No rate cut? More desperate to know if Rajan will stay: India Inc

 

While India Inc. is resigned to the fact that the Reserve Bank of India (RBI) might keep interest rates unchanged today given high retail inflation and a recent spike in oil and vegetable prices, it is keener and in fact desperate to know whether the man of the moment RBI governor Raghuram Rajan will stay or go.

 

Both currency and bond markets have already reacted negatively to his rumoured departure. A report in the Deccan Chronicle this morning said that the prime minister’s office (PMO) has approved his continuation for another three-year tenure and a notification on this is likely to be issued by the end of this month.

 

As journalists get ready to interrogate Rajan on his reappointment during his customary press conference after the policy announcement, Asianet Newsable quickly shines the spotlight on the key events that led to the current impasse on Rajan's reappointment, the current state of the Indian economy and what to expect in RBI's third bimonthly money policy review today.

 

 

Interest rates might remain unchanged

The Reserve Bank of India (RBI) is widely expected to keep its policy interest rate unchanged at a five-year low of 6.50% on Tuesday, while signalling the prospect of another rate cut later this year if monsoon rains dampen the upward pressure on food prices.

 

Annual consumer price inflation accelerated to 5.39% in April which was above Rajan’s near-term target of 5% by March 2017. Crude prices are well off January’s more than 12-year lows and are up to $50 now. A US rate hike is anticipated, and any shortfall in rain could ignite food prices, say economists. Thus, 44 economists polled by Reuters recently predicted that the RBI will leave rates unchanged for now.

 

RBI focus on pushing stimulus of last rate cut

Economists expect that RBI's main focus is to be on ensuring that the broader economy feels the benefit of more than 150 basis points that have already been sliced since the start of 2015. The central bank will also be watching out for the monsoons and its impact on inflation.  

 

DBS said in a note last week that the Indian Meteorological Department expected an above-normal monsoon in the June-to-September period. The bank added that the rainfall was expected to be well-distributed around the country, particularly over the July-to-August planting-and-sowing peak period. That could bring down inflation and allow the central bank to ease policy further later in the year.

 

Earlier, with RBI cutting rates by 150 bps since it began cutting rates in December 2014, banks have passed on only 70-75 bps by way of a cut in the base rate. Part of the reason for this, of course, is the poor liquidity conditions which RBI promised to fix over a period of time – which is why some are looking at RBI cutting the CRR to infuse more liquidity into the system. More important, with no real demand in the economy for funds, banks would prefer not to pass on the full cut – bank deposit rates have fallen by around 120 bps since RBI started cutting rates.

 

Stellar GDP numbers

First-quarter GDP growth came in at a better-than-expected 7.9% on-year, although economists noted there was underlying weakness in some segments.

 

The surprising element is agricultural growth, which stood at 2.3% compared to minus 1% in the previous quarter. A poor monsoon had led to expectations that the previous year’s Rabi crop would have been affected. A matter of slight concern is the fall in industry growth and the change in trend of services sector growth. Industry has grown at a rate of 7.9% as compared to 8.6% in the previous quarter. The services sector reversed the rising trend of the previous three quarters by posting a growth of 8.7%, down from 9.1% in the December quarter.

 

 

The  Swamy-Rajan face-off

Last month, senior BJP leaders Subramanian Swamy demanded the immediate termination of Raghuram Rajan's tenure as RBI governor in a letter to Prime Minister Modi. "The RBI governor is wilfully and deliberately wrecking the Indian economy, he is mentally not fully Indian, the reason why I recommend this is that I am shocked by the wilful and apparently deliberate attempt by Dr Rajan to wreck the Indian economy," said Swamy.

 

 

Arun Jaitley and Nirmala Sitharaman spar with Rajan

Things went from bad to worse when, in a recent interview to a foreign journalist in the US, Rajan said, "I think we have still to get to a place where we feel satisfied. We have this saying - 'In the land of the blind, the one-eyed man is king'. We are a little bit that way."

 

It enraged commerce minister Nirmala Sitharaman. She said, "I would like people like Raghuram Rajan, who know the truths behind the economy and the dynamics of the economy, to be able to speak with better choice of words. Jaitley too was very perturbed by Rajan's remarks. He said, "Compared to the rest of the world, the Indian economy is growing much faster and, in fact, the fastest. At 7.5% growth rate any other country in the world would be celebrating but it is a tribute to India's growth story that at this rate we are still impatient because we know that our potential is to do distinctively better", he said.

 

Final status

Jaitley has now said that the finance ministry shares a 'warm relationship' with the RBI and that he does not approve of 'personal comments' (like the ones made by Swamy) while Rajan himself has written to policymakers expressing concern about the impact of his reappointment on currency and bond markets. Now reports also suggest that the PMO might have granted him an extension.