RBI Monetary Policy: Ahead of Rajan's swansong, focus to be on his legacy than rates

Raveena Singhmoneycontrol.comReserve Bank of India Governor Raghuram Rajan holds his last monetary policy meeting Tuesday but observors say the focus during his final hurrah will extend far beyond interest rates, which, in all likelihood, he will leave unchanged.The three-year stint of the outgoing Reserve Bank chief is largely viewed by economists as positive -- some controversy about his high interest-rate stance notwithstanding -- as growth picked up, reserves increased, currency stabilised, inflation cooled and a number of reforms were undertaken during his watch.Rajan also took several steps to unfetter the growth of the banking industry. On one hand, he initiated a deep clean-up of non-performing assets by forcing banks to declare their stressed loans as such, on the other, he issued guidelines for new-age payments and small banks, apart from opening up the application window for universal bank licences forever.Tomorrow, analysts will particularly look forward to a few measures he announced that remain a work-in-progress.Earlier this year, in a major decision, the RBI said it would move shift its liquidity stance -- it manages this with open market operations using overnight and term repo instruments -- from deficit to neutral.Analysts say more liquidity in the system helps in bringing yields down and may help bank cut interest interest rates even as an upcoming event threatens to reverse that position."The bond market will be looking at the liquidity picture," Bank of America India MD and Treasurer Jayesh Mehta told CNBC-TV18, adding that the maturity of the three-year, USD 34-billion FCNR-B window Rajan opened in September 2013 to attract NRI deposits and stem the rupee fall may impact liquidity negatively."This may lead some liquidity imbalance even though [currently] there is Rs 20,000-25,000 crore of surplus, he added.Rajan, however, has maintained that the Reserve Bank is better prepared to deal with the outflow situation this time.The other important development markets will look forward will be whether there is any other development on the monetary policy committee (MPC) front.Another of Rajan's pet ideas, the government recently ratified formation of a six-member MPC, along with adopting a formal 4 percent inflation target."The idea behind the MPC is that a team of individuals will be responsible for interest rate decisions instead of the Governor alone," Mehta said.Most leading central banks around the world have MPCs and they help provide transparency and robustness in terms of monetary policy decisions, Marie Duron of Moody's told CNBC-TV18.In effect, what Rajan has not only institutionalised the process of interest rate decisions, but by putting out formal inflation targets, also semi-automated them.Even as speculation continues on who would don the mantle of Governor next, Duron said she expects the incoming chief to continue on the path of moderate inflation laid out by the incumbent and continuation of reforms announced by him.