RBI holds back rate cut
HT Business, January 28, 2009, page 1
HT Correspondent, Mumbai, January 27: While the overall inflation number looks comfortable, the Reserve Bank of India fought shy of cutting benchmark policy interest rates further on Tuesday because the prices of sensitive food items are still not under control.
The RBI is worried about the increase in prices of primary articles, which is still in double digits, though the overall wholesale price-based inflation has dropped to 5.6 per cent from 13 per cent in August.
“In view of the divergent movement of various price indices and their components, and overall increase in global economic uncertainties, an assessment of underlying inflation for policy purposes becomes inherently complex,” said RBI governor Duvvuri Subbarao after he unveiled the third quarter policy review of the monetary policy.
“Given the enormity of the economic situation, the need is for systematic, calibrated and continuous rate cut signals,” said Abheek Barua, Chief Economist at HDFC Bank. “The RBI is being reactive and wants to respond to crisis and eventualities.”
Tushar Poddar, Economist at Goldman Sachs, echoed Barua’s views. “We think that more immediate action is necessary given the long lags with which monetary policy influences lending rates and overall activity, rather than wait for activity to deteriorate further,” Poddar said.
The current economic crisis is about growth and liquidity and going by the aggressive rate cuts since September 2008, inflation, or one component of it, should no longer be a concern.
“We think that the WPI (wholesale price indeed) and CPI (consumer price index) based inflation will fall significantly going forward and the RBI needs to take account of this. We still expect rate cuts before the end of 2008-09,” Goldman’s Poddar said.
The RBI has lowered its WPI target for end-March 2009 to 3 per cent from 7 per cent and cut GDP growth forecast for 2008-09 to 7 per cent, with a downward bias, from 7.50-8.0 per cent earlier.
Wednesday, January 28, 2009
RBI holds back rate cut
India is suffering three shocks’
India is suffering three shocks’
HT Business, January 28, 2009, page 1
Amid expectations of continued monetary policy easing, the RBI Governor, D Subbarao on Tuesday kept all rates unchanged as he reviewed the monetary policy. The forecast for growth of the Indian economy in 2008-09 has been lowered to 7 per cent, with downward risks, from 7.50-8.0 per cent.
Subbarao’s views on what lies ahead:
How grave is the economic downturn globally and domestically?
This third quarter review of the monetary policy of the Reserve Bank is set in the context of a deteriorating global situation and heightened uncertainty about the global financial sector. The IMF, which puts out numbers for global growth, predicted a 2009 global growth of 3 per cent in October 2008, it was 2.2 per cent in November 2008, and I believe another number is going to come out day after tomorrow and there are some indications that could be substantially lower than the last one. That gives an indication of the velocity and the gravity of the downturn.
How is India affected?
India too has been affected in three ways—first is the exit of foreign equity that resulted in capital flow reversals and that put pressure on the exchange. Secondly through drying up of overseas bank credits for both Indian corporates and Indian banks, which shifted credit demand from external sources to the domestic ones. Lastly, exports were hit because of the deceleration of the global economy.
Have you taken any new initiative to help the economy?
Apart from the various conventional measures such as adjusting CRR, repo and reverse repo rates and some unconventional methods such as dollar swap facility for banks, we have introduced a new measure in consultation with the government of a special purpose vehicle for non-banking finance companies to the amount of Rs 25,000 crore. The liquidity situation has improved significantly following these measures taken by the RBI since September 2008.
Has RBI taken any measures to get banks to reduce their lending rates to the extent of the policy rate cuts?
HT Business, January 28, 2009, page 1
Amid expectations of continued monetary policy easing, the RBI Governor, D Subbarao on Tuesday kept all rates unchanged as he reviewed the monetary policy. The forecast for growth of the Indian economy in 2008-09 has been lowered to 7 per cent, with downward risks, from 7.50-8.0 per cent.
Subbarao’s views on what lies ahead:
How grave is the economic downturn globally and domestically?
This third quarter review of the monetary policy of the Reserve Bank is set in the context of a deteriorating global situation and heightened uncertainty about the global financial sector. The IMF, which puts out numbers for global growth, predicted a 2009 global growth of 3 per cent in October 2008, it was 2.2 per cent in November 2008, and I believe another number is going to come out day after tomorrow and there are some indications that could be substantially lower than the last one. That gives an indication of the velocity and the gravity of the downturn.
How is India affected?
India too has been affected in three ways—first is the exit of foreign equity that resulted in capital flow reversals and that put pressure on the exchange. Secondly through drying up of overseas bank credits for both Indian corporates and Indian banks, which shifted credit demand from external sources to the domestic ones. Lastly, exports were hit because of the deceleration of the global economy.
Have you taken any new initiative to help the economy?
Apart from the various conventional measures such as adjusting CRR, repo and reverse repo rates and some unconventional methods such as dollar swap facility for banks, we have introduced a new measure in consultation with the government of a special purpose vehicle for non-banking finance companies to the amount of Rs 25,000 crore. The liquidity situation has improved significantly following these measures taken by the RBI since September 2008.
Has RBI taken any measures to get banks to reduce their lending rates to the extent of the policy rate cuts?
Many banks have reduced their lending rates and some are yet to follow suit. The policy leaves further scope for interest rates reduction by the banks. There is a view that bank credit has not expanded or is decelerating. But if you look at the numbers for the first week of January, you can note that bank credit has expanded slightly faster than at this time last year when the number was 22 per cent. On January 2 2009, the year-on-year growth figure stood at 23.9 per cent.
Haryana to develop two green cities
Haryana to develop two green cities
The Financial Express, January 28, 2009, Page 11
Preeti Parashar Chandigarh, Jan 27
There’s good news for the residents of Delhi suburbs Gurgaon and Faridabad—they who will witness the transition of their cities into green/solar cities within the next five years.
The state of Haryana has got in-principle approval to develop Gurgaon as a solar city by using renewable energy sources for power generation. The proposal for Faridabad has also been forwarded to the ministry of new and renewable energy for approval. The step is being taken in the wake of rising electricity demand—which has gone up by 15% over the last couple of years—in the major cities of the state. The ministry has already announced to spend close to Rs 30 crore (Rs 50 lakh per city) for development of 60 solar/green cities pan India during the eleventh Plan.
The government scheme is a step forward towards reducing the green house gas emissions and promoting renewable energy in the urban areas. As per the latest UN report one million people are moving to urban areas each week. It is estimated that around two-thirds of the world population will be living in cities by 2050. Cities like London, New York, Tokyo have achieved major reduction in carbon emissions by shifting to renewable energy. Now India is toeing the line by initiating the solar cities programme.
The ministry of new and renewable energy has granted in-principle approval to 15 other cities also to be developed into solar cities. These include Agra, Muradabad, Rajkot, Ganganagar, Nagpur, among others. A senior official of the Haryana renewable energy department told FE that the scheme would apply to cities with population between 5 lakh-50 lakh. “We are in the process of hiring a consultant to prepare the master plan for these cities. It is expected that the master plan will be ready within the next three months. The cities will be turned into green cities within five years. The master plan will gauge the total and sector wise demand for energy and supply for the next 10 years,” he said.
The master plan will set a goal of minimum 10% reduction in the projected total demand of conventional energy at the end of five years, which can be achieved through a combination of energy efficiency measures and enhancing supply from renewable energy sources.
The Financial Express, January 28, 2009, Page 11
Preeti Parashar Chandigarh, Jan 27
There’s good news for the residents of Delhi suburbs Gurgaon and Faridabad—they who will witness the transition of their cities into green/solar cities within the next five years.
The state of Haryana has got in-principle approval to develop Gurgaon as a solar city by using renewable energy sources for power generation. The proposal for Faridabad has also been forwarded to the ministry of new and renewable energy for approval. The step is being taken in the wake of rising electricity demand—which has gone up by 15% over the last couple of years—in the major cities of the state. The ministry has already announced to spend close to Rs 30 crore (Rs 50 lakh per city) for development of 60 solar/green cities pan India during the eleventh Plan.
The government scheme is a step forward towards reducing the green house gas emissions and promoting renewable energy in the urban areas. As per the latest UN report one million people are moving to urban areas each week. It is estimated that around two-thirds of the world population will be living in cities by 2050. Cities like London, New York, Tokyo have achieved major reduction in carbon emissions by shifting to renewable energy. Now India is toeing the line by initiating the solar cities programme.
The ministry of new and renewable energy has granted in-principle approval to 15 other cities also to be developed into solar cities. These include Agra, Muradabad, Rajkot, Ganganagar, Nagpur, among others. A senior official of the Haryana renewable energy department told FE that the scheme would apply to cities with population between 5 lakh-50 lakh. “We are in the process of hiring a consultant to prepare the master plan for these cities. It is expected that the master plan will be ready within the next three months. The cities will be turned into green cities within five years. The master plan will gauge the total and sector wise demand for energy and supply for the next 10 years,” he said.
The master plan will set a goal of minimum 10% reduction in the projected total demand of conventional energy at the end of five years, which can be achieved through a combination of energy efficiency measures and enhancing supply from renewable energy sources.
'There's scope for banks to cut rates'
'There's scope for banks to cut rates'
The Economic Times, January 28, 2009, Page 17
With no certainty on when the worst of the crisis will be behind us. For now, the central bank is maintaining a flexible stance. The governor D Subbarao, while refusing to take credit for the decline in inflation, is sticking to his objective of making money available at reasonable price. In a media interaction, the governor speaks about why he does not fear deflation despite the possibility of the wholesale price index moving into the negative territory.
What are the objectives of the latest monetary policy?
The current monetary policy review is set in times of increasing uncertainty, where IMF has been continuously bringing down its estimates for the global GDP. RBI has been mainly working with three principal objectives - ample rupee liquidity, comfortable dollar liquidity and monetary policy aimed at continued flow of credit to the economy. Till date, we have injected, or at least made available, more than Rs 4 lakh crore of liquidity through various measures.
But not all banks are cutting rates?
Transmission of monetary policy in the money and GSec markets has been effective, but the same in the credit market has been subdued. Most banks have reduced lending and deposit rates, but some have not. The latest RBI stance leaves a lot of scope for banks to adjust their lending rates, even for those that changed rates recently.
How badly is India affected in the global slowdown? Has it hurt bank credit?
Globalisation is a double edged sword. Although it has often helped India, the impact on the real and financial sector is mainly due to globalisation. India is much more integrated today than ten years ago, at the time of the Asian financial crisis. There is a view that bank credit is decelerating. But non-food credit has expanded faster (23.9%) than the same period last year (22%). So this view is not all that correct, but one must not exaggerate this piece of information. However, there has been a reduction in non-bank resources to commercial sector. Urban consumption is likely to fall from hereon, but rural consumption will hold up because there is no wealth effect here.
Is RBI pleased about inflation? Are inflation worries behind us?
Not withstanding the decline in the wholesale price index, we must note that inflation of primary articles is still in double digits. Inflation projection and inflation estimation is not just about looking at a WPI number. We look at CPI and inflation expectations too. However, the stance in the last few months has shifted from inflation to growth and priority has been to adjust moderation in growth.
The Economic Times, January 28, 2009, Page 17
With no certainty on when the worst of the crisis will be behind us. For now, the central bank is maintaining a flexible stance. The governor D Subbarao, while refusing to take credit for the decline in inflation, is sticking to his objective of making money available at reasonable price. In a media interaction, the governor speaks about why he does not fear deflation despite the possibility of the wholesale price index moving into the negative territory.
What are the objectives of the latest monetary policy?
The current monetary policy review is set in times of increasing uncertainty, where IMF has been continuously bringing down its estimates for the global GDP. RBI has been mainly working with three principal objectives - ample rupee liquidity, comfortable dollar liquidity and monetary policy aimed at continued flow of credit to the economy. Till date, we have injected, or at least made available, more than Rs 4 lakh crore of liquidity through various measures.
But not all banks are cutting rates?
Transmission of monetary policy in the money and GSec markets has been effective, but the same in the credit market has been subdued. Most banks have reduced lending and deposit rates, but some have not. The latest RBI stance leaves a lot of scope for banks to adjust their lending rates, even for those that changed rates recently.
How badly is India affected in the global slowdown? Has it hurt bank credit?
Globalisation is a double edged sword. Although it has often helped India, the impact on the real and financial sector is mainly due to globalisation. India is much more integrated today than ten years ago, at the time of the Asian financial crisis. There is a view that bank credit is decelerating. But non-food credit has expanded faster (23.9%) than the same period last year (22%). So this view is not all that correct, but one must not exaggerate this piece of information. However, there has been a reduction in non-bank resources to commercial sector. Urban consumption is likely to fall from hereon, but rural consumption will hold up because there is no wealth effect here.
Is RBI pleased about inflation? Are inflation worries behind us?
Not withstanding the decline in the wholesale price index, we must note that inflation of primary articles is still in double digits. Inflation projection and inflation estimation is not just about looking at a WPI number. We look at CPI and inflation expectations too. However, the stance in the last few months has shifted from inflation to growth and priority has been to adjust moderation in growth.
Let me repeat, we’ve not conquered inflation once and for all. Today we were having a meeting with bankers and one of them suggested it’s disturbing that inflation is coming down so fast. If it’s coming down so fast it is not because of structural reasons, but because of many other factors over which we have no control. We will continue to have concerns about inflation going forward. There is a possibility that there will negative WPI inflation too. But I do not see a prolonged deflation as in other developed markets or structural deflation. It may only be more of a statistic. Groucho Marx once said – never make a forecast, especially about the future. So we do not want to make any forecasts, we’ve learnt our lessons from the past.
Industry unhappy with RBI decision
Industry unhappy with RBI decision
The Economic Times, January 28, 2009, Page 19
Our Bureau NEW DELHI
INDIA Inc has expressed disappointment over the RBI’s move to maintain key policy rates in its quarterly monetary policy review. Captains of industry and chambers have stated the central bank should have brought down rates by at least another 100 basis points to reverse the process of slowdown.
Inflation is already down to around 5%, so the reverse repo rate at which it absorbs cash from the system should be slashed to 1%,” TVS managing director Venu Srinivasan said. “Otherwise, banks will find it more profitable to park their money with RBI, rather than lend,” he added.
Industry body CII said: “Given the fact that inflation is correcting more rapidly than expected and industry and the economy as a whole is facing a slowdown, the RBI could have used this opportunity to cut key interest rates further.” The chamber said there’s still no sign of reversal in the fortunes of the manufacturing sector. “This might have an impact on employment, unless fresh measures are taken to offset the decline in domestic demand. Credit availability for the small scale sector remains a major concern,” CII added.
Ficci said RBI has held back its activism in further pruning the repo and reverse repo rates. “By RBI’s own admission, inflation is expected to moderate to 3% by March this year, this was clearly a window of opportunity.” It urged the RBI to give a further signal to banks which still remain risk-averse in lending to corporates. “Demand creation and liquidity are still an issue, and will remain so until rates are further moderated,” said Assocham president Sajjan Jindal.
The Economic Times, January 28, 2009, Page 19
Our Bureau NEW DELHI
INDIA Inc has expressed disappointment over the RBI’s move to maintain key policy rates in its quarterly monetary policy review. Captains of industry and chambers have stated the central bank should have brought down rates by at least another 100 basis points to reverse the process of slowdown.
Inflation is already down to around 5%, so the reverse repo rate at which it absorbs cash from the system should be slashed to 1%,” TVS managing director Venu Srinivasan said. “Otherwise, banks will find it more profitable to park their money with RBI, rather than lend,” he added.
Industry body CII said: “Given the fact that inflation is correcting more rapidly than expected and industry and the economy as a whole is facing a slowdown, the RBI could have used this opportunity to cut key interest rates further.” The chamber said there’s still no sign of reversal in the fortunes of the manufacturing sector. “This might have an impact on employment, unless fresh measures are taken to offset the decline in domestic demand. Credit availability for the small scale sector remains a major concern,” CII added.
Ficci said RBI has held back its activism in further pruning the repo and reverse repo rates. “By RBI’s own admission, inflation is expected to moderate to 3% by March this year, this was clearly a window of opportunity.” It urged the RBI to give a further signal to banks which still remain risk-averse in lending to corporates. “Demand creation and liquidity are still an issue, and will remain so until rates are further moderated,” said Assocham president Sajjan Jindal.
Subbarao reserves ammunition
Subbarao reserves ammunition
The Hindu Business Line, January 28, 2009, page 8
Third Quarter Review of Monetary Policy 2008-09.
-------------------------------------------------------------------------------------------------
The RBI has taken the right decision not to make any changes in the key policy rates, since what has been done in the last three months is substantial and it takes time for the effects to be felt, says A. SESHAN.
-------------------------------------------------------------------------------------------------
The Reserve Bank of India (RBI) has preferred not to make any changes in the key policy rates. This is an appropriate stand since what has been done in the last three months is substantial and it takes time for the effects to be felt before further measures are initiated.
The growth of Gross Domestic Product (GDP) in 2008-09 is now brought down to 7 per cent with a downward bias. Considering that it was 7.8 per cent in the first half of 2008-09, it will have to be 6.28 per cent in the second half. This appears doubtful going by the recent statistics on industrial production and exports.
The RBI acknowledges that it too is in a bind when it says that monetary ammunition has been nearly exhausted in many countries.
The indicative growth projection in the total flow of credit to the commercial sector from all sources by the end of the year is raised from 20 per cent to 24 per cent. Going by the trend so far, it is a moot point whether much can be achieved in the remaining weeks.
INFLATION
The RBI’s prediction of inflation at less than 3 per cent by the end of the year is somewhat optimistic. A further reduction can be achieved if the government cuts the administered prices of petroleum products such as diesel. But how much would bringing down the prices of essentials, even after reckoning with their inter-industry effects, help?
The RBI is, of course, cognisant of the double-digit inflation revealed by various versions of the Consumer Price Index (CPI). Here the hope is that the reduction in input prices will bring down commodity prices and the decline in Wholesale Price Index (WPI) will have a lagged effect on the CPI.
In the first place, so far as agriculture is concerned, there is no reduction in the price of a major input, namely fertilisers. Second, whether WPI influences CPI or vice-versa or it is a mutual two-way relationship is yet to be conclusively determined despite the battery of causality tests employed by econometricians for the purpose.
It is surprising that experts of the RBI have fallen for the naive and meaningless reference to the ‘base effect’ of the previous year. Does one fight inflation with the help of such a concept?
It would mean that the high inflation observed a few months ago was a blessing in disguise as it would have a favourable ‘base effect’ next year!
This ‘effect’ is an arithmetical explanation, not an economic one. The total amount of additional liquidity released during the recent period is Rs 4,28,000 crore, including the money unwound (Rs 40,000 crore) through a reduction in the Statutory Liquidity Ratio. With a fall in growth rate and money supply target increasing from 16.5 per cent to 19 per cent, where will all the additional funds go except to raise nominal incomes through inflation?
BACKGROUND DOCUMENT
The document Macroeconomic and Monetary Developments — Third Quarter Review 2008-09 provides an authoritative background for an assessment of the latest policy stance of the Bank. There are two outstanding features that deserve to be mentioned.
Besides being transparent, objective and plain-speaking, it has reference to money multiplier in the context of the changes in cash reserve ratio. This is a good beginning. In future, its actual value can be compared with the theoretical one and variations thereof can be explained.
There is, however, a need to incorporate a reference to the other equally famous income multiplier, associated with Keynes. It is the multiple impact of the initial expenditure on the growth of the GDP.
In fact, the stimulus packages announced by the Government in the area of spending and tax cuts are posited on this multiplier in combating the decline in the growth rate of the economy. So it is imperative to know its value to have some idea about the expected result of the measures.
Valerie Ramey finds from historical US data that the multiplier for public spending is not large in that country: $1 in public spending raises GDP by only $1.4 (Identifying Government Spending Shocks: It’s all in the timing, University of California, San Diego, June 2008) Hence, the expected large-size impact on the US economy due to the massive stimulus packages of the Federal Government has been questioned. Second, there is a detailed description of liquidity in the economy beyond what was covered in the earlier documents.
Incidentally, the Government appointed a committee under the leadership of the Finance Secretary to examine the liquidity problem that prevailed a few months ago. The Report has not yet been published.
The current thinking is that there is little fiscal space left for further stimuli and it is the job of the monetary authorities to take over. This is contrary to conventional Keynesian thinking.
The central bank can flood the economy and reduce rates drastically. But if the environment and expectations are not favourable for businessmen to demand additional credit, the extra liquidity makes a round trip and ends in reverse repo operations with the RBI, as is happening now.
STATE FINANCES
Another point is the role of the States in tackling the present crisis for which not much attention has been given either by the authorities or observers.
A few days ago, the finances of State governments were reported to have made a remarkable improvement with a few exceptions, as brought out by an excellent analysis of the RBI staff (State Finances — A Study of Budgets of 2008-09). It indicated the scope for stimulus packages of State governments.
However, the background document of the RBI puts a damper on this welcome development. It says that the revenue surpluses of States envisaged in their budgets may not materialise due to subsequent developments.
(The author is a former officer-in-charge of the Department of Economic Analysis and Policy, RBI. blfeedback@thehindu.co.in)
The Hindu Business Line, January 28, 2009, page 8
Third Quarter Review of Monetary Policy 2008-09.
-------------------------------------------------------------------------------------------------
The RBI has taken the right decision not to make any changes in the key policy rates, since what has been done in the last three months is substantial and it takes time for the effects to be felt, says A. SESHAN.
-------------------------------------------------------------------------------------------------
The Reserve Bank of India (RBI) has preferred not to make any changes in the key policy rates. This is an appropriate stand since what has been done in the last three months is substantial and it takes time for the effects to be felt before further measures are initiated.
The growth of Gross Domestic Product (GDP) in 2008-09 is now brought down to 7 per cent with a downward bias. Considering that it was 7.8 per cent in the first half of 2008-09, it will have to be 6.28 per cent in the second half. This appears doubtful going by the recent statistics on industrial production and exports.
The RBI acknowledges that it too is in a bind when it says that monetary ammunition has been nearly exhausted in many countries.
The indicative growth projection in the total flow of credit to the commercial sector from all sources by the end of the year is raised from 20 per cent to 24 per cent. Going by the trend so far, it is a moot point whether much can be achieved in the remaining weeks.
INFLATION
The RBI’s prediction of inflation at less than 3 per cent by the end of the year is somewhat optimistic. A further reduction can be achieved if the government cuts the administered prices of petroleum products such as diesel. But how much would bringing down the prices of essentials, even after reckoning with their inter-industry effects, help?
The RBI is, of course, cognisant of the double-digit inflation revealed by various versions of the Consumer Price Index (CPI). Here the hope is that the reduction in input prices will bring down commodity prices and the decline in Wholesale Price Index (WPI) will have a lagged effect on the CPI.
In the first place, so far as agriculture is concerned, there is no reduction in the price of a major input, namely fertilisers. Second, whether WPI influences CPI or vice-versa or it is a mutual two-way relationship is yet to be conclusively determined despite the battery of causality tests employed by econometricians for the purpose.
It is surprising that experts of the RBI have fallen for the naive and meaningless reference to the ‘base effect’ of the previous year. Does one fight inflation with the help of such a concept?
It would mean that the high inflation observed a few months ago was a blessing in disguise as it would have a favourable ‘base effect’ next year!
This ‘effect’ is an arithmetical explanation, not an economic one. The total amount of additional liquidity released during the recent period is Rs 4,28,000 crore, including the money unwound (Rs 40,000 crore) through a reduction in the Statutory Liquidity Ratio. With a fall in growth rate and money supply target increasing from 16.5 per cent to 19 per cent, where will all the additional funds go except to raise nominal incomes through inflation?
BACKGROUND DOCUMENT
The document Macroeconomic and Monetary Developments — Third Quarter Review 2008-09 provides an authoritative background for an assessment of the latest policy stance of the Bank. There are two outstanding features that deserve to be mentioned.
Besides being transparent, objective and plain-speaking, it has reference to money multiplier in the context of the changes in cash reserve ratio. This is a good beginning. In future, its actual value can be compared with the theoretical one and variations thereof can be explained.
There is, however, a need to incorporate a reference to the other equally famous income multiplier, associated with Keynes. It is the multiple impact of the initial expenditure on the growth of the GDP.
In fact, the stimulus packages announced by the Government in the area of spending and tax cuts are posited on this multiplier in combating the decline in the growth rate of the economy. So it is imperative to know its value to have some idea about the expected result of the measures.
Valerie Ramey finds from historical US data that the multiplier for public spending is not large in that country: $1 in public spending raises GDP by only $1.4 (Identifying Government Spending Shocks: It’s all in the timing, University of California, San Diego, June 2008) Hence, the expected large-size impact on the US economy due to the massive stimulus packages of the Federal Government has been questioned. Second, there is a detailed description of liquidity in the economy beyond what was covered in the earlier documents.
Incidentally, the Government appointed a committee under the leadership of the Finance Secretary to examine the liquidity problem that prevailed a few months ago. The Report has not yet been published.
The current thinking is that there is little fiscal space left for further stimuli and it is the job of the monetary authorities to take over. This is contrary to conventional Keynesian thinking.
The central bank can flood the economy and reduce rates drastically. But if the environment and expectations are not favourable for businessmen to demand additional credit, the extra liquidity makes a round trip and ends in reverse repo operations with the RBI, as is happening now.
STATE FINANCES
Another point is the role of the States in tackling the present crisis for which not much attention has been given either by the authorities or observers.
A few days ago, the finances of State governments were reported to have made a remarkable improvement with a few exceptions, as brought out by an excellent analysis of the RBI staff (State Finances — A Study of Budgets of 2008-09). It indicated the scope for stimulus packages of State governments.
However, the background document of the RBI puts a damper on this welcome development. It says that the revenue surpluses of States envisaged in their budgets may not materialise due to subsequent developments.
(The author is a former officer-in-charge of the Department of Economic Analysis and Policy, RBI. blfeedback@thehindu.co.in)
Subscribe to:
Posts (Atom)
Posts
