Even as the clamour for interest rate cut is hardening, Reserve Bank Governor Raghuram Rajan on Friday said, the focus should be on keeping inflation low and avoid using government incentives and monetary policy to achieve short-term economic growth. Retail as well as wholesale inflation have dived to record lows in August on falling global commodity prices.
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While the Street cheered the USA central bank’s decision to keep the Fed funds rate unchanged near zero with the Indian benchmarks rallying almost 1%, experts believe that a slew of important developments, including the data coming out of China as well as the financial health of India Inc, will continue to drive the equity market going ahead. “Remember, the License Permit Raj persisted precisely because some industries were favoured over others in the so-called national interest“, Rajan said.
The RBI chief referred to Brazil’s recent fall from investor grace as a cautionary tale for Asia’s third-largest economy. This year, however, the country’s economy is expected to shrink by 3%, while its political class is mired in corruption scandals, and the government’s debt rating has been downgraded to junk.
Rajan said not only can UIDs expand the access of the poor and young to credit as they borrow against the collateral of their future good name, it will also allow the regulator to detect and curb over-lending to individuals by asking lenders to report the IDs of borrowers to credit bureaus. Delivering the C K Prahlad Memorial Lecture here today, Rajan said that jugaad ends up encouraging an “attitude of shortcuts and evasions, none of which help final product quality or sustainable economic growth“.
The US Federal Reserve left the interest rates at 0.00 to 0.25 per cent citing threats from a weak global economy, persistently low inflation and unstable financial markets. Let us recognize we are doing quite well in comparison – indeed, many industries in difficulty have a problem because exports are low or imports are very competitive, and not because domestic demand is inordinately weak.
On the U.S. central bank’s decision to delay the much awaited rate hike, Rajan said, “We have noted the Fed decision of yesterday”.
Brazil’s real has weakened 32 percent this year, the most among emerging markets, on concern the government won’t be able to shore up finances amid the worst recession in 25 years and above-target inflation.
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“On the debt side, India is a structural story”, says Brijen Puri, head (markets), JPMorgan in India.
