The battle against inflation is on

RBI governor Raghuram Rajan stays the course in his last monetary policy

Reserve Bank of India governor Raghuram Rajan kept interest rates unchanged in his last monetary policy, obliquely hinting that the battle against inflation is far from over. India’s retail inflation rate rose 5.77% in June driven by soaring food prices. Retail inflation, a gauge to measure changes in shop-end prices, was 5.76% in May, and costlier food items have pushed up the overall inflation rates. Consumer food price inflation, a metric to measure changes in household kitchen budgets, grew 7.79% in June from 7.47% in the previous month. Pulses grew 26.86% in June from 31.57% in May. The central bank uses monetary tools to stymie demand and cool prices. In times of relatively high inflation, the central bank maintains lending rates at a higher level. In times of weak growth and low prices, it is usual for RBI to cut interest rates to goad companies to invest, add capacities, hire more, and prompt people to spend on houses, cars and other goods.

Rajan, who will return to the academic world after his term ends next month, has had repeated run-ins with the political establishment, for steadfast focus on taming inflation. His tenure has been marked by the policymakers’ dilemma to balance growth with price stability. Shunning calls from industry and parliamentarians to cut interest rates, Rajan has bluntly said his mission in the RBI is not attracting Facebook ‘likes’. Ever since his famed prediction about the impending global crisis of 2008, Rajan is known for not mincing words. When Rajan took over in September 2013, he faced a central banker’s ‘trilemma’. He had to arrest the rupee’s slide, cool inflation and create conditions that will boost growth. Most central bankers have to deal with one or two of these at a time.

Let’s examine each of these. Three years ago retail inflation was ruling at close to double-digits. Now, it has fallen to less than 6%. The rupee was at a record low of 68 to a dollar. It had recovered to below 60 and now hovering around 67. The worrisome volatility that characterised currency markets when Rajan took over, has eased considerably. Significantly, despite the spiteful remarks by some in the political establishment that Rajan’s hawkish stance was holding back growth, India has cantered past China to become the world’s fastest-growing major economy. On his first day as the RBI governor, Rajan had made it clear that some actions may not be popular. Two aspects of Rajan’s tenure stand out: Not wavering from the primary duty of bottling up the inflation genie, and forcing banks clean up their bleeding balance sheets wounded by chronic bad loans.