Rajan springs Pre-Xmas surprise

Raghuram Rajan, the RBI governor is known to spring a new surprise every time he comes out with his monetary policy update. Although, these are still early days for him as the RBI governor, he has surprised the market more times than his predecessors with his completely fresh approach towards economy.Rajan springs Pre-Xmas surprise

In the recent monetary policy statement (December 18), he kept the interest rates intact, when everyone had assumed the RBI of slashing them by at least 0.25 per cent, if not more. And, this was followed by the announcement from the FED’s side that it’s ready to taper the $85 billion monthly flow of easy money by $ 10 billion cut.

The US Central Bank will reduce its bond purchase program by $ 10 billion increments over the next seven meetings, ending the tapering in December 2014.

The RBI has also reiterated its stand that policy rates would not be confined just to the policy dates. But, most of the market experts, barring some portions of the market (which were anticipating rate hike) were predicting no rate increase from the RBI side. Why?

The chief reason is the disturbing inflation data – (WPI=7.52% and CPI= 11.24%). RBI has always maintained that curbing inflation is its foremost job even if comes at the cost of loss in growth rate. As per Crisil, one of the premier rating agencies in the country, other than food prices, core inflation also rose marginally in the month of November.

So, what exactly is the RBI thinking?

As per what majority of the economists in the country, the RBI too believes that food prices will come down themselves in the coming few weeks, and the cool down in the food prices can be witnessed already. The prices of food items (major component in inflation index) including onion and potato for instance have climbed down considerably and considering good monsoons, the supply of food items is bound to only improve further.

This is what makes the RBI hopeful of better days ahead in terms of lower inflation rates. Also, the RBI doesn’t want the slowly recovering economy of ours to feel further pressure from a fresh rate hike especially when the taper has already begun. Even exchange rate stability must be playing in Rajan’s mind before coming out with an announcement for maintenance of status quo in interest rates. Interesting! Isn’t it?

Since when has the RBI taken the onus from the Finance ministry to look after the growth rate of the country? Isn’t the primary objective of the Central Bank is to tame inflation?

So, should we all say that the focus of the RBI has shifted away from inflation towards growth? If this is the case, then Rajan needs to think again about the primary role of the RBI. In actuality, he should advice the government more vociferously to do something about the supply bottlenecks in the system (APMC law needs to be amended firstly). Because food inflation in particular is increasing mainly due to the ‘supply constraints’ and hence, better policies related with supply chain must be designed and implemented.

But, we have also observed that despite interest rate being hiked several times in the past (during Subbarao tenure also) little was achieved in terms of containing inflation. Infact, it only increased further. The rate hikes in the past only helped in slowing down the growth of our sick economy even more.

However, market cheered the decision to maintain status quo by the most. For it, the anticipation of a rate hike was so deeply rooted that it came as a surprise.

The coming days are worth watching for the market experts so as to see if the food inflation comes down due to the present decision from the RBI. Furthermore, we must not forget that rate hike has only been postponed and not abandoned completely.

Ashish Pandey

I am a business and finance journalist who is currently employed at Financial Express and previously at Zee News. My areas of interest include business and foreign policy. You can reach me on Twitter at @ashuvirgo1984 or @eFundsPlus.

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