RBI Monetary policy: Five takeaways from Raghuram Rajan's review

As widely expected, Reserve Bank of India Governor Raghuram Rajan today kept the interest rates unchanged in the fifth monetary policy review. He also gave his views on a range of issues impacting future monetary policy reviews.

Here are five key takeaways:

1. On Future cuts
"We are in an accomodative stance," says Rajan. RBI has reduced the repo rate by 125 basis points since January this year. The direction is clear for softening of interest rate as and when inflation reduces further or comes under the RBI's comfort zone.

2. On Likely US Fed Rate Hike
"My sense is that after initial bout of volatility, we will see (Indian) market stabilising," says Rajan. The Fed meeting in mid-December will be keenly watched as the US is expected to take a call on hiking rates for the first time since the global financial meltdown. There are fears that as the US starts raising rates, there is a likelihood of foreign funds in debt and equity moving out of emerging market economies like India.

3. On Seventh Pay Commission implementation
"It (the increase) will be offset by additional revenues or cuts elsewhere. We don't feel there will be a significant impact," says Rajan. The government's move to implement the Seventh Pay Commission 's recommendations will create additional fiscal burden as it envisages 23.5 per cent increase in the wages of central government employees including retired employees. This will be an additional expenditure, which will have implications for fiscal deficit. 

4. On fiscal deficit
"Both the quantum and quality of fiscal deficit matters. ...That is the issue government is seized of," says Rajan. As per current statistics coming from the government, the fiscal deficit is already 74 per cent in the seventh months of the budgeted estimates of 2015/16. The targeted fiscal deficit is at 3.9 per cent of GDP in 2015/16. The movement of fiscal deficit impacts the monetary policy as higher fiscal deficit fuels inflation in the medium to longer term.

5. Growth momentum
"It's very clear that we are in the process or midst of recovery. Take, for example, agriculture is growing relatively weaker. As a result, rural demand is relatively weak. On the other hand, capital goods is growing. We are growing in certain areas and there are areas of weakness, which I feel will turn around going forward," says Rajan. The GDP growth at 7.4 per cent in the second quarter is encouraging as compared to 7 per cent in the first quarter of 2015/16. The government is hopeful of achieving 7.3 per cent GDP in 2015/16.