Weeks before RBI Governor Raghuram Rajan demits office, BJP MP Subramanian Swamy on Friday took potshots at him saying an IMF working paper has debunked his inflation-centric interest rate policy. “Now IMF has in effect debunked that interest rate raising madness of R3 had a role in inflation control. Personal?” Swamy tweeted.
R3 is the acronym he uses for references to Raghuram Rajan, whom he had on several occasions attacked for keeping interest rate high and hurting growth. Swamy quoted a Working Paper of the International Monetary Fund (IMF) titled ‘What is responsible for India’s sharp disinflation?’
The abstract of the report quoted by Swamy analysed the dramatic decline in India’s inflation over the last two years using an augmented Philips Curve approach and quantify the role of different factors. The paper said contrary to popular perception, the direct role of lower oil prices in India’s disinflation was relatively modest given the limited pass-through into domestic prices. Instead it found that inflation is a highly persistent process in India, reflecting very adaptive consequence. A moderation of expectations and a rationalisation of minimum support prices explained the bulk of the disinflation over the last two years, the IMF paper said.
Swamy had earlier said that Rajan is “not appropriate for the country” and alleged that he has “hiked interest rates in the garb of controlling inflation that has damaged the country”. Amid attacks, Rajan in June surprised the markets when he in a letter to the RBI staff announced that he would return to academia and not seek a second term. Rajan’s three-year term comes to an end on September 4.
After assuming charge as RBI governor in September 2013, Rajan gradually raised the short-term lending rate from 7.25 per cent to 8 per cent and had retained the high rates throughout 2014. He kept the rates high, citing inflationary concerns despite intense pressure from the Finance Ministry and the industry for softening them with a view to boosting growth. The governor began the process of lowering the rates in January 2015 and since then it has come down by 1.50 per cent to 6.50 per cent.