The RBI's stand on making liquidity expensive to India Inc. may have raised questions on the central bank's policy towards growth. It may have given the impression that the sole objective in the mind of the central bank is inflation control. But statistics show that the RBI's moves have not been without a broader rationale.
As per a report recently released by global rating agency Moody's, companies in Asia have seen their cash reserves swell in the past few years. So much so that the total cash in the books of 121 private and listed non-banking companies in Asia was to the tune of US$ 232 bn at the end of September 2010. That makes it a sizeable war chest for capital expansion and acquisitions. But more importantly the cash gives the companies in the region the ability to run their operations profitably. This is if inflation in the respective economies warrants liquidity control by central banks. And that is exactly the rationale that the RBI has been relying on.
In fact when we checked this data for the BSE-100 companies provided by CMIE, we found that the contribution of India is not negligible. The non banking companies in the BSE 100 list had aggregate cash balance to the tune of Rs 2,135 bn (US$ 47 bn) at the end of FY10 itself. That makes it nearly a fifth of the total bounty in Asia.
What is interesting is that as per Moody's, companies in Asia have seen their cash holdings grow by almost 60% since the end of 2008. Which means that post crisis, most of them chose to remain conservative with their cash. And this has helped them maintain average cash reserves that are almost double that of their American counterparts.
But it is even more important that the cash surpluses are put to good use. Only if channelized towards attractive inorganic growth or productive expansion plans will the cash be remunerative to shareholders. Having said that, some cash could also be conserved to meet operating contingencies.
In hindsight, the RBI's attempt at curbing liquidity may hurt retail borrowing to an extent. But it will certainly do good to India Inc. in ensuring that they use the surplus cash most carefully. In fact, this may be an idea that most other central banks in the region may want to stick to in the days ahead.