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A tough Governor at the Indian monetary scene

Recently appointed Reserve Bank of India (RBI) Governor Dr Raghuram Rajan started his job at a time when India’s sliding rupee, rising inflation and plunging stock market pose serious challenges.

Low levels of business confidence are beginning to tell on the level of investment and the opposition to foreign ownership in retail sector has had its impact in the flow of foreign direct investment.

The appointment of Dr Rajan was based on merit and not political considerations as some public appointments tend to be. His long vision permits him to foresee the future. He had predicted the global financial crisis (2008) three years before it occurred. As Financial Advisor to the Indian Government earlier, he worked closely with the Finance Ministry and the Prime Minister’s Office, giving him a ring side view of the public finance.

Distinguished economist

The new Governor has sound academic and professional policy background for his role in policy-making. An Eric J Gleacher Distinguished Service Professor of Finance at the University of Chicago’s Booth School of Business, he was the Economic Counsellor and Director of Research at the International Monetary Fund (from 2003). Since then, he has chaired the Indian Government’s Committee on Financial Sector Reforms, which submitted its report in September 2008.

His research interests are in banking, corporate finance, economic development, and the significance of the finance sector. His papers have been published widely in major economics and finance journals, and he has served on the editorial boards of the American Economic Review and The Journal of Finance.

His Book titled, ‘Fault Lines: How Hidden Fractures Still Threaten the World Economy won the Financial Times Business Book of the Year Award in 2010. He was the co-author of the book, ‘Saving Capitalism from the Capitalists,’ with Luigi Zingales, Economist and Finance Professor Booth School of Economics of the University of Chicago.

Dr Rajan has started well. In a seven-page statement at a press conference in New Delhi, he set out a bold, progressive and reformist vision for his tenure.

According to some media observers, he is like the legendary “James Bond sent to rescue the Indian Rupee.”

Challenging tasks

Among the measures that he would be implementing to rescue the Indian economy in general and Indian Rupee in particular are deepening the securities markets, enhancing the financial inclusion of Small and Medium Enterprises, supporting and pushing the Rupee as an international currency.

He has also issued a stern warning to corporate and individual defaulters of loans.

He understands the need to preserve the value of the Indian currency.

Highlighting the importance of inflation targeting, he said that the primary role of the Central Bank is ensuring monetary stability by sustaining confidence in the value of the Indian 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,” he said.

Stronger network

Dr Rajan said that a panel of experts under the present RBI Deputy Governor Urjit Patel will suggest what needs to be done to revise and strengthen the monetary policy framework.

In an effort to attract Indian expatriate community, the RBI is to offer concessional swap rates to banks to raise dollar deposits from Non-Resident Indians (NRIs) hoping to raise between US$ 8 billion and US$ 10 billion

The RBI will swap FX-denominated foreign currency non-resident bond (FCNRB) deposits with tenures of three or more years at a fixed hedge cost of 3.5% a year until November 30, 2013.

The NRI resource

Additionally, banks are raising these deposits from NRIs at Libor/Swap rate of +400 basis points, which work out to the cost of mobilising FCNRB deposits (of about 8.5%) with lending at 11% This will enable banks to enjoy 250 basis points spread, as these deposits will not qualify for Cash Reserve Ratio or Statuary Liquid Ratio status for the time being.

According to Morgan Stanley estimates, the measure could raise an additional US$ 5 to US$10 billion from NRIs.

These moves have been compared to the opening up of the Indian financial markets for overseas investors following the economic crisis in 1991.

All these moves can reap benefits only if the political leadership and bureaucracy understand the initiatives undertaken by Dr Rajan.

Balaji Chandramohan is our Correspondent based in New Delhi.

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