Raghuram Rajan, a high profile former chief economist at the IMF took the office of the Governor of RBI in early September this year. Here, he is aiming at a contradictory monetary policy, which is taken up to combat inflation by making less money available in the economy. He talks of tightening the monetary policy by increasing interest rates as inflation currently is showing no signs of receding.
On the basis of an assessment of the current and evolving macroeconomic situation, it has been decided by RBI to:
1. reduce the marginal standing facility (MSF) rate by 75 basis points from 10.25 per cent to 9.5 per cent with immediate effect;
2. reduce the minimum daily maintenance of the cash reserve ratio (CRR) from 99 per cent of the requirement to 95 per cent effective from the fortnight beginning September 21, 2013, while keeping the CRR unchanged at 4.0 per cent; and
3. increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.25 per cent to 7.5 per cent with immediate effect.
Further, Mr. Ranjan says “You should not see the fight against inflation as anti-growth. It is going to be the best medicine for sustainable growth for going forward”.
Contrary to expectations, the RBI has chosen to further tighten the monetary stance giving a clear signal that fighting inflation is its core priority. RBI Governor Raghuram Rajan has acted in a cautious manner, the financial markets were perhaps expecting too much from him. Rajan has demonstrated that he is in front of a surgery table fixing the nation’s multiple fractures, and is not by the roadside clinic administering ibuprofen for a quick relief.
By Ms. Dilpreet Kaur, Asst. Professor, JIMS (Core Area: Economics)