Brazil provides a cautionary tale to the world on the perils of trying to grow too fast, according to Indian central bank Governor Raghuram Rajan.
Brazil’s high growth rates in recent years came on the back of stimulus and low interest rates, Rajan said. Cheap government-backed loans, price controls and corruption scandals made things worse, he said, setting the stage for an economic meltdown this year.
“The fundamental point it makes is, in this difficult environment, growth has to be obtained the right away,” Rajan told a conference in Mumbai on Friday. “It’s possible to grow too fast with substantial stimulus as we did it in 2010 and 2011, only to pay the price in higher inflation, higher deficits and lower growth in 2013 and 2014.”
Rajan, formerly the International Monetary Fund’s chief economist, has repeatedly defended his policy to keep borrowing costs high enough to bring down inflation over the long term. In doing so, he’s resisted pressure from Finance Ministry officials to cut one of Asia’s highest policy interest rates.
“Brazil may have overspent, China may have over-invested, and look where they are now,” Rajan said. He added: “We have to have to have the discipline to stick to our strategy of building the necessary institutions and creating a new path of sustainable growth.”
At the same event, Rajan said that the Federal Reserve’s decision to keep U.S. interest rates near zero wouldn’t affect India’s monetary policy decisions. He reiterated the policy guidance he gave last month, saying he’s watching the Fed move, the monsoon and other factors for room for further accommodation.
Consumer price gains slowed to 3.66 percent in August — below the central bank’s 6 percent target for a 12th month — as oil has tumbled below $50 a barrel and global food costs fell. Rajan said that CPI figure was “excessively low” due to base effects.
Swaps show traders are pricing in more easing, and the majority of economists in a Bloomberg survey last month saw Rajan cutting the key policy rate to 7 percent from 7.25 percent by the end of this month. Rajan’s next scheduled policy review is Sept. 29.
India’s benchmark S&P BSE Sensex index jumped 1.3 percent, set for its highest close in three weeks. The rupee climbed 1 percent to 65.7762 a dollar as of 2:26 p.m. in Mumbai, according to prices from local banks compiled by Bloomberg.
India is in better shape than many of the world’s largest emerging markets and needs to be wary of growing too quickly, Rajan told the seminar. Its $2 trillion economy is set to expand more than 7 percent in the year through March, among the fastest growing in the world.
Brazil’s real has weakened 32 percent this year, the most among emerging markets, on concern the government won’t be able to shore up finances amid the worst recession in 25 years and above-target inflation.
Making things worse, Standard & Poor’s stripped Brazil of its investment grade last week and the country’s opposition party is stepping up efforts to impeach President Dilma Rousseff from office amid growing discontent over her handling of the tanking economy.
“Our fellow BRICS have all got deep problems,” Rajan said, referring to Brazil, Russia, India, China and South Africa. “Indeed, India appears to be an island of calm in an ocean of turmoil.”