There was never any doubt that India’s newest finance minister, Arun Jaitley, and RBI governor Raghuram Rajan would be on the same page on the issue of growth and inflation. Earlier there were concerns when hot-headed wannabes tried to speak out of turn regarding Dr Rajan’s monetary policy and implying he would have to go if he didn’t fall in line. Fortunately for the country, and the economy, Prime Minister Narendra Modi’s choice for the portfolio that could make or break the economy was Mr Jaitley. From all reports the 50-minute meeting between him and Dr Rajan went well on Tuesday as they both spoke of balancing the needs of inflation and growth.
All eyes are on Dr Rajan’s monetary policy expected the coming Tuesday. Hitherto Dr Rajan was ploughing a lonely furrow as the UPA-2 government was unable either to tackle the supply-side constraints that were leading to food inflation or take policy decisions to spur investment and growth. Interest rates were not the sole or defining factor hindering investment. So, in the absence of fiscal and administrative measures, monetary policy perhaps had to be harsher in tackling inflation.
Undoubtedly, Dr Rajan and Mr Jaitley discussed the supply-side constraints while discussing inflation and, as BJP leader and former minister Arun Shourie said in a recent interview, if the RBI is convinced that the new government will tackle the supply-side constraints, it would perhaps relax the policy rates. So there is an outside chance that there could be some loosening in monetary policy.
