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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.


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