Beleaguered Raghuram Rajan says in sync with FinMin on economic growth in India

Written by Press Trust of India | Updated: Feb 28 2014, 15:00pm hrs
Raghuram RajanRaghuram Rajan justified his actions, saying the best way to foster sustainable growth in the current circumstances is through monetary stability. (PTI)
Under flak from various quarters for raising rates, RBI Governor Raghuram Rajan today said the central bank is committed to the "strongest economic growth possible" in India and stressed it is on the same page as the Finance Ministry on this front.

"Note that the RBI is committed to getting the strongest growth possible; there is no difference between us and North Block on this," said Raghuram Rajan, who has hiked rates thrice since taking over as Governor in September.

He was speaking at a fixed income industry (Fimmda-PDAI) event here where the media was not allowed and only given a copy of the speech.

North Block, which houses the Ministry of Finance, has not been pleased with the Reserve Bank's rate increases, given their impact on investor sentiment and growth in general.

Raghuram Rajan justified his actions, saying the best way to foster sustainable growth in the current circumstances is through monetary stability, which is bringing down inflation over a reasonable period of time.

The Governor, who went against the majority view of an internal panel advising on the monetary policy and surprised all by hiking rates in January, also reiterated the central bank's determination to get retail inflation down to 8 per cent by January 2015 and 6 per cent by January 2016.

He explained that even though some people may believe that in the short-run, the RBI's rate hikes may impact growth, the best way for a central bank to generate growth is to bring down inflation.

"Sooner or later, the public always understands what the central bank is doing, whether for the good or for the bad," he said.

Stressing the importance of sentiment, Rajan said a central bank can cut rates "significantly" if the public starts expecting lower inflation.

"To generate sustainable growth, we have to fight inflation first," he said, adding that public faith in the central bank may also help reduce volatility in the rupee.

On the three interest rate hikes under his leadership, Rajan said, "If we have to bring down inflation, we have to start today. We cannot wait till the public's expectations of inflation get more entrenched and the inflationary spiral gains momentum."

However, on the business community's demands for a rate cut, Rajan said the RBI does not believe it would lead to more investments.

"First, we don't believe the primary factor holding back investment today is high interest rates. Second, even if we cut rates, we don't believe banks, which are paying higher deposit rates, will cut their lending rates," he said.

The governor said the current policy rate is not at a level where it can affect demand and it will gain potency only once inflation comes down because of the weak economy and strong food production.