Days ahead of rate-setting policy review, the Reserve Bank of India Governor Raghuram Rajan stressed that India should focus on keeping inflation low and avoid using monetary policy and short-term stimulus to prop up economic growth.
“For us at the RBI, the key tasks are to keep inflation low, not just today, but well into the future,” Rajan said while delivering a lecture at an event today. The RBI will release its bi-monthly policy review on September 29 wherein the central bank would review policy rates as well. Majority in the markets believe that Rajan would cut key policy rates by 25 basis points given that the US Federal Reserve has held rates steady at its meet on Wednesday.
On the Fed’s decision, Rajan said that it was probably driven by rising global uncertainties. “If we look around the world today, it does not present a pretty picture. Industrial countries are still struggling, with a few exceptions, to grow. Our fellow BRICS all have deep problems. Indeed, India appears to be an island of relative calm in an ocean of turmoil,” Rajan said.
Consumer inflation in August hit a record low of 3.66% and the RBI forecasted inflation to be at 6% by January 2016. Rajan, however, attributed the fall in CPI inflation to a favourable base effect and said retail prices would have grown around mid-5% without that positive comparison.
Citing the example of Brazil, Rajan said that using low interest rates and stimulus to select sectors to fuel economic growth would have unfavourable outcomes. He noted that Brazil’s current fiscal and economic problems came as the “country tried to grow too fast.”
“The takeaway lesson is that it is possible to grow fast with stimulus and rate cuts, only to pay the price later through high inflation,” Rajan added.
In his memorial lecture, Rajan said that there is a need for improving the business environment as a way to push growth rather than extending stimulus and rate cuts.