The Hindu Business Line : RBI may not cut Bank Rate

A LIMITING factor on RBI lowering the key indicative Bank Rate could be the sharp rise in crude prices to around $40 a barrel. Till now, the profit-making public sector oil companies have been coerced by New Delhi to hold prices and absorb the cost for garnering votes. That time looks to be over and it is a near certainty that prices of petrol, diesel, LPG and the rest could go up pushing the rate of inflation beyond the 5 per cent mark.

In the event, the RBI may not be expected to take the risk of snipping the Bank Rate, which now stands at 6 per cent, on May 18, when the RBI Governor briefs bankers on Credit Policy. It may not be monetarily wise to lower Bank Rate and then mark it up when prices shoot up, as they are bound to. There is also a haunting fear over a rise in fiscal deficit with subsidies being talked about as the best prescription.

The central bank is quite worried over the first move of the Congress-led Andhra Pradesh Government agreeing to supply free power and picking up a subsidy bill of Rs 350 crore. "Will we go back to the bad old days?" asked a top banker.

A clue to RBI thinking was long provided by the Report on Currency and Finance, 2002-03, released on January 28, 2004. The report said: "The outlook for oil prices in the near term appears highly uncertain. Second, world commodity prices have also increased in 2003. These trends, along with revival of growth and falling excess capacities in several advanced economies, have brought about a noticeable shift in the outlook for prices. These international developments enhance the probability of transmission of inflation from abroad to India."

The adverse balance can be made up by a pick-up in growth, fairly comfortable position of food stocks and strong forex reserves. Yet another reason for the RBI to don the garb of a conservative central banker in these uncertain times, is how good will be the rains and how widespread. Also, the May 18 Credit Policy (if memory serves one well) will probably be the first from RBI without a full-fledged government in place in New Delhi. If all goes well, Ms Sonia Gandhi will take charge as Prime Minister on Monday leaving a few hours for the Finance Ministry to provide some reference points for Dr Yaga Venugopal Reddy, the RBI Governor, to act on Tuesday.

Newspapers have talked of a meeting between Dr Manmohan Singh and Dr Reddy, two old friends who rescued India from the 1991 crisis along with Mr S. Venkitaramanan, the then RBI Governor, and Dr C. Rangarajan.

Quite a few bankers believe the RBI could persist with the current policy stance of staying put implying an unchanged prime lending rates of banks. Incidentally, they may not tinker with deposit rates though here there is a strong case for marking up the saving rate from 3.5 per cent to 4 per cent as a piece of social insurance to protect an aged and retired population. There is a strong disconnect between deposit and lending rates of banks with deposit rates falling more steeply than lending rates in the last few months. On utilisation of forex reserves, the RBI could experiment on passing on the dollars to banks for onward lending to industry and agriculture at rates closer to Libor. Banks have been talking this issue with RBI. The Expert Committee on Rural Credit is reported to have submitted its interim report arguing for lowering interest rates on farm loans besides persisting with the 18 per cent norm for farm lending. One is not sure whether RBI will take these ideas on board though it should not upset the Sonia government.

Reports are an internal working group is close to finalising its mind on monitoring Systemically Important Financial Intermediaries (SIFIs). In his November 3, 2003 policy, Dr Reddy had mentioned the idea of setting up a monitoring system of SIFIs which would encompass: a) reporting system on financial matters of common interest to RBI, SEBI and IRDA; b) the reporting of intra-group transactions of SIFIs; and c) the exchange of relevant information among RBI, SEBI and IRDA. Some entities (no confirmation available) that could qualify as SIFIs are SBI, ICICI, the Sahara group and a few others. In an interview with this paper Dr. Reddy had said, "We should have a separate system to monitor and regulate these bodies as in the West. ... Reporting of intra group transactions will have to take place on a daily basis, if needed."

Setting out the overall stance of monetary policy the RBI talked last time of a ) provision of adequate liquidity to meet credit growth while continuing a vigil of movements in the price level; b) to continue with the present stance of preference for a soft and flexible interest rate environment within the framework of macroeconomic stability. Dr Reddy may not alter the lines till the Union Budget in June makes a firm statement.

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