RBI Governor may want to consider the priorities and plans of the new govt

RBI Governor Raghuram Rajan is likely to hold the key interest rates when he announces his annual monetary policy on April 1. This is the consensus among economists and market participants, who see in the elections ahead the reason for such a move.

In his earlier policy announcement, in January, the Governor had hiked the repo rate by 25 basis points to 8 per cent arguing that this was necessary to set the economy on a disinflationary path.

This announcement came close on the heels of the Urjit Patel Committee recommendations whereby the RBI hopes the CPI inflation will dip below 8 per cent by January 2015 and below 6 per cent by January 2016.

January guidance

In its guidance in January, the RBI had indicated that it did not anticipate further policy tightening in the near term. Indeed, it seemed to have left the door open for some easing, when it said that if inflation eased at a faster pace than anticipated and if it remained down, the Reserve Bank will have room to be more accommodative.

No doubt, both wholesale (WPI) and consumer (CPI) inflation have come down sharply in the last few months, benefiting most notably from lower fruit and vegetable prices. But core inflation (non-food and non-fuel) still remains high and this is likely to weigh with policymakers.

Even earlier, the Governor had pointed out that unless inflationary expectations and cost of funding came down significantly, banks would not follow suit and cut rates (first the deposit rates and eventually the lending rates) even if he cut the policy rates.

For now, ‘wait and watch’ will most likely be the operating procedure for the RBI. The electoral process begins on April 7 and continues across the country over the next month, with a new government expected to take office by the third week of May. The priorities and plans of the next government will have to be taken into account.

That may well strengthen the case for a pause now and leave matters for the next bi-monthly announcement, expected in early June.

(This article was published on March 30, 2014)
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