Sunday, July 25, 2021
HomeBusinessReserve Bank cautious despite pressure for rate cuts

Reserve Bank cautious despite pressure for rate cuts

RBIThough the Reserve Bank of India (RBI) is expected to cut interest rates next week by a quarter percent to a four-year low, officials say concerns over prices make it likely to resist political pressure for significant easing in the coming months.

In growing contrast with the government, which is desperate to accelerate a sluggish recovery, an increasingly independent RBI under governor Raghuram Rajan remains focused on a long-term inflation target of 4 percent and ending decades of damaging price volatility.

“The inflation outlook is still uncertain, and that is why the governor wants to be cautious,” said one official familiar with the RBI’s thinking.

“It makes sense to wait and watch how sustainable the fall in inflation will be.”

Headline inflation has dipped due to lower commodity prices, but the officials said the RBI was concerned that any spike in food prices due to weak monsoon rains or in crude oil would push up prices and expectations of future rises – at least until India can resolve significant supply and transport bottlenecks.

Worries about the impact from rate hikes expected in the United States later this year add to the caution, the officials said, given the potential for destabilising outflows by foreign investors and volatility in the rupee.

For Rajan, who said last week he intended to control inflation “not just on Wednesday, but well into the future”, it is also about learning the lessons of a boom-and-bust past.

Rajan’s predecessor, Duvvuri Subbarao, cut interest rates in response to the global financial crisis to 4.75 per cent by April 2009, from 9 per cent in July 2008.

That cut fuelled double-digit inflation and eventually forced the RBI into reverse, raising rates back to 8.50 per cent by October 2011.

Rajan, who took over two years later, was still fighting inflation at near double digits when he joined in 2013.

“I think Governor Rajan is deliberately falling behind the curve,” said A. Prasanna, an economist at ICICI Securities Primary Dealership.

“Rajan wants inflation to be low and stable for a sustainable period,” he added. “You can be a proactive central bank only after anchoring inflation expectations.”

Most Popular

- Advertisment -