It is a job well begun for the new Reserve Bank of India Governor, Raghuram Rajan. If the manner in which bonds, stocks and, more importantly, the rupee reacted is any indication, the financial market appears convinced that the new man at the helm has definite ideas about rescuing the rupee and shoring up the beleaguered banking sector. In his inaugural speech, he projected a more progressive RBI, one willing to question existing practices and change them wherever required. This was reflected in his ideas on easing some of the constraints on the banking sector such as mandatory investments in government securities, priority sector lending, and the opening of new branches.
His thoughts on the financial market and internationalising the rupee send the strong signal that the days of demonising speculators are over. The RBI seemed as if conducting a war against speculation recently, imposing limits on positions that could be taken in the inter-bank and exchange traded futures market, increasing margins, forbidding banks from trading in currency futures, restricting companies from re-setting forex hedges and so on. While these measures reduced volumes in the domestic market, they did little to curb the currency’s decline. By spelling out that it is better that investors take positions domestically (thereby providing depth and profits to the economy) rather than take our markets to foreign shores, Rajan has signalled his intention to reverse these restrictions in a calibrated manner. He seems to recognise that the way to render the offshore rupee market irrelevant is by liberalising the onshore rupee market and making it easier for non-residents to trade here. The gentle nudge to foreign banks to set up wholly-owned subsidiaries also appears aimed at attaining greater control on their activities in the offshore rupee market that has been influencing domestic currency prices.
The first steps taken to address the rupee weakness — increasing the existing limits on importers and exporters for cancelling and rebooking forward contracts in the rupee, increasing the limits of overseas borrowings of banks and providing a window for domestic banks to swap their foreign currency non-resident deposits with the RBI — have done their bit to improve sentiment. However, these are early days. There is a lot more to be done to improve the country’s external account and repair the country’s battered image among global investors. It remains to be seen if he is able to translate his liberal ideas into action and whether and, to what extent, it will improve the situation. But given the perilous state of the economy, he is quite right in saying that change is less risky than not changing at all.