Whilst leaving the key policy rates unchanged in his fifth bi-monthly monetary policy statement, RBI governor Raghuram Rajan held out a strong hope that rates could be cut in early 2015 if the December inflation rate remained low. Dr Rajan and finance minister Arun Jaitley are obviously not on the same page as the RBI sees the low inflation rates and low growth numbers differently from how Mr Jaitley, his ministry and India Inc. see them. Dr Rajan said there is a lot of uncertainty over the quality and sustainability of disinflationary impulses.
The public perception of inflation expectations is still high and he would like to have more information on how the government intends to maintain its fiscal deficit target. In this scenario, he said, it would be “premature” to cut interest rates. After five years of high inflation, he wants to be sure the disinflationary process is “for real”. Dr Rajan said there was short-sightedness and a misconception in the view of corporate India that the RBI was not concerned about growth. Corporate India, he said, should find ways to cut its risk premium as it is over-leveraged and many are not paying back their loans.
The fundamental way to sustainable growth is through moderate inflation, and the RBI is creating a framework for that. “So bear with us” was his plea. The government sent a message that durable revival of investment will come if infrastructural constraints are removed and manufacturers are assured of supplies of key inputs.
