India’s inflation dynamics are unlikely to offer scope for monetary easing anytime soon despite the slump in economic growth. Actually, more repo rate increases will be necessary. The gradual tightening in global liquidity over the next couple of years will force countries, including India, to decide on different combinations of weaker currencies and higher local interest rates. If Dr Rajan believes his verbal neutral guidance, why wasn’t it included in the policy statement? Time will tell if the recent repo rate increase was mainly a tactical move to establish credibility for the new governor by showing some independence.
It is still early days for markets to have established a clear communication wavelength with Dr Rajan. It remains to be seen whether his walk and talk will be in sync and as hawkish as what India desperately needs. Or if he’ll walk like a hawk but talk like a dove, or walk like a dove but talk like a hawk. Whatever the outcome, he needs to convincingly transmit that achieving sustained low inflation is an inviolable precondition for lasting acceleration in economic growth. Read More