Rajan to bow out, leaving strategies for inflation, bk clean up -:- Equity Research

Stubbornly high food prices mean Reserve Bank of India Governor Raghuram Rajan is unlikely to make a valedictory rate cut at his final policy review on Tuesday before stepping down on September 4. Instead, the much-praised former International Monetary Fund Chief Economist can stake out what needs to be done for India to win its long war against volatile inflation, which means sticking with the programme and targets he set in place. Rajan is also likely to stress the need to keep the RBI's focus on cleaning up bad debts hobbling banks, so that they can once again support investment needed if India is to keep its place as one of the world's fastest growing economies. India has much to thank Rajan for. He steered the rupee off the rocks when he was appointed three years ago, restoring foreign investors' faith in the economic management of the country. And blessed by falling oil prices, his single-minded approach succeeded in halving the inflation rate from the double digit levels prevailing when he came in. Appointed by the previous Congress party government, Rajan quickly earned the respect of Prime Minister Narendra Modi, whose Hindu nationalist party swept to power in 2014 with promises to energise a moribund economy. Caution lowering interest rates drew criticism from within government circles, including from chief economic adviser Arvind Subramanian, but Rajan regarded taming inflation as a prerequisite."His overall assessment will be that RBI has helped lay the foundation for faster, sustainable growth with low and stable inflation," said A. Prasanna, an economist at ICICI Primary Dealership Ltd in Mumbai. Rajan has lowered rates by 150 basis points since January last year, bringing the policy repo rate down to 6.5 percent, and he has argued that the benefits would have been far greater if banks had been less reluctant to lower lending rates. That made the case for tackling their bad loans more pressing, but some bankers might hope the next RBI governor will be less aggressive. A review of asset quality ordered by Rajan found roughly USD35 billion in new bad loans since September, impairing banks' earnings and hitting loan growth.