Raghuram Rajan: India has a new anti-inflation cheerleader

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 Raghuram Rajan: India has a new anti-inflation cheerleader
Industry may have been happy to see the back of former RBI Governor Subbarao, a hawkish Governor, who failed to cut interest rates, despite the duress from industry and government.

Now, industrialists love to give out sound bytes against high interest rates, given that it affects their own profitability.

But Subbarao cared less and would never act under Ministry or Industry duress. He chose the path to fight inflation and once even said that he had to hear the voice of the poor, who had no forum to go to.

He was quoted in the Hindu as saying, "There are hundreds of millions of people in the country who are affected by inflation. For poor people, inflation is regressive tax, it hurts poor people more than it hurts people like us. And we need to hear that silent voices," he said while responding to a question on the rate cut demands of India Inc.

Now, new RBI Governor Raghuram Rajan, has chosen to follow the same path of the former RBI Governor
Subbarao. Interestingly, industry was expecting a more dovish governor, who would cut rates and push growth.

"Of course, we are anti-inflation...of course, our intent is to signal a stance against inflation," Dr. Rajan said at a press conference after announcing his first policy review as the RBI Governor.

He is now a new cheerleader for inflation.

Has he got it right?

Rajan hiked interest rates when industry was least expecting it. He has got it right that's for sure. With CPI inflation hovering around the 10% mark, it certainly affects the common man. Agreed that inflation, maybe more of a structural issue, and rate hikes may not help. But, by cutting rates you are only going to aggravate the inflation situation, pushing it higher.

Food inflation is deeply disturbing, and onions are making people cry. If you cut interest rates at this juncture, it could push prices higher,

In fact, he has helped the financial sector and the industry by reducing MSF, which should help ease liquidity conditions in the banking system.

Clearly, Rajan has got it right in his first policy meet. It's a different matter that industry is sulking and the stock market is tanking.

GoodReturns.in

Story first published: Saturday, September 21, 2013, 10:13 [IST]
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