By Ruma Dubey

Unless food inflation comes down, RBI would maintain a hawk watch. That was pretty much the writing on the wall and Raghuram Rajan stood by this. As widely expected by all, it was a status quo policy. There was no rate cut in repo rates and no tinkering with SLR or CRR.

Like the Janet Yellen, the strong message sent across is that policy is data contingent. The medium term inflation target of 6% by Jan’16 and the balance of risks is still to the upside, though somewhat lower than in the last policy statement. The Governor has stated that this continues to warrant policy preparedness to contain pressures if the risks materialise. Therefore, the future policy stance will be influenced by the Reserve Bank’s projections of inflation relative to the medium term objective (6% by January 2016), while being contingent on incoming data.

Rajan said that he is confident of achieving 8% inflation by Jan’15 and 6% by Jan’16 and we are most certainly in a much better situation than in August and we are positioned better given the better-than-expected monsoon. Yet, he has warned crude could move any way, and there are risks from food price shocks as the full effects of the monsoon’s passage unfold, and from geo-political developments that could materialise rapidly.

When one reads the policy statement, one gets the feeling that the RBI Governor is in no mood to change rates for the at least a year if one goes by the set inflation target. The target of 6% before Jan’16 does not seem possible unless certain Govt actions are not taken.  Yes, what we come with from this policy statement is that 2015 will be a year of pause.

On the inflation front, things are improving. MSPs have been coming down and rural wage rates have been moderating from 25% to 10%, cost of production for CPI is coming down. Thus inflation outlook is good but the fact remains that production of food figures are yet to come and the USA is expected to change its interest cycle from somewhere around next year. Thus while we are at a cusp of change of sorts, any action at this juncture was simply was unwarranted.  

Highlights of the policy

• Repo rate unchanged at 8%; reverse repo same at 7%, MSF and Bank rate at 9%
• CRR unchanged at 4% of net demand and time liabilities (NDTL);
• Reduce the liquidity provided under the export credit refinance (ECR) facility from 32% of eligible export credit outstanding to 15% with effect from October 10, 2014;
• Continue to provide liquidity under overnight repos at 0.25% of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75% of NDTL of the banking system through auctions;
• To continue with daily one-day term repos and reverse repos to smooth liquidity.

But this is indeed the right stance – being dovish. Otherwise it would have been too premature; RBI also needs to wait and watch how the Govt moves on reforms and economic growth. Frankly, if the Govt does its job well and RBI does its job as it is doing, there is really no need for either to interfere with each other. As the RBI has always said, even Rajan’s predecessor, Subbarao said that easing of domestic supply bottlenecks and progress in the implementation of stalled projects should brighten the outlook for both manufacturing and services. And that is what the Govt needs to work on with urgency.

Expecting any rate cut in the immediate future is too early; we will have to wait for more data. Not dovish or hawkish, this is a consistent policy.

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