This is my tweet when Raghuram Rajan was appointed four weeks back:
Today, that is, 4 September 2013, he took over as the new governor of Reserve Bank ofIndia . Upon taking over, he made a
statement the gist of which is as follows:
Raghuram Rajan as the new RBI Governor is like a fresh flower in a desert. I wish our rulers too were young and bubbling with new ideas!
— RamaKrishnaVadlamudi (@vrk100) August 7, 2013
Today, that is, 4 September 2013, he took over as the new governor of Reserve Bank of
1. India is a fundamentally sound
economy with a bright future, though the economy faces challenges.
2. We will emphasize on
transparency, predictability and communication.
3. A newly appointed panel will
be set up to revise and strengthen our monetary policy framework.
4. Shortly, the RBI will
completely free bank branching for domestic
scheduled commercial banks in every part of the country.
5. An external committee headed
by Dr Bimal Jalan will be appointed to screen new bank license aspirants.
Hopefully, the deadline to announce new bank licenses is ‘within or soon after’
January 2014.
6. We need to reduce the
requirement for banks to invest in government securities. This will be done in
a calibrated way and over a period of time.
7. We will steadily but surely
liberalize our financial markets (He has in fact announced certain measures
related to forward contracts, interest rate futures and a window to banks for
swapping FCNR(B) deposits).
8. We will take measures to address
rising bad loans of banks and restructuring/recovery process. Promoters of
enterprises don’t have the right to use banks’ money to finance their failed
ventures. (In an oblique reference to Vijay Mallya-promoted Kingfisher Airlines
and other highly-indebted companies).
9. We will issue
inflation-indexed bonds based on consumer price index (CPI).
10. We will push for more
settlement in rupees in international trade.
11. I’m not here to win votes or
Facebook “likes.” I hope to do the right thing no matter what the criticism is.
It is quite remarkable that on
day one in the office, the new RBI governor has taken so many measures
encompassing the entire spectrum of central banking. I think no previous
governor in recent history has set such an ambitious agenda on the first day
itself. At fifty, he is the youngest RBI governor in the last several decades. He
is exuding great confidence and can-do spirit.
Now, he has taken over as the new RBI
governor, what can we expect from him when the economy is facing severe stress
on several fronts? Broadly, the expectations are:
A. Quick reversal of liquidity
tightening measures undertaken by RBI since July 15th. These
measures have pushed up short term interest rates to more than 10 percent
crimping credit expansion in the economy.
B. The new governor will shore up
confidence and bring stability to the plunging rupee.
C. Till now, the RBI is following
wholesale price index (WPI) for inflation management. In the following months,
I think this will be changed to CPI as is the practice in major developed and
developing countries.
D. RBI will try to improve its
communication with the financial markets, which are one of the vital parts of
any economy. (The governor has already indicated this).
E. Over a period of time, the
capital control measures introduced by the Government and the RBI (such as
restrictions on gold imports, capital controls on overseas direct investments)
will be removed subject to the rupee stabilization.
F. Banks have at present
categorized a major part of their investment portfolio under held-to-maturity
(HTM). I think the HTM category will be removed completely in line with the
international practices. But RBI might implement this in a measured way.
G. Recent restrictions imposed on
banks’ proprietary trading in exchange-traded derivatives will be removed
completely, restoring the status quo ante.
In addition to the above, we may
expect some off-beat/unconventional measures from Dr Raghuram Rajan. It is well
known that the onus of restoring confidence in the Indian economy lies, mainly,
at the doorsteps of RBI and the finance ministry. Let us hope they will do
their job in a proper way, though there is reasonable skepticism about the
ability of the government in controlling the runaway expenditure on the eve of
elections.
Markets:
The stock markets tomorrow are
likely to react favorably to the statement made by the new governor on his
taking over office—though the overall direction of the stock market is weak due
to fears of S&P downgrading India ’s
sovereign rating, fiscal deficit and current account deficit. The Sensex and
the Nifty closed today at 18,568 and 5,448, up two percent each roughly. The
rupee closed the day at 67.10 to the US dollar, up about one per cent. The
7.16% 10-year benchmark G-Sec closed the day with a yield of 8.39%.
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Disclaimer:
The author is an investment analyst, equity investor and freelance writer. This
write-up is for information purposes only and should not be taken as investment
advice. Investors are advised to consult their financial advisor before taking
any investment decisions. He blogs at:
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