1. RBI Governor Raghuram Rajan’s rate cut message to PM Narendra Modi: Now fix the Budget

RBI Governor Raghuram Rajan’s rate cut message to PM Narendra Modi: Now fix the Budget

RBI Governor Raghuram Rajan has put the ball back in PM Narendra Modi's court while showing enough independence to preserve his credibility...

By: | Mumbai | Updated: January 16, 2015 8:47 AM
Raghuram Rajan, RBI rate cut, Narendra Modi

RBI Governor Raghuram Rajan’s surprise 25 bps rate cut not only acknowledges that inflation is easing sharply, but also marks a concession to the Narendra Modi government that has repeatedly, if politely, demanded monetary policy relief. (PTI)

In cutting interest rates and giving a boost to the government’s efforts to revive growth, the Reserve Bank on India (RBI) governor Raghuram Rajan displayed the pragmatism and flexibility familiar to those who work with him.

Rajan’s surprise quarter-point cut not only acknowledges that inflation is easing sharply, but also marks a concession to a government that has repeatedly, if politely, demanded monetary policy relief.

By explicitly tying future rate cuts to “high quality fiscal consolidation”, the former IMF chief economist has put the ball back in Prime Minister Narendra Modi’s court while showing enough independence to preserve his credibility with markets.

Read StanChart Report: RBI likely to ease further
Read SBI Report: Beginning of a rate easing cycle

Modi’s finance minister, Arun Jaitley, now needs to deliver cuts in subsidies, boost tax revenues and invest more in India’s rotten infrastructure when he presents his first full-year budget to parliament next month.

“There is an assurance from the government that fiscal prudence will be followed,” said one policy maker familiar with Rajan’s thinking. “So what was the harm in cutting the rate before February?”

The decision, hatched between Rajan and senior policymakers over recent weeks, could ease the relationship between Jaitley and Rajan, who was hired by the last, Congress-led government.

Raghuram Rajan, RBI rate cut, Arun Jaitley

Finance Minister Arun Jaitley and RBI Governor Raghuram Rajan attend an event in Mumbai. (Reuters)

Arun Jaitley, clearly delighted, said the rate cut would put more money in the hands of consumers and help revive investment.

“If there is a deal between Rajan and Jaitley, that’s very very positive,” said said Surjit Bhalla, chairman of emerging markets advisory firm Oxus Investments and a leading commentator based in New Delhi.

“Monetary and fiscal policy should be coordinated.”

The central bank is not statutorily independent from the finance ministry, but it enjoys broad autonomy in setting monetary policy.


For PM Narendra Modi, relief for the economy cannot come soon enough, with some global CEOs venting frustration at a recent investment summit that, eight months into his rule, doing business in India is as hard as it ever was.

There is mounting evidence too that rural India is struggling as Modi curbs aid schemes championed by the last government, compounding the impact of last year’s bad monsoon and a slide in prices for farm exports.

With India’s $2 trillion economy yet to emerge from its longest spell of sub-par growth in a generation, sources in both Mumbai and New Delhi see room for some slippage on deficit targets as long as Jaitley puts together a credible spending plan for the fiscal year to March 2016.

“It’s about the quality of spending,” said one government source familiar with the budget preparations. “We need to reduce wasteful spending and spend more on building the capacity of the economy.”

Jaitley, sources say, might get away with revising up next year’s deficit target – to around 4 percent of gross domestic product from the 3.6 percent now envisaged – without endangering future rate cuts.


For now, the powerful forces braking inflation – not least a 50 percent fall in world oil prices – have handed Rajan the justification to cut rates without appearing to bow to government pressure.

“The pressure has always been there. Now we are noting a structural change in the inflation trajectory due to a 5-month decline in oil prices,” said a second policy maker familiar with his thinking.

Rajan is playing a longer game to establish inflation as the central bank’s main formal policy target. He appears to have buy-in from key government aides who want to avoid another boom-bust cycle like the one that followed the 2008 global crash.

“The goal is to achieve faster growth which is non-inflationary,” deputy finance minister Jayant Sinha told Reuters after the rate announcement.
Inflation targeting will help make India’s policy framework more predictable after Thursday’s move, which was timed auspiciously to coincide with the Hindu harvest and kite-flying festival of Makar Sankranti.

While welcoming Rajan’s pragmatism in ordering the rate cut between policy meetings, one investor said he would prefer not to have too many surprises.

“Care should be taken to maintain the sanctity of policy meetings,” said A. Prasanna, an economist at ICICI Securities Primary Dealership, otherwise “markets could be in a perpetual state of froth”.

The RBI holds policy meetings every two months, with the next one on Feb. 3.

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  1. S
    Jan 16, 2015 at 4:30 am
    There are three players at this moment; first is the RBI�s rate cut; secondly the government policy and thirdly; the international CEO�s. Well, lets make it clear. One important aspect has been left behind. That is the demand of the Aam Admi. The game the three first players are playing, is not benevitting the Bharatis. Why not? The Aam Admi, about 75% of the potion has no part in it, because they are low earners, having no Savings-potential, therefore out of the market and disas- trous for the economy. This group has to be included. The position of the international Ceo�s are clear. They are introducing the colonialperiod and the biggest gainer. How? Well, without doing anything they can make profit of at least about 75% on their capital. The FDI will give them this possibility. This group can bring in cheap money on basis of 1 or 2% interest and in India the interestrate is 7.75%. Making investement the capital interestrate sure will be more than 7.75%. Taking into consideration the exchange rate of Rupee/Dollar the benefit will cross 60 points. This shows the foreigners will have the gratest advantage above the quarrel between the RBI and government. This model of investment is a "killer" for the Nation. The only solution for India is radical cut in the interestrate by the RBI and the government have no choice but to change the exchange rate of the Rupee and make the citizens shareholders in the investments. To uplift the social-economical wellbeing of the mes their partition is urgent needed. Without this con- dition the mes will stay poor. This is not the policy of the government of: sabka saath, sabka wikaash.
    1. Ganesh Bangalore
      Jan 17, 2015 at 11:05 pm
      17-1-2015 Hon . Rajan. Kindly do one great favour to the banks by reducing defaulters. Three P S Bs Indian, Andhra & State Bank of Mysore refuse empanelment of senior citizens above the age of 65 /70 as valuers, when the rule for empanelment framed by Income Tax Department, Insution of Valuers and I B A says no question of higher age, but only limit is lower age must be above 25 years. Besides most important thing required is educational qualification minimum B E Degree and good experience. When based on this rule almost all banks except the above mentioned three empanel and use the services these three banks say their Directors have framed the rule and can not deviate. This is a serious injustice by the banks for the country and banks themselves also. Now I would like to ask is the Directors job to improve finance of the banks or enforcing rules of age etc which are irrelevant for the job. I wish our esteemed Indian Express Group take up this matter with the INCOME TAX DEPT, and three Banks and make them s their irregular rule, which hinders reduction of defaulters. B S GANESH ganeshbangalore@ymail

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