Interest rate cut only if inflation declines further: Raghuram Rajan

Five days before his term ends, Reserve Bank of India (RBI) governor Raghuram Rajan appeared to have ruled out a rate cut in the near future.

In his foreword to the central bank’s annual report released on Monday, Rajan said: “The shortterm macroeconomic priorities of the Reserve Bank continue to be to focus on bringing down inflation towards the government set target of 4%.” Any room to cut policy rates, he said, could emerge “only if inflation is projected to fall further.”

Retail inflation rose 6.07% in July. The RBI tracks consumer price index-based inflation for setting interest rates.

The report, however, said the fall in prices outside of food and fuel was “a heartening development.”

Growth is still below potential with policy actions being “work in progress”, Rajan said. Assessing the economic environment, he added that lead indicators during 2015-16 were mostly softer than a year ago.

“Economic growth while showing signs of picking up, is still below levels that the country is capable of. The key weakness is in investment, with private corporate investment subdued because of low capacity utilisation, and public investment slow in rolling out in some sectors. Second, inflation projections are still at the upper limits of RBI’s inflation objective.”

Rajan also came down strongly on commercial banks for the delay in passing on rate cuts. “The willingness of banks to cut lending rates is muted; not only does weak corporate investment reduce the volume of new profitable loans, their stressed assets have tightened capital positions, which may prevent them from lending freely.”

Since January 2015, banks have cut lending rates by 0.60% in comparison to RBI’s reduction of 1.50% in key policy rates.

Lauding the government, the outgoing governor said business sentiment improved in response to initiatives, including ‘Make in India’ and faster clearances of stalled projects.

“There has been a significant improvement in roads with respect to new constructions, especially in the national highways network. Ports have recorded the highest ever capacity utilisation in a single year... highest-ever annual capacity addition in solar and wind energy segments… Notable progress was also achieved in railways,” the report added.

The key weakness is in investment, with private investment subdued because of low capacity utilisation, and public investment slow in rolling out in some sectors RAGHURAM RAJAN, governor, RBI