As was widely expected, Reserve Bank of India Governor Raghuram Rajan has opted for a >standstill monetary policy , brushing aside vocal demands from industry and strong hints from the government for a cut in rates. With inflation trending downwards in recent months and settling well below the RBI target of 8 per cent by January 2015, a major factor that prevented a more accommodative stance from the central bank was eliminated. Or at least that is what industry believed, especially because imported inflation is no longer a risk given the steep fall in global oil prices. But Dr. Rajan is not convinced yet about the durability of the disinflationary process. For one thing, much of the fall in inflation in the last couple of months is due to the statistical base effect which will wear off by December when it could trend upwards again. Second, prices of cereals, pulses and oilseeds could rise, given the kharif production shortfall. Finally, though the government appears serious about its commitment to meet the fiscal deficit target of 4.1 per cent for this fiscal, the delay in the disinvestment process and the weak growth in tax collections are causes for worry. In sum, given this situation, a change in the policy stance now could be premature.
Clearly, Dr. Rajan wants to slay the inflation demon fully and ensure it stays slain before he changes his policy stance. This is certainly prudent given the current > macroeconomic environment — though industry might disagree. The fact is that rates in the call money and government securities markets have been softening over the last couple of months. Yet, banks have chosen not to transmit these soft rate impulses to borrowers in the form of lower rates and have thus driven them to alternatives such as commercial paper and external borrowings. Clearly, banks have to up their game by shedding their “lazy banking” habits and aversion to risk, and show some initiative in their business. Again, while industry might bemoan yet another policy slot that has gone by without the central bank’s benevolence, the fact is that interest rate is just one factor that determines investment. Infrastructure constraints such as availability of power and fuel, and clearances, including for land, are greater stumbling blocks to a revival in investment. Despite the government’s efforts, revival of stalled projects has not accelerated. Industry should take hope from the central bank’s promise of a change in its policy stance early next year, including outside the policy review cycle, if the disinflationary process is sustained. Clearly, we are very close to a reversal in the rate cycle; reading between the lines, the markets are already betting on a cut around Budget time, if not earlier.