There are two ways to look at the latest monetary policy review by the Reserve Bank of India. On the face of it, Governor Raghuram Rajan did not press any of the buttons he could have. The benchmark rates, such as the repo rate and the cash reserve ratio, remain unchanged. But the view that since the RBI did not do anything, it was a non-event, would be missing the sophisticated proposition Rajan laid out for the Narendra Modi government, especially Finance Minister Arun Jaitley, who will present the Union budget later this month. Rajan’s assessment offers two key takeaways.
One, irrespective of the sharp fall in global commodity prices, especially crude oil, the inflation faced by consumers in India continues to remain high and sticky. As such, Rajan, known for his single-minded approach to curbing inflation, made it clear yet again that he will stay the course, even though there is always pressure on him to cut interest rates in order to fuel growth. “The Reserve Bank continues to be accommodative… while awaiting further data on the development of inflation,” he said. Rajan has effectively chosen to predicate future monetary policy action (read rate cuts) on the fiscal policy actions (read fiscal rectitude) of the government. “Structural reforms in the forthcoming Union budget that boost growth while controlling spending will create more space for monetary policy to support growth, while also ensuring that inflation remains on the projected path of 5 per cent by the end of 2016-17.” That, in a nutshell, is the challenge for Jaitley.
