When the whole world watched Dr Raghuram Rajan's first credit policy, never would have people guessed what he delivered today, a hike in repo rates. He also sent out a message to the world that he is going to be an independent minded governor and not a Delhi leaning man. According to market "expectations" Dr Rajan was supposed to keep the rates intact with some positive announcements like the cut in MSF which he announced today. Eventually the astute economist in Dr Rajan realized inflation is a monster to be tamed now rather than focus on the economic growth. Even his predecessor Dr Subbarao did not hike the long term rates despite the pressure on the inflationary side. The best he did was to keep the rates intact. Repeated denial of lowering rates led Mr P Chidambaram to make the walking alone comment in public which clearly indicated not all was well between North block and Mint Street. In his final public speech, Dr Subbarao highlighted this and countered PC's point.
Today when the rate hike was announced markets blinked in utter disbelief because markets "expected" a soft stand from Dr Rajan. But in the process Dr Rajan will not be an yes man of Delhi was made amply clear today. Dr Subbarao had to face unfair criticisms of being excessively obsessed with inflation rather than focusing on growth, which was repeatedly ignored by the man himself. Markets and rupee grew impatient with his stand and that's why when Dr Rajan made token announcements on 4th Sep, rupee and markets cheered warmly.
But today Dr Rajan had to wear the governor's hat and make an announcement based on the facts and figures. With food inflation zooming along with the headline inflation, he had very little choice other than raise repo rate and the markets took it with the pinch of salt.The reality is Indian economy is facing multiple headwinds, with Fed's decision on tapering giving government and RBI some breathing space. And if markets are to be believed, Fed is expected to start the tapering from December which will again put pressure on rupee and markets. Government has very little time to do a course correction in next three months and with today's rate hike, RBI has clearly demonstrated that inflation control is the priority above growth and that the government has to "walk alone" on the growth path for the time being.
Gopalakrishnan V, Founder & CEO, Money Avenues.
