Inflation under control, Rajan guns for growth

BY M Post Bureau30 Sept 2015 6:20 AM IST

In its fourth bi-monthly monetary policy for the current fiscal, RBI cut<g data-gr-id="72">benchmark</g> repurchase (repo) rate from 7.25 per cent to 6.75 per cent, lowest in four-and-half-years.

RBI Governor Raghuram Rajan, who had faced growing pressure from the government as also industry to reduce one of Asia’s highest borrowing costs, justified the bigger than expected reduction saying consumer inflation was likely to be at 5.8 <g data-gr-id="65">per cent</g>, below the 6 <g data-gr-id="66">per cent</g>target for January.

The focus should now shift to bringing inflation to around 5 per cent by March 2017, he said, adding that RBI will be vigilant for signs of monetary policy adjustments that are needed to stick to the “deflationary path”.

He also drew comfort from US Federal Reserve delaying the first hike in interest rates in nine years, which may have put emerging market currencies under pressure.

RBI lowered its economic growth forecast for the current fiscal to 7.4 per cent from its previous projection of 7.6 <g data-gr-id="56">per cent</g>.

“While the Reserve Bank’s stance will continue to be accommodative, the focus of monetary action for the near term will shift to working with the government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate are removed,” Rajan said.

The reduction comes on the back of interest rates being cut thrice earlier this year by 25 basis points each.

Within minutes of RBI policy announcement, Andhra Bank cut its benchmark lending rates by 0.25 <g data-gr-id="61">per cent</g>. The other banks are likely to follow suit.

The BSE Sensex, which was over 300 points down, staged a recovery after the announcement of the policy. However, it again slipped into the negative zone.

The fourth policy rate cut by Rajan since January takes up the cumulative rate cuts to 1.25 <g data-gr-id="54">per cent</g>.

Affirming RBI’s commitment to <g data-gr-id="81">be</g> accommodative in its stance, Rajan said, “continuing policy implementation, structural reforms and corporate actions leading to higher productivity will be the primary impetus for sustainable growth”.

He made it clear that RBI has “front-loaded policy action by a reduction in the policy rate by 0.50 per cent”, and this will ensure that the real interest rates will continue to be in the 1.5-2 <g data-gr-id="57">per cent</g> band.

Rajan reiterated the need for banks to pass the benefits of the RBI actions to their lending rates and added that with this cut, the focus of the monetary policy will now shift to working with the government to remove impediments to<g data-gr-id="75">pass</g> a bulk of the cumulative 1.25 per cent cuts to borrowers.

It observed that banks have passed only an average of 0.30 <g data-gr-id="58">per cent</g> to the borrowers as against RBI’s 0.75 <g data-gr-id="59">per cent</g> cut to borrowers and blame the delays in <g data-gr-id="80">repricing</g> of deposits for the lag.

He added that deposit rates have “reduced significantly” and further transmission “is possible”.

The central bank is targeting to get headline inflation at 6 per cent by January 2016 and Rajan said it will reach 5.8<g data-gr-id="68">per cent</g> by then. In the way forward, the focus will now shift to getting the number down to 5 <g data-gr-id="69">per cent</g> by 2016-17. Largely due to the base effects, the number had come at 3.66 <g data-gr-id="70">per cent</g> in August.

Rajan also introduced a slew of actions on the financial markets front, starting with setting the foreign portfolio investment limits in rupee terms, rather than in dollars.

He also said that FPI investments in government bonds will be increased in phases to 5 <g data-gr-id="67">per cent</g> of the outstanding stock by March 2018, which can bring in an additional of Rs 1,200 billion (Rs 1.2 lakh crore), over and above the existing limit of Rs 1,535 billion. .

A majority of analysts were expecting Rajan to cut rates at the policy review largely because of inflation being under control, and possibilities of it staying low in immediate future on compressed commodity prices.

However, more than the rate action, it was the guidance in the future stance, which the market was watching.

The Finance Ministry had also been building pressure on RBI to cut rates, which will serve as a booster for the economy, where the GDP expansion has slipped to 7 <g data-gr-id="76">per cent</g> for the June quarter.

Citing the wholesale price-based inflation continuing to be in the negative zone, Chief Economic Advisor Arvind Subramaniam had said we run the risk of deflation as well.

Inflation under control, Rajan guns for growth

M Post Bureau

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