Within days of announcing his decision against a second term, RBI Governor Raghuram Rajan on Monday hoped his successor will “stay the course” in fighting inflation and said the central bank has been “wise to disregard” calls for deeper rate cuts.
Defending his continued fight to bring down the consumer price inflation to low single-digits from high double-digits during his three-year tenure, Rajan also took on the “highly-indebted industrialists” saying banks were charging them high rates due to a ‘premium’ for the risk they may not repay.
Remaining his outspoken self even when he is on his exit path, Rajan said he would never abandon fight against inflation for growth and hoped that the next Governor and the new Monetary Policy Committee “will internalize the frameworks and institutions that have been set up, and should produce a low inflation future for India.”
In his first public appearance after making public his decision against a second term when his current tenure ends on September 4, Rajan put up a strong defence of his monetary policy stance.
“The fact that inflation is fairly close to the upper bound of our target zone suggests we have not been overly hawkish, and were wise to disregard advice in the past to cut more deeply,” he said while delivering a lecture at the Tata Institute of Fundamental Research.
Rajan, a monetary economist credited to have called the 2008 global financial crisis, further argued that “if a critic believes interest rates are excessively high, he either has to argue the government-set inflation target should be higher than it is today, or that the RBI is excessively pessimistic about the path of future inflation.
“He cannot have it both ways, want lower inflation as well as lower policy rates.”
Stating that perceived short term trade-off between inflation and growth is not sustainable, as is the popular belief is, Rajan said a boom-and-bust cycle will not be good for the economy, because if the economy is producing at potential, we would quickly see shortages and a sharp rise in inflation. This means that a central bank can never abandon their inflation fighting objective.
Exuding confidence that his successor “will stay the course” in setting up the new MPC into an institution, Rajan said a “low-inflation future” awaits India when the government will be able borrow at low rates, and will be able to extend the maturity of its debt.
“The poor will not suffer disproportionately due to bouts of sharp inflation, and the middle class will not see its savings eroded.”