Recently the Government has announced the name of Dr. Urjit Patel who shall succeed Dr. Raghuram Rajan as the new RBI Governor. Dr. Patel has been entrusted with the job of carving the monetary policy of the country. All the Industrial bodies like the FICCI, CCI have hailed the move and now eagerly wait how he shall perform.
Having said this, many new entrepreneurs have asked us how can one person affect the business cycle of the entire country? At the end of the day, we hear of the RBI Governor only when he increases or decreases the bank rates which in turn have a direct impact on our Fixed Deposit. Business houses rarely invest in FDs and hence as per most, RBI does not affect their organisation.
This is a very wrong concept and needs to be modified. RBI plays a far bigger role and its function is not limited to just increase or decrease of bank rates. In fact, it is perhaps the biggest external influencer of your organisation. In this article we shall try to understand what role does the RBI Governor plays and how he can influence your start-up.
1. Watchdog of Inflation- Inflation affects every business house. Say for example if your cost of raw materials increases keeps on increasing due to inflation, will it not burn your profits? And if you increase your sale price so as to keep your margins, won’t it be difficult to sale your goods?
The role of RBI Governor is very important over here. He along with his team proposes ways by which inflation can be controled. In fact perhaps the main role of the RBI Governor is to control inflation. Dr. Rajan was hailed for controlling the inflation and understanding the background Dr. Patel will be no different.
2. Banker’s Regulator- Any country’s financial system depend largely on its banking network. Reserve Bank of India controls the banking system of the country. It is authorized to give new banking licences, announce customer protection guidelines, promote rural banks and various other jobs which are directly related to growth of banking industry. RBI’s role is of high importance. Stronger the banking sector becomes the better for the economy of the country.
3. Lending Rate- RBI Governor also decides the Repo Rate. This rate directly impacts the lending rate of the commercial bank. So, higher the Repo Rate higher the lending rate and if the repo rate is kept at low then the business houses can borrow money at a lower rate. Of course it is not as easy as it seems! There are various nuances which the RBI Governor has to keep in mind before deciding it and hence his role is very critical.
4. Foreign Exchange Management- Imagine you have quoted a client $1000 for your service thinking that the exchange rate is Rs 68. Now, suddenly the Rupee becomes stronger and the Rupee improves to 63 to a dollar. Won’t this affect your books and eat up your profits?
Again say for example, you plan to import goods at Rs 63 to a dollar and by the time you actually book the order Rupee falls and it become 68. Aren’t you being at loss because you end up paying extra for the same goods?
This is quite common especially in the trading and IT industry where there are various foreign stakeholders. Dr. Patel would be entrusted to keep the foreign exchange rate at a stable position. Too many fluctuations in rate will affect the forecasting and plans of any enterprise and hence it is necessary to keep the rate at a stable price.
5. Advisory role- RBI Governor is the head of various financial and social committees. He advises the Government on various key policies that are significant to good governance in the country. The role of the governor is not only limited to the financial industry but it is extends to various committees where he plays the role of advisor. The new RBI Governor may also assist the government in determining FDI Regulations of the country which will impact the foreign investment that the start-ups receive. So next time when you approach a foreign investor remember the governor plays some role in it.
All in all RBI is the backbone of India’s financial system. Dr Patel, the new RBI Governor shall take decisions which will impact every business organisation. So, if you are an entrepreneur follow his policies keenly. His decisions will not only effect you but the entire country all together!
If you have any financial queries feel free to write to us at Taxmantra.com