Rajan says rate hike not for cushioning EM contagion

Reserve Bank Governor Raghuram Rajan today said the decision to hike repo rate by 0.25 percent was not to ward off any possible contagion on the domestic financial markets from troubles in some of the emerging market currencies, but to bring down inflation.

Also Read: Rajan guidance does not rule out rate hikes: Morgan Stanley

The Governor also said he would have liked to see a stronger reduction in core inflation, which stayed steady in the past few months. "I think for some time we have been saying very clearly that we are focused on preserving the value of the rupee in a domestic context by preserving it in the international context," Rajan said during the customary post-policy conference call with analysts.

"Preserving the rupee in the domestic context means bringing inflation under control. So, once we do that, we believe that investor confidence naturally follows and so it (rate hike) was a decision that would have been taken whether or not there was financial market turmoil in the last few days," Rajan explained.

In an unexpected move, the RBI increased the short-term lending rates or repo rate by 25 basis points to 8 percent with an equal upward revision in reverse repo and the MSF rates yesterday, citing core and retail inflation concerns. But while acting hawkish, his guidance was dovish saying RBI does not see the rates rising in the near-term and that any reduction in core and retail inflation will give the central bank more room to support growth by slashing rates.

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Explaining the reason for the recent volatility in the domestic market, Rajan said the sell-off was due to outflows from short-term funds. "We believe that as far as we are concerned there is some build-up of short-term flows in January and some of them are existing," he said. He said the current sell-off is temporary in nature and the country is well prepared to meet any kind of volatility.

"We don't think this is a longer-term situation, unlike we saw in July and August (last). We are much better prepared this time, and to the extent it happens, I am not overly worried." On a question over the Turkish central bank hiking interest rates, Rajan said, "Turkey-like policy action is hypothetical, I won't venture (out) there."