THE HINDU | Article | Staying accommodative | APRIL 06

The Reserve Bank of India’s reiteration of an accommodative stance after it cut the repo rate by 25 basis points on Tuesday is a clear and unequivocal message that the monetary authorities stand ready to spur economic growth. Indeed, Governor Raghuram Rajan has gone a step further by explicitly stating that going forward, policymakers will be looking for greater elbow room, including in additional readings of low headline inflation, indications of softening core inflation, and evidence of transmission of its previous interest rate reductions. Explaining the rationale for his policy action, Dr. Rajan said the RBI’s aim is to help give a monetary fillip to private investment, which is currently becalmed by low capacity utilisation. 

The central bank’s focus on domestic growth comes not a moment too soon. International Monetary Fund chief Christine Lagarde on Tuesday warned that the global economy is losing momentum, with the recovery being “too slow, too fragile”. Among the headwinds that both Ms. Lagarde and Dr. Rajan have cited is China’s current slowdown. For India, this year’s monsoon will be a critical factor. If, as the RBI has assumed in its policy formulation, rainfall during the season is broadly normal after two consecutive years of shortfall, it would provide a healthy supply shock: simultaneously bolstering rural demand and boosting the availability of farm produce. That would help temper inflationary trends. The RBI, for its part, has found comfort in a string of data points. These include its Consumer Confidence Survey that shows a marginal improvement in consumer sentiment and the manufacturing purchasing managers’ index reflecting a continuing expansion. And survey outcomes — both for industrial and services outlook for the first quarter of the new fiscal year — suggesting that business expectations remain positive have fed into the central bank’s decision to retain its 7.6 per cent forecast for growth in gross value added terms for 2016-17.

On the inflation front, the RBI has drawn reassurance from the fact that food inflation eased in the second half of the last financial year, notably as a result of a decline in prices and not as a result of the base effect. The central bank expects retail inflation to continue to decelerate and remain around 5 per cent this year. And showing that it has not dropped its guard against incipient price pressures, the monetary authority flagged uncertainties such as historic lows in reservoir levels, the recent upturn in prices of commodities, especially oil, and the impact of the implementation of the Seventh Central Pay Commission’s recommendations, all meriting close watch. Dr. Rajan is convinced that improved monetary transmission holds the key to unlocking credit. To that end, the move to a marginal cost of funds based lending rate regime has already helped pare borrowing costs by at least 25 to 50 basis points, according to initial estimates of the RBI. The coming months will tell if Dr. Rajan’s pointed efforts to clean up banks’ balance sheets will also help augment funds availability in the real economy.