RBI Governor Raghuram Rajan stressed the need for sustainable growth in the country while keeping the inflation rate low. “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,” said Dr. Rajan. However, he said that ‘India is not in the same situation today.” With the world being an inhospitable place, said Dr. Rajan, “we have to work hard to strengthen our current recovery and put it on a more sustainable footing.” For the RBI, however, he said that a key task is to keep inflation low so that “we get moderate nominal interest rates that satisfy not just the vocal borrowers but also the silent savers.” The RBI Governor also stressed the need to clean up the banking system of distressed assets so that it is in a position to fund growth again.
To improve the environment of the financial sector, Dr Rajan, elaborated on four aspects: the need to foster competition and innovation, create a hospitable environment to those who don’t belong to the club, improve structures for dealing with distress and strengthening human capital.
“We have to find ways to deal with the distress in the banking system,” said Dr. Rajan. Regulatory forbearance, where RBI softens its rules on classifying bad loans, only makes it easy for banks to “extend and pretend.” “It is not a solution.”
