India story is intact, even with inflation cloud, says Rajan

RESERVE Bank of India (RBI) governor Raghuram Rajan has reiterated his confidence in the Indian economy saying gross domestic product (GDP) growth is poised to improve to 7% over the next three years although it would

The RBI governor says GDP growth is poised to improve to 7% over the next 3 years although it would be a steady and not a V-shaped recovery

be a steady and not a Vshaped recovery. The governor, who was speaking at an event organised by Citibank in Boston on Thursday. “Recent development on resource allocation such as coal may create uncertainty in the short term, but longterm, it is a positive development,” Rajan said, according to a Citi report on the event.

The report quotes the governor as saying the RBI considers it prudent to be prepared for the eventual exit from low rates. The central bank has pushed the average duration of bond holding to three years and built up adequate reserves while also curbing volatility in the forex market. Rajan also said that the limits for government securities will be steadily increased but the RBI is comfortable with the current limits. On the price rise, the governor observed that while inflation was off peaks, it remained high due to supplyside rigidities. Nevertheless, the aim was to achieve 6% by January 2016 and to fight rising inflation just once.

However, he added that there is a some discomfort in food inflation due to the subpar monsoon this year and there is a need to keep an eye on food inflation.

“The aim is to achieve 8% CPI inflation this year and 6% by next year through a sound monetary policy framework,” he added.

Speaking on banking sector reforms, Rajan stressed on the need for a more competitive banking structure. “While India needs more banks, the RBI was a little more conservative in the current round of licensing, given that it was timed around the elections,” he said.

Rajan also called on foreign banks to be a part of the financial inclusion agenda, and to facilitate greater participation, the RBI might take another look at priority sector lending norms. “One possible solution could involve domestic banks doing more agriculture lending and foreign banks doing more SME lending,” he suggested.

On stressed assets, the governor in his address said there are some signs of this stress easing in the last few quarters with project approvals being fast-tracked and levels of stalled projects have started to decline. “The RBI is encouraging banks to restructure loan faster. Greater participation from asset reconstruction companies will help to alleviate stress in the system. There seems to be some interest from foreign investors in this area.”

Speaking on fiscal consolidation, Rajan observed that the quality of the deficit could be improved, particularly on the subsidy rationalisation and capital expenditure front. “As regards to the current account deficit, other than the measures take non gold, the trend in oil prices and exports growth is supportive,” he added.