‘Rate hike is for stability, not anti-national move’

MUMBAI: The Reserve Bank of India (RBI) would need to raise interest rates and this should not be seen as an anti-national activity benefiting foreign investors but as an investment in economic stability, former central bank governor Raghuram Rajan has said.
“Inflation is up in India. At some point, the RBI will have to raise rates, like the rest of the world is doing,” said Rajan in an article he shared on social media. He refrained from predicting when the rate hike would come but went on to explain the need for it. “At such times, politicians and bureaucrats will have to understand that the rise in policy rates is not some anti-national activity benefiting foreign investors, but is an investment in economic stability, whose greatest beneficiary is the Indian citizen,” Rajan said.

The former governor’s comments come in the wake of reports that a senior bureaucrat had accused Rajan of taking monetary policy actions with foreign investors in mind during his term.Explaining the interest rate actions taken by the RBI during his term as governor, Rajan said that he took charge when inflation was raging at 9.5%, and the rupee was experiencing a free fall. “The RBI raised the repo rate from 7.25% in September 2013 to 8% to quell inflation.” He added that the repo rate was subsequently cut to 6.5% when inflation eased. These actions, he said brought down inflation to 5.4% and stabilised the rupee.
The monetary policy committee (MPC) brought down the 6.5% repo rate to 6% during the term of Rajan’s successor Urjit Patel. The MPC subsequently raised the repo rate to 6.5% in August 2018. During the tenure of Shaktikanta Das, who succeeded Patel, the MPC never raised rates, with the repo declining to a low of 4% after the Covid outbreak. It is widely expected that the RBI will hike rates in its next policy meeting in response to inflation.
“Of course, no one is happy when rates have to be raised. I still get brickbats from politically-motivated critics who allege the RBI held back the economy during my term,” said Rajan. He acknowledged that such criticism was levelled against his predecessors as well. “At such times, it helps to let the facts talk. And the correct facts are important to guide future policy. It is essential that the RBI does what it needs to, and the broader polity gives it the latitude to do so,” said Rajan.

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