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Don’t ban innovation to feel safer’

Don't ban innovation to feel safer'Gold Silver Reports — Don’t ban innovation to feel safer’ — In a parting message to regulators, RBI governor Raghuram Rajan suggested that they should not ban innovation just because it makes them feel safer. He called on them to differentiate between innovations that are aimed at creating appealing features and those that are only used to circumvent rules and avoid taxes. 

Rajan also set the agenda for his successor Urjit Patel, suggesting that the new Monetary Policy Committee (MPC) headed by him should stick to inflation targets. “I am confident that Urjit Patel, who has worked closely with me on monetary policy for the last three years, will ably guide the MPC in achieving our inflation objectives,“ said Rajan.

Rajan chose his annual address at the Foreign Exchange Dealers Association of India in Mumbai on Friday to set out a list of dos and don’ts for the RBI. He said the central bank should be wary of advice on trading of Indian bonds overseas or allowing infrastructure firms borrowing large amounts abroad.Rajan said that the MPC’s creation has convinced markets to expect lower inflation over the next five years. This has made bonds more attractive, despite inflation as measured by consumer price index inching up to 6.07% in July.

Although Rajan did not explicitly address the dos and don’ts to his successor, al most all the issues he highlighted are in the domain of the RBI governor.

Rajan pointed out that top corporates have been able to take advantage of the debt market to work around the reluctance of banks to pass on rate cuts. Companies with higher ratings are bypassing banks to borrow from the commercial paper (CP) markets with outstanding CPs more than doubling in the last two years to over Rs 3 lakh crore. But companies with lower rating do not have similar access. “We need riskier firms and projects to be able to access the bond markets for funds,“ said Rajan.

He cautioned against curbing speculation to the extent that trading activity declines.“The varied opinions of speculators can provide liquidity, which, in turn, can make markets more immune to manipulation. In other words, excessive fear of speculation in markets is self-fulfilling -it renders markets illiquid and prone to manipulation,“ said Rajan.

He raised red flags on banks lending to real estate through finance companies.“NBFCs are supposed to take on greater risk, such as loans to real estate developers, because their liabilities are longer term. In actuality , though, many have substantial borrowings from banks. It would be better from the perspective of systemic risk if they replaced bank debt with market borrowing,“ he said.  — Neal Bhai Reports

Don’t ban innovation to feel safer’

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