India’s central bank governor warns on banking reforms

Reserve Bank of India (RBI) governor Raghuram Rajan is waxing philosophical about dealing with the challenge of banking reform in his country.

He mused recently that the correct approach is contained in the Chinese metaphor: “Crossing the river by feeling the stones.” The notion behind the phrase (which was a favorite of late Chinese leader Deng Xiaoping) is that when moving forward in new directions, you need to stay grounded and feel your way forward in the face of uncertainty.

RBI Governor Raghuram Rajan

RBI Governor Raghuram Rajan

Rajan recently quoted the words in sending a strong message to the central government to get on with the reform process outlined in RBI’s Annual Report 2014-15. His remarks were a response to a failed monsoon session of India’s parliament when important bills remained in cold storage due to stiff resistance by opposition parties.

The politicians didn’t listen to Rajan advice. But anyone concerned with sound economic planning should.

Rajan warned in the report that the slow pace of reform in the banking sector could lead to greater risk.  So the urgent need, he says, is to put banking reforms on the fast track.

But reforms cannot be shots in the dark subjecting the economy to great uncertainty and risk, he said in his report.

Economic growth is still below levels that India is capable of. Inflation projections for January 2016 (as of early August 2015) are still at the upper limits of RBI’s inflation objective. The willingness of banks to cut base rates — whereby they forego income on existing borrowers to attract more new business — is muted.

However, RBI stuck to its forecast of a 7.6% growth in domestic product growth for 2015-16, saying growth remained below par.

Rajan, one of the best bankers in the world, also thinks Indian investors shouldn’t worry too much about the recent rout in global equities.

Can investors believe him?  Asia Unhedged thinks so.

First, when he took over the RBI job two years ago, the value of rupee had dropped drastically. But thanks to his good grip on monetary policies, it soon grew strong. Second, global investors still favor India as it has avoided the mistakes of other central banks that kept interest rates low to stimulate growth.



Categories: Asia Unhedged, South Asia

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