Base rate needs to be market benchmarked: Rajan

He also said that India will go towards full account convertibility in a few years time

Reserve Bank of India Governor Raghuram Rajan has said  banks’ base rate, the benchmark for pricing their loans, should be more market-determined.

“We need to look at base rate concepts which are more market benchmarked, something like Libor (the London inter-bank offer rate),” he said while addressing the 21st Convocation at the Gokhale Institute of Politics and Economics in Pune

According to the norms issued in 2010, banks are free to calculate the cost of funds on the basis of their average cost or marginal cost or any alternative method, as long as these are available for scrutiny when required.

Rajan said RBI was fairly open to the inflow of foreign funds, barring a few areas such as debt where the central bank has preferred to keep tight control. He also said India will go towards full account convertibility in a few years.

When asked if the US Federal Reserve decision on perhaps soon ending its zero interest rate regime would impact India, he said: “The global liquidity glut will eventually come to an end, when the Fed starts to increase interest rates.”

On the role of the central bank in controlling food inflation, Rajan said RBI couldn't control this but would  look at the second-run impact. He cautioned that the effect of higher prices on wage inflation should be kept in check.

He came out strongly against international organisations siding with industrialised countries, in the context of the need to avoid a global spillover of a country's monetary policy. “We need new rules of the international game. If an emerging economy got into trouble, the international organisations would not have had any problem and would ask it to undertake restructural reforms but if an industrial economy gets into trouble, structural reforms are (considered) too painful and they are allowed to do anything they want, even if it means negative spillover for the rest of the world. That has to be of concern, as the rules of the games are not fairly set across the world.”

He stressed that emerging countries need to work toward modifying the international rules. “We have been too quiet in the emerging markets, saying what the industrial world does is the best for global economies. Sometimes it does but we need better discussion, better policies.”

Later, addressing students at the National Institute of Bank Management's 11th convocation, he said the banking sector was set for much change.

"The sector is set to undergo great changes in the next few years. We are going to have a whole set of new institutions -- payments banks, small finance banks and possibly a postal bank. The existing institutions are going to change tremendously. Public sector banks are going to be a tremendous change agent," he added.