Financial Daily from THE HINDU group of publications
Tuesday, Dec 27, 2005
Financial Daily from THE HINDU group of publications Tuesday, Dec 27, 2005 |
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Money & Banking
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Interest Rates Columns - On Mint Street RBI can afford to lower rates P. Devarajan
IN most ways, astrology and monetary policy are con games dignified by the use of complex maths models. Strip the two of numbers and most times one's grandmother is a better bet than one's neighbouring banker. Stay put while in trouble, one's grandmother will say while astrologers and bankers will get one into a state of sweaty panic. In most, if not all matters, it is best to consult a woman. A tsunami style wave of "inflationary expectations" was predicted by the RBI on October 25, 2005 while unwrapping the Mid-Term Review of Annual Policy Statement for 2005-06. It says at one place: "The full effects of the pass-through of the increase in international oil prices have so far been dulled and the underlying inflationary pressures have been contained. Crude prices continue to remain the most critical factor in the outlook on domestic inflation. "In the remaining part of the year, inflation conditions will warrant continuous vigil in view of the heightened uncertainties surrounding international crude prices and the eventual pressures for fuller pass-through into domestic inflation." At a second place, the RBI warns: "Given the outlook for inflation primarily in the context of the oil economy in India, however, it may be difficult to contain the inflation in the range of 5-5.5 per cent projected earlier without an appropriate policy response." The central bank lifted the reverse repo rate by 25 basis points, effective October 26, to 5.25 per cent from 5 per cent while the repo went up to 6.25 per cent. The first warning from RBI came on April 28, 2005 when the Annual Policy Statement for 2005-06 said, "The outlook for growth in 2005-06, which should be noticeably better than the previous year may get moderated by the conditions in oil markets which remain tight." Crude oil quotes now at around $58 per barrel against around $70 per barrel a few months ago; of course, it can shoot up but as a grandmother recipe one can hope it to remain at $60 per barrel. In the current year, pass-through or not, inflation has not breached the 5-5.5 per cent band with the Union Government getting the state oil companies to take the hit. Perhaps, the most critical factor is a healthy kharif crop, with the rabi crop also expected to do well. Economic growth is strong (reflected in a sharp rise in demand for credit) and could be ruling between 7.5 per cent and 8 per cent in the next three months of the current fiscal. The financial system is best placed for the RBI to reverse its earlier stance and go for a 0.5 percentage point drop in reverse repo and a 0.25 percentage point cut in CRR, to make additional funds cheaper. Over time some Rs 50,000 crore locked in the MSS will unwind lifting liquidity. Quite a few bankers aver the "stress on the economy is now less." Otherwise, banks will continue to offer high deposit rates for bulk deposits and raise lending rates to keep margins in tact. Some bankers are not amused as the rise in deposit rates will not help the common man earn a higher return on his piggy bank collections. If the "stress factors" return, the RBI can always mark up interest rates. But for now will the RBI do a good turn?
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