You may not have noticed the relative ease with which the RBI Governor Raghuram Rajan has gone about setting periodic policy rates without the fear of an overbearing Finance Minister peering down his shoulder. The time when Rajan’s predecessors had one eye coweringly fixed on P Chidambaram while fixing rates ended, with the exit of that obsessive control freak. Rajan is fortunate that he has in Arun Jaitley an unusually intelligent minister who believes in granting him, an expert in his domain, complete autonomy. And that is how it should be. Indeed, if Chidambaram was still around, he would had good reason to pick a bone or two with the central bank for still persisting with the basic rates unchanged, despite an appreciable dip in the consumer price inflation in recent weeks. The bimonthly monetary policy review announced on Tuesday kept the repo rate, at which the RBI lends to the banks, at eight per cent and the reverse repo rate, at which it keeps excess money of the banks, at seven per cent. The no-change stance was widely expected, though corporates and growthwallas had hoped that he would reduce the rate by at least twenty-five basis points. Clearly, Rajan was not fully convinced that the recent drop in the consumer price inflation reflected a general downward trend. He had set a target of eight per cent inflation by January next year, which seemed attainable, but would feel comfortable only when the inflation came down to six per cent or even below. There were valid reasons for the central bank to be extremely cautious. For one, the erratic monsoon could badly skew the kharif crop and depress farm sector incomes while pushing up food prices all around. Hopefully, a full-scale drought can be averted thanks to belated rains in most parts of the country. Yet, a renewed pressure on food prices, especially on the price of pulses and rice, cannot be dismissed lightly. Then the uncertain conditions in the Middle East can always impact adversely the global price of crude and, thus, cause immense pain to the Indian economy. These two factors by themselves warranted a cautious approach on the policy rates. Besides, the timeline set for six per cent inflation is January 2016. In other words, the first priority of the central bank will continue to be inflation. The Urjit Patel committee had set the guideline for the monetary policy easing: Bring down inflation to four per cent, plus or minus two per cent, and then consider lower rates. Rajan summed up the RBI position succinctly: “ … we are not against growth but we do think that the growth will be most benefited if we disinflate the economy and we don’t have to fight this fight again…” Remarkably, the Finance Ministry was quick to endorse the latest policy stance of the central bank. In a statement soon after Rajan confirmed the status quo on rates, the ministry said that it believed that the RBI will not “hold interest rates high any longer than is necessary and if disinflation proceeds as warranted, there will eventually be room to cut rates…” It had been a long time since we last saw the central bank governor and the finance ministry on the same page. Such harmonious relationship augurs well for the management of the economy, alright.

 Still, in order to apply balm to the nerves of marketmen, who are always concerned about liquidity in the system, Rajan lowered the statutory liquidity ratio, or the portion of deposits the banks must invest in designated government securities, from 22.5 per cent to 22 per cent. This will release an additional Rs. 40,000 crore into the banking system, not a bad thing at a time when the credit crunch has contributed to the overall slowdown. Rajan will feel enthused by some of the positive news in recent weeks. For one, the industrial sector has reported a considerable uptick since the slide of the last two years. The latest IIP numbers testify to the spurt in growth in the sector. Yet, Rajan is right in staying the course on combating inflation before he can consider a rate cut.

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