But now it seems a lot of water has flown under the bridge as the new BJP-led NDA government completes one year in office. People and the corporate sector had high expectations and they are now getting restless. So are government functionaries when it comes to lowering the interest rate in the economy to spur growth. As a run up to the second monetary policy review of 2015/16 on June 2, there are at least three top-ranking government functionaries who have called for lower interest-rate regime.
"I only ask for an affordable rate of interest for industry because credit internationally is now very cheap," said Commerce Minister Nirmala Sitharaman. The chief economic advisor Arvind Subramanian , who once worked with Rajan at the International Monetary Fund (IMF), had said the environment is conducive for loosening of monetary policy, given the fall in both CPI and WPI inflation. Jaitley, who often says that the interest rate decision is RBI's prerogative, had also joined the interest rate cut chorus by saying, "It is (the time)."
This joint call for lowering interest rates by the new government is reminiscent of the days when Finance minister Pranab Mukherjee under the UPA regime was joined by chief economic advisor Kaushik Basu, C Rangarajan , former chairman of the Prime Minister's Economic Advisory Council and Montek Singh, Planning Commission's Deputy Chairman for reducing the interest rates. D Subbarao , the then RBI Governor , however , didn't budge from the his position of controlling inflation first before cutting any policy rates.
The situation today for Rajan is quite different from the days of Subbarao. Governor Rajan 's monetary policy stance has already been shifted to accommodative from January this year with a 50-basis points cut in the repo rate to 7.50 per cent. The disagreement, if there is any, is on the quantum of cuts than the direction.
If one analyses the latest inflation figures, there is clearly a case for 25 basis points cut in the repo rate. In April , the consumer price inflation (CPI) plunged to 4.87 per cent from April's 5.25 per cent. In the next three months , the RBI expects it to come down to 4 per cent. By January 2016, the RBI expects the CPI to be below 6 per cent.
What is actually holding Rajan to make bigger cuts in the policy rates is the slow monetary transmission from banks to customers. The likely impact of recent weather disturbances and the monsoon arrival on time is also on the top of the agenda .
In the last two months, the banks have reluctantly reduced interest rates by 10 to 25 basis points. This was done after several elbowing by the RBI as well as the government. Surely Governor Rajan expects the banks to transfer the rate cut more aggressively to retail as well as corporate customers.
Secondly, the unseasonal rains and hailstorm in some parts of the country have damaged the crops. It is likely that its impact would be seen in the food prices. The advance estimates of the agriculture ministry shows a decline in food grains production especially rice, wheat, cereals, pulses etc. There is another bad news on weather front as the Southwest monsoon is getting delayed. The recent deaths from Andhra Pradesh and Telangana is a reminder of heat waves in the South.
Last but not the least is the depreciating home currency. The rupee value against the US dollar has fallen from Rs 60-61 to about Rs 64 against the US dollar. There is a view in the market that the rupee will see a gradual depreciation because of strengthening of dollar and also outflow of FIIs money. This depreciation has all the potential to fuel imported inflation through crude and other imported items.
Surely, Rajan's dashboard has many other variables to worry about even as there is a room for accommodating a 25 basis points cut in the policy rates.