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A central banker is often left to operate the monetary policy with just one tool - interest rate, but the factors influencing it are many. With billions at stake, investors, economists, businessmen and even the government keep reading the message to find out as to what the next act could be.
Forecasters on Wednesday were in for the first shock since Raghuram Rajan, a Chicago University's Booth School of Business professor known for his no-nonsense approach to policymaking, took charge as the governor of the Reserve Bank of India on September 4.
"You have to focus the laser light on inflation," Rajan told bankers on November 15. "That's the only tool we have. That's the blunt tool. (That's why) across the world central bankers use it carefully."
That was not a one off for the sake of effect. On December 12 he said, "We can spend a long time debating the sources of this inflation. But ultimately, inflation comes from demand exceeding supply, and it can be curtailed only by bringing both in balance. We need to reduce demand somewhat without having serious adverse effects on investment and supply."
These utterances and many such opinions of Rajan have established his credentials as an inflation hawk, though as a central banker it may not be to his liking.
Rajan did not raise interest rate as many surveys, including that of The Economic Times', even as the consumer prices rose at a record pace. There was near unanimity that the repo rate, the rate at which the RBI lends to banks, will be raised by 25 basis points to 8%. A basis point is 0.01 percentage point.
Why did he do that?
"The point we were trying to make is that we should not react to every reading of inflation if we believe that inflation will come down. If we set the level of policy consistent to the inflation level of 11.24% reading of CPI headline, and if it came down to 9 or whatever the number is, would we then react to that rate by changing the policy rate? A simplistic reading of it is the RBI believes that probably inflation has peaked, and growth is taking precedence.
But read his lips. The message is different.
"If the expected softening of food inflation does not materialise and translate into a significant reduction in headline inflation in the next round of data releases, or if inflation, excluding food and fuel, does not fall, the Reserve Bank will act, including on off-policy dates if warranted, so that inflation expectations stabilise and an environment conducive to sustainable growth takes hold."
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