It's worth taking a look back at India, and the progress under the new(ish) Governor.It is reassuring to note that the pressure on the currency noted back in early September has abated, with the record lows seen then, reversed by some 10%. The rebound exhibited there has also been reflected by a similar rise over the same time frame in the Sensex. Governor Rajan was only appointed on 4 September this year, so he can look back on his first 2 months as very satisfactory – but greater challenges lie ahead.
The country is still going through a process of readjustment as the deluge of inward investment that came so easily -reflecting the potential of its financial markets; Sensex up 8 fold since 2000 – has slowed, and left familiar economic problems such as inflation and slower growth. The RBI policy review today faced pressure to raise interest rates brought about by rising inflation, whilst at the same time demonstrating that it was tackling external concerns relating to relatively low levels of growth. Governor Rajan, in his first full monetary policy review, tried to walk this tightrope, and generally delivered a pretty well received package of measures, all of which were largely non-controversial and designed to spell out `no panic`. He did however perhaps illustrate a preferred emphasis.
External concerns are primarily focussed on the issue of growth, and I am sure that the small rise in the repo rate today will be interpreted with concern in some quarters that the Governor has chosen to fight inflation as his priority, leaving growth stimuli in the lap of the government. Both India`s own economic council, and the IMF have recently revised growth expectations for this financial year lower to levels below 5%. The Indian finance ministry has in turn, challenged these lower expectations, and point out that emergency measures implemented previously, need a longer gestation period to take effect, only time will tell whether this is true. The Sensex at least liked the measures, and the rhetoric that went with them, posting decent gains towards 3 year highs.
Let`s not forget the size and importance of the economy we are talking about here. Even if it may be a tad overblown, India has been forecast recently as becoming the world`s biggest economy by the middle of this century! So India matters. I think it lost out earlier this year by unflattering comparisons with the speed and strength of structural reforms in China; it could also be argued that the direction in which the Indian economy is heading is perhaps not as clearly defined. Pro-cyclical rises in interest rates need to be accompanied by structural reforms aimed at reassuring investors that growth too remains a focus; challenging times ahead.