Tuesday, 25 August 2015

Raghuram Rajan: Rate cuts not ‘goodies’ to be doled out after ‘public pleading’

RBI Guv Raghuram Rajan: Rate cuts not ‘goodies’ to be doled out after ‘public pleading’

RBI Governor Raghuram Rajan today made it loud and clear that it’s low inflation that will decide future rate cuts and these should not be seen as “goodies” doled out after “public pleading”.

The comments from Raghuram Rajan assume significance as RBI has been facing growing calls from the government and the industry for further rate cuts, although it has already lowered its policy rate thrice by 0.25 per cent each so far in 2015.

“Rate cuts should not be seen as goodies that RBI gives out stingily after much public pleading. Rate cuts are a natural consequence (of low inflation) that RBI has no hesitancy in delivering,” Rajan told a banking summit here.

Blaming leading central banks’ booster doses as the main reason behind the turmoil in global markets, Rajan said RBI is ready to deploy forex reserves to stem the market volatility amid the bloodbath, but warned against the consequences of such “monetary boosterism”.

He was quick to warn that the markets should not be looking at RBI as their cheerleader.

Recalling his past speeches wherein he had said the RBI is not a “cheerleader” for the economy and the markets, he said a central bank should not seen as elevating market sentiment unduly by delivering booster shots.

“I did not mean that RBI does not want to do its utmost to see the economy do well. Far from it! What I meant is that it is not the role of the central bank to elevate sentiment unduly, to deliver booster shots to the stock market so that it can soar for a while, only to collapse when reality hits. We do not have to look too far beyond our borders to see the consequences of such boosterism.”

After three rate cuts, Rajan kept the policy rate on hold at 7.25 percent at August 4 policy meet, but left the door open to easing if the inflation remains under control and banks swiftly lower their lending rates.

Explaining his position further on inflation management, Rajan said the only way to tackle the problem of price rise is to get inflation of all kinds (CPI and WPI) down as so long as the divergence between inflation in traded goods and non-traded services is large, “the problem will not go away”.
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