For a change, Reserve Bank of India (RBI) governor Raghuram Rajan\u2019s first bi-monthly monetary policy for fiscal 2015 was shorn of any surprises\u2014both the policy rate and the cash reserve ratio (CRR), or the portion of deposits that commercial banks keep with the central bank, have been left unchanged. This is in keeping with Rajan\u2019s statement in March that \u201cthe policy rate is appropriately set\u201d.<\/p>\n
This time around, Rajan has even gone to the extent of saying that if inflation continues to decelerate, \u201cfurther policy tightening in the near term is not anticipated at this juncture\u201d. To that extent, despite apprehensions about the trajectory of inflation, at this point, one can presume that we have reached the peak of the rate tightening cycle.<\/p>\n
In accordance with the Urjit Patel committee\u2019s recommendations, RBI has kept the target for inflation measured by the Consumer Price Index (CPI) at 8% for January 2015 and 6% for January 2016. Consumer price inflation dropped to 8.1% in February, the third monthly decline in a row, driven by a fall in food prices but if one excludes food and fuel, the so-called core retail inflation remained sticky, indicating demand pressure.<\/p>\n
Rajan is aware of the fact that there are risks to the 8% retail inflation projection for January 2015. For instance, monsoon rainfall could be less-than-normal because of the El Nino weather phenomenon in the Pacific that affects monsoon patterns. Then, there are uncertainties on minimum support prices for agricultural commodities and administered prices of fuel, fertilizer and electricity and even international commodity prices because of geo-political developments. Finally, with a new government at the helm after the April-May general election, the outlook for fiscal policy too remains uncertain. Indeed, the high base effect\u2014inflation was high for most part of fiscal year 2014\u2014will pull down retail inflation but that cannot be a source of comfort for RBI, particularly when core inflation remains high.<\/p>\n
At this juncture, Rajan has played safe: he has refrained from any hike and instead preferred to wait and see how the earlier rate hikes play into the system. Since he took over as RBI governor in September 2013, Rajan has raised the key policy rate thrice by a total 75 basis points to 8% to fight entrenched inflation in Asia\u2019s third largest economy. One basis point is one-hundredth of a percentage point.<\/p>\n
He has also taken steps to improve the transmission of policy actions across the interest rate spectrum. This he has done by reducing banks\u2019 dependence on overnight repo window of RBI and increasing their access to the seven-day and 14-day term repo. This will encourage banks to hold money for a relatively longer period, help better pricing for financial products and improve treasury management.<\/p>\n
RBI\u2019s projected growth in India\u2019s gross domestic product (GDP) in fiscal 2015 is 5-6%, against less than 5% in fiscal 2014, but with \u201cdownside risks\u201d to the central estimate of 5.5%. With no sign of industrial revival and pick-up in investment climate, it\u2019s difficult to put an exact figure on the year-end GDP growth rate. Even though Rajan does not anticipate further policy tightening in near term, it\u2019s certain that the pragmatic RBI governor has not lost focus on fighting inflation as only sustained low inflation can ensure growth.<\/p>\n
If the monsoon plays spoilsport, though, Rajan could spring a surprise.<\/p>\n","protected":false},"excerpt":{"rendered":"
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