“Rather than administer shock therapy to a weak economy, the RBI prefers to disinflate over time rather than abruptly” raise interest rates, Rajan said yesterday in Mumbai. “As of now, we believe the rate is appropriately set.”The RBI aims to bring consumer price inflation down to 8 percent by January 2015 and 6 percent by January 2016, Rajan said.
A Volcker-like tightening “may lead to a collapse in demand and bring inflation down quickly, it will cause significant damage to the economy,” Rajan said. “A developing country is not in the same resilient position as the United States.”Rajan said the central bank is “committed to getting the strongest growth possible for India,” and the best way to support growth is by bringing inflation down over a “reasonable period of time.”
To control food inflation, India needs to focus on curbing rural wages and cut the role of middlemen in the farm trade to decrease price differences between wholesale and retail food prices, Rajan said.