Guv Rajan launches financial reforms 2.0

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SummaryTaking over as the 23rd governor of the Reserve Bank of India (RBI), Raghuram Rajan announced a whole host of near-term and medium-term policy changes aimed at sending a message to domestic and international investors, who have long complained of policy inertia in India at a time when the economy continues to struggle.

Taking over as the 23rd governor of the Reserve Bank of India (RBI), Raghuram Rajan announced a whole host of near-term and medium-term policy changes aimed at sending a message to domestic and international investors, who have long complained of policy inertia in India at a time when the economy continues to struggle.

“We would like domestic and international audiences to see that a lot is being done,” said Rajan as he announced measures ranging from steps aimed at shoring up the rupee to short- and medium-term reforms for the banking sector.

For starters, the RBI will open a special window for banks to swap foreign currency non-resident (FCNR) dollar deposits at a fixed rate of 3.5% per annum for the tenor of the deposits. The facility will be available for deposits of a minimum tenor of three years.

“The cost of funds for banks on these deposits should come down as a result of these measures,” explained Jamal Mecklai of Mecklai Financial.

The RBI has also eased its stance on permitting exporters and importers to re-book cancelled forward contracts. Exporters can now do this to the extent of 50% of the value of the cancelled contracts compared to 25% earlier while importers can use this facility up to 25% of cancelled contract value.

The RBI has also allowed banks to raise 100% of unimpaired Tier 1 capital through overseas borrowings — a measure that could lead to banks raising more funds in the overseas markets to meet capital requirements

“Together with the government and regulators such as Sebi, we will steadily but surely liberalise our markets as well as restrictions on investment and position taking,” said Rajan. He also spoke of greater internationalisation of the rupee

Even though RBI measures were announced after market hours, the rupee saw a steep recovery in trade closing at 67.09 versus 67.73 on Tuesday.

The Rupee has fallen more than 20% since the start of this year and is one of the worst performing currencies globally

"The tone of the Governor's speech was much mire hands on than most previous Governors and that could be an excellent signal," summarised Mecklai

Meantime, Rajan expects the RBI to give out new bank licences by January 2014 before Deputy Governor Anand Sinha – who has been working on the new licences – retires. The external committee to examine licences will be headed by Dr. Bimal Jalan.

26 companies, including corporate groups like Tata Sons, Reliance

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