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The new Reserve Bank of India governor Raghuram Rajan has proven himself to be a financial hawk by raising interest rates when the market had assumed he would leave them alone, reports Sophia Yan for CNN Money. Rajan is trying to get inflation under control.
Reserve Bank of India Governor’s major decision
Increasing the repo rate by 25 basis points to 7.5 percent will probably be remembered as the first major decision of Rajan’s tenure, which started less than three weeks ago. The former IMF chief economist has started at a precarious moment, when the globe is slowly recovering, but investors are pulling their money out of emerging markets as opportunities open up at home. The specter of tapering will only increase the rate of outflows.
Bernanke’s recent decision not to start tapering gives emerging markets a bit of breathing room. Not only will tapering not begin this month, it’s very unlikely they will start until a new Fed chair is sworn in, which would be in December at the earliest. Serious setbacks in the nomination process, or even just run of the mill stonewalling by Republicans, could push the timetable back even further.
Reserve Bank of India’s take on tapering
“The postponement of the tapering is only that, a postponement. We must use this time to create a bulletproof national balance sheet and growth agenda, which creates confidence in citizens and investors alike,” said Rajan.
It’s clear from his actions so far, that Rajan knows he has a limited amount of time to prepare for tapering when it does eventually come. He is trying to support the rupee by ending emergency monetary accommodation and encouraging commercial banks to accept more overseas deposits, but it may not be enough to stop the slide that started when tapering was first mentioned a few months back.
The Mumbai Sensex Index fell 2 percent and the rupee slipped further after Rajan’s announcement, but he knows that he may have to upset some vested interests to strengthen the economy as a whole.
“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.