Just when the world was starting to expect more transparency from central bankers, two of the world’s most watched technocrats unleashed big surprises.
When Raghuram Rajan took charge as governor of India’s central bank two weeks ago, the markets expected a slew of policies that would immediately spur growth, including holding or even cutting interest rates. US Federal Reserve chair Ben Bernanke’s announcement that the Fed would not to taper asset purchases cemented those expectations for India watchers, since continued Fed easing would keep the dollar weak, making yields on emerging market bonds more attractive. But Rajan decided to follow in Bernanke’s footsteps and defy the markets, raising the benchmark interest rate by a quarter point to 7.5%, the first increase since 2011.
What the markets ignored, which led investors astray, were the following factors weighing on the Indian economy:
Despite hiking India’s benchmark rate, Rajan did his bit to make life a little easier for banks and businesses. He cut the marginal standing facility, a crucial short-term borrowing window for banks, by three-quarters of a percentage point to 9.5%. That should help bring down the cost of borrowing for banks.