Rajan meets Chidambaram ahead of second quarter policy review

 

Reserve Bank of India (RBI) Governor, Raghuram Rajan on Thursday met Finance Minister, P. Chidambaram and discussed a whole range of issues including the economic situation ahead of second quarter monetary policy review.

"I discussed whole set of issues with the Finance Minister including state of economy," Mr. Rajan told reporters after emerging out his meeting with the Finance Minister here. Mr. Rajan, who was Chief Economic Advisor in the Finance Ministry before taking over as RBI Governor on September 4, is scheduled to announce the second-quarter monetary policy review on October 29.

The rising inflation and especially prices of food articles including fruits, vegetables and onions have made the task of the RBI Governor very difficult to introduce a cut in interest rates as being demanded by the industry. Inflation in September rose sharply to 7-month high of 6.46 per cent. The Wholesale Price Index (WPI) based inflation rose for the fourth month in a row. Inflation was 6.1 per cent in August and 5.85 per cent (revised upward from 5.79 per cent) in July. In September last year, it was 8.07 per cent.

"The government measures on economy are showing results and government will continue to take such measures," Economic Affairs Secretary Arvind Mayaram said here.

Earlier this month, the World Bank slashed India's economic growth forecast for the current financial year to 4.7 per cent from an earlier projection of 6.1 per cent. International Monetary Fund (IMF), in its World Economic Outlook, projected an average growth rate of about 3.75 per cent for India in 2013-14, which is expected to pick up to 5.1 per cent next year.

In a statement issued here, ICRA said it expects RBI to hike the repo rate by 25 bps to guard against a generalisation of inflationary pressures, given the anticipation of a gradual moderation of the double-digit food inflation, high suppressed inflation related to under-recoveries of diesel, as well as the anticipated pass through of the net weakening of the rupee since May 2013 into core inflation.

Additionally, it said it expects RBI to reduce the MSF rate by 25 bps to further unwind the exceptional measures introduced since July 2013. These measures would bring the repo-MSF corridor back to 100 bps.

It said in its view, volatility in the forex market may rise once the OMCs return to the market on a daily basis to meet their dollar requirements.

Following a favourable monsoon season, healthy growth of agricultural output and rural incomes in 2013-14 is expected to boost rural consumption demand in the second half of the current fiscal, it said.

However, damage caused to agricultural output by late rains has emerged as a risk factor for kharif output, even though the recharge of groundwater levels has improved the outlook for the rabi harvest.