RBI chief jokes over future as rates held

AFP

India’s central bank chief Raghuram Rajan joked on Tuesday that it would be ‘cruel’ to end intense speculation surrounding his future as he held interest rates in the world’s fastest-growing large economy.
The Indian media is abuzz with predictions about whether the popular central banker, often dubbed ‘Rockstar Rajan’, will be given a second three-year term as governor when his current
contract expires in September.
“It would be cruel of me to spoil the fun the press is having,” Rajan told reporters following the Reserve Bank of India’s (RBI) monetary policy review meeting in Mumbai.
“In all such cases the decision is reached after discussions between the government and the incumbent. I’m sure you will know when there is news,” he added, reading a prepared statement. Rajan, who famously predicted the global financial crisis, enjoys a mass appeal in India not normally associated with a banker, with one newspaper previously even comparing him to James Bond.
The former IMF chief economist has been widely credited with bringing stability to India’s economy since his appointment as RBI governor in September 2013. But he has clashed with Prime Minister Narendra Modi’s Hindu nationalist government over how quickly the central bank should cut rates, fuelling the speculation over his future. A decision is not expected until August.
The RBI held its key interest rate at a five-year low, citing inflationary fears ahead of the imminent monsoon rains.
In a widely expected move, the bank said it would keep the benchmark repo rate, the level at which it lends to commercial banks, at 6.5 percent.
All 44 economists in a Bloomberg News survey predicted that the bank would hold rates after it cut them by 25 basis points in April to their lowest level since early 2011.
In the same month, inflation quickened more than expected as consumer prices rose 5.4 percent from a year earlier, driven up by higher food prices, catching many economists by surprise.

Inflation risk
“The inflation surprise in the April reading makes the future trajectory of inflation somewhat more uncertain,” the RBI governor said in a statement following the monetary policy review meeting in Mumbai.
Rajan, who has made taming India’s once-runaway prices a priority of his tenure, has set a goal of limiting inflation to 5 percent by March 2017.
The monsoon, set to hit later in June, is a key factor in food price inflation because of its huge impact on India’s farmers, whose crops are highly dependent on the annual rains.
Rajan said the RBI would only act again on rates once the inflationary outcome of the monsoon was known.
“A strong monsoon, continued astute food management, as well as steady expansion in supply capacity, especially in services, could help offset these upward (inflationary) pressures,” he said.
“Given the uncertainties, the Reserve Bank will stay on hold, but the stance of monetary policy remains accommodative,” his statement added.
The RBI kept its gross domestic product (GDP) projection for 2016-17 at 7.6 percent.
Official figures last month showed India’s economy grew 7.6 percent in 2015-16, retaining its place as the world’s fastest-growing major economy.
In 2015 the RBI lopped 125 basis points off borrowing rates in four separate cuts, before slashing again in April.
But the rate is still much higher than that of other major economies such as the United States or Japan, where benchmark rates are still hovering close to or below zero.