RBI vs Government!!

The decision by Rajan, not to alter the repo rates has been a good sign not only from economic perspective, but also from the political understanding between the RBI and the government.

Modi Rajan

Image is taken from financialexpress website

Rajan was always keen in controlling the inflation from the time he has been the RBI Governor – he has achieved it by increasing the repo rate with minimum 25 bps every time in the policy, there by controlling the banks not to lend more funds from RBI. This in turn reduced the flow of money in the market there by reducing the inflation.

On the other side, the new government, mainly Modi, is known to be aggressive in driving the investments, flow of funds to boost the infrastructure.

This time Rajan did not touch the repo rates with no increase. It looks like he is relying on Modi’s government to deliver and compensate the supply side, to neutralize the inflation effect. As mentioned in my previous posts (http://thekalyan.com/2014/02/04/what-are-hawks-and-doves-in-finance/), right now RBI is slowly moving to Dovish mode.

Also by reducing the SLR by 50 bps (SLR:  statutory liquidity ratio : a minimum proportion of their Net Demand and Time Liabilities that a bank has to maintain as liquid assets in the form of cash, gold at the end of every business day) and by maintain the cash reserve ratio at 4%, (pls check http://thekalyan.com/2013/12/16/rbi-what-is-repo-rate/ for CRR), Rajan is giving path to investors and allowing flow of money again.

Overall this gives a positive sign that both RBI and government are in targeting for flow of funds, while controlling the inflation.