Flamboyant former Reserve Bank Governor Raghuram Rajan too may have cut interest rates like his successor Urjit Patel did at his every first monetary policy review, said rating agency Fitch. “The newly established six-person monetary policy committee he (Patel) heads voted to cut interest rates at its first meeting (last month) since Rajan’s exit. Tempting as it is to think the central bank has slipped back to its bad habits that had resulted in persistently high inflation, one might argue Rajan would have made the exact same choice at last month’s meeting,” it said in its bi-monthly publication ‘Fitch on India’.
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It reasoned its assessment to consumer price inflation coming in at 4.3 per cent in September, comfortably below the RBI’s 5 per cent target for end-March 2017.
Also, India’s external position has improved in recent years, and is no longer of major concern to the central bank.
“Raghuram Rajan left his role as governor of the Reserve Bank of India (RBI) in September, taking with him his celebrity reputation and a good track record. Inflation fell significantly and the rupee stabilised during his three years in charge, so it is perhaps understandable that his departure has created a few jitters,” Fitch said.
However, it does not take a governor with “Rajan’s high profile to run a central bank that prioritises inflation and delivers economic stability,” it said.
The new inflation-targeting framework – implemented under Rajan – that focuses on consumer prices instead of wholesale prices represents a significant improvement.
“Institutional support for policies that keep inflation in check has also risen. Government officials appear to have grown more cognizant of the downside of high inflation, and have allowed more limited increases in minimum support prices for agricultural products,” it said.
Fitch, however, said it was still far too early to say that there has been a structural shift to a more stable inflation environment that might support India’s credit profile.
“The decline in inflation under Rajan was at least partly driven by a big fall in global commodity prices. Keeping inflation low without that supply-side help could require a more active role for the RBI,” it said.
The government’s decision to raise public-sector salaries by 24 per cent with the implementation of the 7th Pay Commission earlier this year will also add to price pressure.
“Fitch forecasts that inflation will drift to the upper end of the RBI’s medium-term inflation target range of 2-6 per cent by end-2018.
“The RBI’s policy stance between now and then will provide a clearer idea of whether the new inflation-targeting framework is truly a regime shift,” it added.