Reserve Bank of India’s 23 Governor, Raghuram Rajan, has started with a bang.
In a seven-page statement read out at a press conference after markets closed, Dr.Rajan set out a bold, reformist vision for his tenure at the central bank. Included in it are measures to deepen securities markets, improve financial inclusion including for SMEs, support and push for the rupee as an international currency and a warning for corporate defaulters of loans. Declaring that he would “preserve the value of the currency”, Dr. Rajan said India is a fundamentally sound economy with a bright future. “Our task today is to build a bridge to the future, over the stormy waves produced by global financial markets.” Highlighting the importance of inflation targeting, he said the primary role of the central bank is ensuring monetary stability by sustaining confidence in the value of the country’s money. “Ultimately this means low and stable expectations of inflation, whether that inflation stems from domestic sources or from changes in the value of the currency, from supply constraints or demand pressures.’’
Dr. Rajan said a panel of experts under Deputy Governor Urjit Patel will come up with suggestions on what needs to be done to revise and strengthen the monetary policy framework.
While preserving the purchasing power of the rupee, he said that the RBI had two other important mandates – inclusive growth and development as well as financial stability.
The governor said that access to finance is still hard for the poor and for rural and small and medium industries. ``We need faster, broad based, inclusive growth leading to a rapid fall in poverty.’’
In what would be a huge step for the Indian banking industry, he said the RBI would shortly free bank branching completely for domestic scheduled commercial banks in every part of the country. ``No longer will a well-run scheduled domestic commercial bank have to approach the RBI for permission to open a branch. We will, of course require banks to fulfill certain inclusion criteria in underserved areas in proportion to their expansion in urban areas, and we will restrain improperly managed banks from expanding until they convince supervisors of their stability.’’ Dr. Rajan said the RBI will give out new banking licenses latest by January 2014. “We will not stop with these licenses,” he said talking about the possibility of continuous or “on-tap” licensing and converting large urban cooperative banks into commercial banks. He also said that RBI would encourage qualifying foreign banks to move to a wholly owned subsidiary structure, where they will enjoy near national treatment on a reciprocal basis.
As a move to ensure flow of credit to the productive sectors of the economy, Mr. Rajan said, “we need to reduce the requirement for banks to invest in government securities in a calibrated way.”
Admitting that it cannot be done overnight, he said that as government finances improve, ``the scope for such reduction will increase. Furthermore, as the penetration of other financial institutions such as pension funds and insurance companies increases, we can reduce the need for regular commercial banks to invest in government securities.”
Stressing the need for depth in the financial markets to play their necessary roles of providing risk absorbing long term finance and of generating information about investment opportunities, he said, ``we cannot create depth by banning position taking, or mandating trading based only on well-defined `legitimate’ needs. Money is fungible so such banks get subverted, but at some level, “all investment is an act of faith and of risk taking.”
Touching on the subject of rupee `internationalization’ he said, “we need to think beyond the next few months. As our trade expands, we will push for more settlement in rupees. This will also mean that we will have to open up our financial markets more for those who receive rupees to invest it back in. We intend to continue that path of steady liberalization.”
He said that together with the government and regulators, RBI would steadily and surely liberalize the markets, as well as restrictions on investment and position taking. “Better that investors take positions domestically and provide depth and profits to our economy than they take our markets to foreign shores.”
As an immediate measure, the governor said RBI will enhance the limit available to exporters to re-book cancelled forward exchange contracts to 50 per cent from 25 per cent and allow a similar facility to importers to the extent of 25 per cent. Further, to develop the money and G-sec markets, RBI will introduce cash settled 10 year interest rate future contracts and will examine the introduction of interest rate futures on overnight interest rates.
The RBI has decided that the current overseas borrowing limit of 50 per cent of the unimpaired Tier I capital will be raised to 100 per cent and that the borrowings mobilized under this provision can be swapped with RBI at the option of the bank at a concessional rate of 100 basis points below the ongoing swap rate prevailing in the market. These schemes will be open up to November 30, 2013, which coincides with when the relaxations on NRI deposits expire.
Individuals can look forward to Inflation Indexed Savings certificates linked to the Consumer Price Index New Index and this will be available for retail investors by end-November 2013.
While admitting that some of his actions will not be popular, he said “the governorship of the Central Bank is not meant to win one votes or Facebook ‘likes’. But I hope to do the right thing no matter what the criticism, even while looking to learn from the criticism.”