RBI Governor Raghuram Rajan believes that steady and irreversible reform and “mini bangs”, such as the one announced on corporate bonds, rather than “big bang” policy changes, is the need of the hour.

“Observers may be impatient, but my belief is that steady and irreversible reform and “mini bangs” like yesterday’s rather than “big bang” is the need of the hour,” said Rajan, addressing members of the Foreign Exchange Dealers Association of India In Mumbai on Friday.

“As global conditions become less uncertain, the pace of reform can pick up. The lessons we have learnt during this period on what works will be invaluable then,” he added.

Rajan reiterated his concerns about banks’ reluctance to fully pass through past policy rate cuts. “No wonder highly rated firms are bypassing banks to borrow from the commercial paper (CP) markets, with outstanding commercial paper having more than doubled in the last two years to over ₹3-lakh crore,” he said.

On liquidity, Rajan said: “One way to bring liquidity to corporate debt is to enable them to be used as collateral in repo transactions with the central bank, with appropriate haircuts, of course.

“As banks become able to borrow against their high-quality corporate bonds, yields will fall, and more issuers will come to the market.

“With this in mind, we have initiated the process with the government to amend the RBI Act to allow the RBI to conduct repos of corporate bonds with banks and other financial institutions.”

Cautious stand

“Over the last few years, we have had to proceed somewhat cautiously on market development because we worried about creating vulnerabilities when global financial markets were fragile. But as macroeconomic stability has strengthened, the movement has always been forward,” Rajan said.

Rajan, whose term comes to an end this month, also said that he was confident that the next Governor, Urjit Patel, “will ably guide the Monetary Policy Committee going forward in achieving our inflation objectives.”