As inflation pressure rises and demands an increase in policy levels, former Governor of the State Bank of India (RBI) RaghuramRajan has speculated that the RBI will have to raise prices over time.
He also suggested to politicians and officials that raising policy levels to reduce inflation was not a “counterfeit activity” but an investment in the country’s economic stability. In a letter on LinkedIn, MrRajan said the fight against inflation is not over, and it would be helpful if the central bank remembers: “what happened last time?”
While the RBI has maintained the status quo at domestic policy levels to support domestic growth, their uncertainty over rising inflation, the central bank has raised inflation estimates this fiscal year to 5.7 percent from 4.5 percent. It also reduced its growth forecast to 7.2 percent from 7.8 percent, making inflation a priority.
In an article posted on LinkedIn, MrRajan advised politicians and authorities to understand that rising policy rates are not “a counterproductive activity for foreign investors, but an investment in economic stability, which is of great benefit to Indian citizens.”
RaghuramRajan
He then cited the example of his days as RBI ruler (Sept 2013-Sept 2016), in which he said that India had a full-blown financial crisis and inflation was 9.5 percent. He said the RBI had increased the repo rate from 7.25% in September 2013 to 8% to curb inflation. “As inflation declined, we reduced the repo rate by 150 basis points to 6.5%. MrRajan said his actions helped stabilize the economy and boosted growth, which increased from 5.91 percent in June-August 2013 to 9.31 percent in June-August 2016. He said this also improved India’s forex reserve. But he acknowledged that not all things were “done by the RBI,” and other factors were involved. The former RBI chief said the rise in policy levels is an unpopular move. However, he concluded, “It is important that the RBI does what it needs to do, and broader politics gives it the freedom to do so.”
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