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Raising Interest Rates To Curtail Inflation Is No Solution: N. Vaghul

16 May, 2012

   

According to Narayanan Vaghul, former chairman of ICICI Bank which is the country’s largest private sector lender, India’s economy will be affected more by inflation than the global headwinds. According to him, inflation is largely attributable to the fiscal deficit. He is of the view that raising interest rates is not the remedy as it has not worked till date and there is no reason that it should work in the future. Instead, he asserts that there has to be a fine balance between fiscal deficit and interest rates. According to Vaghul, inflation of the current order is unacceptable and detrimental to economic growth. Incidentally, on October 25, 2011, the Reserve Bank of India (RBI) raised the repo rate by another 25 bps to 8.50%. And this has been its 13th hike since March 2010. However, Vaghul, one of the most eminent bankers in India, has reasserted that he is biased against high interest rates. The banker, who is also a consultant to the World Bank, has further added that microfinance in its current avatar is not the solution to all the problems for the bottom-of-the-pyramid sector. Vaghul was also awarded the Padma Bhushan in the Trade and Industry category in 2010.


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Raising Interest Rates To Curtail Inflation Is No Solution: N. Vaghul

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1 Comment
Ambuj Gupta . 5 years ago

Interesting interview. I am not an economist but Mr. Vaghul appears to imply that the fiscal deficit is mainly responsible for stoking inflation. Inflation is stoked when demand is greater than supply. India’s problem is fixing its supply side shortages by freeing up its underemployed potential. Demographics and an ever increasing GDP will obviously keep stoking demand which is only exacerbated by the fiscal deficit. Populist policies and electoral considerations will likely mean that fiscal deficits will likely endure so the Central Bank is turning to the only weapon which it can command – monetary tightening by raising the interest rate and so lowering non governmental demand.

Raising Interest Rates To Curtail Inflation Is No Solution: N. Vaghul

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