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RBI shifts gears, finally

Charan Singh
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Prioritising jobs over inflation may go down well with the aam aadmi. The RBI could reduce repo rates further to spur investment and growth.

The Monetary Policy announced by the RBI recently has been prepared in difficult times — domestically and globally. Domestically, all important parameters are causing concern — the growth rate is far below the trend; large twin deficits, especially current account deficit, poor flow of credit to industry and stubborn inflation.

Globally, the recovery in the US is subdued, and the economic situation in the euro area, the UK and Japan is still a matter of concern.

In such an uncertain environment, the RBI has done a commendable job of signalling a change in approach and reducing, though very cautiously, the repo rate and the cash reserve ratio.

A slight reduction in the two rates amounts to a balanced approach, simultaneously addressing the issue of interest rates and tight liquidity conditions. It probably is a tactical way to indicate that the economic situation is sensitive and that the RBI is closely monitoring the economy. In the political economy literature, the central banker has to be conservative in approach with the basic aim of targeting the inflation rate.

It is also necessary to signal to the watchful international community that the central bank and the Government are in alignment on major economic issues. This step of the RBI will put to rest any such speculation.

Inflation targeting

It is a general perception in the market that the RBI had kept the repo rate above 7 per cent since May 2011 to address the issue of high inflation.

In India, the overall inflation rate continues to be high mainly because of food inflation, which has much to do with supply conditions, domestically and globally. Agriculture output has been dented because of the weak monsoon in India and drought-like conditions in many other countries.

In fact, the issue of tolerance level of inflation in India needs a review to meaningfully anchor inflationary expectations.

In advanced countries as well, there is a discussion on raising the levels of inflation targeting, as it gives more space for policy manoeuvring.

In India, in the last 23 years, annual inflation rate has been below 4 per cent only in four years; between 4 per cent and below 7 per cent in 8 years; between 7 per cent and 10 per cent for 7 years; and above 10 per cent in 4 years. There needs to be an extensive behavioural study on new tolerance levels of inflation, if any, in India, segregating the effect of food and non-food inflation, and the trade-off between growth and inflation.

Higher unemployment

An aam aadmi, a subject of concern for the political parties, would perhaps be mainly concerned about food inflation. And, it is the common man today who may be tolerant of inflation, but not of unemployment.

Using a monetary policy tool in such circumstances could be a sort of double-whammy for the aam aadmi, as high interest rates would imply lower investment and growth, resulting in higher unemployment, over and above high food prices.

In general, repo rate at 7.75 per cent is still high and having established a cautious approach by releasing the pedal gradually, and also acknowledging that an output gap has emerged, it may be useful now to reduce the benchmark rate more aggressively to meet the stated objective of encouraging investment activity and accelerating growth.

There is a precedence in December 2008 when the repo rate was reduced by 100 basis points from 6.50 per cent to 5.50 per cent and by April 2009 repo rate was down to 4.75 per cent. The economy faithfully responded by growing from 6.7 per cent in 2008-09 to 8.4 per cent in 2009-10.

However, it must be conceded that inflation in food articles at that time had continued to be high, even as inflation in non-food articles had come down substantially.

Rise in NPAs

The policy statement mentions that the NPAs are beginning to rise and the trend is mainly noted in public sector and old private sector banks, which is leading to risk aversion by banks.

It would be interesting to know the sectors where larger NPAs are being recorded. It probably could be the housing sector, as a large number of houses remain unsold, which is also reflected in the house price and transactions volume index published by the RBI.

In the case of Delhi, Bangalore, Ahmedabad, Kolkata and Chennai, while the housing prices have been rising annually, transactions have been declining significantly. This could be a cause of concern for banks’ lending to the housing sector.

The RBI’s macroeconomic review provides a focused discussion on the domestic and global economic situation.

It would also be interesting to have some information on the regional scenario within India. In the US, the Beige book is published eight times a year and two weeks before the meetings of the Federal Open Market Committee.

The RBI, with its network of regional offices, could provide information on a near-real time basis on the regional economy, which would be useful in assessing the actual economic condition.

(The author is RBI Chair Professor, Indian Institute of Management, Bangalore.)

(This article was published on February 1, 2013)
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Comments:

RBI has shited the gear and what is the impact.SBI the major public sector which has been harping for the rate cut and reduction in CRR has cut the interest rate by 5basis points and fooled every body.As long as the banks maintain their NIM at a higher level above 3%,do not mobilise more deposits the growth of which is on the decline,do not improve the quality of assets by bringing down the wilful defaulters in particular,the rate cut by RBI cannot have any impact in the market.Besides interest rate and GDP growth does not seem to be correlated as closely as one finds in advanced economies.Industrialists make hue and cry for reduction of interest,but the fact remains that interest rate forms only an insignifact portion of the cost of production for many a corporates. Their lobby is strong and they could dictate their terms to Govt and institutions including RBI.Unfortunately, there is no lobby for aam admi and he is suffering silently under spiralling inflation.RBI has let downAAM ADMI

from:  Dr.T.V.Gopalakrishnan
Posted on: Feb 2, 2013 at 06:00 IST

Government has spent and spending big money to provide ADHAR CARD to the population of this country.It is funny to hear that there is no uniformity in the pronouncents of the higherups about the nature of this instrument.Some say it is for identification and card itself says so ,but now Montek Singh says it is a mere number.At least MR Nilekeni should offer an explanation as to the nature and status of the Adhar card and clear the air. C.M.PANICKER-BANGALORE.

from:  C.M.PANICKER
Posted on: Feb 3, 2013 at 15:36 IST

RBI has supplemented the government's belated policy action with some
cuts which was needed.GOI has been spending on populist programes
without having resources to do so and a result widening fiscal deficit
as well as inflation to a level where International rating agencies
had to warn us. And finally GOI has come out prepared to bite the
bullet and take some tough decisions including diesel price de
regulation. RBI looked bit rigid initially to supplement FM in his
reform led policy actions but decided in favour this time around
,which will help the sentiments domestically as well as amongst
international investors (FIIs) in the times to come. Another step in
the right direction.

from:  vijay shivram menon
Posted on: Feb 5, 2013 at 09:35 IST
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