While industry and government are expecting softer interest rates, a mammoth task of continuing the cleaning up of bank balance-sheets also lies ahead
The next governor of Reserve Bank of India (RBI), who is likely to be named in a few days by the government, faces a series of daunting challenges as he steps into a shoes of a formidable central banker. He or her will be under tremendous pressure from the government, industry and bankers to go soft on interest rates. Experts said whatever else he needs to do, the next governor cannot be a hawk guarding interest rates in the Indian economy.
But with consumer price inflation hovering at a 19-month high at 5.76%, riding higher food prices, ushering in softer rates will be a big challenge. DK Srivastava, chief policy advisor, EY India, said, "Retaining focus on inflation and controlling it, particularly the food inflation, will be the major challenge for the new governor. " The comparisons with his predecessor, a very credible policy maker, will be both inevitable and at times challenging.
Starting January 2015, the RBI governor Raghuram Rajan has cut interest rates 150 basis points to 6.5% while the demand was for sharper cuts due to falling inflation.
The independence of the central bank has been fiercely guarded by Rajan and his successor faces a daunting task to manage the government, which wants lower interest rates. Also, the biggest test of credibility for the new governor will be to continue the work spearheaded by Rajan on bank balance-sheet clean-up, which is currently underway until March 2017.
Banks have been continuously requesting the RBI relaxations from the high capital they need to keep aside for large stressed corporate accounts. In many cases, the RBI has been resisting banks' requests, asking them instead convert debt into equity through policy changes.
"Tackling NPAs in the banking system, ensuring adequate liquidity in the system and later supporting growth through policy action would be the key tasks," Srivastava said. The new governor will enter at a time when the powers of the governor will be curtailed under the new Monetary Policy Committee, a rate-setting panel deciding on interest rates. It will have six members, three from the government and three from the RBI, with the governor having the casting vote. This is a departure from the present practice where the only governor decides on the rates after consultation with various stakeholders within and outside the RBI.
But the first challenge will be to reduce volatility in the forex markets as the Foreign Currency Non-Resident (Bank) deposits will mature in tranches from September to November 2016. Managing the volatility will be a key task as an estimated $26 billion will be sucked out from September to November as the deposits mature. These were special deposits raised in 2013 to attract dollars to support the rupee, which had depreciated to its lowest level of 68.80 to the dollar on August 28, 2013. However, the RBI is pegging the outflows lower at $20 billion. If the foreign inflows dry up, it could threaten the markets though RBI has close $1.4 billion forwards (dollars), which will be redeemed in the next two months to offset the selling pressure.
An economist with a top corporate group said, "Cleaning up the bank balance-sheets will be an important task to ensure that when the RBI cuts interest rates it is passed on to the borrowers -- both corporate and retail. Due to lack of demand, companies are also unable to raise prices."
manju.ab@dnaindia.net
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
 "RBI")
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}