The CBI Director had asked the RBI Governor about the significance of the decision coming before the general election
Reserve Bank of India Governor Raghuram Rajan, on Thursday, described inflation as a ‘destructive disease’, saying prices had to be brought down as inflation hurt the country’s growth.
“Inflation is a destructive disease. Industrialists complain about high interest rate and when inflation is high at 8 per cent, citizens want to have their savings earning 10 per cent interest to marginally beat inflation. Industrialists want an interest rate of about 5 per cent. Both cannot be satisfied. The mismatch is because of inflation,’’ he said.
Delivering the 8th R. N. Kao Memorial Lecture, organised by the Research and Analysis Wing (RAW), here, he said that a long time could be spent in debating the sources of inflation but ultimately inflation came from demand exceeding supply. “It can be curtailed only by bringing both in balance. We need to reduce demand somewhat without having serious adverse effects on investment and supply,’’ he said.
“The point is inflation is hitting the growth in the long run. There can be no trade-off. There is need to bring inflation down,’’ the RBI Governor stressed. He said the policymakers had to face the problem upfront and not keep postponing it. He admitted that last two years had seen a rather high rate of food inflation due to various reasons with the trend spreading across the board to services sector, education and healthcare sectors as well.
He unveiled five pillars of the RBI’s developmental measures over the next few quarters. These are: strengthening the monetary policy framework; strengthening banking structure through new entry; broadening financial markets to increase their liquidity and resilience; expanding access to finance for small and medium enterprises and unorganised sector; and improving the system’s ability to deal with corporate distress and financial institution distress by strengthening real and financial restructuring as well as debt recovery. Emphasising that financial services had to reach out to everyone, however remote or small, Dr. Rajan said that financial inclusion meant a safe mode of remunerated savings, and an easy way to make payments and remittances. It meant insurance and pensions. It also meant financial literacy and consumer protection, he added.
On inflation, Dr. Rajan said it would not be unfair to say that in the last few years it was related to food.
“Indians are becoming richer and eating pulses, eggs and fish. We have shifted the terms of trade in favour of agriculture by giving better minimum support price (MSP) for agriculture produce.”