With headline inflation lingering near a two-year high amid high food prices, the outgoing Reserve Bank of India Governor Raghuram Rajan is likely to leave interest rates unchanged in his final monetary policy review before stepping down early next month. RBI Governor Raghuram Rajan kept the repo rate – the rate at which the RBI lends to commercial banks – at 6.5%.
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“In view of this configuration of risks, it’s appropriate for the Reserve Bank to keep the policy repo rate unchanged at this juncture, while awaiting space for action”.
Gowda said Rajan’s keeping the rates unchanged in the monetary policy showed that he is “extremely concerned” about inflation. Moreover, prices of pulses and cereals are rising and services inflation remains somewhat sticky.
The much admired former International Monetary Fund chief economist is due to step down as RBI governor on September 4 after a three-year term to return to academia and family living in the United States.
Rajan observed that it is not correct to assume that GST implementation would necessarily stoke inflation.
On the other hand, fuel inflation (BP) (STO) (RDS.B), another important component, “remained subdued”, according to the August monetary policy statement issued by the RBI. Retail inflation in June was 5.77 per cent, well above the 5 per cent target set by the central bank. “I have a suspicion that some new concern will crop up once FCNR redemptions are behind us”, Rajan said.
Now that it is mandated that the repo rate be above inflation rates as measured by the Consumer Price Index (CPI), economists opine that policymakers have committed themselves to this rate for a minimum period of two-three years.
The policy update comes against the backdrop of the government fixing on Friday the inflation target for the next five years at plus or minus four per cent – a task which will be entrusted with the soon-to-be-constituted Monetary Policy Committee (MCP) to realise by mandating it to fix policy rates. And unsurprisingly, there is market acceptance that this is what is required for our times. As former RBI Governor Dr Duvvuri Subbarao said only last week in an interview on “Who Moved My Interest Rate?, his book on the RBI, “Price stability is at the heart of a Central Bank’s mandate”.
The RBI held out the assurance that it would continue with both domestic liquidity operations and foreign exchange interventions to enable management of FCNR (B) deposit redemptions without market disruptions.
The three years in RBI for Rajan has been quite eventful to say the least. Business confidence is looking up in recent months, he said. Higher rural demand thanks to the monsoon as well as increased consumption from the higher salaries recommended by the Seventh Pay Commission would bolster momentum, it added.
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On non-performing assets (NPAs) or bad loans that have been ailing the banking sector for a long time, Rajan said he was comfortable with the stressed assets recognition process undertaken by the banks in the process of cleaning up their balance sheets.
