The measures are to fight inflationary pressures and is a reaction to US Fed actions yesterday of not announcing the tapering off of quantitative easing. As Rajan says, “Let’s put our house in order before it (tapering) comes back.”
Most economists surveyed before RBI policy said-no hike in Repo Rate. Suddenly all believe there will be more hikes. This is the way of most market experts!
However, Arvind Virmani had predicted on September 5, 2013 that Governor Rajan will follow a two pronged approach to Monetary and Financial policy
(1) He will adopt a modern, neo-conventional monetary policy, and The epitome of ‘conventional monetary policy’ was “inflation targeting” based on the assumption that in the long run this is also the best policy for full employment/maximum Output (growth). The “Neo” refers to the lessons learned by the Global financial-monetary czars about systemic risks and macro-prudential regulation, after the Global financial crisis (which he was the first to warn about).
(2) He will forcefully pursue liberalization of financial markets, including foreign exchange markets and banking, institutional reform of the RBI & other financial institutions, and universalization of modern payment systems, banking & financial instruments (inclusion). He has already announced a number of specific liberalization on banking and foreign exchange.
So we have a Governor at RBI who is ready to flex his muscles even if it is against the Government’s interest in fueling growth.
As Arvind Virmani explains, “With the reforms log jam persisting in Delhi, he is implicitly saying that he will follow a relatively conventional monetary policy and it is up to the government to do its part on the fiscal and structural policy side to promote growth.”
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