In order to generate sustainable growth, the country has to fight inflation first, according to Reserve Bank of India Governor Raghuram Rajan.
“If we have to bring down inflation, we have to start today. We cannot wait till the public’s expectations of inflation get more entrenched, and the inflationary spiral gains momentum.
“This is why we have raised interest rates 3 times since September,” Rajan said in his inaugural address at the FIMMDA-PDAI Annual Conference 2014.
He observed that the RBI does not believe the policy rate is at a level where it can affect demand, one way or the other.
“We do believe, however, that as inflation comes down because of the weak economy and strong food production, the policy rate will become a stronger influence on bank interest rate setting, and will start influencing demand,” said the RBI chief.
Rather than administer shock therapy to a weak economy, the RBI prefers to dis-inflate over time rather than abruptly, while being prepared to do what is necessary if the economy deviates from the projected inflation path.
“As of now, we believe the rate is appropriately set,” the Governor said.
Rajan said the RBI believes its fight against inflation will have traction, despite food being an important component of the Consumer Price Index.