Policy rates hike not ‘anti-national’: Raghuram Rajan

Former Reserve Bank of India (RBI) governor Raghuram Rajan, in a strongly-worded note, has said the RBI should raise key interest rates keeping in mind the high inflation in India. To politicians and bureaucrats, Rajan said they must understand that if the RBI increases policy rates, it's not "anti-national activity" but a step toward economic stability.

"At some point, the RBI will have to raise rates, like the rest of the world is doing (I will refrain from trying to predict when)," says Rajan in the note, hinting toward expectations of a further rise of half percentage-point in policy interest rates in the U.S. The country's inflation has surged to a 40-year high of 7.9%, the latest data shows.

India's retail inflation, driven by high food prices, also jumped to 6.95% in March 2022, which was the highest in around one and a half years. It's also the third month that inflation has surged beyond the RBI's tolerance threshold of 6%.

Rajan said that enhancing key rates will only help Indian citizens. "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 the greatest beneficiary is the Indian citizen," he wrote.

The former RBI governor, who's Katherine Dusak Miller Distinguished Service professor of finance at The University of Chicago Booth School of Business, said it's true that no one is happy when rates have to be raised but it's important for the RBI to do what needs to be done and let the "facts talk". And the "correct facts" are important to guide future policy, he added.

He said he’s still targetted for taking tough measures during his tenure. "I still get brickbats from politically-motivated critics who allege the RBI held back the economy during my term. Some of my predecessors were similarly criticised," he adds. Sharing inflation data during his three-year tenure as the RBI governor, starting September 2013, Rajan said he had to fight inflation when India was facing a "full-blown" currency crisis and the rupee was on free fall.

"Inflation was at 9.5% then. The RBI raised the repo rate from 7.25% in September 2013 to 8% to quell inflation. As inflation came down, we cut the repo rate by 150 basis points to 6.5%. We also signed on to an inflation-targeting framework with the government," he adds. These actions not only stabilised the economy but also enhanced growth, he said.

"Between August 2013 and August 2016, inflation came down from 9.5% to 5.3%. Growth picked up from 5.91% in June-August 2013 to 9.31% in June-August 2016.1 The rupee depreciated only mildly over 3 years from 63.2 to 66.9 to the dollar," says Rajan.

Rajan said the RBI has since maintained low inflation and the low-interest rates through troubling times like the demonetisation, the fall-off in growth, and the pandemic. “Today, reserves have climbed to over $600 billion, allowing the RBI to calm financial markets even as oil prices have climbed," he says, adding that during the 1990-91 crisis, India had to approach the IMF following higher oil prices.

“The RBI’s sound economic management has helped ensure this has not happened this time,” he said.

The central bank, in its bi-monthly Monetary Policy Committee meeting this month, had raised inflation forecasts for FY23 to 5.7% from 4.5% earlier, with the first quarter inflation at 6.3%. The RBI, however, refrained from increasing policy rates in the April 8 MPC meeting.