ET View: RBI's policy review a victory for Rajan & good for the economy

Many things that RBI governor Raghuram Rajan did in his first full-fledged monetary policy review were unconventional.

So were investors’ cheer and New Delhi’s silence. But the policy prescription of an interest rate increase and repeated stress on price pressures are conventional monetary policy action in an economy which is suffering high inflation and slowing growth.

Many murmur that the country may already be in the dreaded situation called stagflation, but hardly say in public. The establishment of a tradition, that taming price rise will prevail over everything else irrespective of the cacophony of vested interests, may be a new journey in moving towards a matured behaviour. Dropping of forward guidance, which became a millstone for his predecessor Duvvuri Subbarao, also indicates that the markets and the economy may still not be out of the woods. There was no reference to specific estimates of monetary aggregates, inflation, loans and deposits. Rajan is on a different course.

“Normalcy will be restored to the exchange market only when the demand for dollars from public sector oil marketing companies is fully returned to the market,” said Rajan. The monetary policy document, which was 218 paragraphs under YV Reddy in April 2008, shrank to 116 under Subbarao and to 46 under Rajan. But the message is not lost.

“It is important to break the spiral of rising price pressures in order to curb the erosion of financial saving and strengthen the foundations of growth,” said Rajan. Finance minister P Chidambaram may not have hit a “like” on Rajan’s FB account, but he appears to be walking with him, at least publicly. That’s a victory for Rajan, and good for the economy.