Rate hike: Raghuram Rajan wants to be India's Paul Volcker, set to fight inflation, but may get hit by recession

Sep 21 2013, 13:12 IST
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Raghuram Rajan has sensibly retreated from D Subbarao's foolish plan to shore up the falling Indian rupee. Reuters Raghuram Rajan has sensibly retreated from D Subbarao's foolish plan to shore up the falling Indian rupee. Reuters
SummaryA surprise repo rate hike won't win Raghuram Rajan many friends, but...

his tracks? After all, they have to face an election next year. Raghuram Rajan doesn't.

CONTEXT NEWS

-The Reserve Bank of India, now helmed by Raghuram Rajan, a former IMF chief economist, lifted its key policy rate by 25 basis points on Sept. 20 to 7.5 percent to tackle near-double-digit consumer price inflation.

- Simultaneously, the central bank announced a 75 basis point reduction in the marginal standing facility (MSF) interest rate at which banks facing a liquidity squeeze borrow directly from the monetary authority.

- The RBI had raised the MSF rate by 200 basis points to 10.25 percent in July to shore up the rupee by triggering a sharp increase in short-term interbank interest rates.

- The rupee, which slumped 22 percent against the U.S. dollar in four months through Aug. 28, has erased half of its losses since then. The rupee traded at 62.13 against the U.S. dollar after the monetary policy announcement at 11:00 a.m. (0530 GMT) in Mumbai, down from 61.96. The benchmark National Stock Exchange Nifty index declined as much as 3 percent.

By Andy Mukherjee

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

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