RBI governor Raghuram Rajan in Mumbai on Tuesday. — PTI
RBI governor Raghuram Rajan kept the policy rates unchanged on Tuesday and said the key to the turnaround growth path in the second half of the year is predicated on the revival of investment activity in both greenfield and brownfield projects, supported by fiscal consolidation, higher exports and sustained deflation. If this happens, the growth projection for 2014-15 will be retained at 5.5 per cent, within a range of five to six per cent, he said. This is in contrast to what India Inc. has been saying about high interest rates hampering investment.
Announcing his fourth bi-monthly monetary policy on Tuesday, Dr Rajan kept policy rates unchanged as he said he wanted to see the how the evolution of inflation pans out. The consumer price index, he said, had eased in all major groups, including vegetables, but a persistent upside pressure on food prices contributed 60 per cent to headline inflation in August. He said they would have to wait till the kharif crop comes in to assess the future path of food inflation.
He was confident they would meet the near-term eight per cent inflation objective by January 2015 but was less upbeat about the six per cent medium-term objective by January 2016 as the balance of risks was still on the upside. “This continues to warrant policy preparedness to contain pressures of the risks that materialise,” he said.
Going forward, the future policy stance would be contingent on incoming data and would be influenced by the Reserve Bank of India’s projection of inflation relative to the medium term.
Industrial activity, which saw a slump in July as capital goods production followed the contraction in consumer durables, would depend on improvement in the business environment and resumption of consumption and investment demand before gaining sustained speed, he said. Mr Rajan expected the resumption of stalled projects to provide a boost to inventory and capex cycles while reducing distressed bank loans and revitalising growth.
Most analysts felt there would be no cut in the interest rate till the second half of 2015. Dhananjay Sinha, head, institutional research, Emkay Global Financial Services Ltd, said RBI’s statement still suggests loads of uncertainty regarding growth, upside risk to medium-term inflation and potential volatility on the exchange rate front, all of which could negate the basis for rate-easing. Samir Lodha, managing director, QuantArt Market Solutions Pvt. Ltd, said, “We believe that the RBI will stay the course on rates and a rate cut is not coming any time soon. If any, there is a risk of no cut even in 2015 if inflation remains stubborn.” Echoing the same sentiment, Soumya Kanti Ghosh, chief economic adviser, economic research department, State Bank of India, said, “We believe that the first rate cut will only happen towards the second half of FY16.”