Brilliant and bold. That’s the takeaway from the first day first show of Raghuram Rajan, Reserve Bank of India’s 23 Governor. Dr. Rajan’s statement is brilliant in its vision and bold in some of the measures that it contemplates.
And to be politically correct, Dr. Rajan has remembered to give high priority to the subject of financial inclusion, which was the second of the six broad themes that he highlighted, next only to monetary policy.
It is clear that there will be little deviation from the RBI’s singular focus on inflation under his stewardship. The subject got top billing in his statement and a committee under Deputy Governor Urjit Patel will study how to revise and strengthen the monetary policy framework.
Interestingly, on the subject of financial inclusion, Dr. Rajan did not speak about just inclusion of marginalised people but also industries, which are the SMEs. By allowing scheduled domestic banks to freely open more branches Dr. Rajan hopes to expand coverage of the financially excluded.
The clarity he provides on new bank licences is encouraging even as the talk about ‘on-tap’ licensing and converting large urban co-operative banks into commercial banks is a trifle disconcerting given the issues involved. Foreign banks also have reasons to be concerned as it is clear that the new governor will push for a wholly-owned subsidiary model “so that we are not blindsided by international developments.” Dr.Rajan’s bravest proposals though are reserved for the subject of deepening the markets. For starters, he has set his eyes on squeezing the off-shore rupee trading non-deliverable forward market. He would rather have investors take positions in the domestic market where he can manage better rather than helplessly watch rupee trade in foreign shores.
The liberalising of norms on cancellation of forward exchange contracts by exporters and importers and introduction of cash settled 10-year interest rate futures are part of this strategy. Equally bold is the idea of pushing for more settlement in rupees of foreign trade which again rests on deepening the domestic market.
That his will be a period of no-nonsense regulation is evident from the reference to ‘lazy banking’, where banks routinely push their funds into government securities rather than lending outside. If he has his way, Dr. Rajan will reduce investment by banks in G-Secs even as insurance companies and pension funds increase their own buying.
India Inc also needs to watch out. Dr. Rajan’s statement that promoters do not have a divine right to stay in charge even when they mismanage signals an aggressive approach to loan recoveries and restructuring. By vesting the plain-speaking Deputy Governor K. C. Chakrabarty the responsibility of studying the rising NPAs, the new governor has sent a signal of zero-tolerance to corporate misdemeanour.
Interestingly, all these form only the short-term agenda for Dr. Rajan. Impressive as the agenda is, the market will no doubt test him on his commitment and his actions will be closely monitored to see if they match the words. That, though, is in the future. As of now, Dr. Rajan has surely accumulated more Facebook likes than he might have imagined.