The Hindu Business Line : Time PM cleared the haze over foreign stake in banks

THE Report on Currency and Finance 2003-04 of the RBI wants an inflation mandate from the Central Government. "While there is a growing consensus on the acceptable rate of inflation, this needs to be better articulated, formalised and perhaps converted in due course into a mandate from the government to the RBI and in the process to all economic agents," says the report.

Simultaneously, the report adds that a numerical inflation target "comes at a cost." If the annual target is breached, it adversely tells on the credibility of the central bank. It happened this year when the RBI had to revise upwards the inflation band from an earlier 5 per cent after a sharp rise in crude prices and poor agricultural growth.

Concluding, the report says, " uncertainty about how economies operate and about monetary policy itself is, however, no excuse for not pursuing price stability... An environment of sustained low and stable inflation is conducive for financial savings, with beneficial impact on investment in the economy and for sustained growth and employment. Price stability is all the more important for an economy like India, with a large proportion of poor population that has no hedges against inflation."

Readers of the report are unsure whether this is the official view of the central bank as there is a disclaimer saying, "the findings, views and conclusions expressed in this Report are entirely those of the contributing staff of the Department of Economic Analysis and Policy and should not necessarily be interpreted as the official views of the RBI."

Yet, an inflation target seems sensible as it will make fiscal and monetary policies more sensitive to any unnatural price rise or fall. Too sharp a drop in prices affects farmers the most as it is today in the case of raw cotton.

The demand made in the report is close to the basic function of the RBI as set out in the preamble to the RBI Act which is "to regulate the issue of bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."

In the event is the RBI best placed to dwell on corporate issues like the equity and operational status of foreign and Indian private banks? Is the RBI not stepping out of the agenda laid down by the RBI Act, 1934, in coming up with a draft proposal on ownership and governance in private sector banks? Is that not the job of New Delhi and Parliament?

Sure the RBI can and should have its say on the issue, but the policy has to be set by the government.

Bankers are confused over stake-holding in private banks with Mr P. Chidambaram palpably warmer to foreign investments than the RBI Governor, Dr Y.V. Reddy. If RBI is against lifting the cap on voting rights, the Finance Ministry is for removing it, leaving bankers amused.

The Bank of Rajasthan wants to offer 14.5 per cent stake to foreign investors. Can it as the RBI draft proposal is against any foreign equity investment above 5 per cent in an Indian private bank without its permission?

More, the RBI proposal is keen on promoters of Indian private banks to dilute their stake to 10 per cent over a possible three years. The promoters will have to lower their holdings in Bank of Rajasthan. Is it not time for the Prime Minister (who was earlier the RBI governor and also the Finance Minister in Mr Rao's Cabinet) to act and come up with some sure pronouncements? The banking industry deserves it.

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