Reserve Bank isn't done with rate cuts, says Rajan

Says impact of crisis in China won't be as big here as in some other countries

Hinting at a fourth interest rate cut this year, Reserve Bank of India (RBI) Governor Raghuram Rajan has said the central bank isn’t done with lowering rates. The primary problem in the global economy, he added, was slowing economic growth.

RBI has reduced the key policy rate thrice this year, by a combined 75 basis points. It, however, kept the rate unchanged at its monetary policy review in August.

Recently, market participants’ expectations of another rate cut were dashed, with the RBI chief sounding hawkish in the central bank’s annual report, which said inflation would inch up to the upper band of its comfort zone. While retail price inflation, the central bank’s gauge of price increase, dipped to a record low in July, RBI expected it to increase from September, as the effect of a favourable base waned.

“We also have inflation which other people do not have. We have cut the interest rate thrice so far this year and we are still in an accommodative mode. We will have a look at data as it comes and take a view accordingly…We have not said we are finished (with cutting rates) and we will take a view as the data allows us to do,” Rajan told CNBC on the sidelines of the Jackson Hole economic symposium of the Kansas City Federal Reserve in the US.

For January 2016, the central bank has set an inflation target of six per cent.

“Inflation developments will warrant close and continuous monitoring, as part of the overall disinflation strategy that requires inflation to be brought down to five per cent by January 2017,” RBI had said in its annual report.

At its policy review in August, RBI decided to keep the policy rate unchanged, citing sustained hardening of core retail inflation (for which food and fuel is excluded). In addition, food prices, especially of protein-rich items, pulses and oilseeds, have risen sharply in recent months. Also, banks are yet to pass on the entire rate reduction by RBI this year, with base rates falling only 25-30 basis points.

At Jackson Hole, Rajan also said RBI had reached an agreement with the government on a new rate-setting panel, the monetary policy committee, which would be announced soon. He added the panel would be different from what was proposed in a draft last month, wherein the government was to appoint most of the members.

“There is an agreement with the government, which is not that plan,” Rajan said, without divulging the details.

On the recent crisis in China, Rajan said though India was a major trading partner, the impact of the crisis here wouldn’t be as big as in some other countries. “If there is a greater Chinese slowdown than anticipated, it won’t affect us as much as other countries around the world ... Of course, everybody would like stronger Chinese growth. But to some extent, we are among the least affected,” he said.

There was a “mood of optimism” in India’s economy, he said, adding it would among the least affected from the crisis in China.

Rajan also advised the US Federal Reserve against raising rates at a time when the global economy was in turmoil. “My position has been ‘don’t do it when the world is in turmoil’... It is a long-anticipated event; it has to happen sometime … everybody knows it has to happen, but pick your time,” he said.

The RBI chief also urged parliamentarians in India to resolve their differences and allow the proposed goods and services tax legislation to be implemented, saying it would be one of the most important changes in India.

He also termed the proposed bankruptcy code as an “extremely important” legislation. “If we can get a good bankruptcy code, we can start issuing long-term bonds, which is absolutely necessary to finance infrastructure, finance all the big things the government plans,” Rajan said.

On global markets, the RBI governor said though prices weren’t correct in certain asset markets, they would be so. “Now, whether that happens smoothly or in a more volatile fashion is anybody’s guess.”