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Inflation score card, monsoon to decide interest rate: Raghuram

The Reserve Bank of India is closely watching inflation data as well as monsoon rain forecasts for deciding on further interest rate cuts and monetary policy still remains in the “accommodative mode”, Governor Raghuram Rajan has said. Rajan, who had earlier this month cut interest rates by 0.25 bps to 6.5 per cent, did not give any indication on how much or by when further rate cuts would take place. “We are watching the development of inflation and we are also looking for signs of a good monsoon. As evidence builds up one way or the other, it will give us more information of how the trajectory of the monetary policy will be,” he said at the Inaugural Kotak Family Distinguished Lecture at Columbia Law School here. 

Consumer price inflation eased to a six-month low of 4.83 per cent in March from a year earlier. It was 5.26 per cent in February. Rajan wants to limit inflation to 5 per cent by March 2017 and a good monsoon will lead to higher crop output. “We are still in accommodative mode but precisely how much and when we will have to see,” Rajan said.

After two years of drought, the weather department last week forecast the first above-average monsoon in three years. Rajan said monetary policy cannot be coordinated that easily. “But really what we are talking about is the rules of the game for monetary policy. One should see how much one can do and how much is beneficial to us without imposing a huge cost on the rest of the world.” He said a six-member monetary policy committee will be in place to decide on interest rates. “I will no longer be setting the interest rates in India. The committee will be setting,” he said, adding that the virtue of this is that there are “six minds that come together to decide policies rather than one, there is continuity in the committee. It means the committee is much harder to pressurise if you want a particular outcome than any single individual”.
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