Raghuram Rajan also made it clear that the RBI has not been "excessively aggressive" with the rate call and it should not be misconstrued as a bonus ahead of the Diwali festivities.
Reserve Bank Governor Raghuram Rajan on Tuesday said the 0.50 per cent reduction in key rate is to ensure strong and sustainable growth, and was driven primarily by its preconditions being met and the weakness in external environment.
“The conditions we had laid out have been broadly met except monsoon… We have also seen some dramatic reduction in external environment, including China has had a tremendous effect on commodity prices including on oil prices and its prospects,” Rajan told reporters after the monetary policy announcement.
RBI cut the lending rate by a surprising 0.50 per cent, terming it as a “front-loaded” action but affirmed its commitment to the accommodative stance it adopted in January.
Rajan also made it clear that the RBI has not been “excessively aggressive” with the rate call and it should not be misconstrued as a bonus ahead of the Diwali festivities.
Here is Sunil Jain, Managing Editor of The Financial Express’ take on RBI rate cut:
“We have used what room we had, I don’t think we were excessively aggressive. We weren’t throwing Diwali bonus. Given the state of the economy, how can we move it forward,” he said.
After the clarity on meeting the January 2016 target of containing inflation under 6 per cent, Rajan said the focus now needs to shift to squeezing it further to 5 per cent by early 2017.
He acknowledged the difficulties in meeting the target, but made it clear that it is “imminently feasible” and drew attention towards the success in bringing down inflation by two percentage points in the last one year.
The Governor said help from the government is very crucial, and welcomed the support being given through keeping the minimum support prices of grains lower and initiating other supply side measures.
On inflation, Rajan expressed concerns on pressures emanating on the services front, where we have seen prices of education and healthcare go up considerably.
He also said that it is difficult to gauge the supply in this sector, unlike other ones.
For growth, where the RBI has cut its estimate by 0.20 per cent to 7.4 per cent, Rajan said increasing the investments is very crucial.
“The capacity utilisation, the first factor which leads to more investment, is still very tepid and…suggest there is room for more domestic demand which will be non-inflationary and it would create more investment. We need to restart investment. Corporate investment has been weak,” he said.
RBI Deputy Governor Urijit Patel said, “Capacity utilisation continues to be low at 70-72 per cent. That gives us confidence that there is a adequate slack to have higher growth and lower inflation.”
When asked about the degree of influence which the US Fed’s call to hold on to the rate hike had, Rajan said the RBI does keep an eye on all the developments but its calls do not over-rely on such actions.
“We are continuing to make the economy more robust and ensure strong, sustainable growth. That is what we can do in this environment. We don’t agonise everyday about what the Fed is doing,” he said.
Patel, who is in-charge of the monetary policy, added that RBI has also assumed that the government will deliver on its target of cutting the fiscal deficits.
On the real rate of interest, Rajan said that in a year’s time the rate of treasuries will be at 7 per cent and the inflation will be between 5-5.5 per cent, and hence, we will be in the targeted 1.5-2 per cent band.
When asked about transmission of lower rates, Rajan said he hopes that banks will passing on the entire 1.25 per cent cut effected this year to borrowers over time and added that RBI will work in tandem with the government to ensure this happens.
The work with the government will include reviewing the interest rates on small savings products like PPF deposits, while internal work within RBI will focus on changing the base rate calculations, Rajan said.
Rather than worrying about the global volatilities, we should work harder for sustainable growth.
“There is an opportunity in even the worst news, you can stand out as a country which still promises strong, sustainable growth. The possibility of this should encourage us to redouble our efforts, to implement past announcements and undertake new reforms,” he said.
“The economy has legacy problems to deal with, and there are no silver bullets. The government, other regulators and RBI are turning around this economy through hard work and pragmatic policies that are not ideological but based on what works,” he assured.
Asked about how he would describe himself given today’s action, Rajan said, “I don’t know what you want to call me. Santa Claus is what one called me earlier. You want to call me a hawk. I don’t go by these things. My name is Raghuram Rajan and I do what I do.”