Thanks to Fed (Federal Reserve of the U.S.), which said that it would continue the $85-billion a month bond-purchase programme for now, the rupee is out of ICU (intensive care unit). The new chief doctor at the RBI (Reserve Bank of India) has promptly moved the Indian currency to normal ward, and lifted the emergency measures.

Ever since the Fed dropped hints at tapering the massive stimulus package, the rupee (in fact, most emerging market currencies) has slid drastically against the dollar, throwing all calculations on the foreign trade front out of gear.

With deceleration of the economy happening at a faster phase, the then governor D. Subbarao was under immense pressure. The rupee tumble has, in its wake, introduced a new element to the focus of the monetary policy planners.

Besides price stability and growth, a stable rupee has become the additional focus area of the RBI. As a consequence, a series of steps – such as increasing the interest rate on marginal standing facility, raising the minimum cash balance requirements of bank et al – has been put in place to drain out liquidity from the system in a bid to stem the rupee slide.

In the wake of the “no tapering now’’ decision of Fed, the concern over the rupee has somewhat subsided. It was indeed “Fed Sent’ for the new RBI Governor Raghuram Rajan. Seizing the moment, he promptly rolled back all emergency measures introduced by his predecessor-led team. That should ease somewhat the liquidity situation. If Dr. Subbarao were to be there, he, perhaps, would also have done this.

The decision to hike the Repo Rate by 25 basis points to 7.50 per cent, however, has taken the market totally off-guard. At best, Dr. Rajan was expected to hold the rate. That he has chosen to hike the Repo Rate indicates that the RBI has not changed its position vis-à-vis inflation. Headline inflation has shot up to a six-month high of 6.1 per cent in August. With concerns over the “external front’’ mitigating somewhat, the RBI said “the focus has turned to internal determinants of the value of the rupee, primarily the fiscal deficit and domestic inflation.’’ The policy statement went on to add: “The Reserve Bank will closely and continuously monitor the evolving growth-inflation dynamics with a readiness to act pre-emptively, as necessary.’’

Dr. Rajan has indicated that “actions need not be announced only on policy dates’’. Perhaps, he is signalling that RBI need not wait for next policy review to initiate fresh actions, should there be a need. Dr. Rajan deserves a pat for not playing to the gallery. First, he got the policy date rescheduled so that it could have the Fed input on stimulus tapering. Two, he withdrew emergency measures. Last, but not the least, he was bold enough to increase the Repo Rate.

Dr. Rajan comes out as a no-nonsense governor. He has shown practical wisdom. Given that the country is headed for elections in a few months hence, RBI Governor Dr. Rajan has a tough job on hand.

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