How will Governor Rajan and his colleagues decide?
The Reserve Bank of India (RBI) is expected to release its interest rate decision on October 29, 2013 at approximately 1330 hrs (Singapore/Hong Kong time) whereby the newly appointed Governor, Raghuram Rajan, together with his key committee of central bank officials, are expected to set the benchmark repurchase rate (repo) rates by 25.0 basis points (bps) (1.0 bps is equivalent to one-hundredth of a percentage point) to 7.75 percent. This is according to a Bloomberg News survey of 32 of the 42 analysts being polled.
A month has passed since his official appointment to take the helm of the RBI, Governor Rajan has issued several monetary policy mandates, and decisions that seek to manoeuvre the Indian economy into relative stability in terms of the rate of volatility of capital flows, tackling the rising inflationary pressures, liberalising the financial markets through the offer of concessional swaps for banks’ foreign-currency deposits and borrowings to encourage them to raise dollars in order to counter balance the liquidity shortfalls as a result of the massive capital outflows seen from various emerging economies, like India during the early summer months of 2013. Governor Rajan and his team are focused on tackling several unfinished tasks left by his predecessor, including easing of foreign exchange curbs, and implementing several monetary policy reforms intended to bring down the level of consumer price inflation, which has increased to as much as 10.0 percent. This has caused prices of imports to rise, resulting in several severe financial hardship cases of many Indian people, especially when wage levels remained stagnant are not keeping up with the pace of inflation growth.
The economic outlook for India has been downgraded by many prominent economic institutions including the International Monetary Fund (IMF), the World Bank, and the Asia Development Bank (ADB). The economic growth levels for the past five years or so have been mixed, hovering around an average of 7.0 percent to 8.0 percent. However, the latest bleak assessment issued by the three economic institutions last month showed an average of 4.5 percent to 4.7 percent. In a Times of India (TNN) news article published on October 29, 2013, it was reported that the RBI announced its expectations of growth for the country to come in at approximately 5.0 percent in 2013-14 aided by modest recovery during the second half of the current financial year. There is also an expression of caution over the level of price inflation at both the wholesale and retail levels, which are expected to remain at current elevated levels. The official Indian government estimate for average economic growth during the current financial year to be approximately 5.0 percent to 5.5 percent, which is slightly bullish considering the ongoing price inflationary pressures which dampened overall demand, investment and expenditures.
According to the Times of India article, inflation has been posing a serious threat to the overall performance of the Indian economy and it continues to be one of the major challenges faced by many past RBI governors to effectively tackle the issue. The consensus survey for inflation rates are expected to see inflation levels rising to approximately 6.0 percent from the current 5.3 percent levels. In the latest RBI macroeconomics and monetary development report, one of the sections in the report cited that “Growth has slackened to a 17-quarter low of 4.4 percent during the first quarter of 2013-14. On current reckoning, growth in 2013-14 is likely to stay at about level compared to last year. After a slower first half, a modest recovery is likely in the second half of 2013-14”.
With the updated economic assessment from the Reserve Bank of India, coupled with the expected interest rate hike to be announced later this afternoon (Local Singapore/Hong Kong time), I believe that many market observers will be keen to watch for any monetary policy announcements that will offer clues as to what are the sound monetary reforms needed to tackle the stubbornly high inflationary conditions in the Indian economy, and whether Governor Rajan will extend the discount window period for the policy on foreign exchange swap facility available to financial institutions. The Indian economy is quite fragile, especially taking into account the fiscal side of the entire economy, which is unstable due to several allegations of graft, and corruption against several senior members of Prime Minister Mamohan Singh’s cabinet, and Congress Party. The economy is also recovering from the previous bouts of huge capital outflows, which has since moderated due to the general dissipation of the pressures over the timing and extent of the US Federal Reserve’s (US Fed) withdrawal of monetary stimulus, which is widely expected to be deferred till next Spring, following the brief US Federal Government shutdown, and the weak employment growth in the country, as shown by the latest set of weak September employment growth.
Overall, I believe that Governor Rajan’s inaugural term heading the RBI has been relatively well-received by many investors, local and foreign. He has been a key person in helping India ride out of the initial uncertainties caused by the larger than normal capital outflows taking place over the course of summer 2013, and have brought about relative stability in the Indian Rupee currency. I believe that with his experience, knowledge and intellect, he, together with the central bank officials will be focusing on implementing price containment measures, and start to implement monetary policy reforms aimed at long-term growth and stability of the Indian economy.