RBI to watch for monsoon onset before softening rates further

India has emerged as a bright spot in the otherwise gloomy world economy in the last one year. Investment climate in general has improved with the government proactively taking measures to ease legal & bureaucratic processes, and enhance coordination among different stakeholders.

The government has done remarkably well in lifting morale of public servants. Recent coal block and telecom spectrum allocations are good examples of transparent and accountable service delivery. Further, a record 150 million new banking accounts have been opened with the prime minister's Jan Dhan Yojana, making 99.99 per cent of Indian households financially connected.

The government is now harnessing this platform to provide universal social security at very affordable cost for common citizens of the country. On macro front, with current account deficit, fiscal deficit and inflation - all three persistent vulnerabilities - having declined considerably, India stands better prepared than peer economies to witness any rate rise by the US Federal Reserve.

Banking aggregates' growth has been relatively slow in the recent past, reflecting a combination of factors such as reliance on alternative sources of funding, ongoing balance sheet repair amid weak corporate demand, etc. Importantly, current credit cycle experience has led to regulatory and bank-wide measures for enhancing loan-appraisal standards, better monitoring systems, and prompt redressal mechanisms, etc. which together make sound foundation for credit growth, going forward.

With continued softness in inflation, subdued industry and banks passing on earlier repo cuts into their base rate, etc., rate cut calls have grown louder of late. However, downside risks to it materialising include cloudy outlook on monsoon, reversal of crude prices in 2015 so far and uncertainty over the US Federal Reserve raising rates this year.

Importantly, the Reserve Bank of India (RBI), in its annual policy statement for 2015-16, has anticipated retail inflation softening to around four per cent by August 2015, before firming up in the rest of year 2015. These facts, when seen together, puts a case for rate action in balance. Reserve Bank of India, therefore, may prefer to watch for monsoon onset before yielding further as liquidity stays comfortable and interest rates presently are hardly prohibitory for given level of demand.

But in all, if inflation continues to be subdued, we should look forward for softer rates in 2015-16.

The author is chairman & managing director, Union Bank of India. The views expressed are personal