Outgoing governor of the Reserve Bank of India (RBI) Raghuram Rajan on Friday said he was confident that his successor Urjit Patel “will ably guide” the monetary policy committee in achieving its inflation-centric objectives and added he had no doubt that inflation will fall in months to come.
Speaking at an event here, Rajan said Indian debt markets have become a lot more attractive in recent months given that the RBI has a framework that commits to low and stable inflation. “The key point is that market participants know that the monetary policy committee has to maintain low and stable inflation, certainly over the next five years for which its remit has been set, and it will do what it takes,” Rajan said.
The governor cited two more reasons for the debt markets to become more lucrative – reluctance of public sector banks to lend, and along with private sector banks their reluctance to fully pass through past policy rate cuts into bank lending rates. As a result of this, higher rated companies have started bypassing banks and have started borrowing from the commercial paper market.
On concerns over the fixed income and derivatives markets, Rajan said one of the biggest issues in any market is that markets attract speculators, and in thin markets, speculation can move market prices away from fundamentals. “In other words, excessive fear of speculation in markets is self-fulfilling – it renders markets illiquid and prone to manipulation.”
Rajan also pointed out that markets can act as a source of competition for established institutions. Since higher quality corporate credit can move from banks to the debt market, banks could be pushed to lend to riskier clients.
“Once again, there is merit in these concerns. However, too much can also be made of them. After all, banks are supposed to lend to riskier clients that need monitoring and hand-holding, while markets are supposed to lend to clients who do not need such attention,” Rajan said.
The RBI governor observed that though the RBI has been cautious in announcing reforms during the recent period of global market turmoil, it has not stood still either. “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,” Rajan said.
On Thursday, the RBI announced a host of measures for the corporate bond market that are set to deepen these markets and bring in more participation.
