Millennium Post

Steps to ease rupee woes

Raghuram Rajan, taking over as Governor of RBI on 4 September, has sought to ring a note of cheer for an economy in distress, committing himself to restore faith in the value of the rupee with some quick actions like facilitating banks to bring in ‘safe money’ as capital inflows to fund current account deficit over the next three months.
This is part of what he calls ‘first steps’ in building ‘a bridge to the future, over the stormy waves’ from the global financial markets.  His confidence in this regard may perhaps come under test as early as next few weeks if the US Federal Reserve, as expected, begins to unwind its monetary stimulus (QE).
The internationally acclaimed economist lost no time in under-scoring some immediate issues for attention by the central bank and also laying out broad contours of the monetary policy framework he would pursue. Many economists, however, feel whatever innovative approaches Rajan may introduce, monetary policy by itself cannot bring about strong economic revival without simultaneous government actions on structural issues and supply bottlenecks which have held up projects and stifled higher growth.
In making his grand debut, Rajan noted these are ‘not easy times, with many challenges for the economy’. For months we have seen how emerging economies like India, Brazil, South Africa, Indonesia and a few others are struggling to cope with slow growth and domestic and external vulnerabilities. A timely warning of further risks for them from US Fed tapering of asset purchases possibly from September,  also comes from an IMF Note to the G-20 Summit at St. Petersburg (5-6 September).
US monetary policy action by withdrawing the current stimulus even gradually is seen to trigger exchange rate and financial market overshooting while capital is being attracted to major developed markets with higher nominal yields. According to IMF, the role of monetary policy is circumscribed in countries where inflationary pressures persist from supply bottlenecks (like Brazil, India and Indonesia). The scope for easing the monetary stance in such cases may be very limited or it may need to be tightened, IMF Note adds.
In redefining monetary policy – presumably taking note also of Prime Minister Manmohan Singh’s suggestion recently for re-visiting monetary policy – Rajan has brought in ‘monetary stability’ as the primary role of the central bank, citing for the objective the RBI Act of 1934. This marks a qualitative shift from the monetary policy pursued by the outgoing Governor Subbarao, who had emphasised price stability, growth and financial stability. According to Rajan, monetary stability is sustaining confidence in the value of the country’s money. ‘Ultimately, this means low and stable expectations of inflation, whether that inflation stems from domestic sources or from changes in the value of the currency, from supply constraints or demand pressures’. While he sees RBI’s primary role as ‘preserving the purchasing power of the rupee’, he has added two mandates to monetary policy, inclusive growth and development, and financial stability. Inflation does not get a direct focus in Rajan’s Policy elaboration, it is implied or submerged in his concept of Monetary Stability.
Subbarao was confronted by high WPI inflation and near double-digit consumer price inflation persisting over most of his term and in his valiant fight to contain it, he had to calibrate the policy toward a balance in the growth-inflation dynamics. His insistence on supply side actions on the part of government, besides what the monetary policy could do, to reduce pressures from food inflation did not go down well with the Finance Minister who wanted monetary policy to give as much if not greater importance to growth over inflation.
Now, Rajan has made known his own concepts for monetary policy and has asked one of the Deputy Governors R Urjit Patel to constitute a panel of outside experts to come up with suggestions in three months on what needs to be done to ‘revise and strengthen our monetary policy framework’.
While releasing a major statement of policy objectives, intentions and actions at a press conference on taking over, Governor Rajan deferred comments on the economic or inflationary situation till his first mid-quarterly policy statement to be made on 20 September. That would give him enough time, he said, to consider all the details as more data emerge in the next two weeks, besides the spillovers if the Federal Reserve proceeds with its planned exit from QE.  .
Rajan’s ‘first steps’ include actions aimed at rupee stabilisation by attracting capital inflows which would help rupee stabilisation by providing a special concessional window as sought by banks for swapping FCNR deposits that will be mobilised following the recent relaxations permitted by the Reserve Bank of India. Further, based again on requests received from banks, RBI has now decided that the current overseas borrowing limit of 50 per cent of the unimpaired Tier I capital would be raised to 100 per cent and these borrowings mobilised under this provision can be swapped with Reserve Bank of India at the option of the bank at a concessional rate of 100 basis points below the ongoing swap rate prevailing in the market.
Transparency and predictability in monetary policy execution is underlined by Rajan as much as communication. At a time when financial markets are volatile, and there is some domestic political uncertainty because of impending elections, he wants RBI to be ‘a
beacon of stability’ as to its
objectives. IPA
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