Will Rajan strike the right balance?

All eyes, including those in the government, will be keenly watching RBI governor Raghuram Rajan's monetary policy announcement on June 3

srishti

Srishti Pandey | May 30, 2014



A day after assuming charge as the new finance minister on May 26, Arun Jaitley had an interesting visitor in his North Block office – Reserve Bank of India governor Raghuram Rajan. As the meeting went on for 50 minutes behind closed doors, those outside the room waited with bated breath for signs of any discord. None have emerged so far.

After the meeting, both Rajan and Jaitley, told media persons separately that taming inflation remains an important task for both the RBI and the government. In addition, the finance minister highlighted the importance of maintaining a “balancing act”, to bring back the economy on the growth track while tackling inflation.

The finance minister’s emphasis on balancing growth with inflation comes at a crucial time when the apex bank is scheduled to announce its bi-monthly monetary policy on June 3. And apart from bankers, corporate honchos and investors, the BJP government is also going to keenly watch the policy announcement.

The situation is tricky for Rajan for two reasons – first, the consumer price index hasn’t calmed down and increased 8.59 percent in April from a year ago, and second, the BJP hasn’t exactly been a fan of Rajan’s ways to deal with the persistent inflation in the economy.

In such a situation, experts believe that Rajan will for the time being adopt a wait-and-watch policy and leave interest rates unchanged. This would buy him more time to enter into a dialogue with the government and chalk out strategies wherein both the RBI and the government are on the same page.

Since the time of taking over the helm of affairs at Mint Street in September 2013, Rajan has raised the policy interest rates three times in an attempt to rein in inflation but not much has changed. Rajan stood his ground even if it was not exactly to the liking of the previous government led by the Congress party which faced a humiliating defeat in the recently concluded general elections.

While the message from both the RBI chief and the finance minister to maintain a “balancing act” is loud and clear, it is easier said than done. Piggy riding on the UPA’s failure to revive growth or bring down prices, the BJP recorded a thumping victory to form the government with a clear majority. It is not going to compromise too much on its growth agenda. Let’s just hope that the balancing act doesn’t turn into a nasty tug-of-war between the Centre and The Central Bank.

 

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