Govt has political strength to undertake reforms but it hasn't done it so far, says Raghuram Rajan

Former Reserve Bank of India (RBI) governor Raghuram Rajan said that the Fed's signal to pause interest rate cuts in the upcoming policy meetings seems appropriate. Speaking to CNBC, he said India needs new generation of reforms for economic growth. He also talked about the need for cleaning up of the banking system.

Speaking about India, he said that the country has witnessed substantial economic slowdown.

“India needs far stronger growth but it is not going to come from tinkering. It really needs another generation of reforms. Good news, the government has a political strength and the power to undertake those reforms. Bad news,

“Let me not get into political back and forth. The reality is there is a clean-up which we started, which is underway, which needs to be completed fast. The recapitalization has been done but it also has to be done in the non-bank financial sector which is ceasing up and you need to clean-up, get the financial system going again if you want stronger growth,” he added.

The US Fed on Wednesday cut interest rates for the third time this year in a move to ensure the US economy weathers a global trade war without slipping into a recession but signalled its rate-cut cycle might be at a pause.

On the development, Rajan said: “They certainly feel they have done enough to buy insurance against a recession and they have also said they will wait and see. So at this point pause seems appropriate."

"I think they have also, to some extent, bought themselves cover against the charge that they are leading the economy into a downturn that some in the administration have made but also they have exhausted whatever spare room there was within the Fed in terms of dissensions getting strong if you accommodate more,” he added.

When asked whether Fed is influenced by political pressure, Rajan said: “I do not think they would be influenced directly but I cannot believe it’s not at the back of their minds that with the kind of accusations that are being made, they certainly do not want to be in a position where they make a mistake and find that they have been too tight and the economy plunges into a recession.”

Talking about interest rates, he said: “What we have in a period of low rates and high liquidity is high degree of leveraging and the IMF

Rajan added: “I do not think financial risks are going to tip us over into a recession but I do think they could make a recession much worse and much harder to get out of which is why the insurance cuts are probably a wise thing at this point.”