RBI sees big challenge in timing the stimulus exit

RBI sees big challenge in timing the stimulus exit
The Financial Express, January 19, 2010, Page 12

Agencies, fe Bureaus, Mumbai

Reserve Bank of India (RBI) governor Duvvuri Subbarao on Monday said timing the withdrawal of stimulus is “a challenge” as he prepares to unveil the next monetary policy decision amid growing inflation pressures.

“The challenge for RBI is to support the recovery process without compromising on price stability,” Subbarao said at a conference in the southern Indian town of Benaulim, Goa.

India’s benchmark wholesale-price inflation rate climbed to a 13-month high last month, fueling speculation that Subbarao may tighten policy on January 29. China’s central bank last week unexpectedly raised the proportion of deposits that banks must set aside to check price gains and asset bubbles.

India’s inflation accelerated to 7.31% in December, the government said January 14. In the last policy review in October, Subbarao ordered lenders to set aside a higher proportion of deposits in government bonds.

The government injected fiscal and monetary stimulus worth more than 12% of gross domestic product between September 2008 and April 2009 as the global recession deepened. The intervention helped the economy grow 7.9% in the three months to September 30, the fastest pace in more than a year.

Subbarao said on Monday that the contagion of the global financial crisis was effectively contained by coordinated fiscal and monetary measures and described India’s growth in the quarter through September as “robust.”

India’s Industrial production climbed 11.7% in November, the most in two years. Exports surged to a 15-month high in December after rising 18.2% in November, the first increase in 14 months.

Also commenting on the challenges for DICGC on the way forward Subbarao said one key challenge is reducing the time taken to settle claims. Though the corporation has been able to settle all claims within the statutory time limit, its goal is to go beyond the statutory prescription, and ensure settlement of claims within a few days of liquidation of a bank as against a few months taken now.

“Towards this end, effort is required in two directions. First, DICGC must have a computerised depositors’ data base in respect of over 85,000 branches spread across the country. Second, the entire process of filing claims by the liquidator and their processing by the corporation should be computerised with appropriate connectivity,” he said.

Subbarao, in light of the recent experience which has challenged the concept of “too big to fail”, questioned the need to review the manner of defining ‘risk’ for the purpose of determining risk-based premium.

“How do we go about it?How do we factor-in the risk associated with all the non-banking business of a financial conglomerate on its banking business? How should risk based premium factor in this risk? “ he asked.

He also questioned the taxation of the entire income or the surplus of a deposit insurance system or any part of it.

“Is it possible to define an international benchmark or at least a standard methodology for determining a bench-mark for the reserve ratio (ratio of Deposit Insurance Fund to Insured Deposit), signifying the adequacy of Deposit Insurance Fund?

What countercyclical measures should a deposit insurance system take to build up its funds for the rainy day?” he said.