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Here's why Rajan feels RBI cannot abandon inflation to focus on growth

Speed News Desk | Updated on: 20 June 2016, 18:16 IST

RBI Governor Raghuram Rajan delivered the Founding Day lecture on 'The fight against inflation: A measure of our institutional development ' at Tata Institute of Fundamental Research (TIFR) in Mumbai, on Monday.

During the lecture, Rajan said, "Our currency has been stable as investors have gained confidence in our monetary policy goals, and this stability will only improve as we meet our inflation goals. Foreign capital inflows will be more reliable and increase in the longer maturity buckets, including in rupee investments."

"The Government has taken the momentous step of both setting a Consumer Price Index (CPI) based inflation objective for the Reserve Bank of India as well as setting up an independent monetary policy committee (MPC). We intend to ensure these frameworks and institutions work as they should be producing a low inflation future for India."

Giving a bit of relief to the lower and middle income group who have been affected the most by inflation, he added, "This will expand the pool of capital available for our banks and corporations. The government will be able to borrow at low rates, and will be able to extend the maturity of its debt. 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."

According to an India Infoline News Service report, the governor, while referring to the average of more than 9% inflation experienced in India between 2006 and 2013, said, "We had gotten used to decades of moderate to high inflation, with industrialists and governments paying negative real interest rates and the burden of the hidden inflation tax falling on the middle class saver and the poor".

He added, "As we move towards embedding institutions that result in sustained low inflation and positive real interest rates, this requires all constituencies to make adjustments." An inflation-focussed framework means better coordination between the government and the central bank as they go towards the common goal of macro stability. Further, a central bank serves the economy and the cause of growth best by keeping inflation low and stable around the target it is given by the government.

The Governor said that there is no long run trade-off between growth and inflation. The best way for a central bank to ensure sustainable growth is to keep demand close to supply so that inflation remains moderate, and the other factors that drive growth, such as good governance, can take centre stage.

"We can never abandon inflation to focus on growth," he said but added that the best way the monetary authority can support growth over the medium term is to anchor inflation at low levels so that policy rates can also be low.

While concluding his lecture, the Governor said, "What is happening today is truly revolutionary - by focusing on low ,inflation, we are abandoning the ways of the past that benefited the few at the expense of the many. In the days ahead, a new governor, as well as members of the monetary policy committee will be picked. I am sure they will internalise the frameworks and institutions that have been set up, and should produce a low inflation future for India."

First published: 20 June 2016, 18:16 IST
 
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