He has left CRR (cash reserve ratio) untouched at 4 per cent of banks' net demand and time liabilities (NDTL), though the bankers even preferred a cut in CRR to a repo rate cut. But the overall setting in which he has announced his third cut so far in 2015 is far from reassuring in relation to what Government has so far made it appear on the economic front, with its first year record.

Risks and vulnerabilities - global and domestic - cited by Dr Rajan in his second bi-monthly policy statement have led him to mark down the growth projection for 2015/16 from 7.8 per cent in April to 7.6 per cent 'with a downward bias to reflect the uncertainties surrounding these various risks'.

Dr Rajan has also taken note of the downward revision of GVA (Gross Value Added) at basic prices, in the latest CSO projections to 7.2 per cent while estimating GDP in 2015/16 at 7.3 per cent. The major drag for the economy is seen mainly in adverse trends, weather—induced and otherwise, in agriculture.

Taking note of the forecasts of delayed monsoon which would be 7 per cent below average and a contraction in Agriculture Ministry estimates, Dr Rajan has called for 'contingency plans for food management, including storage of adequate quantity of seeds and fertilisers, crop insurance, credit facilities, timely release of food stocks.

All these and other steps including imports to avert disruptions in food supply chains have been urged to manage the impact of low production on inflation, given the weight of food prices on the consumer price inflation. RBI has also suggested limiting increase in agricultural support prices.

Industrial recovery has also been uneven, RBI statement notes. Sustained weakness of consumption trends, especially in rural areas, fall in capacity utilisation in several industries, contraction in output from the core sectors and mixed signals in services sector have all combined to make a negative picture.

Dr Rajan also pointed out a steady weakening of export growth and a deterioration in terms of trade and said these developments also tend to reverse the reduction in the current account deficit though it is expected to be contained at 1.5 per cent of GDP. Growth of the economy, going forward, would depend more on strengthening of domestic final demand.

Although the fiscal year also began with some portfolio outflows, India's reserves at US$ 350 billion provide a strong second line of defence 'to good macroeconomic policies if external markets turn significantly volatile'. On the global outlook, Dr. Rajan referred to low recovery, volatility in global financial and bond markets, and recent firming up of oil prices which may also turn volatile.

On Policy Stance and Rationale, Dr Rajan referred to banks passing through some of the past rate cuts into their lending rates, headline inflation evolving along the projected path, administered price increases remaining muted, and normalisation of US monetary policy being pushed back. 'With low domestic capacity utilization, still mixed indicators of recovery, and subdued investment and credit growth, there is a case for a cut in the policy rate today' he said.

However, risks to inflation still clouded the picture. Given the below normal monsoon predicted, 'astute food management' is needed to mitigate possible inflationary effects. Second, crude prices have been firming amidst considerable volatility, and geo-political risks are ever present.

With all such risks and volatility in the external environment, Dr Rajan has opted for a 'conservative strategy' to wait, especially for more certainty on both the monsoon outturn as well as the effects of government responses if it turns out to be weak.

Meanwhile, in view of weak investment and the need to reduce supply constraints to stay on the proposed disinflationary path (to 4 per cent in early 2018), he said, it would be appropriate to front-load a rate cut and then wait for data that clarify uncertainty. The Governor has suggested banks should pass through the sequence of rate cuts into lending rates.

On how the policy would evolve in the coming months, he thought with reasonable food management, inflation was likely to be pulled down by base effects till August but rise thereafter to about 6.0 per cent by January 2016 – slightly higher than the projections in April. This would require strong food policy and management to help keep inflation and inflationary expectations contained over the near term. But, as he rightly points out, monetary easing can only create 'enabling conditions' for effective government policy thrusts on step up in public investment in several areas that could also crowd in private investment.

Having taken one step - though some may view a quarter percentage cut as 'baby step'-Dr Rajan has put the ball back in Government court. Monetary easing depends on how supply constraints get relieved which would help disinflation over the medium term.

The credit performance of banks is not guided solely by the interest rate. Dr Rajan said the banks need to implement concerted strategies to clean up stressed assets. A targeted infusion of bank capital into scheduled public sector commercial banks which take up such cleaning up of balance sheets, is warranted 'so that adequate credit flows to the productive sectors as investment picks up', the Governor said. (IPA Service)