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Inflation adds to headaches for Raghuram Rajan's first policy review meeting

Sep 17 2013, 16:42 IST
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Dubbed 'The Guv', hopes are high that Raghuram Rajan can find a formula to stabilise the rupee, calm inflationary pressure and at the same time spark a revival in growth. (AP) Dubbed 'The Guv', hopes are high that Raghuram Rajan can find a formula to stabilise the rupee, calm inflationary pressure and at the same time spark a revival in growth. (AP)
SummaryRajan has already warned he does not have a 'magic wand' to deal with India's economic crisis.

When he holds only his first policy review this week, new Reserve Bank of India Governor Raghuram Rajan has to confront what may well prove to be the biggest challenge of his time in office.

Rajan has already warned he does not have a "magic wand" to deal with India's economic crisis, but dubbed "The Guv" by a gushing Indian media, hopes are high he can find a formula to stabilise the rupee, calm inflationary pressure and at the same time spark a revival in economic growth.

Related: Guv Rajan launches financial reforms 2.0

But first he will have to deal with the outcome of a pivotal meeting on Tuesday and Wednesday of the U.S. Federal Reserve. The Fed is likely to announce measures to rein in its massive economic stimulus, an expected policy tapering that has already sparked an emerging market selloff contributing to the rupee's fall to a record low.

In a reminder of the economic pressures facing the RBI, wholesale inflation data on Monday is expected to show price pressures at a six-month high.

It is the last major data point before the former IMF chief economist, who famously predicted the global financial crisis, holds his first policy meeting on Friday.

"These data points will not mean much for the upcoming RBI monetary policy as their hands are tied at this stage and a lot will depend on what comes out of the (Fed) meeting," said Rupa Rege Nitsure, chief economist at Bank of Baroda.

The Fed is expected to reduce its $85 billion a month bond-buying programme, but financial markets are uncertain about the extent of the reduction.

Concerns that India, along with other emerging markets, will see reduced capital inflows once the Fed trims its stimulus programme have been a major factor in the rupee's slump.

Related: RBI to keep monetary policy tight till rupee stabilises, says PMEAC

Many analysts say the economy is more vulnerable than most because of a record current account deficit and a fiscal deficit, both bloated by the increasing cost of oil imports as global crude prices are rising.

IMPORTED INFLATION

New Delhi is contemplating a near 10 percent hike in diesel prices soon to ease its oil subsidy burden, government officials have told Reuters.

Disruption in supplies of vegetables and onions due to summer rains has exacerbated price pressures.

"It looks like over the next few months WPI inflation might be

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