MPC a revolutionary step in fight against inflation: Rajan

World Monday 20/June/2016 18:07 PM
By: Times News Service
MPC a revolutionary step in fight against inflation: Rajan

Mumbai/New Delhi: Within days of announcing his decision to leave Reserve Bank of India in September, Governor Raghuram Rajan on Monday hoped his successor and the new monetary policy committee will "stay the course" to ensure a low-inflation future for the country.
"In the days ahead, a new governor as well as members of the monetary policy committee (MPC) will be picked. I am sure they will internalise the frameworks and institutions that have been set up, and should produce a low-inflation future for us," Rajan said.
The government has taken the "momentous step" of both setting a consumer price index-based inflation objective for the Reserve Bank as well as setting up an independent monetary policy committee (MPC), he said.
Rajan on Saturday said would not accept a second term of governorship.
While delivering the foundation day lecture on 'Fight against inflation: A measure of our institutional development' at the Tata Institute of Fundamental Research here, Rajan called for institutionalising the yet-to-be constituted MPC so that "we build the institutions necessary to secure a low inflation future, especially because we seem to be making headway."
Describing the MPC as a truly revolutionary step, he said we got used to decades of moderate to high inflation, leading to industrialists and governments paying negative real interest rates and the burden of the hidden inflation tax falling on the middle class saver and the poor.
"With the MPC, which is truly revolutionary, we are abandoning the ways of the past that benefited the few at the expense of the many.
As we move towards embedding institutions that result in sustained low inflation and positive real interest rates, this requires all constituencies to make adjustments" he said.
Warning that a move to a sustained low-inflationary regime demands a lot difficult and painful adjustments in the short run, he said the rewards, however, are be many such as cheaper money for individuals and corporations as well as for the government.
Noting that the past three years of inflation fighting has created a stable macro-environment, Rajan, who took over when the rupee was falling like nine pins and Balance of Payments was on a precarious position, said a "stable rupee has given investors confidence in our monetary policy goals, and this stability will only improve as we meet our inflation goals."
Urging the government and the new governor to stay the course, Rajan said going forward, the present stability "will ensure that foreign capital inflows will be more reliable and increase in the longer maturity buckets, including in rupee investments, which will expand the pool of capital available for our banks and corporations.
The government will announce the successor of outgoing RBI Governor well in advance and there won't be any search panel to look for the new chief of the central bank, an official source said.
"It (announcement of new Governor) will happen reasonably in advance. We don't want unnecessary speculation," said a top government source, adding that "the process of selection is already on". Rajan's term comes to end on September 4.
The source also said the government will not be setting up a search panel for selection of the new Reserve Bank Governor.