“We had gotten used to decades of moderate to high inflation, with industrialists and governments paying negative real interest rates and the burden of the hidden inflation tax falling on the middle class saver and the poor. What is happening today is truly revolutionary – we are abandoning the ways of the past that benefited the few at the expense of the many."
“Indeed, the fact that inflation is fairly close to the upper bound of our target zone today suggests we have not been overly hawkish, and were wise to disregard advice in the past to cut more deeply."
“If a critic believes interest rates are excessively high, he either has to argue the government-set inflation target should be higher than it is today, or that the RBI is excessively pessimistic about the path of future inflation. He cannot have it both ways, want lower inflation as well as lower policy rates."
“At the same time, the RBI does not focus on inflation to the exclusion of growth."
“The bottom line is that in controlling inflation, monetary policy makers effectively end up balancing the interests of both investors and savers over the business cycle."
“Decades of studying macroeconomic policy tells me to be very wary of economists who say you can have it all if only you try something out of the box. Argentina, Brazil, and Venezuela tried unorthodox policies with depressingly orthodox consequences."
Rajan has done an admirable job as Governor of the RBI so the big question for investors will be to what extent policy continuity can be achieved when his successor will be a political appointee. The decision will be a fresh test of Modi’s commitment to reform and long-term growth rather than short-term solutions.
The Rupee remains reasonably steady following news of Rajan’s ouster. The stock market is rebounding and continues to hold the progression of higher reaction lows evident since the March upside weekly key reversal.