Columns: Raghuram Rajans first year at RBI - Making a difference to continuity

Written by Madan Sabnavis | Updated: Sep 4 2014, 06:10am hrs
The last change of guard at RBI took place on September 4, 2013, at a time when there was a crisis-like situation on the external front. With Raghuram Rajan taking over as Governor, there was a fresh set of expectationssome irrational, as one followed the speech made that evening. The speech was, in a way, an agenda to accomplish. Quite naturally, when one has to evaluate the course taken by the central bank, this would be the reference template.

The significant part of the path followed has been one of continuity. The difference has been the pace. Most of the points stressed by the Governor have been on the to-do list of RBI earlier and have been reiterated in various policies, but the change really brought about was that the approach has been action-oriented, with committees being set up, policy papers being put up for discussion and notifications being issued. In a way just like the Modi government, RBI has been nimble-footed in getting things done based on a time-line.

Four major achievements are noteworthy. First, there was a frontal counterattack on currency depreciation, and while the path followed all through was defensive in terms of controlling the outflow of dollars and using the LAF to curb speculative activity, Governor Rajan brought in the swap facility to get over $30 billion. This was unique because while there was discussion on the issuing of a sovereign bond, this move got in the dollars that were required without the government entering the market either directly or indirectly.

The second was on the monetary policy front. The market expected him to lower rates to propel growth. This is where Governor Rajan did not deviate and showed continuity in policy. He continued the aggressive stance on inflation and went ahead and had an expert committee lay the path of inflation targeting. We now have inflation targets set through the CPI, and while one can still contest this stance, it does surely lay to rest any uncertainty. What the committee has done is to lay down the rules of the game, and the market has accepted it. Curiously, the same stance taken by his predecessor had come in for vitriolic criticism from industry and critics. Therefore, this achievement is commendable. In fact, the FM is also on the same wavelength now.

Third, there has been a lot of talk on inclusive banking. Keeping in line with the then objectives of the UPA government, which has been reiterated by the NDA government now, the committee has made recommendations and we are on the path of spreading banking through different formsconventional or payments bank and correspondent banking model. Once again, a definite shape has put in place by RBI.

Fourth, there has been talk of new banking licences for long. We have had several applications and controversies with the withdrawal of some entities, as well as the elections coming in the way with the process being within the confines of propriety. Yet, we have had two licences dispensed, and while this has been a conservative and relatively non-controversial start, one may expect more players once these two entities become operational given that they are to be provided on tap.

There have been two areas which have proved to be mixed bags as far as the financial markets are concerned. The first relates to the inflation-indexed bonds that have been brought, under the National Savings Securities scheme. These have not quite taken off, with the structuring not being quite attractive, given that the base return of 1.5% carries a downside risk in case inflation comes down. Also, their non-marketability has kept investors away as these securities have to be held to maturity.

The other is in the area of interest rate futures (IRFs) on 10-year bonds. IRFs have had a checkered story so far, and the 10-year bond does reasonable business of around R1,000 crore a day (the 2023 and 2024 bonds). But such experimentation, though not very buoyant, is still a major improvement over the past escapades with the 364-day T-bills.

All such endeavours have with them an unfinished agenda, and there are three issues that would have to be addressed. The first is more of a theoretical concept, spoken of by Rajan when he visualised the internationalisation of the rupee. This seems to be a long way off at the moment. But the other two issues, relating to SLR and NPAs, are nagging ones.

There was a reference made to lazy banking and the fact that banks were heavily investing in GSecs. But how does one stop banks from overinvesting in GSecs Today, they hold on to almost 4-5% of excess SLR as this helps in reckoning capital to comply with Basel II norms, eschewing NPAs and earning a reasonable return. In fact, at a time when NPAs are rising, the central bank should take comfort especially when weaker banks plough their funds into GSecs. The question really is whether or not RBI can stipulate a maximum SLR. This will be a bold move if RBI is serious about banks not holding excess government paper. Any such move will also mean that the LAF has to be revisited or else the reverse repo window will find queues even at 7%.

The other challenge is NPAs. The Governor had spoken about promoters not having the divine right not to pay back their loans. Here again, with several controversies already in the news, can RBI actually blacklist wilful defaulters and bar them from further finance At present, while such information is available, banks still lend hoping that the projects/promoters become profitable in course of time as all finance is based on taking risk. This probably looks like an effective way to blacklist borrowersit happens for individuals who default on credit card payments for a couple of thousands of rupees. Why not for big companies

The past one year has been exciting for the banking sector, with Governor Rajan taking several measures to make things happen. As a central banker, there are certain things that can be done and others that cannot. There has been a lot of debate generated, which is good but continuity has been the theme.

The Governor had quoted Rudyard Kipling in his inaugural speech: If you can trust yourself when all men doubt you, but make allowance for their doubting too. After one year, Shakespeare sounds appropriate: All the worlds a stage, and all the men and women merely players. They have their exits and their entrances; and one man, in his time, plays many parts. The Governor surely has his part right.

The author is chief economist,

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