Wednesday, 10 August 2016

Raghuram Rajan maintains status quo in Final Innings

Reserve Bank of India Governor Raghuram Rajan refrained from tinkering with the key interest rates in his last monetary policy review, as soaring inflation over the past three months offered little room for monetary easing in Asia’s third biggest economy.

The RBI kept its benchmark repo rate (the rate at which banks borrow short-term funds from the central bank) unchanged at 6.5 per cent, the cash reserve rate that scheduled banks have to keep in the form of liquid funds also remained unchanged at 4 per cent and the reverse repo rate at 6 per cent at its third bi-monthly monetary policy review.

Retail inflation, the RBI’s benchmark gauge for prices, rose to 5.77 per cent in June 2016 from 5.76 per cent in May 2016 driven by higher food prices. Moreover, consumer inflation is also hovering pretty close to the government’s newly notified upper tolerance limit. The government has recently notified an annual inflation target of 4 per cent, plus or minus 2 percentage points. RBI is targeting to bring down inflation to 5 per cent by March 2017.

Further, a good monsoon is likely to bolster farm output and curb the surge in food prices, however, there are still some upside risks to inflation including a hike in wages for government employees that may push up consumption and hence put pressure on prices. 

Raghuram Rajan took over the reins of the Reserve Bank of India (RBI) at a time when the rupee was weakening and touched record lows, the current account deficit (CAD) had widened to alarming levels and India’s inflation rate was among the highest in the BRIC countries. Now, after three years, Rajan is leaving the Indian economy in a much stronger shape, evident by the country’s rising global prowess that includes it becoming the world’s fastest growing major economy. From January 2015 till date Rajan has lowered rates by 150 bps.

Prime Minister Narendra Modi's government is yet to pick a successor for Raghuram Rajan who will step down on September 4 after a three-year term, to return to academia in the United States.


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