There were no surprises from RBI governor Raghuram Rajan in his fourth bi-monthly monetary policy statement 2014-15 on Tuesday, as he preferred to wait and watch over the evolution of inflation.
High food prices remain his bugbear, and the main hurdle that must be crossed before he decides to ease interest rates. He expects a clearer picture once the kharif crop comes in. Till then, industry and other borrowers must live with one of the highest interest rates in the region.
This hurts small and medium businessmen and women who depend on bank credit more than the big boys who have access to cheap external commercial borrowings that have been increasing.
The government would do well to seriously tackle the issue of food prices, primarily protein inflation. There is no reason why the government, which handles a $2 trillion economy, cannot increase the production of protein and other items that are in demand and causing inflation.
The food minister has said that steps would be taken to cut down wastage, but this needs to be monitored so that the government can get a grip on food prices. Excluding food and fuel, the consumer price index has decelerated to its lowest level since the new series started, mainly due to sharp disinflation in transport, communications and household requisites.
But food prices, a possible revision of administered prices that have been held back, and some uncertainty on the sustainability of the improved inflation outlook, override other advantages of lower oil prices, a relatively stable currency and a negative output gap.
So finally, only if all things are equal, policy rates may come down. Will there ever be such an ideal situation?
Oil prices for instance are dependent on relative calm in the Middle East or Ukraine. If violence flares up, so will oil prices. One wonders therefore if interest rates will ever come down.
