(MENAFN- Arab Times) NEW DELHI Aug 10 (AFP): India's central bank governor said Sunday the country was on course to meet the bank's targets on reduced inflation adding that it was working with the new government on monetary policy. Reserve Bank of India (RBI) governor Raghuram Rajan said the bank had started discussions with Prime Minister Narendra Modi's right-wing government on a monetary policy framework that includes measures to control inflation. The RBI on Tuesday left the benchmark repo rate at which it lends to commercial banks unchanged at a steep 8.0 percent citing a need to clamp down on rising prices. Retail inflation slipped to 7.3 percent in June and the RBI said earlier this year it was aiming for consumer-price inflation of 8.0 percent next January. 'We think at the current interest rate policy rate we are on course to meet those targets' Rajan told reporters after a meeting of the RBI's central board in New Delhi. 'We will be discussing the monetary policy framework through the course of the year. Just now we have started a preliminary discussion (with the government)' he said. Businesses have been clamouring for a cut saying high rates discourage investment needed to help India's economy get back on its feet. The government which swept to power at elections in May has pledged to reform and revive an economy growing at less than five percent over the last two years. Finance Minister Arun Jaitley addressed the meeting the first since the government's maiden budget was announced last month. Jaitley told the bank board that the government's 'policy regime is being geared towards attaining higher growth rate lower inflation and sustainable external balance' an RBI statement issued after the meet said. Rajan explained Sunday that the recent cut in the statutory liquidity ratio the amount banks must keep in government securities by 50 basis points to 22 percent would not immediately help expand credit growth. 'Over time as the private sector public sector starts investing more you will see that credit growth would pick up' he said. The central bank governor who famously predicted the 2008 global financial crisis earlier this week warned of another market crash as asset prices surge. Earlier India's central bank governor renowned for forecasting the 2008 financial meltdown warned that the world economy faces risk of another market crash as asset prices surge. Increasing global financial instability stems from investors chasing ever higher yields Raghuram Rajan a former International Monetary Fund (IMF) chief economist told the Central Banking Journal. 'True it (another financial sector crisis) may not happen if we can find a way to unwind everything steadily' Rajan who is famed for predicting the 2008 markets crash years in advance said in the interview posted late Wednesday on the journal's website. 'But it is a big hope and prayer' said the Reserve Bank of India (RBI) governor adding there is a risk of sudden price reversals and sharp spikes in financial volatility. Rajan author of the acclaimed 2011 book Fault Lines on how hidden financial fractures threaten the world economy added he feared central banks globally 'may be exhausting room' in their monetary-easing arsenal to cope with any economic crisis. Rajan compared today's state of affairs as similar to the 1930s which was the era of the Great Depression. 'We are back to the 1930s in a world of 'competitive easing'' Rajan said referring to ultra-low interest rate policies pursued by the US Federal Reserve the Bank of Japan and the Bank of England in a bid to stimulate their economies and spur growth. 'Back then it was competitive devaluation (of currencies) but competitive easing could lead to competitive devaluation' says Rajan. 'If there were no consequences to competitive easing (to spurring economies) fine; but there are consequences' he warned. Rajan left his post as professor at the prestigious University of Chicago's Booth School of Business and returned to India in 2012 to serve as government financial advisor and last September took over the Reserve Bank of India. Last week India's central bank left interest rates unchanged keeping a watchful eye on inflation as it waits to assess the impact of weak annual rains on food prices. After meeting in financial capital Mumbai the Reserve Bank of India (RBI) said the benchmark repo rate at which it lends to commercial banks would remain steady at a steep 8.0 percent. The move was widely expected by economists who said the RBI needed time to assess whether a drought situation could emerge and send food prices soaring despite a recent easing in the consumer price index. 'With some continuing uncertainty about the path of the monsoon it would be premature to conclude that future food inflation and its spill-over to broader inflation can be discounted' said RBI chief Raghuram Rajan. Rajan has raised the key repo rate three times to clamp down on rising prices since he came to the helm in September gaining a reputation for hawkishness on inflation even with the economy growing at sub-five percent for a second straight year. Businesses have been clamouring for monetary easing saying the current high repo rate discourages investment needed to help India's economy get back on its feet. Although June's consumer price index closely watched by the central bank rose by its slowest pace since January 2012 climbing 7.31 percent from a year earlier Rajan wants further evidence inflation is slowing before cutting rates. Indian farmers rely for irrigation largely on the annual rains which are more than 20 percent below average so far this year meaning the CPI is likely to rise again later in the year. 'The Reserve Bank will continue to monitor inflation developments closely and remains committed to the disinflationary path of taking CPI inflation to 8 percent by January 2015 and 6 percent by January 2016' Rajan said. The central bank on Tuesday cut the statutory liquidity ratio the amount banks must keep in government securities by 50 basis points to 22 percent to free up funds for the banking system and spur economic activity. But the cash reserve ratio the amount of cash deposits that banks must keep with the RBI was held steady at 4.0 percent. India's economy and inflation levels remain highly vulnerable to any sharp rise in global crude oil prices as New Delhi imports more than 80 percent of its oil needs. Rajan said upside risks to inflation included 'possibly higher oil prices stemming from geo-political concerns and exchange rate movement and strengthening growth in the face of continuing supply constraints'. Meanwhile India's cabinet has approved plans to open its defence and railways industries to foreign investment as Modi's right-wing administration moves to reform and revive the ailing economy. The cabinet agreed late Wednesday to increase the limit on foreign direct investment in defence to 49 percent from 26 percent and allow unlimited investment in railway infrastructure officials said. Railway Minister Sadananda Gowda said Thursday that foreigners would still be barred from investing in railway operations amid uproar in parliament over the measures. 'As far as the operating portion of the railways is concerned certainly we are not allowing FDI.(It is) only in infrastructure and other areas' Gowda told reporters. Left-wing parties accused the government of 'selling off' national assets while industry applauded the move as critical for moderisation of the sectors. The government which unveiled both plans in the budget last month is attempting to push ahead with reforms after sweeping to power at elections in May with the biggest mandate in 30 years. But its efforts hit a major hurdle this week when the opposition blocked its attempts to introduce legislation to lift investment in the insurance sector. Cabinet approval comes on the eve of US Secretary of Defence Chuck Hagel's visit to India to strengthen ties between the two militaries and to drum up defence deals. Hagel was expected to meet with top government ministers during the three-day visit. 'The US recognises the immense potential for its companies in the Indian arms market' with the lifting of the investment cap analyst Sameer Patil from Mumbai-based think-tank Gateway House said this week. Modi's government wants to speed up modernisation of its Soviet-era military after years of slow procurement and the collapse of deals over corruption allegations. India the world's biggest arms importer has traditionally relied on Russia but has turned to the United States in more recent years for equipment and other technology. Investment in India's vast and crumbling state-run railway network which carries 23 million passengers a day is desperately needed after years of neglect. India struggles to fund upgrades of the network partly developed under British colonial rule because most of its revenues are spent on operating costs and fears of a major public backlash if fares are lifted. Railway and defence shares were mostly trading up on Thursday on the cabinet approvals on the Bombay Stock Exchange. Industry body FICCI said lifting the railway cap was critical 'for introducing high- speed trains suburban corridors and dedicated freight line projects' with public private partnerships. But analyst Vishwas Udgirkar a director of Deloitte India warned against expecting a rush of investment saying foreign companies would first form joint ventures with India firms before taking cautious steps.
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