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

Emerging markets fall behind their developed-world counterparts
Emerging markets

Emerging markets fall behind their developed-world counterparts

While developed-world markets look forward to a recovery, emerging market stocks have tumbled as foreign investors pull out cash.
16 Apr 2021
Four of the best investment trusts for investing in emerging markets
Investment trusts

Four of the best investment trusts for investing in emerging markets

Investors need to tread very carefully in this risky sector. Here are the best ways to approach it
22 Mar 2021
Storm brews in emerging markets as investors pull cash out
Emerging markets

Storm brews in emerging markets as investors pull cash out

Foreign investors have begun to pull cash out of emerging markets as they begin to look less attractive when compared to the rising return from holdin…
12 Mar 2021
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

Most Popular

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?
Bitcoin

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?

Dogecoin – a cryptocurrency created as a joke – has risen by more than 9,000% this year alone. Saloni Sardana looks at how something that began as an …
19 Apr 2021
China owns a lot more gold than it’s letting on – and here’s why
Gold

China owns a lot more gold than it’s letting on – and here’s why

In a world awash with money-printing, a currency backed by gold would have great credibility. And China – with designs on the yuan becoming the world’…
21 Apr 2021
Why investment advice could be about to get a lot cheaper
Investment strategy

Why investment advice could be about to get a lot cheaper

Vanguard, the world’s second-biggest asset manager, is launching its own cut-price financial advice service. It’s something the industry badly needs, …
20 Apr 2021