Dr. Raghuram Rajan
RBI Governor

Causing a pleasant surprise, the Reserve Bank of India announced 25 basis points reduction in policy rates on January 15, the day of Pongal, Makar Sankranti and Uttarayana — 18 days before the scheduled bimonthly policy statement on February 3.

More than the rate cut, signalling a lower interest rate regime to banks which has come after 20 months, it is the change in monetary policy stance, which has gladdened the hearts of industry and finance ministry. In the last bimonthly monetary policy statement on December 2, the apex bank had stated that once the monetary policy stance shifts, subsequent policy actions would be consistent with the changed stance.

The repo rate under LAF now would be 7.75 per cent; reverse repot at 6.75 per cent, and bank rate and MSF rate 8.75 per cent. CRR remains at 4 per cent of NDTL. RBI would also continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system through auctions; as also would carry on daily variable rate repos and reverse repos to smooth liquidity.

The change in monetary policy stance, which the apex bank had resisted for quite some time in the past, has been apparently guided by following developments.

* Inflationary pressures (measured by changes in the consumer price index) have been easing since July last year. The path of inflation, also below the expected trajectory, has been consistent with the apex bank’s assessment of the balance of risks. Prices of vegetables and fruits have been falling, price pressure in cereals has been reducing since September, and international commodity prices, particularly crude oil, are declining sharply.

* Crude prices, barring geopolitical shocks, are expected to remain low over the year. Weak demand conditions have also moderated inflation excluding food and fuel.

* Households’ inflation expectations for short-term and long-term perspective have eased to single digits for the first time since September 2009.

* Inflation outcomes have reduced markedly: CPI inflation is expected to be significantly below the 8 per cent targeted for January 2015, and on current policy settings, below 6 per cent by January 2016.

* The government has reiterated its commitment to adhere to its fiscal deficit target. With spectrum and coal auctions as also PSU equity disinvestment to take care of likely lower tax receipt on one hand and savings from 10 per cent non-plan expenditure cuts on the other, the finance minister is likely to achieve the deficit target.

The RBI has stated that apart from quality fiscal consolidation, continuation of disinflationary pressure is essential to move further in monetary easing and for this steps are needed to overcome supply-side constraints to ensure that potential output rises above the projected pick-up in growth in coming quarters so as to contain inflation.

Apparently, RBI has played its part in economic growth and the ball is in the government’s court to consolidate the gains through appropriate fiscal and other policy measures.

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