Monetary policy: Three out six occasions Rajan went against advisors' view

Six TAC meetings held since Raghuram Rajan took over as central bank's governor in Sept 2013

Reserve Bank of India (RBI) Governor Raghuram Rajan’s decision to go against most members of the central bank’s technical advisory committee (TAC) on monetary policy thrice since he took charge at the central bank is in line with his focus on containing inflation, it is felt.

Rajan had taken charge as the central bank’s governor in September 2013. Since then, six TAC meetings have been held, with the governor going against the views of most members on three occasions.

Between September 2013 and January this year, RBI raised the repo rate (the rate at which banks borrow from the central bank) twice, by 25 basis points each.

On the other occasions, including the monetary policy review earlier this month (when most members had suggested a rate cut), Rajan kept the rate unchanged.

“RBI is sitting on information that is much more granular and detailed. Right from the beginning, Rajan was more committed to an inflation-targeting framework. I believe his single-minded focus on inflation control has helped the economy because we have seen tremendous demand-pull pressure originating after the global financial crisis, when both the government and RBI had undertaken stimulus measures,” said Rupa Rege Nitsure, group chief economist, L&T Financial Services.

Consumer Price Index (CPI)-based inflation, which stood at 9.8 per cent in September 2013, stood at 5.17 per cent in March this year.

The government and RBI have agreed to set a CPI inflation target of four per cent (+/- two percentage points) from the financial year ending March 2017.

At the beginning of this year, the central bank was comfortable on the inflation front, as reflected by repo rate cut of 50 basis points in two tranches. However, it is now felt the scope for further cuts is limited.

“In April, Governor Rajan took a call that we would wait until an improved transmission mechanism was put in place; we are of the view that there is scope for a rate cut. We believe despite near-term turbulence factors such as geopolitical risks pushing oil predominantly and monsoon stress, there is room for a rate cut of 25 basis points in June,” said Shubhada Rao, senior president and chief economist, YES Bank.

She added subsequent rate cuts would be contingent on the monsoon and on whether crude oil prices reverted to $60/barrel.

On Thursday, Brent crude oil was being traded at $64.12/ barrel.