Monetary Policy Committee is revolutionary in fight against inflation: Raghuram Rajan

The Reserve Bank of India Governor Raghuram Rajan, on Monday said the government has taken the momentous step of both setting a Consumer Price Index (CPI) based inflation objective for the Reserve Bank of India as well as setting up an independent monetary policy committee (MPC).

Within days of announcing his decision to leave RBI in September, Rajan hoped his successor and the new monetary policy committee will "stay the course" to ensure a low-inflation future for the country. He said while delivering speech on “The fight against inflation: a measure of our institutional development” at the Tata Institute of Fundamental Research.

"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.

Describing MPC as a "revolutionary step" , Rajan said, "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".

Referring to the average of more than 9% inflation experienced in India between 2006 and 2013, he said, "We had gotten used to decades of moderate to high inflation, with 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. As we move towards embedding institutions that result in sustained low inflation and positive real interest rates, this requires all constituencies to make adjustments.” 

Further, while talking about the new monetary policy framework, Rajan said that with the investor's confidence gain in monetary policy goals, rupee is stable and this will help in meeting inflation target.

"The government will be able to borrow at low rates, and will be able to extend the maturity of its debt. The poor will not suffer disproportionately due to bouts of sharp inflation, and the middle class will not see its savings eroded. All this awaits us as we stay the course", Rajan added.

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.

(With PTI inputs)