Inflation should be kept low, says RBI governor

Reserve Bank of India (RBI) Governor Raghuram Rajan on Friday said inflation should be kept low not only now but also in the future, and added that reforms are needed for sustainable growth.

Keeping inflation down and implementing reforms are needed for maintaining sustainable growth, Rajan said at an event here.

There are expectations that the RBI would reduce interest rates at its next monetary policy review later this month.

This has been reinforced with the US Federal Reserve deciding to hold its interest rates much against the earlier expectation that they would be hiked.

On the US Federal Reserve's decision, Rajan said this could be due to concerns about the US economy.

He said the US may be waiting for more information before deciding on a rate hike.

Rajan also said the banks should quickly balance their books, and there is need for a bankruptcy code to enable the lenders better handle their loan accounts.

Referring to the problems faced by Brazil after logging accelerated growth in the past, Rajan said: "Growth has to be obtained in the right way. It is possible to grow too fast with substantial stimulus, as we did in 2010 and 2011, only to pay the price in higher inflation, higher deficits, and lower growth in 2013 and 2014."

Rajan said one has to work hard to strengthen the current recovery and put it on more sustainable basis.

"And while monetary policy will accommodate to the extent there is room, we will expand sustainable growth potential only by continuing to implement reforms the government and regulators have announced.

These are intended to strengthen the environment for doing business and to expand access to financing, and these will then in turn allow our companies to find and exploit their core competencies."

He said India must resist special interest pleas for targeted stimulus, additional tax breaks and protections, directed credit, subventions and subsidies, all of which have historically rendered industry uncompetitive, government over-extended and the country incapable of regaining its rightful position amongst nations.

Citing the developments in the financial services sector, Rajan said there was a need for more competition especially from new entrants for sustained growth.

"After a decade of no new entry, we will see two new private banks this year, and a large number of payment banks and small finance banks next year. Licensing is likely to go on tap," he said.

"Competition is only unfair if it is not on the same playing field. In fact, new entrants have no privileges that incumbents do not already enjoy. We hope, though, that the new entrants will find innovative ways of giving customers better services at lower prices, thus shaking up and changing the banking sector for the better," he added.

According to him, financial sector will have new comers and outsiders who would rely on arm's length auctions and contracts, enforced quickly by an impartial bureaucracy and judiciary.

"The clean-up that is taking place in methods of allocating resources like mines and spectrum, and the attempts to improve the speed of bureaucratic and judicial decision making are all much needed to increase participation, though much more has to be done over time. Any reforms have to be institutionalised, so that they outlive the reformer's passing," Rajan said.

Lending his support for the issue of unique identity cards to the people Rajan said on that can expand the access of the poor and young to credit as they borrow against the collateral of their future good name it will also allow the regulator to detect and curb over-lending to individuals by asking lenders to report the IDs of borrowers to credit bureaus.

"Today, unscrupulous lenders can avoid current regulations against over-lending by simply misreporting the borrower's name or address. Similarly, the Government has used UIDs to weed out duplicate beneficiaries for various welfare schemes, allowing better targeting of scarce funds to the very poor," he said.