Blame high inflation, not RBI, for killing growth: KC Chakrabarty

Written by PTI | Mumbai | Updated: Oct 6 2013, 02:13am hrs
Amid criticism from some quarters that it is giving priority to price rise issues over growth, RBI Deputy Governor KC Chakrabarty today said it is unfair to blame the central bank for low growth as sustainable economic expansion is possible only with moderate inflation.

"You don't blame the RBI for killing growth, you blame inflation for killing growth...our pursuing moderate or low inflation objective is to facilitate growth and not to kill growth," he said, addressing students of a management school here.

"The basic complaint against RBI is that it is killing growth by keeping interest rate high. But people forget that interest rate is high because inflation is high and inflation is high because people are not working. For inflation to come down, you have to produce more food grains at less prices," he said.

A growth rate of above 9 per cent is possible only if inflation comes down to 5 per cent level, he said.

In his maiden policy review, Governor Raghuram Rajan took everyone by surprise by raising the repo rate by 0.25 per cent on fresh concerns emanating on the inflation front.

With growth falling to record lows, there were heightened expectations that Rajan would announce, or give a direction to growth-positive actions. To unlock liquidity, he reduced the marginal standing facility by 0.75 per cent to bring it down to two percentage points above the repo rate.

Chakrabarty also said that liquidity-tightening measures ushered in to arrest the fall of rupee are temporary in nature and will be taken back once the situation normalises. The aim is to narrow the gap between repo and MSF rate, he added.

"We agree that there are disparities and disjoints between the repo rate and MSF...Our endeavour is to bring down this (gap). These are all emergency measures, adhoc measures which will be rolled back when the situation improves. But that does not mean that MSF has become permanent signalling rate for RBI," he said.

Chakrabarty said the recent move to rely on the concessional FCNR (B) swap window for banks is also a temporary move.

He said it is also wrong to expect that the central bank of a country can alone spur growth.

"We are depending too much on the central bank, too much on the financial institutions, saying they will remove all the problems of the growth and they (would) accelerate the growth," he said.

The financial sector can only facilitate growth and it is the real sector which has to improve in order to make an impact on growth.

On the currency front, he said the rupee will not stabilise unless the current account deficit comes to manageable levels.

For getting CAD under control, he reiterated that we as a society need to curtail our spending, adding that zero gold imports will wipe out the CAD problem.

On the fuel front, he also made an appeal to reduce the fuel consumption and use eco-friendly modes like the bicycle for their transport needs.

He also came down heavily on free market votaries, saying the same set of people who were criticising RBI for excessively intervening in the forex markets two decades ago are today criticising it for not intervening in the face of a fall in the rupee.

This criticism basically reflects their inability to manage volatility, he added.

Chakrabarty said the negative real interest rates have led to a fall of four percentage points in our savings rate and stressed on the need to compress inflation to get it into the positive territory.