Reserve Bank of India (RBI) governor Raghuram Rajan in his policy-making debut on Friday came out as a hawk on the side of inflation in the same mould as his predecessor D Subbarao, belying hopes that he might be inclined to push growth at the risk of inflation.
Addressing a press conference here shortly after unveiling his maiden monetary policy, Rajan, said: “The hike in the repo rate should not be interpreted to mean that growth has taken back seat and is not a priority. Inflation and growth are both priorities for RBI.”.
The 0.25% point increase in the repo rate will not have any significant impact on growth rates, he said, adding: “Containing inflation, along with various other measures, will support economic growth.”
The Fed decision to defer tapering its monetary stimulus provided India with a window to set its house in order, he said.
“Let us remember that the postponement of tapering is only that, a postponement. We must use this time to create a bullet proof national balance sheet and growth agenda, which creates confidence in citizens and investors alike.”
Rajan also said that steps taken by RBI on July 15 to tighten liquidity will be gradually withdrawn as stability returns to the financial system.
“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... there will immediately be a reduction in the cost of funding to the financial sector,” he said.
“As the macro-economic indicators evolve, we will respond with appropriate measures,” said Rajan.
On inflation, Rajan said the RBI has always looked at both the wholesale price index and consumer price index. “Wholesale price index (WPI) does not contain a significant portion of the services inflation. We have to look at inflation from a six to twelve months perspective,” he said.
Rajan also said that he was confident that the current account deficit (CAD) could be financed this year without suffering a substantial drawdown in foreign exchange reserves. India has targeted to keep CAD at 3.7% of GDP this year against 4.8% in the previous year.
Following are the highlights of RBI's mid-quarter monetary policy review:
* Key short-term lending rate (repo rate) hiked by 0.25% to 7.50%.
Read more: Short-term lending rate hike, disappoints automobile manufacturers
* Eases minimum daily liquidity maintenance of CRR to 95% from 99%.
* Maiden policy announcement by new RBI Governor Raghuram Rajan.
* Retains Cash Reserve Ratio (CRR) at 4%.
* Borrowing rate for banks reduced under MSF by 0.75 pc to 9.5%.
* WPI inflation will be higher than that projected for rest of the year.
* Economic growth trailing below potential.
* Pace of infrastructure project completion subdued, new projects' starts remain muted.
* Inflation worrisome, no room for complacency.
* Next monetary policy review on October 29.
Read more: 'Elevated level of retail inflation is worrisome'
Excerpts of what Rajan said in press conference:
* Wholesale price inflation rate will be higher than projected in rest of FY14.
* I don't think growth rate will be afftected be due to Repo rate hike.
* The decision by the US Federal Reserve to hold off tapering has buoyed financial markets but tapering is inevitable.
* The pace of infrastructure project completion is subdued and new project starts remain muted.
* Consumption, while relatively firm so far, is starting to weaken even in rural areas.
* CRR issue is "peanuts" among others.
* As we build confidence in the economy and in Rupee's value, the exchange rate will adjust appropriately.
RBI governor Raghuram Rajan addresses a press conference after his maiden policy review meeting in Mumbai. PTI Photo
* We must achieve the RBI target of bringing down WPI below 5%.
* Don't want to link inflows or outflows directly to a repo rate hike.
* Talks for bringing India into global bond indices are on.
* If we stabilize, we would be better prepared when the Fed begins the tapering.
* Wrong to say RBI is prioritising inflation over growth.
* Don't see a situation in which the window for oil marketing companies will be permanently open.
Read more: Bank shares plunge after RBI unexpectedly hikes rates
* We need to withdraw these liquidity measures as soon as the market allows it.
* No intent to impose capital control.
* We are confident that we can fund CAD without substantial drawdown on reserves.
* MSF reduction is a significant reduction in banks' cost of funding.
* This is a precautionary policy measure, not so much about liberalisation.
* We should create a sense in the stability in the value of the currency.
* Further reduction in CRR daily maintenance level not contemplated.
* Noises on Syria comforting now. Growth picking up in Europe, Japan - helping our exports and bringing down CAD at faster pace.
* RBI will focus on both WPI inflation as well as CPI inflation to adjust rates.
* Intend to make repo rate the effective policy rate.
* We remain vigilant about external market conditions and will do whatever needs to be done.
* We should use this opportunity to make a bullet-proof national balance sheet, on Fed's surprise move.
* Repo rate should be consistent with #inflationary conditions in the economy. Do not have in mind what next move will be.
* Different between repo rate and MSF will be brought down to 100 basis points.
* Economic growth trailing below potential; pace of new project starts remains muted.
* Inflation worrisome, there is no room for complacency.
Read more: Banks mull rate hike, EMIs may rise
* Easing liquidity was essential to narrow current account deficit.
"Now things are back to normal, he is using the policy rate to target inflation and that will allow the rupee to do what it likes," Daniel Martin, Asia Economist at Capital Economics, told AFP.
Nicknamed "The Guv", Rajan stepped up to the post faced with the unenviable task of propping up a weak rupee, reviving slowing economic growth and curbing rising inflation.
Huge expectations have been riding on the former International Monetary Fund chief economist who famously predicted the 2008 global financial crisis years in advance.
He has been lionised by India's media, and one top columnist has dubbed him the "Poster Boy of Banking" whose "chiselled features are as sharp as his brain".
But on his first day in office, Rajan said he may have to take unpopular steps to tackle what some economists have called India's worst economic crisis in decades.
Read more: India Inc disappointed by hike in repo rate
Read more: Fitch slashes India growth forecast to 4.8% for FY14
He almost immediately announced a string of measures to liberalise financial markets and support the currency. His efforts to swell foreign exchange coffers have helped the rupee bounce back, reaching around 62 against the dollar, from 67 when he took charge.
Easing global concerns over the US Federal Reserve's stimulus plan, attacks on Syria and rising oil prices have also aided the rupee's recovery.
The Indian economy has gone dramatically downhill since the "Indian Summer" of the last decade, when annual growth rates regularly topped eight and nine percent.
It grew by 5% last year, its slowest pace in a decade, and some private economists forecast expansion this year at under 4%.
Meanwhile, the Congress-led government has become mired in graft scandals and policy paralysis that have sunk its popularity and sent foreign investors fleeing.
India's public finances are also in trouble with the current account deficit -- the broadest measure of trade -- hitting a record high last year.
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(With inputs from AFP, PTI)