Rajan reiterates hawkish view on price rise

Also says PSU banks divestment to be considered after improvement in governance

Inflation in India as measured by the Consumer Price Index (CPI) is off its peak rate of rise but still high due to supply-side rigidities, Citigroup quoted Reserve Bank governor Raghuram Rajan saying so during an investor summit in Boston, USA, on Thursday.

“Food inflation is a source of discomfort and given the sub-par monsoon this year, there is a need to keep an eye on it,” it quoted Rajan.

The RBI chief reiterated his aim to bring CPI inflation down to eight per cent this year and to six per cent by next year, through a sound monetary policy framework. It had accelerated to a two-month high of 7.96 per cent in July, driven by surging prices of vegetables, fruit and milk.

Rajan also said the government needed to improve the governance of public sector banks before it can reduce its stake in these. The measures he mentioned were separation of the roles of chairman and managing director (MD), an increased tenure for MDs to help them formulate long-term strategy, higher compensation for them, and the related need to attract and retain the best talent in state sector lenders.

In recent years, the focus on financial inclusion has increased. To facilitate greater participation of foreign banks, Rajan said RBI might relook at priority sector lending norms. “One possible solution could involve domestic banks doing more agriculture lending and foreign banks doing more SME (small and medium enterprises) lending,” Citigroup quoted Rajan.

The governor said the limits for government securities had been raised and more would be steadily done. He was, he said, comfortable with the current levels.

Economic growth seems to be picking up on the back of political stability and an improved business and investment climate. It is poised to improve towards an annual seven per cent over the next three years. “Given the low per capita income in India, there is a high potential for catch-up with its Asian peers, considering its demographic dividend,” Citigroup quoted Rajan. “Recent developments on resource allocation such as coal may create uncertainty in the short term but long term, is a positive development.”

He considers it prudent to all to be prepared for the eventual exit from low rates. Due to this, he had pushed the average duration of bond holding to three years and built up reserves, while curbing volatility in foreign exchange rates.

Rajan’s vision for India’s banking system involves a more competitive structure. He believes India needs more banks but RBI was a little conservative in the current round of licensing, as it was timed around the elections, quoted Citigroup.

Rajan believes payment banks could play a key role. Telecom companies and supermarkets could get integrated into the payments network. Besides, small banks could target small entrepreneurs, a population currently underserved, it said.

Rajan also said RBI would like to have a flourishing non-banking finance companies (NBFCs) sector, to complement banks. “There is a need to create a system without significant regulatory arbitrage. RBI will come out with a framework around this – however, NBFCs will continue to be more lightly regulated than the banks,” Citigroup quoted Rajan.