For 16 months, Reserve Bank of India (RBI) governor Raghuram Rajan resisted tremendous pressure from Indian industry, foreign investors and, according to well informed sources, the government as well to cut rates to spur growth that had fallen below 5% in 2013-14 and 2012-13.
When he took over as RBI chief on September 4, 2013, industry had expected him to cut the benchmark rate, which was then at 7.25%. But Rajan, who said at his first press conference as RBI governor that he was not out to “win votes or get Facebook likes” went the other way.
In his very first monetary policy on September 20, 2013, he raised rates to 7.5% and followed this up with two more hikes of 0.25 percentage point each, taking the repo rate, which banks use as the benchmark to set their lending rates, to 8%.
A visibly disappointed Indian industry accused him of being “anti-growth”, a charge he refuted several times. “There is a major misconception in the industry that the RBI is not concerned about growth. The central bank is concerned about growth and the way to sustainable growth is to have a moderate inflation…,” he has said at several forums.
There was frequent speculation that the previous UPA government as well as finance minister Arun Jaitley wanted him to cut rates. But both Jaitley and Rajan have taken pains to publicly clarify that they were on the same page in the fight against inflation.
From June last year, when the wholesale and retail inflation rates began falling, the clamour for a rate cut grew louder. On December 29, Jaitley said at a public function that when “credit offtake is slow, infrastructure creation becomes slower, manufacturers find it difficult to afford costly capital”.
This was widely interpreted as an articulation of the government’s desire to see Rajan cut rates, but the finance minister denied this and clarified on his Facebook page: “The fact is that there was not a single sentence reference in my entire speech to either RBI or its governor. One of the many points that I made was that the cost of capital has to be cut down. Any one speaking on the subject of ‘Make in India’ would necessarily suggest this.”
Seventeen days later, Rajan cut rates by 0.25 percentage points but experts are unanimous that it wasn’t pressure but favourable inflation and macro-economic data that finally convinced him to reverse his stance on holding rates (see graphic).
Inflation is under control, well under the 8% target for January 2015 set by RBI deputy governor Urjit Patel and is expected to remain within the target of 6% by January next year.
Then, falling global oil prices will result in a $40-billion reduction in India’s budgeted oil import bill of about $150 billion. This, and additional revenues from fresh excise duties on petrol and diesel, are expected to help the government meet its revenue targets and keep its fiscal deficit (the amount the government borrows to meet the deficit in its revenues) within the targeted 4.1% of GDP.
Thus, his frequently enunciated conditions for a rate cut – of low and stable inflation and an improvement in government finances –have been met.
Industry, government and the common man will now wait anxiously for him to fulfill his promise to cut rates further.