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CNBC Transcript: Interview with Raghuram Rajan, Governor of the Reserve Bank of India

Following are excerpts from the transcript of a CNBC interview by Geoff Cutmore and Raghuram Rajan, Governor of the Reserve Bank of India.

GC: I have with me the governor of the Reserve Bank of India, Raghuram Rajan, and I think it's useful at this point to get some more perspective on what is happening on these markets at the moment, so thank you very much for joining us here, and let me just ask you that question. Why do you think we have such volatility in markets today?

RR: Well, I think one is jitters, everybody is looking at everybody else and saying, 'Is this the point where they take the money off the table?' because markets have moved up quite a bit. So that's part of it. Part of it is wondering what is really happening in China, why did the Renminbi start moving a little, and is there more to come? And of course the oil price, how far will it go and does it affect some entity, some lever entity somewhere, which has oil exposure, and does that create problems? So I think some jitters are really jitters about jitters, and some is really wondering about fundamentals.

GC: Do you think the fundamentals, though, justify this decline in asset prices that we're seeing?

RR: Broadly, no. Of course, it's hard to tell what the right level for asset prices are, but is there something that changed dramatically over the last few weeks that would say the world economy is heading downwards? I don't think so. In fact, there is a fair amount of sense that, yes, we're trudging along more slowly than we should, but it's not the abyss that we're looking at.

GC: You talked about the concerns, or the opacity, around Chinese policy at this point. You have peer-to-peer relationships with the Chinese. Do you think we should take at face value their commitment not to devalue the Renminbi?

RR: I think the Chinese have been saying at every forum, certainly that I have participated in, that that is not their intent. That certainly they're targeting a basket now, rather than the Dollar itself, but given that, they are not into a situation of comparative depreciation or devaluation, and they do worry about the effects of their actions on other countries, so they've made that quite clear, and I have no reason to doubt that.

GC: How do you feel that you should respond, as the governor of the central bank, to the nervousness that we see in Indian assets specifically? Because the Sensex is off, well, nearly 3%, I think, today. The Rupee also having something of a wobble, at this stage.

RR: Well, the Sensex came back quite a bit in the last few hours of trading, but also the Rupee has been relatively strong amongst emerging market currencies, so we are affected by the same kind of jitters, but my sense is at this point if you are an emerging market, you focus on the fundamentals, try and get inflation down, try and get your current account deficit down, keep your fiscal on target, do all the good things, and then people reward you. They take the money off the table in a hurry when they are doing it everywhere, but then they come back, and so my sense is that after the initial volatility, things will stabilise, people will try and look for the good, stable emerging markets. India is one of them. Our growth is pretty good, all the other indicators seem to be going well.

GC: There are questions as to whether monetary policy should be easier, of course, in India, and we have an upcoming meeting. Could you just talk to us a little about the monetary environment that you think India is currently experiencing, and whether given that we're now seeing another chip lower in the energy prices, the risk of inflation really is ebbing away here, and that there is more room to manoeuvre?

RR: Well, it is certainly true that the rest of the world is facing a deflationary environment, and so to that extent, it helps us disinflate. It's helped us quite a bit so far, you're right, the lower price of oil will help. We, of course, are set on meeting a target of below 6% by January, which, you know, all things put together looks like we'll meet that. Going forward, we have to disinflate a little more. So at the meeting, we'll take all these factors into account and decide what the next step is, but broadly I would say we're on the right path.

GC: But you feel that the room to manoeuvre is getting wider at this stage, because of what we're seeing in international markets?

RR: Well, there are all sorts of forces, right? On the one hand, the international investor wants to be convinced that you will stay the course, and you will disinflate, because he prefers lower inflation, or she prefers lower inflation, rather than higher inflation. So we need, at points of volatility, to reassure them that that is indeed what we intend to do. At the same time, you're right that the disinflationary environment around the world does create room, so we have to play these things against each other.

GC: Does it accelerate, then, in the sense that you feel that you could move to lower rates over a quicker timeframe, given what we're seeing?

RR: I think going forward, if these forces persist, obviously it will give us more room.

GC: So it will give you some more room to-, just one last question. Interesting that you say that, because I know that there is some nervousness about your independence and your ability to manoeuvre, and there were some concerns that Mr Modi's government, and Mr Jaitley, getting frustrated with what they saw as rates not coming down quickly enough, they were trying to weight the board a little bit, to make it difficult for you to manoeuvre. Could you just give us some reassurance that you are not being leant on, and that you are fully independent?

RR: No, we have a great relationship with the government. It's a perfectly respectable relationship where-, respectful, I should say, we both respect each other, and we have absolute independence in what we need to do. We have an inflation framework, an inflation target, we intend to meet it, and that's what we're going to do. So yes, the government advises, yes, on certain issues we cooperate, but the decisions are always ours.

GC: And you were just in Australia, I know, and when asked about the reform program that's currently being worked through, you answered, 'Implementation, implementation, implementation,' which I thought was a fantastic answer when asked what were the three things we need to see achieved in India at the moment. Just give us a sitrep, as the Americans would say. How far have we come, and how much more needs to be done?

RR: Well, this is the interesting thing. When people think about India, they think about the iconic things that they want to see happen, for example, the goods and services tax, but there's a lot that's happening on the ground. Things are moving, actions are being taken. I think if we persist in this, and I have no doubt that we will, this will amount to something much bigger. My sense is we are something like we were in 2001/2002, when we did a lot of work but didn't show up in the growth numbers. We were laying the stage, and after that we had ten years of very strong growth. So my hope and my expectation is that that is what we are doing now. A lot of little, little reforms that combine together to make a big reform. For example, in the financial sector, a lot of new banks are coming on stream in the next year. That's going to be a big change, it's going to be a very interesting change with a lot of people will be brought into the financial sector. So my sense is we're getting things done. Now, people look for big things. They may happen, they probably could happen, but small things are getting done on the way.

GC: One last question about the success of India currently. FDI flow is heading in your direction. That's a good thing, but it also brings challenges, of course. I wonder, is there any risk associated with the growing perception that you are the last man standing in the brick house and you are the marketplace that represents the best opportunity at this stage?

RR: Well, I think the risk is we believe it, in which case we stop doing the things we need to do. I think so long as we believe we have something to do, and we continue working on reforms, continue implementation, which is what we are doing, I think it will serve us well. The moment we think we have arrived, that's when problems start. I don't think we are there, I don't think that's the belief in the government or in the reserve bank, I think we are trying to get things right.

GC: And what measures do you think you may need to take, at the reserve bank, just to make sure that that hot money flow is not disruptive?

RR: Well, we've taken a number of measures already. We, for example, get bond inflows into the longer term bonds rather than shorter term bonds. We've got an adequate level of reserves, but I think again and again it's been proven that the best defence is good policy, and that's what we are continuing to try and do at the reserve bank, what the government is doing. Just yesterday, or the day before, the government announced an entrepreneurship friendly programme, how to remove the business regulations that stifle entrepreneurship. So for three years you don't have to report to an inspector. What a wonderful thing. If we can do more of this stuff and start creating a business environment which will allow a lot of small people to grow into big, big guys, I think that's wonderful. This is an example of the kind of micro reforms that are underway that I think will catch on and will help us.

GC: Very good to have you with us, thank you so much for giving us the benefit of your thoughts, and the reassurance that you don't think the sell off at the moment is really about fundamentals, just jitters about jitters. Good to talk with you.

RR: Thank you.

GC: The Governor of the Reserve Bank of India, Mr Rajan.