Shock Therapy

Reserve Bank of India Governor Raghuram Rajan shocked the market by raising interest rates in his first monetary policy announcement, giving a clear signal that inflation was his primary target, that he would be his own man when it came to setting the central bank’s agenda, and that he was no populist pushover.
In confounding expectations by raising the repo rate, he came across as starkly different from US Federal Reserve Chairman Ben Bernanke, who seemed to blink when it came to going ahead with stimulus tapering. Rajan, on the other hand, bit the bullet. He was forthright about why he did so. Sooner or later, Fed will need to take hard decisions and there’s a window of opportunity before that happens. “Let us remember that the postponement of tapering is only that, a postponement,” Rajan said at a press briefing. “We must use this time to create a bulletproof national balance sheet and growth agenda, which creates confidence in citizens and investors alike.”
But lulled by Fed’s non-action on Wednesday and positive sentiment around the new governor’s advent, the markets had built up hopes about further easing of recent liquidity tightening measures. The announcement of the rate increase, wholly contrary to expectations, hit the markets hard. The Sensex fell 1.9% to 20,263.71 and yield on the 10-year government bond surged 39 bps to 8.58%.