Markets have
reacted adversely to the surprise hike in the repo rate by the Governor of
Reserve Bank of India in the Monetary Policy announcement today.
The Market
expectations of status quo at the worst or a cut in repo rate in my view were
clearly part of the euphoria generated from out of the positive developments on
several fronts during the last few weeks post the assumption of charge by Mr. Raghuram
Rajan as Governor of RBI.
However, the
inflation statistics and the food inflation in particular should be of serious
concern to all policy makers. I believe the new Governor is sending a strong
signal to markets of his unhesitating ability to take unpopular decisions if such
decisions are warranted by ground realities. The Governor has sent a strong
message so early in his tenure to the market “don’t take me for granted”.
The deferment
in withdrawal of quantitative easing by US has given Indian policy makers a
breathing space of three months at the least and six months at the best. It is
important that key policy decisions to insulate the economy (to the extent
possible on final QE withdrawal by US must be taken quickly even if some of
these decisions are not popular).
While the
tight interest rate out look continues to be on cards in the short run
definitely, Reserve Bank of India will need to address the issues of sufficient
liquidity in markets given that the busy season is now round the corner. The
management of the currency exchange rate is the other major issue which will
have to be addressed. Allowing the Rupee to strengthen beyond current levels
may not be actually in the interest of the overall economy in general and
exporters in particular.
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