<p>The measures proposed in the RBI’s monetary policy are hardly intelligible to the lay people for whose benefit they are supposed to work. But they have every right to understand them. After all the patient should know what medicine is being given to her/him. Unless the jargon is understood it would be difficult to judge the efficacy of the twin goals -- arresting inflation and accelerating growth -- announced in the recent review of the monetary policy for this year.<br /><br /></p>.<p> The goals in fact sound good to the lay mind. ‘Growth’, they think, will improve their economic wellbeing through increased incomes and employment opportunities. And ‘inflation’ reduction would mean to them the low prices of the goods they buy; no more tears in the eyes with high onion prices. But in reality, the fruits of growth may not reach them and inflation reduction may not mean low prices of goods they buy.<br /><br />But how does the RBI want to achieve these goals anyway? It believes that it has some weapons in its armory. In particular, the names of the weapons it used in the Q2 were: marginal standing facility (MSF) rate (reduced by 25 basis points from 9.0 per cent to 8.75 per cent); repo rate (raised by 25 basis points from 7.5 per cent to 7.75 per cent); reverse repo rate (stands adjusted to 6.75 per cent) and the liquidity through term repos of 7-day and 14-day tenor ( eligibility increased from 0.25 per cent of net demand and time liabilities (NDTL) of the banking system to 0.50 per cent). <br /><br />Now the meaning of these tools. MSF is a facility available to banks under which they can borrow just for one day; three days if the borrowing is on Friday because next two are holidays. Repo rate simply means the rate at which the RBI lends money to the commercial banks and the reverse repo is the rate at which RBI borrows from the commercial banks. Term repos are for fixed term of 7 and 14 days. <br /><br />It can be now understood that the RBI did some tinkering with these tools to make the banks’ borrowing from RBI costly except for the overnight adjustments and enhanced the funds availability for short term – 7 and 14 days. This is nothing but RBI’s routine help to banks in their manoeuvers of cash management during short term.<br /><br />It is, therefore, simply misleading to say that the measures will ensure more funds to banks to expand their credit. But the banks have no funds paucity nor are they likely to expand credit with the so called fresh injection through RBI’s measures. The scheduled commercial banks (operating with their 1,06,389 branches/offices) have a huge deposit base: Rs 70,60,182 crore by June 2013. <br /><br />Extra funds<br /><br />They have the capacity without extra funds to lend much more than the present level of Rs 54,02,849 crore. But they are not doing that because they are not willing not because they do not have funds. If they had any such scarcity they would not have invested hugely in the shares and securities much more than statutorily required (the statutory liquidity ratio at present is 23 per cent of the banks demand and time liabilities). The Investment deposit ratio of banks has been hovering around 30 per cent during the past several years. <br /><br />As per RBI’s compilation banks were holding as high as Rs 3,27,000 crore in their non SLR investments. So, there is no rationale in the RBI seeking to expand the short term liquidity and expect more loans to the people, particularly to the farming community and to the micro, small and medium enterprise (MSME) sector.<br /><br /> Big farmers and big industries get major chunk of bank credit. More of the credit is deployed in urban and metro areas than in the semi urban and rural areas. It may look logical that the resources (that is deposits) flow is poor from rural area and therefore low credit deployment there. But that is wrong. The rural areas get back as credit only 68.18 per cent of the deposits they provide. This is less than the overall credit-deposit (CD) ratio of 76.5 per cent. <br /><br />The semi urban CD ratio is also a low at 55.67 per cent where as those of the urban and metro CD ratios are 81.41 and 90.57 respectively. That means urban and metro areas are garnering maximum out of their deposit contribution compared to the rural and semi urban areas. <br /><br />So the RBI’s credit policy can neither expand credit to the needy nor can contribute for growth of the economy, let alone the inclusive growth in which poor are the beneficiaries of the growth. <br /><br />It can’t make a dent in inflation either. Inflation and related things are another type of esoteric concepts which may not reflect the price situation – particularly of the prices of goods and services ordinary people buy. The space in this article constrains the explanation of that gimmickry; but one thing is sure that this credit policy cannot contain the prices of onions and the like. This may be simply because the poor are not at the heart of the policies. May be monetary policy cannot address these ‘small things’ for it but very crucial for the lives the poor. The overall shift in the policy orientation of the government including that of the RBI would alone address the real issues. The question is will the powers that be ever do that? <br /></p>
<p>The measures proposed in the RBI’s monetary policy are hardly intelligible to the lay people for whose benefit they are supposed to work. But they have every right to understand them. After all the patient should know what medicine is being given to her/him. Unless the jargon is understood it would be difficult to judge the efficacy of the twin goals -- arresting inflation and accelerating growth -- announced in the recent review of the monetary policy for this year.<br /><br /></p>.<p> The goals in fact sound good to the lay mind. ‘Growth’, they think, will improve their economic wellbeing through increased incomes and employment opportunities. And ‘inflation’ reduction would mean to them the low prices of the goods they buy; no more tears in the eyes with high onion prices. But in reality, the fruits of growth may not reach them and inflation reduction may not mean low prices of goods they buy.<br /><br />But how does the RBI want to achieve these goals anyway? It believes that it has some weapons in its armory. In particular, the names of the weapons it used in the Q2 were: marginal standing facility (MSF) rate (reduced by 25 basis points from 9.0 per cent to 8.75 per cent); repo rate (raised by 25 basis points from 7.5 per cent to 7.75 per cent); reverse repo rate (stands adjusted to 6.75 per cent) and the liquidity through term repos of 7-day and 14-day tenor ( eligibility increased from 0.25 per cent of net demand and time liabilities (NDTL) of the banking system to 0.50 per cent). <br /><br />Now the meaning of these tools. MSF is a facility available to banks under which they can borrow just for one day; three days if the borrowing is on Friday because next two are holidays. Repo rate simply means the rate at which the RBI lends money to the commercial banks and the reverse repo is the rate at which RBI borrows from the commercial banks. Term repos are for fixed term of 7 and 14 days. <br /><br />It can be now understood that the RBI did some tinkering with these tools to make the banks’ borrowing from RBI costly except for the overnight adjustments and enhanced the funds availability for short term – 7 and 14 days. This is nothing but RBI’s routine help to banks in their manoeuvers of cash management during short term.<br /><br />It is, therefore, simply misleading to say that the measures will ensure more funds to banks to expand their credit. But the banks have no funds paucity nor are they likely to expand credit with the so called fresh injection through RBI’s measures. The scheduled commercial banks (operating with their 1,06,389 branches/offices) have a huge deposit base: Rs 70,60,182 crore by June 2013. <br /><br />Extra funds<br /><br />They have the capacity without extra funds to lend much more than the present level of Rs 54,02,849 crore. But they are not doing that because they are not willing not because they do not have funds. If they had any such scarcity they would not have invested hugely in the shares and securities much more than statutorily required (the statutory liquidity ratio at present is 23 per cent of the banks demand and time liabilities). The Investment deposit ratio of banks has been hovering around 30 per cent during the past several years. <br /><br />As per RBI’s compilation banks were holding as high as Rs 3,27,000 crore in their non SLR investments. So, there is no rationale in the RBI seeking to expand the short term liquidity and expect more loans to the people, particularly to the farming community and to the micro, small and medium enterprise (MSME) sector.<br /><br /> Big farmers and big industries get major chunk of bank credit. More of the credit is deployed in urban and metro areas than in the semi urban and rural areas. It may look logical that the resources (that is deposits) flow is poor from rural area and therefore low credit deployment there. But that is wrong. The rural areas get back as credit only 68.18 per cent of the deposits they provide. This is less than the overall credit-deposit (CD) ratio of 76.5 per cent. <br /><br />The semi urban CD ratio is also a low at 55.67 per cent where as those of the urban and metro CD ratios are 81.41 and 90.57 respectively. That means urban and metro areas are garnering maximum out of their deposit contribution compared to the rural and semi urban areas. <br /><br />So the RBI’s credit policy can neither expand credit to the needy nor can contribute for growth of the economy, let alone the inclusive growth in which poor are the beneficiaries of the growth. <br /><br />It can’t make a dent in inflation either. Inflation and related things are another type of esoteric concepts which may not reflect the price situation – particularly of the prices of goods and services ordinary people buy. The space in this article constrains the explanation of that gimmickry; but one thing is sure that this credit policy cannot contain the prices of onions and the like. This may be simply because the poor are not at the heart of the policies. May be monetary policy cannot address these ‘small things’ for it but very crucial for the lives the poor. The overall shift in the policy orientation of the government including that of the RBI would alone address the real issues. The question is will the powers that be ever do that? <br /></p>
