He was the chief economist at the International Monetary Fund from 2003 to 2007. The recent hike of repo rate has been one of the shockers for the economy and for the market.  By the time you read this article all of you are aware of some name like Urjit Patel Committee report etc. RBI has also taken change in its inflation target where it will now focus on CPI moving away from WPI. Well WPI is currently 6.2% hence RBI is least bothered about it where as the CPI is 9.8%. Its good move to shift but I have some hard analysis behind the entire game show being portrayed by RBI. Sudden change over is well reasoned but at the same time it is well disguised. The large picture is that currently Indian government and other BRIC nations excluding China are running with high levels of fiscal deficits. These fiscal deficits are being financed by external borrowings which have been done through increasing the interest rates on the bonds being issued. Well hot money, cheap money whatever name you give have come from the developed economies in the form of QE to these emerging economies over the last 5 years(right after the recession began).

Now when the US economy is improving and is no longer able to print money and keep the QE dragon to alive has finally decided for tapering. Well this tapering would be gradual process but this gradual process is enough to kill the high fiscal deficits economies like India .Brazil, Turkey, South Africa and Russia. China is saved since it stands on its own legs. Well for the rest of the economies its going to hell. When the tapering would happen inflation will spook up since depreciation of the rupee will happen due to the flight of capital (dollar) from the emerging economies. I am not raising the fear that all asset classes would suffer. Flight capital would happen but that little outflow would crate a mojor problems for the Indian economy and for the rupee. I am sharing the economic aspect of the game played by RBI disguising the Urjit Committee Report. This is the reason behind why MSF rate have been hiked so that to control depreciation of rupee. The biggest problem begins when inflation will spook up and RBI will be in a problem of decision making regarding the interest rates. Moreover when you enter FY-15 new monsoon expectation and crop season expectation would be present. Any significant negative affect from these two segments would spook up the inflation more and depreciation of the rupee. Moreover interim budget and New Government Budget would require government borrowings hence their would be problem for the Indian economy.  In between with high inflation and low credit off take would create serious problem on the economic growth of the Economy. The only green line is that if there is an stable government with majority and no chances of coalition then Indian economy would be saved. Quick Policy action would be required to come out of this gridlock.

The bigger picture is that QE tapering would happen. B The answerer lies yes it will happen and the Governor of RBI is EX IMF Chief Economist. That’s why he have hiked the interest rates in advance and this was the key data he was expecting to see after his December 2013 monetary policy where he said he will wait for more data. Just simply imagine that current CPI is 9.18% and he is expecting that CPI to come below 8%. This 8% would come down within a month, moreover 57% of the CPI is based on food items and oil price..Currently the food prices are down hence 8% would come within a month. Then why the interest rate is being hiked now. He might have waited further. He might already know that in calendar year 2014 tapering would happen and he is well aware of the large picture. This is the reason for which the rate of interest has been hiked. Moreover those who have taken the words that this is the last rate hike. Well after the rate hike this is the consolation prize which has been given to us. Rate hikes are bound to happen unless Central Government is formed with a majority and quick decision are not being made to spook the investment climate. The early damage to the economy was made when the RBI hike continuously 13 times the Interest rates to control the inflation.