With monsoon fears subsiding, and inflation-targeting drawing flak, the RBI Guv Raghuram Rajan would do well by changing track.
The market is agog with expectations of a rate cut by the Reserve Bank of India (RBI) in a day or two. This may or may not happen that soon, but with the monsoon situation appearing better than what was projected by the IMD earlier, a reduction in the interest rates is certainly on the cards.
In his monetary policy statement on June 2, Rajan said that in addition to the problems posed by the unseasonal rains in March: “For the kharif season, the outlook is clouded by the first estimates of the India Meteorological Department (IMD), predicting that the southwest monsoon will be 7 per cent below the long period average. This has been exacerbated by the confirmation of the onset of El Nino by the Australian Bureau of Meteorology”.
Rajan also called for a contingency plan for food management to deal with the impact of low production on inflation.
These fears have subsided to a large extent with a good start to the monsoon season as against the IMD predictions of a 12% shortfall.
Though it is the July rainfall that will be the deciding factor, with the government geared up to deal with any shortage in the food grain production and also farm distress, any major problem is unlikely to be seen here.
In fact, the NDA government continuing with the minimal hikes in the MSPs announced this week, has also taken care of the RBI’s worries. Rajan had said in the policy statement that, “inflation control will also be helped by limiting the increase in agricultural support prices”.
So, with one of the major irritants weakening and pressures from the international front also going on the same lines with the US Fed stance on rates, the RBI governor has the option now to accept Chief Economic Advisor Arvind Subramanian’s view that these are not normal times and so the policy stance should also be reflecting that.
In effect, that would mean more rate cuts going ahead, which will reduce EMIs and help companies raise capital. The RBI has already cut the repo rate thrice since January to take it to 7.25%, but this is inadequate to revive investments and push growth.
All eyes on RBI now!