Firstpost
  • Home
  • Video Shows
    Vantage Firstpost America Firstpost Africa First Sports
  • World
    US News
  • Explainers
  • News
    India Opinion Cricket Tech Entertainment Sports Health Photostories
  • Asia Cup 2025
Apple Incorporated Modi ji Justin Trudeau Trending

Sections

  • Home
  • Live TV
  • Videos
  • Shows
  • World
  • India
  • Explainers
  • Opinion
  • Sports
  • Cricket
  • Health
  • Tech/Auto
  • Entertainment
  • Web Stories
  • Business
  • Impact Shorts

Shows

  • Vantage
  • Firstpost America
  • Firstpost Africa
  • First Sports
  • Fast and Factual
  • Between The Lines
  • Flashback
  • Live TV

Events

  • Raisina Dialogue
  • Independence Day
  • Champions Trophy
  • Delhi Elections 2025
  • Budget 2025
  • US Elections 2024
  • Firstpost Defence Summit
Trending:
  • Charlie Kirk shot dead
  • Nepal protests
  • Russia-Poland tension
  • Israeli strikes in Qatar
  • Larry Ellison
  • Apple event
  • Sunjay Kapur inheritance row
fp-logo
Raghuram Rajan defends rate moves, says focus was inflation
Whatsapp Facebook Twitter
Whatsapp Facebook Twitter
Apple Incorporated Modi ji Justin Trudeau Trending

Sections

  • Home
  • Live TV
  • Videos
  • Shows
  • World
  • India
  • Explainers
  • Opinion
  • Sports
  • Cricket
  • Health
  • Tech/Auto
  • Entertainment
  • Web Stories
  • Business
  • Impact Shorts

Shows

  • Vantage
  • Firstpost America
  • Firstpost Africa
  • First Sports
  • Fast and Factual
  • Between The Lines
  • Flashback
  • Live TV

Events

  • Raisina Dialogue
  • Independence Day
  • Champions Trophy
  • Delhi Elections 2025
  • Budget 2025
  • US Elections 2024
  • Firstpost Defence Summit
  • Home
  • Business
  • Raghuram Rajan defends rate moves, says focus was inflation

Raghuram Rajan defends rate moves, says focus was inflation

Press Trust of India • June 21, 2016, 12:31:09 IST
Whatsapp Facebook Twitter

Rajan said he would never abandon inflation control to focus on growth, but admitted there is indeed a short run trade-off between inflation and growth.

Advertisement
Subscribe Join Us
Add as a preferred source on Google
Prefer
Firstpost
On
Google
Raghuram Rajan defends rate moves, says focus was inflation

Mumbai: In a strong rebuttal to rate cut demands from ‘heavy-indebted industrialists’, outgoing RBI Governor Raghuram Rajan today said banks charge them high rates because of the ‘risk’ they may not repay and they must support efforts to improve loan recovery for lower rates. [caption id=“attachment_2844370” align=“alignleft” width=“380”] ![Governor Raghuram Rajan. Reuters](https://images.firstpost.com/wp-content/uploads/2016/06/rajan-serious1.jpg) Governor Raghuram Rajan. Reuters[/caption] Rajan said that RBI has been “wise to disregard advice in the past to cut more deeply”, while observing that high inflation has burdened middle-class savers and poor with ‘hidden inflation tax’ for decades when industrialists and governments were paying ’negative real interest rates’. Stating that he gets “a lot of heart-rending letters from pensioners complaining about the cut in deposit rates”, Rajan said he can understand why the pensioners are upset when they see their interest income diminishing. He further said inflation is now contained fairly close to the upper bound of RBI’s target zone, which suggests “we have not been overly hawkish, and were wise to disregard advice in the past to cut more deeply”. Giving a lecture here at Tata Institute of Fundamental Research, Rajan said, “While higher inflation might help a rich, highly indebted industrialist because his debt comes down relative to sales revenues, it hurts the poor daily wage worker, whose wage is not indexed to inflation. In his first public appearance after announcing his decision against a second term, Rajan said he would never abandon inflation control to focus on growth, but admitted there is indeed a short run trade-off between inflation and growth. “In layman’s terms, if the central bank cuts the interest rate by 100 basis points today, and banks pass it on, then demand will pick up and we could get stronger growth for a while, especially if economic players are surprised. “The stock market may shoot up for a few days. But you can fool all of the people only some of the time. If the economy is producing at potential, we would quickly see shortages and a sharp rise in inflation.” Rajan 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. “What is happening today is truly revolutionary  we are abandoning the ways of the past that benefited the few at the expense of the many.” Calling from adjustments from all constituencies, the Governor said, “if industrialists want significantly lower rates, they have to support efforts to improve loan recovery so that banks and bond markets feel comfortable with low credit spreads.” “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.” Expressing confidence in a ’low inflation future’, Rajan said the government will then 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.” Rajan, who has often been criticised by the industry for not lowering the interest rate enough to spur demand and boost economy, questioned the rationale behind their demand and tore into their logic with his analysis of inflation and rate data. “When someone berates us because heavily indebted industrialists borrow at 14 per cent interest with wholesale price inflation at 0.5 per cent, they make two important errors in saying the real interest rate is 13.5 per cent. “First, 7.5 per cent is the credit spread, and would not be significantly lower if we cut the policy rate (at 6.5 per cent today) by another 100 basis points. Second, the inflation that matters to the industrialist is not the 0.5 per cent at which their output prices are inflating, but the 4 per cent at which their profits are inflating (because costs are falling at 5 per cent annually). “The real risk free interest rate they experience is 2.5 per cent, a little higher than elsewhere in the world, but not the most significant factor standing in the way of investment. Far more useful in lowering borrowing rates is to improve lending institutions and borrower behaviour to bring down the credit risk premium, than to try and push the RBI to lower rates unduly. “The policy rate in effect plays a balancing act. As important as real borrowing rates for the manufacturer are real deposit rates for the saver.” Sticking to his outspoken attitude, Rajan said savers in the last decade have experienced negative real rates over extended periods as consumer price inflation has exceeded deposit interest rates. “This means that whatever interest they get has been more than wiped out by the erosion in their principal’s purchasing power due to inflation. Savers intuitively understand this, and had been shifting to investing in real assets like gold and real estate, and away from financial assets like deposits. “This meant that India needed to borrow from abroad to fund investment, which led to a growing unsustainable current account deficit. The bottom line is that in controlling inflation, monetary policy makers effectively end up balancing the interests of both investors and savers over the business cycle. “At one of my talks, an industrialist clamoured for a 4 per cent rate on his borrowing. When I asked him if he would deposit at that rate in a safe bank, leave alone invest in one of his risky friends, he said ‘No!’ Nevertheless, he insisted on our cutting rates significantly. Unfortunately, policy makers do not have the luxury of inconsistency,” he said.

Tags
Inflation Monetary policy Raghuram Rajan RBI Governor Rate Cuts Interest rate cut
End of Article
Latest News
Find us on YouTube
Subscribe
End of Article

Impact Shorts

Chennai Ranks #1 in Challan Checks: ACKO Insights for Smarter Car and Two Wheeler Insurance Decisions

Chennai Ranks #1 in Challan Checks: ACKO Insights for Smarter Car and Two Wheeler Insurance Decisions

Chennai leads India in challan checks, with drivers checking their e-challans over 5 times a month on average. Helmet non-compliance is the most broken rule, accounting for 34.8% of all traffic offences in Chennai. Regular digital challan checks help drivers avoid hefty fines, promote safe driving, and improve insurance premiums.

More Impact Shorts

Top Stories

Charlie Kirk, shot dead in Utah, once said gun deaths are 'worth it' to save Second Amendment

Charlie Kirk, shot dead in Utah, once said gun deaths are 'worth it' to save Second Amendment

From governance to tourism, how Gen-Z protests have damaged Nepal

From governance to tourism, how Gen-Z protests have damaged Nepal

Did Russia deliberately send drones into Poland’s airspace?

Did Russia deliberately send drones into Poland’s airspace?

Netanyahu ‘killed any hope’ for Israeli hostages: Qatar PM after Doha strike

Netanyahu ‘killed any hope’ for Israeli hostages: Qatar PM after Doha strike

Charlie Kirk, shot dead in Utah, once said gun deaths are 'worth it' to save Second Amendment

Charlie Kirk, shot dead in Utah, once said gun deaths are 'worth it' to save Second Amendment

From governance to tourism, how Gen-Z protests have damaged Nepal

From governance to tourism, how Gen-Z protests have damaged Nepal

Did Russia deliberately send drones into Poland’s airspace?

Did Russia deliberately send drones into Poland’s airspace?

Netanyahu ‘killed any hope’ for Israeli hostages: Qatar PM after Doha strike

Netanyahu ‘killed any hope’ for Israeli hostages: Qatar PM after Doha strike

Top Shows

Vantage Firstpost America Firstpost Africa First Sports
Latest News About Firstpost
Most Searched Categories
  • Web Stories
  • World
  • India
  • Explainers
  • Opinion
  • Sports
  • Cricket
  • Tech/Auto
  • Entertainment
  • IPL 2025
NETWORK18 SITES
  • News18
  • Money Control
  • CNBC TV18
  • Forbes India
  • Advertise with us
  • Sitemap
Firstpost Logo

is on YouTube

Subscribe Now

Copyright @ 2024. Firstpost - All Rights Reserved

About Us Contact Us Privacy Policy Cookie Policy Terms Of Use
Home Video Shorts Live TV