Former RBI Governor, Raghuram Rajan on Sunday cautioned that “drastic changes” in India’s monetary policy framework can upset the bond market as the current system has helped in containing inflation and promoting growth. Rajan, who is also an economist, believes the government’s ambitious goal of making India a $5 trillion economy by 2024-2025 was “more aspirational, rather than a carefully computed one, even before the pandemic.” He believes the (monetary policy) mechanism has aided in the reduction of inflation while also allowing the RBI to help the economy.
In an interview with PTI, Rajan said, “It’s difficult to imagine what would have happened if we had to run such huge fiscal deficits without such a structure in place.” In response to a question about whether he supports revising the monetary policy framework’s 2-6% inflation target range, he said yes.
The Reserve Bank of India (RBI) is responsible for keeping retail inflation at 4% with a 2% margin on either side. The six-member monetary policy committee (MPC) of the Central Bank, led by the RBI Governor, sets policy rates with this goal in mind. The new medium-term inflation target, announced in August 2016, is set to expire on March 31. This month, the inflation target for the next five years, beginning April 1, is expected to be announced. “We risk disrupting bond markets if we make drastic changes in the process,” Rajan said in light of this. “I believe the system has been helpful in lowering inflation, but it has not been costly in slowing growth, and now is probably not the time to make drastic changes,” he said.
With the government embarking on large-scale borrowing plans to help the economy recover from the coronavirus pandemic, there are questions about the government’s overall financial health, and bond yields have also been on an upward trajectory. The latter pattern suggests that government borrowing will become more expensive. While the 2021-22 Budget places a lot of focus on privatization, Rajan noted that the government’s track record of delivering on Privatization has been shaky, and he wondered how things will be different this time. He noted that, laudably, there is greater clarity about the true extent of spending in the current budget, as well as a level of conservatism about budget receipts not seen in recent budgets.
