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STEADY AND SAFE

The consumer price index inflation continues to hover above 8 per cent. This one fact explains why Raghuram Rajan, the governor of the Reserve Bank of India, decided to maintain the status quo on policy rates in the Central bankís bi-monthly policy statement issued last week. This decision is entirely consistent with Mr Rajanís earlier emphasis to battle inflation. If he remains true to his track record of consistency, it is unlikely that there will be any rate cuts in the near future since the projection of the consumer price index for early 2015 is 8 per cent. A monsoon suffering from the adverse effects of El Nino could hike food prices. The silver lining to the cloud of inflation appears to be the prospect of a new government introducing greater fiscal discipline. There are thus grounds for optimism and pessimism, and under these circumstances it will be perfectly understandable if Mr Rajan chooses not to take any risks.

Mr Rajanís refusal to cut interest rates and to remain steadfast in his focus to reduce inflation may not win him too many friends in the government. But Mr Rajan had made it amply clear that, as the governor of the RBI, it is his job to make monetary policy. The government should accept that instead of intruding on Mr Rajanís turf. It should concentrate on the many tasks that it has to address on the economic front. The government should acknowledge that there are major supply constraints that are contributing to keeping inflation at a high level. It should start the work, sooner than later, to remove these constraints. The success of such measures will prepare the ground for the RBI to review and alter its position on interest rates. The RBIís position is thus not unrelated to the overall economic situation that is prevailing in India today, thanks to the absence of effective policies and actions under the previous dispensation, even though a distinguished economist headed the latter. If the new government fails to address these issues and to reinvigorate the economy, the RBI will have no other option but to stay with its present position on interest rates. Mr Rajan needs to be applauded for not playing to the gallery and the government. His consistency is a pointer to the responsibilities facing the present government; it is also a warning against the dangers inherent in the lure of popularity.