Addressing students of Guru Nanak College here on Monday, Rajan had said India is witnessing an “avalanche” of capital flows as central banks around the world are reducing interest rates to very low levels but the RBI is unable to cut interest rates very quickly to the bone due to “high” inflation in India.
He was speaking at an off-media event, but his comments found their way to the news reports and were construed by some analysts as an indication that RBI was not going to cut rates.
After RBI surprised with a cut in the interest rate this morning, Rajan was asked during an analyst conference call today about “sudden change in his stance as one day ago he was quoted by the media as saying that RBI is unable to cut interest rates very quickly due to high inflation.
To this he replied with a “sorry”, while quickly adding that he was quoted “out of context” and he did not “mislead” the markets while speaking to students at a “closed-doors” event about inflation and interest rates in general.
Earlier on Monday, Rajan had said that many central banks around the world were printing money and reducing interest rates to very low levels to deal with the global financial crisis.
With countries like India offering high interest rates, significant foreign inflows have been witnessed in debt, he had said.
“A lot of that money is coming to us. We have got an avalanche of capital inflows.
“Our problem is: we also have high inflation, we cannot cut interest rates very quickly to the bone in order to tell those countries — don’t come here expecting high interest rates,” the RBI Governor had said.
Explaining those remarks to the analysts today, Rajan stated he was talking about central banks internationally having brought interest rates down to zero and it was very hard for India to follow because the country had higher inflation.
“And the context was very clear, I was talking about the fact that internationally, central banks especially in developed countries had brought interest rates down to zero.
And it was very hard for us to follow because we had higher inflation. It was not a commentary on….if you read the statement correctly, ‘we will not be able to cut the rates quickly to the bone’ which means down to zero,” he said.
“Nowhere are we talking about cutting rates to that level. So, I don’t think there was any misleading of the market, but I apologise,” he added.
“It was a closed-door meeting. You should have seen the context of what was discussed then you would have realised I am not talking about our current inflationary path and our current monetary policy,” he said.
Rajan said it was such “half-baked news reports” that actually confuse the market.
“This comes from paying attention to closed-doors events which should not have been reported outside and I apologise to the wider public, but there were no reporters supposed to be present, this was a direct interaction with students.”