Mkts to react positively to Rajan's statements: Experts

Despite the macroeconomic volatility, Raghuram Rajan hasn't shied away from going in for structural reforms and made bold statements on his first day at work. Rajan seems to know exactly what he wants and has laid out the programme for the same.

Also Read: Raghuram Rajan arrives with a bang Below are the reactions of experts to Raghuram Rajan's statements on CNBC-TV18 Rajiv Lall, Executive Chairman, IDFC Q: It is a long list of announcements that have come in from the new Reserve Bank of India (RBI) governor. What to your mind would be the big headline? What to your mind is the big highlight?
A: I think it is a very strong signal as all of you have been suggesting that we expect and hope Governor Rajan will leave a legacy on the banking system in India. What I takeaway from this first presentation is that he has obviously been thinking about these issues very deeply for sometime and he has a very strong sense of direction for which way the financial system in India during his tenure will track.
So he has taken the initiative on structural reform of the financial system and that is very important signal at a time of macroeconomic volatility, because it clearly indicates to market participants that we are of a mindset to continue confidently along the lines of structural reform and since he has been given the mandate he will take that initiative to drive structural reform in the financial space. It is very heartening and I really wish him all the very best. Q: Do you think that bank valuations are going to start falling now? There is going to be a problem of plenty. It will not anymore be a seller's market?
A: No, I do not agree with you at all. From a public policy point of view, having bank licenses on tap actually diminishes the scarcity value and therefore the effectiveness or the importance of lobbying is undermined. So if you are a deserving candidate, the RBI will reserve the right to screen your candidacy and if you are deemed to be an appropriate candidate there is no reason why you will not be allowed to enter the banking play.
So you are getting away from an environment or system where you are saying, okay only so many licenses are going to be available and then the door is going to be closed for 10 years. So in that situation you create a feeding frenzy and then all the lobbies come out and that is what is actually counterproductive. By making it a continuing process you actually deemphasize that. Competition is a good thing. Those who succeed under competition their valuations will stand the test of time and will go. Those who do not succeed will lose value. Gaurav Kapur, Senior Economist, RBS Q: On the basis of what we have heard from the new Reserve Bank of India (RBI) governor, a voice of confidence coming in there. He said I will not talk about the Indian economy and crisis in the same breath. We are stable, we are a solid economy. There is a plan and the plan is being followed. How do you really see markets reacting to this specifically as far as the currency is concerned?
A: His overall tone was very positive. The initiatives he spoken about will definitely bring in a fair amount of energy to a lot of things which have actually been mulled over by the RBI over the last year. One important thing which he has done is actually set up a new committee to look at the monetary policy framework, because the existing monetary policy framework is geared towards an assumption that capital flows will remain in abundance in India. So going back on the drawing board and considering that assumption which clearly is not holding, to me that is an important thing.
Other than that, some of the measures he has announced to support the rupee through the foreign currency non-resident (FCNR) route and by letting banks borrow dollars overseas and giving them the opportunity to swap it with the RBI, those are positive steps. Other than that talking of inducing competition in the banking industry, improving intrusion, so this is a whole set of new measures and he actually specifically mentioned that these are on his short-term agenda. So he is not looking at this over a long-term timeframe. So overall the announcements or his statement today will be taken positively by the markets. Nirmal Jain, IIFL Q: Is there anything specific that stood out – he spoke about unchaining markets – anything specific you want to comment?
A: I think he has surprised the market by being very specific and very clear on what he wants to achieve in the first few minutes of his resuming office. It is not that he does not have understanding of the system because he worked on finance committee on reforms. He worked very closely with RBI as well as government of India. He has good understanding of the issue so his agenda is clear and I think he has confidence as well as shown confidence and he has given a very clear message that he means business and he is going to act on whatever has to be done. Q: Do you think the rupee itself is going to react positively tomorrow?
A: I think the market sentiment reaction to rupee or the stock market is not material at this point in time but he started well, there is a clarity of thought as well as courage of conviction so he is moving in the right direction and market may positively react but market will have many more variables to reckon so I would not like to comment on that.
_PAGEBREAK_ Rakesh Mohan, Former Deputy Governor, RBI Q: Getting down to specifics, charting out an agenda as far as his tenure is concerned on the very first day, making specific announcements with regards to internationalising the rupee, with regards to the foreign currency non-resident (FCNR) deposits, with regards to bank licenses, freeing up bank branches. What did you make of Rajan's first day?
A: This must be the most substantive speech given by an incoming governor on first day in office. He is obviously had spoke a great deal starting from his own financial sector reforms report about 6-7 years back. The good thing of course is that he is really giving speech of great confidence which is really needed in the current circumstances of Indian economy. This is clearly a very important landmark in the RBI for an incoming governor to be as well prepared as he is.
It also of course is a consequence of the government having announced his appointment almost a month in advance, so he had a full month to prepare for this and he used that time extremely well, of course from his knowledge from his previous assignments. So I think it is indeed a very welcome sign for the Indian economy that the incoming governor knows exactly what he wants to do and that he has laid out his programme. SL Bansal, CMD, Oriental Bank of Commerce (OBC) Q: FCNR (B) deposits mobilised for over three years you can now swap at 3.5 percent per annum with the RBI. Do you think this will enable you to offer higher rates in the FCNR (B) or do you think you will still be constrained as to where can you lend it?
A: Today the banks are facing great liquidity issues. It is a welcome step. I think it will have a soothing effect on the cost of deposit also. Q: Rajan in his speech says that he is ready to swap FCNR (B) dollar funds for 3.5 percent?
A: I believe that this new governor has more new ideas. If he brings out these radical changes bankers will be having a soothing effect on their operations. Economy is not doing well. The overall health of the economy is reflected in the bank's balance sheet. A lot of clarity needs to be there. Instead of daily steps you have to clarify in one go a few important steps. So if it is like that then it is a good news. We will be in a position to offer some attractive rates to the depositors. Arvind Narayanan, Head - Sales, Treasury & Markets, DBS Bank Q: FCNR (B) deposits can be swapped with the Reserve Bank of India (RBI) at a fixed rate of 3.5 percent per annum for the tenure of the deposit. Will this mean that banks can offer more attractive rates? Will more dollars come in?
A: I think so. One of the reasons why banks were not getting too much of FCNR (B) deposits has been because deposits were fairly expensive even in dollar terms and add to that the cost of hedging, the rupee landed cost was very expensive from a bank's perspective. You could not on-lend these rupees at that kind of rate. With RBI giving a subvention there and allowing banks to swap at 3.5 percent is a great incentive for banks, so I would not be surprised if we start marketing for these deposits immediately and these are measures which can bring in money in the quick short-term. Siddhartha Sanyal, Chief India Economist, Barclays Capital Q: Everything that Raghuram Rajan has had to announce this evening is a pretty big package considering it is just his first day?
A: Absolutely. It is great to see that the Reserve Bank of India (RBI) governor tries to lay down his roadmap on day zero itself. So it remains very encouraging. Some of the steps like more internationalisation of the Indian currency or steps like talking about a deposit scheme which can actually garner more foreign exchange reserves in the very beginning is very encouraging. On the other hand, it balances things with talks about better priority sector lending. So it is a fantastic statement to start with.