Today India experienced a stir of hope amidst the economic crisis. The rupee and bonds rallied because of raft of measures announced by the Reserve Bank of India (RBI) new chief Raghuram Rajan late on Wednesday. His impressive start upped BSE Sensex more than 450 points and the Nifty gained over 150 points. The prospects of more reforms aiding the economy restored faith in the market, which is now hopeful of catching the falling Rupee which slumped 20 percent since May.
Right after aking charge as the 23rd Governor of the central bank, Rajan, 50, laid out a detailed roadmap on liberalising markets, including more rupee trade settlement and introduction of new financial products like interest rate swaps. He promised transparency, predictability and stability in the RBI’s action. He also said that financial infrastructures like Debt Recovery Tribunals and Asset Reconstruction Companies will be strengthened. He emphasised the need of inclusive development and hinted at more ad hoc measures for the economy.
While RBI’s swap window to banks for new foreign currency non-resident (B) dollar funds could help fund the current account deficit (CAD), lifting restriction on investment and position making will give exporters and importers greater flexibility in their risk management.
He postponed the monetary policy date to September 20 from the earlier schedule date of September 18. This might be on account of the US Fed meet on September 17-18, where a tapering of quantitative easing might be announced.
Although Rajan spoke with a soft and measured tone, one can feel sympathy for the enormity of the task he faces. He has come in at the worst possible time when he has to rein in the Rupee, inflation and CAD. Foreign investors have been pulling out money from the country because of the government’s failure to enact key reforms, as well as improving economic conditions in the US. In fact on Tuesday, Goldman Sachs cut its growth forecast for India to 4% from 6%. And this all has to be done at a time when government has given all its attention to the upcoming assembly and general elections.
In the meantime, critics have also started surrounding him saying that he has generated unrealistic hope of having hold of some magical prescription to fix all the problems of the Indian economy.
Given that Rajan has been the one to predict 2008’s credit crunch in a paper he presented in 2005, and holds many feathers in his cap, one can be hopeful of him saving the Indian economy and making it a friendly market for the world.
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