Raghuram Rajan arrives at the RBI headquarters in Mumbai to take charge as governor. (PTI)
Mumbai, Sept. 4: Raghuram Rajan, an acclaimed economist, announced a raft of reforms and managed to “surprise the markets” soon after taking over today as the governor of the Reserve Bank of India.
“Our task is to build a bridge to the future over the stormy waves produced by the global financial markets,” Rajan said.
The words and actions of the former chief economist of the IMF signalled his resolve to quickly get to grips with the enormity of his three-year mandate to fix the problems that have roiled the economy and give a new direction to policy-making on Mint Street.
Rajan, a suave and articulate academic from the University of Chicago who gained fame by anticipating the global markets meltdown of 2008 three years before it happened, announced several decisions.
An RBI insider said this was perhaps the first time that a governor had made so many announcements on his very first day in office.
Rajan, 50, said the main job of the central bank was to focus on monetary stability. It will also address two other objectives: inclusive growth and development, and financial stability.
“The RBI,” he said, “should be a beacon of stability” at a time financial markets are volatile and domestic political uncertainty prevails because of the impending elections.
“But that is not to say we will never surprise markets with actions,” he added — and then proceeded to do just that by setting out his short-term timetable for the RBI. It indicated that he had been crafting his agenda in consultation with the boffins at the Reserve Bank during his three-week stint as an officer on special duty before assuming charge as the governor.
As a first step, Rajan said the second quarter monetary policy would be deferred by two days to September 20 to give him more “time to consider all major developments”.
But the move appears designed to give the RBI a two-day breathing space to consider its own monetary policy response in the event that the US Federal Reserve’s policy-making Federal Open Market Committee decides on September 18 to wind down its cheap money policy.
Any move by the Fed to back down from its quantitative easing — under which it buys $85-billion worth of bonds a month — is widely expected to cause mayhem in the emerging markets.
Rajan announced two important decisions today: the first was to give well-run banks freedom to open branches anywhere in the country without having to seek prior approval from the RBI.
The second was to “internationalise the rupee” — a phrase that Rajan did not completely explain but which suggested that he was preparing to resurrect the slow and laboured process towards convertibility of the currency that had stalled more than a decade ago.
“This might be a strange time to talk about rupee internationalisation but we have to think beyond the next few months,” Rajan said.
He stressed on the need to crack down on “lazy banking”. Lazy banking is a phrase coined by former deputy governor Rakesh Mohan to describe how banks are reluctant to lend money and instead prefer to park their money in low-yield government securities.
Rajan said he would consider relaxing some of the onerous obligations on banks that require them to invest in gilts, thereby propping up the government’s borrowing programme.
He told reporters that donning the mantle of the governor of the central bank was not a popularity contest or a social networking trend, clearly hinting that industry and banks must be prepared for some tough measures.
Market observers applauded. “I was surprised by the big-bang announcements. It reflects the youth and glamour that Dr Rajan brings,” said Madan Sabnavis, chief economist, CARE Ratings.
Decision: Local banks can open branch anywhere in the country without seeking prior approval
Impact: Strong banks will have the freedom to grow and scale up operations
Decision: Move to internationalise rupee; more trade deals will be settled in rupees
Impact: Baby step towards a free currency; will help narrow current account deficit by reducing dollar outflows
Decision: Foreign banks to move to wholly owned subsidiary structure; these entities will enjoy ‘near national treatment’ on reciprocal basis
Impact: Foreign banks will be able to have a wider footprint; reciprocity will enable more Indian banks to set up branches abroad
Decision: Plan to scrap lazy banking; reduce onerous obligations on banks to invest in government securities
Impact: Banks will have more money to lend to the productive sectors of the economy
Decision: New bank licences to be issued by January 2014
Impact: Big industry houses will be allowed to own banks; increase competition
Decision: Inflation-indexed bonds to be issued in November; linked to Consumer Price Index
Impact: A budget announcement being fulfilled; investors will have another instrument to hedge against inflation
Decision: SMS-based fund transfers using apps from mobile handsetsproposed
Impact: Will ensure financial inclusion; will bring the benefits of the telecom revolution to banking
The pension bill was passed in the Lok Sabha on Wednesday after the Congress
and the BJP joined hands and will now go to the Rajya Sabha. The following are
answers to questions from potential subscribers
• Does the bill cover only
No, it covers any firm that opts for the scheme and even employees
in the unorganised sector
• What does the pension bill
The Pension Fund Regulatory and Development Authority Bill seeks to give statutory powers to the interim authority set up in 2003. It also
allows pension funds to have foreign investment of up to 26 per cent
• How is the new law different
from that in 2003?
The new law allows the option of minimum assured returns, which was not there earlier. It mandates that at least one of the pension funds that a subscriber can opt for should be a public sector company
• When will the pension scheme take off?
It already exists but has not yet achieved depth. Eight asset
managers — three from the public sector — are in the field now. The eight manage around Rs 300 billion, compared with Rs 5 trillion by the state-owned provident fund and over Rs 7.60 trillion by mutual
funds in the country. More people are expected to opt for it after the law is passed
• Why should I subscribe to
a pension fund?
It assures a steady income after your retirement, provided you
make prudent choices. Rise in cost of living and increased longevity mean a fixed sum kept aside for
old age is not enough. An annuity
is needed to lead a dignified life
• Do I have the option not to be part of the pension scheme?
Yes. The pension scheme is as
yet mandatory only for central
government employees and
employees of 26 state
governments. Others have to
opt for it either individually or as
a corporation. Several firms such
as Reliance Industries, Reliance ADA Group, ICICI, SBI, Wipro,
Cognizant, Grasim Industries,
Nalco and Konkan Railway
Corporation have joined it
• How do I become part of
a pension fund?
You can check if your office has joined such a pension scheme. If not, you can enrol with any of the eight asset managers or wait if
more players come into play. The
existing eight have dedicated outlets in banks or some head post offices. At least one asset manager offers online subscription
• Can I decide how much of my savings should go into stocks and how much in debt?
Yes. Subscribers can choose
between a mix of E (equities),
G (government securities) and
C (corporate debt). They can opt
for 100 per cent investment in
government securities or in
options that allow a mix of E,C
and G. However, there are no
options for investing all pension money in only equities
• Between equity and debt, which is safer?
Equities or stocks allow for possible higher returns. But they are also riskier as there could be negative returns. Debt is safer — government debt is the safest — but it also brings the lowest rate of return
• If stock prices crash, will
my pension be affected?
If you opt for an option that
allows part-investment in
equities, the pension corpus
will be affected by a crash
• Can I choose the stocks in which the pension fund will put my money?
Fund managers will make
disclosures of the sectors they
choose and of stocks they have
put money in. But individual
investors cannot choose the
stocks on their own
• Can I withdraw money
whenever I want or only
after I retire?
The regulatory authority
currently does not allow the
basic investment to be touched. But withdrawals of the interest
income from the basic sum
invested are permitted, subject
to conditions. Such withdrawals
will reduce the pension corpus
• Will I get my money back
in instalments or at one go?
It will be paid annually