Hope investors will choose robust EMEs like India: Raghuram Rajan

Written by Arun S | Washington | Updated: Oct 11 2014, 13:33pm hrs
Raghuram RajanRBI Governor Raghuran Rajan is in Washington DC to attend the International Monetary Fund and World Bank Group annual meetings.
In Washington DC to attend the International Monetary Fund (IMF) and World Bank Group annual meetings, Reserve Bank of India Governor Raghuram Rajan spoke to Arun S on issues, including the proposed new monetary policy framework, which, he said, should allow the central bank to have clear objectives and clear tools as well as the ability to achieve the targets. Excerpts.

There is an apprehension that the new monetary policy framework would undermine the autonomy of the RBI as under the proposed framework, the policy will be decided by a panel that will also comprise government officials. Do you think the new framework will lead to more differences between the government and the RBI

Many earlier reports including those by the committees led by Percy Mistry and myself had talked about the composition of the panel in the new framework as well as the importance of central bank accountability and independence. Since there is an ongoing dialogue, I wont prejudge the outcome. The general direction will be on the basis of what the finance minister pointed out in his 2014-15-Budget speech where he said it is essential to have a modern monetary policy framework to meet the challenge of an increasingly complex economy and that the government will, in close consultation with the RBI, put in place such a framework. It is important to ensure that the framework allows the central bank to have clear objectives and clear tools and the ability to achieve the goals.

The IMF has warned that factors such as a sudden departure from the low interest regime by the US Federal Reserve and major geo-political flare-ups could result in global investors staring at losses worth over a whopping $3.8 trillion. What will be the impact on India

We were affected in July 2013 (due to the US Fed monetary policy and related global developments). But in January 2014, when many other emerging market economies were affected, we were only mildly affected. In August 2014, when there was turmoil in a number of emerging markets, we survived with little volatility. Its anybodys guess when markets fully internalise the eventual rise in (US) interest rates. But my hope and expectation is that given all that we have done, both from the government side and the RBI side on preparing (for the eventuality of a rate hike in the US), this is something that we are much better prepared for. I hope that the investors will be able to distinguish between EMEs such as India that are much better prepared (and those that are not). We have a low current account deficit, moderating fiscal deficit, moderating inflation and high forex reserves.

What is the RBIs view on the proposed public sector bank consolidation

Bank size can help in certain circumstances due to economies of scale. Big banks can fund large projects. They can deal with large clients. They will have the exposure limits to make large loans. They can spread their costs over a larger base. On the other hand, large banks are more difficult to manage as shown by the global financial crisis. Also, large banks tend to find it harder to deal with small and medium enterprises as clients. Local banks which are smaller in size are more willing to deal with MSMEs. So every economy needs a mix of very large banks and small banks. On bank mergers, some are likely to take place going forward. They key is to have an ability to benefit from the synergies of the mergers.

When do you see someone taking over as COO of RBI

First we will create the departmental structures, though most of them will be what they were before. But some changes will be made to bring more synergies. Then they will be brought together under the units of executive directors. Then, when we find the need we will move to the post of COO.