Is Raghuram Rajan coming back for a second term as the Governor of Reserve Bank of India? The simple answer after Tuesday's monetary policy review is that we still don't know. With analysts and the markets hoping for some clarity after weeks of wild speculation – and a bellicose campaign against him by Bharatiya Janata Party leader Subramanian Swamy – Rajan preferred to stay mostly silent on the matter.
“You will know when there’s news,” he said at a press conference after the monetary policy review briefing. “It would be cruel of me to spoil the fun the press is having."
Rajan did make one mention of the media frenzy over his tenure extension, saying he was “intrigued” by the letters he had “supposedly written” – a reference to media reports circulating last week that the RBI governor had written to Prime Minister Narendra Modi to say that he doesn’t want to stay on for a second term.
The central banker chose to reference comments by Modi, who said the media should not be speculating on the matter, and Finance Minister Arun Jaitley, who condemned the personal attacks on Rajan.
Keeping it steady
Despite these comments though, the rest of the briefing had no indication of whether Rajan is staying on for a second term or even wants to. Instead, it focused on the central banker's decision to hold rates steady in what might be his last solo policy statement, before the government sets up a monetary policy committee to set the rates.
The RBI maintained the benchmark repo and reverse repo rates at 6.5% and 6% respectively.
A high repo rate means that the banks will have to spend more money in interest to borrow from the central bank which would mean lower incentives for providing fresh loans. However, low interest rates also lead to easier flow of credit which often fuels inflation as consumer demand goes up which drives the prices.
Rajan decided to make the latter his priority, as experts expected, since retail inflation spiked in April to 5.39%.
“The inflation surprise in the April reading makes the future trajectory of inflation somewhat more uncertain,” Rajan said, adding that there are chances of a slowdown in inflation if the monsoon is stronger this year.
Global demand is still tame, crude oil prices are rising again and the seventh pay commission is going to put more money in the hands of consumers further raising the chances of inflation.
Addressing concerns about non-performing assets in public sector banks which could lead to slow transmission of previous rate cuts in the economy, Rajan said he is working to clean up the balance sheets as well as making sure that RBI evaluates how effectively banks are transmitting RBI policy moves.
Meanwhile, the RBI also retained the growth projection of 7.6% for the financial year 2016-2017, even after considering the macroeconomic risks.