Guv’s Sys­tem­atic Ap­proach to Help In­dian Econ­omy Shape up Stronger

The Economic Times - - Money -

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)

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