New Delhi(PTI): Finance Minister Arun Jaitley is likely to announce policy initiatives on some of…
Mumbai: Reserve Bank of India governor Raghuram Rajan met finance minister Arun Jaitley on Monday amid clamour for a rate cut in monetary policy review “I do not think a rate cut is very likely. It is still too early. Central banks all over the world tend to be conservative. And RBI is not confident yet about the inflation. Inflation numbers look a lot more respectable because of the last year’s base. So, if I were the RBI, I would say I need to be a little more confident although I am worried about the rate of growth, which is not as good as one had expected,” — Bibek Debroy, economist
This is perhaps for the first time that the Reserve Bank of India governor Raghuram Rajan would be feeling some pressure on the eve of announcing the key policy rates.
Amid soundbytes from the finance minister Arun Jaitley and clamour for a rate cut by the industry, Rajan has to make a tough call today on whether to continue inflation fight, or relax rates to push investments.
Meanwhile, there is a variety of opinion from experts and economists on what Rajan may do tomorrow, even as Rajan met finance minister Arun Jaitley on Monday morning at his residence.
The finance ministry thinks that the time has come to relax the conservative approach on key rates. Industry also opines the same. Their conviction is based on the encouraging wholesale price index and consumer price index based inflation, which have cooled recently. WPI-based inflation touched its five year low at 1.77% in October and retail inflation touched a low of 5.52% in the month.
An official source close to the development told dna, “The RBI may not announce a reduction in the key policy rates any time before January 2015.”
Economist Bibek Debroy told dna, “I do not think a rate cut is very likely. It is still too early. Central banks all over the world tend to be conservative. And RBI is not confident yet about the inflation. Inflation numbers look a lot more respectable because of the last year’s base.”
“So, if I were the RBI, I would say I need to be a little more confident although I am worried about the rate of growth, which is not as good as one had expected,” said Debroy.
Surjit Bhalla, chairman of Oxus Investments, however, is hopeful. “On every criteria, whether it is inflation, or low growth the situation is conducive for a rate cut by the RBI.”
Meanwhile, the finance ministry officials are non-committal on what transpired between Jaitley and Rajan in their morning meeting today. Jaitley, meanwhile, has given enough indications about what he expects from the RBI.
During an interaction at an investor summit earlier this month, Jaitley said, “Inflation, especially food inflation, has moderated in last few months and global fuel prices have also come down. Therefore, if RBI which is highly professional organisation in its wisdom decides to bring down the cost of capital will give a good fillip to the Indian economy.”
But the question over here is, whether there is an appetite for a rate cut, or on what slab of a rate cut will the desired investments flow.
“The issue is that of the investments actually happening. See, if there is a policy cut of 0.25% or 0.50%, I do not think that alone is going to solve the problem.
The government needs to address long-term financing, particularly for the infrastructure projects as banks are not equipped to sanction such funding, said Debroy, adding that several other issues such as labour issues, among others. Among other things, RBI’s credibility will also be at stake when Rajan unveils the policy rates today.