How Raghuram bit the Fed bullet, shot down hidden bears

The Indian stock market went euphoric on Thursday after the US Fed decided to postpone the tapering of easy money in the system. The next day, on Friday, the market opened on a cautious note hours ahead of the RBI's mid-quarter policy review.
The minute RBI announced that it has decided to cut the repo rate by 25 basis points, the markets began to sink, with the Sensex diving a little less than 600 points. Analysts were quick to say that the rally is over, and bad days have dawned on Dalal Street. This was because the market had expected at least a status quo, if not easing of policy rates.
But did the market get the math of Raghuram Rajan wrong? Was the new governor of the RBI, much touted as a growth-oriented man at the helm of the central bank, not pragmatic in his approach to balance inflation and growth?
"First, we have to be careful about immediately associating the repo rate hike to growth implications," Raghuram said in a presser held minutes after the RBI announced the rate hike.
"I don't think you want to immediately conclude that this is a negative for growth. Remember, it is clubbed with a reduction in MSF, which is growth-positive. I think analsyts should see it together and not as a unilateral issue," he said.
The RBI's intent in hiking repo rate was clearly to send out a signal that it is pretty serious about taming inflation. "Our intent is to signal a stance against inflation," Raghuram said.
Sometimes lower inflation can actually enhance growth prospects rather than reduce growth prospects, he contended.
"The intent here is that when the repo rate becomes the effective policy rate, it should be consistent with inflationary conditions in the economy. These measures will reduce the cost of bank financing substantially while allowing us to take an appropriately precautionary stance on inflation," he said.
Raghuram emphasised that there were other factors that are going to come into economy going forward, including completion of projects, which he said is going to be an important issue. "Power generation, on which there has been some positive news, will also be an important factor," he said, alluding to his optimism over India's long-term growth prospects.
The decision taken by the RBI was also keeping in mind the depreciation in the rupee, he said.