Good Evening. I took charge this afternoon as the 23rd Governor of the Reserve Bank of India. These are not easy times, and the economy faces challenges. At the same time, India is a fundamentally sound economy with a bright future. Our task today is to build a bridge to the future, over the stormy waves produced by global financial markets. I have every confidence we will succeed in doing that. Today I want to articulate some first steps, concrete actions we will take, as well as some intentions to take actions based on plans we will formulate.

Before I turn to specifics, let me repeat what I said on the day I was appointed. The Reserve Bank is a great institution with a tradition of integrity, independence, and professionalism. I congratulate Dr. Subbarao on his leadership in guiding the Bank through very difficult times, and I look forward to working with the many dedicated employees of the RBI to further some of the important initiatives he started. I have been touched by the warmth with which the RBI staff have welcomed me.

To the existing traditions of the RBI, which will be the bedrock of our work, we will emphasise two other traditions that become important in these times: transparency and predictability. At a time when financial market are volatile, and there is some domestic political uncertainty because of impending elections, the Reserve Bank of India should be a beacon of stability as to its objectives. That is not to say we will never surprise markets with actions. A central bank should never say “Never”! But the public should have a clear framework as to where we are going, and understand how our policy actions fit into that framework. Key to all this is communication, and I want to underscore communication with this statement on my first day in office.

Monetary Policy

We will be making the first monetary policy statement of my term on September 20. I have postponed the originally set date a bit so that between now and then, I have enough time to consider all major developments in the required detail. I will leave a detailed explanation of our policy stance till then, but let me emphasize that the RBI takes its mandate from the RBI Act of 1934, which says the Reserve Bank for India was constituted

“to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage;”

The primary role of the central bank, as the Act suggests, is monetary stability, that is, to sustain confidence in the value of the country’s money. Ultimately, this means low and stable expectations of inflation, whether that inflation stems from domestic sources or from changes in the value of the currency, from supply constraints or demand pressures. I have asked Deputy Governor Urjit Patel, together with a panel he will constitute of outside experts and RBI staff, to come up with suggestions in three months on what needs to be done to revise and strengthen our monetary policy framework. A number of past committees, including the FSLRC, have opined on this, and their views will also be considered carefully.

Inclusive Development

I talked about the primary role of the RBI as preserving the purchasing power of the rupee, but we have two other important mandates; inclusive growth and development, as well as financial stability.

As the central bank of a developing country, we have additional tools to generate growth – we can accelerate financial development and inclusion. Rural areas, especially our villages, as well as small and medium industries across the country, have been important engines of growth even as large company growth has slowed. But access to finance is still hard for the poor, and for rural and small and medium industries. We need faster, broad based, inclusive growth leading to a rapid fall in poverty.

The Indian public would benefit from more competition between banks, and banks would benefit from more freedom in decision making. The RBI will shortly issue the necessary circular to completely free bank branching for domestic scheduled commercial banks in every part of the country. No longer will a well-run scheduled domestic commercial bank have to approach the RBI for permission to open a branch. We will, of course, require banks to fulfil certain inclusion criteria in underserved areas in proportion to their expansion in urban areas, and we will restrain improperly managed banks from expanding until they convince supervisors of their stability. But branching will be free for all scheduled domestic commercial banks except the poorly managed.

There has been a fair amount of public attention devoted to new bank licenses. The RBI will give out new bank licenses as soon as consistent with the highest standards of transparency and diligence. We are in the process of constituting an external committee. Dr. Bimal Jalan, an illustrious former governor, has agreed to chair it, and the committee will be composed of individuals with impeccable reputation. This committee will screen licence applicants after an initial compilation of applications by the RBI staff. The external committee will make recommendations to the RBI governor and deputy governors, and we will propose the final slate to the

Committee of the RBI Central Board. I hope to announce the licences within, or soon after, the term of DG Anand Sinha, who has been shepherding the process. His term expires in January 2014.

We will not stop with these licences. The RBI has put an excellent document on its website exploring the possibility of differentiated licences for small banks and wholesale banks, the possibility of continuous or “on-tap” licensing, and the possibility of converting large urban co-operative banks into commercial banks. We will pursue these creative ideas of the RBI staff and come up with a detailed road map of the necessary reforms and regulations for freeing entry and making the licensing process more frequent after we get comments from stakeholders.

India has a number of foreign owned banks, many of whom have been with us a long time and helped fuel our growth. They have been in the forefront of innovation, both in terms of improving productivity, as well as in terms of creating new products. We would like them to participate more in our growth, but in exchange we would like more regulatory and supervisory control over local operations so that we are not blindsided by international developments. The RBI will encourage qualifying foreign banks to move to a wholly owned subsidiary structure, where they will enjoy near national treatment. We are in the process of sorting out a few remaining issues so this move can be made.

Finally, our banks have a number of obligations that pre-empt lending, and in fact, allow what Dr. Rakesh Mohan, an illustrious former deputy-governor, called “lazy banking”. One of the mandates for the RBI in the Act is to ensure the flow of credit to the productive sectors of the economy. In this context, we need to reduce the requirement for banks to invest in government securities in a calibrated way, to what is strictly needed from a prudential perspective.

This cannot be done overnight, of course. As government finances improve, the scope for such reduction will increase. Furthermore, as the penetration of other financial institutions such as pension funds and insurance companies increases, we can reduce the need for regular commercial banks to invest in government securities.

We also subject our banks to a variety of priority sector lending requirements. I believe there is a role for such a mandate in a developing country – it is useful to nudge banks into areas they would otherwise not venture into. But that mandate should adjust to the needs of the economy, and should be executed in the most efficient way possible. Let us remember that the goal is greater financial access in all parts of the country, rather than meeting bureaucratic norms. I am asking Dr Nachiket Mor to head a committee that will assess every aspect of our approach to financial inclusion to suggest the way forward. In these ways, we will further the development mission of the RBI.

Financial Markets

Some see financial markets as competition to banks. They are that, but they are also complementary. Too many risks in the Indian economy gravitate towards commercial banks even when they should be absorbed by arm’s length financial markets. But for our financial markets to play their necessary roles of providing risk absorbing long term finance, and of generating information about investment opportunities, they have to have depth. We cannot create depth by banning position taking, or mandating trading based only on well-defined “legitimate” needs. Money is fungible so such bans get subverted, but at some level, all investment is an act of faith and of risk taking. Better that investors take positions domestically and provide depth and profits to our economy than they take our markets to foreign shores.

Together with the government and regulators such as SEBI, we will steadily but surely liberalise our markets, as well as restrictions on investment and position taking. Given the current market turmoil, our actions will have to be at a measured pace, but as a symbolic down payment, we will do the following:

1. Presently, exporters are permitted to re-book cancelled forward exchange contracts to the extent of 25 per cent of the value of cancelled contracts. This facility is not available for importers. To enable exporters/importers greater flexibility in their risk management, we will:

i. Enhance the limit available to exporters to 50 per cent; andii. Allow a similar facility to importers to the extent of 25 per cent.

2. Further to develop the money and G-sec markets, we will introduce cash settled 10 year interest rate future contracts;

3. We will also examine the introduction of interest rate futures on overnight interest rates.

Rupee internationalization and Capital Inflows

This might be a strange time to talk about rupee internationalization, but we have to think beyond the next few months. As our trade expands, we will push for more settlement in rupees. This will also mean that we will have to open up our financial markets more for those who receive rupees to invest it back in. We intend to continue the path of steady liberalisation.

The RBI wants to help our banks bring in safe money to fund our current account deficit.The Reserve Bank of India has been receiving requests from banks to consider a special concessional window for swapping FCNR deposits that will be mobilised following the recent relaxations permitted by the Reserve Bank of India. We will offer such a window to the banks to swap the fresh FCNR (B) dollar funds, mobilised for a minimum tenor of three years and over, at a fixed rate of 3.5 per cent per annum for the tenor of the deposit.

Further, based again on requests received from banks, we have decided that the current overseas borrowing limit of 50 per cent of the unimpaired Tier I capital will be raised to 100 per cent and that the borrowings mobilised under this provision can be swapped with Reserve Bank of India at the option of the bank at a concessional rate of 100 basis points below the ongoing swap rate prevailing in the market.

The above schemes will be open up to November 30, 2013, which coincides with when the relaxations on NRI deposits expire. The Reserve Bank reserves the right to close the scheme earlier with due notice.

Financial Infrastructure

Finance thrives when financial infrastructure is strong. The RBI has been working hard to improve the financial infrastructure of the country – it has made tremendous advances, for example, in strengthening the payment and settlement systems in the country. Similarly, it has been working on improving information sharing through agencies such as credit bureaus and rating agencies. I propose to carry on such work, which will be extremely important to enhance the safety and speed of flows as well as the quality and quantity of lending in the country.

On the retail side, I particularly want to emphasise the use of the unique ID, Aadhaar, in building individual credit histories. This will be the foundation of a revolution in retail credit.

For small and medium firms, we intend to facilitate Electronic Bill Factoring Exchanges, whereby MSME bills against large companies can be accepted electronically and auctioned so that MSMEs are paid promptly. This was a proposal in the report of my Committee on Financial Sector reforms in 2008, and I intend to see it carried out.

Finance is not just about lending, it is about recovering loans also. We have to improve the efficiency of the recovery system, especially at a time of economic uncertainty like the present. Recovery should be focused on efficiency and fairness – preserving the value of underlying valuable assets and jobs where possible, even while redeploying unviable assets to new uses and compensating employees fairly. All this should be done while ensuring that contractual priorities are met. The system has to be tolerant of genuine difficulty while coming down hard on mismanagement or fraud.

Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalize their failed ventures.

Most immediately, we need to accelerate the working of Debt Recovery Tribunals and Asset Reconstruction Companies. Deputy Governor Anand Sinha and I will be examining the necessary steps.

I have asked Deputy Governor Dr. Chakrabarty to take a close look at rising NPAs and the restructuring/recovery process, and we too will be taking next steps shortly. RBI proposes to collect credit data and examine large common exposures across banks. This will enable the creation of a central repository on large credits, which we will share with the banks. This will enable banks themselves to be aware of building leverage and common exposures.

While the resumption of stalled projects and stronger growth will alleviate some of the banking system difficulties, we will encourage banks to clean up their balance sheets, and commit to a capital raising programme where necessary. The bad loan problem is not alarming yet, but it will only fester and grow if left unaddressed.

We will also follow the FSLRC suggestion of setting up an enhanced resolution structure for financial firms. The working group on resolution regimes for financial institutions is looking at this and we will examine its recommendations and take action soon after.

Households

Everyone has a right to a safe investment vehicle, to the ability to transfer remittances to loved ones, to insurance, to obtain direct benefits from the government without costly intervening intermediaries, and to raise funding for viable investment opportunities. In addition, access to credit to smooth consumption needs or to tide over emergencies is desirable, especially for households in the lower income deciles, when it does not impose unserviceable debt loads. The Reserve Bank will continue to play its part in making all this possible.

In particular, I want to announce a number of specific actions:

First, households have expressed a desire to be protected against CPI inflation. Together with the government, we will issue Inflation Indexed Savings Certificates linked to the CPI New Index to retail investors by end- November 2013.

Second, we will implement a national giro-based Indian Bill Payment System such that households will be able to use bank accounts to pay school fees utilities, medical bills, and make person to person transfers electronically. We want to make payments anywhere anytime a reality.

Third, only banks are currently allowed to deploy Point-of-Sale terminals, and these are largely set up by a few banks in urban areas. As announced in the Annual Monetary Policy statement, we will facilitate the setting up of “white” POS devices and mini ATMs by non-bank entities to cover the country so as to improve access to financial services in rural and remote areas.

Fourth, currently holders of pre-paid instruments issued by non-bank entities are not allowed to withdraw cash from the outstanding balances in their pre-paid cards or electronic wallets. Given the vast potential of such instruments in meeting payments and remittance needs in remote areas, we intend to conduct a pilot enabling cash payments using such instruments and Aadhaar based identification.

Finally, there is substantial potential for mobile based payments. We will set up a Technical Committee to examine the feasibility of using encrypted SMS-based funds transfer using an application that can run on any type of handset. We will also work to get banks and mobile companies to cooperate in rolling out mobile payments. Mobile payments can be a game changer both in the financial sector as well as to mobile companies.

This is part of my short term time table for the Reserve Bank. It involves considerable change, and change is risky. But as India develops, not changing is even riskier. We have to keep what is good about our system, of which there is a tremendous amount, even while acting differently where warranted. The RBI has always changed when needed, not following the latest fad, but doing what is necessary. I intend to work with my excellent colleagues at the Reserve Bank, the senior management of which is represented around this table, to achieve the change we need.

Finally, a personal note: Any entrant to the central bank governorship probably starts at the height of their popularity. Some of the actions I take will not be popular. The Governorship of the Central Bank is not meant to win one votes or Facebook “likes”. But I hope to do the right thing, no matter what the criticism, even while looking to learn from the criticism – Rudyard Kipling put it better when he mused about the requirements of an ideal central banker in his poem “If”:

If you can trust yourself when all men doubt you, But make allowance for their doubting too:

Kipling’s reference to “men” only dates these lines, but his words are clear.

We will fill in details of what we have announced shortly, and lay out a broader roadmap of reforms soon after. Appropriate notifications will be issued shortly. As this is underway, we will turn to preparing the mid quarter policy statement.

Sabeeta BadkarAssistant Manager

Good morning. As the world seems to be struggling back to its feet after the great financial crisis, I want to draw attention to an area we need to be concerned about: the conduct of monetary policy in this integrated world. A good way to describe the current environment is one of extreme monetary easing through unconventional policies. In a world where debt overhangs and the need for structural change constrain domestic demand, a sizeable portion of the effects of such policies spillover across borders, sometimes through a weaker exchange rate. More worryingly, it prompts a reaction. Such competitive easing occurs both simultaneously and sequentially, as I will argue, and both advanced economies and emerging economies engage in it. Aggregate world demand may be weaker and more distorted than it should be, and financial risks higher. To ensure stable and sustainable growth, the international rules of the game need to be revisited. Both advanced economies and emerging economies need to adapt, else I fear we are about to embark on the next leg of a wearisome cycle.

Central bankers are usually reluctant to air their concerns in public. But because the needed change has political elements to it, I take my cue from speeches by two central bankers whom I respect greatly, Ben Bernanke in his 2005 “Global Savings Glut” speech, and Jaime Caruana in his 2012 speech at Jackson Hole, both of whom have raised similar concerns to mine, although from different perspectives.

Before starting, I should disclose my interests in this era of transparency. For the last few months India has experienced large inflows of capital, not outflows, and is seen by the markets as an emerging economy that has made some of the necessary policy adjustments.2 We are well buffered with substantial reserves, though no country can be de-coupled from the international system. My remarks are motivated by the desire for a more stable international system, a system that works equally for rich and poor, large and small, and not the specifics of our situation.

Unconventional Policy

I want to focus on unconventional monetary policies (UMP), by which I mean both policies that hold interest rates at near zero for long, as well as balance sheet policies such as quantitative easing or exchange intervention, that involve altering central bank balance sheets in order to affect certain market prices.3 The key point that I will emphasize throughout this talk is that quantitative easing and sustained exchange intervention are in an economic equivalence class, though the channels they work through may be somewhat different. Our attitudes towards them should be conditioned by the size of their spillover effects rather than by any innate legitimacy of either form of intervention.

Let me also add there is a role for unconventional policies – when markets are broken or grossly dysfunctional, central bankers do have to think innovatively. Fortunately for the world, much of what they did immediately after the fall of Lehman was exactly right, though they were making it up as they went in the face of extreme uncertainty. They eased access to liquidity through innovative programs such as TALF, TAF, TARP, SMP, and LTRO. By lending long term without asking too many questions of the collateral they received, by buying assets beyond usual limits, and by focusing on repairing markets, they restored liquidity to a world financial system that would otherwise have been insolvent based on prevailing market asset prices. In this matter, central bankers are deservedly heroes.4

The key question is what happens when these policies are prolonged long beyond repairing markets – and there the benefits are much less clear. Let me list 4 concerns:

1. Is unconventional monetary policy the right tool once the immediate crisis is over? Does it distort behavior and activity so as to stand in the way of recovery? Is accommodative monetary policy the way to fix a crisis that was partly caused by excessively lax policy?

2. Do such policies buy time or does the belief that the central bank is taking responsibility prevent other, more appropriate, policies from being implemented? Put differently, when central bankers say, however reluctantly, that they are the only game in town, do they become the only game in town?

3. Will exit from unconventional policies be easy?4. What are the spillovers from such policies to other countries?

Since I have dwelt at length on the first two concerns in an earlier speech, let me focus on the last two.5

Exit

The macroeconomic argument for prolonged unconventional policy in industrial countries is that it has low costs, provided inflation stays quiescent. Hence it is worth pursuing, even if the benefits are uncertain. A number of economists have, however, raised concerns about financial sector risks that may build with prolonged use of

unconventional policy.6 Asset prices may not just revert to earlier levels on exit, but they may overshoot on the downside, and exit can cause significant collateral damage.

One reason is that leverage may increase both in the financial sector and amongst borrowers as policy stays accommodative.7One channel seems to be that a boost to asset liquidity leads lenders to believe that asset sales will backstop loan recovery, leading them to increase loan to value ratios. When liquidity tightens, though, too many lenders rely on asset sales, causing asset prices and loan recovery to plummet. Because lenders do not account for the effects of their lending on the “fire sale” price, and subsequently on lending by others, they may have an excessive incentive to build leverage.8 These effects are exacerbated if, over time, lenders become reliant on asset sales for recovery, rather than on upfront project evaluation and due diligence. Another possible channel is that banks themselves become more levered, or equivalently, acquire more illiquid balance sheets, if the central bank signals it will intervene in a sustained way when times are tough because unemployment is high.9

Leverage need not be the sole reason why exit may be volatile after prolonged unconventional policy. Investment managers may fear underperforming relative to others. This means they will hold a risky asset only if it promises a risk premium (over safe assets) that makes them confident they will not underperform holding it.10 A lower path of expected returns on the safe asset makes it easier for the risky asset to meet the required risk premium, and indeed draws more investment managers to buy it – the more credible the forward guidance on “low for long”, the more the risk taking. However, as investment managers crowd into the risky asset, the risky asset is more finely priced so that the likelihood of possible fire sales increases if the interest rate environment turns. Every manager dumps the risky asset at that point in order to avoid being the last one holding it.

Leverage and investor crowding may therefore exacerbate the consequences of exit. When monetary policy is ultra-accommodative, prudential regulation, either of the macro or micro kind, is probably not a sufficient defence. In part, this is because, as Fed Governor Stein so succinctly put it, monetary policy “gets into every crack”, including the unregulated part of the financial system.11 In part, ultra accommodative monetary policy creates enormously powerful incentive distortions whose consequences are typically understood only after the fact. The consequences of exit, however, are not just felt domestically, they could be experienced internationally.

Spillovers

Perhaps most vulnerable to the increased risk-taking in this integrated world are countries across the border. When monetary policy in large countries is extremely and unconventionally accommodative, capital flows into recipient countries tend to increase local leverage; this is not just due to the direct effect of cross-border banking flows but also the indirect effect, as the appreciating exchange rate and rising asset prices, especially of real estate, make it seem that borrowers have more equity than they really have.12

Exchange rate flexibility in recipient countries in these circumstances sometimes exacerbates booms rather than equilibrates. Indeed, in the recent episode of emerging market volatility after the Fed started discussing taper in May 2013, countries that allowed the real exchange rate to appreciate the most during the prior period of quantitative easing suffered the greatest adverse impact to financial conditions.13 Countries that undertake textbook policies of financial sector liberalization are not immune to the inflows – indeed, their deeper markets may draw more flows in, and these liquid markets may be where selling takes place when conditions in advanced economies turn.14

Macro-prudential measures have little traction against the deluge of inflows – Spain had a housing boom despite its countercyclical provisioning. Recipient countries should adjust, of course, but credit and flows mask the magnitude and timing of needed adjustment. For instance, higher collections from property taxes on new houses, sales taxes on new sales, capital gains taxes on financial asset sales, and income taxes on a more prosperous financial sector may suggest a country’s fiscal house is in order, even while low risk premia on sovereign debt add to the sense of calm. At the same time, an appreciating nominal exchange rate may also keep down inflation.

The difficulty of distinguishing the cyclical from the structural is exacerbated in some emerging markets where policy commitment is weaker, and the willingness to succumb to the siren calls of populist policy greater. But it would be a mistake to think that pro-cyclical policy in the face of capital inflows is primarily a disease of the poor; Even rich recipient countries with strong institutions, such as Ireland and Spain, have not been immune to capital-flow-induced fragility.

Ideally, recipient countries would wish for stable capital inflows, and not flows pushed in by unconventional policy. Once unconventional policies are in place, however, they do recognize the problems stemming from prolonged easy money, and thus the need for source countries to exit. But when source countries move to exit unconventional policies, some recipient countries are leveraged, imbalanced, and vulnerable to capital outflows.

Given that investment managers anticipate the consequences of the future policy path, even a measured pace of exit may cause severe market turbulence and collateral damage.15 Indeed, the more transparent and well-communicated the exit is, the more certain the foreign investment managers may be of changed conditions, and the more rapid their exit from risky positions.

Recipient countries are not being irrational when they protest both the initiation of unconventional policy as well as an exit whose pace is driven solely by conditions in the source country. Having become more vulnerable because of leverage and crowding, recipient countries may call for an exit whose pace and timing is responsive, at least in part, to conditions they face.

The Case for International Monetary Policy Coordination

Hence, my call is for more coordination in monetary policy because I think it would be an immense improvement over the current international non-system. International monetary policy coordination, of course, is unpopular among central bankers, and I therefore have to say why I reiterate the call and what I mean by it.

I do not mean that central bankers sit around a table and make policy collectively, nor do I mean that they call each other regularly and coordinate actions. In its strong form, I propose that large country central banks, both in advanced countries and emerging markets, internalize more of the spillovers from their policies in their mandate, and are forced by new conventions on the “rules of the game” to avoid unconventional policies with large adverse spillovers and questionable domestic benefits.16 Given the difficulties of operationalizing the strong form, I suggest that, at the very least, central banks reinterpret their domestic mandate to take into account other country reactions over time (and not just the immediate feedback effects), and thus become more sensitive to spillovers. This weak “coordination” could be supplemented with a re-examination of global safety nets.

The Gains from Coordination

Economists generally converged on the view that the gains to policy coordination were small provided each country optimized its own policies keeping in mind the policies of others. The “Nash equilibrium” was not that far from the global optimum, hence the “own house in order” doctrine was dominant in the international monetary field.17 National macroeconomic stability was seen as sufficient for international macroeconomic stability. The domestic and international aspects were essentially regarded as two sides of the same coin.

Two factors have led to a rethinking of the doctrine. First, domestic constraints including political imperatives of bringing unemployment down and the economic constraint of the zero lower bound may lead monetary policy to be set at levels different from the unconstrained domestic optimal. Dysfunctional domestic politics could also contribute in moving monetary policy further from the unconstrained optimal. In other words, the central bank, responding to a variety of political pressures and weaknesses, may stray away from even the constrained optimal – towards third best policies rather than second best policies. Second, cross-border capital flows can lead to a more dramatic transmission of policies, driven by agency (and other) considerations that do not necessarily relate to economic conditions in the recipient countries.

One argument along these lines is that if some large country adopts unconventional and highly accommodative sub optimal policies, other countries may follow suit to avoid exchange rate appreciation in a world with weak demand.18 As a result, the policy equilibrium may establish at rates that are too low compared to that warranted by the global optimal. Another argument is that when the sending country is at the zero lower bound, and the receiving country responds to capital inflows with aggressive reserve accumulation, both may be better off with more moderate policies.19 Indeed, it may well be that coordination may allow policy makers political room to move away from sub optimal policies. If political paralysis and consequent fiscal tightening forces a source country to a sub-optimal reliance on monetary stimulus, policy coordination that allows for expanded demand elsewhere could allow the source country to cut back on its dependence on monetary stimulus.20

Domestic Optimal is close to the Global Optimal

Despite these arguments, official statements by multilateral institutions such as the IMF continue to endorse unconventional monetary policies while downplaying the adverse spillover effects to other countries. Indeed, in an excellent analysis of the obstacles to international policy coordination, the IMF’s own Jonathan Ostry and Atish Ghosh argue that “impartial” international policy assessments by multilateral entities could be suspected of bias21

“…if there were a systematic tendency of the assessor to identify a change in policy (tighter fiscal policy; looser monetary policy; structural reform) as always yielding welfare gains at the national and global levels. This would

breed suspicion because the base case should be that countries do not fail to exploit available welfare gains…it is implausible that welfare gains at the national and global levels should always be positively correlated…”

By downplaying the adverse effects of cross-border monetary transmission of unconventional policies, we are overlooking the elephant in the post-crisis room. I see two dangers here. One is that any remaining rules of the game are breaking down. Our collective endorsement of unconventional monetary policies essentially says it is ok to distort asset prices if there are other domestic constraints to reviving growth, such as the zero-lower bound. But net spillovers, rather than fancy acronyms, should determine internationally acceptable policy.

Otherwise, countries could legitimately practice what they might call quantitative external easing or QEE, whereby they intervene to keep their exchange rate down and build huge reserves. The reason we frowned on QEE in the past is because we believed the adverse spillover effects for the rest of the world were significant. If we are unwilling, however, to evaluate all policies based on their spillover effects, there is no legitimate way multilateral institutions can declare that QEE contravenes the rules of the game. Indeed, some advanced economy central bankers have privately expressed their worry to me that QE “works” primarily by altering exchange rates, which makes it different from QEE only in degree rather than in kind.

The second danger is a mismanaged exit will prompt fresh distortionary behaviour. Even as source country central banks go to great pains to communicate how their removal of accommodation will be contingent on domestic activity, they have been silent on how they will respond to foreign turmoil. Market participants conclude that recipient countries, especially those that do not belong to large reserve currency blocks, are on their own, and crowd devastatingly through the exit.

Indeed, the lesson some emerging markets will take away from the recent episode of turmoil  is (i) don’t expand domestic demand and run large deficits (ii) maintain a competitive exchange rate (iii) build large reserves, because when trouble comes, you are on your own. In a world with deficient aggregate demand, is this the message the international community wants to send?

For this is not the first episode in which capital has been pushed first in one direction and then in another, each time with devastating effect. In the early 1990s, rates were held low in the United States, and capital flowed to emerging markets. The wave of emerging market crises starting with Mexico in 1994 and ending with Argentina in 2001, sweeping through East Asia and Russia in between, was partially caused by a reversal of these flows as interest rates rose in industrial countries. The subsequent reserve build up in emerging markets, including China, contributed to weak global demand and excess spending by some industrial countries, culminating in the global financial crisis of 2007-09. Once again, though, post-crisis unconventional monetary policy has pushed capital to emerging markets, with the associated build up in fragility. Are we setting the stage for a resumption of the “global savings glut” as emerging markets build reserves once again?

Two obvious remedies suggest themselves; Less extreme monetary policies on all sides with some thought given to adverse spillover effects when setting policy, and better global safety nets to mitigate the need for countries to self-insure through reserve buffers.

More Moderate Policy

Even though we live in a world where monetary transmission is global, policy focus is local.  Central banks mount a number of defences as to why they should not take full account of spillovers. One way to demonstrate the weaknesses in the usual arguments that are put forward to defend the status quo is to see how they would sound if they were used to defend QEE, that is, sustained intervention in the exchange market to keep the exchange rate competitive.

Defense 1: We are a developing country and we are mandated to support growth. Institutional constraints in enhancing productivity, and our vulnerability to sudden stops, means that a competitive exchange rate, and thus QEE, is essential to fulfilling our mandate.22

Defense 2: Would the world not be better off if we grew strongly? QEE is essential to our growth.

Defense 3: We take into account feedback effects to our economy from the rest of the world while setting policy. Therefore, we are not oblivious to the consequences of QEE on other countries.

Defense 4: Monetary policy with a domestic focus is already very complicated and hard to communicate. It would be impossibly complex if we were additionally burdened with having to think about the effects of QEE on other countries.

There are many problems with these defenses that those who have complained about currency manipulation will recognize. Currency manipulation may help growth in the short run (even this is debatable), but creates long-run distortions that hurts the manipulating country. There are more sensible policies to foster growth. And even if a central bank has a purely domestic mandate, the country’s international responsibilities do not allow it to arbitrarily impose costs on the rest of the world. The net spillover effects need to be estimated, and it cannot be taken for granted that the positive spillovers from the initiating country’s growth (say through greater trade) more than offset the adverse spillovers to other countries.  Feedback effects to the source country represent only a small part of the spillover effects experienced by the world, and a central bank will be far from implementing the globally optimal policy if it is solely domestically-oriented, even if it takes these feedback effects into account. Countries are required to pay attention to the effects of their policies on others, no matter how much the added complication, because we all have international responsibilities.

Of course, the reader will recognize that each one of these arguments has been made defending unconventional monetary policy. Yet multilateral institutions treat sustained currency intervention with great opprobrium while giving unconventional monetary policy a clean chit. Should the cleanliness of the chit not depend on the size of the net spillovers and the competitive response it engenders? Without estimating them carefully, how can we tell?

Operationalizing Coordination: Some Suggestions

We need to break away from this cycle of unconventional policies and competitive monetary easing. Already, the events of recent months have set the stage for renewed reserve accumulation by the emerging markets. And this time, it will be harder for advanced economies to complain if they downplay their own spillover effects while they are pushing for recovery.

An Independent Assessor

In an ideal world, unconventional monetary policies such as QE or QEE should be vetted by an independent assessor for their spillover effects.23 The assessment procedure is easy to visualize; Perhaps following a complaint by an impacted country (as in the WTO), the independent assessor could analyse the effects of such policies and come to a judgment on whether they follow the rules of the game. Policies where the benefits are largely domestic, while the costs fall largely abroad, would be especially carefully scrutinized. And if the assessor deems the policy reduces global welfare, international pressure should be applied to stop such policies.

The problems with such an idealistic process are easy to see. Where is such an impartial assessor to be found? The staff at multilateral institutions is excellent, and well capable of independent judgment. But political pressure subsequent to the initial assessment operates unevenly. Initial assessments typically remain unaltered when a small country complains (no country likes independent assessments), but are often toned down when a large economy protests. There are many exceptions to this, but more work is needed to build trust in the impartiality of assessments of multilateral institutions.

Even if multilateral organizations become immune to power politics, they are not immune to cognitive capture. Their staff has been persuaded by the same models and frameworks as the staff of industrial country central banks – models where monetary policy is an extremely powerful tool to elevate activity, and exchange rate flexibility does wonders in insulating countries from the most debilitating spillovers. “Decoupling” is always possible in such models, even though the evidence is that the models typically underestimate the extent of “coupling”. Indeed, many of these models do not have realistic models of credit, or of monetary transmission in an economy with debt overhang, which reduces their value considerably. Progress is being made but it will take time.

And, of course, even if a truly independent assessment came to the conclusion that certain policies were in violation, how would such a judgment be enforced?

The reality is that the rules of the game were framed in a different era to deter competitive devaluations and currency manipulation. They have not been updated for today’s world of more varied competitive easing. But it is unclear that even if they were updated, they could be assessed and enforced in the current environment.

A More Modest Proposal

Perhaps then, it would be better to settle for a more modest proposal. Central banks should assess spillover effects from their own actions, not just in terms of immediate feedback, but also in terms of medium term feedback as other countries alter their policies. In other words, the source country should not just worry about the immediate flows of capital to other countries from its policies, but the longer run reaction such as sustained

exchange intervention that this would bring about. This would allow central banks to pay more attention to spillovers even while staying within their domestic mandate.

For example, this would mean that while exiting from unconventional policies, central banks would pay attention to conditions in emerging markets also while deciding the timing of moves, while keeping the overall direction of moves tied to domestic conditions. Their policy statements should acknowledge such concerns. To be concrete in a specific case, the Fed postponing tapering in September 2013 allowed emerging economies more time to adjust after the initial warning in May 2013. Whatever the underlying rationale for postponement, it helped tapering start smoothly in December 2013, without disrupting markets. In contrast, with volatility hitting emerging markets after the Argentinian problems in January 2014, the Fed policy statement in January 2014, with no mention of concern about the emerging market situation, and with no indication Fed policy would be sensitive to conditions in those markets in the future, sent the probably unintended message that those markets were on their own. Speeches by Regional Fed Presidents emphasizing the Fed’s domestic mandate did not help. Since then, Fed communication has been more nuanced, though the real challenge in communication lies ahead when policy rates have to move up.24

International Safety Nets

Emerging economies have to work to reduce vulnerabilities in their economies, to get to the point where, like Australia, they can allow exchange rate flexibility to do much of the adjustment for them to capital inflows. But the needed institutions take time to develop. In the meantime, the difficulty for emerging markets in absorbing large amounts of capital quickly and in a stable way should be seen as a constraint, much like the zero lower bound, rather than something that can be altered quickly. Even while resisting the temptation of absorbing flows, they will look to safety nets.

So another way to prevent a repeat of substantial reserve accumulation is to build stronger international safety nets.25 As the financial crisis suggested, this is not just an emerging economy concern. In a world where international liquidity can dry up quickly, the world needs bilateral, regional, and multilateral arrangements for liquidity. Multilateral arrangements are tried and tested, and are available more widely, and without some of the possible political pressures that could arise from bilateral and regional arrangements. Indeed swap arrangements can be channelled through multilateral institutions like the IMF instead of being conducted on a bilateral basis, so that the multilateral institution bears any (small) credit risk, and the source central bank does not have to justify the arrangements to its political authorities.

Perhaps equally valuable would be a liquidity line from the IMF, where countries are pre-qualified by the IMF and told (perhaps privately) how much of a line they would qualify for under current policy – with access limits revised every Article IV and any curtailment becoming effective 6 months later.26 Access to the line would get activated by the IMF Board in a situation of generalized liquidity shortage (as, for example, when policy tightening in source countries after an extended period of low rates causes investment managers to become risk averse). The IMF has suggested such arrangements in a discussion paper, and they should be explored because they allow countries access to liquidity without the stigma of approaching the Fund, and without the conditionality that accompanies most Fund arrangements.27

Clearly, the Fund’s resources will be safe only if the situation is one of genuine temporary illiquidity rather than one where countries need significant reforms to regain market access. Equally clearly, access will vary across countries, and prolonged use after the liquidity emergency is declared over will necessitate an IMF program. Nevertheless, the twin proposals of the Global Stability Mechanism and Short-term Liquidity Line that the IMF Board has examined in the past deserve close examination for they come closest to genuinely helping offset reserve build-up.

Finally, it would be a useful exercise for the Fund, in a period of growing vulnerability to capital flow reversals, to identify those countries that do not have own, bilateral, regional, or multilateral liquidity arrangements to fall back on, and to work to improve their access to some safety net. The role of honest ex-ante marriage broker may be one that could prove to be immensely important when the interest rate environment changes.

Conclusion

The current non-system in international monetary policy is, in my view, a source of substantial risk, both to sustainable growth as well as to the financial sector. It is not an industrial country problem, nor an emerging market problem, it is a problem of collective action. We are being pushed towards competitive monetary easing.

If I use terminology reminiscent of the Depression era non-system, it is because I fear that in a world with weak aggregate demand, we may be engaged in a futile competition for a greater share of it. In the process, unlike

Depression-era policies, we are also creating financial sector and cross-border risks that exhibit themselves when unconventional policies come to an end.28There is no use saying that everyone should have anticipated the consequences. As the former BIS General Manager Andrew Crockett put it, “financial intermediaries are better at assessing relative risks at a point in time, than projecting the evolution of risk over the financial cycle.”

A first step to prescribing the right medicine is to recognize the cause of the sickness. Extreme monetary easing, in my view, is more cause than medicine. The sooner we recognize that, the more sustainable world growth we will have.

The five things that Raghuram Rajan did right in his first speech as RBI governorIt is not just his looks that appeal to people, Raghuram Rajan has laurels to match. Younger and more articulate than most, RRR as he is beginning to be known, comes in as a breath of fresh air. (He is , in fact RGR). He is seen as a harbinger of change and a chance to get something right when all seems to be crumbling around the Indian economic narrative. He has solid credentials which is why expectations ride high. Which is very tough, because he is not going to be given much time to ‘walk the talk’. The policies he implements need time to bear fruit while the patience of the nation is running thin. The fall of Ozymandias is inevitable but he may just have bought himself a bit more time with a very strong starting speech.

Raghuram Govind Rajan did many things right today. His top five:

Step up and be firm

For a nation starved of leaders, here was one who stepped up and claimed his space. This was the right thing to do for a leader. He also used the chance to set his agenda before the forces of consensus, negotiation and circumstance began to weigh in on his actions. This is what he means to do, this is what he wants to do - even if it breaks from tradition. Seemingly contradicting himself while he has the support and freedom to do so - he lay claim to both predictability and the element of surprise, tacking the strategic and the tactical challenges with ease expected of a leader. Transparency and improved communications are achievements that his predecessor can lay some claim to as well - RGR takes it to the next level, and comfortably makes it his own.

Lean on predecessors and strong team mates

A good leader is as good as his team. RGR co-opts not just the present but also past achievers to support him in his (grand) endeavour. An outsider to the system, RGR knows he cannot navigate it alone. Calling on colleagues within the RBI, setting up committees with known and respected thinkers and doers to lead them, RGR already has a program in place even before he starts work. This is what the starting block must look like, and RGR shows that he and his team mean business. He leans on the shoulders of giants, shepherding them to his vision while giving them their space and the respect due to their previous achievements. As with every good team, they will hold him up, and if they fall, they fall together. With so many of them supporting different parts of his vision, something has to go right at every point of time. The lessons of a diversified portfolio are well applied here.

Think Straight - details and people

Professor Rajan’s key strength is his analytical ability. The speech read like a paper covering problem areas. As is taught in research - there are three levels at which one can analyse issues - the country,

the company and the individual. Within his mandate, RGR speaks to all three, creating a matrix with the issues and their impact on these levels. Having analysed them, with typical clarity he zones in to the top three problems and highlights them. Inclusion is key. With a large portion of the system unbanked, and another chunk in the grey market, the impact of the RBI is limited. For his policies to work, he needs to be able to reach those who churn and multiply the rupee. He states that as a priority. To include more people, you have to make it easy for them - Bank Branches. Mountain, reach Mahomet. This is priority two. He sets it straight up at the top of his agenda. Popular, clean, few barriers. He even proves his Global Indian (GI Rajan?) credentials in an aside where foreign banks are given a chance to be near national but not quite. Third, the rupee. Stabilising it is important, and part of his remit. The long term plans for rupee internationalisation with a clearly stated strategy for the near future to clear up the mess created due to poor financial infrastructure has already sent a sigh of relief across the investor segment. They don’t believe it all yet, but the intent is reassuring and a reason to keep India investments on the table.

Acknowledge the tough choices but not dwell on them

RGR does not shy from speaking of the elephant on the table - NPAs. The hollow nature of bank balance sheets has been an area of concern for a few years, with little being done to remedy the problem. Even if it becomes one of his intractables, the intent is stated upfront, and, at the very least shows willingness to tackle a tough problem. The honesty in including the CPI as an index for measuring inflation rather than the - ahem- more stable- WPI price index again shows willingness to tackle the real problems. Smartly, of course he does not dwell on them and moves swiftly to proposed solutions, consolidating the goodwill he gains today.

Look ahead - plan for the years beyond the current doldrums

As a good leader should, RGR focuses on the long term. Having spoken of specifics in the near term and created enough of a shake up to move the ship out of the doldrums, he leads the conversation to the time when all problems are solved and we can look forward to changes that are necessary. Not only does he reiterate the commitment to liberalisation (which was expected, thus discounted), he speaks of how things should be - painting an idealistic vision of the future with an internationalised rupee, seamless money transfers, inflation indexed investments and mobile based transaction systems. Some of these are in process already and would considerably ease the cost of doing business in India, increasing transparency. By highlighting these low lying fruits, where investments are close to bearing result, RGR does the near impossible - bring hope to a despondent nation.

Not afraid of taking risks, he adds, “not changing is even riskier”. RGR has the classical tasks of a hero ahead of him. His speech today seeks to cut the Gordian knot via the tool of inclusion, clean the Augean Stables of NPAs among the various others he has taken on in the role of Governor. Like the legendary Alexander and Hercules, we wait to celebrate him like a Hero.

Inflation Hawk?In his first two months in office, Rajan has asserted his independence. Although the government would have preferred a reduction in interest rates to boost the slowing economy, Rajan has instead raised the main lending rate twice to tame inflationary expectations. The repo rate, at which the RBI lends money to banks, now stands at 7.75 per cent from 7.25 per cent before he took over. Markets have branded him, like Subbarao, an inflation hawk.

Subbarao increased the repo rate a record 13 times, from 4.75 per cent to 8.5 per cent, between March 2010 and October 2011. Inflation still remains high - headline inflation based on wholesale prices has averaged 8.6 per cent in the past three years (see Stubborn Inflation). And growth has slumped. The Indian economy expanded five per cent in 2012/13, the slowest pace in a decade. Rate hikes are, of course, not the only reason for slowing growth. Supply-side bottlenecks and the government's failure to take reform measures are responsible as well.

So, is Rajan really the inflation hawk he is made out to be? On leave from his tenure as professor of finance at the University of Chicago, Rajan believes low inflation is a prerequisite for long-term sustainable growth. The battle against inflation is not the RBI's alone, he emphasises. "This fight is for everybody. Not just us, not just the government, but also the private sector," says Rajan. "The common goal [of the RBI and the government] is growth with low inflation. But our view of the time frame in which we will achieve that and the necessities for that step can be different from that of the government."

Industry has criticised the rate hikes. "This [high inflation] is a supply-side issue and raising interest rates would hurt growth," says Chandrajit Banerjee, Director General at the Confederation of Indian Industry. But Rajan has plenty of supporters as well. "We had earlier attacked inflation more and kept liquidity tight. Rajan thinks both inflation and growth can be tackled simultaneously," says Vishwavir Ahuja, Managing Director and CEO at Ratnakar Bank. "That is a positive shift."

Rajan took a number of steps to control the rupee's slide. At a time when foreign fund inflow had slowed down and the government was contemplating a sovereign bond issue, Rajan opened a swap window for deposits from non-resident Indians. The swap window has attracted $12 billion in just two months. He also allowed banks to borrow more overseas. These measures, along with easing worries of a US strike on Syria and the continuation of the US Federal Reserve's steps to revive its economy, have helped stabilise the rupee. The local currency is now trading around 61 to a dollar compared with the record low of 68.86 it touched on August 28.

Rajan is also normalising monetary policy operations by making the repo rate the most important tool to signal interest rates, moving away from levers such as the more expensive marginal standing facility (MSF). Before he took over at the RBI, the difference between the repo rate and the MSF, the rate at which banks borrow from the RBI as the last resort, had widened to 300 basis points. This had prompted large banks such as State Bank of India and ICICI Bank to increase their base lending rates, even though the repo rate was not increased. Rajan slashed the MSF rate in three phases and raised the repo rate, bringing the gap now to the normal level of 100 basis points. What industry needs in the short term, says YES Bank founder and CEO Rana Kapoor, is "confidence, conviction and communication" from the central bank. Glenn Maguire, Chief Economist for Asia Pacific at ANZ Economic Research, says Rajan has brought two powerful characteristics to the RBI - accessibility and transparency. "The simpler monetary policy approach aligned with these characteristics has been a key factor behind less market volatility, thus contributing to rupee stabilisation," says Maguire.

No Facebook 'likes'A big task before Rajan is managing people's expectations. He knows some of his actions - like the recent rate hikes - will be unpopular. But he is undeterred. "The governorship of the central bank is not meant to win one votes or Facebook 'likes'," he said in his maiden speech. North Block mandarins say Rajan, who they describe as amiable and not very bureaucratic, has asked finance ministry officials to not speak publicly on his monetary policy, which is what primarily ruined Subbarao's tenure. So far, nobody from the government has commented on Rajan's two monetary policy reviews.

We need to draw a balance between innovation and regulation. Rajan is trying to ensure a proper mix: C. Rangarajan, Chairman, Prime Minister's Economic Advisory CouncilRajan has many other issues on his agenda, and he is fixing strict timelines to achieve the goals. He plans, for instance, to sell inflation-indexed bonds to retail investors by December. He has talked about inclusive growth and development as one of the mandates of the RBI. "We need to draw a balance between innovation and regulation. Rajan is trying to ensure a proper mix," says Rangarajan.

Banking sector reform is high on Rajan's priorities. He wants to issue new banking licences by January, though he had previously opposed the entry of large corporate houses into the banking sector. He is also looking to treat foreign banks on a par with Indian banks in terms of branch expansion. Ahuja of Ratnakar Bank says long before Rajan took over as RBI governor he had outlined the future architecture of banking in India. "Rajan has indicated the kind of banks that we must have - a few large Indian multinational banks, a few large Indian domestic banks and another set of banks that are closer to customers which can serve the underprivileged sections," says Ahuja.

The new job is replete with challenges. Rajan has to tread carefully on the issue of separating the RBI's monetary policy operations from its government debt management function. In October he faced opposition to his idea of allowing foreign banks to acquire local lenders. The topic is sensitive, as India hasn't seen many mergers even among local banks. Rajan says easing takeover rules is "a possibility", but the RBI will first examine how foreign banks perform over time and whether further privileges are warranted.

At the global level a lot of people have faith in him [Rajan] because he has interacted with them at the IMF: Kaku Nakhate, India country head, Bank of AmericaRajan's growth report on Indian states, before he became the RBI chief, is also under criticism from regional parties. The report has put Maharashtra among the seven most developed states and Gujarat, home of the Bharatiya Janata Party's (BJP) prime

ministerial candidate Narendra Modi, among the 11 less developed ones. Critics say being away from India for long could prove to be a big handicap for Rajan as he lacks adequate understanding of the political system. Rajan is quickly learning the ropes. He is brushing up his Hindi as well. Rajan's older sister, Jayashri Sridharan, who lives in Delhi, recollects how their parents had engaged a tutor to teach Hindi to their four children. "We used to run away at the sight of the tutor," she recalls with a smile.

In August, after Rajan was named the central bank's chief, senior BJP leader Murli Manohar Joshi questioned how a foreigner could be appointed as the RBI governor. Rajan, who holds a US green card, has dismissed such queries. "The green card does not require you to take a pledge of allegiance anywhere... It simply is a work permit which you need to have to work in another country," he asserted on October 29 after announcing the second-quarter monetary policy review. Will he be able to navigate the political landscape while keeping the RBI's autonomy intact? This will be keenly watched in his three-year tenure. Rajan would surely love to end his innings at the RBI with another Kipling poem, "The Secret of The Machines":

"But remember, please,the Law by which we live,We are not built to comprehend a lie,We can neither love nor pity nor forgive,If you make a slip in handling us you die!

RBI governor Raghuram Rajan adds Rs 40,000 crore to banks lending corpusMUMBAI: Reserve Bank of India governor Raghuram Rajan on Tuesday added nearly Rs 40,000 crore to the banking sectors lendable resources by reducing the statutory liquidity ratio by 50 basis points to 22% even as he kept other key policy rates unchanged. The SLR is the percentage of bank deposits that banks have to mandatorily maintain in government securities.

In his third bi-monthly monetary policy statement for FY15, Rajan kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8 per cent. The RBI also retained the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0% of bank deposits. The central bank also kept unchanged the terms of overnight repos at 0.25% of bank deposits and 0.75% of bank deposits for 14-day repos.

RBI said that since the second bi-monthly monetary policy statement of June 2014, global economic activity has been picking up at a modest space from a sharp slowdown in Q1. Investor risk appetite has buoyed financial markets, partly drawing strength from assurances of continuing monetary policy support in industrial countries. Portfolio flows to emerging market economies (EMEs) have risen strongly. This implies, however, that EMEs remain vulnerable to changes in investor risk appetite driven by any reassessment of the future path of US monetary policy or possible escalation of geopolitical tensions.

RBI cuts statutory liquidity ratio by 50 bps to release Rs 39,000 crore of liquidity for banksMUMBAI: In a move that will release over Rs 39,000 crore of funds locked in government bonds, the Reserve Bank of India has cut the mandatory statutory liquidity ratio (SLR) requirement for banks by 50 basis points to 22.5% in its bi-monthly policy on Tuesday.

SLR is the portion of bank deposits that banks have to mandatorily invest in government bonds.

In keeping with expectations, RBI governor Raghuram Rajan left the repo rate, the rate at which the RBI lends to banks, unchanged at 8%. The governor appears to have taken a pragmatic decision by holding his own on rates but at the same time addressing concerns of the finance ministry of adequate credit to businesses by releasing liquidity. The biggest beneficiaries of this move will be private banks and foreign banks who are close to the statutory limit on SLR.

Growth will benefit if we disinflate economy: Raghuram Rajan

MUMBAI: Raghuram Rajan surprised the markets by cutting statutory liquidity ratio (SLR) to a level last seen before the Banking Regulation Act was amended in 1962 and 25% SLR was made mandatory. However, he made it clear that rates are not coming down until inflation was completely stamped out.

On cutting SLR: The SLR cut was not intended to make loans cheaper, it was to give banks more flexibility to lend to the productive sectors of the economy as demand picks up. When we take a decision, we are not trying to get an immediate vote of approval from the sensex or the G-sec market. We are thinking about the medium to long term.

On hardening stance on inflation: Six percent is our ultimate goal for the medium term. Long term is too long to think about. Our stance has not moved from where we were last time. RBI will not hold rates high any longer than necessary. We are not against growth, but we feel that growth will be most benefited if we disinflate the economy and we don't have to fight this fight again. Let us fight the anti-inflation fight once and let us win. I think the government has a long horizon in mind, given that we have just had elections, and is on the same page.

RBI Governor Raghuram Rajan to meet employees on recast planMeeting with employee unions on Tuesday is to get a consensus on proposed restructuring plan; unions opposed to move, say lateral hires will affect promotions

The Reserve Bank of India (RBI) governor Raghuram Rajan, and deputy governors S S Mundra and R Gandhi will address the employees of the central bank on Tuesday (August 19) to discuss and get a consensus on their restructuring plan amid growing opposition from various quarters.

The unions are strongly opposing the restructuring plans as it involves lateral hires and setting up a post of chief operating officer (COO) who may assume powers of a deputy governor.

A member of the RBI officers' association told dna, "We strongly oppose plans of an organisation revamp as it will hamper promotions, and one more officer almost in the rank of deputy governor will reduce the representation of RBI officers among the deputy governors. This is the first time there is so much of discontent within the organisation. We will not compromise on our stand of allowing outsiders to enter the rank and file of RBI."

RBI has four unions including officers and workmen with a membership of 17,000 employees. All the four unions come under the United Forum of RBI Officers and Employees. The executive directors, deputy governors and the RBI governor are not members of any of the unions.

Rajan is going to face a tough battle with unions, and the ministry, which, according to the unions, does not agree with the entire process.

If indeed Rajan is able to bring about the organisational changes, RBI may able to induct professionals like Nachiket Mor who can help the central bank in its financial inclusion plan. Mor was a senior banker with ICICI Bank before leaving the lender to work in the social sector.

The unions also allege that lateral hire to the post of chief general manager is also being contemplated, and it will hamper the promotions of the existing staff.

"The name of Prachi Mishra, a senior economist with the IMF who was also in the team of Raghuram Rajan when he was the chief economist, government of India before coming to RBI, is also doing the rounds," said a union member who did not wished to be quoted.

RBI restructuring proposals also include grouping of departments so that there is no overlap in functions. There will be no job loss, but the unions are opposing the move as their promotions may be impacted.

RBI had sent out a press release on Friday evening saying the proposals were discussed in its board meeting. "The board approved the broad contours of the proposals. It advised the central bank to operationalise the restructuring, while taking into account the need to continuously keep communication channels open with stakeholders as the process moves forward," the statement said.

It said that the board also asked the RBI to initiate a dialogue with the government on the additional post of deputy governor and the legislative changes that will be needed. "The Reserve Bank will proceed further in the matter keeping such advice in view," said the statement.

Asked about RBI's proposal on a COO, financial services secretary G S Sandhu who is also in the RBI board was quoted in New Delhi saying, "RBI is reorganising internally. After that, if they think there is a requirement of a COO, they will send the proposal and the finance ministry will take a view," he said.

RBI, however, said in its release on Friday that the proposals are widely discussed at various levels in the central bank. One of the proposals envisaged the creation of an additional position of a chief operating officer of the rank of deputy governor to head one of the five functional clusters.