The last hint from Raghuram Rajan: Battle against inflation is far from over
Two aspects of Raghuram Rajan’s tenure as RBI governor stand out: Not wavering from the primary duty to bottle up the inflation genie, and forcing banks clean up their bleeding balance sheets wounded by chronic bad loanseditorials Updated: Aug 09, 2016 23:35 IST
Reserve Bank of India governor Raghuram Rajan kept interest rates unchanged in his last monetary policy, obliquely hinting that the battle against inflation is far from over. India’s retail inflation rate rose 5.77% in June driven by soaring food prices. Retail inflation, a gauge to measure changes in shop-end prices, was 5.76% in May, and costlier food items have pushed up the overall inflation rates. Consumer food price inflation, a metric to measure changes in household kitchen budgets, grew 7.79% in June from 7.47% in the previous month. Pulses, a common source of protein for most Indians, grew 26.86% in June from 31.57% in May.
The central bank uses monetary tools to stymie demand and cool prices. In times of relatively high inflation, the central bank maintains lending rates at a higher level. Likewise, in times of weak growth and low prices, it is usual for RBI to cut interest rates to goad companies to invest, add capacities, hire more, and prompt people to spend on houses, cars and other goods.
Rajan, who will return to the academic world after his term ends next month, have had repeated run-ins with the political establishment, for steadfast focus on taming inflation. Rajan’s tenure has been marked by the policymakers’ dilemma to balance growth with price stability. Shunning calls from industry and parliamentarians to cut interest rates, Rajan has bluntly said his mission in the stately RBI headquarters in Mumbai’s Mint Street, is not attracting Facebook ‘likes’. And anyway, ever since his famed prediction about the impending global crisis of 2008, Rajan is known for not mincing words. When Rajan took over in September 2013, he faced what economists call a central banker’s ‘trilemma’. He had to arrest the rupee’s slide, cool inflation and create conditions that will boost growth. Most central bankers have to deal with one or two of these challenges at a time. Attempting all three simultaneously is a Herculean task.
Let’s examine each of these. Three years ago retail inflation was ruling at close to double-digits. Now, it has fallen to less than 6%. The rupee was at a record low of 68 to a dollar. It had recovered to below 60 and now hovering around 67. The worrisome volatility that characterised currency market when Rajan took over, has eased considerably. Significantly, despite the spiteful remarks by some in the political establishment that Rajan’s hawkish stance was holding back growth, India has actually cantered past China to become the world’s fastest-growing major economy. On his first day as the RBI governor, Rajan had made it clear that some actions may not be popular. Two aspects of Rajan’s tenure stand out: Not wavering from the primary duty to bottle up the inflation genie, and forcing banks clean up their bleeding balance sheets wounded by chronic bad loans.