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

Sep 19 2013, 09:56 IST
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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.

to keep the repo rate, the RBI's official policy rate, on hold at 7.25 per cent.

Some economists expect Rajan to build the case for shifting the central bank's key inflation measure to the consumer price index from the wholesale price index.

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That would put India in tune with other major economies but would also reinforce a near-term hawkish stance given that consumer inflation has been consistently high, registering 9.52 per cent in August.

In his first-day press conference, Rajan spoke of the need for communication and a "clear framework" as to where the central bank is headed.

"We need a more comprehensive policy statement from the RBI underlining the outlook on inflation and guidance around the future of monetary policy framework, especially with regards to inflation targeting," said Gaurav Kapur, senior economist at Royal Bank of Scotland.

DE FACTO POLICY RATE

Rajan is widely expected to leave the marginal standing facility (MSF) unchanged, a Reuters poll shows. The overnight rate is generally viewed as the central bank's effective policy rate now, since it is the major interest rate tool being used to support the rupee.

The central bank jacked it up by 200 basis points in July to 10.25 per cent so that it stood 300 basis points above the official policy repo rate, aiming to tighten market liquidity and make it more expensive to speculate against the rupee.

Still, A. Prasanna, economist at ICICI Securities Primary Dealership Ltd in Mumbai, said it was a 50/50 call as to whether Rajan cuts the MSF to 9.25 per cent.

"If the governor cuts MSF he wouldn't want to give an impression that it is the start of further cuts or that we will go back to 7.25 per cent and so on. Thus he has to guide markets that 7.25 per cent is not coming back soon and further easing will be calibrated and data-dependent," he said.

Several economists expect Rajan to reverse some of the other rupee-supporting steps.

He might relax a requirement that banks meet 99 per cent of their cash reserve ratio on a daily basis. The minimum was increased from 70 per cent previously, which drained liquidity from money markets but also choked off credit.

Rajan took over at the RBI with what many observers warned were impossibly high expectations given the difficulty of revitalising an economy whose record-high current account deficit makes it especially vulnerable to

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