The Hindu Business Line : Helping to ring in the money

While the RBI Governor was unveiling the Credit Policy in Mumbai, at almost the same time the Finance Minister was announcing a slew of measures to tame inflation in Parliament. The Finance Minister also presented preliminary data on wheat and rice procurement, which indicate that buffer stocks are going to be ample in the coming months. Which bodes well for price stabilisation, at least of staple grains, whose price rise has given sleepless nights to the political class.

This serendipity perhaps explains why there was a pause in tightening by Dr Y. V. Reddy. The RBI’s tightening stance against inflation began more than two-and-a-half years back.

Since then the repo rate is up by 1.75 per cent, and the cash reserve ratio by 3.25 per cent. (It still is far below China’s CRR, and Chinese inflation is moderating too, but that’s another story.) Monetary inflation anti-measures work like homeopathy. Surely, but slowly.

Key rates

Hence impatient politicians often want to supplement by other knee-jerk actions such as resorting to anti-hoarding laws. Of course, excise duty relief and relaxation of imports are helpful and welcome, but export bans create other complications.

Whatever the reasons or mechanisms, the fiscal plus monetary medicine seems to be working. Perhaps that’s why the Governor opted to keep all key rates on hold. The CRR hike conveys that there’s expectation of further foreign inflows, maybe in the form of FII or when the ECB tap is turned on again.

Credit growth and money supply will continue to be healthy next year. The selective relief given to housing and infrastructure indicates that credit flow to those sectors can remain unhampered.

Payment systems

The most significant item in this policy is not related to monetary measures. It is on payment systems. The RBI will soon take first steps in enabling payments via mobile phones. This has great potential for inclusive banking as well as micro-payments and migrant workers’ remittances across the country.

Mobiles have reached where no bank has reached, or even a post-office.

And clearly telephone operators are recovering payments from these far flung rural customers. It is time to piggyback on those very channels to provide savings and payment services. Of course there will be a host of issues such as security and money laundering, but then India is not the only developing country toying with this idea.

Finally, given the great recent volatility and frequent two way movement in the currency, it is high time we introduced currency futures.

Currency futures

This is to enable exchange-based trading in currency, by participants who may not actually be exporters or importers.

The RBI says that currency future trading may commence very soon. This is not too soon, since offshore markets like Dubai are already trading rupee futures since June 2007, and it’s time we move that business onshore.

(The author is Chief Economist, Aditya Birla Group.)