Environment favourable for policy action by RBI: Jayant Sinha

The Fed decided not to go for first rate increase in almost a decade, stemming outflows from emerging economies

With inflation in decline and the US Fed handing emerging markets a lifeline by not raising interest rates, there is a "favourable" environment for monetary policy action by RBI, the Finance Ministry said today.

The Fed yesterday heeded to calls from the World Bank and IMF by deciding not to go for the first rate increase in almost a decade, stemming outflows from emerging economies.

Minister of State for Finance Jayant Sinha said central banks globally tend to take a data-driven approach towards their monetary policies.

"We are in a favourable environment now. Obviously, all of these have to be balanced and RBI has to take its decisions," he said on the sidelines of a PAFI event here.

He was asked if there was a case for RBI to cut interest rates before its scheduled monetary policy review on September 29.

"Let us see how Governor (Raghuram) Rajan and RBI process all of these factors and decide for themselves which course monetary policy should take," he said.

RBI has cut interest rate by 0.75 per cent this year in three tranches. It refrained from reducing the rate further in the last bi-monthly monetary policy in August. Since then, consumer as well as wholesale price inflation have dived to record lows in August on falling global commodity prices.

Sinha said, "The global economy right now is trying to find a balance between slowdown in the second-largest economy, which is China, and growth picking up in the largest economy, which is US."

A slow growing China and a reasonably well US economy is bringing volatility and turbulence in the markets, he said while commenting on yesterday's decision of the US Fed.

"I think the statements from (US Fed) Chairman (Janet) Yellen indicated that she believes and the Fed believes that it is going to take some time for these adjustments to happen, for asset prices and financial markets to deal with this new reality. And once that settles down, I think the Fed will have clearer sort of picture as to what they need to do," he said.

And this was the reason for the cautious approach of the US Fed, he said.

"On balance, while they see a pick-up in growth and other factors -- the US economy is doing rather well -- they also recognise the slowdown in China and the impact that has on asset prices. Financial markets around the world are required at this stage to take a more cautious stance," he said.

Sinha said the US Federal Reserve will meet twice before the end of this year -- once in October and then in December, and India will have to wait and see how the Fed assesses the global factors.

"With respect to India, we will continue to do what we are doing, which is to strengthen our real economy to ensure we follow robust policies, and as far as monetary policy is concerned, Governor (Raghuram) Rajan and RBI will make appropriate decisions," he said.