India: Rajan steadies the ship

Central bank chief Raghuram Rajan has put India's recovery back on track.

Raghuram Rajan, governor of the Reserve Bank of India (RBI), raised the country's benchmark interest rate by 0.25% to 7.75% this week. It was the central bank's second hike since Rajan, a former chief economist at the International Monetary Fund (IMF) credited with predicting the 2008 crisis, arrived last month.

The rupee has gained 12% against the dollar since its record low sparked concern that a currency crisis would overcome the economy.

What the commentators said

That's because his interest-rate hikes lift potential returns on Indian assets higher, thus bolstering the currency, and show he's serious about tackling inflation.

Consumer prices have been rising at an annual rate of 8% over the past few years, noted Abheek Bhattacharya in The Wall Street Journal. Pre-Rajan, the RBI "didn't respond strongly enough".

Short-term borrowing costs have been negative in real terms for most of the past five years. And it hardly helped matters that negative real interest rates were deterring the foreign capital needed to plug the current account deficit, which ballooned to 4.9% in the second quarter.

The external deficit is now coming down amid repeated increases in duties on gold imports. These in turn will dwindle further as deposit rates for cash turn positive in inflation-adjusted terms.

While Rajan is concentrating on inflation, dearer money will temper growth, which the IMF now reckons could fall to 3.8% in the year to April 2014. This is where he needs help from the government, said Leif Eskesen of HSBC.

The government has been spending too much, and been too slow to deregulate the economy to encourage investment. Rajan has steadied the ship, but the government must get its act together if the recovery is to last.

Recommended

China’s new small-cap stockmarket
China stockmarkets

China’s new small-cap stockmarket

China has announced plans to establish a new stock exchange in Beijing that will be aimed at small and medium-sized firms.
10 Sep 2021
Evergrande: is China facing a Lehman Brothers moment?
Chinese economy

Evergrande: is China facing a Lehman Brothers moment?

China's property market is overheating. And one of its biggest developers, Evergrande, is in struggling to repay its debts. John Stepek looks at what'…
9 Sep 2021
El Salvador could be the shape of things to come for bitcoin – and emerging nations
Bitcoin & crypto

El Salvador could be the shape of things to come for bitcoin – and emerging nations

El Salvador has become the first nation to adopt bitcoin as legal tender. That’s an extraordinarily bullish move both for bitcoin and for El Salvador,…
7 Sep 2021
Pedro Castillo: leftist outsider who rode to power in Peru
People

Pedro Castillo: leftist outsider who rode to power in Peru

Pedro Castillo amassed support among the left-behind as a trade-union leader before riding to power in this year’s presidential race. What has the cou…
7 Sep 2021

Most Popular

The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021