, RBI governor from cutting interest rates at his final policy review as head of the Reserve Bank of India today.
Such is his appeal that Rajan’s announcement of not continuing for a second term evoked anguished editorials from across the country.
Added to the rate cuts are RBI actions on the liquidity front, which have created a condition where on some days, banks have parked their excess money with RBI using the reverse repo facility.
Whoever takes over from Rajan will need to follow through on efforts to clean up bad loans hobbling Indian banks, so that they can finance the investment needed if India is to hold onto its place as one of the world’s fastest growing major economies. Later he set out to accomplish three main goals: keep inflation low and stable, spur competition at state-run banks and deepen India’s financial markets.
“The Reserve Bank will continue with both domestic liquidity operations and foreign exchange interventions that should also enable management of the FCNR (B) redemptions without market disruptions”, Rajan said.
“Earlier, some bankers said that it is the lack of liquidity that is holding rates high; now I hear from some that it is fear of the FCNR (B) redemptions that is making them reluctant to cut rates”, he said.
Yet a host of other price pressures are looming.
RBI Deputy Governor Urjit Patel said about 55% of Consumer Price Index basket will not be impacted by GST and since the cascading effect of “tax-on-tax” disappears, so the effective rate on many goods and services will come down. He, however, steered away from questions as to in what capacity the Congress could utilise the services of Rajan, if it returned to power in 2019.
“Snap judgements either by critics or supporters don’t really matter”. The MPC is a “fundamental institutional reform” that will modernize the monetary policy framework, and build a platform for strong and sustainable growth, he said.
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On critics, of which Rajan has had more than his share, the former chief economist of International Monetary Fund, who now plans to go back to his teaching job, said: “I have nothing to say.critics are there all the time. That’s where his legacy will be most visible”.
