An aggressive tightening of monetary policy may be a drastic prescription for India's beleaguered economy, but some economists are advocating the measure as a way to ease sky-high inflation and put a floor under the rupee.
According to Lombard Street Research, the Reserve Bank of India's (RBI) new chief may be compelled to take on radical measures that hark back to the time when Paul Volcker was chairman of the U.S. Federal Reserve some 30 years ago.
"The country may soon be forced into an abrupt and aggressive monetary tightening cycle," Shweta Singh, an economist at Lombard Street Research, said in a note.
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"With the limited window of opportunity getting even narrower, the newly appointed central bank governor, Raghuram Rajan, may be forced to tighten aggressively, not the least to avoid a more disruptive tightening by market forces," she said in the report titled "India: will Rajan be forced to do a Volcker?"
Paul Volcker, as Federal Reserve Chairman from 1979 to 1987, was forced to raise rates to 20 percent in June 1981 when inflation peaked at 13.5 percent. Volcker's series of rate hikes eventually brought U.S. inflation down to 3.2 percent by 1983.
India's inflation rate climbed to 5.79 percent in July, its fastest pace in five months and above the 5 percent economists had expected, as the food inflation rate rose to an annualized 9.5 percent in the month. The country's benchmark interest rate stands at 7.25 percent.