In­dia’s in­fla­tion fight ham­pered as debt role hin­ders RBI

The Pak Banker - - COMPANIES/BOSS -

The big­gest critic of In­dia’s $100 bil­lion bud­get deficit is also one of the largest pur­chasers of the debt that fi­nances it: the cen­tral bank.

The Re­serve Bank of In­dia faults government ex­pen­di­ture for stok­ing in­fla­tion even as its sov­er­eign-bond hold­ings have risen to $91 bil­lion from neg­li­gi­ble amounts in 2008. While it has a man­date for price sta­bil­ity — like coun­ter­parts in the U.S., Europe and Ja­pan — the RBI has an­other charge its peers lack: en­sur­ing the government achieves its bor­row­ing pro­gram.

The Re­serve Bank is pro­hib­ited from buy­ing notes di­rectly from the government, in­stead ac­quir­ing them from in­vestors through so-called open-mar­ket op­er­a­tions.

In­dia’s econ­omy will ex­pand 5 per­cent in 2012-2013, the least in a decade, sapped in part by cool­ing in­vest­ment, fore­casts from the statis­tics agency show. The RBI’s abil­ity to damp the cost of liv­ing may be fur­ther cur­tailed by record government bor­row­ing and spend­ing next fis­cal year, stok­ing de­mand and prices in an econ­omy fac­ing sup­ply con­straints. The in­fla­tion threat adds pres­sure on In­dia to join na­tions from the U.S. to Brazil in sep­a­rat­ing debt man­age­ment from in­fla­tion con­trol. A bill to do so has been sent for cab­i­net ap­proval, two Fi­nance Min­istry of­fi­cials said. “As the government’s debt man­ager, the bank can’t say, ‘I won’t go ahead and fa­cil­i­tate this bor­row­ing you need,’” said Ra­jeev Ma­lik, an econ­o­mist at CLSA Asi­aPa­cific Mar­kets in Sin­ga­pore, who has an­a­lyzed In­dia’s econ­omy for a decade. “By con­tin­u­ing to fi­nance the large fis­cal deficit, the RBI has made its own fight against in­fla­tion more chal­leng­ing.”

The bank holds about 27 per­cent of the sov­er­eign bonds is­sued since 2008, when its hold­ings stood at $2.5 bil­lion, ac­cord­ing to a data. The deficit will widen to 5.2 per­cent of gross domestic prod­uct in the 12 months to March 31, 2013, from 2.5 per­cent in 2008, bud­get doc­u­ments show.

Whole­sale-price in­fla­tion has av­er­aged 7.5 per­cent in the past year and the con­sumer gauge about 10 per­cent, among the high­est in Asia. The RBI has pre­vi­ously said its thresh­old level may be about 5 per­cent. A report to­day showed con­sumer prices rose al­most 11 per­cent in Fe­bru­ary from a year ear­lier. The Re­serve Bank is pro­hib­ited from buy­ing notes di­rectly from the government, in­stead ac­quir­ing them from in­vestors through so-called open-mar­ket op­er­a­tions. Those pur­chases don’t pri­mar­ily seek to fa­cil­i­tate government bor­row­ing, ac­cord­ing to the mon­e­tary author­ity.

“This has noth­ing to do di­rectly with the government bor­row­ing pro­gram,” cen­tral bank Deputy Gov­er­nor Harun Rashid Khan said in an in­ter­view on Feb. 7. “Government bor­row­ing man­age­ment is the by-prod­uct of OMOs. We do it to ad­dress the liq­uid­ity short- age.” Khan was re­fer­ring to cash short­ages in the bank­ing sys­tem. Gov­er­nor Duvvuri Sub­barao said last year if bond pur­chases aim “to help out a fis­cally vul­ner­a­ble sov­er­eign or to re­duce the cost of bor­row­ing for the sov­er­eign, cen­tral banks could end up hold­ing price sta­bil­ity hostage to sov­er­eign-debt con­cerns.” He cut the bench­mark in­ter­est rate to 7.75 per­cent from 8 per­cent in Jan­uary to counter the weak­est eco­nomic growth in a decade, while flag­ging the need for fis­cal con­sol­i­da­tion.

“The high level of fis­cal deficit and higher rev­enue ex­pen­di­ture by the government may add to the in­fla­tion­ary process,” the RBI said in a Jan. 28 report. Leg­is­la­tion for a re­form pend­ing since 2007 to set up a sep­a­rate debt of­fice has been sent to the cab­i­net for ap­proval, two Fi­nance Min­istry of­fi­cials with knowl­edge of the mat­ter said this week, ask­ing not to be iden­ti­fied as the in­for­ma­tion isn’t pub­lic.

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