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Journalism of Courage
Raghuram Rajans five pillars lay out the agenda for the RBI in the quarters to come.
The RBI governor,Raghuram Rajan,unveiled a five-point agenda at the second quarter monetary policy review,aimed at an overhaul of the banking sector. Though Rajans five pillars were overshadowed by his 25 basis point hike in the repo rate,they are important because they set the RBIs agenda for the next few quarters. The five points are to clarify and strengthen the monetary policy framework; to shore up the banking structure through the entry of new banks and more branches; to broaden and deepen financial markets; to expand the net of the formal banking sector; and lastly,to improve the systems capacity to deal with corporate distress. The Urjit Patel,Nachiket Mor and Bimal Jalan committees,which will be submitting their reports soon,will provide a roadmap for strengthening the monetary policy framework,encouraging financial inclusion and facilitating the entry of new banks,respectively.
Rajan has always emphasised the deepening of financial markets and the completion of missing markets the third pillar. By increasing liquidity through term repos at the short end and allowing banks to give partial credit enhancement for corporate bonds,he has encouraged the emergence of a corporate bond market. This is unambiguously a good thing. By allowing interest rate futures,important to help companies hedge risk,Rajan has taken a crucial step to deepen derivative markets in India. This is significant as it recognises that speculation isnt always bad.
