RBI signals hope by not hiking interest rates
In keeping the interest rates unchanged, the Reserve Bank of India has signalled two issues: First, it is willing to keep on hold any upward revision in the rates in anticipation of the new Union Government's moves at fiscal consolidation; and second, it still believes that inflation remains a serious enough matter which does not call for a reduction in the interest rates. Many analysts have seen the refusal of RBI Governor Raghuram Rajan to change his previous hard position as an indication of friction between the Narendra Modi-led regime and the RBI. This is a wrong reading of the situation. If anything, both the Government and Mr Rajan are on the same page on the need to contain inflation. Rising prices and inflation had been among the priority talking points of the Bharatiya Janata Party during its election campaign. Union Minister for Finance Arun Jaitley has acknowledged that the RBI had under Mr Rajan's leadership “followed a calibrated approach aimed in the direction of balancing between growth and inflation”. Mr Jaitley will of course be keen to kick-start growth as quickly as he can through a series of confidence-building measures, and the lowering of interest rates by the RBI could help in this endeavour. But he realises the pitfalls of the RBI allowing a free run of cheap money in the economy at a stage when inflationary trends are high. There are a number of steps he will have to take to check those trends, and we shall see many of them in the forthcoming Budget. Meanwhile, confidence is already growing among the corporate sector and the markets in the ability of the Modi-led regime to turn the economy around. Mr Rajan understands that the process of a turnaround is no longer a matter of speculation but a real possibility. This is one reason why the RBI has not only not increased the rates (which it had done on as many as three occasions since September 2013), but also cut the statutory liquidity ratio by 0.5 basis points. Through this action, banks across the country would be able to unlock more than Rs 40,000 crore that will be available to consumers. Mr Rajan's remark that further tightening would not be necessary (once the Government gets cracking) is a clear indication that the RBI is geared up to coordinate meaningfully with the Government.
Of course, not everybody is happy with the apex bank's decision to keep the interest rates unchanged; the struggling real estate sector, for instance. However, realtors need to exercise patience. As the measures to contain inflation are rolled out, the RBI will surely reciprocate. Once housing loans get cheaper as a result of lower interest charges, it will have a cascading impact on the economy, with industries connected with real estate, such as cement, iron and steel etc, witnessing a boom. Meanwhile, the Union Government has to brace for a projected poor monsoon which could play a spoiler. let’s not forget that agriculture remains the backbone of the country’s economy.