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Business News/ Opinion / Blogs/  Is this the end of the rate tightening cycle for RBI?
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Is this the end of the rate tightening cycle for RBI?

Even though Raghuram Rajan does not anticipate further policy tightening in the near term, he could spring a surprise

RBI governor Raghuram Rajan in Mumbai on Wednesday. Photo: BloombergPremium
RBI governor Raghuram Rajan in Mumbai on Wednesday. Photo: Bloomberg

For a change, Reserve Bank of India (RBI) governor Raghuram Rajan’s first bi-monthly monetary policy for fiscal 2015 was shorn of any surprises—both 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’s statement in March that “the policy rate is appropriately set".

This time around, Rajan has even gone to the extent of saying that if inflation continues to decelerate, “further policy tightening in the near term is not anticipated at this juncture". 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.

In accordance with the Urjit Patel committee’s 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.

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—inflation was high for most part of fiscal year 2014—will pull down retail inflation but that cannot be a source of comfort for RBI, particularly when core inflation remains high.

He has also taken steps to improve the transmission of policy actions across the interest rate spectrum. This he has done by reducing banks’ 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.

RBI’s projected growth in India’s gross domestic product (GDP) in fiscal 2015 is 5-6%, against less than 5% in fiscal 2014, but with “downside risks" to the central estimate of 5.5%. With no sign of industrial revival and pick-up in investment climate, it’s 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’s certain that the pragmatic RBI governor has not lost focus on fighting inflation as only sustained low inflation can ensure growth.

If the monsoon plays spoilsport, though, Rajan could spring a surprise.

Banker’s Trust Realtime is a frequent blog by Tamal Bandyopadhyay, who writes a popular weekly column Banker’s Trust.

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Published: 01 Apr 2014, 01:11 PM IST
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