Can The New Governor Revive Flagging Economy?

Indian stock markets got a much needed cheer after a long time after a slew of measures were announced by the new Reserve Bank of India Governor Mr. Raghuram Rajan, in his very first day at office. While the measures per se were not as drastic, but the calming effect of an assured RBI Governor played a major role in soothing the nerves among market participants and led to sharp bounce back in currency as well as equity markets.

Key Highlights of Governor Speech

• The Governor insisted on insisted on monetary stability as the prime role of RBI. Mr. Rajan also reiterated that Indian economy is fundamentally sound and the concerns are overdone.
• Dr. Raghuram Rajan also hinted that new banking licenses will be awarded by January 2014.
• Also, fixed-rate swap for FCNR (B) deposits was also announced by RBI. FCNR are dollar-denominated deposits for expat Indians. This is for three years at 3.5%, for over 3-year deposits.
• The RBI has also increased the current overseas borrowing limit for banks from 50 per cent of the unimpaired Tier I capital to 100 per cent.
• RBI also announced its intention to launch Inflation Indexed Savings Certificates linked to the CPI to retail investors by November 2013.

Positive Impact on Markets

Indian markets gave big thumbs up to the RBI measures and proactive steps taken by the new Governor on his very first day which led to a sharp rally in rupee as well as equity. The rupee bounced sharply from lows over 68 per dollar and has already appreciated by almost 7% since the announcements took place. Consequently, even equity markets joined the party and recovered from lows of below 5200 on Nifty and is currently trading at above 5800 on expectations of further action.

Road ahead

Mr Rajan has already become a celebrity for the markets after the blockbuster opening speech which led to unprecedented elation in market participants. However, one must not lose sight of the fact that there is only so much that RBI can do to revive an economy where Government holds the key to curb twin deficits and bring back foreign confidence. The Government must take decisive policy action soon which may not be simple in the wake of upcoming elections. While RBI Governor has shown the intent to revive the economy, it will take the twin combo of RBI and Government bring a sustained and meaningful recovery in a sluggish economy.

By Rajat Gupta– Research Analyst – Concept Securities Private Limited