Inflation, especially food inflation, continues to remain the principal concern of the Reserve Bank of India. This is evident from the central bankís third bi-monthly monetary policy review of the present financial year. The governor of the RBI, Raghuram Rajan, did not announce any cuts either in the repo rate or in the cash reserve ratio. There was nothing unexpected in this, although some observers believed that the recent dip in the inflation figures would have justified a cut in the rates. Mr Rajan is obviously of the view that the dip is not of a permanent nature and therefore it did not warrant a response in terms of a relaxation of the interest rates. He must have also borne in mind the phenomenon of a reluctant monsoon, at least in the first half of the season. The RBIís projection is that for the rest of the year the inflation rate would reach around 8 per cent. The RBI has preferred to be cautious and this is entirely consistent with its policy over the recent months.
Very few will find fault with Mr Rajan for being cautious and for maintaining the status quo undisturbed by any carping background noise. He knows his business and how important the containment of inflation is for his business and for the economy. He is a committed fighter of inflation and was clearly not taken in by the optimism that was generated in certain quarters by recent inflation numbers. He also has before him some figures to support his stubborn maintenance of the status quo so far as interest rates are concerned. These figures relate to some signs of growth, of a recovery of the economy: early signs but signs nonetheless. The industrial production index is the highest in nearly two years and this was followed by the positive readings of the purchasing managersí index. One valid conclusion from this data is that the recovery of the economy is not being adversely affected by the high interest rate regime as some doomsday predictors had prophesied. Mr Rajan must be heartened by some of the steps the new government has put in place to check food inflation. The government stopped the open market sales of cereals; it has frozen the procurement price of paddy and has leaned on the state governments to prevent additional incentives being offered for cereal procurement. It would appear that the government and the governor of the RBI are on the same page on inflation. This in no way diminishes Mr Rajanís position as an independent-minded governor; rather it enhances his credibility.