He has moved a few paces already in that direction this week by lowering the short-term interest rate and pushing a little additional liquidity into the financial system. These are good augury as partial roll back of the extraordinary measures which were taken to fight the sliding rupee exchange rate.

RBI had in stages squeezed liquidity to make it difficult to fund speculative deals in rupee forwards. It was felt that with easier money at cheaper rates, corporates were playing betting against the rupee.

The RBI moves in lowering marginal standing facility (MSF) rate and weekly auction through repo window of 7-day and 14-day tenors within about a fortnight of Raghuram Rajan’s first credit policy statement shows a new style of intervention. The new governor had earlier stated that there was no fixed timing for RBI moves in a fast moving market situation. Interventions can take place any time.

While this agility is welcome, the Reserve Bank could now take a little longer term view on promoting growth. For that to happen, RBI must reset the stance of its monetary policy in this fast moving scenario. Maybe, RBI might choose to be a little risk-on mind frame as well. What is that?

Deviating from conventional wisdom, can RBI take a more growth friendly approach even in the face of the current levels of inflation. Raghuram Rajan has stated in his interactions with the media that the central bank would have to be more alive to the “noises” from different points. That is, the WPI may not be the only indicator of inflation, nor possibly the Consumer Price Index.

Earlier, RBI had depended on focussing attention on core inflation, which is a sub-set of the WPI, it being the measure which gives the price rise of non-food manufactured goods. The consumer price index, which gives much greater weightage to the food items, had been taken. However, there are problems with CPI as well, as there are any number of CPIs. Besides, food habits being different throughput the country, CPI as a general index cannot give a correct picture.

Even then if the RBI takes its views on the basis of an analysis of core inflation, WPI and CPI (General), all of which are at wide variance now, some level of inflation is possibly a lesser evil than lower growth. This is so because growth means a few more jobs going around for the unemployed or under employed.

The second issue that Mr Rajan stated to the press is his approach of giving more emphasis on domestic savings for propelling India’s growth and cutting down dependence on outside funds. The dependence on funds flow from overseas – an approach enshrined in P Chidambaram’s last budget – has been the basic reason for the last round of turmoil in the financial markets.

With a surging current account deficit, Chidambaram had emphasised on attracting funds to overcome the hump. The going was good as long as Federal Reserve’s bond buying had indirectly resulted in capital flows into emerging economies. When the talk of tapering started that sources dried up and reserve flows started which battered the EMEs including India. With hindsight the best strategy should be to lower the exposure to overseas funds flow.

But then, the critical thing is to encourage domestic savings. How do we do that? Obviously the savers need to be given “a good deal”, as Rajan mentioned. Should banks’ deposit rates go up. That will put the banks through a wringer. But then, in India the spread between banks’ lending and deposit rates are large and there is scope to lower this thorough productivity gains.

But then, government has a major role to play in promoting savings. We have ben seeing the savings rate plummet recently. Fiscal policy can play significant part in making savings more attractive. Long term savings such as pension schemes, provident fund savings can be encouraged by offering significant tax breaks.

The US for example allows savers to get tax benefits under its well-known 401K scheme which offers tax exemption at the time of entry as well as exit from a long term savings scheme. Tax benefits could also be ext3ended to specific savings instruments and schemes to attract funds.

It is also important to think of new instruments for the savers to put their money. The issue has been emphasised in the context of weaning away funds going into purchase of gold. Financial instruments offering liquidity and returns, aimed at the vast rural hinterland where gold purchases were rising most, can mobilise large amounts of funds.

In an economy fuelled by private sector investment, we need instruments for capturing funds for such investments. While risk capital is a traditional way, low risk debt capital can be an attractive proposal for many savers. Fixed income debt instruments are needed. But here the government has a major role to play.

Savers often had bad experience with loans to corporate takers. Even if one bad experience hits the market, it results in total loss of confidence. Such instances and malpractices should be severely dealt with.

India had been traditionally dependent on domestic savings for its investments. The current turn appears to be ideal for re-launching some major financial sector innovations. The present widow should be properly used. (IPA Service)