RBI monetary policy review: 5 reasons that stopped Guv Raghuram Rajan from hitting hat-trick

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Updated: April 7, 2015 10:30:30 PM

RBI Governor Raghuram Rajan has pulled no surprise this time in the monetary policy review.

RBI, RBI rate cut, RBI interest rate cut, RBI repo rate, Raghuram Rajan, Raghuram Rajan rate cut, RBI monetary policy, Narendra Modi, India inc, Business news, Indian economy, Economy newsLeft to Right: RBI deputy Governor Urjit Patel, Governor Raghuram Rajan and Deputy Governor H R Khan during the first bi-monthly monetary policy review statement. (Express Photo by Ganesh Shirsekar)

Reserve Bank of India (RBI) Governor Raghuram Rajan has pulled no surprise this time in the monetary policy review and kept the repo rate and CRR (Cash Reserve Ratio) unchanged at 7.5% and 4% respectively.

Just when we thought rate cuts were becoming a predictable surprise, Governor Raghuram Rajan’s monetary policy inked a status quo this time around.

RBI’s firm grip on the reins of the economy decides its direction and pace. Few analysts had expected another rate cut. The expectations were justified, since it would be in line with the fiscal consolidation programme. However, RBI has made it clear through its actions that data is as important as having an accommodative stance.

Here is what kept Governor Rajan from hitting the rate cut hat-trick.

1. Good old rate cut days.

RBI had announced two rate cuts earlier this year in January and March. Repo rate was cut by 50 bps and brought down to 7.5%. Big cuts that would scare off any central banker from a repeat performance.

2. Thumbs up to acche din.

The rate cuts were RBI’s response to decreasing inflation rates. It was also in sync with the government’s growth plans announced during the annual Budget. So much and no further was the message Governor Rajan sent to the Centre on a number of occasions leading up to the monetary policy review meet.

3. Have loans become cheaper?

Well no, and that means the previous policy impact is yet to be seen. Even though rate cut was announced by RBI, banks are yet to pass on the benefit to consumers by lowering lending rates. Hence, the effect of increased liquidity in the system is yet to be seen. Rajan indicated his willingness, but the rest of the banking community refused to play ball with him, acting as an impediment to further softening of stance.

4. It’s raining like crazy and it’s not even June!

Untimely rains definitely did not go down well with crops. Crops have been badly damaged and this will hit food prices. Hailstorms in March have also led to losses. All these factors, coupled with unpredictable monsoons may lead to food shortage resulting in inflation of food prices. The risk of food price inflation is indeed looming large over the country and RBI has factored in this inflation risk while drafting the monetary policy.

5. Crude oil prices may shoot up

Unrest in the Middle East may lead to a rise in crude oil prices and this will not be positive news for our inflation numbers. Definitely not favorable for further rate cuts.

Rajan said, “Next rate cut will depend on effective transmission of policy stance by banks.” Incoming data like inflation numbers, impact of previous rate cuts, etc will be guiding the monetary policy decisions. Having said that, RBI maintains that it will continue its accommodative stance which is pro-growth. RBI is treading carefully when it comes to taking monetary policy decisions. Currently the picture is foggy and a clearer view is expected once previous policy decisions are implemented and numbers from data reveal the true story. With various other factors at play as mentioned above, status quo is warranted as it will help reassess the situation. The second bi monthly policy statement will be out on 2nd June, 2015 and what we do know for sure is that it will be data driven.


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