RBI governor Raghuram Rajan’s report to be lynchpin of financial sector reforms

NEW DELHI: Next up on India's reforms agenda is the financial sector. After retail, aviation and fuel prices, the government is getting ready to roll out the long-overdue, next generation of measures aimed at freeing up the country's financial sector and a framework for this could be in place as early as next month.

The plan to kick off the process, stalled for many years, was discussed in the run-up to the appointment of Raghuram Rajan as Reserve Bank of India governor and has the highest political sanction. The reforms blueprint will lean heavily on the two high-profile reports already available with the government, one of them authored by Rajan himself.

"We will have a framework ready soon and will take it to the Financial Stability and Development Council (FSDC) for deliberation before the measures are rolled out," a senior finance ministry official told ET. 

Financial sector reforms took a back seat after the global meltdown in the belief that India's conservatism had saved it from the worst effects, which which wasn't the right lesson to draw from the experience, Rajan had said in his 2008 report on financial sector reforms, 'A Hundred Small Steps'.

The policy paralysis that gripped the government in the first three years of the UPA-2 administration (2009-12) also contributed to the lack of progress on changes in the sector even as the government swore on the need to improve financial inclusion.

P Chidambaram's return as the finance minister in August last year was followed by a series of measures to break the policy logjam — fuel price reforms, the opening up of multi-brand retail, the establishment of the Cabinet Committee on Investment. It's now the turn of the financial sector. "The idea is to pick out 10-12 recommendations that could be taken up," the official added.

Drawing up the blueprint for change shouldn't be too onerous as two committees have conducted an exhaustive study of what needs to be done.

The High-Powered Expert Committee (HPEC) on making Mumbai an international financial centre called in 2007 for "deregulating, liberalising and globalising, all parts of the Indian financial system at a much faster rate".

Rajan's 2008 report cited above spoke of the "need to deregulate certain areas of the financial sector" and "focus on creating necessary institutions, and closing important gaps in regulation".

The Reserve Bank has sought suggestions on the banking structure in India in response to a discussion paper released last month. That could yield more ideas for the reforms exercise.

The Rajan committee had suggested more small private banks, disinvestment in small, underperforming state-run banks, the freeing of branch licensing rules, and the greater participation of foreigners in Indian financial markets.

Rajan, reputed as one of the few who warned about trouble ahead of the 2008 financial crisis, has already set the ball rolling in a way with a flurry of announcements on the day he took over as the RBI governor — September 4. He also said that new bank licences could be issued in January. India had first raised the prospect of new banks in 2010. Financial sector reforms are badly needed, experts said.

"This is good news... financial sector reforms in India are long overdue," said Jahangir Aziz, senior Asia economist and India chief economist at JPMorgan Chase. The "past five years we did not touch anything for the fear of doing something unintended".

Aziz also cited the widespread belief in India that the country was ring-fenced in 2008 by the restrictions and controls it had in place and said there had been no empirical study of the cost that taxpayers had to bear.

India's interest rates shot up to among the highest in emerging market economies after the crisis, besides which RBI's foreign exchange losses have been substantial, he said. Even when it comes to financial inclusion, competition is needed to ensure that it happens, he said.

 

Rupee at four-week high; climbs 90 paise against dollar

MUMBAI: The rupee on Monday strengthened by 90 paise to trade at four-week high of 62.58 against the dollar at the Interbank Foreign Exchange market on increased capital inflows and dollar selling by exporters.

The rupee had settled at 63.48 against the dollar on Friday, up marginally by two paise over previous day's close.

Traders said apart from selling of the American currency by exporters and banks, a higher opening at the domestic equity market and dollar's weakness against other overseas currencies, after Larry Summers, the man tipped to be named Ben Bernanke's successor as Fed chairman, withdrew from the race, also supported the rupee. 
Meanwhile, the BSE benchmark sensex soared by 293.30 points, or 1.49%, to 20,026.06 in early trade today. 

Sensex climbs 293 points in early trade on Sebi steps

MUMBAI: The BSE benchmark sensex on Monday shot up by 293 points in opening trade, mainly on the back of a flurry of buying by funds and investors after market regulator Sebi allowed overseas entities to invest in government securities without any auction mechanism.

Amid a firming trend in the Asian region, the 30-share index gained 293.30 points, or 1.49%, to trade at 20,026.06, with banking, capital goods, PSUs and power sector stocks leading the rally. It had lost over 265 points in the previous two sessions.

The wide-based National Stock Exchange index Nifty rose by 81.95 points, or 1.40 per cent, to trade at 5,932.55. 

Brokers said sentiments turned buoyant after Securities and Exchange Board of India (Sebi) allowed FIIs to invest in government securities without any auction mechanism so as to boost foreign fund inflows into the capital markets.

They said rise in rupee also supported the upside in equities. The rupee gained 90 paise against dollar to 62.58 in early trade today.

In the Asian region, Hong Kong's Hang Seng index rose by 1.47% in the opening trade, while Japan's Nikkei would remain closed today.

The US Dow Jones Industrial Average ended 0.49% higher on Friday.

July industrial output surprises with 2.6 pct growth

India's industrial production jumped an unexpected 2.6 percent in July after contracting for two straight months, government data showed on Thursday, good news for Asia's third-largest economy as it tries to emerge from a deep slump.
Analysts polled by Reuters had expected output to shrink an annual 0.8 percent in July after a 2.2 percent contraction in June.
The manufacturing sector, which constitutes about 76 percent of industrial production, rose 3.0 percent from a year earlier, the statistics office said.
Capital goods production, a barometer for investments in the economy, rebounded by a robust 15.6 percent in July from a year earlier

World shares slide on growth, Fed concerns, dollar flat

Adrop in euro zone factory output after a run of weaker-than expected U.S. data stalled an eight-day rise in world shares on Thursday, jangling the nerves of investors positioning for a shift in Fed policy next week.
Moves towards a diplomatic solution on Syria gave some support to financial markets, but doubts over what exactly the Fed will announce on September 18 increase the potential for near-term volatility.
"The Fed is still likely to taper next week or in October but the trajectory of the tapering that we had assumed can no longer be taken for granted," said Ned Rumpeltin, head of G10 FX strategy at Standard Chartered Bank.
Euro/dollar and dollar/yen one-week implied volatilities - a gauge of how sharp price swings will be next week - have shot up as investors try to guess when and how fast the Fed will start to run down its monetary stimulus.
The one-week euro/dlr implied volatility traded at around 7.85 percent, much higher than the equivalent one-month rate which was around 7.2 percent.
The one-week dollar/yen implied volatility was also trading much higher than the one-month level.
Uncertainty has grown with weaker-than-expected U.S. data, including jobs growth in August and consumer spending, home building, new home sales, durable goods orders and industrial production in July.
A Reuters poll of economists on Monday this week found most now see the Fed trimming its $85 billion monthly spend on bonds by about $10 billion. This was down from $15 billion in a poll before the jobs report.
The shifting views have put pressure on the dollar, which hovered near two-week lows against a basket of major currencies .DXY on Thursday. U.S. Treasury yields have dipped to nearer 2.8 percent from over 3 percent last week.
But the euro slipped against the dollar on Thursday and European shares ended a run that had taken them near a five-year high when data showed a surprisingly large drop in industrial output across the currency bloc in July.
That bolsters the case for the European Central Bank to keep monetary policy loose in the face of changes at the Fed and adds weight to the argument that it should even consider another rate cut.
Europe's broad FTSE Eurofirst 300 index .FTEU3 was down 0.1 percent by mid-morning at 1,248.33 points, edging away from a 5-year high of 1,258.09 points reached in late May this year.
The MSCI world equity index .MIWD00000PUS was slightly lower, with U.S. stock index futures pointing to further weakness when trading gets underway on Wall St. .N
ASIAN RELIEF
Reduced expectations of the degree of Fed tapering eased pressure on emerging market currencies, which had been driven up as the cheap U.S. money was pumped into high-yielding stocks and bonds, and are now falling as these trades reverse.
Indonesia's central bank unveiled a surprise rate hike to help the rupiah recover from a 4-1/2 year low. Other Asian central banks were expected to wait for next week's Fed decision before taking any action.
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS shed 0.2 percent while the stronger yen and downbeat economic data helped push Japan's Nikkei stock average .N225 down 0.3 percent.
In fixed income markets anticipation of the Fed trimming its stimulus combined with concerns abut domestic politics drove up Italy's borrowing costs at an auction of 7.5 billion euros ($10 billion) of new debt.
A cross-party Senate committee in Italy is due to resume a hearing later on whether to bar Silvio Berlusconi from political life, at the risk of prompting the former prime minister's allies to pull out the coalition government.
No decision by the Senate is expected until mid-October leaving investors in considerable uncertainty over whether the government has the strength to overhaul the economy and manage its budget deficit.
In commodities, copper slipped 0.9 percent to $7,101 a tonne. An improved outlook for China's economy and the reduced risk of a strike on Syria have helped bring copper prices off the three-year lows plumbed in late June.
Gold skidded 1.8 percent to $1,342.56 an ounce, its weakest since mid-August while Brent crude added about 0.8 percent to $112.40 as investors watched diplomatic efforts to place Syria's chemical weapons under international control stepped up.
U.S. Secretary of State John Kerry and Russian Foreign Minister Sergei Lavrov were meeting in Geneva on Thursday to try to agree on a strategy to eliminate the chemical arsenal.