RBI can cut rate if inflation stays below 6%: Rajan

During the calender year, RBI has reduced the rate thrice by 0.75 percent.

However, the policy document pegged the January price index at 5.8 per cent, which is 20 basis points below the April and June estimate. The Governor reminded that the RBI could take monetary actions at any time.

Under the present system, the Reserve Bank Governor is appointed by the government, but controls monetary policy and has veto power over the existing advisory committee of RBI members and outside appointees that sets rates.

“A cut in interest rate in such a situation would have done much to restore the investment cycle”, said CII Director General Chandrajit Banerjee.

He also welcomed the announcement by the Government regarding the infusion of capital into public sector banks, which he believed would help loan growth, and hence, transmission.

It said the most worrisome aspect is the sustained hardening of inflation excluding food and fuel though prices of pulses and oilseeds have pushed up a bit.

The better than expected economic recovery recorded in the second quarter of 2015 strengthens the case for an increase.

Under a target declared as part of a newly announced inflation-targeting framework, RBI is targeting to hold the inflation under 6 percent by January next year, which many analysts feel is possible. Though the government and the central bank introduced MPC framework earlier this year, there have been disagreements regarding the constitution.

These include the sharp fall in crude prices since June and the likelihood of this softness persisting in view of the global supply glut and expanding production by Iran.

Another key concern for the RBI has been the slow speed at which its cuts have prompted commercial lending banks to cut their rates and prompt fresh loans from consumers. Over recent decades, policy makers have placed great store by “anchoring” inflation expectations at their target rates as a means of ensuring shocks to the economy – such as sharply rising or falling commodity prices – don’t prove disruptive.

India’s central bank policy review is expected to yield little in the way of action on Tuesday, but its statement will be pored over for clues as to whether there is a chance of another interest rate cut this year.

Economists polled by Reuters expect a seven-to-two split among BoE rate-setters, but clues that more members are on the cusp of voting for higher interest rates would leave short-dated bonds vulnerable, said Jason Simpson, rates strategist at Societe Generale.

Rajan had already snipped rates three times this year to aid India’s economy, which at 7.5 percent growth outperformed China’s for the first three months of 2015.

He further said that while the details of the monetary policy committee (MPC) will have to be ironed out, “there are no differences between RBI and the government” on this matter.