Change risky, but not changing riskier, says new RBI chief

The new Reserve Bank of India Governor Raghuram Rajan hit the ground running, announcing a series of measures that will cheer markets, banks, corporates and households.

Shortly after he took charge as the 23rd Governor of the central bank on Wednesday, Rajan addressed the media outlining his priorities, setting the tone for his stint at the Mint Road office.

However, he said the change he is seeking to make is fraught with dangers. “It involves considerable change and change is risky. But as India develops, not changing is even riskier,” Rajan said. He said the monetary policy review would be postponed to September 20 to get a better handle on events. Rajan said financial markets need to be liberalised more to prevent investors from heading to foreign shores.

“Together with the government and regulators such as SEBI, we will steadily but surely liberalise our markets, as well as (lift) restrictions on investment and position taking,” he said.

He announced the first symbolic measure — the RBI will allow exporters and importers to re-book cancelled forward exchange contracts to the extent of 50 per cent and 25 per cent of the value, respectively. Currently, exporters are allowed to re-book cancelled forward exchange contracts to the extent of 25 per cent and importers are not allowed to do so. To improve forex inflows, the RBI will open a special concessional window for swapping Foreign Currency Non-Resident deposits.

Rajan added that based on requests from banks, the RBI has decided to allow banks to borrow 100 per cent (from 50 per cent currently) of their unimpaired Tier-I capital from overseas. These borrowings can be swapped with the RBI at a concessional rate of 100 basis points below the ongoing swap rate.

Boosing fund flows

To encourage capital flows, the RBI has decided to allow seven-year borrowing(External Commercial Borrowings) by companies under the approval route from foreign equity holder company. However, the ECB can be tapped subject to the foreign lender holding a minimum of 25 per cent of the paid-up equity of the Indian company.

The RBI has clarified that for overseas direct investments, instead of the limit of 100 per cent of net worth, the earlier cap of 400 per cent will apply.

(This article was published on September 4, 2013)
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