..........In these circumstances, Rajan had only one thing to do: deliver a shock to the system by raising repo rates substantially – say by 0.5 percent or even 1 percent – so that the government is forced to act on its core revenue deficit. Now it won't. By chickening out, Rajan has flunked his test. He is making the same mistake made by his predecessor D Subbarao – giving the government too much of the benefit of doubt. He has eroded his own credibility as an inflation fighter.
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My perception about Dr Rajan prompts me to disagree with the concluding observation which reads: “By chickening out, Rajan has flunked his test. He is making the same mistake made by his predecessor D Subbarao – giving the government too much of the benefit of doubt. He has eroded his own credibility as an inflation fighter.” I feel, it may be too early to come to conclusions about RBI’s(Read Dr Rajan’s) intentions while leaving the rates untouched this time. Perhaps, this may be just to give signals to speculators that RBI doesn’t go by market gossip. RBI has never claimed changes in base rates alone or even a combination of traditional Monetary Policy measures in the central bank’s armoury can manage inflation. Every time RBI’s policy statements contain or are followed by ‘expectations’ from GOI on various ‘possibles’ from fiscal policy angle. Some unpredictability needs to be consciously woven into policy actions to signal that when Centre feels any action perceived as unpopular cannot be taken during pre-election year. Dr Rajan may be under the impression that RBI has no such constraints and can make another announcement when need arises. M G Warrier, Thiruvananthapuram
Read more at: http://www.moneycontrol.com/news/economy/rbi-policy-rajan-is-making-same-mistakes-as-subbarao_1010867.html?utm_source=ref_article
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