Containing inflation: PM Narendra Modi clears high interest rates

Mumbai: The high interest rate regime is set to remain for some more time. In its war against inflation, the Modi government has reportedly given a green signal to the RBI to keep interest rates high. A clear indication came when the RBI governor, Raghuram Rajan in Tokyo said on Friday that he  expected to join hands with the BJP-led NDA government to bring down the high inflation.

Incidentally to bring down inflation, the main weapon that RBI has in its armament is high interest rates. Dr Rajan said the new government’s plan to curb food inflation seems sensible and that he expected the public’s inflation expectations to fall in the future, as per agency reports. “There is a sense of conviction about our plan to bring inflation down to eight per cent this year and six per cent next year,” said Mr Rajan.

He said further: “This information has gotten out to the public. The public’s inflation expectations have fallen and I think expectations will fall further in the future.” After taking over the charge of the RBI, Dr Rajan had fighting inflation as his main priority and raised interest rates three times. There had been speculation that the new government may put pressure on the RBI governor to bring down interest rates to give a boost to growth, which has slipped  under 5 per cent in 2013-14.

However, it seems that the government also wants to bring down inflation, which has been high for years now. Dr Rajan said that both the government and the central bank have expressed the need to bring down inflation, while respecting the fact that economic growth is “very weak.”
“We need to ensure, through a variety of steps, that we sustain the growth process,” he said.

Dr Rajan noted there was a “fairly long, established tradition of respect and mutual consultation” between the RBI and the government. “I think the government respects the fact that the central bank determines monetary policy,” he added. In the past Dr Rajan had indicated that he will try to maintain his autonomy in setting up the interest rates. “I am happy to talk to the government, I am happy to listen to the government, but ultimately the interest rate that is set is set by me. The government can fire me, but they do not set monetary policy," he had said.