Reserve Bank of India Governor Raghuram Rajan provided no surprises in his final monetary policy announcement as he kept the central bank’s unwavering focus on inflation by leaving interest rates unchanged for the second successive time this fiscal. Mr. Rajan, set to leave office at the end of his three-year term on September 4, had his task cut out after the Centre last week notified the Statutory and Institutionalised Framework for Monetary Policy, under which the maintenance of price stability has been unequivocally laid down as the primary remit of monetary policy. The Consumer Price Index-based inflation reading edged up in June to 5.77 per cent, well above the RBI’s March 2017 target of 5 per cent and nearing the 6 per cent upper bound set by the government’s monetary framework, largely on account of food prices. Mr. Rajan may have taken this into consideration in taking this decision. While acknowledging that the outlook for the global economy and international trade remain clouded and sluggish, the RBI has posited that the risks to India achieving 7.6 per cent Gross Value Added economic growth in the current financial year remain evenly balanced as of now. With clear signs emerging of “green shoots in manufacturing”, including those of a pick-up in new domestic and overseas orders, renewed business confidence, and an increasingly broad-based improvement in services activity, the central bank has opted for an accommodative stance that allows it elbow room to take more growth-supportive steps if the environment warrants.
The rationale proffered for sitting pat on rates is the sharper-than-anticipated increase in food costs, particularly the rising prices of pulses and cereals; at the same time, services inflation has remained somewhat sticky. And of course there is a lot riding on the outcome of the monsoon: the steady progress of the rains so far has translated into a strong improvement in sowing, with its potential for a salutary impact on food inflation. The full impact that the implementation of the Seventh Pay Commission’s recommendations will have on house rents and, as a result, the CPI, could have influenced the RBI’s price stability calculus. It is these risks to the inflation target that prompted Mr. Rajan to stay the course, even as the RBI continues to ensure that liquidity remains adequate. Expressing broad confidence in the RBI’s ability to stay on the “glide path” to achieving 5 per cent inflation by March 2017, Mr. Rajan has flagged the fact that his successor will, in all likelihood, have the advantage of being joined by five other members of the Monetary Policy Committee when they meet to decide interest rates in October. It will no longer be lonely at the top at the RBI.
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