The Hindu Business Line : RBI's price concerns

IN PITCHING FOR a high interest rate regime to slow an upward price spiral fuelled by volatile crude prices, the Reserve Bank of India seems to have shuffled its agenda from growth to price stability. The Mid-Year Review of the Annual Credit Policy statement for 2005-06 is a classic orthodox response, with the RBI unsure of the price line being held at the projected 5-5.5 per cent though the Finance Minister, Mr P. Chidambaram, has predicted that inflation would remain at the lower end. For the RBI Governor, Dr Yaga Venugopal Reddy, "inflation is a joint concern" of the Finance Ministry and the RBI, nothing beyond.

On the ground, the annual inflation based on the WPI (wholesale price index) was 5.3 per cent as on October 8 against 6.2 per cent a year ago, though for well over a year crude oil prices have been on a high. At one place, the Policy Statement admits that, "the oil price hike has not seriously hampered growth prospects or significantly affected inflationary expectations so far." That could be the reason for the RBI upping the economy's growth projections from 7 per cent to 7-7.5 per cent. The reverse repo (the price at which the RBI takes in loose bank funds) has been raised from 5 per cent to 5.25 per cent and the repo (the rate at which the central bank offers funds to banks) from 6 per cent to 6.25 per cent when excess funds are flooding the system. The total liquidity caught up in the RBI's vaults (through the Monetary Stabilisation Scheme, the Liquidity Adjustment Facility and surplus balances of the Central government) had gone up from an average of about Rs 114,192 crore in March to Rs 123,844 crore in August before dropping to Rs 120,076 crore in October.

By the RBI's admission, the economy is doing well with the year-on-year growth in resources flow higher at 27.8 per cent against 21.4 per cent a year ago backed by an 18.56 per cent jump in deposits (15.8 per cent). Investment by banks in the debt market, at Rs 14,283 crore (till September 30), is lower than Rs 28,526 crore in the same period last year with credit diverted to service a pick up in demand. The current account deficit is being covered by invisibles, including remittances from Indians abroad put at a steady 3.3 per cent of GDP. Banks will look at re-pricing loan portfolios even while scrambling to pick up corporate accounts at knock-down interest rates.

At today's lunch meeting, the RBI and bankers agreed that the current system of sub-PLR (prime lending rate) credit did no one any good in the absence of transparency and too wide an interest rate band (3-4 per cent to 24 per cent); a modified bank lending system, fairer to farmers and the small-scale sector, could be in place. Corporates will play cool sitting on piles of rupees and borrowed dollars. Bankers may crib over the higher provisioning against standard advances from 0.25 per cent to 0.40 per cent while the RBI contends it should not tax the system. Most strange is the concern of the RBI for the stock market, manifesting in an altered bank exposure norms when a month ago regulators were uneasy over the sharp rise in the Sensex. Probably, evidence with the RBI does not sufficiently justify its doing on interest rates.

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