RAGHURAM RAJAN COMMITTEE REPORT ON FINANCIAL SECTOR REFORMS Presented by: GROUP: 06
RAGHURAM RAJAN COMMITTEE REPORT ON
FINANCIAL SECTOR REFORMS
Presented by:
GROUP: 06
Honorary economic adviser to Prime Minister Manmohan Singh
Macroeconomic Framework and financial sector development
• High growth, moderate inflation, absence of major
turbulence(target of 9% growth,07-12)
• Economy faces major challenges in maintaining high growth &
moderate inflation
• Sustainability of this growth process depends on its being inclusive
& remaining non-inflationary
Some basic question(Due to recent painful surge in inflation)
• Is the present monetary policy right for stabilizing inflation expectation over 2-3
years
• Is policy framework adapted able to cope up with the practical realities on the ground.
• Sophistication and complexity of financial markets can be or should be unwounded
• How do macroeconomic policies fit in to the game plan for financial sector reforms
Answer is…….
• Disciplined and predictable monetary, fiscal and debt
management policies constitute the crucial foundation for further
progress
• A well-functioning financial system is essential for
macroeconomic stability, and can be particularly helpful in
reducing the secondary effects of various shocks that inevitably
hit any economy
How macroeconomic policy can influence the evolution of the financial sector
• Challenges from capital inflows(inflow quadrupled)
• In 2006–07, net capital inflows amounted to 45 billion US
dollars(equivalent to nearly 5 per cent of India’s GDP)
• These inflows far exceed the current account deficit, which was 10
billion dollars
• Eased of in 2008-09 mainly due to turmoil in international financial
markets
• Monetary and forex rate are equally related to the increased scale of
gross inflows and outflows
Confidence in India remains strong
• It would therefore be prudent to adapt the financial system to larger
inflows than in the past
• It would also be wise to be prepared for a larger outflow of funds if
either domestic or global circumstances were to deteriorate
• Current account deficit makes it vulnerable to a sudden stop of inflows,
although the level of foreign currency reserves does provide a cushion
In Nutshell
• There are no ‘correct’ or ‘ideal’ solutions for managing the
integration of a large domestic financial system into the global
economy
• mistakes can be both large and harsh
• What is clear is there is a premium on consistency, clarity,
credibility and continuity of policies
Challenges
• capital inflow result in home currency
• Main issue is how to handle exchange rate?
Higher earnings in more non traded goods sector will cause
appreciation of real exchange rate
Govt budget deficit as well as capital inflow creates imbalance
b/w demand and supply causing real exchange rate to appreciate
Countering real appreciationpressures
• Slow down productivity growth
• Restraining private consumption(key-fiscal policy)
• limiting net inflows could help slow appreciation pressures.
capital control(not a sensible approach)
encourage domestic capital to flow out
.Buy companies abroad
.Individual investment abroad
Motto of monetary policy
• Recommends Price stability(stable inflation)
• It will :-
Stabilize GDP growth
Help house hold & firms make long
term plans
Increase investment
Capital Account Liberalization
Opening up to foreign banks and other financial firms and to foreign
direct investment in the financial sector has many potential benefits
• Introduction of financial innovations and sophisticated financial
instruments by foreign financial firms
• Depth in domestic financial markets due to foreign inflows
• More efficiency in the domestic banking sector through increased
competition
LEVELLING THE PLAYING FIELD
• Anyone can offer financial services as long as he can
compete with the others.
• In an efficient financial system, the playing field is level –
– Privileges
– Resources allocated efficiently
– Maximum out of productive resources
• Challenge to level fields in India
– Privileges given to certain firms namely public sector.
• Social Obligations for Banks in India:
– Lending to Priority sector
–Meeting prudential norms
– Statutory liquidity ratio
– Funding the government
• Let competition decide
– Steadily lowering privileges, obligations and
regulations for the most efficient form to prevail.
• Neutral Institutional Ownership:
– Removing the overlay of costs & benefits imposed
by Govt. ownership.
Welcoming Foreign Financial Firms
• Equalization by removing burdens.
• Should be given time to adjust.
• Financial Integration.
• Check on the misuse of their freedom of
activity.
Deficiencies in the Banking System
• Smaller role relative to GDP.
• Largest Indian Bank (SBI) is relatively small.
• India ranked at 102, by the share of the top there
banks in total banking assets.
• India doesn't have many small private banks.
• Foreign banks earning more profits.
• Average spread exceeds 5%
• Less use of technology to reduce transaction
costs.
• Fundamental differences between the new
private sector and foreign banks; and public
sector and old private sector banks.
Proposals
• Proposal 1:
• Reforming the public sector banks:
– To free the public sector banks from factors that cripple
their ability to compete
The major steps include:
Create stronger boards of PSBs
Delink banks from the government
• Proposal 2:
• Encourage, but don't force, consolidation.
– To improve variety and efficiency in the banking sector
specifically, and in the financial sector more generally.
Takeovers of PSB
Takeovers by private banks and eligible financial institutions
Takeovers by large Indian banks
• Proposal 3:
• Reduce barriers to competition:
– To reduce the overlay of obligations and benefits
on the banking sector as a whole
• Proposal 4:
• Moving to holding company structure
– To allow for a more effective provision of products
that cut across financial activities.