Rajan links future rate cut to sub-6% inflation

Says retail inflation should be below 6% to see how much room is there to cut rate

Reserve Bank of India (RBI) Governor Raghuram Rajan on Wednesday said the central bank would cut the policy rate if it felt confident that inflation remained below six per cent even after the reduction.

“We will cut the rate when we see that even after the rate cut, inflation will remain below six per cent,” Rajan said.

RBI had said it expected retail inflation to be around 6.1 per cent in January-March 2016.

“It should be actually below that. That is what we are looking for to see how much room we have (to cut rate),” Rajan told CNBC Awaaz.

RBI had on Tuesday maintained status quo on policy rate but promised the central bank could consider a reduction in rate ahead of the September 29 policy review, depending on macro economic data.

Since January, RBI had reduced the key lending (repo) by 0.75 per cent in three tranches.

Rajan said there was a perception among people that inflation was rising because of increase in prices of milk and vegetables, which was “worrying”.

Retail inflation stood at an eight-month low of 5.4 per cent year-on-year in June compared with 5.01 per cent in May. RBI tracks Consumer Price Index (CPI)-based, or retail inflation, in deciding its monetary policy action.

On the impact of a likely hike in interest rate by the US Federal Reserve, Rajan said initially there could be volatility and flight of capital, but investors would return as prospects were good in India and it provided a “stable” investment option.

On growth prospects, Rajan said the current financial year was expected to end with a growth rate of 7.6 per cent, which was “strong growth”.

Talking about the structure of the proposed monetary policy committee and setting up of the Public Debt Management Agency, Rajan said it would require legislative changes and could take years.

Rajan had on Tuesday favoured doing away with the veto power of the central bank’s chief in deciding interest rate, arguing that it would be better for a committee to decide the key rate rather than one individual.

In the Budget, the government had proposed to set up PDMA to manage government debt and also to shift the regulation of government bond from RBI to Sebi. However, due to opposition from RBI, the proposal could not go through.