Rate hike may move India to inflation target

SOME analysts are predicting more rate hikes in India in the near future, after Raghuram Rajan, the new governor of the Reserve Bank of India (RBI) upped interest rates at the end of last week.

Rajan, who only took the position as head of the RBI earlier this month, made his mark by hiking the country’s benchmark rate from 7.25 per cent to 7.5 per cent, against popular expectations.

Nomura’s Sonal Varma commented: “The hike in the repo rate suggests that the ‘New RBI’ is moving toward inflation targeting, with a greater emphasis on the role of inflation expectations.”

She added that given the more explicit new focus, further rate hikes would likely follow: “For the economy, interest rates will likely be much higher than assumed thus far, and growth should be weaker in the near-term.”

In his previous capacity as an academic economist, Rajan advocated an inflation target for the RBI, a path that he seems to be sticking to in the job. The RBI stated at the end of last week that changes in policy were “intended to address inflationary pressures so as to provide a stable nominal anchor for the economy.”