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Monetary policy review on 3 June: Rajan meets Modi

Ahead of monetary policy review on Tuesday, Reserve Bank Governor Raghuram Rajan on Sunday called on Prime Minister Narendra Modi and is likely to have discussed the macro-economic situation and issues related to price rise.

The RBI’s bi-monthly policy review on 3 June will be the first after Prime Minister Narendra Modi assumed office on 26 May.Last week, Rajan also met the newly appointed Finance Minister Arun Jaitley and had said fighting price increase is a priority, stressing that the central bank has always maintained a balance between the need to check inflation and prop up growth. ‘Governor of the Reserve Bank of India (RBI) Raghuram Rajan called on Prime Minister Shri Narendra Modi at 7, Race Course Road on Sunday. It was a courtesy call,’ an official statement said.

India’s economic growth stayed below 5 per cent for the second year in a row at 4.7 per cent in 2013-14. Growth remained subdued at 4.6 per cent in the fourth quarter. The Reserve Bank of India may leave key interest rates unchanged in its 3 June monetary policy review as Dr Rajan is likely to prefer containing stubborn inflation before conceding to demands for a rate cut to boost growth.
‘RBI is likely to maintain status quo as inflation is still high and the threat of monsoon being weak this time is looming large,’ Indian Overseas Bank chairman and managing director M Narendra said. Rajan had kept the policy rate unchanged at 8 per cent in its 1 April review as inflation, especially of food items, hovered at over 8 per cent. Food inflation in April stood at 9.66 per cent and retail inflation was at 8.59 per cent. An emerging risk on the inflation front is the likelihood of a deficient monsoon, which could lead to a surge in food inflation and affect growth adversely.

The India Meteorological Department (IMD) has indicated a 60 per cent probability of El Nino this year along with a below-normal monsoon. According to DBS, ‘The RBI reiterated that inflation control was a priority and the bank will also attempt to balance growth-inflation objectives. We look for the repo to be left unchanged next week.’ After meeting new Finance Minister Arun Jaitley last week, Rajan said fighting price increases is a priority and the central bank has always maintained a balance between the need to check inflation and prop up growth.
Foreign lender RBS said while keeping rates unchanged in the policy review, the RBI could gradually ease liquidity conditions in the inter-bank market, which in turn could allow for lower cost of borrowings.

However, industry bodies are clamouring for a rate cut to boost growth.Assocham said the low level of wholesale inflation of items such as wheat, pulses, vegetables and oilseeds would give extra room to the RBI to be accommodative.

‘Governor’s job would become much easier as he along with others can see much higher level of commitment to reduce the inflation, both at the WPI and retail level,’ Assocham president and Yes Bank Managing Director Rana Kapoor said.
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