Government and RBI are hopeful of lower interest rates if inflation continues to cool down and monsoon turns out to be good. Reserve Bank Governor Raghuram Rajan, who is also in the US, separately said he is closely watching the inflation data and the monsoon rain forecasts for deciding on further interest rate cuts and his monetary policy remains in accommodative mode.
Rajan, who had earlier this month cut interest rates by 0.25 per cent to 6.5 per cent, however, did not give any clear indication as to how much or by when further rate cuts would take place.
Inaugurating Kotak Family Distinguished Lecture at the Columbia Law School few days back, he said,
We are watching the development of inflation and we are also looking for signs of a good monsoon. As evidence builds up one way or the other, it will give us more information of how the trajectory of the monetary policy will be.
Consumer price inflation eased to 6-month low of 4.83 per cent in March from a year earlier. It was 5.26 per cent in February. Rajan wants to limit inflation to 5 per cent by March 2017 and good monsoon will lead to higher crop output. We are still in accommodative mode but precisely how much and when we will have to see, Rajan said to a question on impact of monsoons on interest rates at the lecture.
After two years of drought, the weather department last week forecast the first above-average monsoon in three years. Finance Minister Arun Jaitley said that India can also improve upon its GDP growth rate if there is 'a moderate monsoon or a good monsoon'
I am sure if this trend of containing inflation continues, we can hope for a better interest rate regime which in turn will have a spiral effect on improving upon India s productivity and generate more activity.
In the last one and half years, RBI has reduced interest rate by 1.50 per cent and the rates have come to their lowest level in about five years. Still, the industry has been demanding further rate cuts to stimulate investment and boost growth.