The ball is in other people’s courts!

A SESHAN | Updated on January 19, 2018

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Preserving the status quo is the best thing the RBI could have done in times of financial uncertainty

The sixth bimonthly monetary policy statement of the Reserve Bank of India maintains the status quo. There are no changes in the repo, reverse repo, or marginal standing facility rates, or in the cash reserve ratio.

In the policy statements of recent periods, the statutory liquidity ratio has not been mentioned by the bank although the reader understands from the context that there is no change therein. One gets the feeling that in the current circumstances, the RBI has done its best with its ongoing policies and there is not much it can do further on inflation and growth.

Does this indicate a feeling of helplessness? The RBI cannot be blamed for this. It is perhaps true of many other central banks in the world as well. The formulation of the review has been handicapped in the absence of the Budget for the next fiscal year.

So any further space for policy action will depend on what the government does in relation to its financial performance and the action of banks in dealing with the rising problem of loans overdue for repayment. I confine my observations to the analytical part of the statement as I feel the RBI has done the right thing in not making any changes in its policy.

The assessment of trends in the economy in the domestic and external sectors is useful in understanding the rationale for the RBI’s policy decision to stand still. In the past, the central bank used to issue a detailed quarterly review of developments in the economy along with the policy review for the period. Now, of course, it is a bimonthly policy review.

Can it not still provide details for the trends in important variables such as growth in deposits/credit and money supply?

Updating the Bulletin

In the very distant past, the Bulletin used to carry a monthly review of financial markets: it was not of much use because of the inordinate delay in bringing out the issues. At one stage it was six months! The monthly review itself was one of the built-in causes of the delay.

When I was editor, it was decided at a meeting headed by the then deputy governor in charge of the department of economic analysis and policy to drop the monthly financial review and replace it with a quarterly review brought out without delay.

Due to many other steps taken within a few months the Bulletin appeared without any time-lag, the issue for a month being published in the course of the same month.

This healthy practice of timely publication continues thanks to the editorial staff following the system set up then.

The quarterly reviews were of great interest to domestic and international institutions. But, for no reason, once this writer retired, they were discontinued along with other popular features such as the summaries of important committee reports, news and notes, and so on.

In fact the entire Bulletin content, as proposed by the editor, was discussed with the deputy governor, and was approved by him. One does not know whether his consent was obtained for dropping the features. Quite likely not!

It is time that from the next review onwards the RBI resumes the practice of presenting a summary of developments in major economic and financial variables in the two-month period.

The external sector

Another area not touched upon adequately in the latest review is the external sector. The rupee has undergone depreciation over a period of time.

Of course, the RBI has stated more than once that its objective is to deal with the volatility in the market and not aim at any specific rate, which, in the nature of things, is difficult to determine. While it may not give any indication for what it will do in future, certainly it can reveal what it has done in the past to deal with volatility, such as its interventions in the market. Such data are now available in the Bulletin, but with a time-lag.

While the RBI has got over its excessive adherence to the concept of confidentiality, there are still some remnants that remain. In the distant past, data on the level of forex reserves were not available in the RBI’s publications although they were published in the monthly International Financial Statistics of the International Monetary Fund. I learnt that the reason was that it might lead to speculation against the rupee.

Thanks to the support I got from the top management I could introduce a table on forex reserves on a weekly basis in the weekly statistical supplement to the RBI Bulletin with no adverse effect on market operations.

Liquidity shortage

The central bank could have said something on the implications of the negative interest rate announced by the Bank of Japan. Will it give a fillip to the yen carry trade?

The RBI says that its liquidity operations in the market are designed to ensure that the call money rates are close to the policy rates and it will continue to be accommodative even if rates are left unchanged.

Is it a good policy to adhere to irrespective of the causes of shortage? Liquidity shortage may arise due to speculative demand in commodity, currency and asset markets. The governor of the Bank of England once said that there are occasions when the central bank follows the market instead of it being always the other way round.

If the hardening of rates is due to excess demand for liquidity that has no bearing on production and investment activities in the economy, the central bank should investigate the matter and decide on whether the higher rates are justified in the interests of the economy.

The writer is a Mumbai-based economic consultant

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Published on February 02, 2016
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