Mumbai, May 31
As the Reserve Bank of India
(RBI) prepares for its bi-monthly monetary policy update here on
Tuesday, uncertainty remains over Governor Raghuram Rajan cutting
interest rates, despite requests to do so from stakeholders -- right
from the government to corporates.
Rajan has twice cut the repo
rate, at which RBI lends to commercial banks, over two unscheduled
monetary policy reviews in January and March, bringing it down to the
current 7.50 percent.
On the other hand, the scheduled reviews
in February and April passed without any changes. He kept interest rates
on hold at 7.50 percent in April, saying he was waiting for banks to
pass on the previous rate cuts - and dismissed bankers' claims that the
cost of funds remained too high.
Rajan also said the government's
"fiscal consolidation programme, while delayed, may compensate in
quality, especially if state governments are cooperative". Announcing
the rate cut in January, he had said that "the key to further easing are
data that confirm continuing disinflationary pressures and sustained
high-quality fiscal consolidation".
Finance Minister Arun Jaitley
had in his first full budget in February extended the target deadline
for controlling fiscal deficit to three percent, reasoning that
insistence on a timetable to contain this would harm growth prospects.
The targets for the next three years have been set at 3.9 percent for
2015-16, 3.5 percent for 2016-17 and 3.0 percent for 2017-18.
With
the background of unexpected rate cuts this year, the inflation numbers
are providing more room for the central bank governor to ease monetary
policy and making the clamour for him to do so louder.
The
annual rate of wholesale price inflation (WPI) decelerated further to
its lowest in six months at (-)2.65 percent in April from (-)2.33
percent in the previous month. The annual rate of inflation based on WPI
was 5.5 percent in April 2014. The country's retail inflation based on
the consumer prices index (CPI) was also on the downswing in April by
40 basis points to 4.87 percent.
The key elements to consider in
this situation are the predilections of the governor himself, and the
way the government has sought to make changes this year to the very
domain of the RBI.
Here, it is instructive to hear RBI Deputy
Governor Urjit Patel on the thinking of Rajan, who in 2005 had predicted
the financial meltdown three years later that is still affecting
global economy and feels stronger in his belief that global markets now
are at the risk of a crash due to the competitive loose monetary
policies being adopted by developed economies.
"We are in the
midst of the age of competitive depreciation and of a
beggar-my-neighbour philosophy. It brings to mind an old African saying
that when elephants fight the grass suffers," Patel said at the press
conference to announce the February policy review, on the trend of
accommodative monetary policies being adopted by developed economies.
"While
the ECB (European Central Bank) and the Bank of Japan are printing
money and devaluing their currencies on one hand, the US economy is
reviving on the other. Anyone in the middle is getting crushed," he
said.
Rajan has been warning that emerging markets are especially
vulnerable to big shifts in capital flows triggered by the
unprecedented monetary accommodation in rich countries.
Jaitley,
in his February budget, had announced the fait accompli of a monetary
policy committee pact earlier with the RBI that will reduce the
governor's power to act alone. The monetary policy committee and an
official inflation target for the RBI are going to come about through
the biggest post-Independence overhaul of the RBI Act of 1934.
However,
in what was the biggest backtrack by the government earlier this month,
Jaitley withdrew from the Finance Bill the clauses pertaining to
setting up of a public debt management agency (PDMA) and the amendments
to the RBI Act that would have taken away its powers to regulate
government securities.
The United Forum of Reserve Bank Officers
Employees had earlier written to MPs and chief ministers of various
states that the changes, if implemented, would cripple the functions of
the central bank. It said the proposed changes would curtail the
authority of the RBI and render it totally ineffective in discharging
its responsibilities on monetary policy, financial stability and
targeting inflation.
(Biswajit Choudhury can be reached at [email protected])
