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Raghuram Rajan takes charge as new RBI Governor, unveils 'big package', vows more

Sep 04 2013, 22:04 IST
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Raghuram Rajan and D Subbarao at RBI headquarters on the day the former took over as the cbank chief. IE photo Raghuram Rajan and D Subbarao at RBI headquarters on the day the former took over as the cbank chief. IE photo
SummaryRaghuram Rajan ditches much-maligned D Subbarao policy, set to align it with what UPA govt wants.

New RBI Governor Raghuram Rajan today came out with a slew of measures, including more trade settlement in Indian rupees to rescue the battered financial markets and hinted at a shift in focus from inflation control, doggedly pursued by his predecessor, to boosting growth.

Shortly after he took over as the 23rd Governor of the the reserve Bank of India (RBI), Raghuram Rajan, 50, addressed the media with a prepared statement in which he laid out a detailed road map for his innings in the short term, which he called a "big initial package."

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He also rescheduled by a few days the date for his much-anticipated first monetary policy statement to September 20.

The new Governor set up a number of committees for revising and strengthening monetary policy framework, financial stability, financial inclusion, NPAs and an outside panel of experts headed by former Governor Bimal Jalan to screen applications for new bank licenses.

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Raghuram Rajan said the new bank licences will be issued around January next year.

Apparently reflecting a shift in the approach from his predecessor D Subbarao, who had serious differences with the government of late, Raghuram Rajan said the primary role of the bank is monetary stability to sustain confidence in the value of the Indian rupee.

"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 pressures.

"...but we have two other important mandates; inclusive growth and development, as well as financial stability," he said.

Asked about Subbarao's focus on targeting inflation, Raghuram Rajan said he would reserve his comments till September 20.

Rajan said the bunch of reforms has been unveiled today to enhance growth.

"I think there are so many low-hanging fruits in the economy that if we only pluck them we can accelerate growth substantially."

The former IMF chief economist and economic advisor to the Finance Ministry said there were some positive developments in the economy which will help to boost growth.

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The measures disclosed to support the rupee include liberalisation of the financial market by enhancing the limits for exporters to re-book cancelled forward exchange contracts and opening a special concessional window for swapping foreign currency non-resident (FCNR) deposits and dollar funds.

"My sense is that we certainly don't need false optimism.

But I think there is good reason to believe that in the medium run, the future of the country is strong," he said.

Asked about Standard and Poor's downgrade threat, he said the international rating agency "nearly reiterated what has been its long standing claim about there being one-third possibility of a rating downgrade...it is not something new. So I won't read too much into the statement."

The measures announced by Rajan include enhancing the re-booking limit on cancelled forward exchange contracts for exporters to 50 per cent, extending a similar facility to importers and introducing cash settlement in 10-year interest rate future contracts to develop the money and G-sec markets.

Rajan indicated the RBI will take steps to reduce the Statutory Liquidity Ratio (SLR) and introduce greater regulatory and supervisory control over the domestic operations of foreign banks. He promised to give freedom to banks to open branches without prior RBI permission.

The new RBI chief also said he will steadily liberalise the markets and lift restrictions on investment and position-taking, together with Sebi, and will examine introduction of interest rate futures on overnight interest rates.

While the RBI has enhanced the re-booking limit on cancelled forward currency contracts to 50 per cent for exporters, importers will be allowed a 25 per cent limit.

The central bank will push for more trade settlements in rupees and open up the financial markets for those who receive rupees to invest it back in.

Rajan said the RBI will raise the overseas borrowing limit of 50 percent of unimpaired Tier I capital to 100 per cent for banks and will introduce cash-settled 10-year interest rate future contracts.

The central bank will also examine introduction of interest rate futures on overnight interest rates; steadily but surely liberalise markets, restrictions on investments and position-taking; and issue inflation-indexed savings certificates tied to CPI to retail investors by end November.

He stressed on the need to reduce the requirement for banks to invest in government securities in a calibrated way and will push foreign banks to set up wholly owned subsidiaries.

Rajan proposes to collect credit data, examine large common exposures among banks and encourage banks to clean up their balance sheets.

Referring to the announcements, he said, "This is a part of my short-term time-table for the Reserve Bank. It involves considerable change, and change is risky. But as India develops, not changing is even riskier. We have to keep what is good about our system, of which there is a tremendous amount, even while acting differently where warranted."

He also announced a committee headed by RBI Deputy Governor Urjit Patel to strengthen monetary policy framework. The panel will submit its report in three months.

Rajan said that a committee under former Governor Bimal Jalan would screen bank license applicants after an initial compilation of applications by the RBI staff.

He said new bank licences will be announced "within, or soon after, the term of Deputy Governor Anand Sinha, who has been shepherding the process. His term expires in January 2014."

Financial sector expert Nachiket Mor will head a panel to suggest steps to promote financial inclusion. Another committee, to be headed by Deputy Governor K C Chakrabarty, will take a close look at rising NPAs and suggest steps to improve the recovery of bad debts.

"While the resumption of stalled projects and stronger growth will alleviate some of the banking system difficulties, we will encourage banks to clean up their balance sheets and commit to a capital-raising program where necessary. The bad loan problem is not alarming yet, but it will only fester and grow if left unaddressed," Rajan said.

Stressing that India is a fundamentally sound economy with a bright future, the new RBI chief said, "Our task today is to build a bridge to the future, over the stormy waves produced by global financial markets. I have every confidence we will succeed in doing that."

HIGHLIGHTS

* New bank licences by January 2014 or soon after

* Bimal Jalan to head the external committee to screen banking licence applicants

* RBI wants more regulatory and supervisory control over the domestic operations of foreign banks

* Banks need not require RBI nod to open new branches

* Hints at reducing the SLR in a calibrated way

* Mid-quarter review of monetary policy postponed by 2 days to Sept 20 as more time required to consider all developments

* To steadily liberalise markets, and lift restrictions on investment and position taking, together with Sebi

* Says primary role of RBI as maintaining monetary stability but generating growth is also important

* Re-booking limit on cancelled forward exchange contracts for exporters will be enhanced to 50 per cent

* Importers will also be allowed a similar facility to the extent of 25 per cent

*To introduce cash settlement in 10-year interest rate future contracts to develop money and G-sec markets.

*To examine introduction of interest rate futures on overnight interest rates.

*Deputy governor Urijit Patel to head a panel to strengthen monetary policy framework; to submit report in three months.

* Committee under Nachiket Mor to assess approach to financial inclusion.

* There is a need to internationalise the rupee

* To encourage banks to clean up their balance sheets, and commit to a capital raising programme wherever necessary

* Need to accelerate the working of debt recovery tribunals and asset reconstruction companies

* Need to improve the efficiency of the loan recovery system

* Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise

* Promoters do not have any right to use the banking system to recapitalise their failed ventures

* Bad loan problem is not alarming yet

* To push for more rupee settlements

* To help banks bring in safe money to fund current account deficit.

* To offer a window to banks to swap fresh FCNR-B dollar funds at a fixed rate of 3.5 per cent

* Current overseas borrowing limit of 50 per cent of the unimpaired Tier I capital to be raised to 100 per cent

* Will issue inflation indexed savings certificates linked to the CPI new index to retail investors by end-November.

* Aim to make payments anywhere anytime a reality

* To set up a technical panel to study feasibility of using SMS-based fund transfer system that can run on any handset.

*To emphasise the use of the unique ID, Aadhaar, in building individual credit histories.

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