RBI’s present concerns
Amit KapoorAug 8, 2015, 02.17 PM
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The recent third bi-monthly monetary policy review of the
The framework for limits in Foreign Portfolio Investments' (FPI's) in debt securities has an overarching goal to enlist FPIs in market development. It is because, within prudential limits, they are often attracted by rates available on Indian bonds.
With respect to the payment banks and small finance banks, RBI seems to be inching ahead internally with the first round of licenses expected by the end of August. It is indeed a welcome development that promises greater market penetration of the formal financial system. It also promises better access and greater financial inclusion for people both domestically and with respect to people remitting from foreign countries.
The RBI has also made known that with respect to the Urban Cooperative Banks; the governor has just received the high-powered committee report on the same. RBI actions in light of this development will be driven by this specific report in the area of Urban Cooperative Banks.
Finally, Governor Rajan made his thoughts pretty clear on the MPC that has gained steam in the press in the past two weeks. He mentioned that internally the process at present has been to an extent institutionalized in the RBI. However, the responsibility of the monetary policy is still with the governor. Institutionalizing the process further with the MPC will only help matters. Though Governor Rajan did not go into the details with respect to the member constitution of the MPC, he said the RBI and the Government are broadly in consensus with respect to the constitution of the committee. Three ways in which this is a welcome step according to Governor Rajan are: First, with respect to the ability of a committee to represent various viewpoints. Second, with respect to spreading the responsibility thereby reducing the external and internal responsibility on a single individual. Finally, the committee's ability to have monetary policy continuity when any one member or even the governor changes all spell favouring the committee over the individual. All these points clearly spell out how a committee is better than a single individual.
Over the longer time frame, the recent developments bode well. A consensus-driven approach to monetary policy, as well as greater inclusion, will go a long way in bettering India's financial system.
(The article is co-authored with Sankalp Sharma, Senior Researcher at the Institute for Competitiveness, India. Amit Kapoor is Chair, Institute for Competitiveness & Editor of Thinkers. The views expressed are personal. Amit can be reached at firstname.lastname@example.org and tweets @kautiliya)