Friday, 20 September 2013

All eyes on Raghuram Rajan as he presents his maiden credit policy today

Reserve Bank of India's (RBI) new governor Raghuram Rajan will be under intense scrutiny when he chairs his first policy review on Friday faced with the "impossible trinity" of a weak rupee, rising inflation and slowing growth.

Most analysts bet "The Guv", as Raghuram Rajan has been nicknamed, will debut on a cautious note and focus on inflation, which hit an unexpected six-month high of 6.1% this week, and resist business pleas to ease interest rates to try to revive growth.

The inflation rise underscores "the challenges faced by the new governor when the economy is obviously struggling", said Daniel Martin, economist at Capital Economics. "We think he will keep policy rates on hold and keep them there for a while."

Analysts say Rajan cannot loosen monetary policy for fear of pushing inflation higher and the rupee lower.

The central bank's benchmark policy lending rate stands at 7.25%, and it hiked short-term rates in July to try to stabilise the rupee as it hit a string of lows.

"Anything suggesting wanting to remove these measures would risk undermining the rupee once again," said Credit Suisse India economist Robert Prior-Wandesforde.

The Reserve Bank of India (RBI) governor has been lionised by India's media, with one top columnist calling him the "Poster Boy of Banking" whose "chiselled features are as sharp as his brain".

But analysts say that Rajan, a former International Monetary Fund chief economist famed for forecasting the 2008 global financial meltdown, faces a Herculean task at the RBI's helm as he seeks to tackle what economists call a trilemma, or an "impossible trinity" of problems.

With expectations of his abilities so high, "some are bound to be disappointed," HSBC economist Leif Eskesen said.

India's economy has gone dramatically downhill since the "Indian Summer" of the last decade, when annual growth regularly topped 8 and 9%.

The economy grew by 5% last year, its slowest pace in a decade, and some private economists forecast expansion this year at under 4%.

Meanwhile, the Congress-led government has become mired in graft scandals and policy paralysis that have sunk its popularity and sent foreign investors fleeing.

India's public finances are also in trouble with the current account deficit - the broadest measure of trade - hitting a record high last year.

Rajan is seen as hesitant to go for growth at the risk of higher inflation - something he emphasised at his first news conference this month as governor, when he said the bank's role was to ensure "low and stable expectations of inflation".

His comments suggest he is likely to be "hawkish", CLSA economist Rajeev Malik said.

No comments:

Post a Comment