Raghuram Rajan’s term as RBI governor ends at a time when India will see the Foreign Currency Non-Resident (FCNR) outflows and the banking system is at nascent stages of rebuilding balance sheets. Whoever succeeds Rajan – and there are many names like Arundhanti Bhattacharya, Urjit Patel, Rakesh Mohan, Arvind Subramanian that are doing the rounds – will have to deal will some tough challenges, though Rajan has achieved a lot in his three years as RBI governor.
Inflation, rupee stability, liquidity, smooth transition to monetary policy committee – experts have highlighted a slew of issues that the new governor will have to address September onwards. We take a look at some key points that experts have highlighted to FE Online:
Ashish Vaidya, Head – Trading and ALM, Treasury & Markets, DBS Bank:
1) To ensure inflation remains subdued even in the environment of higher crude prices.
2) To maintain stable exchange rate regime by curbing volatility in the uncertain global environment.
3) Would need to address the effect of FCNR outflows on the Indian Banking system.
4) The new Governor will have to work along with the new MPC (Monetary Policy Committee) rather than on an individual basis.
5) The Indian Banking system is currently in the process of balance sheet clean up exercise. It is important to ensure this exercise is not just one time clean up, instead it is important that the Governor works with the Union Government, Bank Bureau and Bank Boards to help set the process for future operations for State run Banks.
DK Srivastava, Chief Policy Advisor at EY India:
1) The new RBI governor will need to make sure that the reforms that have been initiated by Rajan are carried forward, particularly in terms of banking sector NPAs.
2) It is also imperative to examine the potential increase in inflation due to food and fuel inflation.
3) While RBI has been working on liquidity, there has been a crunch in the last few quarters. RBI is working actively to address liquidity constraints and should continue to do so.
4) Monetary policy transmission has been weak in the last few quarters. RBU governor should look at examining the reasons behind this and address them effectively.
5) Smooth transition to the MPC is an important challenge that the central bank will face.
Sahil Kapoor, Chief Market Strategist at Edelweiss Securities
1) The immediate challenge would be FCNR. So much of payout hasn’t happened before, forex reserves can take care of $10 billion, but there will still be a substantial amount left.
2) If the monsoon is below the forecast, vegetable prices will shoot up and that may be a major concern for the RBI governor in terms of targeting inflation.
3) While the NPA mess has been majorly dealt it, the new governor needs to focus on rebuilding bank balance sheets.