The Reserve Bank of India may further lower the interest rate if inflation continues to decline and the monsoon turns out to be good, Governor Raghuram Rajan has said.
“We are looking at inflation. If it continues on a downward path, that would create room (for further rate cuts),” he said.
Earlier this month, the RBI reduced its policy rate by 0.25 percentage points to 6.5 per cent — its lowest level in more than five years. This was the first rate cut after a gap of six months. With this, the RBI has lowered its rate by 1.5 percentage points cumulatively since January 2015.
Still, industry wants further rate cuts to boost investments. During the same time period, banks have lowered their own lending rates by 0.25-0.5 percentage points.
Rajan, who is here for the spring meetings of the International Monetary Fund and the World Bank, further said the RBI is also looking at how the monsoon progresses this year after two consecutive bad years.
“We are looking for signs of a good monsoon. Unfortunately, India is still somewhat sensitive to monsoon though people find it hard to see a link between monsoon and food prices. But there is potentially (a link), with this being the third bad monsoon in a row (if) that happens,” Rajan told business daily Wall Street Journal in an interview.
He further said India has got it “right” when it comes to managing the macro-economic scenario even as several other economies, including emerging ones, were struggling amid overall tough global conditions.
Rajan said India has narrowed its deficit to ensure greater flexibility to manage its economy through the turbulent global scenario.
Pat for Yellen
He also praised the US Federal Reserve Chair Janet Yellen for paying more attention to emerging markets in her policy for the US markets.
“They certainly are paying more attention and talking about paying more attention, which I think is a very welcome step... I think that’s changed quite a bit under Yellen,” he said. The US Fed policies have been criticised in the past by policymakers from emerging markets for the adverse impact their quantitative easing moves have had on emerging markets, including on India and China.
Rajan said the current shift in Fed policy gives emerging markets more room to address issues, such as currency volatility and declining commodity prices.
Referring to the Fed move to slow the pace of its rate hikes, Rajan said it has helped take a little bit of pressure off others.