India should drive growth without depending on rate cuts: Viral Acharya


MUMBAI: Revising up inflation bands for the central bank will hurt the poor, former deputy governor of Reserve Bank of India (RBI) Viral Acharya said on Wednesday, terming the current 4 per cent mid-point on price-rise as a “reasonable target”.
Acharya, who quit RBI ahead of his tenure coming to an end last year, said India has to devise ways of pushing up growth in a structural manner and not by “pump-priming” measures like easy credit and easy liquidity.
It can be noted that revising up the inflation target can help the RBI deliver more rate cuts to address the concerns on growth. Fearing inflation to go up higher in the immediate future, the RBI opted for a status quo in rates at last week’s bi-monthly policy review, the third consecutive time that it has chosen this route despite the GDP in contraction mode.
There were reports earlier in the day saying the government is considering recommending a looser inflation target for the central bank.
“I don’t know how serious they are about it. I thought that the Urjit Patel committee report had done all the ground work to help understand why 4 per cent was a reasonable target,” Acharya said, speaking at an event organised by NSE here.
Those pitching for a 6 per cent inflation should get into poor man’s shoes for a day to see how price rise pinches and finally impacts his consumption.
“When food and fuel are actually at very very high levels of inflation, not just broadbased inflation which is also high in India at present, actually these people (poor) have to seriously constrain their consumption basket,” he said.
“My sense is that unfortunately the story of growth and inflation trade-off in india has become one of the rich and the urban economy, its actually not paying enough attention to ensuring that the basic levels of (poor man’s needs),” Acharya, who went back to teaching at New York University, added.
It can be noted that the present 4 per cent target with a 2 percentage point leeway on either side is coming to an end in March. The actual inflation has been overshooting for the last few months, leading to the status quo in rates by the RBI, which is disappointing many pro-growth voices.
“I think India has got to find a way to driving up growth without allowing inflation to run away to such high levels. India has to invest in growth structurally, not through this pump-priming of the economy through easy credit and easy liquidity conditions,” Acharya said.
“I don’t see how interest rates can come down unless we completely decide to sidestep inflation altogether which could arise if monetary policy gets fiscally dominated,” he said, speaking in the context of corporate debt.
On the issue of corporate bond markets development, the Mumbai-born academic blamed the high fiscal deficit as a key factor which is impinging broader objectives.
“Unless we fix our macro conditions on the government debt and fiscal (deficit), unless we stop financial repression which is where our financial sector firms are always under pressure to buy up government bonds and unless we therefore we move to a situation in which the government debt market and the corporate debt market are roughly on a level-playing field in terms of the space that the private corporate bond market has in India’s financial system, I am deeply sceptical that we can have a corporate bond market which is sustainable,” he said.
The corporate bond market is fuelled by foreign investors’ activity and there will be episodes of ups and down in corporate bond raising depending on the financial conditions globally, he said, warning that this exposes us to risks on interest rates and also outflows.



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