In the boldest ever reply to the government nudging the Reserve Bank of India (RBI) to cut interest rates every now and then, RBI Governor Raghuram Rajan on Monday said that interest rate cuts should not be seen as “goodies” that the RBI gives out after “public pleading”.

“…It is not the role of the central bank to elevate sentiments unduly, to deliver booster shocks to the stock market so that it can soar for a while, only to collapse when reality hits,” Rajan said at a banking event in Mumbai.

Two sides of the coin

“…When people say inflation is low, you can now turn to stimulating growth, they really do not understand that these are two sides of the same coin. The statement inflation is low, you can now turn to stimulating growth, also perhaps reflects a misunderstanding of how central banking works,” the RBI Governor said, criticising the demand in strongest possible terms.

According to him, the RBI can never abandon inflation to focus on growth, nor can it focus on inflation to the exclusion of growth.

Rajan’s comments came days after a veiled call for rate cut was made by Finance Minister Arun Jaitley earlier this month. Jaitley at a press conference said that all macroeconomic indicators including inflation and factory production were extremely encouraging. But parried a question on whether the RBI should move ahead to ease policy interest.
He merely said, “I am sure we all know the relationship now”.

Bankers and Industry chambers also make a similar demand from time to time. The pitch increases closer to the monetary policy review. The next policy review is on September 29.

Ahead of that a nine-month low inflation and an encouraging industrial production data has again rekindled hopes that RBI will act on interest rate ahead of scheduled policy announcement. Rajan, however, maintained that while deciding on policy rates, the RBI has to keep in mind the interests of households as much as the industry bodies.