India : Raghuram Rajan defends inflation record, urges independence

MUMBAI : The Reserve Bank of India’s outgoing governor, Raghuram Rajan, on Tuesday staunchly defended his record in curbing inflation and cleaning up bad debt at banks, and he called on the government to protect the central bank’s independence.

The comments mark Rajan’s latest response to his critics after the former International Monetary Fund chief economist said last month he would step down when his three-year term ends in early September.

Rajan had faced withering criticism from right-wing members of Prime Minister Narendra Modi’s party for keeping interest rates high and choking growth, raising speculation it had contributed to his decision to leave.

“Criticism comes with the territory, and central banks need to make the case for their policies,” Rajan said at a statistics conference in Mumbai, according to a speech released by the central bank.

He did not single out any particular critics.

“At the same time, it is important that governments around the world look beyond sometimes uninformed and motivated public criticism and protect the independence of their central bank to act. That is essential for stable sustainable growth.”

Rajan on Tuesday credited the RBI’s deliberate efforts to control consumer prices for bringing down inflation and supporting economic growth, rejecting arguments he had benefited from a fortuitous slump in oil prices.

He also warned that giving in to pressure to cut rates aggressively would have raised the spectre of losing control of inflation.

The RBI cut the policy rate by 150 basis points from January 2015 to April this year, but Rajan has expressed caution about cutting them further after consumer inflation rose to a near two-year high of 5.77 percent in June, near the upper end of the RBI’s 2-6 percent inflation target.

Rajan is widely expected to keep rates on hold at his last policy review on Aug. 9.

“The fragilities associated with high inflation accumulate, and eventually could lead to crisis,” he said in his speech.

“Without any political push back as inflation rises, what is to ensure macroeconomic stability?”

Rajan also defended his push to clean up banks, which has included a mandatory asset quality review that forced banks to recognise more bad debt, leading to a sharp erosion in profits.

He said the clean-up needed to be “taken to its logical conclusion”.

The government is in the midst of selecting a new RBI governor, but a decision is seen as unlikely before the Aug. 9 review, sources have told Reuters.

A former central bank governor, Duvvuri Subbarao, in an interview with Reuters on Tuesday, said it was important for political considerations to be kept out of the selection process.