High interest rates will help in long run: Raghuram Rajan

Aug 14 2014, 13:44 IST
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"Let us fight this fight once, let's deal with it and then let's keep interest rates down in the longer term," he said. (Reuters)
SummaryThe Reserve Bank's elevated rate structure may be painful in the short run..

The Reserve Bank's elevated rate structure may be painful in the short run, but will help in the long-term by containing inflation, Governor Raghuram Rajan said today.

"It (high interest rates) may be more painful in the short run but helps in the long-run by quelling inflation," he said while speaking at an event late this evening.

"But I haven't raised them (rates) to Paul Volcker (former US Fed Chairman) like level. People keep saying you are trying to be the Indian Volker. No chance. I have no illusion," he said, adding that the former US Fed Chairman had hiked rates up to 16-18 per cent. The RBI's repo rate is at 8 per cent.

Rajan, who has been under fire for keeping the interest rates high for long, explained that in the face of bottlenecks on supply sides, the RBI is seeking to keep some control over the demand side by keeping the interest rates high.

"We're saying let us keep interest rates to control demand but also bring inflation down steadily without a dramatic disinflation over a quarter or so. It also means we have to keep interest rates (high) till such time as we have high inflation," he said.

The comments come retail inflation rising 7.96 per cent for July.

Rajan, who is targeting to keep inflation at 8 per cent in January 2015 and reduce it further to 6 per cent by January 2016, said three years back RBI lowered rates after some cool off in inflation but the price rise scenario became concerning again.

"Let us fight this fight once, let's deal with it and then let's keep interest rates down in the longer term," he said.

Rajan also stressed on getting fiscal deficit and current account deficit under control, saying complacency on this front had led to some adverse effects including the heavy depreciation in the rupee.

He, however, reiterated that work on various fronts has yielded good results and the country is not vulnerable if some adverse developments were to happen externally, as it was the last time when the rupee depreciated.

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