IMPERATIVES FOR RBIAGENDA FOR

RAGURAM RAJAN

Raghuram Rajan

INTRODUCTION  On August 28, 2013, the value of the Indian rupee vis-à-vis the US dollar plummeted to a record low of INR68.80.

India’s economy grew at its slowest in the previous four years and recorded a growth rate of 4.4% A t a time when India was facing its worst financial and economic crisis in decades Raghuram Rajan was appointed as the 23rd governor of the RBI on September 04, 2013, for a period of three years

Main Points Of TopicAnalyze the history of the Reserve Bank of India (RBI) and its governors.

RBI.

Study the agenda for RBI governor Raghuram Rajan and the monetary policy stance adopted by him.

BAKGROUNDIn 1926 royal commission on Indian currency established an central bank called as RESERVE BANK OF INDIA

On April 1, 1935 RBI commenced it operations with Sir Osborne Smith as its first Governor

In 1938 first RBI notes were published

Its main objective is to Secure Monetary stability

It operates the credit and currency system of the country to its advantage

In 2008 financial stability was included as an important objective of the monetary policy

Post Independence EventsThe major event in the history of RBI was its nationalization in the year 1949

In 1951 first five year plan was launched. The State Bank Of India was established in the year 1954.

In 1960 a rule for compulsory amalgamation was passed to maintain the banking sector . Nearly 200 banks were liquidated .CRR was used first in 1962.

In 1970 to control inflation SLR was increased for the first time from 25% to 28%.In 1975 RBI set up the first RRB.

In 1980 the Monetary policy was amended many times based on the recommendations made by the Chakravathy Committee (suggested price stability )and Vaghul Committee(introduced money market reforms)

In 1990 there was external payment crisis which lead to the devaluation of currency. In 1991 Narashimam Committee suggested to decrease the CRR and to give more emphasis on Open Market Operations.

RBI Governors-1997-2013Bimal Jalan 1997-2003 was appointed at the time when the Asian Financial crisis was at its peak . He is well known for his crisis management skills

Y.V Reddy 2003-2008 was appointed in relatively stable time. He maintained a tight monetary policy throughout. He was against the ideas of the Finance Minister of India P.Chidhambaram .

Dr.Duvvuri Subbarao 2008-20013 took post when the global economic system had almost collapsed due to the Great Depression. He was against P.Chidhambaram’s idea of decreasing the interest rate for better economic development.

Bimal Jalan(1997-2003)

Y.V Reddy(2003-2008)

Dr. Duvvuri Subbarao ( 2008-20013)

He is appointed as the 23 rd governor of RBI on September 4 th 2013.He became the youngest ever chief economist at IMF at the age of 40 and served during 2003-2006.

As soon as he became the governor of RBI, he took many steps to stop the rupee fall.

Apart from steaming the rupee fall, banking sector reforms was also high on Rajan’s list of priorities.

He stated that “Changing the financial sector will help India grow.”

AGENDA FOR RAGHURAM G. RAJAN

In the first two months, Rajan raised the central banks main lending rate twice two control Inflation .

According to analysts Rajan was following in the steps of Subbarao,who has raised the REPO rate a record of 13 times from 4.75% to 8.5% during March 2010 and October 2011.

STUBBORN INFLATION

Some economists opined that the rate hikes and slowed down the economic growth of the country but not the inflation and it remained stubborn.

However defending the interest rates hike Rajan opined “CPI is at a worrisome number at 10% and beyond. I do not think there is any elbow room to give any kind of relaxation as far as interest rates are concerned.”

According to RBI, India’s widening current deficit which has the main reason for the rupee’s decline was estimated to come down to 56 Billion USD(3% of the GDP) for the fiscal year 2013-14,when compared to a deficit of 88 Billoin USD(4.8% of GDP) in 2012.

Analysts opined that India which imported 79% of its oil imports would continue to face a high current account deficits and as result the rupee was likely to continue weakening over a long term.

WIDENING CURRENT ACCOUNT DEFECIT

According to Wharton “ In a fiscal year 2012-13 India’s oil imports were 2.6 Million Barrels Per Day (bpd) which pushed oil imports bill to 109 Billion USD.”

The gold import bill for the same year stood at 47 Billion USD, less than half of the Indian Oil imports bill.

There was a lot of expectation that Rajan would tackle the most serious econimic problems in more than two decades.

In this regard he devised five pillar of financial reform which were :

Clarifing and strengthning the monetory policy framework.

Reforming the banking system.

RBI:THE SAVIOUR OF INDIAN ECONOMY

Liberalising indian markets. Increasing financial inclusion. Sorting out financially distressd financial

institutions. Rajans Five Pillars were compared to

Abenomics.The term coined for Japanese prime minister Shinzo Abe’s economic policies.

C.RANGARAJAN(DEC 1972-77)

BIMAL JALAN(NOV 1972-2003)

Y V REDDY(SEP 2003-08)

D.SUBBARAO(SEP 2008-13)

AVERAGE INFLATION

7.79% 4.53% 5.85% 7.23%

GDP GROWTH 5.49% 5.4% 7.9% 7.86%

EXCHANGE RATE

-9.16% -5.67% -0.68% -8.35%

EXHIBIT 1: PERFORMANCE OF RBI GOVERNERS

Reduced short term interest rates by withdrawing earlier exceptional measures to reduce ForEx volatility.

Completely freed branch licensing. Talked about permitting banks to acquire local

lenders with riders. Attracted 12 Billion USD via swap facility of

dollar deposits. Relaxed ForEx hedging limits for

exporters/importers to rebook cancelled forward contracts.

EXHIBIT 2:RAGHURAM RAJAN’S MAIN INITIATIVES (FIRST 60 DAYS)

Foreign Banks setting up wholly owned subsidiaries to be given new national treatment. The RBI to issue this scheme by mid November 2013.

Initial minimum paid up voting equity capital or net worth for wholly owned foreign bank’s subsidiary to be 5 billion USD.

More durable way for banks to mitigate mismatch in demand and supply of cash is to set up efforts to mobilise deposits.

EXHIBIT 3:RBI’s MEASURES FOR BANK,NON BANK FINANCIAL COMPANIES

Draft report on BASEL III capital framework likely by November 2013.

The RBI to issue updated guidelines on stress testing for banks by the end of November 13’.

Draft of proposed framework for domestic systematically important bank by Nov 13’.

First meeting of high level advisory committee on new banks licences was on 1 November 2013.

To issue 10 year retail inflation-indexed securities in November/December 2013.

To launch 10 year interest rate futures contracts by end December 2013.

To allow partial credit enhancement for corporate bonds by bank via credit liquidity facilities.

RBI’s MEASURES FOR MARKETS LIQUIDITY

To issue final guidelines on unheeded foreign currency exposures by end December 2013.

To close special repo Window for mutual funds with immediate effect.