‘It will not be possible for banks to cut deposit rates in the absence of low inflation.’
Countering advocates of an interest rate cut to boost growth, Reserve Bank of India Governor Raghuram Rajan, on Thursday, said it was ‘wishful thinking’, and the notion that the central bank was standing in the way of economic expansion was ‘nonsense’.
“Somehow there is a sense among some bureaucrats and industrialists that you cut the interest rate and magically get growth. I think at this point it is a wishful thinking...The notion that the RBI is standing in the way of growth is nonsense,” he said.
Dr. Rajan, who in the third quarter monetary policy on last Tuesday raised the key interest rate by 0.25 percentage point to 8 per cent to check inflation, said the best way to promote growth was keeping inflation low.
“Once inflation comes down, then in circumstances when growth is very weak you will have room to cut the interest rate sharply so as to create a condition for growth without worrying about inflation,” he said in an interview to a TV channel.
Dr. Rajan in a separate interview to Bloomberg TV said there was no trade off between inflation and growth, and added that unless prices came under control it would not be possible for banks to reduce interest rates.
He also said it would not be possible for banks to cut deposit rates in the absence of low inflation.
On differences with the Finance Ministry about cutting interest rate to boost growth, Dr. Rajan said the government and the RBI were in constant dialogue.
“We are working with the government in stabilising the economy. And when there is huge amount of outside turmoil today, it is extremely important that we both be seen on the same page,” he said.
“Of course, there will be discussion and both are big organisations. Somebody will speak and somebody else will speak. But there is a huge degree of understanding and communication between the RBI and the government.”