After all the speculation about whether US Fed chief Janet Yellen would or would not raise rates, she left US interest rates near zero. Ms Yellen attributed the status quo on interest rates to the global economic and financial turmoil, including in China which she said was threatening to hold back the US economy and keep the lid on inflation. There was literal celebration in the emerging markets, including India. The stock markets, barometers of sentiment, soared in India and emerging markets whilst the US markets slumped.
There were fears of an outflow of dollars from the emerging markets, including India, back to the US if interest rates were raised there. In fact there has been a net outflow of FII investment in the last two months because of the uncertainty over interest rates. All eyes will now be on the RBI’s credit policy announcement at the end of September. The chorus for cutting rates is growing louder, especially after the US Fed held interest rates.
Coincidentally, RBI governor Raghuram Rajan, anticipating questions on interest rates while speaking at a meeting in Mumbai on Friday, said he had expressed his future guidance on interest rates in the last policy statement. He reiterated that he had said that future policy would depend on how global uncertainty, the monsoon, the Fed’s action, and the transmission of the earlier rate cuts pan out. It is difficult to see how Dr Rajan can forego cutting interest rates on September 26. Even the government’s chief economic adviser, Mr Arvind Subramanian, has said there is room to cut interest rates by one per cent, and the majority of the RBI’s technical advisory committee have been in favour of a rate cut.
The government, particularly finance minister Arun Jaitley, and most economists are worried about growth, which has been very tepid, and feel that low interest rates would spur growth. There is a wide and unbridgeable gap between the thinking of Dr Rajan and the government and India Inc. The governor’s yardstick, like Ms Yellen’s, are different from the rest. As she said, decisions are not taken on day-to-day developments. Likewise, Dr Rajan does not look at monthly figures. But pressure is growing for him to oblige.
