With the US Federal Reserve holding interest rates, India Inc and the Centre have increased pressure on the Reserve Bank of India to cut rates. On Friday, RBI Governor Raghuram Rajan sought to stave off the same by saying that the focus should be on improving the business environment as a way to drive growth rather than extending stimulus and rate cuts.

“While our policy will accommodate, substantial reforms are needed to create an environment for businesses. We want to keep inflation low even in the future,” Rajan said while speaking at the 4{+t}{+h} CK Prahalad Memorial Lecture organised by the CII.

While Rajan underlined that his comments were not an indication of what to expect at the forthcoming monetary policy review meeting on September 29, he stressed on the importance of being conservative. This, according to Rajan, is aimed at ensuring that “we get moderate nominal interest rates that satisfy not just the vocal borrowers but also the silent savers.”

Due to softening inflation and lower quarter-on-quarter GDP growth, there is expectation that the RBI will cut the repo rate by at least 25 basis points. The inaction by the US Fed has reinforced that expectation.

Rajan, however, observed that the 3.6 per cent retail inflation reading was seen to be low due to the “base effect”. Adjusted for the base effect, it would be around mid-5 per cent, he said.

Emphasising the need to achieve growth the right way, Rajan said Brazil was growing at about 7.6 per cent a few years back but fast expansion and rapid interest rate cuts had dragged down the country’s economy.

“Growth has to be obtained in the right way. It is possible to grow too fast with substantial stimulus, as we did in 2010 and 2011, only to pay the price in higher inflation, higher deficits, and lower growth in 2013 and 2014,” Rajan said.

India, he said, must resist special interest pleas for targeted stimulus, additional tax breaks and protections, directed credit, subventions and subsidies — all of which have historically rendered industry uncompetitive, government overextended, and the country incapable of regaining its rightful position among nations.

Against ‘Jugaad’ Rajan said “ Jugaad ” (or a thoroughly Indian way of “working around” difficulties by hook or by crook, predicated on a difficult or impossible business environment) encourages an attitude of short-cuts and evasions, none of which help the final product quality or sustainable economic growth. The global stock markets on Friday behaved divergently following the US Fed’s decision to hold rates. Developed market stocks fell but stocks in emerging markets, including India, reacted positively.

The benchmark index, Sensex, gained over 500 points intraday before settling at a more sedate 254-point gain, at 26,218.91, while the Nifty closed at 7,981.90, up 1.05 per cent, or 82 points. But this does not mean that the US Fed action is over. Yellen said that a change in rate is on the table in every upcoming meeting, including in October, so long as data and conditions can justify a move. For now though, all eyes are on how the RBI will act on September 29.

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