Monday, April 1, 2013

Dial RBI for Missed Numbers!

From Inflation to Liquidity Deficit, The Fiscal gone by has seen RBI missing on many Projections; still, The New Monetary Policy has Proposed high hopes. But Considering that India at Present is Living a trade off between growth and inflation, RBI needs to be more Serious and Realistic in its Approach.

For the past 18 months or so, India has been at the crossroads – unable to decide whether to control the inflation menace at the cost of growth or concentrate on a double-digit growth allowing inflation to take its natural course. Perhaps, that is the reason for which, we have only RBI fighting against inflation through its monetary policy measures. But what is hilarious is the performance of statisticians at the RBI headquarters. Because of them, the RBI is even more confused as to how far and how fast it should move to control inflation.

Amidst a high inflation rate of over 9% prevailing all throughout the last 12 months, perhaps, few must still be remembering RBI’s annual policy statement in 2010. With great amount of determination, the apex bank targeted to bring down inflation to as low as 5.5%. But after 5 rate hikes of 25 basis points each between April and November, the RBI finally realised that they are heading nowhere. So, by January the inflation target was revised to 7% and then to 8% in March, yet it was wide off the mark as WPI in March climbed 8.98% and this provisional figure, when revised, could get close to 10%. After the disastrous predictions in the last fiscal, in the Monetary Policy announced for financial year 2011-12, RBI has now pegged inflation at 6% with an upward bias. But, considering the increasing pressure on commodities in the country due to supply side crunch in particular and the instability in global crude prices, a revision of this target may soon become necessary despite RBI’s bold 50 basis point hike in repo and reverse repo rates early this month (eighth consecutive rate hike in less than 13 months).

But it’s not only on the inflation front that the RBI economists have floundered. RBI was also found in soup in case of liquidity management in the system. The bank’s measures to control liquidity was certainly in line with its measures to combat inflation till liquidity deficit shot up to unparallel levels. While RBI’s comfort zone is plus/minus 1% of net demand and time liabilities (NDTL) or Rs.500 billion, in the second half of the fiscal liquidity deficit climbed up to as high as Rs.1,700 billion and the deficit remained over double the RBI estimate for a good part of the second half of the last fiscal. So much so that the RBI had to undertake open market operations (OMOs) and other measures in the third quarter to ease liquidity pressure. In total, RBI had to purchase government securities of Rs.670 billion to control the situation till the government started increasing its spending in the last quarter.

But the question remains, why could the RBI economists not see this coming? Were they expecting this liquidity crunch to take care of inflation by anyway and it was just about to be proven as a fatal hope than a well calculated risk? The second seems to be more appropriate, at least for the way RBI kick started a number of measures to mitigate the liquidity deficit in the last quarter including reduction in the statutory liquidity ratio (SLR) from 25% of NDTL to 24% with effect from December 2010, and additional liquidity support to scheduled commercial banks (SCBs) under the liquidity adjustment facility (LAF, this facility, which was initially available upto 2% of NDTL, was brought down to 1% after reduction the SLR by one percentage point). In fact, the average daily net liquidity injection through LAF was at around Rs.1200 billion during December 2010 (Rs.900 billion in January 2011).


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist). For More IIPM Info, Visit below mentioned IIPM articles
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