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The rock star bats for change
The rock star bats for change
RBI Governor Dr Raghuram Rajan had the media, the corporate honchos and everybody eating out of his hands with a strong Obama like speech.

The fanfare and  fireworks that began when Dr Rajan was named as the new Governor  of  the Reserve Bank of India (RBI) hadn’t remotely slowed down when he took charge on 4 September 2013.

Dr. Rajan opened his maiden speech portraying the stark reality of the present  economic situation, but he expressed confidence in tiding over these tough times. Emphasising the need for RBI to work with transparency and predictability, he went on to unveil a long slew of measures.

Quoting the mandate for RBI to ensure monetary stability, he quipped that ensuring stable inflation is expected of a central bank. He said that a panel will look into measures to strengthen the monetary policy framework.


Road to inclusive development

In a bid to accelerate financial inclusion, he announced that  soon well-run scheduled domestic commercial banks won’t need RBI’s nod to open a branch, subject to fulfilling certain inclusion criteria in underserved areas.

Speaking about new bank licences, he said that an external committee chaired by Dr. Bimal Jalan, former RBI governor, will screen applications and added that the licences will be announced around January 2014. While recognising the contribution of foreign-owned banks to India’s growth, he said that more regulatory and supervisory control over their local operations is likely to happen.  Though not immediately, he hinted at reducing the requirement for banks to invest in government securities in a measured manner in order that banks will be able to lend more.

On priority sector lending, he called for greater efficiency in its implementation.  A committee headed by Dr. Nachiket  Mor has been asked to assess the current approach to financial inclusion.


On financial and forex markets

With respect to financial markets, he said that actions will be taken in tandem with SEBI to gradually liberalise the markets, although at a cautious pace. To begin with, among others, the cap on re-booking cancelled forward exchange contracts will be increased to 50 per cent of the value of cancelled contracts for exporters and to 25 per cent for importers, to ease exchange rate woes.

The former IMF chief economist anticipated that in the longer term, as trade expands, more settlement in rupees will be pushed along with an accompanying upgrade of financial markets to serve as investment avenues for those who receive rupee payment.

As a move to bridge current account deficit with ‘safe’ money, soon banks can swap fresh FCNR(B) dollar funds with a minimum tenor of three years, at a fixed rate of 3.5 per cent per annum for the tenor of the deposit. Similarly, the current overseas borrowing limit will be raised from 50 to 100 per cent of the unimpaired Tier-I capital and banks can swap those borrowings with RBI at a concessional rate.


Building financial infrastructure

In what could be a significant move for MSMEs, auctioning MSME bills against large companies via Electronic Bill Factoring Exchanges to speed up payment is being contemplated. On the loan recovery front, he came down heavily on those promoters who mismanage, saying they “do not have a divine right” to stay at the helm of affairs nor to keep using banks’ money. He insisted on efficiency and fairness in recovery process.  

The working of Debt Recovery Tribunals and Asset Reconstruction Companies will also be accelerated and Deputy Governor Dr K C Chakrabarty has been asked to assess the level of NPAs and their recovery. RBI proposes to collect credit data and examine large common exposures across banks. He emphasised  the use of Aadhaar to build individual credit histories.

Happy households

Dr. Rajan spoke about specific measures in the pipeline for the benefit of households including issue of Inflation Indexed Savings Certificates, implementation of a national giro-based Indian Bill Payment System to enable households to make any payment, and encrypted SMS-based funds transfer using an application that can run on any type of handset. Towards improving access to financial services in remote areas, ‘white’ POS devices and mini-ATMs by non-bank entities are likely to be introduced.   A good idea for sure.

Prophesying that change is risky but not changing is even riskier for India,he ended his address saying an RBI Governor doesn’t work for Facebook ‘Likes’. Markets cheered as hopes soared. But how long will the honeymoon last is the question upper most on everyone’s mind.

Caution on inflation...

The mid-quarter monetary policy review released on 20 September, had some surprise elements.

In his maiden policy statement, Dr. Raghuram Rajan indicated that the exceptional liquidity measures taken by the Reserve Bank of India (RBI) since July to tighten liquidity and to counter exchange rate volatility will now be eased in a calibrated manner. It is on these lines that the Marginal Standing Facility (MSF), the rate on overnight borrowings by banks from RBI has been relaxed by 75 basis points to 9.5 per cent. The reason for the easing is cited as the improved external environment and the measures taken to narrow the Current Account Deficit (CAD). Further, while the Cash Reserve Ratio (CRR) remains at 4 per cent, to ease liquidity, the minimum daily maintenance of CRR has been lowered from 99 per cent to 95 per cent of the requirement.

However, in an unexpected move, when the growth is still sluggish, the repo rate under the Liquidity Adjustment Facility (LAF), the rate at which banks borrow money from RBI to meet short term liquidity requirements, has been increased by 25 basis points to 7.5 per cent. RBI has justified the raising of LAF repo rate stating that inflation levels had to be brought down to ‘tolerable levels’ as stated in the document released.

The net effect of these measures is expected to lower the cost of borrowing for banks, while remaining watchful of inflation.


Continuing inflation and CAD woes

The policy review document mentions that WPI inflation is increasing on account of increasing fuel prices, compounded by rupee depreciation and rising commodity prices internationally. WPI levels may remain higher in the absence of appropriate policy response, despite the negative output gap and easing of supply side constraints, which could have disinflationary effects. Although retail inflation levels, measured by CPI, continue to worry, a better Kharif output may slow down CPI. 

CAD has been widening due to lesser export demand and the rising oil bill owing to the geopolitical turmoil in the Middle East. Further, capital outflows triggered by the anticipated tapering of asset purchases by the US Federal Reserve have been worsening the exchange rate woes. Although the tapering has been put off for now, Rajan has acknowledged that it is still only a postponement and ultimately, the tapering will happen. He said that during the interregnum, “a bullet-proof balance sheet and growth agenda” must be prepared.

The Review document explained that even as the fears regarding the widening CAD have been allayed by the steps taken by government and the RBI, now fiscal deficit and inflation have become the major determinants of the value of the rupee.

Also, RBI noted with respect to Indian economy that growth has come down owing to slow down in industry and services and dipping consumption levels.  However, hopes for better growth rates are pinned on better kharif output and growth in exports.


Calibrated withdrawal of exceptional measures

RBI may have embarked on the easing of exceptional liquidity measures with the reduction in MSF rate.

However, it has cautioned that further action on these measures will depend on stability in exchange market and that the easing is not one-way.

With the easing of these exceptional measures, LAF repo rate would resume its role as the effective policy rate marking a return to normal monetary operations. The difference between MSF and the LAF repo rate is expected to be brought down to 100 basis points.

The withdrawal of exceptional measures, although at a cautious pace, is likely to be a catalyst for growth. However, RBI will keep vigil on external market conditions and growth-inflation dynamics.


RBI Guv keeps his promise

Some of the measures promised by the new RBI Governor when he took office on 4 September have already been set in motion.

Rajan pointed to the implementation of bank branching liberalisation on 19 September, intact with inclusion criteria in underserved areas. With regard to the FCNR(B) swap facility and the swap facility for bank borrowings announced to encourage banks to bring in ‘safe’ money to fund CAD, RBI had received a total of nearly  1.4 billion USD. Also, the committees envisaged for various purposes are already on the task, the process of issuing inflation indexed certificates has begun, and the central registry for large bank borrowings has been set up.

For now, the message is loud and clear: caution on inflation.

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