“My last reading is not 6 percent. The reading for August will be the last reading during my term. I expect that to be below 6 percent. That is where we needed to bring it and that is where I will leave it. My sense is it should come down from 6 percent over the next few months,” he said.
During July, retail inflation shot up to nearly 2-year high of 6.07 percent, above the RBI’s comfort level, on surge in prices of food items as demand for sugar, oil and fats and spices rose ahead of the festival season.
Government has fixed an inflation target of 4 percent, with a range of plus or minus 2 percent, for next five years under the new monetary policy framework agreement reached with the Reserve Bank.
Asked if there was further room to cut interest rate, Rajan said RBI has used every room available to cut interest rate.
“The point is to keep it low over a sustained period. we can’t just follow inflation of the moment and say we have plenty of room… Much of our communication was about explaining we didn’t have that much room because there were other factors which would come into the play. We used all the rooms whenever we had the room,” he told Karan Thapar in an interview on India Today news channel.
Since January 2015, the RBI has slashed its benchmark lending rate by 1.5 percent.
When asked why banks did not fully transmit the rate cut benefits to the customers, Rajan said, “The primary problem in passing through was partly a weak economy where there was not that much credit demand. So as they cut interest rate, they lost income from existing client but did not get any new clients. So that was one concern they had.
“So they were caught in Catch 22. Some were trying to protect their income because they had stressed balance sheets and so they were not expanding their balance sheet,” he said.
He also said that cleaning up of balance sheet exercise should be largely over by March 2017.