RBI governor Raghuram Rajan is a difficult man to please! When all the people and their uncle union finance minister Arun Jaitley think that the situation is overripe for a cut in interest rates -- inflation rates have come down, growth rates have been negative, manufacturing is down, investment is not picking up, exports are down, government’s fiscal deficit target is under control – Dr Rajan is not convinced. He wants to see “the real thing”.
And what is the real thing? The sustainability of the downward inflation rate. He admits that inflation rate is coming down nearer to his comfort level and that the November rate that will be announced around December 15 may also be lower but as he says, it is because of the favourable base. He is suspicious about the quality of the lower inflation figures. Besides, as he says the perception of the man-on-the-street is that inflation is still high. His clothing, bedding, housing and other miscellaneous services are still high and so are protein based items like milk and eggs. Even the drop in vegetable prices are seasonal.
The December inflation data that will be released in mid-January 2015 will be the real thing as the favourable base effect will no longer be there. So maybe if the lower inflation sustains in December he could think of a rate cut around the end of January. Like he said “I don’t want to do a flip flop. Cut it one month because inflation is down and raise it again if inflation is up.”
Meanwhile, Dr Rajan has lobbed the ball in the government and corporate India’s court, very much like his predecessors did. He says a durable revival of investment demand continues to be held back by infrastructural constraints and lack of assured supply of key inputs, in particular coal, power, land and minerals. He suggests that the slow pace of reviving stalled project, despite government efforts, “warrants policy priority even as the ongoing efforts to ease stress in the financial system unlock resources for financing the envisaged investment push.”
“The success of ongoing government actions in these areas will be key to reviving growth and offsetting downside risks emanating from agriculture and exports given the sluggishness in external demand,” said Dr Rajan, talking tough. He was even tougher on corporates. He said “there seems to be some confusion in their minds about rates.” The risk premium that corporates have to pay is because there are heavily leveraged and some are not repaying their loans so they should control their risk premiums. He also pointed out that there was plenty of liquidity and the transmission by banks of earlier rate cuts by lower interest rates is not happening fast enough. Besides, he said, long term bonds are down 60-70 basis points which means borrowing rates are down and this should be a positive for corporate India.
There is obviously a communication gap between the RBI governor/the general public and the government/corporates on serious issues of inflation and growth. Words don’t mean the same things to both the sides. Jaitley and his team that includes Piyush Goel,Nitin Gadkari etc., and corporate India have this cosy relationship, attending award functions and giving out awards—a job better left to film stars and cricketers-- to each other. Their world of illusions! For governor Rajan, the hard headed man and the general public, it’s the real thing that matters.
