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THE HAWK-SONG OF RBI

Reserve Bank of India has come out with the first quarter review of its Annual Policy 2008-09 on July 29th, 2008.
The important measures undertaken by RBI are as follows:
1. Increase of RBI’s LAF-Repo rate by 50 basis points to 9.00 per cent with immediate effect
2. Increase of Cash Reserve Ratio (CRR) by 25 basis points to 9.00 per cent with effect from August 30th, 2008
3. Liquidity window offered to PSU oil companies to borrow foreign exchange for import of oil is discontinued

RBI’s MEASURE / RBI’s RATIONALE MARKET’s INFERENCE


ASSERTION
LAF-Repo Rate Stern measures are required to Its previous measures since October 2004 have failed to
increased by 50 bp to rein in inflation which is at a 13-
control inflation. To obfuscate the failure of RBI on
9.00% year high. To maintain price monetary side and the Govt’s failure on supply side, now
stability, interest rates have to be
they have taken much harsher measures. So that common
increased. man will be lulled into thinking that they are doing
whatever they can to lessen the impact of higher prices.
CRR increased by 25 Inflation can be controlled only We believe in the philosophy of Milton Friedman, who
bp to 9.00% with the help of active liquidity said, “Inflation is a monetary phenomenon always and
management and the CRR hike everywhere.” We want the world to believe that money
is pre-emptive. supply alone is responsible for inflation, though empirical
evidence suggests that there is no direct link between the
money supply growth and inflation. Former RBI Governor,
S.Venkitaramanan states that liquidity has come down to
Rs 1,45,200 crore (LAF+MSS+Central Govt’s cash
balances with RBI) on 25.7.08 from Rs 2,42,370 crore in
April 2008; but strangely RBI says there is monetary
expansion in the banking system!

LAF-Reverse Repo The gap between repo and We admit our inability to manage liquidity in the system in
kept unchanged at reverse repo has widened and a narrower band. One day, we say we don’t want ECBs,
6.00% the widening gap reflects and another day we say we welcome ECBs. It’s a flip-flop
growing uncertainties. policy.
RBI’s MEASURE / RBI’s RATIONALE MARKET’s INFERENCE
ASSERTION
Managing inflation in Fiscal deficit is growing because Tax payers have to be punished for our fiscal profligacy
an environment when of various bonds-oil, fertilizer, extended to the rich and non-tax paying agriculturists.
fiscal pressures are food, etc. And there is the Moreover, we have to compensate civil servants with
growing is challenging burden of high salaries as per higher salaries so that they ensure our success in the next
the Sixth Pay Commission. elections. Every deal comes with a price!
Non-food credit growth Non-food credit growth is at 25.9 In January and February 2008, North Block has gone on
is much higher than per cent. We want to bring it record saying that banks should hold their lending rates.
the deposit growth down to a more manageable Now, we have failed on the inflation front, banks have to
level of 20 per cent. be made scapegoats. As they say, banks are sandwiched
between the devil and the deep sea.
Growth rate for 2008- There is a need to moderate We’re comfortable only with the Hindu rate of growth. We
09 will be around 8% growth rate in view of the high confess that we have failed to manage high growth rates.
inflationary pressures. Our previous talk of double-digit growth is just hogwash.
We emphasize credit Some banks have expanded If NPAs rise as a result of the high lending rates, we are
quality their credit portfolio much higher not responsible for them. In future, we can not assure you
than the industry growth rate of any loan waivers or such measures to bail out
which may pressurize the quality delinquent banks. There’ll be no more debt restructuring.
of their loans. We’re not to be faulted if any banks go belly up!
Our savings and Our savings ratio is among the With inflation at 12 per cent and bank deposit rates at 10
investments are at highest in the world. It will take per cent, it’s better to spend rather than save. People
comfortable levels care of the growth rate. would be better off spending their money now rather than
save and spend after a year.
The policy is pre- RBI is forward-looking and sets “Yes, on the verge of retirement, I am looking for a
emptive policies for a secure future. sinecure post.” We are living in a mutual back-scratching
society. This is a nice arrangement between the Mint
Street and the North Block.
Policy ‘leaked’ much The leak was caused by an We need some escape routes to justify our inactions. This
before the 12.00 noon outsourced web-manager. is a fine way of ‘outsourcing’ our responsibilities!
timeline on 29.7.08

*vrk/30.07.2008