Raghuram Rajan: A rate cut at this point is wishful thinking

Written by Press Trust of India | New Delhi | Updated: Jan 31 2014, 20:00pm hrs
Raghuram RajanWishful thinking" and the notion that the central bank is standing in the way of economic expansion is "nonsense". Reuters
Countering advocates of an interest rate cut to boost growth, RBI Governor Raghuram Rajan today said it is "wishful thinking" and the notion that the central bank is standing in the way of economic expansion is "nonsense".

"Somehow there is a sense among some bureaucrats and industrialists that you cut the interest rate and magically get growth. I think at this point it is a wishful thinking.... The notion that RBI is standing in the way of growth is nonsense," he said.

Rajan, who in the third quarter monetary policy on last Tuesday raised the key interest rate by 0.25 per cent to 8 per cent to check inflation, said the best way to promote growth is keeping inflation low.

"Once inflation comes down, then in circumstances when growth is very weak you will have room to cut the interest rate sharply so as to create a condition for growth without worrying about inflation," he said in an interview to Karan Thapar for CNBC TV18.

Rajan in a separate interview to Bloomberg TV said there is no trade off between inflation and growth and added that unless prices come under control it would not be possible for banks to reduce interest rates. He also said it would not be possible for banks to cut deposit rates in the absence of low inflation.

On differences with the Finance Ministry about cutting interest rate to boost growth, Rajan said the government and RBI are in constant dialogue.

"We are working with the government in stabilising the economy. And when there is huge amount of outside turmoil today, it is extremely important that we both be seen on same page," he said.

"Of course, there will be discussion and both are big organisations. Somebody will speak and somebody else will speak. But there is a huge degree of understanding and communication between the RBI and government".

Replying questions on the Urjit Patel committee report, which had recommended the central bank should target retail or CPI inflation, Rajan said: "Some of these changes can be done immediately because they give us some technical support. Some of the changes require political discussion."

Over the next two years, he said, the RBI would endeavour to bring down inflation to 6 per cent. "That to my mind is achievable target, a reasonable target... It means brining down inflation in a serious way," he said.

Rajan wanted the government to slow hiking the agriculture support price because it will help in reducing the price of food.