INDIA’S new central bank governor will be under intense scrutiny when he chairs his first policy review on Friday (September 20) faced with the “impossible trinity” of a weak rupee, rising inflation and slowing growth.
Most analysts bet “The Guv”, as Raghuram Rajan has been nicknamed, will debut on a cautious note and focus on inflation, which hit an unexpected six-month high of 6.1 per cent this week, and resist business pleas to ease interest rates to try to revive growth.
The inflation rise underscores “the challenges faced by the new governor when the economy is obviously struggling”, said Daniel Martin, economist at Capital Economics. “We think he will keep policy rates on hold and keep them there for a while.”
Analysts say Rajan cannot loosen monetary policy for fear of pushing inflation higher and the rupee lower.
The central bank’s benchmark policy lending rate stands at 7.25 per cent, and it hiked short-term rates in July to try to stabilise the rupee as it hit a string of lows.
“Anything suggesting wanting to remove these measures would risk undermining the rupee once again,” said Credit Suisse India economist Robert Prior-Wandesforde.
The Reserve Bank of India (RBI) governor has been lionised by India’s media, with one top columnist calling him the “Poster Boy of Banking” whose “chiselled features are as sharp as his brain”.
But analysts say that Rajan, a former International Monetary Fund chief economist famed for forecasting the 2008 global financial meltdown, faces a Herculean task at the RBI’s helm as he seeks to tackle what economists call a trilemma, or an “impossible trinity” of problems.
With expectations of his abilities so high, “some are bound to be disappointed,” HSBC economist Leif Eskesen said.
India’s economy has gone dramatically downhill since the “Indian Summer” of the last decade, when annual growth regularly topped eight and nine per cent.
The economy grew by five per cent last year, its slowest pace in a decade, and some private economists forecast expansion this year under four per cent.
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.
Rajan is seen as hesitant to go for growth at the risk of higher inflation – something he emphasised at his first news conference this month as governor, when he said the bank’s role was to ensure “low and stable expectations of inflation”.
His comments suggest he is likely to be “hawkish”, CLSA economist Rajeev Malik said.
The ex-professor at the University of Chicago has already sought to dampen expectations of what he can do, saying he has “no magic wand” and warning “some of the actions I take will not be popular”.
“The governorship of the central bank is not meant to win one votes or Facebook ‘likes’,” he said.
Since taking over September 4, Rajan has displayed an energy that contrasts sharply with the normal crawling pace of Indian policymaking, announcing a string of measures to liberalise financial markets and support the rupee.
His efforts to swell foreign exchange coffers have helped pushed the rupee higher, trimming its drop against the dollar this year to around 13 per cent from close to 20 per cent a month ago.
One extra headache Rajan faces is the potential fallout from a critical US Federal Reserve meeting, where the tapering of huge stimulus is expected to be announced on Wednesday.
Anticipation of such a move has already sparked an exodus of funds from emerging markets – greasing the fall of the rupee and currencies of other developing nations.
“There is still a chance that the RBI could be forced into action (and hike rates) if global markets return to panic following Wednesday’s US Fed policy decision,” said Capital Economics’ Martin.
“However, we think that Fed tapering is almost certainly factored in by markets at this stage,” Martin said.
