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.
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.
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
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
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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
This cannot be done overnight, of course.
As government finances improve, the scope for such reduction will
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
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
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
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
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:
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:
Enhance the limit available to exporters to 50 per cent;
and Allow a similar facility to importers to the extent of 25 per cent.
Further to develop the money and G-sec markets, we will introduce cash settled
10 year interest rate future contracts;
We will also examine the introduction of interest rate futures on overnight
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 liberalization.
The RBI wants to help our banks bring in safe money to fund our current account
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
mobilized 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.
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
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
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.
we need to accelerate the working of Debt Recovery Tribunals and Asset
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.
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
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
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
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
If you can trust yourself when all men doubt you, But make allowance for their
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
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