India’s new central bank governor doesn’t have all the answers, but at least he has a plan

So it wasn’t a bad dream.
So it wasn’t a bad dream.
Image: Reuters/Danish Siddiqui
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If a central banker has no easy solutions to the worst financial crisis in decades and little control over many of his country’s economic problems, he can hardly be blamed for waxing profound about what should be done, while skipping discussion of whether it’s all possible. In his first address as the governor of the Reserve Bank of India, Raghuram Rajan put forth his plan to reform the central bank, fix the financial system and save the rupee. Here’s a quick round-up of Rajan’s agenda:

Get the Reserve Bank of India’s reputation out of the gutter

The recent flip flops in the defense of the rupee have dented the central bank’s credibility. Rajan sought to address the issue head-on, saying that transparency and predictability will help the RBI become a “beacon of stability” in times of market volatility and political instability. Rajan’s comments came just hours after the RBI eased the norms for international investments by Indian companies and individuals, a move that had sparked fears of wider capital controls.

Use baby steps to liberalize the rupee

Rajan came out strongly in favor of rupee internationalization, through which international trade can be settled in the local currency. That would allow those who receive rupees to invest it back in India, and take the currency towards full convertibility.

Redefine the goals of monetary policy

Rajan admitted that RBI’s ability to shore up the confidence in the rupee hinged on inflation and its impact on the purchasing power of Indian consumers. To that end, he set up a panel to come up with suggestions to revise and strengthen the monetary policy framework within three months.

Hand out more credit

Rajan also hinted at reducing the statutory liquidity ratio requirement, which forces banks to park 23% of their deposits in government securities. The governor said that the limit can be brought down to what is “strictly needed from a prudential perspective” to boost the flow of credit to the productive sectors of the economy.

Give new banks a chance

Rajan has set up a panel headed by former RBI governor Bimal Jalan to scrutinize the applications of the 26 banking aspirants, a list than includes Tata Sons, India’s biggest business conglomerate, and firms controlled by billionaires Anil Ambani and Kumar Mangalam Birla. Rajan expects the process to be completed by January 2014.

Get more foreign money into the economy

The former IMF chief economist also unveiled measures to help build confidence in the rupee by boosting foreign capital investment. Exporters and importers will have greater flexibility to cancel and rebook foreign exchange contracts, easing some of the restrictions initially put in place to reduce currency speculation. Banks will be able to hedge against interest rate volatility by tapping foreign currency deposits of non-residents, who have the option of investing in bonds denominated in foreign currencies.

Rajan’s appointment as central bank governor unleashed a wave of optimism in the Indian media, but Rajan himself is aware that the honeymoon period will soon end. “Some of the actions I take will not be popular,” said Rajan. “The governorship of the central bank is not meant to win one votes or Facebook ‘likes.’ ”