Known for his strong monetarist approach and hawkish view on inflation, Reserve Bank Governor Raghuram Rajan today defended the rate hikes earlier this week and ruled out adopting any unconventional tools to tackle inflation.
At a Town Hall meeting with school students here this morning, Raghuram Rajan when asked whether he would be more innovative in combating inflation or will stick to tools adopted by his predecessors of raising interest rates, said he does not have any wonder tool to fight the price rise menace.
"Do we have any new or wonderful tool (for inflation) or can we invent one? I think problems emerge when central bankers get overly innovative in the tools that they will use.
"So, I think its better to be a little boring and to do what is conventional because conventional works. If you try the unconventional you may create a whole set of new problems," told the meeting.
"One reason for high inflation is supply-side mismatches and other is too much demand. Now, there are many ways of constraining demand. Less spending by the government is a way of constraining demand. Another way is to make demand match supply, which is to raise interest rates," Raghuram Rajan said.
He, however, was quick to added that to accelerate growth, the central bank is taking newer steps.
"We are trying our best to improve health of the economy and we will do whatever it takes to improve that. As far as growth goes we are addressing it through a variety of reforms which make finance easier and more widely available but I hope the answer for us in the demand-side is doing something different from what we are doing now," Raghuram Rajan said.
He further said as far as the current situation in the economy goes we have both supply-side problem -- large projects have been stalled, and also on the food side there are discrepancies in distribution.
The Governor who took over charge last September has raised interest rates by 75 basis points in three out of his four monetary policy announcements, citing elevated inflation as a major cause of concern.
When asked what the central bank is trying to achieve with the recent hikes in key lending rates, Raghuram Rajan said it is to keep cost of money higher and manage inflation expectations.
"Can hike in repo rate have some effect (on inflation)? It works in