Raghuram Rajan urges Fed to raise rates to contain inflation

Former Reserve Bank of India governor Raghuram Rajan has urged the US Federal Reserve to raise interest rates to contain accelerating inflation, saying he would take a more hawkish approach than the central bank's current stance.

"The Fed should be raising rates or should have raised rates already," Rajan told Bloomberg Television, where he is attending the annual conference of central bankers and senior officials.

Rajan said US financial conditions were not restrictive, pointing to strong investment in data centres, a large fiscal deficit and continued consumer spending despite declining savings. Together, these factors suggest the US economy is not being significantly constrained, he said.

Markets expect the Fed to raise borrowing costs in December, while rising bond yields have also increased expectations of a possible rate hike in September.

Fed Chair Kevin Warsh's speech at Jackson Hole on Friday is being closely watched for signals on the future path of interest rates. Warsh has avoided providing forward guidance since taking charge, and investors interpreted his comments following the July policy meeting as lacking sufficient resolve to bring inflation back to target. Long-term bond yields subsequently climbed to a two-decade high.

Rajan, who is co-leading one of five task forces established by Warsh to examine the Fed's policies, said the Fed chief has "the right instincts" and is opposed to inflation. He said investors would be looking for a clear plan from Warsh on how he intends to bring inflation down.

On India, Rajan said the rupee had held up better than expected and was not in a "panic situation". The currency was trading at around Rs 95.50 to the dollar, compared with nearly Rs 97 in May after the RBI introduced measures to attract dollar inflows.