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RBI will have to raise rates, not anti-national to do so: Former RBI governor Raghuram Rajan

Taking a dig at his critics in a social media post, former RBI governor Raghuram Rajan said that bureaucrats and politicians need to realise that raising policy rates does not amount to anti-national activity that benefits foreign investors. As inflation is on the rise, Rajan is of the view that India’s central bank would have to start raising policy rates too. He writes, “At some point, the RBI will have to raise rates, like the rest of the world is doing (I will refrain from trying to predict when). At such times, politicians and bureaucrats will have to understand that the rise in policy rates is not some anti-national activity benefiting foreign investors, but is an investment in economic stability, whose greatest beneficiary is the Indian citizen.”

The Reserve Bank of India (RBI) will have to eventually raise interest rates amid a worldwide upsurge in inflation the former RBI governor said. Rajan was alluding to a term often bandied about by a section of the ruling dispensation and their sympathisers to describe a range of actions, opinions and people that they perceive to be inimical to India’s interests.

In a two-page LinkedIn post, Rajan said it is important to remember that the war against inflation is never over.

Rajan is currently Katherine Dusak Miller Distinguished Service Professor of Finance at the University of Chicago Booth School of Business.

In its April monetary policy, the RBI has shifted its focus to inflation as its first priority from growth. It will remain accommodative with a focus on the withdrawal of accommodation, governor Shaktikanta Das has said. Markets are anticipating a repo rate hike in the June policy.

Rajan referred to “politically-motivated critics” who say that the RBI held back the economy during his term, just as some of his predecessors were also criticised.

“At such times, it helps to let the facts talk. And the correct facts are important to guide future policy. It is essential that the RBI does what it needs to, and the broader polity gives it the latitude to do so,” he said.

Rajan identified himself as the last RBI governor who had to fight high inflation. His own experience was evidence of the importance of curbing inflation when the need arises, he said. Rajan took charge as RBI governor with a three-year term in September 2013 when India was going through a full-blown currency crisis, with the rupee in free fall. Inflation was at 9.5% then. The RBI raised the repo rate to 8% from 7.25% in September 2013 to quell inflation.

As inflation fell, the central bank under Rajan cut the repo rate by 150 basis points (bps) to 6.5%. It also signed on to an inflation-targeting framework with the government.

“These actions not only helped stabilize the economy and the rupee, they also enhanced growth,” Rajan said, pointing out that between August 2013 and August 2016, inflation came down to 5.3% from 9.5%. Growth picked up to 9.31% in June-August 2016 from 5.91% in June-August 2013. The rupee depreciated mildly over three years to 66.9 from 63.2 to the dollar, while India’s foreign exchange reserves rose to $371 billion in September 2016 from $275 billion in September 2013.

Some of this was certainly the RBI’s doing, Rajan said, and it was not a flash in the pan as the RBI’s actions laid the foundations for stability. He pointed out that the RBI has since maintained low inflation and low interest rates through troubling times like the demonetisation, the fall-off in growth and the pandemic. Reserves have today climbed to over $600 billion, allowing the RBI to calm financial markets even as oil prices are up. “Recall that the crisis in 1990-91, when we had to approach the IMF (International Monetary Fund), was precipitated by higher oil prices. The RBI’s sound economic management has helped ensure this has not happened this time,” Rajan said.

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