Presenting the monetary policy review on Tuesday, Reserve Bank Governor Raghuram Rajan did what was widely expected by the markets in the run-up — kept policy rates unchanged. That’s because far from softening further since the last review in April, inflation, especially consumer price index inflation, has firmed up. Moreover, the RBI’s three-month inflation expectations survey of households showed that people do not expect inflation to go down substantially. Inflation expectations are often a more important variable in deciding the course of policy than actual inflation. The RBI policy statement said “The inflation surprise in the April reading makes the future trajectory of inflation somewhat more uncertain…” In reality, there are clear upside risks, as Rajan pointed out. For instance, “firming of international commodity prices, particularly of crude oil; the implementation of the Seventh Central Pay Commission awards which will have to be factored into projections as soon as clarity on implementation emerges…” There are other extraneous factors as well, such as the possibility of a rate hike by the world’s most influential central bank, the Federal Reserve, as well as the uncertainty surrounding the possible British exit from the European Union.
The suspense around Rajan’s future at the helm of affairs in the RBI only adds to these uncertainties. He took over in September 2013 at a time when almost all macroeconomic variables, especially those most closely influenced by monetary policy, such as inflation, were running amok. It was his single-minded focus on containing inflation by keeping the interest rates high that has contributed to India weathering the global economic maelstrom. Despite the fact that India is still struggling to control inflation, it is relatively better off than many of its erstwhile equals. Rajan also brought about long-pending structural reforms in the banking sector. He has ushered in a new regime of banking that stresses on differentiated banks, which specialise in reaching specific categories among the vast number of the unbanked in India. Rajan has been a voice of reason on matters of fiscal policy. Time and again, he has predicated monetary policy cuts on the government walking the talk on fiscal prudence.
Rajan has countered uncertainties by following a well-articulated and well-argued policy stance. It is time for the government to take the cue, and end the uncertainty over his extension as the RBI governor.