Premature rate cuts
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A series of statements by various Bharatiya Janata Party leaders since Reserve Bank of India (RBI) governor Raghuram Rajan’s decision to not seek an extension should be read as hints that the Narendra Modi government wants to push growth even if it means higher inflation.
The latest example comes from finance minister Arun Jaitley. He said over the weekend that high interest rates on bank deposits are one reason for high lending rates, which in turn is hurting investments in new projects. Both policy rates as well as post-tax returns on bank deposits in real terms are barely in positive territory. The only way to bring down interest rates on a sustainable basis is to kill the inflation dragon. Lower bank deposit rates without lower inflation will merely encourage a shift to gold in household savings, as in the last years of the previous government.
The next RBI governor could well have a big task in fighting such calls for premature rate cuts from the political system.