Below-par monsoon, inflation loom large on future rate cuts

The Reserve Bank of India (RBI ) Governor Raghuram Rajan may have carefully front-loaded a 25 basis points cut in the repo rate to 7.25 per cent in the second bi-monthly monetary policy 2015/16, but the war on inflation is still not won.

The future rate cuts will depend upon how the new emerging variables play out in the coming months.

First , there is already a prediction of a below-normal Southwest monsoon."This is one area where astute food management is needed to mitigate possible inflationary effects," suggested Rajan.

The agricultural production has already been adversely affected by unseasonal rains and hailstorm in North India early this year. The Ministry of Agriculture has indicated a contraction in foodgrains production by more than 5 per cent this year. "Successive estimates have been pointing to a worsening of the situation, with the damage to crops like pulses and oilseeds-where buffer foodstocks are not available in the central pool-posing an upside risk to food inflation," said Rajan.

In the last few months , there has also been an increase in the prices of protein items like milk and pulses.

Secondly, crude oil prices have been firming up due to geo political risks. Thirdly , the volatility in the external environment could impact inflation by way of a volatility in domestic currency against the US dollar. There is also a political pressure on increasing the minimum support prices. Any substantial increase in MSP will be inflationary. Rajan also added that inflation control will also be helped by limiting the increase in agricultural support prices. He also suggested a strong food policy and management to help keep inflation and inflationary expectations contained over the near term.

Rajan has once again reiterated that monetary easing can only create the enabling conditions for a fuller government policy thrust that hinges around a step up in public investment that can also crowd in private investment. "This will be important to relieve supply constraints and aid disinflation over the medium term," he said.