The recent interest hike is necessary to curb inflation and, even though it may affect growth in the short-term, the step will be beneficial in the long run, according to Dr D. Subbarao, Governor of the RBI.
He was addressing students of GITAM University here on Monday. He delivered a talk on the theme “India and the global financial crisis: what have we learnt ?” He began the lecture in a lighter vein, remarking that as soon as he assumed charge as the RBI Governor the global financial crisis set in and “it will all be over when I complete my term.”
He explained to the students that as India had got integrated into the world market after the 1991 economic reforms, the global economic recession had affected India too, though not on the same scale as the other countries. “Globalisation is a double-edged sword. There are benefits such as higher growth trajectory, but there are also costs. Our endeavour is always to maximise the benefits and minimise the costs,” he said.
“There are of course economic pundits writing in newspapers that India should not have been affected even to the extent it did by the global crisis. They aver that we should have been ahead of the curve and not behind it. But I often wonder whether they know the shape of the curve,” he added.
India had recovered much sooner than most other countries, he said and added that the time had come now “to battle the growth-inflation dynamics. You are presented with a difficult choice. Rate hike is necessary to check the inflationary pressures, even as it impedes growth to an extent in the short-term. We have to make the little sacrifice for sustainable growth in the medium and long terms.” He later interacted with students. When a student asked him whether there were any warning signals to an impending global economic crisis, he said, “I wish I knew the answer to your question. In fact, everything seemed fine before the economic crisis hit the world in 2008. Perhaps, I can point out one or two danger signals. Too much money was pumped into the housing sector in the US and other economies and that was asking for trouble. Too much stability may also be a cause for concern. We should always be alert.”
Later, Dr Subbarao gave a lecture in Andhra University on the role of the RBI. He stressed the importance of financial inclusion and taking banking to the rural areas. “The rural markets are coming alive and many corporates are now concentrating on the rural areas. Therefore, banks should also open many branches in villages. Rural branches are viable,” he said.