Mumbai: New RBI Governor Raghuram Rajan Wednesday came out with a slew
of measures, including more trade settlement in 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 central bank, 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."
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.
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, Rajan said the
primary role of the bank is monetary stability to sustain confidence in
the value of the 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, 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.
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 percent, 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 percent for exporters,
importers will be allowed a 25 percent 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 percent 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."
