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'High interest rates won't hurt growth'

Former RBI governor Y.V. Reddy says said that it was the right step for the central bank to take in order to control inflation and high interest rates do not affect growth.

Anuradha Shukla   New Delhi     Last Updated: November 26, 2010  | 09:31 IST

Supporting the stand of the Reserve Bank of India (RBI) on tightening its monetary policy, former RBI governor Y.V. Reddy on Thursday said that it was the right step for the central bank to take in order to control inflation and high interest rates do not affect growth.

"This is a wrong notion created by the industry lobbies that high interest rates are bad for the economy or will hurt industrial growth," Reddy told Mail Today in an interview ahead of the release of his latest book Global Crisis Recession and Uneven Recovery.

"In my whole term, I never reduced the interest rate and yet India continued to maintain its growth momentum. Rather high interest rates prevent the formation of bubbles in the economy. So it is not bad to have high interest rates in the present context," Reddy added.

According to Reddy there is a dichotomy in the confidence of financial market and social realities, such as high unemployment rates. So, the central bank must take a long term view, he said.

"The approach has to be conservative. Industries as well as the financial markets would like to have the comfort of continuing the stimulus. So, their approach is short-term. But the central bank's approach is medium- to long-term," Reddy added.

Advocating a regime of selective credit controls, Reddy said it was this approach as his tenure as the RBI governor that helped him protect the financial sector from the crisis and maintain growth at the same time.

"There is some sort of corporate lobby pressure working under which the government has encouraged huge public debt. RBI has to take into account when to ease the credit and when to tighten the policy.

The timing is very important," Reddy added.

Talking about his book, Reddy said that the crisis is still not over and India has many internal and external challenges.

"Even as India will maintain a growth of 8- 8.5 per cent, it remains most vulnerable among the emerging economies to get affected," Reddy said.

According to Reddy, the global crisis is not yet over. " If you look at the global crisis and recovery, US and Europe have not completely recovered," he said. The recovery is uneven and uncertainly continues to loom over the economy, which poses different challenges to it, he said.

"It will take two to three years, at least, for the world economy to stabilise. Because of its weak fiscal situation, any volatility in the global economy is likely to affect the Indian economy," Reddy said.

India is vulnerable to four shocks - food inflation, fuel, finance and fiscal situation, out of which the fiscal situation is the key challenge area.

According to Reddy, India's fiscal position is something that policymakers need to worry about. Unlike China, India's fiscal position makes it weak. So India has to take lots of precautionary measures to protect its economy.

Advocating his stand on inflation, Reddy added that there is inflationary pressure in emerging economies like India. Even in the past, the average inflation in developing economies was higher than the inflation in developed economies.

"The most important thing is that for large segments of poor people inflation is something that we cannot afford. We should, at any cost, avoid high inflation or even huge volatility in prices. So, I agree with the monetary stand," Reddy added.

Courtesy: Mail Today 

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