Raghuram Rajan,
the new RBI governor is at it again. Famous for his unconventional thinking, some
of the comments he let out at Frankfurt yesterday arouse suspicions that he is
eyeing the Nobel for Economics after or during his stint at RBI. His comments
come when he was in Germany to accept the Deutsche Bank prize in financial
economics.
It
is part of established financial wisdom that low interest rates spur economic
growth of the national economy, especially after a meltdown such as those we
witnessed around the end of the last decade. It works this way – when the lending
rates go down, more money is available for entrepreneurs who could invest them
on new projects and schemes. It also prompts people to park their savings in
stock markets instead of banks where the interest on deposits would also be
low. In fact, the rate of interest is a distinct marker of the health of the
economy. Industrialized nations possess a razor thin interest rate while the
developing ones slug it out with a big rate. Though it may superficially appear
to be beneficial for small investors in banks, that is not really the case.
High inflation always accompanies high interest rates thereby wiping out the
additional amount claimed as interest. So, the trusted equation goes – high growth,
low rates.
The
RBI governor now asks whether there were better tools than the rock bottom
rates used by major central banks. He also said that low rates could have
unidentified consequences, for instance that they could encourage people in
their 60s to save instead of spend because the low returns mean they were
unable to reach their retirement savings goal. However, he conceded that he did
not have the answers but said it was time to ask, “Are ultra low rates the
solution or part of the problem?”
So,
what does it tell us? Is Rajan trying to explore less trodden paths in his all
out efforts to shore up the rupee and to kick start the halted economic reforms?
Unconventional it surely is, but are such policies enough to save the day?
There is no doubt that in case what Rajan has in mind comes to pass, it
evidently merits a Nobel. Will it be Rajan, after Amartya Sen?
