RBI walks the tightrope

The Pak Banker - - Front Page - S.s. Tara­pore

GOVER­NOR D. Sub­barao set out the Re­serve Bank of In­dia's (RBI) Mone­tary Pol­icy on Oc­to­ber 30, un­der the most ex­ten­u­at­ing cir­cum­stances. The Gov­ern­ment, in the re­cent pe­riod, has un­leashed a se­ries of mea­sures lib­er­al­i­sa­tion of for­eign di­rect in­vest­ment in re­tail, in­sur­ance and pen­sion funds, bold re­duc­tion of the pe­tro­leum sub­sidy and a vow to re­duce the fis­cal deficit.

It has un­equiv­o­cally ad­vised the RBI to ease mone­tary pol­icy as part of an over­all pack­age to stim­u­late growth. The dilemma faced by the RBI was to for­mu­late its mone­tary pol­icy in the con­text of fall­ing growth and ris­ing in­fla­tion. Given this tricky sit­u­a­tion, the RBI has deftly gone in for what could be called a dam­age-con­tain­ment mone­tary pol­icy.

The as­sess­ment by var­i­ous eco­nomic agents, in­clud­ing the Gov­ern­ment, is to ac­knowl­edge that growth in 2012-13 would be lower than ear­lier es­ti­mated. The RBI's own as­sess­ment is that the cur­rent year's growth, ear­lier es­ti­mated in July 2012 at 6.5 per cent, would now be 5.8 per cent.

In­fla­tion con­tin­ues to be a ma­jor cause of worry for the RBI, with the Con­sumer Price In­dex (CPI) show­ing a year-on-year in­crease of close to 10 per cent and the Whole­sale Price In­dex (WPI) some­what be­low 8 per cent both well be­yond the RBI's com­fort zone of 4-4.5 per cent. Ac­cord­ingly, the RBI has in­creased its pro­jec­tion of WPI in­fla­tion for 2012-13 from 7 per cent in July 2012 to 7.5 per cent in its lat­est as­sess­ment.

The em­i­nent econ­o­mist Joseph Stiglitz, greatly ad­mired in In­dia, a few days ago, pro­nounced that "8 per cent in­fla­tion is nor­mal in a de­vel­op­ing coun­try... In a trade-off be­tween growth and mod­er­ate in­fla­tion, I would plump for growth". The price indices grossly un­der­state in­fla­tion.

In In­dia, with a CPI in­fla­tion of close to 10 per cent, the "true" in­fla­tion rate could well be closer to 15 per cent. In­dia does not have an in­fla­tion-tar­get­ing regime and, hence, the RBI has nei­ther ob­jec­tive in­de­pen­dence nor in­stru­ment in­de­pen­dence, yet it is the first tar- get for ac­count­abil­ity when in­fla­tion gets out of hand.

The Stiglitz pro­nounce­ment is an ' ac­tion re­play' of Kal­dor 50 years ago. In 1960, In­dia was on the verge of launch­ing the Third Plan. Ev­ery in­ter­na­tional econ­o­mist worth his name stopped by New Delhi to freely of­fer his ad­vice.

In 1960, Ni­cholas Kal­dor wrote a short pa­per for the Plan­ning Com­mis­sion wherein he ar­gued that In­dia should move from its then 2-3 per cent in­fla­tion rate and work with a 10-15 per cent in­fla­tion rate like Cey­lon (now Sri Lanka), which was then en­joy­ing a high real growth rate.

The Third Plan talked of an ap­proach wherein the phys­i­cal plan would be larger than the fi­nan­cial plan! The rest is his­tory, with In­dia be­ing in­flicted by a sharp in­crease in the in­fla­tion rate.

With prospects of lower growth and higher in­fla­tion, to­gether with strong gov­ern­ment pres­sure to ease mone­tary pol­icy, the RBI ap­pears to have fol­lowed a dam­age con­tain­ment pol­icy of the min­i­mum pos­si­ble eas­ing.

As be­tween a repo cut and a CRR re­duc­tion of 0.25 per cent (re­lease of Rs 17,500 crore), one can sur­mise that the RBI view was that a CRR cut would im­pact less on de­posit rates of banks, which are al­ready close to neg­a­tive real rates.

Since the RBI was un­der tremen­dous pres­sure to ease mone­tary pol­icy, one could de­fend the pol­icy of a CRR re­duc­tion which could be mod­u­lated, along with Open Mar­ket Op­er­a­tions, to avoid ex­ces­sive mone­tary eas­ing.

The RBI has done well to stress that there would ini­tially be an ac­cel­er­a­tion of in­fla­tion which, in the short run, would take the heat off the RBI in the im­me­di­ate en­su­ing pe­riod.

Tak­ing a purely an­a­lyt­i­cal ap­proach, the RBI should not have eased mone­tary pol­icy, but given the po­lit­i­cal econ­omy ground re­al­ity, one can credit the RBI for a good dam­age con­tain­ment.

The RBI has also an­nounced a num­ber of reg­u­la­tory mea­sures, but what is glar­ing is an is­sue the RBI has not ad­dressed:

Carteli­sa­tion of the sav­ings bank rate: The RBI freed the sav­ings bank rate in Oc­to­ber 2011. Most banks have con­tin­ued with the last reg­u­lated rate of 4 per cent and only a hand­ful have fixed their own rates. Some banks, which have a very low pro­por­tion of cur­rent and sav­ings ac­counts (CASA), have raised the sav­ings bank rate and their CASA, thereby re­duc­ing their over­all cost of funds.

The bulk of banks have ad­hered to the 4 per cent sav­ings bank rate and it is ob­vi­ous that a very strong car­tel is oper­at­ing un­der the aegis of the In­dian Banks' As­so­ci­a­tion. Many of the banks which of­fer only 4 per cent on sav­ings bank give priv­i­leged cus­tomers fa­cil­i­ties like Sweep­ing Ac­counts and Mul­ti­ple Op­tion De­posits.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.