Two repo rate hikes in quick succession by the new governor of RBI MR. Raghuram Rajan has taken everybody by surprise.
While industry expected RBI governor to soften the repo rate to give a fillip to the sagging economy, the two quick hikes has taken even the most ardent supporter of RBI governor by surprise. However, while doyens of industries in India were struggling to find out the reason for repo rate hikes, the secret has finally come out in the open. A file leaked from Ministry of Finance (MOF) says it all.
As per the file, if a RBI governor wants to get re-appointed and stay as the governor he has been assigned some KRAs or key result areas. Anybody deviating from these KRAs is likely to face the ire of MOF. The most important KRA identified is 10 repo rate hikes during the tenure.
The governor is expected to provide only two reasons for this hike which are 1) sticky inflation and 2) Obdurate rupee never ready to show resilience. It has been very clearly informed to the governor that failure to hike repo rate less than 10 times in a single tenure may result into increment being stopped. The earlier a governor does the repo rate hikes, better it is for his career growth.
In order to protect the governor from cross questioning by media, he has been given option to cut repo rate as well but only twice during the entire single tenure. The governor has accepted in private that he will reduce rates after he hikes them for 5 consecutive times.
So, industry will have to wait for rates hike for three more time. After reading this file, brokers in Bombay Stock Exchange have decided to ignore repo rate hike and its impact. No wonder Bombay Stock Exchange index Sensex went up by 350 points immediately after the governor announced repo rate hike.