The next RBI rate cut could be sometime away! Know why!

TModi-led government at the Centre and Raghuram Rajan’s stand on monetary policy could go on for some more time now. Despite both sides making serious attempts at appearing ‘friendly’ and ‘perfect’ for each other, the Modi government’s aggressive growth stance is something RBI Gov Rajan has not always bought into.

While at a recent function in Mumbai, marking the 80thNarendra Modi said that there was a lot of similarity in thought between the government and the RBI, that has not always translated into similarity of action with Modi taking a more aggressive path via his policy decisions to implement rapid growth in the economy, and the cautious monetary policy stance taken by Rajan on several occasions.

The recent spate of interest rate cuts by the RBI, on many occasions have been seen by experts as having ‘been tendered under pressure from the growth hungry government’. But Rajan has largely stood his ground, as he does even this time around. In the statement released, Rajan charts five points that clearly suggest that despite all pressures from the government, he will take into account all economic and market indicators before making his next rate cut announcement. Rajan says in the statement, ‘Monetary policy actions will be conditioned by incoming data.’

Rajan’s 5 reasons why the next rate cut won’t happen anytime soon:

· First, the Reserve Bank will await the transmission by banks of its front-loaded rate reductions in January and February into their lending rates.
· Second, developments in sectoral prices, especially those of food, will be monitored, as will the effects of recent weather disturbances and the likely strength of the monsoon, as the Reserve Bank stays vigilant to any threats to the disinflation that is underway. The Reserve Bank will look through both seasonal as well as base effects.
· Third, the Reserve Bank will look to a continuation and even acceleration of policy efforts to unclog the supply response so as to make available key inputs such as power and land.
· Further progress on repurposing of public spending from poorly targeted subsidies towards public investment and on reducing the pipeline of stalled investment will also be helpful in containing supply constraints and creating room for monetary accommodation.
· Finally, the Reserve Bank will watch for signs of normalisation of the US monetary policy, though it anticipates India is better buffered against likely volatility than in the past.