A star abroad, India central bank boss riles bond traders at home

Thu Apr 17, 2014 4:19am EDT
 
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By Neha Dasgupta

MUMBAI (Reuters) - Since taking the helm of India's central bank, Raghuram Rajan's agenda to reform markets has put the noses of Mumbai bond traders firmly out of joint by upending practices that provided them with a relatively secure rate of return.

Benchmark 10-year bond yields have risen more than half a percentage point since Rajan took office on September 4, as the Reserve Bank of India (RBI) has sharply restricted bond purchases and announced an unexpected shift in the focus of monetary policy to consumer inflation from wholesale prices.

While the dealing community in India's financial capital concedes that Rajan's reforms are necessary for the longer term, many traders complain that he has gone too far too quickly, and without consulting the markets.

Their gripes stand in contrast with the high-profile central bank chief's glowing global reputation as a capable technocrat who has been instrumental in guiding the rupee through its worst turmoil since India's balance of payments crisis in 1991.

More efficient markets are a priority for the former International Monetary Fund chief economist, who has criticized distortions he believes unfairly benefit traders and banks.

Early this month, for example, he cited a fiscal year-end practice by banks to dress up balance sheets by hoarding cash and holding back on lending, which distorts overnight rates.

"We don't think the RBI should be in the business of bailing out the banking system with infusion of liquidity when the banking system itself is creating its own problems. And so we have to change the incentive structure," he said.

The RBI did not have immediate further comment when asked to respond to this story.   Continued...

 
Reserve Bank of India (RBI) Governor Raghuram Rajan attends a seminar organised by the University of Chicago in New Delhi March 28, 2014. REUTERS/Anindito Mukherjee