MAVERICK VIEW. Power packed monetary policy

With the off-policy reduction in the repo rate on January 15, market expectation was that the policy review of February 3 would be a short review without any significant measures. But RBI Governor Raghuram Rajan has produced a power-packed monetary policy with significant measures.

Traditionally, the RBI sets out its developmental and regulatory measures in the April review; these measures have been brought forward to the pre-Budget February review.

The key policy repo rate has been kept unchanged at 7.75 per cent. Furthermore, the cash reserve ratio (CRR) has also been kept unchanged at 4 per cent of net demand and time liabilities (NDTL). There are, however, a number of other important measures.

The statutory liquidity ratio has been reduced from 22 per cent to 21.5 per cent of NDTL. In recent years, the RBI has been reducing the preemption of resources of investing institutions via the SLR.

This measure signals to the government that its market borrowing programme would need to be moderated in the Budget for 2015-16.

The withdrawal of the export credit refinance (ECR) facility and the provision of system level liquidity from February 7 is a historical measure.

For about 25 years, the RBI has been trying to abolish sector specific facilities. While a number of sector specific refinance facilities were abolished, including the sensitive food refinance facility, the RBI was unable to abolish the ECR facility.

In fact, whenever the RBI tried to curtail the facility, it had to be restored. While negotiating the financial sector loan from the Asian Development Bank in 1992, Indian authorities gave a clear undertaking that the ECR facility would be withdrawn.

Despite persistent efforts by the RBI, the powerful export lobby was able to prevent the abolition of this facility. It needs to be explained that the ECR is able to provide very little assistance to export competitiveness which can only be provided by an appropriate exchange rate.

The withdrawal of the ECR significantly improves the transmission of monetary policy. Rajan deserves kudos for having achieved what the RBI was unable to do for 25 years.

The policy statement provides a tour de force of global as well as domestic developments. The International Monetary Fund’s (IMF) latest forecasts of global growth for 2015 and 2016 have been scaled down.

In the US, earlier optimism of a strong revival have been belied; while the fall in crude oil has boosted consumption demand, it has been more than offset by the drag on exports from a strong US dollar.

The Euro area and Japan are still in the doldrums while growth in China is slowing down.

In India, although the revision of the base year for GDP calculations and changes in the methodology of calculating GDP seem to point to higher growth rates, it requires deeper study to assess what these revisions mean for the underlying trends in GDP.

The RBI has, however, kept the baseline projection for growth at 5.5 per cent for 2014-15 and 6.5 per cent for 2015-16 based on the earlier GDP numbers.

On inflation, the target level for January 2016 is being retained at 6 per cent; it is, however, recognised that with the Consumer Prize Index (CPI) base change to 2012 as also changes in the consumption basket may require a reassessment of the inflation rate in the ensuing period.

The RBI has undertaken a comprehensive assessment of developmental and regulatory measures and a few select measures need to be highlighted.

The RBI had reduced the eligibility for foreign exchange remittances by resident individuals from $200,000 to $75,000 in August 2013. This was raised to $125,000 in June 2014. As part of the policy of February 3, 2015, the limit has been raised to $250,000. This is indeed a salutary measure.

Till 2004, there was a barbaric measure under which the limit was nil! Despite the liberalisation from 1991, it was erroneously felt that if any remittance facility was provided to resident Indians, every Indian would take out money and there would be no local currency left in India!

The experience since 2004 has been that by liberalising remittances net inflows into India increased as there was a building up of international confidence in the Indian regulatory system.

Against this background the measure announced on the February 3 policy review is of great significance.

The limit for investments in government securities by foreign portfolio investors is capped at $30 billion of which $5 billion is reserved for long-term investors; the limit is fully utilised.

To encourage longer-term investments, long-term investors are now permitted to reinvest interest coupons in government securities even when the existing limits are fully utilised.

Again, for corporate bonds, a minimum residual maturity of three years will be required as in the case of government securities.

Applications for small finance banks have been received from 72 parties while 41 applications have been received for payments banks.

The external advisory committees — chaired by Usha Thorat for small finance banks and Nachiket Mor for payments banks — will help the central bank.

To say the least, the screening of applications is in very safe hands.

The writer is a Mumbai-based economist

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