RBI MEASURES - TO ADDRESS RUPEE VOLATILITY -WHAT SBI CHAIRMAN SAYS - WHAT CAN BE DONE,INSTEAD

RESERVE BANK OF INDIA

MEASURES TO ADDRESS EXCHANGE MARKET VOLATILITY

WHAT SBI SAYS

WHAT CAN BE DONE - INSTEAD

As we know, RBI has  announced various  Additional measures to address Exchange Market Volatility on23rd July 2013. The extracts-summary of the same are hereunder :

(1)        The overall limit for access to LAF by each individual bank is set at 0.5 per cent of its own NDTL outstanding as on the last Friday of the second preceding fortnight. This measure will come into effect immediately, i.e., from July 24, 2013 and will remain in force until further notice.

(2)        Currently, banks are allowed to maintain their Cash Reserve Ratio (CRR) prescribed by the RBI on an average daily basis during a reporting fortnight, with a minimum of 70 per cent of the required CRR on a daily basis. Effective from the first day of the next reporting fortnight i.e., from July 27, 2013, banks will be required to maintain a minimum daily CRR balance of 99 per cent of the requirement.

(3)        The total quantum of funds available to a bank under Liquidity Adjustment Facility (LAF) will be capped at 0.5 percent of the individual bank’s Net Demand and Time Liabilities (NDTL). The above changes in LAF will come into effect from July 24, 2013. For the purpose of arriving at an individual bank’s limit, the NDTL would be the same as being reckoned for the purpose of maintenance of CRR during a reporting fortnight. Accordingly, the earlier instructions issued vide RBI circular RBI/2013-14/142/FMD.MOAG.No. 80/01.01.001/2013-14 dated July 16, 2013 regarding cap on overall allocation of funds at Rs. 75,000 crore under LAF stand withdrawn.

(4)        Presently, an additional LAF repo is conducted on reporting Fridays. Under this arrangement, the cap for the individual bank will apply to the combined allocation of funds in the morning and additional LAF repo.

OPINION OF SBI CHAIRMAN :

State Bank of India chairman Pratip Chaudhuri has said the Reserve Bank of India should have used transparent measures to raise interest rates to manage the rupee and should not have choked liquidity for banks.

"Today the repo rate is 7.25, but funds are not available and from (another) window money is available instead at 10.25 per cent. It doesn't help anybody in covering or camouflaging the repo rate. If the repo rate has to be taken to 10.25 per cent, so be it, but do it in a transparent manner," Chaudhuri said.

"To prevent the inflation from going out of hand, please increase the interest rate (but) don't choke liquidity," he said at a Banking Conclave organised by Ficci in Kolkata.

MY COMMENTS :

There is strong logic in what the SBI Chairman has said.

But, while he is only seeking a more transparent measure, I feel, a more focused measure is needed.

It is necessary that RBI has to manage the Rupee volatility against Dollar and other currencies. But, perhaps, it can be done in a more focused manner – concentrating more on all FOREX and FOREX related transactions rather than adversely affecting all sectors of the economy.

In the earlier instance of raising interest Rates to curb Inflation, this BLOG had pointed out that the main components of inflation related to the food and agricultural products – and the impact of raising interest rates is close to NIL on food inflation. 

Food inflation will only respond to additional supplies of food products and not to Bank Interest Rates.

In fact, all agricultural inputs and agri loans must be available at subsidized rates, so that food output can go up thus bringing down the food  articles prices. Any raising of the input costs through interest rates will only adversely affect the food production and only raise food inflation further. This seems to be happening already.

Government, on its part, must have released the stocks available with it, of rice, wheat etc into the market at subsidized rates to tackle the inflation. This should have been done in the last 2 years, during which period, food inflation continued to be very high and RBI was raising Interest rates to curb inflation.  

Secondly, exports of inflation-prone products should have been curbed and imports of products in short supply should have been encouraged. These supply side measures from Government would have added strength to RBI measures in curbing Inflation.

How will Government implement its much touted Food Security Bill, if it is unwilling to take these supply side measures, to improve production and supply in the market?

There must be greater debate and transparency on the modalities for efficient implementation of the Bill for the next 5 years at least - and not for just a few months in this election year. There is no denying that FOOD SECURITY is needed. But, how can it be done without the food and without the money needed to buy it? Government must make it clear where from the food and the money for it will come in the next 5 years.

On the RBI’s part, my feeling is – can it not think of measures, more directly impacting the concerned sectors of economy, rather than straining the whole economy, with its generalized measures.

For instance, if RBI directs Banks to apply enhanced rates of interest for import-based industries (like Gold, for instance) and lower interest rates for export based industries, perhaps, imports will come down and exports will go up, releasing the pressure on the Rupee. Likewise, Industries and companies, under heavy strain should have been exempted from higher Interest Rates. The Heavy taxes by Government and the Heavy Interest Rates on their loans by the Banks - on these Industries under heavy strain – seem to be a case of killing the Goose that lays the Golden Eggs. They must be made to live and limp back to health. Then, they will any way contribute again to the Government and Banks at normal rates.

As of today, the high interest rates are hurting too many Industries. The NPAs of all Banks, especially the large public sector Banks, are rising at a rapid rate, quarter after quarter, and they are covering a wide spectrum of Industries. Government and RBI must investigate the causes for near collapse of so many companies in so many Industries in detail and take measures for ensuring the health of these companies in these Industries.

If Industries collapse at this Rate, where from will higher revenues come for the Government? Some Industries may not have defaulted to Banks, but, their slipping into bad days is clearly visible. Like, for instance, the Auto, and steel Industries. There is continuous fall in demand for Auto Industry products, and therefore, for the steel Industry products too. In a developing economy like India, this should not be occurring at this point of time.

The benefits that may flow to the people from welfare measures like the food security Bill will be wiped out if the NPAs in Banks rise this fast, indicating directly the collapse of so many companies in so many Industries. The people suffering because of the Industries’ collapse may be different from the people benefitting from the Food security Bill – but, overall, the economy will slide down adversely – if we do not address these concerns.

Welfare State and all welfare Measures are Possible- only if the Economy is Growing Fast in all the Agri, manufacturing and service sectors – and not if all of them are shrinking.

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