As has been the case in every country that I have visited, India’s industry professionals and financial markets have pointed to the importance of India’s central bank—The Reserve Bank of India (RBI). The Governor of India’s Central Bank is Raghuram Rajan. He is well respected in global financial markets, and he is a former chief economist at the International Monetary Fund. He later taught at the University of Chicago Business School.
It is well worth reading an interview with Reserve Bank of India Governor Raghuram Rajan:
Governor Rajan has brought tremendous creditability to India’s monetary policy, but there is still progress needed in banking reform and battling the long-term demons of inflation.
The RBI cut interest rates for the third time this year on June 2nd, bringing the benchmark interest rate to 7.25%. There is some belief that the RBI will pause after this rate cut. There is concern that inflation might be set to move modestly higher in coming months. India’s CPI is heavily influenced by food and energy, and projections for India’s monsoon season suggests food prices are set to increase. In the short-term, financial markets have pulled back on the thought that monetary easing might be coming to an end.
However, the discipline to fight inflation is very positive for the long-term performance of Indian financial markets. In early March, the Reserve Bank of India and India’s ministry of finance came to an agreement that the RBI’s mandate would be price stability. The RBI’s mandate is to bring inflation below 6% by January 2016, and to 4% (within a 2% to 6% range) in subsequent years. Inflation has historically weighed on the performance of financial markets. More certainty surrounding policy and inflation will bring substantial benefits to India’s economy and to financial markets.
Some more views here:
The market will watch the Modi government and the Rajan RBI to see if they collectively have the discipline to fight inflation and structurally reform the economy in a world filled with competitive currency devaluations. Some short-term pain could bring tremendous long-term growth.
Special thanks to Brennan Staheli, Peter Johnson, and the Lunt Capital team for their contributions to this report.