The first policy review of Reserve Bank of India (RBI) Governor Raghuram Rajan is, above all, an exercise in continuity. A statement like that before the mid-quarter review of Friday would have been thoroughly disbelieved. After all, the new Governor was seen an outsider, who seemed to have a huge groundswell of support, however, ambiguous that might sound, and who, in any case, would bring a ‘fresh insight’ into the monetary policy making .

Not to be forgotten Dr. Rajan has already ‘delivered’ — the markets and most analysts have welcomed him unabashedly. The rupee was miraculously stronger and the stock markets on the upswing.

All these, of course, did not occur because of any specific policy action, but were primarily attributed to the improved ‘sentiment’ in the wake of the Governor’s appointment. Reports speak of large stock purchases by foreign institutional investors.

The key question has been whether the positive vibes will hold and last long enough? To put it differently, after Friday’s monetary measures were announced, will the always fickle markets continue to support him at least over the short-term even if he does not indulge them with rate cuts and so on?

The crux of the matter is irrespective of who is in charge there cannot be a radical policy shift from one Governor to another.

In short, continuity is the norm rather than the exception. This has been amply proved by the monetary measures in Friday’s review.

A reduction in the marginal standing facility rate (MSF) by 75 basis points to 9.5 per cent, and a surprise increase in the policy repo rate by 25 basis points to 7.5 per cent are the key measures announced. From now on, the MSF and the policy repo rate will have a gap of 200 basis points.

Operationally, it has been claimed that the hike in repo may be more than offset by the reduction in the MSF. After all, the latter has recently emerged as the policy rate (consequent on restrictions placed on borrowings through the repo window).

Focus on inflation

Whatever else might be claimed but this review is focussed on inflation. Growth advocates may be disappointed but the review is totally consistent with previous RBI approaches to the basic dilemma that confronts all central bank governors.

Framing monetary policy involves balancing several, sometimes antithetical, goals and tasks. On the one hand growth has slumped. The slowdown is pronounced. There is, as always, a pressure on the RBI to lower interest rates.

The liquidity tightening measures put in place in mid-July as part of the rupee’s defence has indirectly pushed up interest costs without, as some say, stabilising the rupee. The rollback by 75 basis points of the MSF facility is a step in boosting liquidity.

The biggest obstacle to monetary easing is the persistent inflation. The Wholesale Price Index-based inflation surged to 6.1 per cent in August. The Consumer Price Index-based inflation has come down to 9.54 per cent in August from 9.62 in July, but is still uncomfortably high. The divergence between the two indices is something that the RBI has to reckon with. It may not be in a position to ignore the persistently high CPI inflation for too long.

A disquieting feature

One disquieting feature behind the current inflation trends is that however measured, food prices, especially those of vegetables, play a big role. Such supply side causes are beyond the purview of monetary policy. Also, WPI inflation remains high even if the widely watched core inflation (non-food, non-fuel inflation) has been coming down.

In addition to the usual dilemma of growth versus price stability, the RBI has recently been pre-occupied with defending the rupee.

Most of these have confronted previous RBI governors. The major difference is that so far at least the repo rate hike has not drawn critical comments from the Governor. Maybe it is due to the special status Dr. Rajan has had. In any case, he has not been inconsistent.

The first task he had set upon himself on taking office on September 4 was to stress on monetary stability ,which is the primary role of the RBI.

Ultimately, this means low and stable expectations of inflation. All these and the specific monetary actions indicate continuity above all.