Partha Ray on RBI Policy

Businessworld

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Reserve Bank of India Governor Raghuram Rajan kept the country's key policy repo rate unchanged at 8 per cent on Tuesday (3 June), as widely expected, with consumer price inflation coming down this year after a series of tightening steps by the central bank.

The central bank also took steps to increase the availability of credit, reducing the mandatory amount of bonds lenders must park at the RBI - called the statutory liquidity ratio - by 50 basis points to 22.5 per cent of deposits, starting in mid-June.

Commentary

Partha Ray, Professor of Economics, Indian Institute of Management-Calcutta (IIMC)
Did Governor Rajan wear the hat of the typical conservative central banker and effectively turned a blind eye to the travails of the industries? In order to appreciate the context of this decision, following features of the current objective economic condition are worth noting:

First, domestic activity remained sluggish during the first quarter of 2014-15 and the outlook of agriculture is uncertain in view of the impending El Nino. Second, globally the recovery has been far from uniform. And third, despite some moderation in inflation since September 2013, it remains elevated and recently consumer price inflation increased for the second consecutive month in April 2014, pushed primarily by food inflation.

Thus, in making the policy, Governor Rajan was effectively caught between the ‘rock of sluggish economic activity’ and a ‘very hard place of inflation’. Faced with this, while maintaining the policy rates, he reduced the SLR so that commercial banks will be able to extend some more credit to the corporates.

In my view, the signal that the RBI Governor wanted to transmit is that: RBI is not insensitive to industries’ woes but it cannot give up the central banker’s dharma of anti-inflation. Furthermore, if government behaves responsibly and attempts to cut its deficit, then further reduction in SLR may be on the cards – but do not expect wonders in policy rate front unless the inflationary situation gets bridled further.