RBI Governor Raghuram Rajan surprised the markets on Friday by taking a hawkish line in his much-hyped maiden policy review. Rajan, who took office early this month, chose to raise interest rates to combat rising inflation, even as he scaled down some of the liquidity-tightening measures put in place last month to support the flagging rupee.
When he raised the RBI’s key policy rate (the repo rate) by 25 basis points to 7.50 per cent, Rajan said the hike in the rates cannot be immediately viewed as negative for economic growth.
Apart from his low tolerance for inflation, the other takeaway from Rajan’s maiden policy is that he has strongly discounted the wave of new-found optimism that had reinvigorated both the capital and currency markets over the last one month.
Rajan also asserted that the Fed’s decision to put its $ 85 billion a month bond-buying programme was just “a postponement”. In the mean bullet-proof national balance sheet”, especially in the context of the coming general elections.
In his policy statement, Rajan gave two reasons for his decision to raise the repo rate: “...Inflation is high and household financial saving is lower than desirable.”
Through the hike, the RBI chief has sent an clear signal of his lack of comfort with the persistently high level of inflation — the wholesale price inflation had surged at its fastest pace for six months in August to 6.1 per cent, and retail inflation is hovering around the double digit mark at 9.52 per cent.
Analysts believe that Rajan has, to some extent, fast-forwarded the repo rate hike. The US Federal Reserve’s decision to hold the tapering seems to have offered Rajan a window of opportunity to crack the whip on inflation, an opportunity that he has used. This gives him the option of possibly another hike in rates before the US Fed starts pruning its bond-buying programme, which is widely predicted to take place at its next meeting in December.