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Thursday, September 5, 2013

The RBI Governor Raghuram Rajan's Starts with a Knock Out Punch!!!


Over the past few articles the topic about Mr. Raghuram Rajan the new Governor of the RBI and his impact on the Indian Economy and Rupee has come up. Every time I have been positive of Mr. Rajan's influence and based on his speech yesterday, International Investor confidence has gone up many-fold. The stock market went up significantly yesterday and is continuing the upward momentum today as well. Similarly the Rupee posted impressive gains yesterday and might do the same today as well.

If we go through the key points in his speech yesterday, you will see that he has actually started his tenure as Governor with a knock-out punch and that too within the 1st minute of the 1st round. It was a pleasant surprise to see him come out with such a detailed speech within the 1st week of his tenure as Governor. He must have spent days analyzing the situation and contemplating on the next steps. He finished his speech with the following words:

Finally, a personal note: Any entrant to the central bank governorship probably starts at the height of their popularity. Some of the actions I take will not be popular. The Governorship of the Central Bank is not meant to win one votes or Facebook likes. But I hope to do the right thing, no matter what the criticism, even while looking to learn from the criticism

Without further delays, let me try to give you just the key features and points from his speech yesterday. You can do a simple Google search and read his full speech if you want...

Highlights from Raghuram's Speech - About the Indian Monetary Policy

RBI's Goal: To Sustain confidence in the value of the Rupee, to keep inflation low and stable

RBI's Steps: Deputy Governor Urjit Patel along with a panel of experts will come up suggestions in the next 3 months on what needs to be done to revise and strengthen our monetary policy framework


Highlights from Raghuram's Speech - About the Indian Banking System


RBI's Goals:

1. To accelerate Financial Development.
2. Greater financial access in all parts of the country, rather than meeting bureaucratic norms.
3. To make credit available as required esp. to Sectors of the Economy that need it more
4. To remove the lazy attitude when it comes to recovering loans or cleaning up their books

RBI's Steps:

1. Branch Banking regulations and requirements will be altered to help banks set up new branches quickly and service customers effectively. RBI will require banks to fulfill certain inclusion criteria in underserved areas in proportion to their expansion in urban areas, and we will restrain improperly managed banks from expanding until they convince supervisors of their stability. But branching will be free for all scheduled domestic commercial banks except the ones that are poorly managed.

2. The RBI will encourage qualifying foreign banks to move to a wholly owned subsidiary structure, where they will enjoy near national treatment on a reciprocal basis. We are in the process of sorting out a few remaining issues so this move can be made.

3. RBI will try to ensure that credit is available to the productive sectors of the economy. Banks may require to venture into sectors where they don’t usually enter, but RBI will push them to do so, to ensure that credit is available to everyone who needs it. This might also mean that banks would have to stop investing in Government Securities. The RBI will help banks reduce this in a controlled manner.

4. Banks will be forced to clean up their balance sheets. They can’t sit on bad loans in their books forever. Though the NPA's and Bad Loans situation isn’t alarming yet, it will if left unaddressed. Banks will be forced to raise capital if necessary.


Highlights from Raghuram's Speech - About the Indian Financial Markets

RBI's Goals:

1. To Liberalize the Markets
2. To Make India an Attractive Investment Destination for everyone

RBI's Steps:

1. RBI will work with the Stock Market Regulator (SEBI) to slowly and steadily liberalize the Markets. Restrictions on investments and position taking will be amended to ease the process.

2. Exporters are permitted to re-book cancelled forward exchange contracts to the extent of 25% of the value of cancelled contracts. This facility is not available for importers. To enable exporters/importers greater flexibility in their risk management, RBI will Enhance the limit available to exporters to 50% and Allow a similar facility to importers to the extent of 25%.

3. Cash settled 10 year interest rate future contracts will be introduced to develop the Money Market and the G-Sec Market

Highlights from Raghuram's Speech - About Increasing Capital Inflows

RBI's Goals:

1. To help our banks bring in capital to fund our Current Account Deficit


RBI's Steps:

1. RBI will be opening a special concessional window for swapping FCNR deposits. During this window, banks can swap the fresh FCNR (B) dollar funds, mobilized for a min of 3 year or more Tenors at a fixed rate of 3.5% per annum

2. Current overseas borrowing limit of 50% of the unimpaired Tier 1 capital will be raised to 100%. The borrowings mobilized under this provision can be swapped with the RBI at the discretion of the bank at a concessional rate of 100 basis points below the ongoing swap rate prevailing in the market

The above schemes will be open up to November 30, 2013 and RBI reserves the right to close the scheme earlier with due notice.

Trivia:
The RBI's swap window to banks for new foreign currency nonresident (B) dollar funds is expected to lead to an estimated $10 billion of inflows. This is relatively substantial and could help to fund the current account deficit.

Highlights from Raghuram's Speech - About Strengthening the Financial Infrastructure in the Country

RBI's Goals:

1. To improve the efficiency of the Debt Recovery System
2. To improve the payments and Settlements network in the Country
3. To promote information sharing between financial institutions, banks and credit agencies


RBI's Steps:

1. Unique ID's (Aadhar Cards) will be used to uniquely tag individual’s credit histories so that financial institutions can take properly informed decisions
2. Promoters can no longer stay in charge regardless of how badly they mismanage an enterprise. Nor can they use our banking system to recapitalize their failed ventures.
3. RBI proposes to collect credit data and examine large common exposures across banks. This will enable the creation of a central repository on large credits, which we will share with the banks. This will enable banks themselves to be aware of building leverage and common exposures


Highlights from Raghuram's Speech - About Individual Investors/Households

RBI's Goals:


1. To help individuals save money at a rate that beats inflation
2. To make Bill payments easier for individuals and to make anytime, anywhere bill payments a reality


RBI's Steps:

1. As a joint effort with the Government, RBI will be issuing Inflation Indexed Savings Certificates that will be linked to the CPI New Index which will be made available by end of Nov-2013

2. A GIRO Based National level Bill Payment system will be introduced which individuals can use to link up with their bank accounts and make payments like school fees, medical bills etc.

3. Electronic Funds transfer systems like NEFT and RTGS will be optimized to make person to person funds transfer quicker and more efficient

4. Non-Banking Institutions will be allowed to set up ATM's and Point-Of-Sale Terminals across the country to improve access to financial services in rural and remote areas



My Opinion On These Proposed Changes:

Personally, I am really glad that a person of Mr. Raghuram's knowledge and capabilities is being given control of the RBI. If there is anyone who can bring back investor confidence in our markets, save the rupee and resurrect our economy, it is him.

Let us just hope that our political infrastructure does not interfere with his operations and lets RBI truly be the autonomous body that it is supposed to be. This will greatly help the country, its economy and at the end of the day, the common man.

Let’s hope for the best!!!

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