Monetary Policy: What RBI’s Raghuram Rajan needs to keep in mind

Mumbai:Raghuram Rajan, Governor, Reserve Bank of India is going to announce the second bi-monthly monetary policy on at 11 am on June 2.

Where in the previous monetary policy he surprised everybody by not making any changes to the repo rate, this time most are expecting rate cuts of at least by 25 basis points.

“The Reserve Bank is likely to cut policy rates by 0.25% in its upcoming policy review next week, said Citi Group in one of its reports.

Industry body Assocham, too, said, “The Reserve Bank is likely to slash the benchmark interest rate by 0.25% to stimulate demand.”

In the previous monetary policy, the governor kept the rates unchanged because he wanted to assess the impact of unseasonal rains on food prices. He had also asked the banks to reduce their lending rates.

RBI has cut repo rate twice this year in order to bring lending rates down but banks did not follow suit immediately. Banks alleged that tight liquidity position and high deposit rates are holding them back from cutting interest rates. Therefore, banks first began cutting deposit rates and then brought down their lending rates.

State run Corporation Bank on May 26 cut their base rate or minimum lending rate by 0.25%. This move is considered to lead to lower EMIs for its customers.

Other banks such as Punjab National Bank, Bank of Baroda and IDBI Bank also reduced their base rates by 0.25% to 10% earlier this month.

Although the banks have started showing results, Raghuram Rajan should keep in mind these factors before setting the policy road-map for this new fiscal:


Graphical visualization of InCPIiny

The retail inflation stands at 4.87% in April which is much below than the target that the bank has set.

The bank aims to reach 6% by January 2016. So, the governor might slash the rates by 0.25% this fiscal.

One more factor that ASSOCHAM points out is that RBI may cut the interest rate by another 0.50% in the two quarters post the June 2 monetary policy review.

“Even the Consumer Price Index (CPI) inflation is expected to be in a range of 4.5-6% over the remainder of 2015,” said D S Rawat, Secretary General, Assocham.

Due to lower food prices, CPI inflation decreased from 5.25% in May to 487% in April.

Graphical visualization of InCPIiny

Loan growth:

The value of loan growth in India increased 10.50% in May 2015 over the same month in the previous year. Hence, the governor may slash the rates to keep the numbers growing. But the banks also need to act accordingly.



The Reserve Bank governor might not cut the repo rate keeping El Nino in mind. This is one of the most important factors that Raghuram Rajan has to give a lot of thought before reviewing the next monetary policy keeping economy in consideration.

But in matters of monsoons not being proper and leading to high food inflation, rates should come down.

The India Meteorological Department ((IMD) has predicted a 70% probability of El Nino this year. There are 33% chances that rainfall will be below normal this monsoon i.e. below 90%.

This will lead to reduction in crop yield which will automatically shoot the prices of food up, thereby causing inflation.

Nomura, a Japanese investment bank has warned that El Nino conditions could push up food prices in India.

On the contrary, a private weather forecaster, Skymet predict that there will not only be a normal monsoon but India will soon witness excess rains.

Now, Raghuram Rajan will have to think which prediction to believe.

Industrial Production Growth:

India’s industrial production growth has decreased by 2.77% in April 2015. For the economy to grow India’s industrial sector needs a push which only the RBI can give by slashing the rates.


(with agencies)