RBI likely to hold interest rates

Raghuram Rajan

Raghuram Rajan

The Reserve Bank of India (RBI) is likely to keep interest rates unchanged when it reviews its monetary policy Tuesday as its first major exercise after the installation of the new union government.

Known for his anti-inflation stance, RBI Governor Raghuram Rajan had kept the policy rate unchanged at eight percent in its April 1 review. He gave an indication Friday when he told reporters in Tokyo that the “government and the central bank have both stressed on the need to bring down inflation while respecting the fact that growth is very weak”.

The RBI is expected to hold its repo rate (at which it lends money to commercial banks) unchanged at 8 percent.

Amid speculation that the RBI governor’s primacy to inflation control may clash with the pro-growth orientation of the new government with emphasis on easing of credit, Rajan has met with both Prime Minister Narendra Modi and Finance Minister Arun Jaitley during their first week in office, ahead of RBI’s policy review.

After his meeting with the new finance minister, Rajan told reporters the government and the RBI were on the same page on maintaining a balance between growth and inflation.

Last week, Jaitley had said: “The challenges are very obvious. We have to restore the pace of growth, contain inflation and obviously concentrate on fiscal consolidation itself.”

Rajan raised interest rates three times since he took office in September 2013, even as economic growth slowed to its lowest in nearly a decade.

India’s economic growth remained below the 5 percent mark for the second year in a row at 4.7 percent in 2013-14.

Growth remained subdued at 4.6 percent in the fourth quarter of 2013-14 and during the entire fiscal, mainly due to a decline in manufacturing and mining output.

Rajan has set a target of bringing down consumer price inflation to 8 percent by the end of the fiscal, and to 6 percent by the next fiscal.

Retail inflation (consumer price index) was at 8.59 percent in April year-on-year, after running near or above 10 percent for almost two years through 2013. Food inflation in April stood at 9.66 percent.

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