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Rajan suggests interest rates hike to curb inflation, not anti-national activity

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Rajan suggests interest rates hike to curb inflation, not anti-national activity
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Mumbai: Former RBI governor and economist Raghuram Rajan suggested the Reserve Bank of India to raise the interest rates to tame unconstrained inflation, which was a17-month high of 6.95% in March due to spurt of crude oil prices.

Recommending the policy rate raise, Rajan said that it is not anti-national activity that some politicians and bureaucrats may think of, but an investment in economic stability.

Inflation is up in India. At some point, the RBI will have to raise rates, like the rest of the world is doing," he said in a LinkedIn post.

Costlier food items pushed the retail inflation to a 17-month high of 6.95% in March, above the upper tolerance level of the RBI, while the wholesale price-based inflation (WPI) rose to a four-month peak of 14.55%, mainly due to hardening of crude oil and commodity prices.

"... Politicians and bureaucrats will have to understand that the rise in policy rates is not some anti-national activity benefiting foreign investors, but is an investment in economic stability, whose greatest beneficiary is the Indian state," he emphasised. Rajan is currently a professor at the University of Chicago Booth School of Business.

Earlier this month, the Reserve Bank of India (RBI) kept borrowing costs unchanged at a record low for the 11th time in a row in a bid to continue supporting economic growth despite inflation edging higher. While the RBI has raised the retail inflation projection for the current financial year to 5.7% from the earlier forecast of 4.5%, the benchmark interest rate was retained at 4%.

Addressing criticism that higher rates held back the economy during his term, Rajan said he became RBI governor with a three-year term in September 2013 when India had a full-blown currency crisis with the rupee in a free fall. "Inflation was at 9.5% then, the RBI raised the repo rate from 7.25% in September 2013 to 8% to quell inflation. As inflation came down, we cut the repo rate by 150 basis points to 6.5%," he recalled.

The economist said: "We also signed on to an inflation targeting framework with the government."

While noting that these actions not only helped stabilise the economy and the rupee, he said between August 2013 and August 2016, "inflation came down from 9.5% to 5.3%." Rajan said that today, foreign reserves have climbed to over USD 600 billion, allowing the RBI to calm financial markets even as oil prices have climbed.

"Recall that the crisis in 1990-91, when we had to approach the IMF, was precipitated by higher oil prices. The RBI's sound economic management has helped ensure this has not happened this time," he noted.

While admitting that no one is happy when interest rates have to be raised, Rajan said he still gets brickbats from politically-motivated critics who allege the RBI held back the economy during his term.

Noting that some of his predecessors were similarly criticised, he asserted: "It is essential that the RBI does what it needs to, and the broader polity gives it the latitude to do so."


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TAGS:Interest rate inflation Economy Raghuram Rajan 
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