India's new central banker hikes rates
By Kay Johnson, APMUMBAI--India's new central bank chief unexpectedly raised interest rates Friday, putting a higher priority on taming stubbornly high inflation than bowing to pressure to juice the struggling economy with cheap credit.
September 21, 2013, 12:07 am TWN
Asia's third-largest economy has been looking to respected former IMF chief economist Raghuram Rajan to rescue it from slow growth, high inflation and a weakened currency. He has been governor of the Reserve Bank of India for less than a month but already has been hailed as a rock star in local media.
But his tough love approach to monetary policy in his first policy review will put the onus on India's politicians to fix deep-seated problems in the economy. He raised the benchmark interest rate at which banks borrow from the central bank by a quarter percentage point to 7.5 percent.
The surprise rate hike sent Indian stocks into a tailspin. The Sensex index was down 2.5 percent.
A longtime University of Chicago professor known for having predicted the 2008 global financial crisis, Rajan's steadying voice of authority had in recent weeks given a boost to investor confidence in India. But the central bank has limited scope in addressing India's economic woes. Rajan's greatest potential contribution might lie in whether he can use his credentials and international standing to coax India's government into reforming policies that he identifies as the underlying cause of the country's economic doldrums.
At the Reserve Bank, Rajan faces a tough, ongoing balancing act of trying to stimulate growth while keeping inflation in check. He has signaled he considers stability in both prices and the currency a priority, indicating he likely will leave the benchmark interest rate of 7.25 percent unchanged at Friday's review.
Businesses and the government would have liked him to cut interest rates to boost consumption and kick-start flagging economic growth. The economy expanded 4.4 percent in the April-June quarter, far below the average of 8 percent growth of just a few years ago.