Can't cut rates with every drop in inflation: RBI chief Rajan
27 December 2014
Facing persistent calls for interest rate cuts from both government and industry, Reserve Bank of India governor Raghuram Rajan today said the central bank cannot 'flip-flop' on rates with every rise or fall in inflation, and he would rather wait for a stable low-price scenario.
Earlier this week, chief economic adviser to the government Arvind Subramanian had joined the chorus, saying the time was right for a rate cut by the RBI.
But Rajan said, "The message I have been sending is that we don't want to flip-flop back and forth. This month inflation was 2 per cent, therefore I will cut this much. Oh! It went up to 5 per cent, maybe I should increase it. That's not how a central bank operates," he said.
"It (RBI) takes a point of view and unless things change dramatically from that view, it proceeds on a process of either accommodation or tightening and that is what I would like to see have happened," Rajan told NDTV.
The Wholesale Price Index (WPI) based inflation is on the decline; in November dropped to zero, the lowest in about five and half years. Retail inflation too fell for the fifth straight month in November.
Rajan, who has kept the key policy rate at 8 per cent since January, said India has not fully solved supply-side problems and hence people will get more inflation over time.
"It's not that the RBI is against growth, it is for sustainable growth ... our horizon is sometimes longer than those who want us to cut. They are seeing next quarter's profits. Let us look at the next year and year after, just down the line how profitable you are," he said.
Rajan further said that government wants low inflation and the best way RBI can aid growth over the medium term is by keeping inflation low.
"What we have to do is, once we are sure that the disinflationary process is well under the way, we will have the ability to be more accommodative in a sustainable way," he said.
Explaining his point, Rajan said RBI could cut interest rates by 500 basis points today and there would be a boom in consumption and in investment. "But what happens to inflation? Because we haven't fully solved the supply side problem, people will get more inflation over time. But essentially what I have said is let's do it in a sustainable way," he said.
The RBI governor also said that the central bank was not focusing on falling oil prices as it is not known "how long it's going to stay low".
Referring to the Uber (taxi aggregator) controversy, Rajan said it was using means to bypass regulations. "No matter who you are, can't violate regulations," he said, adding that new technology needs some adjustments in terms of regulations.
Answering question on bitcoin, a virtual currency which has raised security concerns, he said that down the line the nation will be moving to "cashless currency" and that virtual currencies would become much safer.
For better functioning, he also supported segregation of the post of chairman and managing director in public sector banks.
Answering a question on Prime Minister Narendra Modi's 'Make in India' campaign, Rajan said it is necessary to create conditions for promoting domestic manufacturing.