Analysts, economists divided over Rajan measures

The surprise rate hike and liquidity boost by Governor Raghuram Rajan left analysts and economists divided with a section terming the moves as "growth-supportive", while others saying he has left market confused and further dampened the already anaemic growth.

"Governor Rajan has established his credentials as a responsible central banker sensitive to critical macroeconomic vulnerabilities and not a cavalier cheerleader for growth. His emphasis is on focusing on long-term inflation and not just one or two high inflation prints is also heartening," HDFC Bank said in a research report.

Noting that Rajan has spooked the market, the report said hiking the repo rate was the natural reaction to the prospect of higher inflation and potential depreciation of the rupee.

PwC India's financial services head Robin Roy said, "The inflationary overhang is still very palpable in the policy document, though we feel that the recent monsoons may help blunt the CPI and food inflation.

"While effective interest rates have not been tempered for banks, short-term liquidity has not been hampered. So in sum, the Governor took a measured effort to balance inflation containment measures and stoke growth supported by a good monsoon and expected results of measures to moderate import dependent demand," Roy said.

Terming the policy stance as strongly hawkish, Standard Chartered Bank's Anubhuti Sahay said, "The unexpected policy rate hike and the strong hawkish bias are likely to dampen market sentiment. It also shows that RBI has shifted its focus back to domestic factors."

Describing the policy as as "a careful balancing act performed by the new Governor", EY India's financial services head Abizer Diwanji said this indicates his cautious attempt to ease the exceptional measures on liquidity at one end and inflation/growth-oriented priorities on the other.

"We need to use this window to control inflation by easing supply side constraints more through policy change and efficiency and open up fiscal measures thereafter. In that context the repo rate increase and the MSF rate reduction seems to be in the right direction, Diwanji said.

On the other hand Credit Suise's Robert Prior-Wandesforde termed the announcement as a reflection of Rajan's confusion saying "the key question is what exactly is he trying to achieve by raising the repo rate by 25 bps to 7.5 per cent, while cutting the MSF by 75 bps to 9.5 per cent?"

Noting that the reason for repo rate hike is pinned squarely on inflation, he said, "Presumably, Rajan would have hoped that by hiking the repo rate the currency would have strengthened. Unfortunately, however, this hasn't happened or at least not yet...and that statistics shows a repo rate rise has a bigger negative impact on economic activity than higher money market rates."

Crisil chief economist Dharmakirti Joshi said the policy is driven by the spike in inflation.
"Governor Rajan has stressed on inflation control while taking measures to ease the short-term borrowing cost and the repo rate hike indicates concerns on high inflation even in an anemic growth environment," Joshi said, adding on the whole, measures taken by the RBI today will serve to reduce the borrowing costs for banks in the near term.

Another rating agency India Ratings also sounded similar saying inflation still remains the top priority for RBI, but warned that this will keep lending rates high.

"Amid the evolving growth-inflation dynamics, the Reserve Bank current monetary policy stance clearly reflects its intention to anchor both inflation and inflationary expectations.

We believe that this has been triggered by the reversal of the declining trajectory of whole price index inflation, high retail inflation and suppressed economic inflation due to the recent rupee fall," the India Ratings report said.

Describing the policy stance as more hawkish than expected, ICRA chief Naresh Takkar said it has indicated that further actions can be two-way, contingent on exchange market stability.

Kuntal Sur of KPMG India said, "The policy announced today is in tune with earlier policies, where true to the central bank's role, RBI has given priority to inflation control."

Siddhartha Sanyal of Barclays said the policy reinforced RBI's inflation fighting credentials. "The new Governor clearly wants to reinforce the central bank's inflation fighting credentials in an attempt to better anchor inflation expectations...given this we do not expect any easing in the repo rate in the near term."

On slashing MSF, he said this indicates that the central bank is willing to gradually phase out the excessive tightness in near-term interest rates in place since July.

Deloitte's Atul Dhawan said the liquidity boost may not necessarily promise the industry a turnaround in growth prospects in the near future and accordingly the improvement in growth now primarily depends only on other policy initiatives of the government.