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After hiking rates three times between September 2013 and January 2014 – each of which surprised the markets – Raghuram Rajan, governor of Reserve Bank of India (RBI), kept interest rates unchanged in the April 2014 policy review, in line with expectations.
Rajan, who had already acquired the reputation of surprising markets within his 6-month tenure, acknowledged during the media interaction that the only surprise in the policy was that there was no surprise.
Now, again, both the rate cuts – one January 15, 2015 and March 4 – have surprised the markets. Not because of the quantum, say RBI watchers, but the timing. Both rate cuts were announced well in advance of scheduled policy review dates.
The irony, though, is that Rajan is now being criticised by think tanks on the grounds that markets will expect him to surprise them with good news (read rate cut) whenever data turns favourable – the RBI has been indicating that its policy stance will be data driven – and if he fails to surprise, markets will react negatively.
“The shift in the central bank’s strategy to make out-of-turn rate cuts something of a habit is likely to increase market volatility instead of anchoring it. The out of policy move, in our view, highlights a sense of urgency that can only be associated with the RBI realizing that it could in fact be “behind the curve” in terms of monetary policy action,” said Abheek Barua, Chief Economist at HDFC Bank while commenting on yesterday’s rate cut – a concern echoed by many of his peers.
Yes, Rajan could be mindful of the frequent criticism his predecessor faced of being ‘behind the curve’. He is also aware that monetary policy is most effective when it is forward looking.
But he can also question why the markets should be surprised?
“Key to further easing are data that confirm continuing disinflationary pressures. Also critical would be sustained high quality fiscal consolidation…” he said after cutting the repo rate in January this year.
The disinflationary pressure has continued, as retail inflation (even after the change in the base year) rose by 5.11% in January as compared to 4.28% increase in December, but still lower than the 6% target of January 2016. The other criteria for a rate cut was fiscal consolidation. While it can be debated whether the government’s intention will reflect in implementation, the move to cut rates was a judgement call. And Rajan seems to have trusted the Union Budget proposals.
As far as rate cuts outside of the policy review calendar is concerned, Rajan had clearly indicated that he would not dither from doing so.
“...if the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle,” Rajan had said on 2 December, during the 5th bi-monthly monetary policy review.
And he kept his word. He started the easing cycle as early as January 15, which was ‘outside the policy review cycle’.
(Manojit Saha is Banking Editor at Business Standard)
(Manojit Saha is Banking Editor at Business Standard)
