Rajan putting house in order before tapering

Says he wants to bring inflation down to the central bank's comfort zone

Reserve Bank of India (RBI) Governor Raghuram Rajan is clearly readying for the long haul. After taking measures to stabilise the currency, in which he has succeeded, he is now focusing on resolving various other issues - high retail inflation, as well as Wholesale Price Index (WPI)-based inflation, which is showing an upward trend.

"The internal value of the currency also determines the external value," Rajan said in a press conference on Friday, indicating inflation had to be brought under control.

The day he took charge as RBI chief, Rajan had announced a series of steps to attract inflows. These steps have helped the rupee appreciate 9.5 per cent since August 28, when it had hit an all-time low of 68.82/dollar.

Though the US Federal Reserve's decision to continue with its asset purchase programme has helped the currency, Rajan said, "The postponement of tapering is only that, a postponement. We must use this time to create a bullet-proof national balance sheet and growth agenda, which creates confidence in citizens and investors alike."

"What we need to do is put our house in order before it comes back," he added.

In a note to clients, Barclays said, "The new governor clearly wants to reinforce the central bank's inflation-fighting credentials in an attempt to better anchor inflation expectations...we view today's repo rate rise (which was contrary to market expectations) as an important signal from RBI to reinforce its inflation-fighting credentials."

In August, WPI-based inflation was 6.1 per cent, above RBI's desired level of five per cent; Consumer Price Index-based inflation stood at 9.5 per cent.

Though core inflation has fallen, the central bank is worried the exchange rate depreciation in the past year may exert pressure on manufacturing inflation.

"While the central bank has commenced the easing of exceptional measures instituted since July, it has increased the repo rate by 25 basis points to focus on curtailing inflationary pressures. RBI's policy stance is more hawkish than expected, as it has indicated further action could be two-way, contingent on exchange market stability," said Naresh Takkar, managing director and chief executive, Icra.

On Friday, Rajan emphasised he wanted to bring inflation down to the central bank's comfort zone. "You always have to balance the state of the economy with your fight against inflation. What I would like to see is that we achieve, certainly, the RBI's target of trying to bring WPI inflation below five per cent," he said.