Raghuram Rajan, governor, Reserve Bank of India (RBI), seems to be enjoying by surprising the markets by cutting rates unannounced and ahead of monetary policy reviews. The Bank has cut rates by 25 basis points on Wednesday morning bringing the key repo rate down to 7.50%. Rajan said, "Given low capacity utilisation and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilise available space for monetary accommodation.” with the release of the agreement on the monetary policy framework, it is appropriate for the Reserve Bank to offer guidance on how it will implement the mandate,” Rajan said.

Rajan said, "Inflation in January 2015 at 5.1% as measured by the new index was well within the target of 8% for January 2015." “Disinflation is evolving along the path set out by the Reserve Bank in January 2014 and, in fact, at a faster pace than earlier envisaged," he said. He added, "Yet the picture it presents of a robust economy, with growth having picked up significantly over the last three years, is at odds with still-low direct measures of growth of production, credit, imports and capacity utilisation as well as with anecdotal evidence on the state of the economic cycle. Nevertheless, the picture of a steadily recovering economy appears right."

He cautioned, "In the short run, however, the postponement of fiscal consolidation to the 3 per cent target by one year will add to aggregate demand. At a time of accelerating economic recovery, this is, prima facie, a source for concern from the standpoint of aggregate demand management, especially with large borrowings intended for public sector enterprises."

By Premji