Should The RBI Cut The Repo Rate?
In the August monetary policy review meeting, The Reserve Bank Of India (RBI) governor Raghuram Rajan did not cut the repo rate. But, according to media reports, most of the members of technical advisory panel opposed his decision. Finance Minister Arun Jaitley, too, urged the RBI to cut the interest rates. Rajan recently said that "rate cuts should not be seen as goodies that the RBI gives out stingily after much public pleading".
The next monetary policy review meeting is on September 29. Will the RBI cut the repo rate on September 29?
There are three reasons why it could:
Here are three reasons it may not:
Infographic By Sandeep Bhatnagar
1. The RBI did not cut the interest rates in August because Raghuram Rajan thinks that as India had high inflation rates for long, the common man still has inflationary expectations. To inspire greater trust in the public, the RBI is keen on maintaining low inflation levels for long periods of time. India did not see low inflation levels in the 68 years since it gained Independence except from 1999 to 2006 when the RBI tamed inflation to a large degree. In the past twenty five years, there was not a year when average inflation in India was below three per cent. But for much of this period, major central banks in the West have maintained inflation levels between zero and three per cent. As late as 2014, the average inflation in India was as high as 6.4 per cent. The United States adopted inflation targeting only in 2012. But, the United States had historically low levels of inflation for nearly three decades, since it began de facto inflation targeting. The RBI may wait till India witnesses low inflation levels for a considerably long period of time.
Infographic By Sandeep Bhatnagar
2. India's inflation levels are still at 3.78 per cent. This is still a little higher than the level accepted by major central banks. The target of the Federal Reserve and Bank of England's is two per cent. The European Central Bank has a target of up to two per cent.
3. In the late 90's, New Zealand had a much higher inflation rate than India has today. A mandatory legislation later decreed that the governor of the Reserve Bank of New Zealand could be fired for missing the inflation target. In the second quarter of 2015, the average inflation rate in New Zealand was merely 0.40 per cent. As Rajan has long been an advocate of inflation targeting, it is possible that he will set the bar higher.