Rajan rules out rate cuts unless inflation tamed

Rajan rules out rate cuts unless inflation tamed

Mumbai, Aug 29 (IANS) Reserve Bank of Governor (RBI) Raghuram Rajan on Monday ruled out any further interest rate cuts till such time the inflation came down to the comfort zone, and once again asked commercial banks to lower the cost of credit to their customers.

“Inflation projections are still at the upper limits of RBI’s inflation objective,” Rajan said in his last Governor’s Foreword to Annual Report released here, referring to the government-mandated level of 4 per cent annual retail inflation, plus or minus 2 percentage points.

“With the Reserve Bank needing to balance savers’ desire for positive real interest rates with corporate investors’ and retail borrowers’ need for low nominal borrowing rates, the room to cut policy rates can emerge only if inflation is projected to fall further,” he said.

In any case, the task of taking a call on the interest rates is to be handed over to a new Monetary Policy Committee, that will comprise three representatives from the central bank — including the RBI Governor as its chair — and three others to be chosen by the government.

Rajan also said the willingness of commercial banks to cut lending rates was muted, since the level of corporate investment had reduced the volume and scope of new profitable loans for banks. The stressed assets of the lenders was also preventing them from taking fresh exposures freely.

As regards growth, he said, while the economy was showing signs of picking up, it was still below the levels that the country was capable of.

“The key weakness is in investment, with private corporate investment subdued because of low capacity utilisation, and public investment slow in rolling out in some sectors,” said Rajan, who is scheduled to demit office on September 4 and hand over the reins to Deputy Governor Urjit Patel.

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