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

I wish I knew what an emerging market was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what an emerging market was, but I’m too embarrassed to ask

This week's “too embarrassed to ask” explains what emerging markets are, and why you might want to invest in them.
9 Sep 2020
Bullish investors return to emerging markets
Stockmarkets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Beware the hidden risks when investing in emerging markets
Investment strategy

Beware the hidden risks when investing in emerging markets

Emerging markets look cheap compared with developed countries, but earnings may be less trustworthy.
23 Dec 2019
Emerging markets: buy when the news is bad
Emerging markets

Emerging markets: buy when the news is bad

Emerging markets are being squeezed by local turmoil and by more general factors. But bad news can spell opportunity for investors.
5 Nov 2019

Most Popular

Will a second wave of Covid lead to another stockmarket crash?
Stockmarkets

Will a second wave of Covid lead to another stockmarket crash?

Can we expect to see another lockdown like in March, and what will that mean for your money? John Stepek explains.
18 Sep 2020
Here’s why you really should own at least some bitcoin
Bitcoin

Here’s why you really should own at least some bitcoin

While bitcoin is having a quiet year – at least in relative terms – its potential to become the default cash system for the internet is undiminished, …
16 Sep 2020
IAG's share price is ready for take-off - here's how to play it
Trading

IAG's share price is ready for take-off - here's how to play it

The owner of British Airways has had a turbulent year, but is now worth a punt. Matthew Partridge explains the best way to play it.
8 Sep 2020