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By Suvashree Dey Choudhury and Rafael Nam
MUMBAI, June 3 Reserve Bank of India Governor
Raghuram Rajan is expected to keep the country's key lending
rate unchanged and temper his tough rhetoric on inflation in a
conciliatory gesture to a new government elected on a platform
of reviving economic growth.
All but three of the 52 economists polled last month
predicted the RBI would keep India's policy repo rate
on hold at 8 percent on Tuesday, after last raising
interest rates by a quarter percentage point in January.
The decision is expected at 0530 GMT Tuesday.
Rajan is already showing some success in bringing down
consumer price inflation (CPI) after raising interest rates by a
total of 75 basis points since September, and analysts widely
expect price pressures to keep moderating by early 2015 as the
government battles market inefficiencies which raise costs.
The governor will now have to sell his agenda - which puts
priority on the fight against inflation - to India's new prime
minister, Narendra Modi, who many count on to push up the growth
Investors are hopeful the new government will respond to
Rajan by tackling the supply-side factors that drive up food
inflation in India, thus easing the burden on the poor and
restoring investors' confidence.
"There is a realisation in the new government that high
inflation is politically costly, and so they will be willing to
walk the extra mile to bring down inflation," said A. Prasanna,
economist at ICICI Securities Primary Dealership in Mumbai.
Rajan started toning down some of his anti-inflation
rhetoric on expectations of easing retail inflation, which
except for an increase in April to 8.59 percent, has been
cooling in 2014. It was nearly 10 percent throughout the two
Last week, after meeting new Finance Minister Arun Jaitley,
the central bank governor told reporters of the importance of
balancing growth and inflation. He later told a Tokyo audience
he would work hand-in-hand with the government.
The RBI is targeting to bring down CPI inflation to 8
percent by January 2015 and 6 percent the following year, in
line with recommendations from a central bank panel in January.
Most analysts expect the RBI to keep interest rates on hold
through 2014 unless India experiences a sudden spurt in
inflation, which could happen if there are reduced rains during
the monsoon season.
Yet to bring down inflation, the RBI will need the new
government to also take steps to bring down food inflation as
well as contain its elevated fiscal deficit.
Modi is expected to soon unveil a roadmap to tame food
prices, control the fiscal deficit and push reforms to boost
Asia's third largest economy, which posted its second straight
year of sub-5 percent growth in the year ended in March.
The RBI will also need to work with the new government in
making other important decisions, including whether to remove
restrictions on gold imports that have sharply narrowed the
current-account deficit but are believed to have spurred in
increase in smuggling.
In turn, 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.
Rajan hinted last month the RBI could consider freeing up
some banks from meeting hefty reserve requirements and promised
support for the sale of infrastructure-related bonds.
(Editing by Richard Borsuk)