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Reserve Bank of India (RBI) governor Raghuram Rajan. Photo: Abhijit Bhatlekar/Mint
Reserve Bank of India (RBI) governor Raghuram Rajan. Photo: Abhijit Bhatlekar/Mint

Raghuram Rajan signals no rate cut in the offing

RBI governor Raghuram Rajan says monetary policy in sync with inflation data, offers a good prognosis for the Indian economy

New Delhi: Reserve Bank of India (RBI) governor Raghuram Rajan has all but ruled out an interest rate cut in August, when the central bank reviews its monetary policy, citing escalating inflation pressures.

“This discussion keeps going on without any economic basis. You saw the CPI numbers just last week; 5.8% is the CPI inflation (in June), our policy rate is 6.5%," he said, and added, “So, I am not sure where people say we are behind the curve. You have to tell me that somehow inflation is very low for us to be seen as behind the curve. So, I don’t really pay attention to this kind of dialogue."

He was responding to a query on whether RBI has behind the curve on cutting interest rates, during an interaction with reporters on Sunday. At the same time, Rajan—who leaves office on 4 September—offered a good prognosis for the economy, especially in the context of an above-normal monsoon.

A pickup in the rural economy on the back of a good monsoon should revive demand, Rajan said, pointing out that the focus should be on structural reforms. “I think we sometimes get overly fixated with a particular growth number 7.6 (%), 8 (%); they are all within the same sort of range of numbers. What we should be focused on is undertaking all the actions that need to ensure that growth is strong and sustainable and that means macro stability; that means (the focus should be on) the kind of structural reforms we are doing to enhance the pace of growth," he said.

When asked whether a review of the inflation target of 4% (+/- 2 percentage points) under the monetary policy agreement is on the cards, Rajan said: “The government has to reflect on it and notify the target. But that’s all that’s on the table."

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Economists did not expect an August rate cut anyway. “We rule out a rate action in August policy as RBI would be closely monitoring the higher-than seasonal surge in vegetable prices and the pace of monsoons," Kotak Mahindra Bank said in a 14 July note, adding that RBI may cut rates by a further 25 basis points this year. “Progress on monsoons and favourable base effect in second half of FY17 continue to point towards RBI achieving its near 5% inflation target by end-March 2017. Further, the expectation of additional monetary easing by major central banks amid increasing global uncertainty may provide additional policy leeway."

Rajan added that passing legislation to introduce the goods and services tax in the monsoon session will help speed up structural reforms needed to boost growth. “Our last projection was 7.6% and I think as the monsoon develops, as the global economy develops, clearly there will be changes in that," Rajan said while responding to a question on whether 8% growth is achievable with a good monsoon.

He also ruled out any blanket immunity for bankers from scrutiny by central investigative agencies on their decisions. At the same time, he said, commercial decisions taken in the right spirit and with the information available should be respected as banks grapple with bad debts. “I think bankers have expressed some concern that they should not be held liable for actions that are taken in the full spirit of what is needed; and I think everyone has respected that need that where they take actions based on appropriate due diligence, on a proper application of mind given the situation, they should have some freedom to take actions, because otherwise we will not get the kind of clean-up, the kind of putting over-leveraged projects back on track that the economy needs."

ALSO READ: The government must let RBI do its job

On a lighter note, Rajan said that he has no plans to write a tell-all book along the lines of his predecessor, but added that he may write on academic issues once his term ends.

D. Subbarao, was RBI chief during 2008-13, wrote about the sharp differences between the central bank and the Congress-led United Progressive Alliance government over interest rates in his memoir, Who Moved My Interest Rate?

The revelations come against the backdrop of Rajan’s abrupt decision to resign as RBI governor and a parallel allegation made by the Congress that the current National Democratic Alliance government had pressured him into the decision.

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