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EDITOR
By Namit Varma
The principle cost of flawed monetary policy in the recent past has
been that growth has slowed down and unemployment has increased.
The government's 3 month lag in putting together statistics will reveal
this in January 2008, but workers made redundant in the agriculture,
textile, handicraft and BPO sectors, already knows as much.
Growth has been curtailed by a flawed monetary policy which has seen
interest rates soar despite global financial capital begging for
deployment in the Indian economy. The paradox is that there is a
surfeit of money but it has become too expensive. High lending rates
of banks are driving small entrepreneurs away from new ventures.
Caps and ceilings on external commercial borrowings (ECBs) motivated
by flawed policy or blatantly antinational designs, is forcing big
business to forego expansions and new ventures. In short the
government has done everything in its power to turn around India's
growth story into recession misery. What can be the motivation behind
this?
How did this come to pass despite the stringent safeguards in our
system of government? Fraud, deception, violation of statutory
provisions: in short, the Market Stabilisation Scheme (MSS): whereby
the RBI violated the Reserve Bank of India Act 1934, which does not
allow RBI to accept interest bearing deposits from Banks or to indulge
in any form of speculative activity.
Governor Reddy and his colleagues have been pretending that the
Memorandum of Understanding (MoU) that they signed with the
Government of India on 25 March 2004, authorizes them to flout the
provisions of the RBI Act 1934. Since the government of India itself
cannot overrule the Act without following due constitutional.
Amendment process, the MoU is nothing more than evidence of
wrongdoing and intent to subvert constitutional safeguards.
The problem is that RBI has been hijacking investment into the MSS
account. Under these circumstances, the economist triumvirate can be
absolved of guilt only if they admit to never having realised that
Ambassador Mulford was leading, nay ordering, them up the garden
path; but then, there will be competence issues.
Namit Verma
23 December, 2007
The primary misdemeanors which are the defining features of the MSS
Bond Scam are (i) violations of the RBI Act 1934 by the present
Governor RBI and the Central Government under the tutelage of
American Ambassador David Campbell Mulford, (ii) fraudulent transfer
of precious Indian resources to the United States of America, (iii) covert
funding of the US Occupation of Iraq, and (iv) conspiracy with foreign
governments, banks and financial institutions, to damage the
economic security of India and to steal our resources.
The MSS facility flagrantly violates the Reserve Bank of India Act 1934,
but was launched because RBI felt that "a deposit facility becomes
essential to afford more flexibility to RBI in using the repo facility as a
signaling device while not sacrificing the objective of the provision of a
floor to the movement of short-term interest rates."
The RBI Working Group report of 2 December 2003 had admitted that
"the Group explored the feasibility of instituting a standing deposit
facility. However the Reserve Bank of India Act. 1934 in its present
form does not permit RBI to borrow on clean basis from banks and pay
interest thereon." With a view to dissuade adventurers, who were
willing to violate the RBI Act at the behest of the foreign banks, the
Working Group included the transparently clear reminder, "therefore,
institution of such a deposit facility distinct from CRR for banks would
necessitate a suitable amendment to the RBI Act."
Such a far reaching policy decision should have been brought to the
attention of parliament at the first available opportunity: this would
have been in keeping with the sentiments expressed by Finance
Minister Palaniappan Chidambaram when he wound up his Budget
speech on July 8, 2004, by quoting the great sage Tirvalluvar, "Aran
Izhukkathu Allavai Neeki Maran Izhukka, Maanam Udayathu Arasu."
(They are good rulers who observe ethics, commit no crime and walk
the path of honor and courage.)
Instead, Finance Minister chose to leave the MSS issue out of his
Budget Speech, and to merely include it in the section on Receipts
Budget 2004 - 2005 under the head Debt Position of the Government
of India, with the vague explanation, "Government of India has
launched Market Stabilization Scheme (MSS), in consultation with
Reserve Bank of India, since April 2004. The scheme envisages issue of
treasury bills and/or dated securities to absorb excess liquidity, arising
from significant foreign exchange inflows."
While the investible resources represent cash flows which will have to
be compensated at some date in the future, the American government
also got veritable donation / subsidy of tens of thousands of crores
from the government of India. How and why did this happen?
When the Reserve Bank mopped up the investible funds flowing into
India, it was forced to pay compensatory interest / yield of at least as
much as the global investor was assured of earning through
investments in the free Indian economy: effective yield on the
compensating MSS Bond was between 7.5 and 8.25%
The credit squeeze and increasing interest rates resulting from RBI's
MSS Bond based credit mopping/sterilization and unwarranted market
stabilization, has imposed a virtual ban on domestic investment in the
world's most attractive investment destination, India.
The fallout of this is, that our growing market is no longer available to
fuel our economic growth; instead, growing Indian demand without
commensurate growth in investment and production in the economy, is
unleashing the new problem of increasing indebtedness and loan
defaults in the economy. Credit Card and Equated Monthly Installment
(EMI) based consumers unprepared for the sudden spurts of interest
rates to over 40% per annum on card based credit are trapped: unable
to repay dues, they suddenly find themselves in a debt trap. Worse, as
the conspiratorial anti-national monetary policy of the government
unleashes sterilization and recession, cash flow tapers off, forcing debt-
ridden borrowers to offload property or default. In the event of a
default, once again, it is the aggressively lending foreign banks which
will collect, thanks to the securitization act.