Monetary policy: Raghuram Rajan seen hawkish on debut, may roll back some FX steps

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RBI Governor Raghuram Rajan makes his first monetary policy statement on Friday with expectations he may scale back some of the emergency measures. RBI Governor Raghuram Rajan makes his first monetary policy statement on Friday with expectations he may scale back some of the emergency measures.
SummaryWith price pressures rising & growth at decade low, Rajan must find a fine balance in policies.

New Reserve Bank of India chief Raghuram Rajan makes his first monetary policy statement on Friday with expectations he may scale back some of the emergency measures that have helped the rupee bounce from a record low.

Related: Rajan gets more headroom to do away with rupee restrictions

But in a reflection of the policy challenges faced by the former IMF chief economist who has been dubbed "The Guv" by the Indian media, Rajan is likely to strike a hawkish tone on inflation.

With price pressures rising and economic growth running at a decade low, Rajan must find a fine balance in central bank policies to support economic activity without adding fuel to inflation and giving investors fresh reason to sell the currency.

"There is a change of guard, so we don't know what the flavour will be, but Rajan is likely to be hawkish and reiterate the importance of low and stable inflation for sustained economic recovery," said Rajeev Malik, senior economist at CLSA in Singapore.

Related: Rajan may not unveil any 'gamechanger' policy, says Stanchart

Famed for predicting the global financial crisis, Rajan took office at the Reserve Bank of India (RBI) on September 4 as India was confronting its biggest economic crisis since 1991 and wowed central bank-watchers with an action plan on his first day.

Since hitting a record low on August 28, marking up losses of about 20 per cent for the year, the rupee has strengthened by 9 per cent.

Rajan, 50, pushed back his maiden policy review by two days and will now follow the pivotal meeting of the U.S. Federal Reserve, which later on Wednesday is widely expected to announce a winding down of its extraordinary monetary stimulus.

Related: US Fed surprises as Ben Bernanke sticks to economic stimulus, cuts growth outlook

Investor concern that India and other emerging markets will see reduced capital inflows once the Fed trims its stimulus programme has been a major factor in the rupee's slump. India was seen as more vulnerable than many emerging markets because it is running hefty current account and fiscal deficits.

Absent shock waves from the Fed meeting, economists expect at most a partial rollback on Friday of the slate of measures implemented by Rajan and his predecessor to support the rupee, which had the side affect of stifling credit.

With wholesale inflation at a six-month high in August, he is likely

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