Raghuram Rajan's appointment as governor of the Reserve Bank of India (RBI) has elicited exuberant response ranging from plain optimism to wishful thinking. His brilliant opening speech has further fuelled positive sentiments. Rajan's first policy move, on Friday, a small hike in policy rates, surprised markets. However, overall liquidity will go up because some of the steps to prop up the rupee have been rolled back. And banks now need to hold slightly lower reserves for prudence.
Expectations, bordering on irrational, could set some commentators up for disappointment. We should calibrate our hopes. Let's not expect a revolution in monetary management. The critical dependence on fiscal management by the government is evident to all. That should help us rein in our dreams.
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