Edited excerpts from a media interaction with Reserve Bank of India Governor Raghuram Rajan, after the policy announcement
Reason for 50 bps rate cut
Since our earlier review, the bulk of our conditions for cutting interest rates have been met. The January 2016 target of six per cent inflation is likely to be achieved. Therefore, the focus should shift to bringing inflation to around five per cent by the end of 2016-17.
With weakening global activity since the earlier review, commodity prices will remain contained for a while. With low industrial capacity utilisation, more domestic demand is needed to substitute for weakening global demand, so that the domestic investment cycle picks up. The coming Pay Commission report could add substantial fiscal stimulus to domestic demand. But, the government has reaffirmed its desire to respect its fiscal target and improve the quality of spending.
Under these circumstances, the Reserve Bank intends to be accommodative, given its inflation goals, while recognising that continuing policy implementation, structural reforms and corporate actions will be the primary impetus for structural growth. We do believe that investments, as well as durable goods purchases, are likely to respond more strongly if there’s more certainty about the extent of monetary stimulus in the pipeline, even if transmission is slow. Therefore, RBI has front-loaded policy action by reduction in the policy rate by 50 bps. Given our year-ahead projections of inflation, this ensures a one-year expected treasury bill real interest rate of 1.5-2 per cent.