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CNBC Exclusive: CNBC Transcript: Reserve Bank of India Governor Raghuram Rajan Speaks with CNBC's Steve Liesman on "Closing Bell"

WHEN: Today, Thursday, October 9th

WHERE: CNBC's "Closing Bell"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Reserve Bank of India Governor Raghuram Rajan on CNBC's "Closing Bell" today. Following is a link to the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000318607.

All references must be sourced to CNBC.

KELLY EVANS: WELL HE IS ONE OF THE SMARTEST MINDS TODAY IN ECONOMICS AND BY THE WAY, THE BOMBAY SENSEX, INDIA'S STOCK MARKET IS UP MORE THAN 25 PERCENT THIS YEAR UNLIKE HERE IN THE U.S. THE RESERVE BANK OF INDIA IS RESOLVING TO KEEP INTEREST RATES HIGH. THAT IS BECAUSE THEY HAVE AN INFLATION PROBLEM WITH THAT RATE HOVERING AROUND 7 PERCENT. AND THE MAN AT THE HELM OF THAT ECONOMY IS RAGHURAM RAJAN. OUR STEVE LIESMAN SITTING DOWN FOR A RARE INTERVIEW WITH THE GOVERNOR OF INDIA'S RESERVE BANK. STEVE?

STEVE LIESMAN: HEY KELLY, I THINK YOU ARE LIKE ME. WE BOTH LEARNED A LOT OF ECONOMICS FROM WHEN HE WAS AT THE UNIVERSITY OF CHICAGO. IS THAT RIGHT?

KELLY EVANS: WELL, LET'S JUST SAY I FOLLOWED HIS WORK CLOSELY, STEVE, FOR YEARS. EVERYBODY DOES. EVERYBODY WANTS TO HEAR WHAT HE HAS TO SAY.

LIESMAN: EVERYBODY DOES. IT IS A GREAT OPPORTUNITY TO HAVE AN EXCLUSIVE INTERVIEW WITH RAGHURAM RAJAN THE GOVERNOR OF THE BANK OF INDIA, THANKS FOR JOINING US.

RAGHURAM RAJAN: THANK YOU.

LIESMAN: KELLY AND I BOTH AGREEING THAT WHILE WE COVERED U.S. REPORTERS AT THE UNIVERSITY OF CHICAGO, WE LEARNED A LOT FROM YOU. TODAY THE MARKETS WERE INCREDIBLY VOLATILE. DOWN 340 POINTS IN THE UNITED STATES. I THINK WE MOVED SOMETHING LIKE 2,000 POINTS IN THE LAST SEVERAL DAYS. WHAT EXPLAINS THE VOLATILITY IN YOUR MIND WHEN YOU LOOK AROUND GLOBAL MARKETS?

RAJAN: WELL FIRST, I THINK THE BIGGEST SOURCE OF VOLATILITY NOWADAYS IS EXPECTATIONS AND WHAT MARKET POLICY IS GOING TO DO IN REACTION TO EVENTS. IS THE U.S. GOING TO TIGHTEN MORE? WHAT IS GOING TO HAPPEN IN EUROPE? AND SO ON. BUT OF COURSE, THERE IS AN UNDERLYING REAL ECONOMY, ALSO. AND ONE OF THE BIGGEST CONCERNS IS THAT THE WORLD ECONOMY IS NOT PICKING UP. THE IMF HAS DOWNGRADED ITS FULL COST REPEATEDLY, WE'VE SEEN CHINESE GROWTH SLOW DOWN, WE'VE SEEN JAPAN NOT PICKING UP AFTER THE TAX RATE RISE, WE'VE SEEN EUROPE IN A VERY BAD WAY. ITALY, ACTUALLY, HAS NEGATIVE GROWTH. FRANCE IS NOT PICKING UP. SO, BIG PARTS OF THE WORLD ECONOMY ARE NOT GROWING EVEN WHILE THE U.S. IS PICKING UP. SO THE QUESTION IS, CAN THE U.S. LIFT THEM OUT? WHAT DOES MONETARY POLICY IN THE U.S. DO IF THE U.S. IS ONE OF THE ONLY PLACES STRENGTHENING?

LIESMAN: HOW IMPORTANT IS THAT FOR THE WORLD THAT THE U.S. DOES – IS ABLE TO SORT OF REACH A SKATE VELOCITY. WHAT IF IT DOESN'T?

RAJAN: IT'S EXTREMELY IMPORTANT. AND WE'RE ALL HOPING THAT THE U.S. IS THERE. UNFORTUNATELY, EVERY YEAR AT THE BEGINNING OF THE YEAR WE THINK THE U.S. IS GOING TO GO 3.5 PERCENT. BY THE END OF THE YEAR, IT IS DOWN TO 2. WE ARE THINKING AGAIN NEXT YEAR WILL BE 3.5. LET'S HOPE IT DOES HAPPEN.

LIESMAN: ONE OF THE THINGS I THOUGHT I KNEW ABOUT MONETARY POLICY, WAS THAT CENTRAL BANKERS – THEY COULDN'T PICK AN UNEMPLOYMENT RATE, BUT THEY COULD PICK AN INFLATION RATE. I LOOK AROUND THE WORLD TODAY AND I SEE KEY CENTRAL BANKERS LOSING THIS WAR ON DISINFLATION OR DEFLATION. THEY CAN'T SEEM TO GET THE INFLATION. WHAT'S GOING ON IN THE WORLD IN YOUR OPINION THAT THESE INFLATION NUMBERS KEEP COMING IN LOWER WHILE THEY KEEP PUTTING ON THE ACCELERATOR MORE WHEN IT COMES TO MONETARY POLICY?

RAJAN: WELL, ESSENTIALLY MONETARY POLICY HAS LIMITS. IF EVERY TIME YOU PRESS THE ACCELERATEOR YOU PUMP MORE RESERVES INTO THE ECONOMY, BUT BANKS ARE WILLING TO HOLD THOSE RESERVES WITHOUT ACTUALLY LENDING, WITHOUT INCREASING CREDIT. THEN MONETARY POLICY IS ACTUALLY PUSHING ON A STRING. I THINK IN MANY COUNTRIES WE ARE IN THAT SITUATION NOW. SO WE ARE LOSING THE ABILITY TO GET TRACTION ON INFLATION. OF COURSE, WE IN INDIA DON'T HAVE THAT PROBLEM.

LIESMAN: COMPLETELY DIFFERENT PROBLEM. NOW, I WANT TO TALK ABOUT INDIA IN JUST A SECOND BECAUSE IT'S ASTONISHING HOW DIFFERENT IT IS FROM THE REST OF THE WORLD. BUT I WANT TO JUST FOCUS ON THE GLOBE FOR ONE MORE QUESTION HERE. THIS ISSUE OF MONETARY POLICY AND THE ABILITY TO GET TRACTION AND GET OUT OF THE CURRENT TRAP THAT THEY SEEM TO BE IN RIGHT NOW. DO YOU THINK THAT EUROPE AND MARIO DRAGHI HAS THE ABILITY TO GET THE RIGHT POLICIES IN PLACE? OR ARE THE POLITICS JUST TOO DIFFICULT?

RAJAN: WELL, I DON'T KNOW. I THINK MARIO DRAGHI HAS BOUGHT TIME FOR EUROPE. BUT THE POLITICAL SYSTEM HAS TO TAKE THAT FORWARD THROUGH THE REFORMS THAT ARE NEEDED IN COUNTRY AFTER COUNTRY. AND WHAT WE HAVE TO WAIT AND SEE IS, CAN EUROPE USE THE TIME THAT THE ECB HAS BOUGHT FOR IT WISELY?

LIESMAN: GETTING NOW TO INDIA. ONE OF THE THINGS YOU'VE SPOKEN ABOUT IS YOUR CONCERN ABOUT U.S. RATE HIKES. IS IT STILL SOMETHING THAT CONCERNS YOU IN THE EFFECT ON INDIA? AND YOU HAVE ALSO SAID THAT WE NO LONGER HAVE INTERNATIONAL MONETARY POLICY COOPERATION. IS THAT STILL TRUE?

RAJAN: WELL FIRST, WE WERE HIT BY THE TEMPER TANTRUMS IN JULY OF LAST YEAR. BUT I THINK SINCE THAT, WE'VE HAD TWO OTHER EPISODES. IN JANUARY, WHEN ARGENTINA HAD SOME PROBLEMS. EMERGING MARKETS FACE MORE PROBLEMS. INDIA CAME THROUGH THAT FAIRLY SAFELY AND STABLY. AUGUST AGAIN, WE HAD TURMOIL IN EMERGING MARKETS. INDIA AGAIN WAS RELATIVELY CALM AT THAT TIME. SO MY SENSE IS, WE'RE IN A MUCH BETTER SITUATION RELATIVE TO THEN BECAUSE THERE HAVE BEEN MAJOR CHANGES IN INDIA'S MACRO STABILITY. WE'VE GOT A LOWER CURRENT ACCOUNT DEFICIT, LOWER FISCAL DEFICIT, LOWER INFLATION. THERE IS MORE CONFIDENCE.

LIESMAN: SO WHAT IS YOUR INFLATION RATE? BECAUSE PEOPLE AREN'T GOING TO BELIEVE THAT. WHAT IS YOUR INFLATION RATE THERE?

RAJAN: 7.8 PERCENT AS OF THE LAST COUNT.

LIESMAN: EVERYBODY ELSE IS NEAR ZERO. YOU HAVE 7.8 PERCENT.

RAJAN: YES.

LIESMAN: BUT IT'S BEEN COMING DOWN?

RAJAN: IT'S BEEN COMING DOWN.

LIESMAN: AND PEOPLE ARE BEGINNING TO BELIEVE THAT SOMETIME NEXT YEAR YOU'RE GOING TO CUT INTEREST RATES.

RAJAN: WELL, THEY BELIEVE THAT. I CAN'T ENLIGHTEN THEM ON THAT RIGHT NOW BECAUSE WHAT WE HAVE SAID IS, WE'RE WELL POSITIONED AS FAR AS REACHING OUR TARGET OF 6 PERCENT BY THE END OF NEXT YEAR GOALS. BUT IF THE DATA COMES IN MORE FRIENDLY, WE'LL BE IN A POSITION TO CUT RATES. IF THEY ARE MORE HOSTILE TO OUR INFLATION TARGETS, WE WILL HAVE TO RAISE RATES. SO WE'RE DATA DEPENDENT AS THE FED PUTS IT.

LIESMAN: PRIME MINISTER MODI IS A HUGE SENSATION HERE IN THE UNITED STATES, AROUND THE GLOBE. HE'S BEEN THOUGHT TO BE VERY, VERY PRO BUSINESS. WHEN YOU LOOK AT HIS POLICIES AND WHAT IS HAPPENING, WHAT KIND OF EFFECT DOES IT HAVE ON THE CENTRAL BANK? WHAT IS YOUR VIEW OF THE EFFECT IT WILL HAVE ON THE INDIAN ECONOMY?

RAJAN: WELL FIRST, I THINK THE FACT THAT WE HAVE A STABLE GOVERNMENT IS A VERY BIG PLUS FOR INDIA. THERE WAS A LOT OF POLITICAL UNCERTAINTY THAT HAS BEEN REMOVED BY THE VAST MAJORITY THAT THE GOVERNMENT HAS. SECOND, IT'S A BUSINESS FRIENDLY GOVERNMENT. AND IT'S WORKING AT THE MICRO LEVEL, CLEARING OUT THE REGULATIONS, MAKING IT MORE BUSINESS FRIENDLY AS FAR AS, SAY, TAXATION GOES. GIVING MORE CLARITY ON TAXATION. SO THE NUMBER OF PLACES WHERE THEY ARE TRYING TO IMPROVE THE BUSINESS ENVIRONMENT, THEY HAVE A GOAL OF BRINGING INDIA ON THE WORLD BANK SCALE DOWN FROM 130 ON HOW EASY IT IS TO DO BUSINESS, TO THE 50TH COUNTRY ON THAT LIST. SO THAT IS AN ADMIRABLE GOAL. LET'S SEE HOW IT WORKS OUT. BUT ACTION IS HAPPENING AND THAT MAKES OUR JOB MUCH EASIER.

LIESMAN: RAGHURAM RAJAN, THANK YOU FOR JOINING US. I'LL SEE YOU SOON WHEN YOU'RE BACK AT THE UNIVERSITY OF CHICAGO IN, I GUESS, SEVERAL YEARS FROM NOW.

RAJAN: THANK YOU VERY MUCH.

LIESMAN: THANKS FOR JOINING US. KELLY BACK TO YOU.

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