MUMBAI, June 7: Citing rising inflationary pressure, RBI Governor Raghuram Rajan today kept interest rates intact but said his monetary policy remains “accommodative” and hinted
at a cut later this year if good monsoon helps ease inflation.
He also exhorted banks to pass on the benefits of earlier rate cuts and emphasised that a better transmission of policy easing remains critical to support growth.
He left unchanged the key policy rate, repo, at 6.50 per cent and the cash reserve ratio at 4 per cent, citing the uncertainties on account of the surge in inflationary pressure and reversal in commodity prices.
“What we are saying is that we have not shifted stance to either a neutral stance or tightening stance. We are still accommodative, that means we are looking for room to ease. If that room opens up we will be able to ease. But now, I can’t tell you because there are lots of uncertainties around this. But broadly we are still in easing mode,” Rajan told reporters at the customary post-policy briefing.
Explaining the rationale for his caution, Rajan said, “All we are saying is that relative to our April stance, the data prints that came in surprised on the upside. The inflation reading in April was higher than anybody in the markets or we expected.
“Going forward we have to see how inflation pans out. It is a one-month reading. We have to see how the monsoon plays out and how that affects food prices? We also have to look at the supply management by the government. So, a variety of factors will come into play,” the Governor said.
He, however, hoped that expectations of a normal monsoon and improved supplies would check any food inflation flare-up.
While industry continued to hope for a rate cut soon, stock market saw a 232-point rally in the Sensex, which some experts attributed to expectations about Rajan’s extension beyond his current tenure ending September 3.
While Rajan kept the suspense alive saying a decision is taken in such cases after consultation between the government and the incumbent, he spelt out an ‘unfinished agenda’ in areas like financial inclusion, containing inflation and bad loans. This was seen by some as a hint that he may continue.
Retail inflation accelerated to an unexpected 5.39 per cent in April and RBI said part of the spike was fuel driven.
Rajan said the April surprise makes the future trajectory of inflation somewhat more uncertain but retained the March 2017 inflation target at 5 per cent with an upside bias.
When asked whether he is hawkish on inflation again, Rajan said: “I hate these bird analogies — hawkish, dovish etc. I would just say that it is a realistic assessment of the data that have come in. There are potential disinflationary pressures, there are also potential inflationary pressures.”
“The net effect is we have put a little more weight on upside risks to inflation, but we have to wait and see. The target is obviously 5 per cent by March 2017 which is there for us to attain and we have to figure out how to attain it,” Rajan said.
He added that the expectations of a normal monsoon and a reasonable spatial and temporal distribution of the rainfalls, along with various supply-side management measures and the launch of the electronic national agriculture market (e-NAM) trading portal, should moderate unanticipated flares of food inflation.
In the first bi-monthly monetary policy statement of the current fiscal in April, RBI had stated that it would remain accommodative but also watch macroeconomic data and financial developments in the months ahead with a view to responding as space opens up.
“Incoming data since then show a sharper-than-anticipated upsurge in inflationary pressures emanating from a number of food items (beyond seasonal effects), as well as a reversal in commodity prices,” Rajan said.
A strong monsoon as projected by the IMD, continued astute food management as well as steady expansion in supply capacity, especially in services, could help offset these upward pressures, he said.
Today’s second bi-monthly policy of the current fiscal is probably the last statement anchored by RBI Governor, as with the Monetary Policy Committee expected to be in place soon, the next policy could be announced by the committee and not the central bank alone.
When asked whether disinflationary pressures have fallen, Rajan said: “I would not say that. Monsoons could be a source of disinflationary pressure. If some salient prices come down rapidly that could also bring down inflationary expectations, which for both the households as well as the corporates have been on an upward curve. Expectations are moving about a little bit. So we have to see.”
On growth, RBI retained the GVA growth projection for 2016-17 at 7.6 per cent. “Domestic conditions for growth are improving gradually, mainly driven by consumption demand, which is expected to strengthen with a normal monsoon and the implementation of the seventh pay commission awards,” he said.
The Governor said transmission of policy actions into bank lending rates is taking time and shortly a review of marginal cost lending rate framework by the banks will be done.
Rajan said the government and the Reserve Bank are working together for cleaning of the bank balance sheets.
“We are working together with the government on facilitating the process. There are discussions on the mechanisms that will leave projects with appropriate capital structures and access to credit, as well as some incentive for promoters to earn their way out of difficulty,” he said, adding that Sebi has also been consulted in the process.
“Let me emphasise this there is no intent to go back to days of forbearance or reverse the move towards transparent bank balance sheets,” Rajan emphasised. (PTI)
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