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Reserve Bank of India plans inflation-indexed savings certificates
Will the Indian government do as well as the U.S. government in manipulating the inflation data?
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New Reserve Bank Chief Hits the Ground Running
From the Business Standard, New Delhi
Thursday, September 5, 2013
http://www.business-standard.com/article/economy-policy/raghuram-rajan-h...
MUMBAI -- It was easily the most substantive speech by a Reserve Bank of India governor on his first day in office. Just two hours after the formal signing-in ceremony and a warm hug from his predecessor, Raghuram Rajan got down to business in a manner that surprised all.
In his first media conference as governor, Rajan unveiled a slew of reforms, many of those focused on "protecting the value of money." His opening remarks set the tone for the new order at the central bank: "To the existing traditions of the RBI, we will emphasise two others: Transparency and predictability. That is not to say we will never surprise markets with actions."
The new governor removed uncertainties over the new bank licence process by setting a timeframe. An expert panel under former RBI governor Bimal Jalan will scrutinise the applications and licences will be issued before or soon after Deputy Governor Anand Sinha leaves office in January.
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Rajan postponed the mid-quarter review of its monetary policy by a couple of days to September 20. The US Federal Open Market Committee (FOMC) meeting, scheduled on September 17-18, is expected to indicate when the US Fed might start tapering its stimulus programme -- an event crucial for the fate of currencies of emerging markets, including India.
Rajan also announced four committees -- one under RBI Deputy Governor Urjit Patel to revisit the structure of monetary policy; two on bad and restructured loans and their recovery; and one on financial inclusion to be headed by Nachiket Mor, a former board member of ICICI Bank who is now on the RBI board.
Earlier in the day, the rupee recovered 0.94 per cent from its previous close to 67.09 a dollar. Stock markets also gained, with the BSE Sensex rising 1.83 per cent, or 333 points, to close at 18,567.55.
Freeing up branch licensing is another key reform Rajan announced on Wednesday. At present, banks need to take prior approval of RBI for opening branches in Tier-I centres (with population of more than 100,000, except in the Northeast and Sikkim). For Tier-II to Tier-VI towns, banks can open branches, subject to reporting. However, banks are required to ensure they open 25 per cent of their branches in unbanked rural areas (Tier-V and -VI).
In a move to ensure flow of credit to productive sectors and curb "lazy banking," Rajan proposed reduction of banks' requirement to invest in government securities. As of now, banks need to hold at least 23 per cent of their net demand and time liabilities in government securities.
"This cannot be done overnight, of course. As government finances improve, the scope for such reduction will increase. Furthermore, as the penetration of other financial institutions such as pension funds and insurance companies increases, we can reduce the need for regular commercial banks to invest in government securities," Rajan said.
To boost inflows to support the rupee, which has depreciated more than 23 per cent this financial year, the central bank has allowed exporters to re-book cancelled forward exchange contracts to 50 per cent of the value of cancelled contracts, compared with 25 per cent earlier. In addition, a similar facility has also been extended to importers, to the extent of 25 per cent.
The governor said the central bank was examining if interest rate futures on overnight interest rate could be introduced.
A major part of the speech focused on shoring up investor confidence. This was evident from the fact that RBI -- in a separate notification -- partially relaxed the restrictions imposed last month on capital outflows from residents, including by allowing Indian companies more leeway if they opted to raise funds through external commercial borrowings.
Rajan said RBI would push for more settlement in rupees for which India would have to further open its markets.
Banks will be allowed to swap the fresh FCNR (B) dollar funds, mobilised for a minimum tenor of three years and more, at a fixed rate of 3.5 per cent a year for the tenor of the deposit. The central bank notified the measures late in the evening.
Further, the current overseas borrowing limit of 50 per cent of the Tier-I capital will be raised to 100 per cent and the borrowings mobilised under this provision can be swapped with RBI at the option of the bank at a concessional rate of 100 basis points below the prevailing swap rate in the market.
These schemes will be available till November 30. This coincides with a time when the relaxations on NRI deposits will expire.
On loan recovery, Rajan said the system had to be tolerant of genuine difficulty while coming down hard on mismanagement or fraud. But “promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalise their failed ventures,” he added.
The RBI, he said, would collect credit data and examine large common exposures across banks.
On the households front, RBI will issue inflation-indexed savings certificates linked to the new Consumer Price Index to retail investors by the end of November. Besides, a national giro-based Indian Bill Payment System will enable households to use bank accounts to pay school fee utilities and medical bills and make person-to-person transfers electronically.
The RBI will also set up a technical committee to tap the potential for mobile-based payments.
Giving a glimpse of his approach, Rajan said: "The governorship of the central bank is not meant to win one votes or Facebook 'likes.' I hope to do the right thing, no matter what the criticism, even while looking to learn from the criticism."
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