By Ruma Dubey

At the 2nd June 2015 Credit Policy meet, RBI Governor, Raghuram Rajan had very clearly sent out the message - Expect no more rate cuts in this year as this 25 bps today itself is more like a preemptive step to ease supply constraints.

That time too, the Governor had placed the onus on the Govt, urging it to get back to policy action, encouraging investment to alleviate medium term supply side bottlenecks. The Governor had said that between 2000 to 2003, monsoon was poor but thanks to proper action from the Govt, inflation remained largely on the leash. Thus the message which had come across then on 2nd June – RBI has done what it could, now it is time for the Govt to roll up its sleeves and get to work.

So what has changed now, in two months’ time that the RBI would look at reducing rates once again? At that time, he said we need to watch out for CPI rates, monsoon and global happenings. So in that context, only one thing has changed – monsoon. In June IMD had said that monsoon would be deficient but since then, monsoon has been. The only catch here – it’s been patchy with rains not being equitable all around India with many parts of the country still waiting for the rain. So we cannot say that India is out of the woods completely when it comes to monsoon. Thus on this front, RBI would most likely remain cautious and not be in a tearing hurry to reduce rates.

The other two factors remains same. The WPI which has shown a contraction for eight consecutive months is not the benchmark but it is the Consumer Price Index which the Governor watches. That is yet volatile. True, crude price has reduced but he needs to watch for the monsoon and see whether any deficiency could cause collateral damage in terms of higher food prices. As such pulses and cereals are scaling new highs, with tur dal ruling over Rs.100 for past few months. Thus if inflation is the criteria, surely it indicates a wait.

And regarding global scenario, for now there is calm in Europe and for a month or two at least, US will not hike rates. But India needs to be prepared for the uncertainty of US Fed Reserve announcing a rate hike, which could happen by the end of this year. So till this uncertainty is out of the way, it makes logical sense to keep a hold on the rates.

The Annual Report of Bank for International Settlements (BIS) was very telling. It actually went on to the low interest regime in developed countries. The BIS has in factt issued a stark warning that an unprecedented period of ultra-low interest rates mask deep weaknesses in the global economy and threaten to be the trigger for the next financial crisis.

The BIS has said that these abnormally low rates of interest rates, near zero for past six years after the global crisis is actually a reflection of a deeper malaise. Instead of relying on structural reforms to being about sustainable growth, the BIS said that these low rates and willingness to print more money has put the world into the current situation that it is in. Well, we need to give attention to what the BIS says because apart from being the central bank for the central banks, it had similarly warned about the oncoming 2007 global crisis. Thus this latest warning from the BIS will be taken seriously by most banks, especially the US Fed Reserve as a call to start turning back the monetary policy to a more normal setting.

And after reading all this, aren’t you thankful that RBI is cautious, maybe even over cautious? But given the flat world we live in, the global inter connectivity across all aspects, this need to remain over cautious is extremely necessary. We should be glad that the RBI did not look merely at the short term gains, which could have come via rate cuts; but that would have come at the cost of long term stability. Especially now, we in India are worried about the unfolding Greek saga but not losing sleep over it; it is the usual piquant kind of curiosity, similar to probably the curiosity over the happenings in your neighbor’s house. If India too had fired all guns, sacrificed prudence at the altar of growth, maybe we too would be looking at a much bigger crisis. The low interest rates would have created much bigger asset bubbles than what we are looking at right now. Can you imagine the NPAs of the banks if rates were lower?  The current situation of the banks is due to indiscriminate lending, especially by PSUs under political pressure and lack of autonomy.

Hopefully, the autonomy of the RBI Governor will never come under threat; the Govt should get that message loud and clear.