RBI governor Raghuram Rajan does not like being called a dove, a hawk, but his second bi-monthly Monetary Policy Statement, 2014-15, announced on Tuesday, was dovish for the first time since he took over in September 2013.
He left policy rates unchanged despite headline inflation in March and April remaining high fuelled by the high prices of food. Instead, he reduced the statutory liquidity ratio by half a per cent to 22.5 per cent so there is more money available to corporates.
His tone reflected his confidence in the Modi government’s ability to take stronger action on the food front and better fiscal consolidation. If the disinflationary process expected from his earlier rate hikes is faster than anticipated, it will give him headroom to ease policy stance.
The ball is now back in the government’s court, only this time the government will surely lob it back to the RBI, unlike its predecessor that did not have the political will to tackle food inflation.
The governor also raised the eligibility limit for foreign exchange remittances under the Liberalised Remittance Scheme to $1,25,000 from $75,000 last year as the forex situation has stabilised. Dr Rajan sees a positive future.
He observed that following the decisive election result, with improved sentiment this should create a conducive environment for comprehensive policy actions, a revival in aggregate demand as well as a gradual recovery of growth over the year.
