Raghuram Rajan, governor of the Reserve Bank of India (Photographer: Dhiraj Singh/Bloomberg) 

RBI Should Stick To Its Inflation Targeting Regime, Raghuram Rajan Says

Stay focused and stick to inflation-targeting monetary framework.

That's the word of advice coming in from former Governor Raghuram Rajan to the monetary policy committee, which will announce its monetary policy tomorrow. "It is crucial for the RBI to fend off calls for a rate cut," Rajan, architect of the policy said in an interview to Bloomberg Television.

India has entered the inflation targeting regime relatively recently and has to establish credibility over time that it is controlling inflation, he said "There are ups and downs, there are pressures but the regime working is working as advertised," Rajan reiterated.

Fed Tightening

The U.S. Federal Reserve will probably stay the course and raise rates three times this year since it’s focused on domestic growth and labour market conditions, Rajan said. In an article in the Financial Times earlier this week, RBI Governor Urjit Patel had written that the dollar bond market is likely to face a crisis if the Fed does not reduce the pace of rate hikes.

Also read: U.S. Fed Must Go Slow With Balance Sheet Unwind, Urjit Patel In FT

Need More Faith In Managers Of PSU Banks

The government should have more confidence in managers of public sector banks when they lend, according to former Reserve Bank of India Governor Raghuram Rajan. This comes at a time most state-run lenders are reeling from a bad loan crisis.

“Public sector banks need to do risk assessment credit evaluations and lend and have a sense of confidence among managers that they will be evaluated on a commercial basis,” Rajan told Bloomberg News. “The government should ensure that if they lend with good intent it will not be held against them.”

Government-owned banks, including Punjab National Bank, have been facing bad loan issues after jewellers Nirav Modi and Mehul Choksi defaulted on loans. The bank has been recognising these bad loans and reported its worst-ever loss in the March quarter due to huge provisions to account for this loan. There may be some more bad loans to be recognised but it’s going to be relatively small, Rajan said. “At this point the resolution process is working through.”

Also read: Rajan Sees EM Stress But 'No Clear and Present Danger' in Asia