The RBI’s present concern about rupee stability and its fight to
bring down inflation deserve full support. The Government, on its part,
needs to boost the confidence in the economy through result-oriented
measures.
August 11, 2013:
The Reserve Bank in its latest
review of monetary policy decided to keep the repo rate, reverse repo
rate and CRR unchanged at 7.25 per cent, 6.25 per cent and 4 per cent,
respectively. The other changes introduced on a temporary basis on July
15 to contain rupee volatility were also retained.
Also, the current macroeconomic indicators do not give it room to ease its monetary policy stance.
The
RBI is in a Catch-22 situation. It is compelled to maintain the
internal and external value of the rupee at any cost, which is becoming
difficult in the background of lack of growth, increasing deficits
(fiscal as well as current account), declining investor confidence, and
falling savings trend.
Also, there is no quick-fix
to bring down the persisting high retail inflation caused by rupee
depreciation. Inflationary expectations are also high because of the
increasing fiscal deficit and the political agenda to implement the food
security bill.
Banks are feeling the heat of
liquidity constraints. Finding it difficult to raise resources from the
Reserve Bank, they are forced to raise interest rates to get deposits.
But they don’t have an adequate market to deploy them profitably, and
recovery of loans is becoming increasingly difficult.
At
this juncture, banks cannot think of reducing the rate on advances. The
chances are that they may have to eventually raise it.
Now,
what is the FSDC (Financial Stability Development Council) doing? Its
very creation undermines RBI’s supremacy over the financial system. And,
an element of uncertainty has crept into the equity, bond and forex
markets as well.
The quarterly results of companies,
except perhaps of those in the IT and pharmaceutical sectors, are not
impressive and investors’ confidence in the equity market is on the
wane.
The debt market has also been showing symptoms
of weakness. The forex market continues to be volatile despite the
RBI’s specific measures to contain the rupee fall, which has again
breached the Rs 61/$ mark.
Speculation in the
currency market seems to have affected the sentiments of both importers
and exporters alike, choking the growth in trade, which, in turn, has a
negative impact on production, inflation and GDP growth.
Of
late, the bullion market has also been fluctuating with an upward bias,
indicating more confidence of investors/savers in gold than in any
other asset
The external market also does not offer
any solace, as raising funds overseas is not exactly cheap but also
risky in the context of the unstable rupee. The scope for NRI/sovereign
bonds is limited as the funds may not come cheap in the background of
weak macroeconomic factors.
The only way to raise
inflows is to enhance NRI deposits, by offering additional interest and
incentives through CRR relaxations. The prospects of attracting debt
inflow look bleak.
This is the time for the FSDC to
come to the rescue of the entire financial system, by focussing on the
positives of the domestic segment of the economy.
EASE TAXES
One
way to to pull the economy out of its present condition is to ease some
tax rates and, thereby, attract both savings and investment.
The
tax on fixed deposits needs to be completely eliminated to compensate
the investors against inflation and, at the same time, prevent them from
parking their funds in real estate and gold.
The savings potential needs to be fully tapped to bridge the gap between savings and investment.
The
costs, if any, incurred in this regard are worth the salt.
Simultaneously, the administrative hurdles inhibiting production and
supply, particularly of food products, need to be identified and removed
as fast as possible to bring down retail inflation.
The need of the hour is to boost the confidence in the economy and any attempt to raise revenue now will only boomerang.
The
RBI’s present concern on rupee stability and its fight to bring down
inflation deserve full support from all segments of the economy and, for
this, the confidence level in the economy needs a boost through
result-oriented measures from the Government.
Dr.T.V.Gopalakrishnan
(The author is a Bangalore-based financial consultant.)
(This article was published on August 11, 2013)
1 comment:
There would appear to be too few options at the moment. But there would appear to be a consensual approach among the policy arms as to where they would like to drive the economy: poor to live on subsides and election pay-off comforts; middle income group to fight for their rights and existence; and the rich to become richer. I am reminded of this quote: "“Banking was conceived in inequity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be happier and better world to live in. But if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money.” (Sir Josiah Stamp, Director, Bank of England in 1920s and reputed to be the second wealthiest man of England at that time). Cited online October 30, 2006, the moneymasters.com)
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