The Reserve Bank of India (RBI) Governor Urjit Patel appears to have pleased both the hawks as well as doves by cutting the repo rate by 25 basis points. This is lower than the 50 basis points cut that markets were expecting but enough to shed the hawk image that his predecessor had acquired.
However, the next few months are going to be important as they will test the Governor’s resolve towards inflation targeting, a policy recommended by the committee he had chaired as Deputy Governor. In his first policy announcement Governor Patel has clarified that the policy requires Consumer Price Index (CPI) inflation not to be targeted at 4 per cent but within a band of 2-6 per cent making it “easier” for him to meet the target. “Domestic growth is currently being driven by private consumption rather than private investments,” said Rudra Sensarma, Professor of Economics, Indian Institute of Management,Kozhikode. According to him, close to normal monsoon, would help rural demand while the pay commission effect will support urban spending.