Budding revival signs and falling inflation rates have rekindled the Indian economy. Various experts are anticipating inflation numbers to hover around the current levels of 6% or head lower in the coming future. And thus, this group of experts is now betting on steep cut in interest rates in the forthcoming RBI monetary policy review.
Undoubtedly, the joint efforts of RBI and government have brought some good news for the Indian economy. Food prices have remained at much acceptable levels. Plus, global crude oil prices have plummeted quite sharply aiding in descending inflation levels. Now, even the government has expressed hope of rate reversal; and expects the RBI to end its prolonged hawkish stance on interest rates.
However, it seems that Mr Rajan has different views. And as per Mr. Rajan, India's inflation battle is far from over and rate cut may not imminent as anticipated.
In a recent interview Mr Rajan said - "The recent cautious optimism that is building in the economy on the back of improved business sentiment needs to be placed on solid foundations through a step-up in investment,"
We agree with Mr Rajan's view. It is pertinent to note the global commodity prices cannot be controlled and might keep pinching the consumers; however internal factors are much in government's hands. While the government has taken various steps to keep the food prices under control, the archaic distribution system needs a total revamp. There still exists wide gap between demand and supply, lack of storage and irrigation facilities. Inadequate, infrastructure keeps the Indian farmers more dependent on rains as well. The government needs to take some hard steps to build a robust infrastructure and measures to address such supply side loopholes. And once these issues are brought under control, only then will it be relatively easier for the RBI to manage such issues in the future. For the time being however, we are in favour of a wait and watch approach.
So, despite the rising clamor for an interest rate cuts by the RBI, will Mr Rajan declare a rate cut in its next monetary policy review on 2 December? Let's see...