No parting gift, no parting shot, Raghuram Rajan signs off

For those who expected a parting gift from Reserve Bank of India (RBI) governor Raghuram Rajan, 53, as he hangs up his boots at the country's central bank less than a month from now, it is utter disappointment.

Not only has Rajan kept the key rates where they were, and in the process quashed any hopes of banks lowering their lending rates, he has also cautioned against inflation reigning in excess of 5 per cent through the current fiscal.

Consumer price inflation or retail inflation (based on the weighted average of retail prices of a basket of goods and services), which the RBI uses as a benchmark to fix rates, stood at around 5.8 per cent in June.

On Tuesday, the RBI kept the repo, or the rate at which banks borrow from it, at 6.5 per cent on the back of projected high inflation in the coming months.

It also kept the cash reserve ratio (CRR) or a percentage of the total deposits that banks have to keep in the current account with the RBI, at 4 per cent.

Most analysts and market watchers had expected Rajan to keep the rates unchanged.

Despite this, the sentiment-driven markets fell, with the benchmark Sensex down over 150 points to 28,083 at 12.45 pm on Tuesday.

The final monetary policy of the RBI's 23rd governor, who is on leave from University of Chicago's Booth School of Business, was viewed with much interest after he announced that he would go back to the academic world early September, when he completes three years at the helm of the RBI.

He is only the second governor since 1991 (S Venkitaramanan was the other) not to have served for five years.

Also read: Food inflation is a hot potato for Modi government

The monetary policies under Rajan received unprecedented attention after senior BJP leader Subramanian Swamy launched a full-fledged attack on him earlier this year, alleging that the governor choked economic growth by refusing to slash interest rates in the initial months of his term.

Rajan held on to rates citing high inflation until January 2015, although he subsequently reduced policy rates by 150 basis points in various tranches.

In his interaction with the media on Tuesday, Rajan emphasised that very soon, the RBI governor's role in determining interest rates would diminish.

The formation of a six-member Monetary Policy Committee (MPC) is almost in place, with the RBI proposing the name of Michael Patra, an executive director with the central bank, as one of the nominees, along with the governor and deputy governor.

The government will have to now decide on the names of the other three members on the committee.

"With the formation of the MPC, the government and the RBI will have completed a fundamental institutional reform, which modernises India's monetary policy framework and builds a platform for strong and sustainable growth," Rajan said.

Also read: Raghuram Rajan is right, India’s growth can’t be measured by numbers alone

To his credit, Rajan has reined in inflation, which was over 10 per cent when he took over as governor in 2013, and brought it to sub-six per cent levels.

He also was successful in his initial days, to tame the rupee.

The rupee, which had sunk to a historic low of 68.83 against the dollar in August 2013 when Rajan took over, strengthened to 61 in November 2014.

However, it has weakened again and fell 7 paise to 66.84 on Tuesday following the monetary policy announcement.

The government, of late, seems to be towing Rajan's line on inflation, and in consultation with the RBI, notified consumer price inflation target of 4 per cent to be achieved by the RBI.

"Overall, the RBI's assessment is guided by the trajectory inflation may take in the near term, given the stickiness in food and services inflation," says Sushil Kumar Sinha, principal economist with India Ratings & Research, a Fitch Group company.

Also read: What India is looking for in its next RBI governor

The implementation of the 7th central pay commission award is expected to have a direct impact on the house rent component of the CPI, he added.

Rajan said it was too early to speculate whether the Goods and Services Tax Bill, which has been passed by both houses of Parliament, will have an inflationary impact, especially since the rate of tax is yet to be announced.

The experience of Malaysia, which had also implemented such a tax, was that inflation post the tax was only short-lived.

Rajan also touched upon the issue of cleaning up the banking system of its non-performing assets (NPAs), saying the "culture of cleaning up is now well-embedded" within banks.

The other issue was about the banks transmitting lower interest rates to consumers.

Banks are generally having "difficulties", and once the NPAs are cleaned up, they should be in a position to do the transmission in a better manner, Rajan said.