Guv’s Systematic Approach to Help Indian Economy Shape up Stronger
Definitely, I believe Rajan has enumerated that multiple number of times since he took charge as RBI governor in 2013.
One — focus on real rate of interest; when he was the chief economic advisor to the previous government,RajanusedthatIndianeededlarge pool of savings to go beyond gold and real estate. In fact in the last two years, the Indian mutual fund industry alone has mobilised more than ₹ 1,50,000croreinequityfundspotentiallyacting as a strong counter force for FIIs.
Second — Rajan attracted a large pool of money into the country through FCNR deposits. I remember back then, bankers were not ready even after the announcement of the scheme by RBI. However, I was told that Rajan met people at RBI and made the market players understand how the scheme is attractive to NRIs. It number. The fact was that there was a mismatch in recognising NPAs by different entities. Can anyone afford to have differential treatment for the same set of borrowers? Rajan understood the simple practice and drew a huge inference in order to make the system much stronger. There is no doubt it resulted in short term pain, however, it delivered something good and positive in the long run.
Lastly, bond market behaviour turned extremely negative between November 2015 and February 2016. It did have an impact on the bond market creating pressure in yields going up. However, a series of OMOs (open market operations)duringFebruaryandMarchleadto softening of liquidity and rates. While one can argue that one has lost big money during the volatile period, they were probably those who couldnotstomachthevolatility.Thosewithless patience and less faith would have lost money. Those who stayed with conviction were rewarded handsomely.
In Tuesday’s policy too, Rajan has further addressed the issues surrounding liquidity management and the need for predictable OMOs so as to avoid volatile money market yields and finally cut the differential between reverse repo and repo rates. This, I am sure, will further help in the real transmission of rates to potential borrowers. RBI’s policy stance is very accommodative and the measures on liquidity will lead to more OMOs, reduce bank borrowings from RBI, stability in funding rates and encouraging risk taking (not worrying on liquidity) will help banks reduce lending rates. This augurs well for entire economy and will be beneficial for across debt heavy sectors. This will definitelyhelpbankingsector,automobilesand a large pool of SMEs at large.
Rajan’s deep understanding, ability to do high-level root cause analysis, and understanding the behaviour of market participation and its purpose will help the Indian economy shape up much stronger. Patience will pay big time. (A Balasubramanian is CEO
at Birla Sun Life AMC)