RBI's Raghuram Rajan Finds Falling Inflation a Hard Sell for Consumers

MUMBAI: Waiting for the right moment to cut interest rates, Reserve Bank of India faces a problem over public perceptions that price rises will return to double-digits even though forecasts show retail inflation fell to a record low of 4.5 percent last month.

Explaining why he left the policy rate at 8.0 percent, despite inflation’s steep fall from over 11 percent in November last year, Reserve Bank of India Governor Raghuram Rajan said last week that he wanted to be sure inflation and inflationary expectations are really waning.

He also wants to see Prime Minister Narendra Modi’s seven-month-old government to reduce the fiscal deficit. If the signs are good, the RBI could reduce rates early next year, the central bank said in its policy review statement on Dec. 2.

Aside from looking at the strength of on-going deflationary impulses, the RBI is listening to people like Siddhi Mindalkar, a 34-year-old Mumbai housewife, taking into account their views on how prices will behave to determine the best time to cut.

“I am spending about 20 percent less on fruit and vegetables now than six months ago, but prices will probably rise again once the summer comes,” said Mindalkar as she shopped for vegetables at a roadside stall.