Raghuram Rajan's arrival

The  media went to town about Rajan's "rocking" arrival speech. Although Rajan had been careful to downplay expectations by warning that he did not have a 'magic wand' for India's problems, the media came close to suggesting that he was on his way to waving away India's economic woes. Some of the stuff I heard on TV sounded absurd: a century on debut; no, a century in the first session of play; and if this was his performance in the first session, what might one expect in the slog overs? Even by the abysmal standards of private channels these days, this was the pits.

Ok, so what did we have on the first day? Monetary policy, whether interest rates would be lowered or kept where they are, was deferred to the policy statement, which itself was deferred by a few days. RBI to offer low-cost hedging for banks that bring in NRI deposits in foreign currency. But this means the RBI is indeed focusing on currency stability and not just price stability. At the very least, commentators might have noted that Rajan was not strictly adhering to the ideology of focusing on price stability alone. 

Most of the announcements were about financial sector reform, mainly banking. New bank licenses to screened by a committee headed by Bimal Jalan (Jalan, if I am not mistaken, has had reservations about corporates getting into banking); a committee on financial inclusion under Nachiket Mor; SLR to be brought down once government finances improve, which is easier said than done.

Bank branch licenses to be made freely available except in the case of banks where RBI has concerns. Much was made of this but, as many bankers pointed out subsequently, getting branch licenses is not a problem today. Getting banks to apply has the effect of imposing a certain discipline on banks- they get to thinking through the commercial and other aspects more carefully- and it is also a means for the RBI to convey messages to banks (on say, customer service). So dispensing entirely with branch licensing might sound like "big bang reform" but may not be that.

What else? An inflation-linked bond. How will these be sold? Through banks? If so, what will be their motivation to push these at the cost of their own deposits. And, if it is sold through other agencies and works perfectly, what happens to deposit growth, the sheet anchor of our banking system? Gold bonds might be a better idea, so that idle gold is monetised and the need for gold imports is reduced but Rajan was silent on this. As for going after promoters with high NPAs, that's too much to expect in India's brand of crony capitalism.

It was left to FT to strike a cautionary note in its Lex column. How to stabilise the rupee is the main issue and this might require work outside the RBI; the G-20 declaration to create a fund for the purpose is a sign that all central banks feel helpless in the wake of the impending reversal of QE, not just the RBI.  Good to have a classy governor at the RBI but any euphoria is misplaced.