As the clamour for a rate cut by the Reserve Bank of India (RBI) grew with the U.S. Fed leaving ultra-low rates intact, Governor Raghuram Rajan on Friday kept all guessing about his next monetary policy move saying the ‘key task’ is to keep inflation low.
He further said the ‘excessively low’ level of retail inflation at 3.6 per cent last month was due to ‘base effects’, excluding which it should be around mid-5 per cent.
“The key task is to keep inflation low, not just today but well into the future,” the Governor said while addressing industrialists and bankers at an event here.
Mr. Rajan has been under pressure to cut the rates further, with the government and industry leaders repeatedly stressing on the need to lower the cost of capital to give a boost to the economy, especially in the wake of retail inflation hitting record low levels and wholesale inflation actually being in the negative zone for 10 months in a row.
Delivering the fourth CK Prahlad memorial lecture , Mr. Rajan said, “We have to be careful while pursuing growth and have to make it sustainable.” He said that keeping inflation low on a sustained basis was key to achieving this target.
Explaining further, Mr. Rajan said, “The 3.6 (per cent) we got last month is I think rendered excessively low by base effects (and) if you add back the base effects, it is about mid-5s.”
Mr. Rajan, who has cut rates thrice this year, attributed his U.S. counterpart Janet Yellen’s decision to delay a rate hike to slow growth in the U.S. and other big economies, and sought to convey it does not change RBI’s monetary policy machinations.
“Clearly, thus so far the markets seem to have reacted somewhat benignly, certainly toward us. What we’ll have to do is continue doing what we’ve been doing, which was anyway the intention, regardless of the Fed decision,” he told reporters in one of his rare comments on the sidelines of an event. The Fed’s no-show, coupled with the inflation staying much below the RBI’s projected trajectory for many months, has raised the possibility of Mr. Rajan delivering a sentiment —driving rate cut on September 29, the next scheduled review date.
To the large posse of reporters looking for hints about RBI’s next move, Mr. Rajan said, “I know these cameras are here not to see me speak on core competencies but on interest rates — so let me offer my standard disclaimer.
“For any hints on what we will do in the upcoming policy statement, please read the guidance in our last policy statement,” he said. At that time, Mr. Rajan had linked further cuts to inflation and said that “significant” uncertainties for the monetary policy will be ending in coming months with data on inflation, monsoons and the U.S. Fed’s actions. “On-hold U.S. Fed paves way for RBI rate cuts,” Singaporean brokerage DBS said in a note this morning, citing lower-than-expected headline retail and wholesale price inflation.
However, Mr. Rajan’s comments keep the rate cut advocates guessing.
Transmission of rate cuts On transmission of earlier rate cuts by banks, which has not happened in the way the RBI wants it and is a key variable that will influence its decisions, Mr. Rajan acknowledged that deposit rates are taking time to get re-priced and it is a ‘matter of time’ before banks lower their lending rates.
With the ebbing of inflation concerns, the RBI shifted its policy stance in January to being more accommodative of the concerns on the growth front. It has cut the key rate thrice by a cumulative 0.75 per cent.
Against this, the banks have only passed on an average of 0.30 per cent in their lending rates, resulting in the RBI asking for more.
Mr. Rajan said RBI is ‘nudging’ lenders to adopt newer ways of calculating base rate like the move to adopt marginal cost of funding, and it is a matter of time before they are decided by benchmarks like the Libor.
On the growth front, wherein the June quarter GDP expanded at 7 per cent, coming down by 50 bps from the March quarter print, making a stronger case for a stimulus from the central bank, Mr. Rajan said the key in the pursuit of growth was to make it sustainable. The difference between the consumer price inflation and wholesale price inflation is “certainly is a source of problems”, Mr. Rajan said, stressing that this differentiates between different sections of the economy.
Prices Mr. Rajan pointed out that prices of finished goods have not fallen as much as the input commodities and therefore, even those trading in such goods are able to maintain or expand their margins in a situation of negative WPI. The Governor also noted that consumers should not worry much as with the climb-down in inflation, as its getting a higher real interest rate.
With non-performing assets continuing to be a problem, Mr. Rajan reiterated his earlier stance, saying the process of restructuring was discontinued for ensuring that there are no delays in recognition of problems, and added that there is enough in the laws at present for the banks to lend even for a NPA account.
