Raghu Reform Rajan

 Mr. Rajan’s beginning is definitely commendable. He might have travelled across the half way too quickly but covering the other half would not be easier.

“If you can trust yourself when all men doubt you, But make allowance for their doubting too” following lines from the poem ‘If’ by Rudyard Kipling is probably the best message newly appointed RBI-Chief Raghuram Rajan could convey to everyone bewildered with current economic turmoil. Through his maverick maiden speech, he effectively addressed the hopes of each stakeholder but how much walk of his talk will take place is something yet to be seen.

Slew of measures, in order to provide fresh breather to banks, have been proposed by Rajan. For instance, well-run scheduled commercial banks do not have to acquire permission from RBI in order to set-up new branches. Also, no fees will be charged for this purpose. That underserved areas don’t remain neglected, RBI will make sure that banks open up branches in those areas in proportion to their expansion in urban areas. Apart from this, he also emphasized to expedite the process for issuance of new banking licenses. A committee chaired by former RBI-Chief Mr. Bimal Jalan will be looking into the applications after an initial review and compilation by RBI staff. The process is stipulated to be completed by Jan 2014 i.e. the new licenses should be issued by then, if the deadline is not extended any further. In a bid to set up robust banking structure in the country, differentiated licenses will also be issued to small banks and wholesale banks. Large urban cooperative banks will be converted into commercial banks.

Rajan also took into consideration the growing Non Performing Assets of the banks due to loan-defaults and subsequent Corporate Debt Restructuring. He took a hard line on owners of those companies and said they do not have the divine right to stay in charge unmindful of how badly they mismanaged their enterprises. Banks aren’t supposed to bear the brunt of their bleak business scenario. Thus CDR norms are certainly going to get tougher now. To the relief of cash-strapped banks, Rajan intends to reduce their requirement to invest 23% of their deposits in Government securities which is known as Statutory Liquidity Ratio. It reduces the amount of cash available with banks to make loans.

For the benefit of citizens, finally an RBI-Chief will be launching Inflation-indexed savings instruments pegged with Consumer Price Inflation (CPI), not WPI as it is former which reflects the actual inflation being borne by consumers. A national grid-based Indian bill payment system will also be launched, where households will be able to use bank accounts to pay school fees, utilities, medical bills etc. This will make payment anytime anywhere a reality. Also, a pilot will be conducted to enable cash payments using prepaid instruments issued by non-banking entities and Aadhar-based identification. An application for encrypted SMS-based funds transfer that can run on any type of handset will also be examined by a technical committee.

Acknowledging that access to finance for the poor and for rural small and medium industries is hard, Point of sales devices and mini-ATMs will be set up by even non banking entities so that financial inclusion leading to inclusive growth can be feasible.

As monetary policy is the first and foremost responsibility of RBI, a committee under the chairmanship of Urjit Patel, in three months, will be suggesting measures to strengthen the monetary policy framework. Measures such as liberalization in forward market and internationalization of rupee etc. have certainly spurred the confidence of investors that India is not afraid to take bold decisions concerning with financial markets.

They say that ‘well begun is half done’. Mr. Rajan’s beginning is definitely commendable. He might have travelled across the half way too quickly but covering the other half would not be easier. All eyes are now set on 20^th Sep i.e. the day when he will be coming up with his first monetary policy as RBI-Chief. All the best Mr. Raghuram Rajan!! Hope you setting-off to tread on the other half-way is a success. 

Rupee Dearer Growth Sufferer

Dear Mr. Subbarao, your last monetary policy review as Central Bank Governor can be exceptional if only you could dare to lower down policy rates in order to get our slackening growth back on fast-track. That’s the only panacea Sir while rest is just nostrum.

Rupee Rescue Mission on the part of Reserve Bank of India (RBI) is on. While it can’t admonish foreign investors on their exit-spree but at least it can twist ears of internal perpetrators putting downward pressure on rupee. RBI, in order to prevent speculation in currency market causing pseudo demand of rupee, tightened liquidity via putting restrictions on banks to avail and let availed easy access of money. Also, RBI is of the view that concomitant raise in interest rates giving arbitrage advantage to foreign investors might persuade them to stay invested in Indian debt market. However, these measures have been taken at a time when market was hoping for a rate-cut and has gone highly discouraged on the prospect of increased borrowing cost. Given that one week has gone yet no major improvement could be seen on rupee front, it seems that these measures instead of bearing fruits will rather end up crimping country’s growth which is already running at its decade low.

To explain in detail, following three key steps have been taken by RBI governor D. Subbarao to tame rupee volatility. Firstly, he has put a cap on overnight transaction between RBI and banks and also among banks themselves. The overnight borrowing limit for the system now stands at 75,000 crore for the entire banking system. Earlier there was no such limit. “The allocation to individual banks will be made in proportion to their bids, subject to overall ceiling.” Secondly, in case any bank falls short of liquidity, it will have to borrow money from RBI at steeper rate through Marginal Standing Facility (MSF) window. MSF is an emergency liquidity facility under which banks can borrow from RBI for short-term by pledging government securities. MSF rate, which is 1% above the repository rate (7.25%), has been raised by 200 basis points and now stands at 10.25%. Thirdly, RBI intends to sell bonds worth 12,000 crore under its Open Market Opertaions (OMO) i.e. auction of government securities in secondary market. However, it could only suck out Rs 2,532 crore through OMO, which is about a fifth of the Rs 12,000 crore as bond investors are looking for higher yields which RBI refuses to accept.

Ironically, though these measures didn’t help much where those were supposed to but their after-effect will surely lead to banks’ balance sheet getting embattled. Banks are already suffering losses at loan-recovery front due to enormous extent of Corporate Debt Structuring (CDR) of various companies and current raise in lending rates won’t bring them more borrowers. Thus their profit earned by interest on loans might not increase in the proportion of their liability to pay interest on deposits leading to Net Interest Margin (NIM) coming negative. Also, due to tightened liquidity, banks will have no other option but to resort to escalating deposit rates in order to rein in their capital shortage. Apart from this, higher borrowing cost will not only affect consumers’ purchasing power but also make it tough for industries to keep up with production in the want of cheap credit. It’s worth mentioning here that India’s industrial production has already slumped to negative side if compared to last year and is all set to slide down more.

Now that RBI’s rupee- rescue mission is being faded out as a non-event with no major development in sight, RBI is stuck in catch-22 situation where neither can it terminate these measures abruptly, nor can afford to go on with it. It seems that rupee’s rout has become a structural challenge and nothing much can be done to stem its volatility. Only lessons can be learnt that huge reliance on foreign capital while domestic economy is off-track can bring serious repercussions at any time with no preparation beforehand to tame them. It is pertinent to improvise on internal resistance against maladies as external weather can’t be controlled. On this note, dear Mr. Subbarao, your last monetary policy review as Central Bank Governor being held on 30^th July can be exceptional if only you could dare to lower down policy rates in order to get our slackening growth back on fast-track. That’s the only panacea Sir while rest is just nostrum.