raghuram rajan : the fight against inflation – a measure of our institutional development text of the foundation day lecture by dr raghuram rajan, governor of the reserve bank of india, at tata institute of fundamental research, mumbai, 20 june 2016. * * * i thank the tata institute of fundamental research for inviting me to give this foundation day lecture. i have always seen tifr with awe from afar. some explanation is in order. my roommate in my first year at mit was dr. renganathan iyer, who is one of the smartest mathematicians i know – he used to help me understand my tutorials in real analysis. and he never missed an occasion to tell me how much smarter everyone else at tifr was. perhaps renga was being modest, but i half expected on coming here today to see everyone with gigantic heads housing enormous brains. it is a relief to find that, outwardly, you all look normal. seriously, however, i think the continuing success of tifr suggests to us that when india wants to set up world class institutions, it can. while the institute was fortunate to have a visionary like dr. homi bhabha as its founding director, the institution has been built by the collective efforts of dedicated researchers like you all. congratulations on a job well done! in my speech today, i thought i would describe our efforts to build a different kind of institution, not one that delves into the deepest realms of outer space or into the tiniest constituents of an atom, but one that attempts to control something that affects your daily life ; inflation. there are parallels between the institution building you have done, and what we are setting up to control inflation, though clearly our efforts are much less tied to investigating the very fabric of the universe and more towards influencing human behavior. ultimately, both require a fundamental change in mindset. the costs of inflation high inflation has been with us in india for the last four decades. most recently, we have experienced an average of more than 9 percent inflation between 2006 and 2013. what are the costs of having high inflation? clearly, everyone understands the costs of hyper - inflation, when prices are rising every minute. money is then a hot potato that no one wants to hold, with people rushing straight from the bank to the shops to buy goods in case their money loses value along the way. as people lose faith in money, barter of goods for goods or services becomes the norm, making transacting

##voking coordinated actions by several leading central banks. liquidity is being provided by leading central banks in ample measure, at relatively softer terms, for longer duration than ever before. despite prevailing assessments regarding inflationary pressures, the concerned central banks are perhaps indicating softer interest - rate regimes thus inciting fears of stagflation. the globally highest - rated financial intermediaries, mainly banks, are releasing information on possible losses in installments giving rise to concerns of not merely liquidity. there is an ongoing process of repositioning of the world ’ s leading reserve currency, which is naturally complex. the unusual steps taken include, government ’ s assurance to all bank depositors in uk and arranged amalgamation of banks within what may be termed as public sector banks, in germany. in usa, the proposal mooted for a super fund of $ 75 billion has not taken - off, while a proposal to freeze interest rates has not had desired impact on sentiment, so far. the scope for financial contagion to other economies cannot be ruled out and it is not clear how it will unfold in the year 2008. the impact on real economy, especially in terms of extent of decoupling of the world economy from the u. s. economy is still being explored. there is one certainty in these circumstances, and that is – extraordinarily uncertain times are ahead of us. it is in this background that reserve bank had, in its mid - term review, devoted considerable attention to the recent global developments, their possible impact on india and the need for enhanced vigilance. the scholarly caution in the idr 2008 in regard to the challenges of maintaining stability is arriving a few weeks after the u. k. based weekly economist ( dated november 17, 2007 – pages 75 - 77 ) ranked india along with turkey and hungary as the riskiest economies among select leading emerging market economies. the article states, inter - alia, “ those with currentaccount deficits are vulnerable to a sudden outflow of capital if global investors become more risk averse. economies where inflation and credit growth are already high and budget deficits large, such as india, have less room to ease monetary or fiscal policy if the economy weakens. ” there is merit in clarifying in detail the perception of the reserve bank in regard to these related observations. at a general level, it is essential to recognise that the central banks concerned, being aware of the risks in respective jurisdictions, seek appropriate safeguards to ensure