RBI monetary policy review: Is this a new Arun Jaitley, Raghuram Rajan growth model?

By: | Updated: December 1, 2015 10:46 AM

Ahead of the RBI monetary policy review announcement, FM Arun Jaitley had said that the policy played an important role in economic growth and expressed optimism that the Governor Raghuram Rajan-led central bank...

RBI monetary policy review, RBI policy review, rbi repo rate cut, rbi rate cut, raghuram rajan, raghuram rajan quotes, raghuram rajan newsRBI monetary policy review: Guv Raghuram Rajan on Tuesday announced a repo rate cut of 50 bps from 7.25 per cent to 6.75 per cent – something that FM Arun Jaitley had been asking for quite some time.

narendra modi us visitAhead of the monetary policy review announcement, FM Arun Jaitley had said that the policy played an important role in economic growth and expressed optimism that the Governor Raghuram Rajan-led Reserve Bank of India (RBI) would act appropriately with a sense of responsibility in this regard.

Arun Jaitley now has reasons to be happy that RBI Governor Raghuram Rajan has gone beyond the market expectations and has cut the repo rate by 0.5%, from 7.25% to 6.75%, as against the general view of a 0.25% reduction.

While this has certainly enthused the industry, which had demanded this in its meeting with Prime Minister Manmohan Singh; the government agreeing to work with the RBI for a better transmission of the repo rate cuts, 1.25% since April 2014, is also an encouraging sign for the home loan and other segments.

But, the larger point coming out of RBI monetary policy review is that the tussle between the RBI and the government over the growth-inflation dynamics appears to be taking the back seat for now.

If this turns out to be a situation or a phase in which both are on the same page to push growth, and there are reasons to believe this looks to be the case, it will remove a lot of uncertainty over the sustainability of the incipient growth signals.

“…the focus should now shift to bringing inflation to around 5 per cent by the end of fiscal 2016-17. In this context, the weakening of global activity since our last review suggests that commodity prices will remain contained for a while. Still-low industrial capacity utilisation indicates more domestic demand is needed to substitute for weakening global demand in order that the domestic investment cycle picks up,” the RBI has pointed out.

Rajan further said that, “The coming Pay Commission Report could add substantial fiscal stimulus to domestic demand, but the government has reaffirmed its desire to respect its fiscal targets and improve the quality of its spending. Under these circumstances, monetary policy has to be accommodative to the extent possible, given its inflation goals, while recognizing that continuing policy implementation, structural reforms and corporate actions leading to higher productivity will be the primary impetus for sustainable growth”.

What the RBI governor has done, therefore, is facilitate investment to respond more strongly by front-loading the policy action.

Atsi Sheth, Associate Managing Director, Moody’s Investors Service, says that RBI’s cutting of the repo rate by 0.5% suggests that it ‘sees underlying growth trends as subdued enough to require more aggressive stimulus, given the rising external headwinds to growth’.

Though it will be simplistic to think that the RBI will still persist with this stance if the inflation scenario is not on expected lines, but it is also a fact that the RBI governor has taken a different turn and he would not like to change course unless there is a strong reason to do so. This is certainly good news for the NDA government.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition