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Raghuram Rajan says RBI should continue focus on inflation management

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  • Raghuram Rajan says RBI should continue focus on inflation management
    2020-08-05, By: System Administrator

    Former Reserve Bank of India (RBI) governor, Raghuram Rajan has asserted that it is important for the Indian central bank to retain the inflation focus to ensure that people continue to have confidence in the Rupee.

    “People still have confidence in the rupee and it is very important that confidence continues. For that confidence to continue, it is important that the RBI shows commitment towards inflation,” Rajan said in an interview,

    “If there is no expectation that it will contain inflation going forward, there will be more worries about the rupee plummeting and that could be a source of concern going forward,” Rajan said.

    Rajan’s comments are significant in the context of an ongoing debate on whether the monetary policy committee (MPC) should cut key RBI policy lending rate further or remain on status quo to guard against inflation fears. The MPC is set to announce the policy decision tomorrow after a three-day meet.

    India’s retail inflation inched up to a little above 6 per cent in June from 5.84 per cent in March.

    Rajan said it is critical to safeguard the credibility of the RBI.

    “One of the Institutions working well right now is the central bank. The credibility of RBI is one reason why the currency has not plummeted despite our inability to contain the virus, fears around our growth trajectory as well as our fiscal situation,” Rajan said in the interview.

    The inflation targeting regime served India well and it is important that RBI continue to emphasise that it will keep inflation within those bands, Rajan said. “It (inflation targeting) has actually served us quite well and let's recognise that rather than have a whole set of dialogues, which take us nowhere,” Rajan said.

    The RBI has cut its key lending rate, repo, by a cumulative 115 basis points (bps) since the start of the pandemic. This, along with a liquidity infusion to the tune of Rs 8 to Rs 9 lakh crore was aimed at pushing up credit growth in the system. However, bank lending to industries will continue to be muted on account of lack of demand.

    Rajan, a former chief economist with the International Monetary Fund (IMF), was RBI governor between 2013 September and 2016. Rajan’s tenure was a crucial phase for the Indian banking system. It was then the RBI initiated the process to identify and hidden stress in the banking system and subsequently initiated an asset quality review (AQR).

    Following this, banks were forced to identify and disclose the hidden bad loans in their balance sheets. Within a few years, the Gross NPAs in the banking system shot up to over Rs 9 lakh crore from around Rs 3 lakh crore before the process.

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