By Divya Shukla
There were great expectations from our new RBI governor to acknowledge the deficiency of economic growth that India is suffering from and announce a rate cut in the second quarter review. Although no rate cut was anticipated, yet the question of a rate hike by the new governor was too distant to be believed. So, when there was a consensus on the rates being kept unchanged, a hike in the rate spooked the markets across the globe.
Also, there was a positive sentiment prevailing in the economy since Rajan succeeded D.Subbarao as the 23rd RBI Governor. Firstly, he postponed the second quarter review date from September 17th to 20th. This was done in order to get an idea what the Big Ben has in store for the world market. Also, the monetary authorities had lately been trying hard to have a grip on the rupee through structural reforms. After that, when the US Fed rescheduled its bond-buying program, clearing some uncertainties, the bourses all over the world celebrated it, with the Indian rupee and the Sensex also sharing the joy.
On Thursday, after the Feds decision came up, the stock indices in India were at their highest levels in nearly three years, majorly for two reasons. Firstly, as foreign investors had more dollars in hand for at least two months, the prospect of facing a liquidity crisis was evaded. Secondly, India, among the emerging nations was anticipated to offer them a good deal as Rajan-the Chicago Economist, famous for prophesying the global financial crisis was presumed to be facilitating Indias bottoming out which has been getting repeatedly suspended.
But, unfortunately, the previous days high (i.e. September 20th) took a sharp U-turn after Fridays hawkish monetary policy announcement. It left the markets aghast after it chose inflation as its prime priority.
Zooming inflation, with the WPI ranging one per cent above the comfort level, is once again rekindling doubts on the economic sustainability aspect. To this, around 20 percent depreciation in the rupee since the beginning of the current year has also added to the problems of the Indian capitalists, eating into their profits. All this, has led to the stocks getting hit badly in almost all the sectors, with no recovery likely in the near future (too long for the investor class though).
To conclude, we can say that the honourable governors decision to attract capital had been in order to direct the dollar flow into the high interest rate environment of India till the year end and bring down the interest rate and CAD levels to some acceptable range. However, Fridays monetary policy stance echoed the height of fiscal policy mismanagement when the rupee got depreciated by nearly 0.81%. Such a low-spirited environment signals deep fundamental problems in the economy. Therefore, the investors who are closely watching the growth prospect of the Indian economy can get their expectations turned into a reality only when the government joins hands with the RBI in getting the economy out of this crisis.
A graduate with a Major in Economics degree from the renowned University of Delhi, Divya is about to enroll for a Masters program in Financial Economics in Babasaheb Bhim Rao Ambedkar University, Lucknow. Whilst this journey of financial economics is a career path, has also developed a diverse field of interests, (especially in Economics, Politics, and Finance).