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Rajan Will Not Do a Volcker, For Now

Rajan is unlikely to be a Volcker right now. The policy press conference has this statement:

I do not want to say inflation targeting because once you say the word inflation targeting, people have single minded focus on inflation regardless of the growth sequences. And the point about any kind of reasonable central bank is it looks at achieving a reasonable level of inflation taking into account the growth situation. Because growth itself will create some disinflationary forces and therefore it means that you can achieve the target with less of an interest rate hike.

Volcker did the opposite. He showed the finger to growth – and indeed, caused two recessions – and when inflation was under control, let interest rates come down. That would have come from a strong view that inflation is more important to control than the effect of lowered growth. Indeed, inflation was broken so well then, that the next thirty years have been remarkably disinflationary for the US.

In India, I personally believe we have to make such a call. In order to control inflation, we have to do whatever it takes including stifling growth. We are at the stage where any impetus to anything will only increase inflation, not cause any serious growth, and in fact, some of the inflation will look like growth (because at the macro level it’s difficult to tell, and the price indexes aren’t very comprehensive or updated well).

Inflation is like a cancer. To kill cancer you have to kill some cells, because any attempt to strengthen the body will strengthen the cancer also, as the cancerous cells respond equally (or better!) to the same stimulus. You weaken the body in the hope that enough is left behind to take it forward – and in the inflation analogy, a lot less will be needed to kill inflation that it will take to kill India.

But it’s obvious from the above statement that Rajan will not do things “regardless of growth consequences”. This might be a stand today, and I hope he changes it if data is presented to him that demonstrates the much larger problem of inflation against growth. We need interest rates to be 12-15% – and honestly we had them, just about 15 years back and we didn’t die – in order to control inflation. Sure, we will cause a recession but if you look at CPI inflation of 9% and nominal growth of (around) 10% we are pretty much close to a recession anyhow.

  • vishnu says:

    Inflation is like cancer , I agree. But what makes you think that we can control inflation ?. Esp by raising interest rates ?. we have raised Interest Rates consecutively , inflation doesn’t seems to be down. Do you think politician or RBI can go go plant Onions to reduce the prices ?

  • Px says:

    The signs were there in his first interview with Latha ! The position still holds.
    Main job of RBI …1. To manage govt debt / borrowings, while having no control over the debt balloon. 2. Keep politicians and their biz cronys happy 3. Token symbolism on Inflation.
    You had said that rate of increase of money printing is at avg @16 % from 1997
    RBI has been talking tough and doing something quite the contrary since time of Rangarajan or MmS. Things got really bad during Subba Rao`s tenure where financial repression of savers and retirees was at its peak.
    Ajay Shah of IGIDR , one of Indias best economists has some fab posts on Inflation which everyone should read up.
    He points to loss of price stability that affects social contracts badly.

  • Px says:

    I remember investing in mafatlal and ifci ncds at 16 to 18% !
    Im sick of hearing that supply side problems cant be cured by interest rates !
    Interest rates go up when money becomes dear ! That is when consumption and more importantly borrowed consumption has to fall, heck at least savers are incentivized to invest in the economy rather than in gold or commodities or property !
    But i dont see a volker in India unless external circumstances force our govs hand cause the nation has never lead … we have copycats in every arena , and if us and eu have loose monetary policy what incentive do our politicians and bureaucrats have to go against the tide ?

  • Px says:

    I wonder what India can learn from the japanese experience ?
    Will we see local version of Mrs Watanabe ?

  • Prasad Oak says:

    Hi Deepak,
    I’m a regular visitor to this site and I hold your views and opinions in high regard. However, on this subject I’m more aligned with Mr. Rajan. The main difference with US economy is that our inflation is not a monetary one but more of a supply side inflation. RBI is doing what is in its power (controlling liquidity), but the main action has to come from administration in terms of better infrastructure, better cold storages etc.
    As of now, only the liquidity is drying up and more people are in queue to buy the same limited goods available – resulting in high inflation. This is certainly not RBI’s fault and I don’t think Mr. Rajan can control it beyond a point at cost of industrial growth.

  • Leo says:

    the problem is with MMS ..he is drowning india in debt and he is the ben bernanke of india. he knows one thing just print trash the currency.The man came in 1991 devalued rupee now he is doing the samething.
    Sick and tired of these guys rigging the system.savers are killed .All IMF guys know just one thing print and solve the problems.Hell indians are buying more gold it shows.
    Dont worry friends 8.6% it is blasting to 17% soon at that time MMS will blink for sure.The markets will do it for these guys.What i am worried is he will do a bailin that time.force the depositors to hold those govt bonds.

  • Vidyanshu says:

    Rajan comes across as another MMS – a academic, a sycophant and a spineless bureacrat. I don’t have any lofty expectations from Rajan. On the contrary, I had some hope from Subbarao who tried to raise rates under tremendous duress. Mark my words, Rajan is going to lower rates and pump up the market before the election and try to show this as an UPA achievement…people who anticipate otherwise are going to be severely disappointed. A Paul Volcker might happen if someone like Anna Hazare becomes the RBI governor, which will not happen in my lifetime. Suffer inflation, suffer loot, suffer scams and scandals…and people like Rajan will promote it.

  • lohit says:

    Gillian Tett at the Financial Times has been remarkably prescient about various financial crises over the last few years. Her latest article on FT – ‘ Gillian Tett
    Money mirage exposes emerging markets ‘ – talks about how traders and bankers are worried about a liquidity shock that could hit emerging markets when the Fed tapers.
    The markets will probably force Rajan’s hand. Either that or we have to live with a much weaker rupee.
    The FT is behind a paywall. But you can read the article through Google :).