 "Raghuram Rajan")
Two days after announcing decision to leave RBI after completing term in September, governor Raghuram Rajan has said he hopes his successor will stay the course in fighting inflation and pointed out the central bank has been "wise to disregard" calls for deeper rate cuts.
Delivering a lecture on "The fight against inflation: A measure of our institutional development" at Tata Institute of Fundamental Research (TIFR), Mumbai, on Monday, Rajan even praised the Narendra Modi government for setting a Consumer Price Index-based inflation objective.
Here are the key things the RBI Governor said during his speech:
1. On setting up of the institution to control inflation, he said, " I would describe our efforts to build a different kind of institution, not one that delves into the deepest realms of outer space or into the tiniest constituents of an atom, but one that attempts to control something that affects your daily life; inflation."
2. "High inflation has been with us in India for the last four decades. Most recently, we have experienced an average of more than 9% inflation between 2006 and 2013."
3. "Hyperinflation has redistributive effects, destroying the middle class’ savings held in bonds and deposits. The horrors of hyperinflation in Austria and Germany in the 1920s still make scary reading."
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4. "Even if inflation is at a moderate level that does not hurt overall growth, the consequences of inflation are not evenly distributed."
5. "RBI does not focus on inflation to the exclusion of growth. If inflation rises sharply, for instance, because of a sharp rise in the price of oil, it would not be sensible for a central bank to bring inflation within its target band immediately by raising interest rates so high as to kill all economic activity."
6. "More generally, the extended glide path over which we are bringing inflation in check appropriately balances inflation and the need for reasonable growth."
7. "In recent years, our fight against inflation also meant the policy rate came down only when we thought depositors could expect a reasonable positive real return on their financial savings. This has helped increase household financial savings relative to their savings in real assets, and helped bring down the current account deficit."
8. "Food inflation has contributed significantly to CPI inflation, but so has inflation in services like education and healthcare. To prevent sustained food inflation from becoming generalised inflation through higher wage increases, we have to reduce inflation in other items."
9. "One reason the RBI was historically reluctant to lock itself into an inflation-focused framework is because it feared government over-spending would make its task impossible."
10. "We must not get diverted as we build the institutions necessary to secure a low inflation future, especially because we seem to be making headway. The Government has taken the momentous step of both setting a CPI based inflation objective for the RBI as well as a framework for setting up an independent monetary policy committee."
11. "The central and state governments have to continue on the path of fiscal consolidation so that they borrow less and thus spend less on interest payments. Households will have to adjust to lower nominal rates, but must recognise that higher real rates make their savings more productive."
12. "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 and this will expand the pool of capital available for our banks and corporations."
