Rise in policy rates is not anti-national activity, says former RBI Governor Raghuram Rajan

Amid increasing inflation in India, former Reserve Bank of India (RBI) Governor Raghuram Rajan, in a post on LinkedIn, said the nation’s central bank will have to raise rates like global peers. He added that it should not be seen as against the interests of the economy.

“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.

“No one is happy when rates have to be raised,” he added, addressing the criticism that higher rates held back the economy during his term. Correct facts are important to guide future policy. He said, “It is essential the RBI does what it needs to, and the broader polity gives it the latitude that it needs to.”

The Reserve Bank has maintained the status quo on policy rates to support domestic growth. The central bank has hiked the inflation projection for this financial year to 5.7% from 4.5%. It has also cut back its growth forecast to 7.2% from 7.8%, making inflation a priority.

Raghuram Rajan cited an example from the past to make people understand his point. Citing an instance of his tenure, Rajan said when he took charge, India was in the midst of a full-blown currency crisis with the rupee depreciating sharply. Inflation was at 9.5% then.

The RBI raised the repo rate from 7.25% in September 2013 to 8%, before bringing it to 6.5% when inflation consequently fell. This was accompanied with an inflation-targeting framework signed with the government. He added that these actions not only helped stabilise the economy and the rupee, they also enhanced growth.

Praising RBI, Rajan said that the central bank has calmed financial markets despite the rise in oil prices. This is unlike the crisis in 1990-91, which was also precipitated by higher oil prices, he said. India’s Foreign exchange reserves is over USD 600 billion, according to the central bank data.