Why RBI cannot cut Rate Aggressively

Taken from the Speech of RBI Governor Dr. Raghuram Rajan
A lesson from Brazil?
Perhaps Brazil offers a salutary lesson. Only a few years ago, the world was applauding the country’s thriving democracy, its robust economic growth, and the enormous strides it was making in reducing inequality. It grew at 7.6 percent in 2010, and had discovered huge oil reserves which the then President Lula likened to “winning a lottery ticket”. Yet the country is expected to shrink by 3 percent this year, and its debt just got downgraded to junk. What went wrong?
Paradoxical as it may seem, Brazil tried to grow too fast. The 7.6 percent growth came on the back of substantial stimulus after the global financial crisis. In an attempt to keep growth high, the New York Times says the central bank was pressed to reduce interest rates, fuelling a credit spree that overburdened customers are now struggling to repay.² Further, Brazil’s government funded development bank hugely increased subsidized loans to corporations. Certain industries

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