- Chambers seek growth boosting steps from Raghuram Rajan's RBI in key policy ratesPlanning Commission scraps Raghuram Rajan index for Central fund distributionRaghuram Rajan-effect: Received $10.1 bn under forex swap window, says RBIRBI guv Raghuram Rajan meets FM ahead of second quarter policy review
A day before RBI Governor Raghuram Rajanís first major review of monetary policy (MP), it is useful to consider the medium term implications of broader financial sector reforms. Rate actions (repo, MSF, CRR, SLR, refinance, etc) get the most attention during a MP review, owing to the immediate consequences on bond yields, banksí lending rates, the rupee, banksí profits, etc. Most analysts are focused on this. But the actions also need to be evaluated over the years and across sectors, with a view to setting a context of future actions.
Statements and comments from Rajan and his team suggest a major change in approach to financial sector reforms. Some of these steps will be incremental, advancing measures already taken, others will be more radical and unconventional. Some of this will get reflected in the forthcoming report of the committee on monetary policy reform; some, in the final version of the paper on structure of the banking sector; and some more, in the ongoing implementation of the Financial Sector Legislative Reforms Commission (FSLRC). Coincidentally or otherwise, the various strands appear to be converging towards the recommendations of the report of Committee on Financial Sector Reforms (CFSR), ĎHundred Small Stepsí, then chaired by the current Governor. What are the practical consequences of this line of thought?
The following are ten major facets of change in Indiaís financial sector we think are likely to happen over the next couple of years (with some help from Rajanís statements).
1. The most immediate signal will be inflation. Inflation will become the primary target of monetary policy, with other components of Multiple Indicators becoming more diffused. Right up front in Rajanís very first statement on the day he assumed office: ďThe primary role of the central bank, as the [RBI] Act suggests, is monetary stability, that is, to sustain confidence in the value of the countryís 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 pressuresĒ. In other words, inflation is inflation!
* A shift