- POSTED: 01 Jun 2014 11:16
- UPDATED: 01 Jun 2014 11:22
India's central bank holds its first monetary policy-setting meeting this week amid speculation its hawkish stance could bring it into conflict with the pro-growth policies of the new prime minister, Narendra Modi.
MUMBAI: India's central bank holds its first monetary policy-setting meeting this week amid speculation its hawkish stance could bring it into conflict with the pro-growth policies of the new prime minister, Narendra Modi.
Analysts say the central bank's strong anti-inflation policies may clash with Modi's aim of reviving an economy which grew by 4.7 per cent last year -- the lowest level in nearly a decade, and half the rate seen during India's boom years.
Central bank chief Raghuram Rajan, an former International Monetary Fund chief economist, has hiked interest rates three times since taking over the helm last September.
The Reserve Bank of India (RBI) governor's policies have been widely lauded for helping to reduce the current account deficit -- the widest measure of trade -- and restoring the rupee's stability.
But his tight money policy has disappointed business leaders who have called for lower borrowing costs to spur growth -- a view analysts say could find sympathy with Modi's Bharatiya Janata Party (BJP) government.
"The RBI and the government may not be on the same page," said Anjali Verma, an economist at financial services firm PhillipCapital.
"But it would be a big risk to remove Rajan, especially after his moves were responsible for bringing back stability" to the currency market, she told AFP.
Economists widely expect the bank to keep its trend-setting repo rate -- at which the RBI lends to commercial banks -- on hold at eight per cent at Tuesday's policy meeting, but say there is no chance it will lower the rate.
Modi swept to victory earlier this month, ousting the left-leaning Congress.
The party trumpeted "the start of a new era" after winning the first parliamentary majority in three decades, and it faces huge public expectations to revive growth.
But with consumer inflation nudging 10 per cent and fears that a weak monsoon could push prices higher, the central bank has little scope to loosen monetary policy.
Rajan, whose chiselled features prompted the daily Times of India to describe him as an "economist with rock star appeal", warned when he took over the job he might have to take unpopular steps to achieve "low and stable inflation".
Some experts have warned Rajan could be under threat from a BJP government, with the bank chief coming in for criticism from the party before the election for keeping rates high.
"The government can fire me, but the government doesn't set the monetary policy," he was quoted as saying by the Indian media in Switzerland earlier this month, highlighting the RBI's nominal independence.
At another conference in Tokyo on Friday, he denied any discord with the government.
There is "often a tendency to try and find a wedge between the two and widen the wedge", he said, according to media reports.
He met the new BJP finance minister Arun Jaitley on Tuesday, the day after the government was sworn in.
Rajan afterwards insisted the RBI has always "maintained the balance between growth and inflation".
Jaitley indicated similar priorities, saying: "We have to restore back the pace of growth, contain inflation, and obviously concentrate on fiscal consolidation itself".
India's economy has registered sub-five-per cent growth for two straight years, with tightening of monetary and fiscal policy fuelling downward pressure.
Along with controlling inflation, analysts also say higher growth requires long-term reforms by the government including an overhaul of the nation's creaking infrastructure and a simplified tax system.
"Rajan is well respected through the global investor community... He has enough credentials to just walk away from the current situation," said Rajiv Biswas, chief Asia economist for global consultancy IHS.
"The government needs to give him enough leeway to continue."