Reserve Bank of India (RBI) governor Raghuram Rajan on Monday defended the central bank’s ‘inflation-targeting’ monetary policy and termed those clamouring for lower policy rates on the basis of low wholesale price index (WPI) inflation as ‘short-sighted’. He expressed hope that his successor and the new monetary policy committee will “stay the course” to ensure a low-inflation future for the country.
“One reason critics may advocate a focus on WPI is because it is low today, and thus would mean low policy rates. This is short-sighted reasoning, for when commodity prices and global inflation pick up, WPI could well exceed CPI,” Rajan said while delivering the Foundation Day lecture at the Tata Institute of Fundamental Research. This was his first public speech after opting out of a second term as the RBI governor.
Rajan said the CPI inflation at 5.76% in May is validation of the fact that the RBI’s monetary policy under his leadership wasn’t overly hawkish and was necessary to adhere to the government’s set band of 2-6% annual inflation from FY17. “That inflation is fairly close to the upper bound of our target zone today suggests we have not been overly hawkish, and were wise to disregard advice in the past to cut more deeply,” Rajan, whose term as the governor of the RBI ends in September, said.
Hitting out, probably at the likes of finance minister Arun Jaitley, who has often pointed at low WPI inflation and asked for more competitive interest rates, Rajan said, “When people say ‘inflation is low, you can now turn to stimulating growth’, they really do not understand that these are two sides of the same coin. The RBI always sets the policy rate as low as it can, consistent with meeting its inflation objective. If a critic believes interest rates are excessively high, he either has to argue that 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.”
Raghuram Rajan, once again, justified the RBI adopting the CPI as the measure of inflation, reiterating it to be the real measure of price rise for the common man.
“A low WPI could result from low international inflation, while domestic components of inflation such as education and healthcare services as well as retail margins and non-traded food are inflating merrily to push up CPI. By focusing on WPI, we could be deluded into thinking we control inflation, even though it stems largely from actions of central banks elsewhere. In doing so, we neglect CPI which is what matters to common man,” Rajan said.
“We can never abandon inflation to focus on growth”, Rajan said, adding “the best way the monetary authority can support growth over the medium-term is to anchor inflation at low levels so that policy rates can also be low”.
Rajan called for institutionalising the yet-to-be constituted monetary policy committee (MPC) so that “we build the institutions necessary to secure a low-inflation future, especially because we seem to be making headway”.
Describing the MPC as a truly revolutionary step, he said we got used to decades of moderate to high inflation, leading to industrialists and governments paying negative real interest rates and the burden of the hidden inflation tax falling on the middle class and the poor.
“With the MPC, which is truly revolutionary, we are abandoning the ways of the past that benefited the few at the expense of the many. As we move towards embedding institutions that result in sustained low inflation and positive real interest rates, this requires all constituencies to make adjustments.” (With PTI inputs)