Outgoing Reserve Bank of India Raghuram Rajan, who was attacked by some for following his tight monetary policy stance, found backing from his University of Chicago colleague, nobel-laureate Lars Hansen.
In an exclusive chat with Nisha Poddar on the sidelines of an ISB event, Professor Hansen said Rajan had "worked hard" to bring inflation to reasonable levels and said his successor should continue the inflation crusade.
He added that banking reforms and attractive labour market can get more foreign direct investment (FDI) flows into India.
"There have been some positive moves made in terms of transparency of the public banks and I would hope that that continues in the future," he added.
Hansen is of the opinion that there was scope to make the banking sector more private and 'not just leave [banks] in the hands of the government.'
Below is the transcript of Lars Hansen's interview to CNBC-TV18's Nisha Poddar.
Q: What are your thoughts on the Indian economy?
A: There is lot of potential for the Indian economy and so I can understand the sentiment, the positive sentiment towards it. Certainly the evidence that foreign direct investment in India has been increasing, I think that is all a very positive sign. I think there are more steps that India can do to even make this more attractive for investors in the future.
The Indian economy right now - the banking sector is largely government run, I think down the road trying to make that more private can be a very productive move and can help to nurture investments and smaller enterprises where a lot of the job growth can emerge. Like other economies I think there are still challenges in terms of the labour market, removing wages in the labour market to make it all the more attractive for foreign enterprises to locate here.
So, I see many positive signs and I also think there are challenges that can even make things better in the future.
Q: Raghuram Rajan is not going in for the next term as RBI governor. Whoever is the next RBI governor going to be, what is your word of advice for him?
A: Over the course of the last few years the RBI has been very concerned about inflation, it has worked hard to bring inflation back to reasonable levels. I hope that next governor does the same too. I think there is a danger when the population, when the press and when government looks to monetary policy for doing too much.
I also think there have been some positive moves made in terms of transparency of the public banks, I think that has been a very positive sign, I would hope that that continues in the future. I would hope that there is going to be explorations of how to make the banking sector more private and not just leave in the hands of the government.
Q: What do you think about how Janet Yellen is taking forward the rate hike thing because all the indications do suggest at this point and many economists have also said that probably the time is right for a rate hike, what do you have to say to that?
A: I believe that we should be engaging in a very slow and measured set of rate hikes and the way it is done are really predictable ways. My sometimes worry about the Fed is trying to not be as clear on its policies as it could be and it induces a type of policy uncertainty which investors then have to factor in. The uncertainty alone can be a drag on the economy. So, a more predictable approach would be better.
Q: What do you make of Brexit? How is it going to behave? Are you going to see more downturn in the way the economy in Britain is developing?
A: Brexit is a drag on both the British economy and the US economy and the world economy largely because of the uncertainty it puts on the table.