Rama Krishna Vadlamudi, HYDERABAD

04 September 2013

www.ramakrishnavadlamudi.blogspot.com
He as the new RBI governor is like a fresh flower in a desert. I wish our rulers too were young and bubbling with new ideas, I tweeted so when Raghuram Rajans appointment was announced four weeks back. Today, that is, 4 September 2013, he took over as the new governor of Reserve Bank of India. Upon taking over, he made a statement the gist of which is as follows: 1. India is a fundamentally sound economy with a bright future, though the economy faces challenges. 2. We will emphasize on transparency, predictability and communication. 3. A newly appointed panel will be set up to revise and strengthen our monetary policy framework. 4. Shortly, the RBI will completely free bank branching for domestic scheduled commercial banks in every part of the country. 5. An external committee headed by Dr Bimal Jalan will be appointed to screen new bank license aspirants. Hopefully, the deadline to announce new bank licenses is within or soon after January 2014. 6. We need to reduce the requirement for banks to invest in government securities. This will be done in a calibrated way and over a period of time. 7. We will steadily but surely liberalize our financial markets (He has in fact announced certain measures related to forward contracts, interest rate futures and a window to banks for swapping FCNR(B) deposits). 8. We will take measures to address rising bad loans of banks and restructuring/recovery process. Promoters of enterprises dont have the right to use banks money to finance their failed ventures. (In an oblique reference to Vijay Mallya-promoted Kingfisher Airlines and other highly-indebted companies). 9. We will issue inflation-indexed bonds based on consumer price index (CPI). 10. We will push for more settlement in rupees in international trade. 11. Im not here to win votes or Facebook likes. I hope to do the right thing no matter what the criticism is.

Rama Krishna Vadlamudi, Hyderabad 04 September 2013 www.ramakrishnavadlamudi.blogspot.com

It is quite remarkable that on day one in the office, the new RBI governor has taken so many measures encompassing the entire spectrum of central banking. I think no previous governor in recent history has set such an ambitious agenda on the first day itself. At fifty, he is the youngest RBI governor in the last several decades. He is exuding great confidence and can-do spirit.

Now, he has taken over as the new RBI governor, what can we expect from him when the economy is facing severe stress on several fronts? Broadly, the expectations are:
A. Quick reversal of liquidity tightening measures undertaken by RBI since July 15th. These measures have pushed up short term interest rates to more than 10 percent crimping credit expansion in the economy. B. The new governor will shore up confidence and bring stability to the plunging rupee. C. Till now, the RBI is following wholesale price index (WPI) for inflation management. In the following months, I think this will be changed to CPI as is the practice in major developed and developing countries. D. RBI will try to improve its communication with the financial markets, which are one of the vital parts of any economy. (The governor has already indicated this). E. Over a period of time, the capital control measures introduced by the Government and the RBI (such as restrictions on gold imports, capital controls on overseas direct investments) will be removed subject to the rupee stabilization. F. Banks have at present categorized a major part of their investment portfolio under held-to-maturity (HTM). I think the HTM category will be removed completely in line with the international practices. But RBI might implement this in a measured way. G. Recent restrictions imposed on banks proprietary trading in exchange-traded derivatives will be removed completely, restoring the status quo ante. In addition to the above, we may expect some off-beat/unconventional measures from Dr Raghuram Rajan. It is well known that the onus of restoring confidence in the Indian economy lies, mainly, at the doorsteps of RBI and the finance ministry. Let us hope they will do their job in a proper way, though there is reasonable skepticism about the ability of the government in controlling the runaway expenditure on the eve of elections. Markets: The stock markets tomorrow are likely to react favorably to the statement made by the new governor on his taking over officethough the overall direction of the stock market is weak due to fears of S&P downgrading Indias sovereign rating, fiscal deficit and current account deficit. The Sensex and the Nifty closed today at 18,568 and 5,448, up two percent each roughly. The rupee closed the day at 67.10 to the US dollar, up about one per cent. The 7.16% 10-year benchmark G-Sec closed the day with a yield of 8.39%. ---

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Rama Krishna Vadlamudi, Hyderabad 04 September 2013 www.ramakrishnavadlamudi.blogspot.com

Disclaimer: The author is an investment analyst, equity investor and freelance writer. This write-up is for information purposes only and should not be taken as investment advice. Investors are advised to consult their financial advisor before taking any investment decisions. He blogs at:

http://ramakrishnavadlamudi.blogspot.in/
Connect with him on twitter @vrk100

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