Is Raghuram Rajan A Party Spoiler?

PTI photo
PTI photo

A governor’s got to do what he’s got to. Raghuram Rajan, in his first policy announcement, has surprised experts and belied expectations by hiking the repo rate (rate at which RBI lends money to banks). This means interest rates in the economy will remain high, keeping your loans expensive.

This policy has quickly forced people to immerse assumptions that ‘Raghuram was supposed to be Chidambaram’s friend’ or was expected to make moves in sync with political appeasement. But looks like it’s time to say hello to the ‘RBI Governor’ and good bye to the ‘former Chief Economic Advisor.’

A couple of interesting observations. One, inflation is India’s big worry, and RBI is clear it will not move from that objective. Interest rates, although a blunt instrument to manage inflation, will remain the preferred tool of the central bank. However, later in the year, a good monsoon should help lift off pressure a little bit as agriculture growth will improve.

Two, just because Ben Bernanke kept the dollar tap on by not tapering the stimulus given to the US economy does not mean India has to follow by continuing the party. But, the discerning Rajan has used this positive fallout (of no tapering out of funds) of the Federal Reserve to let cushion today’s rate hike.

Three, Raghuram Rajan said that the economy should not have to wait for the quarterly policy days for RBI actions. This means Rajan plans to be hands on and tinker with measures depending on short-term conditions. This can mean some more hikes could be on the anvil but also that the RBI will use different tools to balance the impact.

The main villain of the piece is inflation but it’s been around. While all these months India has been grappling with over 9% in consumer price inflation, today the RBI expressed that CPI was going to be high for years to come. A bigger and added worry is that wholesale inflation has risen above 6% and RBI admitted this would be the case for more time. So what happens to growth? In theory growth has never been RBI’s responsibility and it looks like with this rate scenario growth will have to find other ways for a kick-start. This will certainly disappoint corporate India, as RBI is making no effort to appease manufacturing or boost consumption. From a consumer’s standpoint this is like being between a rock and a hard place. High rates, more expensive food, fuel and articles and few jobs due to lack of growth. It’s also a hard scenario for politicians to carry to election campaigning.

So will banks hike rates? Clearly State Bank of India had seen this coming and announced a hike in their base rate (rate on which bank loans are priced) on Thursday. Other bankers are admitting they too may have to do this. Your EMIs will not be down soon. If India’s inflation doesn’t reduce, RBI will look to increase rates.

At the same time in the policy, the RBI has made moves to ease money supply in the system. It reduced borrowing rate for banks by 0.75% to 9.5%. The measure was earlier taken to tighten liquidity and arrest volatility in the foreign exchange market.

But, while Rajan has been greeted as India’s latest rockstar or 007 James Bond, he is quickly doing what is expected of a smart central bank governor. If this takes the ‘sex out of the Sensex’ as Shobhaa De called it, so be it. One would be curious to know what the headlines or celebrity columns plan for tomorrow’s papers. Would a face saving be to hail this ‘super hero’ effort, his plainspeak adding to his sex appeal since they built him up so much? Or there will be those who made a Band Baaja Baraat of Bernanke’s ability to fire up markets just 24 hours ago, but will call the RBI Raja a party spoiler. With this policy and Rajan’s first move, on both fronts – economy and Rajan – the last words are yet to come.


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