Rajan is often criticised for his stance on not reducing interest rates, but previous rate cuts have also not been transmitted by banks.
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Consumer Price Index based retail inflation rose by 5.77 per cent in June, the fastest pace in 22 months and it is expected that the implementation of the new Goods and Services Tax (GST) may push it up further.
“The Indian government’s notification of the inflation target at four per cent, plus or minus two per cent through to 2021 is a credit positive re-affirmation of commitment to keeping inflation at moderate levels”, said Moody’s Senior Vice President (Sovereign Risk Group) Marie Diron in a statement.
With Raghuram Rajan set to deliver his last monetary policy on Tuesday, most brokerages as well economists seem to be united that a parting gift in terms of a rate cut is unlikely by Rajan.
The MPC will be entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level. “It will take a few months for the vegetable prices to come down when the kharif crops come into the market”, State Bank of India chairperson Arundhati Bhattacharya said. “This necessarily will imply that the scope for rate cuts is limited”, he said.
“We see three compelling reasons for the governor to cut rates by 0.25 per cent on Tuesday”. These three members of MPC will be experts in the field of economics or banking or finance or monetary policy and will be appointed for a period of four years and will not be eligible for re-appointment.
“Even the liquidity condition in the system is sufficient, so CRR will not be altered”, the treasury head added.
Rajan, a former International Monetary Fund chief economist highly regarded by financial markets, will step down on September 4 after three years at the helm of the RBI during which his policies helped to cut inflation in half.
Economists at HDFC Bank, in a research report, opined that given that headline inflation (which measures overall inflation in the economy and includes volatile components such as food and energy prices) still remains above the RBI’s target of 5 per cent, further room for policy rate cuts is rather limited.
“With good rains, pulses’ sowing for the kharif season has jumped 39% above last year’s sowing”.
Finance Ministry officials said the committee – which will fashion the contours of the monetary policy once it is in place – would be finalised before the next bi-monthly policy review, due in October.
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The government had amended the RBI Act through Finance Act 2016 to provide for a Monetary Policy Committee (MPC) with a specific inflation goal, but it did not notify the inflation target.
