Taming inflation a high priority: RBI

The short-term macroeconomic priorities of RBI are, therefore, clear – to focus on reducing inflation in line with the proposed glide path; work with the government and banks to speed up resolution of dis-tressed projects and cleaning up bank balance sheets; ensure banks have the capital to make provisions, support new lending, and thus pass on future possible rate cuts, Rajan said. “It is a long anticipated event, it has to happen sometime – everybody knows it has to happen – but pick your time”, he said. It’s not anxious about deflation, India is growing twice as fast as the US, and interest rates sit around 7 percent.

For now it doesn’t appear as though that decision has been made ahead of the Fed’s mid-September policy meeting.

Voicing concerns over the outlook for capital flows that remains “highly uncertain” with the widely anticipated normalisation of US monetary policy later in 2015, RBI expects capital outflows from emerging markets and also to harden financing conditions as bond yields rise.

Interestingly, it is the same summit where Rajan had once presented a paper that talked about an imminent global financial crisis, which eventually hit the world markets in 2007-08. Whereas the headline figure looks healthy, many economists have treated the data series with caution since the statistics department revised its methodology for measuring gross domestic product earlier this year.

In the ‘Governor’s Overview: Annual Report (2014-15) – a first of its kind section – Rajan noted: “First economic growth is still below levels that the country is capable of. Of course, everybody would like stronger Chinese growth, but to some extent we are among the least affected”, he added.

“Those might be the sources of fragility – that we’ve tried doing too much”, Rajan said.

India Inc has been urging the central bank to cut rates in the light of an expanding economy which is expected to grow around 7 per cent with contained inflation, reining-in of fiscal deficit, good monsoon coupled with a plunge in commodity prices. He is of the view that making change in policies could strengthen the economy and put it back on a high-growth trajectory.

After cutting its repo rate by 75 basis points this year, the RBI kept the rate on hold at its last policy review, saying it wanted to monitor inflation and wait for lenders to further lower their lending rates.