RBI governor Raghuram Rajan bats for steady and firm reforms

Mumbai,Manju AB:The Reserve Bank of India (RBI) governor Raghuram Rajan said the reform process in a country as big and populous as India cannot be shots in the dark as he urged the government to be guided by the Chinese saying: ‘Crossing the river by feeling the stones while unfolding the reform process’.


“Wherever possible, we have to move steadily but firmly, ever expanding the scope of reforms while always limiting the uncertainty they create,” he said in the central bank’s 2014-15 annual report.

Rajan has been warning India and countries around the world to rethink on the exports-led growth and try to cater to the domestic demand. He has also rephrased the prime minister’s Made-in-India slogan to Made-for-India, which urged manufacturing to meet the demands of the domestic economy.

He said the economic growth is still below levels that the country is capable of. Inflation projections for January 2016 (as of early August 2015) are still at the upper limits of RBI’s inflation objective. Third, the willingness of banks to cut base rates – whereby they forgo income on existing borrowers in order to attract more new business – is muted; not only does weak corporate investment reduce the volume of new profitable loans, some bank capital positions, weakened by bad loans (non-performing loans), may prevent them from lending freely.

The central bank also suggested that the government ‘front-load’ its disinvestment plans to take advantage of supportive market conditions while cutting back on capital expenditure to meet its fiscal deficit target of 3.9% of GDP by the end of the current fiscal.

The short-term macroeconomic priorities of the RBI is to focus on bringing down inflation; work with the government and banks on speeding up the resolution of distressed projects and cleaning up bank balance sheets; ensure banks have the capital to make provisions, support new lending, and thus pass on future possible rate cuts.

Though inflation has so far closely tracked projections, developments on this front “will warrant close and continuous monitoring”, RBI said. India’s consumer price index (CPI) eased to 3.78% in July, much below RBI’s January 2016 target of 6%. However, the central bank wants to keep inflation below 5% by January 2017 “as part of its overall disinflationary strategy”.

RBI’s target is to further bring down CPI to 4% by January 2018.

Asset quality concerns resulting in risk aversion are considered to be one of the major factors underlying the current slowdown in credit. Public sector banks, which recorded higher NPA ratios, experienced a sharp decline in credit growth. On the other hand, private sector banks with lower NPA ratios posted higher credit growth.

However, Rajan strongly batted for the public sector banks. “We should recognise that public sector banks undertake public interest activities (like the rollout of accounts under the Pradhan Mantri Jan Dhan Yojana) that are not always fully compensated. The government should endeavour to keep the competitive playing field level by fully compensating banks for activities it wants undertaken in the public interest.

He also demanded a revision in the salary package of the middle management of the state owned banks. “PSBs compete in the same market place for talent as do private sector banks and foreign banks, and because skill gaps are increasing at middle management levels because of past hiring freezes, they will be unnecessarily hampered if they are unable to pay appropriate compensation to middle and senior managers, as well as Board members. Of course, higher pay should come with better accountability for performance.”