Tuesday, November 6, 2018

RBI needs to play like Dravid: Rajan opens up on public spat - economic news of india - world economic news - economics news for students - indian economy news

ad300
Advertisement
RBI needs to play like Dravid: Rajan opens up on public spat
Former RBI governor Raghuram Rajan wants the RBI to play like Rahul Dravid in its current tussle with the Centre. The role of the central bank is to be the wise counsel, like Dravid, not to make operational decisions and certainly not be loud like Navjot Sidhu, Rajan told Supriya Shrinate in an interview to ET Now. Rajan likened the role of the Central Bank to that of a car seat-belt, saying wearing it is important to prevent accidents. Here's what he had to say on the public spat, Section 7, the NBFC crisis, PCA, CIC's notice, and the RBI board.ON RUPEE'S VOLATILITY Can’t say what the true level of rupee should be. Focus should not be on the rupee's level, instead on things that will aid apt value.ON RBI VS GOVTCentral Bank is like a seat-belt for Centre, which is the driver. The government can decide whether it wants to put on the seat belt or not. Wearing a seat belt helps prevent the unfortunate eventuality. It (government) naturally thinks about pushing growth while the RBI focuses on financial stability.RBI has the authority to say no because it is responsible to maintain stability. It is not performing role for political or self-interest but because ithas taken a view for stability. Possible for Centre and RBI to disagree but still be respectful of each other's territoryON SECTION 7Section 7 hasn't been invoked, that's the good news so far. If Section 7 has to be invoked then relations have become precarious, cause of worry. The dialogue between RBI and Centre is always an ongoing one, works based on respect. Agree that RBI is an agency of the government but it has been entrusted with a particular task.Ongoing dialogue must be based on respect. They have to be watchful of each other’s territories, when encroached it’s problematic. Hope respect for RBI’s territory gets re-established.THE DEBATE ON NBFC LIQUIDITYIn case of financial stress RBI has to decide if NBFC facing a liquidity problem or a solvency issue. Solvency problem of NBFCs is when some entities have taken on bad assets and are decapitalised. Solvency involves fiscal use of funds which the Centre has to direct and put tax payer’s money at risk.Bailing out private entities with taxpayer’s money will raise issues. For addressing pure NBFC liquidity issue doing so via OMOs is a good idea. Lending through entities that can make direct loans to NBFCs is better. Allowing banks to guarantee bonds to the NBFCs is a good idea. Any intervention for NBFC must come after firms in trouble have taken steps to bolster own balance sheet.Firms that are worried about rollover must raise equity now to back up balance sheet. Going to the Centre for a bailout has to be the last step for NBFCs in trouble.GOVT'S RIGHTS ON RBI DIVIDENDTried for a comprehensive discussion on dividend since it always becomes controversial. Moving closer to the budget time makes it difficult to interact on dividend. I wanted to make dividend a cleaner and mechanical process, hasn’t happened. Value of RBI equity is Centre’s asset, RBI is subsidiary of government. India has a BAA rating can borrow only at that rate, RBI equity has AAA rating. Helps to have one entity in market that is well-capitalised on a rainy day. Having RBI as a separately capitalized entity gives you a vehicle that can make credible promised in global markets. RBI’s separately capitalised entity has AAA rating, has credibility like swap pact of 2013. Rupee depreciation has ensured RBI’s capital equity has gone up.Accountants have advised RBI not to pay more than profit as dividend accounting, credit worthiness and RBI printing money makes it tough to give away dividend. The value of RBI equity has gone up with recent rupee depreciation, RBI cannot pay more than the profits to the government. RBI paying extraordinary dividend will lead to an inflationary situation. If dividend transferred then equal amount of govt bond to be sold to suck out liquidity to avoid inflation. There are no free lunches with dividends, there is no Rs 3 lakh cr to give to the government. Giving dividend and then sucking out liquidity will not change the borrowing programme. TIME TO RELAX PCA NORMS?Citing Basel norms to relax PCA for 11 banks is erroneous. Basel norms are flexible for some conditions but very stringent versus other Indian rules. RBI as a professional institution must be trusted for putting 11 banks under PCA. MSMEs world over are starved of funds, hard to lend to so always clamour for funds. Important to improve formalisation of MSMEs and business environment. Opening lending tap for MSMEs or relaxing norms risks creation of higher NPAs.Right way to get funds to MSMEs is by improving biz environment they operate in. The worry is that Mudra loans NPA are far bigger than we think.THE CIC GOOGLY TO RBIIssue of fraud not necessarily the same as willful defaulter. Wilful defaulter doesn’t want to pay but hasn’t run away with the money. Full arm of law should be applied to bring frauds to book, its work in progress. Not well-versed to understand why those names cannot be made public. If frauds go unpunished they encourage more frauds.If there is a sense that there’s no place on earth one can hide from Indian law it will send out sound message. One cannnot prevent fraud but must create incentives so that it doesn’t pay.POLITICAL WILL TO GO AFTER FRAUDS? There seems to be political will to bring frauds to book.SUPERVISION OF PSUs RESTRICTED FOR RBI? There is room for improvement on both PSU and private bank sides. Have to recognise that level of NPAs on pvt & public sector banks is not at a level to be proud of. PUBLIC SHOWDOWN IMPACT ON MARKETS Hope the RBI and Centre take the right lesson and back off from cliff edge. Both sides have to listen to each other while respecting each one's turf. Most worrisome is role of the RBI board in all these issues. The role of the RBI board is not operational but to coach. It is supposed to bridge differences, reduce noise. India can’t have a breakdown in dialogue between Central Bank and government. S GURUMURTHY ON BOARD? Role of board is to give wise counsel and not intervene in judgments. INDIA'S TWIN DEFICIT PROBLEM Short-term moves to address CAD problems will be problematic. Need to have a far more open economy, with much lower tariffs. Haphazardly raising tariffs will make it very hard to produce in India. Seven per cent consolidated fiscal deficit is bad with CAD heading towards 3%.
Source: ET
Share This
Previous Post
Next Post

Pellentesque vitae lectus in mauris sollicitudin ornare sit amet eget ligula. Donec pharetra, arcu eu consectetur semper, est nulla sodales risus, vel efficitur orci justo quis tellus. Phasellus sit amet est pharetra