Thursday, September 19, 2013

RBI - Mid-Quarter Monetary Policy Review: September 2013 - AN ASSESSMENT

Mid-Quarter Monetary Policy Review: September 2013

Monetary and Liquidity Measures

A Summary of the RBI”s Monetary Policy Review  dated 20-sep-2013 is here.

On the basis of an assessment of the current and evolving macroeconomic situation, RBI has decided to:

      reduce the marginal standing facility (MSF) rate by 75 basis points from 10.25 per cent to 9.5 per cent with immediate effect;

      reduce the minimum daily maintenance of the cash reserve ratio (CRR) from 99 per cent of the requirement to 95 per cent effective from the fortnight beginning September 21, 2013, while keeping the CRR unchanged at 4.0 per cent; and  

      increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.25 per cent to 7.5 per cent with immediate effect. 

Consequently, the reverse repo rate under the LAF stands adjusted to 6.5 per cent and the Bank Rate stands reduced to 9.5 per cent with immediate effect. With these changes, the MSF rate and the Bank Rate are recalibrated to 200 basis points above the repo rate.


The RBI’s raising of the  Policy Repo Rate to 7.5%  is the only thing that is a dampener – in this monetary Policy review. This Blog has always maintained that the inflation in India is basically Food Inflation  - which is not in any way affected by the Policy repo rates. Controlling the food inflation basically depends on the supply side measures and administrative measures from the Central and State Governments. While Onion Prices were going through the roof, the Central Ministries were still toying with Onion export, which was bound to exacerbate the Inflationary pressure. There is absolutely no motivation in these Ministries to address food Inflation on a war footing. The only Ministry which seems to be consciously acting, within its limited jurisdiction, against Inflation, is the Finance Ministry under Mr. Chidambaram.

So, what should have been done – and what should now be done by these Ministries concerned with food Inflation?

Given that there is Huge , unjustified Profiteering which is taking place  in the market – one suspects that some Individuals / companies are behind this profiteering – and Government has no motivation to stop this undue profiteering. My strong sense is – there is need to clamp down on this Excessive profiteering in these essential commodities. Probably, Governments (State and Centre) must fix an upper ceiling for the sale price, of not more than Rs.35-40 for onions. This is an example and this principle can be extended to other essential commodities.

Secondly, why is the Government sitting over huge reserves of pulses, to the extent of the pulses rotting and becoming inconsumable finally. It is not wise to wait for the food security Bill for this purpose. The food Inflation right now is too High and there is an immediate need to release the existing stocks with the Government into the Market and bring down the inflationary pressures in the Market. It must be understood that – Food Inflation is the one factor, which directly results in and aggravates Human suffering.

There is also a great need to go in strongly against hoarders. There is also a strong need to suspend all speculation in these essential food grains and food articles immediately – till the inflation comes down to tolerable levels.

The Union food, agri and commerce Ministries must have initiated such supply side and administrative measures – in combination with state Ministries. But, all that we see in the Media is the centre and states blaming each other – instead of coming together for such re-active measures at least, if not pro-active measures.

Good Governance must be Pro-active in such matters. RBI’s measures cannot address FOOD INFLATION which is the main component of present inflation. And, Government only must address it. And, that must come urgently.

There is an Old story. When the thief entered the house, the Dog and the Donkey both saw him. Dog wasn’t barking. Donkey asked him – why are you not barking. Dog replied that it has not happy with the master’s treatment. So, it will not bark. Let the thief steal. Let the master suffer. But, the faithful donkey raised its voice loudly, to alert the Master. But, the master thought, it was disturbing him in the midnight and beat him black and blue. The Dog’s barking would have sent right message. The donkey’s howling set the wrong message – and even as the master was beating the donkey, the thief stole the ornaments and left happily.

The Government is not acting sufficiently – even though, its actions only will bring down Food Inflation, which is the main component of inflation. The RBI is acting – and it acted for over 2 years now – with no effect on food inflation whatsoever – and the Master, the Public, is any way suffering with increasing food Inflation on one side and High interest rates on all sorts of loans etc, on another. Let no one take offence on the allegory of the story – which is just an ancient well known story. The only intent is that Food Inflation must be acted upon by the central and state Governments swiftly.

This is the problem today.

The Market’s reaction – is less reasonable. The Bank stocks have come down. Banks are not going to suffer a wee bit on account of this Monetary Policy. They will maintain their profit margins any way. Also, there is some more liquidity and other easing measures favouring Banks functioning and profits. These must be welcome for the Market. 

But, RBI must be bringing down the Repo rates now – despite the food Inflation. At least, it must calibrate Bank lending rates for specific sectors like Auto, realty and Infra sectors – especially loans for Buyers of autos and houses – which will support growth.

RBI and Government also have another urgent duty. They must together examine the huge rise in the NPAs of public se4ctor Banks and see what really is affecting the performance of the borrowing sectors. Not giving further loans is not the solution. But, ensuring the health of these industries is the solution.

One area of NPAs is Educational Loans. This can easily be solved. Government must make rules – making it obligatory on all employers of these students availing the Educational loans – to deduct the monthly repayment from the salaries ( like they do for a tax deduction ) and remit it to the Bank. Making the giving of Educational loan mandatory is one thing. Making the repayment mandatory is also a part of the deal. This will make it a healthy practice for both sides.

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