‘Rate action driven by data, but no scope for flip-flops’

There was widespread expectation from the corporate sector and markets for a reduction in rates in the wake of the decline in inflation and the sharp fall in money market rates.

Reserve Bank of India Governor Raghuram Rajan on Tuesday said that the central bank would rather wait for a while to see if the low inflation trend is for real, and avoid a flip-flop on the monetary policy.

Addressing a press conference after unveiling the policy, Rajan said, “We have not pre-determined any course of action. We had said data will drive policy actions. We don’t want to cut rates in one policy and then increase it in the next policy. When we are certain of the facts, we will act.”

“We have to make sure that the disinflation process is well underway. We have had a couple of months of low inflation after five years of high inflation. We want to make sure that this is for real especially because we don’t intend to flip-flop,” he said. The consumer price inflation fell for the fifth consecutive month to 5.52 per cent in October.

“A change in the monetary policy stance at the current juncture is premature,” Rajan said, adding, “It is very short-sighted when people say we are not helping growth this quarter. We’ve been working on a framework, we are nearly there. I would say bear with us and hopefully, if we can stay there, we will produce years of sustainable growth.”

“If the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle,” Rajan said.

There was widespread expectation from the corporate sector and markets for a reduction in rates in the wake of the decline in inflation and the sharp fall in money market rates. Rajan said the RBI is in discussions with the government for a new monetary framework which it hopes to finalise shortly. Currently, the RBI’s Monetary Policy Committee proposals are advisory in nature and not binding on the government to implement them.