As expected, Rajan does the unexpected
29 Jan 2014 5:45 AM IST
Going by Reserve Bank of India (RBI) Governor Raghuram Govind Rajan’s record since he took office on 4 September, 2013, economic decision-making — by consumers, investors and, yes, even financial and capital market players — is almost always likely to be based on wrong premises about future conditions and parameters.
This is because Rajan has demonstrated an uncanny tendency to almost always prove expectations about his policy actions wrong. On Tuesday, he surprised the markets once again by raising the key policy (repo) rate by 25 basis points (bps) to 8 per cent in a bid to curb retail inflation, a move that may translate into higher EMIs and push up the cost of borrowing for corporates. ‘... a 25-bps increase in the policy rate is needed to set the economy securely on the recommended disinflationary path,’ the RBI Governor said while unveiling the Third Quarter Review of Monetary Policy.
The reverse repo rate under the liquidity adjustment facility will be revised to 7 per cent and the marginal standing facility rate and bank rate to 9 per cent. However, the RBI kept the cash reserve ratio (CRR) unchanged at 4 per cent as the economy’s liquidity situation seems to be comfortable.
It was widely expected that Rajan would maintain status quo on rates to support growth. Ahead of the quarterly review, he had dubbed inflation a ‘destructive disease.’ In line with the Urjit Patel Committee recommendations, monetary policy reviews will, henceforth, be undertaken every two months consistent with the availability of key macroeconomic and financial data, Rajan had said.
The repo rate hike is likely to have a bearing on interest rates and may push up cost of funds for both retail and corporate borrowers. The recent resumption of capital inflows should help finance the current account deficit (CAD) comfortably, added Rajan.
This is because Rajan has demonstrated an uncanny tendency to almost always prove expectations about his policy actions wrong. On Tuesday, he surprised the markets once again by raising the key policy (repo) rate by 25 basis points (bps) to 8 per cent in a bid to curb retail inflation, a move that may translate into higher EMIs and push up the cost of borrowing for corporates. ‘... a 25-bps increase in the policy rate is needed to set the economy securely on the recommended disinflationary path,’ the RBI Governor said while unveiling the Third Quarter Review of Monetary Policy.
The reverse repo rate under the liquidity adjustment facility will be revised to 7 per cent and the marginal standing facility rate and bank rate to 9 per cent. However, the RBI kept the cash reserve ratio (CRR) unchanged at 4 per cent as the economy’s liquidity situation seems to be comfortable.
It was widely expected that Rajan would maintain status quo on rates to support growth. Ahead of the quarterly review, he had dubbed inflation a ‘destructive disease.’ In line with the Urjit Patel Committee recommendations, monetary policy reviews will, henceforth, be undertaken every two months consistent with the availability of key macroeconomic and financial data, Rajan had said.
The repo rate hike is likely to have a bearing on interest rates and may push up cost of funds for both retail and corporate borrowers. The recent resumption of capital inflows should help finance the current account deficit (CAD) comfortably, added Rajan.
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