RBI Governor Raghuram Rajan has said that the bank should encourage innovation, but stay wary about following foreign advice on exporting bond markets or allowing infrastructure firms borrowing large amounts overseas. He added that regulators should not just ban innovation because it makes them feel safer.
Rajan also set the agenda for successor Urjit Patel, asking him to guide the Monetary Policy Committee, in achieving inflation targets. Putting out a list of do's and don'ts for the bank, Rajan spoke at his annual address at the Foreign Exchange Dealers Association of India in Mumbai. "I am confident that Urjit Patel, who has worked closely with me on monetary policy for the last three years, will ably guide the MPC going forward in achieving our inflation objectives." He also pointed out that top corporates have been able to take advantage of the debt market to work around the reluctance of banks to pass on rate cuts. Highly rated firms are bypassing banks to borrow from the commercial paper markets, outstanding Cps having more than doubled in the last two years to over £30 billion. "We need riskier firms and projects to be able to access the bond markets for funds," said Rajan.
He said, "The varied opinions of speculators can provide liquidity, which in turn can make the markets more immune to manipulation. In other words, excessive fear of speculation in markets is self-fulfilling, it renders markets illiquid and prone to manipulation."
