RBI governor Raghuram Rajan on Monday cautioned against “dramatic’ interest rate cuts to spur growth, speaking on a touchy issue in his first comments since announcing his decision to step down as the central bank chief.
On Saturday, the RBI chief dubbed “Rockstar Rajan” said he would return to academia when his term finishes in September, taking everyone by surprise but ending months of intense speculation over his future.
Rajan, 53, made controlling inflation a priority during his tenure, leading to differences with a section within the ruling BJP at the Centre over how quickly the central bank should cut rates.
BJP MP Subramanian Swamy, who has been at the forefront in criticising Rajan, consistently attacked the RBI governor’s method of holding on to rates.
Speaking at the Tata Institute for Fundamental Research on Monday, his first public event after the surprise letter on June 18, Rajan said that “wisdom” called for keeping “inflation low and stable”.
“This contrasts with the earlier prevailing view in economics that by pumping up demand through dramatic interest rate cuts, the central bank could generate sustained growth, albeit with some inflation. That view proved hopelessly optimistic about the powers of the central bank.”
He is credited with bringing inflation down from double-digit levels to 5.8 percent currently. The RBI and the government have agreed on an inflation target of 5% by March 2017.
But Rajan said the gains of such drastic rate cuts could be temporary.
“…If the central bank cuts the interest rate by 100 basis points today, and banks pass it on, then demand will pick up and we could get stronger growth for a while…The stock market may shoot up for a few days. But you can fool all of the people only some of the time,” he said.
The former IMF chief economist added that the rewards of low inflation were many.
“The poor will not suffer disproportionately due to bouts of sharp inflation, and the middle class will not see its savings eroded. All this awaits us as we stay the course.”
Rajan, who famously predicted the 2008 global financial crisis, has been widely credited with bringing stability to India’s economy since taking over the reins of the RBI in September 2013.
(With agency inputs)