NORMAL MONSOON CAN LEAD TO INTEREST RATE CUT: RBI GOVERNOR RAGHURAM RAJAN

Posted On: 2015-06-27 05:13:05

 

Reserve Bank Governor Raghuram Rajan said the progress of the monsoon thus far has been "quite strong", which may be read as a signal that normal rains could strengthen the possibility of further interest rate cuts this year as pressures on the food price front are headed off.

 

Rajan's statements in Stockholm at the Riks bank Macro prudential Conference may come as a relief to investors who have been fretting that rate cuts may be off the table given RBI's consumer price inflation forecast of 6% at the end of the year. RBI plans to bring down inflation to 4% in the medium to long term.

 

"Assuming reasonable food management, inflation is expected to be pulled down by base effects till August but to start rising thereafter to about 6% by January 2016, slightly higher than the projections in April," Rajan said during the monetary policy review earlier this month.

 

"Putting more weight on the IMD's (India Meteorological Department) monsoon projections than the more optimistic projections of private forecasters as well as accounting for the possible inflationary effects of the increases in the service tax rate to 14%, the risks to the central trajectory are tilted to the upside," Rajan had said.

 

IMD had forecast a rain-deficient monsoon. India has received good rain this season but there's another three months to go for the June-September monsoon, with July being a crucial month. At the time of his June 2 policy announcement, Rajan had said that further rate action would depend on data, especially rainfall.

 

The governor, who rarely speaks about economic expansion outside monetary policy statements, said India "needs to create more growth" and "needs to grow still faster", indicating the central bank - that has made taming inflation its main priority - may also begin to lean toward fine-tuning its policies to shore up a revival.

 

Rajan, who has been warning about likely volatility in the event of the US Federal Reserve raising interest rates, said developments in Greece could affect the financial markets. "There are for sure" repercussions for India from Greece, Bloomberg News cited Rajan as saying.

 

INDIAN FIN MARKETS STRONG


But he also said the Indian financial markets have the strength to withstand any fallout of a Greek default on its repayment obligations. India's foreign exchange reserves are at a record high and investors have a positive outlook on the country, he said.

 

That's in contrast with the situation in 2013 when poor macroeconomic numbers led to investors dumping Indian securities amid a scare about the Fed unwinding quantitative easing. With regard to Greece, "our impression is that there's still a long way to go", Bloomberg cited German finance ministry spokesman Martin Jaeger as saying in Berlin. Creditor institutions have made "exceptionally generous" concessions to the Greek government, and "it's now up to the Greek side to show some movement".

 

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