Home / Politics / Policy /  Raghuram Rajan stresses on need to improve business environment over stimulus

Mumbai: Reserve Bank of India (RBI) governor Raghuram Rajan said on Friday that consumer price inflation remains a concern and warned against the use of short-term stimulus measures to spur economic growth, as pressure mounts on the central bank to lower borrowing costs.

Rajan, at the same time, cautioned that his remarks should not be read as a indicator of what RBI will do at its 29 September monetary policy review.

“The key task is to keep inflation low, not just today, but well into the future," the governor said at the fourth C.K. Prahalad Memorial Lecture, a day after the US Federal Reserve held off on an interest rate increase.

Consumer inflation, which RBI targets in setting monetary policy, has been slowing, hitting a record-low 3.66% in August and strengthening the case for a fourth rate cut this year. RBI wants to rein in consumer price inflation at 4%, with a tolerance band of 2% around the target.

The inflation figure “we got last month is, I think, rendered excessively low by base effects (and) if you add back the base effects, it is about mid-5s", said Rajan, who has cut rates three times this year by a quarter of a percentage point each.

Rajan, who completed two years in office this month, cautioned against any impatience in regaining growth, and highlighted the experience of both Brazil and China, where economic growth has slowed rapidly.

“Brazil may have overspent, China may have overinvested," he said.

Brazil, which was hailed as one of the most promising emerging markets not too long ago, has been downgraded to junk rating by international credit assessor Standard and Poor’s.

“Brazil tried to grow too fast," Rajan said, adding that in an attempt to keep growth high, Brazil’s central bank was pressed into reducing interest rates, fuelling a credit binge that customers are now struggling with. The country’s development bank subsidized loans to companies and extended tax breaks to some industries.

Rajan also cited India’s own example.

“It is possible to grow too fast with substantial stimulus, as we did in 2010 and 2011, only to pay the price in higher inflation, higher deficits and lower growth in 2013 and 2014," the governor said.

Today, compared with the other BRICS nations, “India appears to be an island of relative calm in an ocean of turmoil", he said. BRICS is an acronym that stands for Brazil, Russia, India, China and South Africa.

Companies have called for a cut in borrowing costs to spur faster economic growth, and some policy planners have implicitly echoed the rate reduction demands.

“Any policy planner would like cheaper cost of capital, but that’s not a decision which I would like even to influence at this stage because it’s a decision which RBI has to take," PTI quoted finance minister Arun Jaitley as telling TV channels in a report from Singapore.

India’s gross domestic product growth, as measured at market prices, slowed to 7% in the April-June quarter from 7.5% in the January-March quarter. It still makes India the fastest growing major economy in the world, but Jaitley told investors in Singapore that it “is just not enough".

Falling commodity prices have reduced price pressure in the Indian economy, spurring expectations of a 25 basis point cut in the repo rate, or the rate at which RBI lends funds to commercial banks, in the 29 September policy review.

A basis point is one-hundredth of a percentage point.

“For any hints on what we will do in the upcoming policy statement, please read the guidance in our last policy statement," Rajan said.

In the last policy review on 4 August, the central bank said it will be watching the inflation path, the outcome of the monsoon and possible Federal Reserve action before determining its course of action.

The document also said RBI will await greater transmission of its past cuts by commercial banks.

“We have noted the Fed decision..," Rajan said. “What we need to do is to continue doing what we are doing, which anyway is the intention, regardless of the Fed."

The Fed’s decision was probably driven by rising global uncertainties, said Rajan. “If we look around the world today, it doesn’t present a pretty picture. Industrial countries are still struggling, with a few exceptions, to grow and the uncertainty about growth in the US, as well as the world, is probably what impelled the Fed to stay on hold yesterday (Thursday)," he added.

While RBI’s monetary policy will accommodate “to the extent there is room", India’s sustainable growth potential will expand “only by continuing to implement reforms the government and regulators have announced".

“These are intended to strengthen the environment for doing business and to expand access to financing, and these will then in turn allow our companies to find and exploit their core competencies," Rajan said.

Analysts read the Fed’s decision to hold rates as clearing the ground for RBI to announce a rate cut.

“Global markets will likely cheer the postponement of Fed lift-off and this could improve global market sentiments, albeit temporarily. This short window of opportunity strengthens our call for a 25 basis point rate cut by RBI in the upcoming policy, amid comfortable domestic inflation dynamics," Kotak Economic Research said in a report on Friday.

In a research note, DBS Bank Ltd said receding external event risks paved the way for RBI to cut the repo rate by 25 basis points this month.

“Based on domestic developments, there is a sufficient case for rates to be lowered," said the report.

PTI contributed to this story.

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