Never miss a great news story!
Get instant notifications from Economic Times
AllowNot now


You can switch off notifications anytime using browser settings.
12,086.70114.9
Stock Analysis, IPO, Mutual Funds, Bonds & More

RBI policy review: Raghuram Rajan cuts repo rate 25 bps, says more reduction will depend on Centre's response to poor rains

“I would characterise (the policy) as neither conservative nor aggressive. It’s in some sense a Goldilocks policy — just right given the current situation,” he said.

ET Bureau|
Updated: Jun 03, 2015, 02.55 AM IST
0Comments
“I would characterise (the policy) as neither conservative nor aggressive. It’s in some sense a Goldilocks policy — just right given the current situation,” he said.
“I would characterise (the policy) as neither conservative nor aggressive. It’s in some sense a Goldilocks policy — just right given the current situation,” he said.
MUMBAI: Reserve Bank of India Governor Raghuram Rajan cut interest rates for the third time since January in a delicate balancing act aimed at shoring up a tentative economy. Much depends on the June-September monsoon and the government’s response to a possibly poor rainy season, he said. “I would characterise (the policy) as neither conservative nor aggressive. It’s in some sense a Goldilocks policy — just right given the current situation,” Rajan said at a news conference after Tuesday’s monetary policy review. The Reserve Bank cut the key repo rate by 25 basis points, or 0.25 percentage point, to 7.25%.

Despite the various imponderables, “a more appropriate stance is to front-load a rate cut today and then wait for data that clarify uncertainty”, Rajan said.

The governor then told banks, and not for the first time, what they needed to do to make the policy change effective. “Banks should pass through the sequence of rate cuts into lending rates.” Rajan conceded that banks have been reducing interest rates on deposits, which should ideally translate into lower borrowing costs. But he elaborated on the weakness of the Indian banking system. RBI policy review: Raghuram Rajan cuts repo rate 25 bps, says more reduction will depend on Centre's response to poor rains Rajan also elaborated on how the Indian banking system needs capital to fund debt that’s gone bad and to provide credit when the investment cycle gathers momentum.

The governor’s words were heeded — State Bank of India cut its base rate in the evening, followed by Allahabad Bank, Dena Bank and Punjab & Sind Bank. The policy’s tone was muted, particularly in comparison with some of the pronouncements that have emanated recently from the government on economic revival prospects.

RBI’s growth estimate for the year was reduced to 7.6% from 7.8% and its inflation forecast was raised by 20 basis points to 6% by the fiscal year-end.

“The government and RBI agree that these cuts signify that the economy needs policy support as economic growth is recovering while the external environment remains weak,” said Arvind Subramanian, chief economic advisor.

“The government and RBI will work together to ensure that the macroeconomic (position) remains strong while investment and growth are accelerated towards their potential.”

Equities plummet

With the weather office further lowering its monsoon forecast, the equity markets plummeted, particularly since the interpretation was that any further rate cuts will only come once it is clear whether there’s any adverse rain impact on agriculture and prices, which would mean waiting until later in the year.

“RBI’s statement would suggest that the central bank is done with cutting rates, with the onus now on the commercial banks to transmit the policy rate cut into lending rate cuts and the government to accelerate policy efforts to ease supply constraints,” said Ravneet Gill, chief executive, Deutsche Bank.

“However, we still expect another rate cut because we don’t see further upside risk to commodity prices, and we expect administrative measures to be successful in preventing food prices from spiking excessively in the event of a poor monsoon.”

Chanda Kochhar, managing director & CEO of ICICI Bank, welcomed the rate cut as domestic demand and credit growth need to be boosted.

“The uncertainties cited in the policy statement present a pragmatic evaluation of economic conditions warranting a guarded approach, particularly with regard to risks to inflation and impact of monsoon,” she said.

Investors signalled their disappointment at what they regarded as Rajan’s hawkish stance that appeared to eliminate the possibility of inter-meeting interest rate reductions, given the higher estimate for prices and lowered growth outlook. The next monetary policy review is due on August 4.

The benchmark Sensex fell 2.37% to 27,188.38, its biggest decline in a month, and the most traded government bond’s yield jumped eight basis points to 7.72%. The rupee, among the best-performing emerging market currencies, weakened 0.19%, or 12 paise, to 63.83 per dollar.

Rajan insisted that his commitment to tackling deflationary trends is unwavering. But he will resist easy solutions even as the pressure to do more to boost investment intensifies.

“RBI is not a cheerleader,” Rajan said at the press briefing. “There are other people in the economy who can play cheerleader. Our job is to give people the confidence in the value of the rupee, in the prospects of inflation. Every time an exporter comes to me and says that the stability has been valuable for us to make decisions, that reiterates my view on our role.”

‘Fulfilling mandate’

The central bank is not trying to project itself as an inflation slayer by keeping interest rates high but is only trying to fulfill its mandate to keep prices under check while seeking to boost growth, he said.

“There is a misimpression that we want to keep interest rates really high because our primary objective is to look really strong and firm,” said Rajan. “But there is no point looking strong and firm if you kill the economy in the process.

We want to do what is right, given our mandate to keep inflation under control. So we are trying to use whatever room we have to revive the economy. We are under no illusion that the investment is up and running. It is not. It needs support.

We also don’t take the view that interest rates are the only thing that matters. It is one part of the overall picture.”

In its policy statement, the central bank cited three concerns on prices.

“First, some forecasters, notably the IMD (India Meteorological Department), predict a below-normal southwest monsoon. Astute food management is needed to mitigate possible inflationary effects. Second, crude prices have been firming amidst considerable volatility, and geopolitical risks are ever present. Third, volatility in the external environment could impact inflation,” it said.

Also Read

India in growth recession; extreme centralisation of power in PMO not good: Raghuram Rajan

India’s construction, property industries in trouble, says Raghuram Rajan

Suppressing criticism bad for government: Former RBI Chief Raghuram Rajan

Raghuram Rajan ko gussa kyu aata hai (with apologies to Pinto)?

India's fiscal deficit 'conceals' a lot, warns Raghuram Rajan

Comments
Add Your Comments
Commenting feature is disabled in your country/region.
Download The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.

Other useful Links


Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service