The Hindu Business Line : RBI's gentle squeeze

WITH PRICE INDICES continuing to climb, the Reserve Bank of India had the choice of leeching out excess funds from the system or marking up the Bank Rate to make lending dearer across the system. For a start, the RBI has sensibly gone in for impounding around Rs 8,000 crore of bank money by mandating banks to deposit more cash with it. The mark-up in the Cash Reserve Ratio from 4.5 per cent to 5 per cent in two steps is effective September 18, and these deposits will fetch banks lower interest at 3.5 per cent (the same as on savings accounts) against 6 per cent earlier. Though doubly squeezed, bankers may not be harried as the system has surplus funds of slightly over Rs 90,000 crore parked with the RBI under various deposit schemes, which if fertilised could send the Indian economy spinning on to a high-growth orbit.

By brandishing the sharpest sterilisation instrument in its armoury, the RBI has made its acute discomfort known to the financial markets. The monetary action comes at a time when the Planning Commission does not see GDP growing at 8.1 per cent in the current year; the RBI had refused to place a number on growth in its Annual Report released recently. At the base level, bankers do not see a sharp acceleration in the credit offtake to earn for themselves the tag of lazy lenders. The Finance Minister, Mr P. Chidambaram, wants banks to move out of placing funds in gilts but turn them over to borrowers, preferably farmers and small-scale units. Perfectly reasonable, say bankers, but want to know: Who, then, would subscribe to Central and State government floats to fund cost overruns planned in New Delhi? If banks do not pick up gilts on auction days, the RBI will have to step in to handle the devolvement by running its printing presses and that will only speed up the rising trend in prices. Possibly, the RBI has read the future and could be preparing for worse times. If that fear turns out to be true, the RBI will end up marking up the Bank Rate and the repo rate of 4.50 per cent which banks now earn from the central bank on unused funds in exchange for gilts.

For the financial markets, the repo has become a better calling card than the Bank Rate, going by the report of an RBI working group though bankers still prefer to watch the Bank Rate to rework lending rates. Some bank chairmen privately talk of a hardening of lending rates by November while others prefer to wait for the October Credit/Monetary Policy review. Borrowers are still not rushing bank counters and any step to make funds dearer will keep them away for some more time. As international markets turn tight, corporates could turn back to negotiating rupee funds and it may be best if the banking system refrained from loading lending rates. For a change, the RBI cannot be faulted as New Delhi is still not doing enough to re-kindle investment.

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