Raghuram Rajan overruled majority view of lowering repo rate - Economic Times

KOLKATA: Reserve Bank of India Governor Raghuram Rajan overruled the majority view yet again on interest rate decision as he kept policy rates unchanged at the last review meeting in the run up to the April policy review. With worries about inflation getting stronger, the next interest rate cut may have to wait till August if the view of the minority, which the Governor went with last time, is any indication.

Three members of the technical advisory committee on monetary policy suggested status quo in the policy repo rate while four of them recommended lowering of rates. The members also suggested that the rupee should be allowed to depreciate to boost trade balance and spur demand.

The repo rate - at which bank borrow funds from the central bank - at 7.5% is near neutral, assuming neutral real rate of 2% and likely inflation of about 5.5% and this leaves little room for easing. The members in favour of no-cut believed that there would be little space for a rate cut unless inflation declines further amid growth picking up.

Governor Rajan went with the minority group's view that until the impact of repo rate since January is transmitted into lending rates, no further cut is desirable. Only about eight of India's 47 banks have listened to Rajan's call to lower base rates but none has matched RBI's two 25 basis points rate cut since January.

The majority view was that a decrease in interest rates would stimulate the interest-sensitive sectors of the economy and enable depreciation of the exchange rate, thereby helping the globally connected sectors. The third cut in the interest rate may wait at least till August after the monsoon impact is known. They wanted that the centrality of inflation in a flexible inflation targeting framework be recognised in the Reserve Bank's forward guidance.

RBI expected consumer-price gains will moderate to 4% by August before climbing to 5.8% by March 2016. Inflation has averaged 5.3% this year. Members said that the rupee should be allowed to depreciate as the present level of exchange rate is not beneficial for trade. A modest real depreciation of the rupee would boost the external trade balance as well as push aggregate demand. Since the rupee has appreciated significantly against the euro, India's share of exports in the Euro area may have fallen relative to South Asian countries where currencies have remained fairly stable.

The rupee appreciated by about 11% in real terms against a six-currency basket over the year to March, making Indian exports less competitive.

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