‘Watching inflation, monsoon to decide interest rate’

New York: RBI is closely watching inflation data as well as monsoon rain forecasts for deciding on further interest rate cuts and the monetary policy still remains in the “accommodative mode”, Governor Raghuram Rajan has said.
Rajan, who had earlier this month cut interest rates by 0.25 per cent to 6.5 per cent, did not give any indication as to how much or by when further rate cuts would take place.
“We are watching the development of inflation and we are also looking for signs of a good monsoon. As evidence builds up one way or the other, it will give us more information of how the trajectory of the monetary policy will be,” he said at the Inaugural Kotak Family Distinguished Lecture at the Columbia Law School here yesterday.
Consumer price inflation eased to 6-month low of 4.83 per cent in March from a year earlier. It was 5.26 per cent in February. Rajan wants to limit inflation to 5 per cent by March 2017 and good monsoon will lead to higher crop output.
“We are still in accommodative mode but precisely how much and when we will have to see,” Rajan said to a question on impact of monsoons on interest rates at the lecture.
After two years of drought, the weather department last week forecast the first above-average monsoon in three years.
Rajan said monetary policy cannot be coordinated that easily. “But really what we are talking about is the rules of the game for monetary policy. One should see how much one can do and how much is beneficial to us without imposing a huge cost on the rest of the world.”
On FDI inflows, Rajan said India is this year on its way to “our highest ever inflow of FDI”.
On inflation, he said the most recent figure for the month of March stood at 4.8 percent, which was below the 5 per cent target set by RBI for March 2017 and on track towards the four per cent targeted after that. “One of the virtues of getting a low and stable inflation rate is that it will also stabilize the currency.”

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