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Rajan Welcomes Modi, Turns Dovish on Inflation, Holds Rate

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Rajan Welcomes Modi, Turns Dovish on Inflation, Holds Rate

Reserve Bank of India Governor Raghuram Rajan's meeting with Prime Minister Narendra Modi and Finance Minister Arun Jaitley last week was described as "courtesy call" by officials, but those interactions likely had a profound impact on Dr Rajan's rate outlook.

In the first policy announcement since the Modi government took charge at the centre, Dr Rajan kept interest rates unchanged, but seemingly climbed down from his aggressive stance on controlling inflation. (Read: Rajan holds rates in first policy after Modi win)

"If the economy stays on this course, further policy tightening will not be warranted," Dr Rajan said referring to the moderating inflation trend.

(See:RBI Took Calibrated Approach to Balance Growth, Inflation: Arun Jaitley)

The RBI's outlook is considered to be "dovish" and in tune with the pro-growth mandate won by Mr Modi in recently held elections, analysts said.

Shubhada Rao, chief economist of Yes Bank said, "I think we have probably seen for the first time, a statement which says that if disinflationary trend appears, it could also provide headroom for easing in policy stance."

"They have brought back the language (in the policy statement) that if inflation remains below the indicated trajectory adjusted for base effect it will open up room for easing. This is a statement which is different from April and is indicative of a slight softening of stance," said R Sivakumar of Axis Asset Management.

Dr Rajan, who calls high inflation a "dangerous disease", has so far raised rates thrice in a bid to fight stubbornly high inflation. He overcame push-back from within the central bank as well as the finance ministry to shift the benchmark inflation measure from wholesale to consumer prices, which may force the RBI to keep rates tighter for longer.

Successive hike in interest rates has often been blamed for the sharp slowdown in Indian economy, which grew at sub-5 per cent for a second straight year in 2013-14. High interest rates make credit more expensive and create a difficult environment to re-ignite growth.

Tuesday's policy signals that the central bank and the government will work in tandem to restore growth and control inflation. Mr Modi is expected to bring down inflation by cutting subsidies, improving food distribution and promoting investment in infrastructure.

In turn, Dr Rajan is likely to help the government fulfill parts of its agenda, including most prominently by ensuring that enough cash is available for infrastructure projects.

It looks like both the government and RBI are on the same page ahead of monsoon, Premal Madhavji of Espirito Santo Securities told Reuters.

Dr Rajan also announced a 50 basis points reduction in SLR or statutory liquidity ratio to boost bank lending in a move set to be welcomed by the Narendra Modi government, which has won a historic mandate on the back of pro-growth plank. (Read the full story here)

(With inputs from Retuers)

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