I have yet to meet an industrialist who does not want lower rates, whatever the level of rates. But will a lower policy interest rate today give him more incentive to invest We at the RBI think not. We dont believe the primary factor holding back investment today is high interest rates, he said at the FIMMDA-PDAI Annual Conference.
We have to start today to bring down inflation. We cannot wait till the publics expectations of inflation get more entrenched, and the inflationary spiral gains momentum. This is why we raised interest rates three times since September, he said. However, he said he cant raise rates too fast as it would collapse demand and damage the economy.
Rajan said that along with a strong increase in food production, the government must contain the rise in wages so that relative wages in agriculture could rise without too much problems. He also argued for allowing food prices to be determined by the market and limited use of minimum support prices. He also asked for reducing the role of middlemen by amending the state-level APMC Acts and improving logistics.
Rajan also said theres no difference between the RBI and the government setting high growth rate and suggested that a medium-term inflation target can be set by the government or Parliament, leaving the operational part to the technocrats in the RBI.
Even if we cut rates, we dont believe banks, which are paying higher deposit rates, will cut their lending rates. The reason is that the depositor, given her high inflationary expectations, will not settle for less than the rates banks are paying her. Inflation is placing a floor on deposit rates, and thus on lending rates, he said.
He said that in order to generate sustainable growth, we have to fight inflation first. Let me also add that inflation will be low and will add stability to our currency, and prevent the kind of gyrations we saw last summer.