Inflation swells pressure on Rajan’s first policy meet

The new Reserve Bank of India Governor Raghuram Rajan will have to face the prime challenge of his time in office, when he chairs his first policy meet this week.

Rajan, who is called ‘The Guv’ by the voluble Indian media, has already cautioned that he does not hold a ‘magic wand’ to tackle India’s economic crisis, but still expectations are high that he can find a method to stabilise the rupee, compose the inflationary pressure and also ignite the revival in economic growth.

But first he will have to deal with the conclusion of the crucial meeting of the US Federal Reserve on Tuesday and Wednesday. The Fed is expected to declare measures to strap in its huge economic stimulus; likely a policy tapering that has already sparked an emerging market selloff causing to the rupee’s fall to record lows.

In a reminder of the economic pressures faced by the RBI, the government data showed on Monday that India’s wholesale price based inflation rose to 6.1 percent in August, the sharpest pace in six months, driven by more than 18 percent jump in food prices.

It is a major data point, before the former IMF chief economist, who is popularly known for his prediction of the global financial crisis, chairs his first policy meeting on Friday.

The Fed is likely to trim down its $85 billion a month bond-buying programme, but financial markets are unsure about the amount of the reduction.

Once the Fed reduces its stimulus programme, India, along with other emerging markets, will witness decrease in capital inflows and the impact has already started to show with the rupee’s slump.

Many analysts say our economy is more susceptible than others because of a record current account deficit and a fiscal deficit, both swollen by the escalating cost of oil imports as global crude oil prices are mounting.

Reportedly government officials said New Delhi is considering a near 10 percent hike in diesel prices soon to lighten its oil subsidy burden.

Disruption in supplies of vegetables and onions due to summer rains has aggravated price pressures.

This had made the central bank’s job harder because measures to choke inflation, such as raising interest rates, would weaken economic growth, which is already stressed and running at a decade low.

This is the reason why the central bank has not raised its policy rate to hold up the rupee, unlike Brazil and Indonesia. Rather, it has put in place short-term rates.

Rajan, who has received media attention like celebrities, astonished the financial markets on the first day of joining, as he announced a blaze of measures to sustain the currency and open up markets.

Reportedly, the rupee has regained more than 6 percent against the US dollar since September 3. Indian stocks have gained about 8 percent since then.