• RBI’s Mandate to Ensure the Flow of Credit to the Productive Sectors of the Economy: Dr. Rajan thus wants to reduce the requirement for banks to invest in government securities in a calibrated way so bank credit shifts toward businesses and consumers and away from the government. This should investment activity and fuel local consumption in the years ahead.
• Providing Discounted Loans to Banks: The RBI is providing discounted rates for banks to borrow from the RBI, which can help alleviate the interest rate pressures the banks are facing. Dr. Rajan also lowered the rate for banks to exchange (swap) foreign currency deposits for the local currency to 3.5% per year from the prevailing market rate of 7%.3 The markets reacted extremely positively to this initial announcement.
Many of these initiatives came from Dr. Rajan’s years of research. It is great to see he’s taking deliberate actions to cut down red tape and speed bank branch openings, as regulations are often cited as a primary concern for India. Encouraging more foreign direct investment (FDI) is critical for funding investment needs, so Dr. Rajan’s calls to open access to foreign banks and open corporate and government bond investments to foreigners is helpful.
Furthermore, Dr. Rajan last year advocated for a new wave of privatization of state-owned enterprises, which control about three-quarters of the banking sector but also substantial parts of other sectors, including natural resources and energy. He stated, “State ownership in many areas no longer serves the public interest, and the only reason it continues is because it serves the many vested interests that benefit from the status quo … public sector workers who have cushy undemanding safe jobs … the occasional corrupt executive who rakes in bribes, and the minister who enjoys the patronage.”
These are serious thoughts and very much in line with India’s needs. Dr. Rajan brings high expectations. We have been living in a world dominated by central bank activity in recent years, with the U.S. Federal Reserve, bold new policies from the Bank of Japan, the European Central Bank, which will do “whatever it takes” to preserve the euro, and Mark Carney taking the helm at the Bank of England. Dr. Rajan has the potential to enter the discussions as one of the most influential global central bankers. His first press conference certainly had an immediate positive impact on the financial markets. Let’s hope he can continue the momentum at his first policy meeting on September 20.
Jeremy Schwartz is director of research at WisdomTree Investments (NasdaqGM: WETF). This post was republished with permission from the WisdomTree blog.
1 — Source: European Corporate Governance Institute, May 2009.
2 — See, for instance www.reuters.com/article/2013/09/03/us-india-economy-rajan-idUSBRE9820HP20130903
3 — Source: Bloomberg.