Although Rajan has raised the key policy rate by 75 basis points to 8% in phases, inflation remains elevated. (Reuters)
Well begun, they say, is half done. Without doubt, Raghuram Rajan got off to a great start after he took over as Reserve Bank of India (RBI) governor on September 4 last year. Within a couple of months the rupee, which was plumbing new lows, had stabilised after the RBI offered banks concessional swaps to raise foreign currency deposits which brought in $34 billion and a special dollar window for oil marketing companies, which eased demand in the currency markets. However, although Rajan has raised the key policy rate by 75 basis points to 8% in phases, inflation remains elevated. Nevertheless, high interest rates have attracted foreign funds into bond with flows crossing $17 billion in 2014 so far. These, together with inflows into equities, have helped support the currency. While Rajan is trying to tighten rules to keep banks NPAs in check, that could take a while given how deep-rooted the problem is.
Click here for graph