Left unfettered by the Modi government, RBI’s fourth bi-monthly monetary policy review on Tuesday has not resulted in announcement of any cut in the policy rate as well as banks’ cash reserve ratio (CRR) or the portion of the deposits that commercial banks need to keep with RBI. RBI governor Raghuram Rajan has also moved the goal post from 8 per cent of retail inflation in January 2015 to 6 per cent in January 2016. Two major concerns seem to have dictated the RBI’s decision to stay on course. First, inflation continues to be a key risk as it is still too high by global standards. Second, emerging markets have been again looking jittery over the past two weeks as the US moves closer to interest rate hikes.
Neither of the conditions is conducive to a rate cut. With the return of political stability following 2014 Lok Sabha mandate, India’s economy is limping back to normalcy, growth has picked up in the first quarter and business confidence has improved. The decline in global oil prices could help the government keep the fiscal deficit within its budgeted level, and core inflation seems to be easing. However, RBI has kept the growth projection for fiscal year 2015 unchanged at 5.5% but cautioned this can be achieved only if the investment climate improves.
As the RBI document shows, the key to a turnaround in the growth path of the economy in the second half of the year is a revival in investment activity—in greenfield as well as brownfield stalled projects—supported by fiscal consolidation, stronger export performance and sustained disinflation. According to the Centre for Monitoring Indian economy, projects entailing `6.26 trillion of investment were shelved, abandoned, or stalled in 2013-14, the highest ever in India’s history. The reasons behind the lack of progress in project completion range from lack of funds to absence of environmental clearance. The Centre has done well to give RBI full freedom on monetary policy. It must do what is needed to restart stalled projects.