RBI is anti-inflation, asserts Raghuram Rajan

Raghuram Rajan_1.jpg

Mumbai: Asserting that Reserve Bank is ‘anti-inflation’, new Governor Raghuram Rajan on Friday said partial easing of its recent liquidity tightening measures coupled with repo rate hike is supportive of growth, a remark that helped the markets trim losses.
"Of course, we are anti-inflation...of course, our intent is to signal a stance against inflation," Rajan said at a press conference after announcing his first policy review as the RBI Governor.The RBI wants to get inflation down to the stated 5 per cent-mark, he said without giving a deadline for the same.
Rajan, a celebrated economist credited for predicting the 2008 global financial crisis, said the central bank is worried about the growth aspect as well, even though he today increased the repo rate by 25 basis points to 7.50 per cent with immediate effect.
"We have to be very careful about immediately associating our repo rate hike to growth implications. Sometimes, the knowledge that inflation will be lower can actually enhance growth prospects rather than reduce growth prospects," he said.
While the stock markets were rattled by the unexpected move to hike repo rate with Sensex tanking nearly 600 points intra-day, the market recovered some ground to end with a loss of 383 points after Rajan's comments in the conference. Also, the rupee, which fell to 62.6 level, ended at 62.23 versus the dollar on Friday.
Markets had pinned hopes on Rajan to revive growth by cutting rates. The Sensex had vaulted over 10.5 per cent and rupee jumped over 12 per cent since September 4 when Rajan assumed office.
Drawing attention to his decision to reduce marginal standing facility rate by 0.75 per cent to 9.5, he said the repo rate hike has to be looked in this context as well.
"It (repo hike) is clubbed with a substantial reduction in the MSF, which is growth positive. Analysts, when they look at this, should weigh the measures together rather than seeing it as a unilateral issue," the Governor said.
Without giving a timeline, Rajan said the gap between the repo rate and the MSF will be narrowed down to 100 basis points, which will signal a shift back to the normal process of monetary policy wherein the repo is the operational rate.
One basis point is equal to 0.01 per cent. Rajan said he expected banks to pass on the reduction in cost of funds to the borrowers by setting their rates "appropriate to the cost of funds", a move that can help drive investment.
"The intent of the policy today is primarily to say the cost of funding is very high; we need to withdraw these liquidity (tightening) measures as soon as the markets allow it...immediately there will be a reduction in the cost of funding to the financial sector," the RBI Governor said.
However, bankers did not buy his argument for repo rate hike and said lending and deposit rates will have to rise.
SBI Chairman Pratip Chaudhuri said: "Now that the busy season has started, there is a huge credit demand and banks are scrambling for deposits. Deposit rate, I think, will go up and accordingly lending rates can also go up."
However, Chaudhuri, who raised his base rate by 10 bps yesterday, ruled out a hike in base rate.
In July, RBI had resorted to a slew of unconventional liquidity tightening measures like increasing the MSF rate by 300 basis points and asking banks to maintain CRR at 99 per cent, to arrest the steep fall in the rupee.
The local currency has been under sustained pressure ever since the US Federal Reserve chief Ben Bernanke hinted at withdrawing its stimulus on May 22.
The RBI had postponed its mid-quarter review by two days because of the Wednesday meet of the US Fed, which decided to continue with its easy money policy for now. On the possible tapering US economic stimulus, Rajan said: "We should not be complacent in the event of the US tapering and should emerge stronger to take on the tapering, whenever it comes." "It is going to come back and what we need to do is put our house in order before it comes back....of course we'd have to prepare once again but this time, we will be in a much better position, much stronger position and we won't have to worry that much," he said.

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