Inflation still a concern, says Raghuram Rajan

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India is witnessing an “avalanche” of capital flows as central banks around the world are reducing interest rates to very low levels but the RBI is unable to cut interest rates very quickly due to “high” inflation, Governor Dr. Raghuram Rajan said on Monday.

To deal with the global financial crisis, many central banks around the world are printing money and reducing interest rates to very low levels. With countries like India offering high interest rates, significant foreign inflows have been witnessed in debt.

“A lot of that money is coming to us. We have got an avalanche of capital inflows.

“Our problem is: we also have high inflation, we cannot cut interest rates very quickly to the bone in order to tell those countries — don’t come here expecting high interest rates,” the RBI Governor said, addressing the students of Guru Nanak College in central Mumbai this morning.

The RBI has faced pressure from the industry and the government to cut rates to boost growth. In the 6th bi-monthly Monetary Policy Review announced on February 3, Dr. Rajan had kept the key policy (repo) rate unchanged at 7.75 per cent. Dr. Rajan had, however, surprised markets by effecting a 25 basis point cut in January, ahead of the policy.

The RBI has in an agreement with government committed to using monetary tools to cut inflation to pre-decided levels.

The Monetary Policy Framework Agreement binds Reserve Bank of India (RBI) to using monetary policy tools including fixation of interest rates, to bring down inflation to less than 6 per cent by January 2016 and to around 4 per cent by March next year.