Rate cut could have stoked inflation, yielded little: Rajan

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Reserve Bank of India Governor Raghuram Rajan Wednesday defended his decision not to cut rates, saying the risk reward trade off was poor. “If the RBI had tried to be accommodative by cutting rate, it would have increased the risk of inflation, given rising (household inflationary) expectations, weak monsoon and other factors,” Rajan said in an exclusive interview to CNBC Awaaz “On the other hand, what benefit will it yield in terms of transmission (banks passing on lower rates to borrowers)? ..very little…banks are saying they are not yet ready to cut rates “So you are taking on more risk for little gains. A rate cut is just a signal. Soon after we cut rates in June, the Met department said that monsoons would be below average, and all the good signal went off immediately. So even signals, if not given at the right time, will not be helpful,” he said. Rajan said the position on monsoon will be clear by September and that the government was capable of handling food inflation by better management of foodstock. He expects some volatility when the US Federal Reserve hikes interest rates, but was of the view that India would benefit once the dust settled, and investors looked for stable markets to invest. He said concerns of a global deflation were exaggerated, since the US Federal Reserve’s inclination to hike rates signaled that the US economy was in good shape. He said the RBI would cut rates only if it was convinced that inflation would stay below 6 percent even after it cut rates.

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