Rajan Set to Depart, Leaving India Strategies for Inflation and Bank Cleanup – Reuters

By Rafael Nam

MUMBAI (Reuters) – With food prices remaining stubbornly high, Reserve Bank of India Governor Raghuram Rajan is expected to refrain from making a final interest rate cut during his last policy review on Tuesday before his departure on September 4.

Rather than implementing a rate reduction, Rajan is likely to outline the critical measures needed for India to combat persistent inflation, emphasizing the importance of adhering to the strategies and targets he has established.

Rajan is also expected to highlight the urgency of addressing the issue of bad debts that have burdened banks, enabling them to resume investing activities vital for maintaining India’s status as one of the world’s fastest-growing economies.

India has much to credit Rajan with; he stabilized the rupee shortly after his appointment three years ago, helping to restore foreign investors’ confidence in the nation’s economic management. His focused approach, bolstered by declining oil prices, managed to reduce the inflation rate from double digits to more manageable levels since he took office.

Initially appointed under the previous Congress party administration, Rajan quickly gained the respect of Prime Minister Narendra Modi, whose party gained power in 2014 with a commitment to rejuvenate the economy.

Despite criticism from government insiders, including chief economic adviser Arvind Subramanian, over his cautious approach to interest rate cuts, Rajan has consistently viewed inflation control as a priority.

A. Prasanna, an economist at ICICI Primary Dealership Ltd in Mumbai, noted that Rajan would likely convey that the RBI has laid a solid groundwork for robust and sustainable growth characterized by low and stable inflation.

Since January of the previous year, Rajan has lowered interest rates by 150 basis points, bringing the policy repo rate down to 6.5 percent. He has argued that the positive impact of these cuts could have been significantly greater had banks been more willing to reduce lending rates.

The pressure to address non-performing loans has intensified, with a recent review revealing approximately $35 billion in new bad loans since September, which has affected banks’ profitability and hampered loan growth.

To align government efforts in combating inflation, Rajan advocated for the establishment of a monetary policy committee (MPC) similar to those in several major economies, aimed at distributing some responsibilities away from the RBI Governor.

The government recently endorsed Rajan’s target of a 4 percent consumer price inflation rate, allowing for a margin of 2 percentage points on either side. Once constituted, the MPC will include three members appointed by the government and three from the RBI, with the Governor’s vote being decisive in case of a tie.

In June, inflation rose to 5.77 percent, nearing a two-year high and approaching the upper limit of the targeted range, diminishing the likelihood of a final rate cut from Rajan. However, above-average rainfall may ease some of the food price pressures, potentially allowing for rate cuts later in the year without diverging from Rajan’s established path.

Rajan desires to see an MPC in place before his exit, but the government has yet to announce his successor or form the committee.

Any new appointee may find it challenging to match Rajan’s innovative approach, but investors will likely look for continuity in the strategies he implemented.

According to Radhika Rao, an economist for DBS Bank in Singapore, "Today there is relative macroeconomic stability, making policy continuity essential moving forward."

"The groundwork for inflation targeting and the transition to a monetary policy committee has been established, with expectations for the new governor to maintain the course."