A matter of time

To the dismay of industry, Reserve Bank of India Governor Raghuram Rajan has held the policy rate in his fifth bi-monthly review. But while maintaining the status quo , he has signalled — and very clearly — that we are headed, at last, for a rate cut. He has said this could happen early next year if the current inflation momentum continues and gone further by saying the decision could be taken outside the regular review cycle. Even though he has left the market guessing about whether the rate cut will happen on or before the February policy or after the Budget, the governor appears much more confident about achieving the long-term target of 6 per cent by January 2016. In holding the policy rate, despite intense lobbying by industry and strong hints from the Finance Minister, Rajan has been consistent with his larger objective of ushering in sustainable and continued growth rather than applying what he perceives as a quick fix.

But the question he is bound to be asked is whether he missed an opportunity to be a bit ahead of the curve and kick-start the economy with, say, a bold 50 basis point cut. At the very minimum, this would have boosted sentiment. In addition, it may well have spurred some banks to use this loud and clear signal from the central bank to actually cut lending rates. They could have well afforded to do so being flush with funds; some banks have even cut their deposit rates recently.

Rajan must know that rarely has there been such a favourable constellation of circumstances for a cut. Consumer price inflation is trending down and at around 5.52 per cent currently. Also, oil prices are at their lowest in five years and offer considerable relief to a country that imports three-fourths of its oil requirements. Add to this the recent slump in industrial production and the fact that the GDP growth last quarter limped at a mere 5.3 per cent, and the case for a cut becomes stronger. Of course, there is a flip side that he may have felt needed to be taken into account as well. For instance, the CPI is expected to recoil a bit in the next few months as the high base effect wears off; also, it is entirely possible that oil prices may move up again. Besides, a weak kharif crop may see agricultural prices harden. Rajan has argued that cutting rates is premature given the overall circumstances, choosing to wait until he is confident of making his move. The good news is that the Budget is less than three months away and if Rajan is waiting to see how sustained the downtrend in inflation is and how committed the Centre is to meeting its fiscal targets, then the much awaited rate cut is only a matter of time.

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