The Hindu Business Line : Forex reserves: Passing the buck to banks

Chennai April 20 Bankers may not like it, but the 1.5 per cent hike in the Cash Reserve Ratio (CRR) is pretty much a case of `the good lord giveth and the gay lord taketh.' Over the past four months, the Reserve Bank of India has merely impounded/immobilised a small fraction of the huge growth in deposits that it had earlier `gifted' to banks.

While mopping up forex inflows to avoid an appreciation of the rupee, the central bank deliberately dragged its feet on mopping up the rupees paid out. From December 2005 to April 2006, balances already impounded under the Market Stabilisation Scheme (MSS) were `allowed to unravel', even as forex continued to pour in.

The bank later called a halt to this, and began adding to sterilised balances. But hundreds of thousands of crores of rupees paid out to mop up forex inflows have yet to be sterilised.

So money growth increased from 14 to 17 to 20 per cent per year between 2004-05 and 2006-07. In turn, bank deposits, which had been chugging along at 12 per cent to 15 per cent, broke into a gallop at 25 per cent per annum, on a point-to-point basis.

Had they continued to grow at the earlier rate, demand and time deposits would have been Rs 2 lakh crore lower than the present Rs 26 lakh crore. So even after the CRR hike, from 5 per cent to 6.5 per cent, banks are still thousands of crores ahead of the game.

But so far as the larger picture is concerned, putting banks in the line of fire is only a stop gap. Forex reserves now exceed $ 200 billion, and tried and tested methods of sterilisation have run out of steam. The RBI ran out of its Rs 50,000-crore stock of marketable government securities in 2004. And the MSS bonds that the Central Government later began issuing have almost touched the Rs 60,000-crore cap.

This government fears, quite rightly, that if MSS were to continue to be the sole policy instrument for sterilisation, it would have to pay out huge amounts of interest for money that it never gets to use. (Incidentally, this sort of `penny-pinching' is also the logic behind the RBI's refusal to pay interest on funds impounded under the CRR).

So other, innovative, alternatives are being explored. Letting the rupee appreciate to reduce net inflows may be one of them. Probes to assess how much liquidity the economy can absorb certainly are.

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