Introduction to New Policy Measures
The Reserve Bank of India recently announced several policy measures that will have significant effects on the financial markets, including both equity and debt markets. These measures aim to boost the flow of credit and promote the internationalization of the Indian rupee. The central bank’s shift towards a more liberal framework comes at a time of significant changes in the global economic environment and trading systems.
Measures to Increase Credit
The new measures operate on multiple levels to increase credit. Firstly, the RBI is allowing banks to finance acquisitions by Indian corporates, an activity that was previously prohibited. Secondly, it is easing the flow of funds to large borrowers by proposing to scrap its 2016 framework that had placed restrictions on lending. These moves could accelerate mergers and acquisitions in the economy and boost credit growth to the industry, which has been sluggish, averaging just 6.5% since January this year. According to a report by economists at the SBI, M&A deals were estimated at $120 billion in 2023-24.
Risks and Benefits
However, there is a risk of "reckless borrowing" by corporates. To address this, the central bank has proposed to increase banks’ lending limit against shares to Rs 1 crore and for IPO financing to Rs 25 lakh. This will boost the flow of funds into equity markets. Investors welcomed these announcements, with shares of banks such as HDFC, ICICI, and Kotak rising on the day.
Internationalization of the Indian Rupee
The central bank has also announced measures to increase the usage of the rupee in international transactions. It will permit banks to lend rupees to non-residents in neighboring countries like Bhutan, Nepal, and Sri Lanka for cross-border trade. This is a significant step towards internationalizing the Indian currency and reducing reliance on the USD for trade purposes. To achieve this, it is essential to establish confidence in the stability of the rupee.
Investment and Deployment of Funds
The central bank has also permitted the balances in Special Rupee Vostro Accounts to be invested in corporate bonds and commercial papers. This will increase the avenues available for deploying the funds and establish reference rates for currencies of major trading partners such as the UAE, making transactions more efficient. Each of these steps is designed to promote the use of the Indian rupee in international transactions and pave the way for its greater acceptance, while protecting the economy from sudden exchange rate movements.
Conclusion
In conclusion, the Reserve Bank of India’s new policy measures aim to boost credit growth, promote the internationalization of the Indian rupee, and increase the efficiency of transactions. While these measures have the potential to accelerate economic growth, the central bank must proceed carefully and be mindful of the associated risks. By doing so, it can ensure that the benefits of these measures are realized while minimizing the risks, ultimately contributing to the stability and growth of the Indian economy.
