MUMBAI: The Reserve Bank kept key rates unchanged on Tuesday with governor Raghuram Rajan saying room for a cut— widely sought by industry — will only come when food prices soften, hopes of which ride on a good monsoon.
Rajan also kept the suspense alive on the extension of his tenure, joking, “As far as the question of me continuing in this position after September 4 goes, it would be cruel of me to spoil the fun the press is having.”
The central bank governor’s three-year term ends on September 3.
“In all such cases, the decision is reached after discussions between the government and the incumbent. I’m sure you will know when there is news,” he told reporters.
Later, explaining his recent “a lot left to be done” remark, Rajan said, “I think people pick out something and hang it and over-interpret. That statement was made in terms of what is left to be done. We are still relatively a poor economy and if we want to wipe the tear from every eye, there is still two decades worth of work to be done.”
At Tuesday’s monetary policy review, the RBI decided to hold the repo rate (the interest rate at which it lends to banks) steady a ta five-year low of 6.5%. The central bank raises or keeps interest rates high to control money supply in the economy to tame inflation.
“We’re looking for room to ease,” Rajan said. “This requires not just a good monsoon but also good management of stocks and easy movement of supplies across the economy. Incoming data shows a sharper-than-anticipated upsurge in inflationary pressures from a number of food items as well as reversal in commodity prices.”
The RBI cited several risks to inflation — rising oil prices, an across-the-board pay hike for government employees and rising expectations of inflation. Prices of non-food and nonfuel items, or core inflation, remained sticky.
“A strong monsoon, continued food management could help offset upward pressures. Given the uncertainties, rates will stay on hold but the stance remains accommodative,” Rajan said.
The June-September monsoon is expected to hit Kerala on June 9. After two back-to-back droughts, the Met department has forecast surplus rains that would be evenly spread, vital for good overall food output.
Rajan indicated the RBI would be watching if the monsoon dampened food price rise. Inflation rose sharply to 5.39% in April. The bank’s targeted inflation is 5% by March 2017 and 4% over the medium term.
“Two elements — one a surprise, one a continuing concern. The surprise was the food element that went up in April. The continuing concern is the stickiness of core inflation; it seems to have steadied at around 5%,” said Rajan.