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Liquidity squeezing: has RBI gone overboard?
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Bikky Khosla | 30 Jul, 2013
Last week, the Reserve Bank of India took more steps to squeeze liquidity in the banking system, and the monetary action, which is perhaps the sharpest taken by the central bank in last 17 years, has created a real hue and cry, inviting criticism from many quarters, including economic pundits, bankers, and industry leaders. As per the new guidelines, fresh restrictions are placed on commercial banks' access to daily borrowing under the liquidity adjustment facility (LAF), and minimum CRR balance was increased to 99% as against 70% earlier. I think this new round of tightening measures has enough potential to hurt the economy in several ways.
Of course, the RBI has its own side of the story to tell, but as regards the effect on the Indian industry -- particularly the small and medium enterprises -- I think the move will have a cascading effect on interest rates. Costs of funds of the commercial banks, particularly that of the small banks that usually use LAF window more frequently will be impacted by the new guidelines, and this will lead to higher interest rates, which in turn will have direct impact on the SME sector, which has long been shouldering the burden of high borrowing costs due to the RBI's past inflation-fighting measures.
In the bond and stock markets, the negative effects are already evident. After the RBI announcement, the Bombay Stock Exchange benchmark index Sensex lost 211.45 points on Wednesday, 285.92 points on Thursday, 56.57 points on Friday, and 154.91 points on Monday. Midcaps and Smallcaps were also hammered, and the National Stock Exchange benchmark Nifty suffered the brunt as well. Similarly, in the bond market yields on government bonds jumped nearly 0.7 percentage point over two days through Wednesday. These immediate after-effects -- although the Rupee has been propped up -- raise question in the minds of many about the wisdom behind the RBI decision.
The central bank's decision could also put our growth forecast at risk. Since RBI started its currency saving measures over the last two months, several global rating agencies have lowered India's GDP growth forecast for the current fiscal -- on July 16, Bank of America Merrill Lynch trimmed it to 5.5% from 5.8% earlier, and the move was followed by three other rating agencies -- global financial services firm Macquarie cut the growth forecast from 6.2% to 5.3%, Deutsche Bank from 6% to 5%, and more recently on Thursday Crisil cut it from 6% to 5.5%. Such developments are, of course, not welcome.
And it's not only about rating -- growth can really be hampered due to the RBI move. No doubt the rupee down-slide needs to be arrested, but at this juncture where we stand today it is equally important to push growth and investment. For a long time our industry has been exhibiting a disappointing performance mainly driven by slack in manufacturing the biggest impediment to which is sharp rise in input costs, including high borrowing costs. So maintaining the right balance is very important, and it's really a great relief -- although not enough to make up for the last week's tightening move -- that the central bank, in its policy review today, left the key rates unchanged.
I invite readers' feedback.
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Liquidity squeezing
Ratan Poddar | Fri Aug 2 05:29:54 2013
Rs is at 60 may go further down.
Economy is slow, sliding downwards.
Bank NPA s are rising.
Extra liquidity may not be necessary at this point. Well some high growth company with overflowing order book may feel a bit pinch.
Rising interest rate can help small investors.
Huge cash in few section of society
Devaraj | Thu Aug 1 05:20:35 2013
Sir, is it not true that, from last five years, In India, trading is more profitable than investment in industry. The reason is because of huge cash in few section of society, who has started manipulating economy either in Real estate sector or in Equity sector or in Gold Trade or in Forex, which is costing poor man's life. For entire story RBI is the Main culprit. Please take look at how each US$ was spent and how difficult it to earn. Whom do you think is buying gold at 3300 per gms and for such people did our hard earned foreign exchange reserve has to be spent.
Interest rate
Ashok Kumar Gupta | Wed Jul 31 06:26:35 2013
These days, everyone talks about interest rates, but nobody talks about increasing saving rate and investment rate. We want low loan interest rates so that home loan and car loan get cheaper, but how many people are in this country who take home loan and car loan. One who buys a flat taking Rs 50 lakh loan wishes that the value of his property appreciates at least at the same rate of bank interest rate; one who buys a car taking car loan wants to consumed subsidized fuel. Why not we look for a way that enables creation of new industries and entrepreneurs get loan at 10.15 % interest rate - same at which car and home loans are available from bank. We must find a way out so that people, instead of investing in unproductive assets such as gold and silver invest in productive assets. Today, we don't see coming of new companies like ITC Ltd, Maruti Suzuki, Hero Honda, Hindustan Lever, Ponds, Cadbury, Britania, Tata Steel, Bajaj Autro, Cenury, etc where the public can invest and benefit. Today, we see companies like Reliance Power and PCJ Jewellers which cannot protect shareholders' money. In this situation, how productive investment is possible? Why doesn't the government tax agricultural income with exemption limit of Rs. 10 lac. (translated)
Tax payers do not get a govt we voted for
TA | Wed Jul 31 05:30:25 2013
The country has gone to the wolfs as well! Opposition political party lacks teeth to overthrow the ruling Government in spite of many reported scams, reason may be of their small few sins committed but definitely not as largest as of the ruling party. The next ruling party should not be corrupt to revive the economy as the reputed economist have taken the tax payers for granted. Let us have the Interns who will throw better light to improve our future. The population has to come under control as most of the new born are from illiterate families who will multiply to be only vote bank whose majority out beats the literates from the cities. The result is we the tax payers do not get a govt we voted for. The illiterates are always the winners. Most important the NEW Voting machines procurement is MUST as the present used models are suspicious and outdated!
Govt eyes political goals only
Dilip | Wed Jul 31 00:44:30 2013
RBI is asked to do the job that the government was to do the last 9 years. Little discussion on need to lead production (other than buying from China). I will not be surprised if growth declines to 4 percent. The most important goal of the Government is to get re-elected and have Rahul as PM. Concerns of the people, especially the lower 80% can be ignored.
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