Rajan pins rate cuts to monsoon, inflation figures

Reserve Bank of India governor Raghuram Rajan says that future rate cuts will depend on moderation in price rise and a good monsoon.

"We're looking at inflation," he said in an interview with The Wall Street Journal on Friday. "If it continues on a downward path, that would create room."

Rajan and finance minister Arun Jaitley are in Washington for the spring meeting of the International Monetary Fund and World Bank.

Inflation has fallen steadily in the recent months. Retail inflation fell to 4.83 per cent in March, from 5.26 per cent a month ago. Food inflation fell to 5.21 per cent from 5.3 per cent. The RBI plans to keep inflation within 5 per cent by January 2017 and about 4 per cent thereafter.

After reducing policy rates by 25 basis points in its first bi-monthly monetary policy on 5 April, RBI said it would wait out to see a proper transmission of its cumulative 150 basis rate cuts.

In his policy statement, Rajan said "monetary stance remains accommodative".

However, the central bank would assess the situation before more cuts, Rajan said in an interaction with media after the policy. Transmission by banks would also be critically monitored before deciding on rates. Banks have passed on no more than 70 basis points against the front-loaded rate easing exercise by the central bank.

"At this point, we want to get a better sense of what the big uncertainties surrounding the economy are before we take further action," Rajan had said in the interaction on policy day. "More importantly, we want to see the past rate cuts pass through. There is no point just cutting rates, which makes the market happy for a day, but the economy doesn't benefit if the pass-through doesn't happen," he said, adding that transmission would be one of the important consideration for future rate cuts.

The policy statement also cautioned that an erratic monsoon pattern would chip off some of the growth prospects of the economy. With reservoirs drying up fast, India suffered two consecutive years of bad rainfall, but rains this year is expected to be at 106 per cent of the long period average, the meteorological department said recently. Rajan's comment in the latest interview comes after the met department projection.

"We're looking for signs of a good monsoon. Unfortunately, India is still somewhat sensitive to monsoons, though people find it hard to see a link between monsoons and food prices. But there is potentially, with this being the third bad monsoon in a row that happens," Rajan said in the interview.

A bad monsoon would push up the prices of food and impact the real economy in several ways. This makes future rate cuts impossible even as rural demand would suppress further.

Most economists see RBI having a room of a 25 basis points cut, having met inflation targets comfortably.

In the interview with the US financial daily, Rajan said India did well in narrowing its current and fiscal account deficits, giving the economy more flexibility to weather potential turbulences.