Raghuram Rajan defends rate hike, says cut wouldn't have helped banks

RBI Governor Raghuram Rajan, who on Tuesday surprised markets with a rate hike, defended the move saying a rate cut would not have impacted either banks or borrowers and that bringing down retail prices is the key to sustainable growth.

"If we cut policy rates, it won't have any impact on banks' cost of funds or lending rates for borrowers," Rajan told reporters in the customary post-policy press conference. "Consumer price inflation is too high, we need to bring it down...and we should be able to reach the 8 per cent objective by end of the year with this rate hike," he added.

Rajan said there was a need to create an environment for economic recovery to be strong and that inflation was a part of it. "I'm not in any way giving up on growth in coming months or quarters and that RBI is cognisant of the weak state of economy," he said. The best way to sustain growth over medium term is to bring inflation down to a tolerable level during the course of the year. This will give the RBI more room to take policy action later and that will help growth, he said.

The RBI Governor said disinflationary factors must be taken into account in a weak economy, and focussing on retail inflation will "hasten path of disinflationary pressure." On the external sector threats, he said the economy is far better prepared now to face any risks, and attributed the recent rupee volatility to outflows of short term funds from the debt market.

On whether the RBI has accepted the Urjit Patel committee recommendations on inflation targeting, he said: "It is premature to say the RBI is moving towards inflation targeting. We've not accepted Patel committee's inflation target.

"The central bank is studying the recommendations of the Patel panel on monetary policy and complete implementation of its report will need a dialogue with the government." Rajan also denied that the recall of the pre-2005 currency notes was an attempt at demonetisation and preventing black money or curbing tax evasion, and said it is aimed at reducing counterfeiting.