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RBI governor Raghuram Rajan has kicked off the rate cut cycle in the New Year and provided the much needed boost to growth. Rajan makes it amply clear that he would prefer to assess the government's commitment to fiscal consolidation in the 2015-16 Budget before moving on interest rates again perhaps in March.
In This Pic : Raghuram Rajan
Pic Courtesy : BCCL - Non Copyright
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While his action on Thursday is being interpreted as a surprise, a closer look at the previous monetary policy statement would make it clear that Rajan had provided enough hints of an impending cut. Rajan used Thursday's statement to make his stand clear on the timing of the rate cut.
In This Pic : Raghuram Rajan
Pic Courtesy : BCCL - Non Copyright
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The ground had been prepared for a rate cut by the near 55% fall in the price of crude oil since June and the sharp moderation in both retail and wholesale price inflation. The expected pressure on food prices also did not take place as expected as supplies remained stable.
In This Pic : Raghuram Rajan
Pic Courtesy : BCCL - Non Copyright
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Rajan, who had resisted several calls from various quarters including the government for rate cuts, chose the timing after he was convinced that the inflationary pressures were benign and would remain below the central bank's target. Oil prices are expected to remain soft for now and inflationary pressures are expected to remain muted.
In This Pic : Raghuram Rajan
Pic Courtesy : BCCL
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The next trigger for a sharp cut in interest rates would be the 2015-16 Budget. Rajan has already listed the "to do task" for the government which includes a clear and transparent road map on fiscal consolidation. "Also critical would be sustained high quality fiscal consolidation as well as steps to overcome supply constraints and assure availability of key inputs such as power, land, minerals and infrastructure. The latter would be needed to ensure that potential output rises above the projected pick-up in growth in coming quarters so as to contain inflation," Rajan said in his statement.
In This Pic : Raghuram Rajan
Pic Courtesy : BCCL
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