“This is short-sighted reasoning, for when commodity prices and global inflation pick up, WPI could well exceed CPI”, Rajan said while delivering the Foundation Day lecture at the Tata Institute of Fundamental Research. “We don’t want unnecessary speculation”, said a top government source, adding that “the process of selection is already on”.
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On Saturday, Rajan said no to a second term, and said he would return to academia at the end of his term. An allegedly corrupt government, a hefty current account deficit and the over-dependence on external factors such as the U.S. Federal Reserve’s monetary policy had been plaguing the economy. In a speech in Mumbai he also called on the country to continue the reforms he has pushed for, including the creation of a monetary policy committee to set interest rates. “He can not have it both ways, want lower inflation as well as lower policy rates”.
“I am disappointed and profoundly saddened by the decision of Dr. Raghuram Rajan to leave the RBI on completion of his term on September 4, 2016, but I hasten to add that I am not surprised at all”, former Finance Minister P Chidambaram, during whose term Rajan was appointed, said.
Rajan called for institutionalising the yet-to-be constituted monetary policy committee (MPC) so that “we build the institutions necessary to secure a low-inflation future, especially because we seem to be making headway”.
Rajan’s strong anti-inflationary stance, which led to three rate hikes after his taking over, had got the RBI a lot of flak for not doing enough to push sagging growth.
Justifying his focus on inflation, Rajan said, “Investors have gained confidence in our monetary policy goals which will only improve as we meet our inflation goals.” .
He specifically addressed critics of his policies during his almost three-year tenure – from the adoption of consumer inflation as the main benchmark for the Reserve Bank of India (RBI), to his decision to keep rates higher than some members of the government and executives had called for.
Rajan expressed confidence that the government and the new RBI chief will internalise frameworks and institutions that have been set up and ensure low inflation in the future. The move came after allies of Prime Minister Narendra Modi criticized him for keeping interest rates too high.
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Stating that perceived short term trade-off between inflation and growth is not sustainable – as is the popular belief – Rajan said a boom-and-bust cycle will not be good for the economy, because if the economy is producing at potential, we would quickly see shortages and a sharp rise in inflation.
