Govt needs to keep its part of the bargain, says RBI

The Reserve Bank of India's decision to keep key rates unchanged appears to be a clear signal to the government that no more interest rate cuts will be forthcoming till the policy makers in Delhi pull their weight.

This is what RBI had to say in its monetary policy review:

"The Reserve Bank had frontloaded the policy rate reduction in April with a cut of 50 basis points. This decision was based on the premise that the process of fiscal consolidation critical for inflation management would get under way, along with other supply-side initiatives. Our assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small. Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures."

Simply put, growth cannot be revived until the government does something to encourage corporate investments and kickstart the investment cycle.

What would have irked the RBI is that not only has there been no key policy action from the government in the past few months, but there have been some counter productive measures as well. The decision to hike minimum support price for agriculture is clearly one such move which will add to the inflation problem in the coming months.