Dr Rajan had earlier surprised the markets on January 15 with a 25 basis points cut in repo to 7.75 per cent from the 8 per cent maintained throughout 2014, and has now followed up with a similar cut to lower the repo to 7.5 per cent. This makes a total cut of 50 basis points or 0.5 per cent in the benchmark rate, in the first quarter of 2015.

While this underscores the central bank's steady pursuit of monetary accommodation corresponding to the disinflationary path it had itself projected in January this year, Dr Rajan may have helped to lift up the post-budget spirits in both North Block and the corporate world.

However hyperbolic in presentation, Finance Minister Arun Jaitley's well-designed growth and welfare oriented Budget on February 28 has evoked mixed reactions at home and abroad. The rating agencies are not overly enthused to respond readily with upgrades.

The need for monetary easing has also been the refrain lately of both the Minister of State for Finance Mr Jayant Sinha and the Chief Economic Adviser Mr. Arvind Subramanian through his pre-budget Economic Survey. Mr Sinha said the data right now was 'very compelling in terms of interest rates being reduced further'. Even as Dr Rajan has acted on his own judgement, the surprise cut would have delighted the establishment.

With the lowering of repo to 7.5 per cent with effect from March 4, the reverse repo rate under LAF stands adjusted to 6.5 per cent, and the marginal standing facility (MSF) and the Bank Rate at 8.5 per cent. CRR (cash reserve ratio) of scheduled banks remains unchanged at 4.0 per cent of net demand and time liabilities (NDTL).

Governor Rajan had scheduled the first bi-monthly monetary policy statement in 2015-16 for April 7 - which would have been weeks after the Union Budget tabled on February 28. In the last bi-monthly review for 2014-15, on February 3, he had indicated that RBI would keenly monitor the revision in CPI (February 12) with regard to the path of inflation in 2015-16 and the Union Budget.

Dr Rajan has now said the still weak state of certain sectors of economy as well as the global trend towards easing suggest that any policy action should be anticipatory if supported by sufficient data. Secondly, he notes, with the release of the agreement on the monetary policy framework, 'it is appropriate for the Reserve Bank to offer guidance on how it will implement the mandate'..

Accordingly, going forward, the RBI will seek to bring the inflation rate to the mid-point of the band of 4 +-- 2 per cent provided for in the agreement, i.e., to 4 per cent by the end of a two year period starting fiscal year 2016-17. Dr Rajan said 'softer readings' on inflation are expected to come in through the first half of 2015-16 before firming up to below 6 per cent in the second half.

Outlining the policy stance, Dr Rajan says, given low capacity utilisation and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be 'pre-emptive' in policy action to utilise available space for monetary accommodation.

. On the Budget itself, while he takes note of 'valuable' structural reforms embedded in it - which could improve supply over the medium term- he has concern over the deferring of fiscal consolidation to 3 per cent by one year to 2017-18 from the point of view of aggregate demand management. It would be at a time of accelerating economic recovery, especially with large borrowings intended for public sector enterprises.

While large transfer of resources would be taking place under the 14th Finance Commission recommendations, Dr Rajan hoped the fiscal consolidation programme, while delayed, might compensate in quality and states would also narrow their deficits to bring down the general government deficit.

There is also a welcome intent in the Budget to shift in spending from subsidies to infrastructure and reduction and better targeting of subsidies through direct transfers However, Dr Rajan has not overlooked uncertainties surrounding inflation projections like oil prices firming up as seen in recent weeks.

There are also risks of spillovers of volatility from international financial markets via exchange rate and asset prices as monetary policies in developed markets go through transitions. Domestically, the inflation outlook would also be determined by steps the government would take on food management in the critical pre-monsoon months.

On the new monetary policy framework setting out clear inflation objectives, for Dr Rajan it has only made explicit what was implicit before – that the government and the Reserve Bank have common objectives and that fiscal and monetary policy would work in a complementary way.

'In sum, then, the government intends to compensate for the delay in fiscal consolidation with a commitment to an improvement in the quality of adjustment' Dr Rajan points out. But monetary specialists are coming up with varying interpretations, some seeing it as limiting the autonomy for the central bank while others see there are obligations for both government and RBI. (IPA Service)