Reserve Bank of India governor D Subbarao has suggested a sovereign guarantee for money market transactions and mutual funds in a global crisis situation, similar to the cover given to bank deposits, to sustain investors faith in financial institutions. He, however, warned against too much of financial regulation that could stifle innovation and said RBI recognises that Indian companies would need more credit from domestic banks. His comment, coming after two rounds of CRR cut by 150 basis points that released Rs 60,000 crore of liquidity into the system, could be a pointer to a repo rate cut by the regulator to encourage affordable credit. Repo is the rate at which the RBI lends funds to banks.
The governor made the comments in the international monetary & financial committee meeting of the International Monetary Fund at Washington DC. The IMF on Sunday endorsed the G-7 decision to move unitedly to unfreeze the global money markets, seized up since September 16. Agency reports said European leaders met over the weekend to forge a new set of measures to combat the credit freeze after their failure to act a week ago contributed to the worst sell-off in the regions stocks in two decades.
Subbarao said, ?India, with its strong internal drivers for growth, may escape the worst consequences of the global financial crisis.?
He clearly spelt out the safety aspect of the Indian banks, saying the banks have ?very limited exposure to the US mortgage market, directly or through derivatives, and to the failed and stressed financial institutions.? According to him, the only way the contagion could spread in India was through equity and forex markets, while money, debt and credit markets could be impacted indirectly. The governors comments are expected to soothe the markets when they open on Monday.
The governor said exchange-traded derivatives were superior to over-the-counter derivatives. This is because they are more transparent. ?Do we need to focus on prescribing and instituting appropriate clearing & settlement practices even for OTC products?, he asked. There are two distinct groups of derivative contracts in India?OTC and exchange traded. RBI and Sebi have recently permitted exchange-traded currency futures, initially in rupee-dollar pair, and are expected to allow exchange-traded interest rate futures by December-January.
Subbarao said the emerging market economies like India need to be taken into confidence and consulted whenever the policies and actions of the developed countries have implications for them. ?We endorse the IMF view that the respective roles of central banks, regulators, supervisors and fiscal authorities regarding financial stability needs to be revisited. Central banks should play a central role in maintaining financial stability and should have the necessary informational base to do so effectively. This implies close co-operation among all the agencies entrusted with the task of maintaining financial stability,? he said. The large-scale bailout packages will have implications for the regulatory architecture of the financial system and for the fisc of countries, he said.
Batting for reforms in financial sector Subbarao said, ?The right lesson to draw is that markets and institutions do succumb occasionally to excesses, which is why regulators have to be vigilant, constantly finding the right balance between attenuating risk-taking and inhibiting growth.?
Over the last month financial analysts and political leadrers in various countries have talked of excessive risk taking by financial institutions. They have sought to turn the clock back on financial reforms, which include cutting out products like derivatives.
Panel to weigh rate options today
The high-powered committee formed to monitor the domestic liquidity situation under the chairmanship of finance secretary, Arun Ramanathan will have its first meeting in New Delhi on Monday. Sources said the committee could take a call on cutting interest rates and creating special rate bands by banks to provide easier loans to small and medium enterprises.
It will monitor the impact of the reduction of cash reserve ratio (CRR) by 150 basis points. which released Rs 60,000 crore in to the system. It will also advise the government on the course of action to manage situation emerging out of the direct and indirect impact of the global financial turmoil originated from the US subprime crisis.
The committee includes members like Bank of India chief TS Narayanaswamy, UTI AMC chairman UK Sinha, L&T chief financial officer M Deosthalee and Sidbi chief RM Malla.
