Reserve Bank of India Governor Raghuram Rajan said the central bank aims to bring down inflation “over time rather than abruptly” in its effort to curb price pressures and generate sustainable growth.
“Rather than administer shock therapy to a weak economy, the RBI prefers to disinflate over time rather than abruptly” raise interest rates, Rajan said yesterday in Mumbai, according to an e-mailed text of his speech. “As of now, we believe the rate is appropriately set.”
Rajan, a former International Monetary Fund chief economist who has raised interest rates three times to 8 percent since he took charge in September, said the best way the central bank can support growth is to reduce inflation, which also should help stabilize the rupee. The RBI aims to bring consumer price inflation down to 8 percent by January 2015 and 6 percent by January 2016, Rajan said.
“You need to control inflation if you want growth later, and Rajan is right in his approach,” said Arun Singh, an economist at Dun & Bradstreet Information Services India Pvt. in Mumbai. “Given that India is still a developing nation, you can’t ‘do a Volcker’ here and seriously damage the economy.”
India’s economy is forecast to expand 4.9 percent in the fiscal year to March, compared with a decade-low 4.5 percent in the previous year, according to government estimates.
In his speech, Rajan said the interest rate increases the U.S. Federal Reserve took under Paul Volcker in the late 1970s and early 1980s weren’t an appropriate policy model for India.
Not a Volcker
Volcker, Federal Reserve chairman from 1979 until 1987, halted U.S. inflation exceeding 14 percent by raising the main interest rate to 20 percent, pushing the economy into a recession in 1981-82. Volcker kept money tight even as unemployment rose in 1982 to as high as 10.8 percent.
A Volcker-like tightening “may lead to a collapse in demand and bring inflation down quickly, it will cause significant damage to the economy,” Rajan said. “A developing country is not in the same resilient position as the United States.”
Rajan said the central bank is “committed to getting the strongest growth possible for India,” and the best way to support growth is by bringing inflation down over a “reasonable period of time.”
Consumer price gains slowed to 8.79 percent in January from 9.87 percent in December, the fastest among 18 Asia-Pacific economies tracked by Bloomberg, while wholesale price inflation slowed to 5.05 percent. A central bank panel last month proposed reducing CPI to 8 percent within one year and 6 percent by 2016, and that the RBI should then adopt a 4 percent target with a band of plus or minus two percentage points.
Rajan said it would be “good” if the prime minister or parliament set a medium-term inflation target, based on advice from the central bank.
To control food inflation, India needs to focus on curbing rural wages and cut the role of middlemen in the farm trade to decrease price differences between wholesale and retail food prices, Rajan said.
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