Raghuram Rajan says Fed going for 25 bps rate hike a strong possibility amid bank crises

A pause in the Fed rate hike looks unlikely and a 25 bps hike still looks like a strong possibility, said former RBI Governor and economist Raghuram Rajan in an exclusive interview with CNBC-TV18, citing the fact that the core inflation in US is still going strong.

"Well, I think in the US, at least for the moment there seems to be a sense that the Fed has pulled out all stocks. Depositors have been guaranteed right up to the largest depositors who typically are uninsured and and second, banks have access to liquidity by using the entire value of their bond portfolio. Remember, there are two reasons for concern in the US. One is a lot of small and medium banks are sitting on unrealized losses on their bond portfolios," he said.

"Many of them holding long term bonds which have fallen in value with the Fed's rate hiking and the second is, many of them have a lot of uninsured depositors and the toxic combination of these two asset values having fallen and uninsured depositors getting very anxious is what led to Silicon Valley Bank's failure. And what is being attempted now is to reassure both sides, on the one side you can borrow against the full value of your...your assets and on the liability side, don't run...we've got you covered," he said.

"So hopefully that should be enough to quell concerns. Of course, you know, banking panics are things that that happened. And you know, if I was a large deposit on a small bank, I might still say, look I don't really want to be dependent on the government. Let me take my money to a money center bank like JP Morgan or Citibank and that might continue, the slow run may continue. So the Fed has to watch and see what's going on," the former RBI Governor added.

Rajan said, "The CPI report that came out yesterday is not a comfortable one. Core inflation in the US is still going strongly, inflation has come down. But that was in a sense, the easy part, the supply chains rectifying and so on. The tough part now comes bringing it down to the 2-2.5 percent that the Fed will feel comfortable with and that's where it's really overly strong. Now the Fed will hope perhaps that some of this financial sector concern will slow the economy, but that's not the way it wants the economy to slow. It wants demand to come off for good reasons rather than because of fear."

"So I think if the Fed sees that the financial sector stabilises, it may still go with a 25 basis point hike; I think 50 (basis point hike) is off the table. And the reason for that is to just say it hasn't paused or it will do zero. But again, make the statement that it hasn't paused. It is just taking a little bit of time getting to where it wants to. My sense is 25 (basis point hike) if the financial markets come down, but you know, it is in a tough place."