Mumbai, Aug 29: Inflation projections are still at the upper limit of Reserve Bank's target and the policy rate can be cut only if inflation eases, outgoing Governor Raghuram Rajan said today.
Retail inflation shot up to nearly 2-year high of 6.07 per cent, while the one based on wholesale prices soared to a 23-month high of 3.55 per cent in July.
"Inflation projections are still at the upper limits of RBI's inflation objective.
With RBI needing to balance savers' desire for positive real interest rates with corporate investors' and retail borrowers' need for low nominal borrowing rates, the room to cut policy rates can emerge only if inflation is projected to fall further," Rajan wrote in the foreword to RBI Annual Report 2015-16.
He said the short term macroeconomic priorities of the RBI continue to focus on bringing down inflation towards the government-set target of 4 per cent.
So far, the RBI has followed a gentle glide path, aiming at 5 per cent by March 2017 after having brought it below 6 per cent in January 2016, Rajan said.
RBI is also working with the government and banks on speeding up the resolution of distressed projects and completing the clean-up of bank balance sheets; ensuring banks have the capital to make provisions, support new lending, and thus pass on future possible rate cuts, he added.
He said economic growth, while showing signs of picking up, is still below the levels that the country is capable of.
The key weakness is in investment, with private corporate investment subdued because of low capacity utilisation, and public investment slow in rolling out in some sectors, he noted.
The Governor said willingness of banks to cut lending rates is muted. "Not only does weak corporate investment reduce the volume of new profitable loans, their stressed assets have tightened capital positions, which may prevent them from lending freely," Rajan said.