Reserve Bank of India Governor Raghuram Rajan said Friday he would rather India’s economy expanded at a slower pace on a sound basis instead of growing at a rate untenable in the long term, as he struck a down note on the global economic outlook.
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Delivering the fourth CK Prahlad memorial lecture on the morning after the US Federal Reserve decided to keep its near zero rates on hold for the eight year in a row, Rajan said, “We have to be careful while pursuing growth and have to make it sustainable”.
Rajan said while fellow BRICS (Brazil, Russia, India, China and South Africa) nations were in distress, India seemed to be an “island of tranquillity”.
It was pushed to the brink by extravagant stimulus measures and low interest rates. It will also focus on cleaning up the banking sector of the distressed assets, so that it can fund the growth agenda, he said. RBI governor Raghuram Rajan, however, said any move in India would have to consider long-term inflation implications. “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”.
India’s consumer inflation in August hit a record low of 3.66 percent. “If we look around the world today, it doesn’t present a pretty picture”. “The Fed has given a clear signal that any increase would be calibrated”, Das said in first official response to the Fed decision.
Now set at 7.25 percent, a quarter percentage point cut in the repo rate would reduce it to its lowest since May 2011. “So let’s us just help the banks clean up their balance sheets”, Rajan said. RBI has cut the key rate thrice by a cumulative 0.75 per cent. Against this, the banks have only passed on an average of 0.30 per cent in their lending rates. “Industrial countries are still struggling, with a few exceptions, to grow and the uncertainty about growth in the USA and the world is probably what impelled the Fed to stay on hold”.
Over the last one year, the RBI has relaxed norms for trading currency derivatives and interest rate derivatives by allowing hedging through cross-currency options in addition to dollar/rupee options, allowing greater flexibility in cancelling and rebooking forward contracts and introduced cash settlement in exchange-traded interest rate futures.
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On the US Federal Reserve’s decision, Rajan said this could be due to concerns about the United States economy.
