• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Brand Quest
• The New Manager
• BL Club
• Smartbuy

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth
• Events 2007

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

The RBI has announced its mid-term review of the annual monetary policy for 2008-09. The central bank had already taken pre-emptive action in respect of liquidity and signalling interest rates well before the policy in view of the unsettled conditions in the market.

It is, therefore, to be expected that the policy statement itself has not come forward with any further changes in the cash reserve ratio or repo rate. The fact that the markets themselves were looking for prompt reactions from the RBI ahead of the monetary policy indicates that the monetary policy review is turning out to be a non-event.

The Finance Minister drew attention, in his comments on the policy, to the RBI’s views that “in the context of uncertain global situation and its indirect impact on the domestic economy, in general, and the financial markets, in particular, the RBI will closely and continuously monitor the situation strictly and effectively, employing both conventional and unconventional methods”.

The RBI has also restated its emphasis on creating quality credit delivery, in particular for the employment-intensive sectors, while pursuing financial inclusion.

While the policy has been greeted with a sharp decline in the indices, both the Sensex and the Nifty, it is only fair to point out that the RBI’s degrees of freedom in respect of policy measures were, indeed, limited. The markets could not have expected the central bank to perform a miracle.

Liquidity in the stock market is drying out, largely because of global factors and the exit of FII money. In a falling market, it is difficult to visualise the central bank doing much more in terms of stimulating the stock market than the RBI has already done. What is important is the impact of the apex bank’s policies in respect of the real economy.

The relatively high interest rate policy in force till recently has been rightly blamed for the slowdown in certain sectors, such as automobiles, consumer goods and real estate. It is time that the RBI corrects these aspects of policy, especially given that India’s interest rates are at 9 per cent higher than the CPI inflation of 7 per cent. Also, it has to take into account the declining tendencies in global inflation.

The emphasis on credit growth in the document on macroeconomic development accompanying the credit policy does not bode well for the real economy. While the Centre and the Planning Commission emphasise credit growth in agriculture and for manufacturing, the RBI’s emphasis seems to be to contain credit growth with a view to controlling inflation.

As many observers have pointed out, we are fighting the wrong war. The consumer price index has not grown more than 7-8 per cent, which is comparable with that of other emerging market countries, such as China. The need of the hour is for the RBI to refocus on growth and not on inflation control with reference to the wholesale price index.

The reference in the RBI’s statement to ‘unconventional methods’ has excited some comments that the RBI and the Government may be thinking in terms of a bail-out of the stock market on the lines of the Hong Kong monetary authorities’ intervention in the stock market in 1998.

In that case, the Hong Kong monetary authorities had created a Fund to intervene in the falling market, buy up equities and stabilise the market. The Hong Kong experiment was an unqualified success because, at the end of the operation, the markets had stabilised and the authorities sold equities at a handsome profit.

It has been pointed out that Russia and Taiwan have been among the countries that have contemplated Sovereign Wealth Funds using domestic resources to mitigate the fall in their stock markets triggered by foot-loose foreign institutional investors. This does not require any foreign exchange; it requires only domestic resources. Time alone can tell whether the RBI would venture to use the unconventional methods that it mentions.

The “no change” credit policy may yet be a starting point for further discussion and new policy measures to be initiated by the RBI and the Central Government to tackle the present impasse in the financial markets.

While much of the problems are because of the contagion from the global market, there is a lot we can do to set right the present atmosphere of doom and gloom in India because of tight money policies of the RBI, which has adverse effects on the prospects of businesses raising resources and pursuing their growth plan. This has inevitable adverse impact on employment and growth.

It is, therefore, my suggestion that the monetary policy statement of the RBI for 2008-09 be used as a trigger for bold initiatives by the Government.

It can be part of the global programme, which will hopefully be discussed in the ensuing meetings to be convened in the US and Europe in November 2008 to discuss the global financial situation.

More Stories on : Credit Policy | Monetary Policy | S Venkitaramanan

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Copyright © 2008, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line