RBI Governor Raghuram Rajan says core inflation higher than desired

He also said that recovery of Indian economy should accelerate with a good monsoon

India's core inflation remains a bit higher than policymakers would like, but the economy's recovery should accelerate with a good monsoon, Reserve Bank of India (RBI) Governor Raghuram Rajan said on Friday.

The remarks come a day after data showed consumer prices rose last month at a more-than-expected 5.39% annual rate, up from 4.83% in March. It was the first increase in the retail inflation rate since January.

With Rajan targeting 5% retail inflation by March 2017, his comments will solidify the view that the RBI will hold interest rates steady at its June 7 policy meeting. The bank cut rates last month to a four-year low of 6.5% in April.

 

"Broadly, core inflation has been fairly sticky, a bit higher than we would want. It hasn't moved up and down. We will continue on the task of anchoring expectations," Rajan said at an event at the Chicago Booth business school in London.

Core inflation strips out volatile items such as food and energy.

Rajan said growth also seemed to be ticking higher. India's economy is among the world's fastest growing, at 7%-plus, but the 8% level needed to alleviate poverty remains elusive. The latest quarterly growth was also slower than the prior quarter.

"I think we are at the beginning or maybe in the midst of a slow recovery. The signs of faster growth are there - auto sales for example, cement production and consumption. And a good strong monsoon would accelerate the process of recovery."

One issue for India is that banks remain reluctant to lend and to reduce rates for borrowers, despite 150 bps basis points of rate cuts in the past year. To ensure rate cuts feed into the economy, the RBI has injected billions of rupees via open-market bond purchases and cut daily maintenance of bank cash reserve ratios.

Rajan has made cleaning of bad loans a priority. Extra provisions had to be made for bad loans of banks which are burdened with stressed assets. He said the banks now have the instruments to deal with the bad debts.

"Now they have instruments they can start dealing with it ... parliament has just passed the bankruptcy law, so I am hopeful the clean up will happen and create the necessary room banks need to lend," he said.

"(Non-performing loans) is an issue, but we have acted early enough on these concerns so it's manageable."