Rajan to flag last independent monetary policy update Tuesday

Rajan to flag last independent monetary policy update Tuesday
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Story Dated : August 7, 2016

Mumbai: As a farewell move, perhaps, the last that a RBI governor can undertake independently, Raghuram Rajan will on Tuesday conduct what will be his last monetary policy update for the Reserve Bank of India (RBI).

The policy update comes against the backdrop of the government fixing on Friday the inflation target for the next five years at plus or minus four per cent — a task which will be entrusted with the soon-to-be-constituted Monetary Policy Committee (MCP) to realise by mandating it to fix policy rates.

Finance Ministry officials said the committee — which will fashion the contours of the monetary policy once it is in place — would be finalised before the next bi-monthly policy review, due in October.

“The MPC would be entrusted with the task of fixing the benchmark policy rate (repurchase rate) required to contain inflation within the specified target level,” a Finance Ministry statement said after the inflation target was notified.

The Reserve Bank governor will be its chair with two more representatives from the central bank, while the other three will be chosen by the government of the basis of the recommendations of a search-cum-selection committee.

“Under Sub-Section (1) of Section 45ZA of the RBI Act, the Central Government, in consultation with the RBI, determines the inflation target in terms of the Consumer Price Index (CPI), once in every five years. This target would be notified in the Official Gazette.”

Given this backdrop and the fact that India’s retail inflation in June stood at 5.77 per cent — and as high as 6.20 per cent in rural India — the possibility of a rate cut has been virtually ruled out, as the current price line is precariously close to the upper tolerance level of six per cent.

Ahead of the policy update, Rajan met Finance Minister Arun Jaitley on Friday, as has been customary, but declined to comment. “We have a policy on Tuesday. So I have to wait till policy. On Tuesday, I’ll be able to talk.”

Since January 2015, when the central bank started seeing some improvement in the economy and external conditions, the repurchase rate, or the short-term lending rate for commercial banks on borrowings from the Reserve Bank, have been cut by 150 basis points — the last one on April 5 worth 25 basis points.

Thus far, since Rajan took the high office, the policy rate has been raised thrice and cut five times.

Now as his three-year term ends on September 4, he intends to return to academia as professor at the University of Chicago — from where he is on a three-year leave.