by Ashok Handoo*
By not reducing any of the key rates in its third-quarter review of the monetary policy, the Reserve Bank has sent a clear signal to commercial banks that they need to reduce their lending rates and make cheaper credit available to the customers. RBI is clearly of the view that banks have yet to pass on the benefits of the previous cuts in interest rates announced by it. Obviously, the Reserve Bank is not happy with the response of the banks, particularly private and foreign banks, to the initiatives taken by it so far. It feels there is enough scope for banks to do more.
As it is, the Reserve Bank in a space of just one quarter brought down the repo rate (the rate at which RBI lends overnight funds to banks) from 9 to 5.5 percent. The reverse repot rate (the rate at which RBI accepts deposits from banks) was brought down to 4 percent, what the RBI Governor Dr. D. Subbarao described as “historically lowest level”. But as he pointed out it’s “transmission in the credit market has so far been subdued”. RBI firmly believes that it’s policy easing had allowed banks considerable room to respond more actively which has not happened. It has thus adopted a wait and watch policy for the time being, to monitor the response from the banks and give them more time.
The bankers, on the other hand, feel that they have responded to the extent possible. They argue that the average cost of funds to them is still high and lending and borrowing rates can come down only when the fund costs come down. Some even expressed disappointment at the RBI “holding back it’s activism” in reducing the key rates to make cheaper funds available to them. But by and large, bankers agree that the RBI policy is on expected lines.
Through its earlier initiatives the RBI has infused liquidity of over Rs. 4 lakh crore into the system improving the liquidity situation, significantly.
It is not that the doors for further reduction in key rates have been closed. On the contrary, the RBI has made it clear that it will respond to any adverse development. So, more cuts outside the policy can happen anytime. The current pause could only be a temporary thing.
Another message that the RBI has given is that there is a clear evidence of deeper consequences of the global downturn on the Indian economy which can lead to its further slowdown. Industrial activity, particularly in the manufacturing and the infrastructural sectors, is decelerating. The services sector too, which has been the prime engine of growth for the last several years, will slowdown mainly in construction, transport, hotels, tourism and trade sectors. . The consequences have been more pronounced after October 2008 which has led the RBI to revise its GDP growth projection for the current financial year to 7 percent against the earlier 7.7 percent. In fact the Survey conducted by the 13 professional forecasters has put it at 6.8 percent.
That is all the more reason for the banks to respond more vigorously to the rate cuts already effected.
At the same time , there are two positive factors at play. One, the inflation rate has been falling sharply for the last 10 months to 5.6 % with only a small aberration in the latest figure which is attributed to the Truckers strike during that period. The current projections are that the rate will fall further to about 3 percent by March end, though it is reflected more in the Wholesale Price Index (WPI) than in the Consumer Price Index (CPI).That is primarily because of the fall in international crude oil prices, steel and select food items. A fall in demand has also played some role in this.
The second positive factor is the expected increase in consumption demand in the days ahead, reflecting rise in basic exemption limits in tax and tax slabs, the 6th pay commission award, debt waiver to farmers, and the expenditure that would be incurred in the run up to elections in a few months from now.
All this will allow an elbow room to the government to cut the key rates further, if the situation so demands.
The RBI has also warned that the fiscal measures to boost growth and lower revenue receipts could sharply widen the fiscal deficit from the earlier estimate of 2.5 percent to 5.9 % .The combined shortfall of the centre and the state governments could come to 8.5 %, or even more.
As the Prime Minister’s Economic Advisory Council pointed out the other day, both the saving and investment rates are likely to be lower in the current fiscal. The saving rates may fall due to larger negative savings of the Government. The investment rate will be less by 2.5 percentage points compared to the previous year, due to financing constraints facing Indian enterprises.
The widening trade deficit is a matter of concern as is the moderation in capital inflows. Though the Foreign Direct Investment (FDI) has shown an increase in the current financial year the portfolio investment has recorded a substantial outflow. The institutional investors have sold about $10 billion of their investment in Indian companies to cover losses in their home markets.
With Indian economy getting more and more integrated with the world economy and the US, Europe and Japan already experiencing recession, India can not remain totally insulated. A less than optimistic sentiment in the economy is therefore quite natural. As the Prime Minster pointed out India’s economic problems would not be over in the current year and could spill over into 2009-10, but the “Government will continue its efforts for a supporting environment next year also. Both monetary and fiscal policy will have to be tailored.” The Deputy Charmin of the Planning Commission Shri Montek Singh Ahluwalia has also spoken of innovative interim measures. These include floating of tax- free bonds ‘to provide refinancing facilities to banks to encourage them to offer long term debts” to companies investing in infrastructure sectors which have long gestation periods.
It is a matter of satisfaction that everybody agrees that the Indian economy will recover earlier than the world economy, once things begin to improve. (PIB Features)
*Disclaimer : The views expressed by the author in this feature are entirely his own and do not necessarily reflect the views of PIB.
Showing posts with label Financial Crisis. Show all posts
Showing posts with label Financial Crisis. Show all posts
Saturday, January 31, 2009
Monday, October 13, 2008
Banish Fear, says Indian FM
NEW DELHI, October 13, 2008: Indian Finance Minister P. Chidambaram today declared that “we must banish fear”.
Making a statement on the ongoing crisis in the financial markets, Mr Chidambaram said: We must remain confident and respond to the situation in a cool and mature manner. We must banish fear. Especially, depositors have nothing to fear because their deposits in banks are safe.”
He said: “Investors must take informed decisions. Before you sell, you must remember that for every seller there is a buyer. You must ask yourself why the buyer is buying in these times of perceived uncertainty and, therefore, ask yourself the further question whether there is a need to act in haste or in panic. In my view, there is no reason at all to act in haste or to give room for panic.”
“If all the players in the economy remain confident and take informed decisions, I have no doubt that the Indian economy will weather the current storm and emerge stronger.,” he said.
Pointing out that “this is a time of uncertainty,” he said: “Yet, even in a time of uncertainty there are some facts that cannot be – and ought not to be – ignored.”
The Indian economy continues to grow at a satisfactory rate. As recently as last week, the IMF’s research department (Mr. Oliver Blanchard) noted that “the Indian economy would continue to do well despite the impact of the global liquidity crunch.” As per projections made by the IMF, India is expected to post a GDP growth of 7.9 per cent during the current fiscal year.
The stock market indices are important indicators, but they are not the only indicators of the health of the Indian economy. The ratio of investment to GDP remains high at over 35 per cent at the end of the first quarter of 2008-09. The monsoon has been normal; the Kharif crop (especially rice and cotton) has been good; farmers are sowing their fields; and the prospects for the Rabi crop are bright. Factories continue to produce goods and the services sector is growing at a brisk rate, he said.
“Crude oil and commodity prices have declined sharply. This is expected to have a beneficial effect on inflation.
“The root cause of the present uncertainty is liquidity and not any dramatic change in the fundamentals of the economy. According to RBI figures, as on 26th September, 2008, non-food credit increased, year-on-year, by 24.8 per cent. Between April and 26th September, non-food credit grew by 7.8 per cent. Time and demand deposits with banks grew, year-on-year, by 18.8 per cent and, between April and 26th September by 7.2 per cent. I am happy that depositors continue to repose their confidence in the health of our banking system.
“Nevertheless, liquidity was found to be inadequate and, consequently, lenders were unwilling to take risks. Some lenders and investors faced redemption pressures leading to a sale of assets, especially stocks. The markets that are bearing the brunt of the problem are the capital market and the money market and, to an extent, the foreign exchange market. These problems can be overcome if adequate liquidity is infused into the system.
“Accordingly, RBI has taken measures that have infused an additional Rs.60,000 crore into the financial system. The LAF also provides liquidity and, as on 10th October, 2008, Rs.91,500 crore had been accessed by banks through the LAF window. We believe that these steps should ease the liquidity situation and the flow of credit should become smoother, relieving the pressures that had built up in the last two weeks.
“Government, RBI and SEBI have been in close consultation with each other during the weekend. I have spoken to the Governor, RBI and Chairman, SEBI several times in the last two days. We are coordinating our actions. We are watching the situation carefully and we will respond swiftly according to the needs of the situation. We are working on more measures that will infuse liquidity, make credit intermediation smoother, and increase the confidence of depositors and investors. We hope to be able to announce them shortly.
“Our banks are ready and willing to provide credit. Suitable advisories are being issued to the banks.
Over the weekend, the US, UK, Euro zone and Australian authorities have announced a number of measures to stabilize the financial system. The Australian capital market and three of the East Asian capital markets have opened on a bright note this morning. I expect that our capital market will also take its cue from these positive developments.”
Making a statement on the ongoing crisis in the financial markets, Mr Chidambaram said: We must remain confident and respond to the situation in a cool and mature manner. We must banish fear. Especially, depositors have nothing to fear because their deposits in banks are safe.”
He said: “Investors must take informed decisions. Before you sell, you must remember that for every seller there is a buyer. You must ask yourself why the buyer is buying in these times of perceived uncertainty and, therefore, ask yourself the further question whether there is a need to act in haste or in panic. In my view, there is no reason at all to act in haste or to give room for panic.”
“If all the players in the economy remain confident and take informed decisions, I have no doubt that the Indian economy will weather the current storm and emerge stronger.,” he said.
Pointing out that “this is a time of uncertainty,” he said: “Yet, even in a time of uncertainty there are some facts that cannot be – and ought not to be – ignored.”
The Indian economy continues to grow at a satisfactory rate. As recently as last week, the IMF’s research department (Mr. Oliver Blanchard) noted that “the Indian economy would continue to do well despite the impact of the global liquidity crunch.” As per projections made by the IMF, India is expected to post a GDP growth of 7.9 per cent during the current fiscal year.
The stock market indices are important indicators, but they are not the only indicators of the health of the Indian economy. The ratio of investment to GDP remains high at over 35 per cent at the end of the first quarter of 2008-09. The monsoon has been normal; the Kharif crop (especially rice and cotton) has been good; farmers are sowing their fields; and the prospects for the Rabi crop are bright. Factories continue to produce goods and the services sector is growing at a brisk rate, he said.
“Crude oil and commodity prices have declined sharply. This is expected to have a beneficial effect on inflation.
“The root cause of the present uncertainty is liquidity and not any dramatic change in the fundamentals of the economy. According to RBI figures, as on 26th September, 2008, non-food credit increased, year-on-year, by 24.8 per cent. Between April and 26th September, non-food credit grew by 7.8 per cent. Time and demand deposits with banks grew, year-on-year, by 18.8 per cent and, between April and 26th September by 7.2 per cent. I am happy that depositors continue to repose their confidence in the health of our banking system.
“Nevertheless, liquidity was found to be inadequate and, consequently, lenders were unwilling to take risks. Some lenders and investors faced redemption pressures leading to a sale of assets, especially stocks. The markets that are bearing the brunt of the problem are the capital market and the money market and, to an extent, the foreign exchange market. These problems can be overcome if adequate liquidity is infused into the system.
“Accordingly, RBI has taken measures that have infused an additional Rs.60,000 crore into the financial system. The LAF also provides liquidity and, as on 10th October, 2008, Rs.91,500 crore had been accessed by banks through the LAF window. We believe that these steps should ease the liquidity situation and the flow of credit should become smoother, relieving the pressures that had built up in the last two weeks.
“Government, RBI and SEBI have been in close consultation with each other during the weekend. I have spoken to the Governor, RBI and Chairman, SEBI several times in the last two days. We are coordinating our actions. We are watching the situation carefully and we will respond swiftly according to the needs of the situation. We are working on more measures that will infuse liquidity, make credit intermediation smoother, and increase the confidence of depositors and investors. We hope to be able to announce them shortly.
“Our banks are ready and willing to provide credit. Suitable advisories are being issued to the banks.
Over the weekend, the US, UK, Euro zone and Australian authorities have announced a number of measures to stabilize the financial system. The Australian capital market and three of the East Asian capital markets have opened on a bright note this morning. I expect that our capital market will also take its cue from these positive developments.”
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