RBI should continue with Raghuram Rajan’s policies on inflation: Moody’s

Moody's Investors Service Senior VP Sovereign Risk Group Marie Diron said credibility and effectiveness of monetary policy are factors which impact India's sovereign ratings.

By: PTI | New Delhi | Published:August 15, 2016 6:03 pm
raghura rajan, rbi, reserve bank of india, rbi governor, inflation, inflation policy, india inflation, india inflation policy, rbi inflation, business news Rajan, who demits office on September 4, has been pilloried by his critics for keeping interest rates high and has also been accused of stifling growth. (Source: Express file photo)

Governor Raghuram Rajan’s policy of tight leash on inflation has showed results and the Reserve Bank should continue with similar policies and communication going forward, Moody’s Investors Service has said. Moody’s Investors Service Senior VP Sovereign Risk Group Marie Diron said credibility and effectiveness of monetary policy are factors which impact India’s sovereign ratings. Moody’s has a ‘Baa3’ rating on India, with a positive outlook.

“In the last two years, India’s inflation has fallen to more moderate levels, likely in part because of more credible monetary policy that has anchored inflation expectations. We expect the RBI to continue with similar policies and communication, showing commitment to achieve its inflation target,” Diron told PTI. A monetary policy with tight leash on inflation is important especially in India, where in the past inflation has risen to very high levels, negatively affecting growth and investment prospects.

Rajan, who demits office on September 4, has been pilloried by his critics for keeping interest rates high and has also been accused of stifling growth. Rajan had challenged these critics to show how inflation is “very low” before accusing him of “being behind the curve” in his focus on containing price rise than on growth.

Consumer price index or retail inflation rose by 6.01 per cent in June, the fastest pace in 23 months and it is expected that the implementation of the new Goods and Services Tax
(GST) may push up inflation further. Diron also said that inflation targeted monetary policy enhances transparency and is suited for India’s specific economic and institutional structures.

“In India, inflation targeting has likely contributed to enhancing the transparency and predictability of monetary policy, two important elements to foster its credibility and effectiveness,” she said. Diron said with around half the consumption basket consisting of food, whose prices are less predictable than others, India’s inflation will continue to face periodic upside risks.

“If credible, monetary policy can contribute to preventing food-driven spikes in inflation from spilling over to other prices and wages,” she said. The government, in consultation with the RBI, has set an inflation target of 4 per cent within a band of (+/-) 2 per cent for five years to 2021.

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The next monetary policy on October 4 is likely to be decided by a six-member interest rate setting panel, instead of the present practice of RBI governor deciding the interest rate. The Monetary Policy Committee (MPC) will set interest rates by majority, with a casting vote for the central bank governor in the event of a tie.

Out of six members of MPC, three will be from RBI — the Governor, who will be the ex-officio Chairperson, a deputy governor and an executive director. The other three members will be appointed by the central government, on the recommendations of a search-cum-selection committee, which will be headed by the Cabinet Secretary.

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  1. S
    S.Gonesh
    Aug 15, 2016 at 2:43 pm
    Moody as an foreign investor group is wrong. All those who are supportinglt;br/gt;Mr. Rajan, president of the RBI and Mr. Rajan himself is damaging thelt;br/gt;interest of the people of Hindustan. Why? First; what is inflation? One canlt;br/gt;say, spending more and specially in useless products create inflation. An example;lt;br/gt;India is a tropical country with above 40% C temperature. Look at the dresslt;br/gt;of the educated persons and managers of the industry. In such a heat theylt;br/gt;are dressing like foreigners from countries with a temperature of less thanlt;br/gt;20* C. They have dropped their cheapest home made dress.lt;br/gt;Second; the exchange- rate of the Rupee has to be changed.lt;br/gt;Thirdly; the interest-rate of the SBI is a hinder for the development oflt;br/gt;the country. The common-man can't invest, because the interest is toolt;br/gt;high. Only the industries and the foreigners with their cheap money havelt;br/gt;a good time in India. That is why this system is not wrong only, but itlt;br/gt;keep the potion poor.
    Reply
    1. C
      Caamano
      Aug 15, 2016 at 5:52 pm
      Nice joke!!
      Reply
      1. V
        Velayudham
        Aug 15, 2016 at 6:33 pm
        That's Moody's PARODY!!! An existent object is non-existent and vice versa is their prescription to its customers
        Reply
        1. M
          m
          Aug 15, 2016 at 4:42 pm
          Rajan’s policies ??? -
          Reply
          1. R
            rohan
            Aug 15, 2016 at 3:45 pm
            Moody's will be banished from India by Modi !
            Reply
            1. S
              SC Joshi
              Aug 15, 2016 at 1:39 pm
              Rightly said, India should not miss out this opportunity, once Mr. Rajan goes he shall not come back to the same post again. It is high time the Modi government give a second though of relieving him from the post of RBI governor. He could be allowed to continue one more tenure of three years as governor RBI in this juncture when the world economy is shrinking
              Reply
              1. S
                Swapnil Chalje
                Aug 15, 2016 at 3:12 pm
                Respected gentleman I read your comment , there is a point .But you are missing what Rajan had said because of draught for consecutive three years CPI inflation has been over 6.5 sometimes it was more than 8.5. Even though Rajan had cut interest rates by 1.75 as much as space he got.So RBI have to check the consumers interest also to maintain balance.ry hike in private sector was not encouraging, retired private sectors employee pension digits are horrible that they can't spend single day in this inflation.
                Reply
                1. S
                  Swapnil Chalje
                  Aug 15, 2016 at 3:13 pm
                  Respected gentleman I read your comment , there is a point .But you are missing what Rajan had said because of draught for consecutive three years CPI inflation has been over 6.5 sometimes it was more than 8.5. Even though Rajan had cut interest rates by 1.75 as much as space he got.So RBI have to check the consumers interest also to maintain balance.ry hike in private sector was not encouraging, retired private sectors employee pension digits are horrible that they can't spend single day in this inflation.
                  Reply
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