Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Monetary policy: Common man's perspective - Outside View by S.S. TARAPORE

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Monetary policy: Common man's perspective
May 20, 2013

The governor of the Reserve Bank of India (RBI), Dr D Subbarao, announced the Annual Monetary Policy for 2013-14 on May 3, 2013. The annual policy is significant, as both monetary policy and developmental and regulatory policies are covered. While the policy has a large number of measures, this column is restricted to a few issues which directly impinge on the common person.

Implications of Lower Repo Rate

Against the backdrop of a large balance of payments, the Current Account Deficit (CAD) of 5 per cent of GDP in 2012-13, a Consumer Price Index (CPI) increase, on a year-on-year basis at the end of March 2013 of 10.4 per cent (since come down to 9.4 per cent for April 2013), the RBI reduced the repo rate, i.e. the rate at which it lends to banks, against holdings of government securities, from 7.5 per cent to 7.25 per cent. Of course, the reduction of the policy rate is defended as a response to the Wholesale Price Index (WPI), which showed an increase at the end of March 2013 of 6 per cent (later data for April 2013 shows an even lower inflation rate of 4.9 per cent).

While banks have not immediately reduced their deposit rates, there will be an inevitable downward movement of deposit rates. Individuals would be well-advised to lock into the two-year maturity for fixed deposits, as any significant increase in deposit rates can be ruled out for the next 12-18 months. The government diktat to public sector banks to reduce or eliminate the additional premium for senior citizens is indeed cruel.

As regards shorter term surplus funds, most individuals leave such balances in savings bank accounts, which, in most banks, earn a low rate of return of 4 per cent. As a matter of discipline, depositors must develop a practice of moving funds out of savings bank accounts and put them in short-term deposits of seven days with automatic roll-over instructions; such fixed deposits earn significantly more than savings bank accounts. Withdrawal after a seven-day block will not lead to any loss of interest. The All-India Bank Depositors' Association (AIBDA) would do well to publicise this option. If depositors move out of savings bank accounts, which offer only 4 per cent, banks will start opting out of the informal cartel arrangement. The AIBDA needs to articulate that cartelisation is against the interests of depositors and should be examined by the competition commission. The RBI needs to counsel banks that most banks fixing the rate at 4 per cent could conceivably be considered as cartelisation.

The triad

According to the policy statement, the triad of financial inclusion, financial literacy and consumer protection are intertwining threads in the pursuit of financial stability. Dealing with these issues in a connected and coordinated manner will greatly enhance the effectiveness of these measures. The attainment of financial inclusion is not going to be an easy task and would need years of work. Nonetheless, it would ultimately be rewarding.

Financial Inclusion

The implementation of the Financial Inclusion Plan (FIP) for 2010-13 has led to the establishment of banking outlets in more than two lakh villages. The policy statement stresses that it is necessary to take financial inclusion to the next stage. The target of universal coverage to facilitate direct benefit transfer for delivery of social welfare benefits by direct credit of the bank accounts of beneficiaries will require a stupendous effort of opening accounts for all eligible individuals. Accordingly, banks have been directed to draw up the next FIP for the period 2013-16. One would not underestimate this stupendous task, but there has to be an on-going assessment of both success stories, as well as failures, which would facilitate the attainment of the goals.

Under the Lead Bank Scheme, districts in metropolitan areas are excluded. It is recognised that financial exclusion is also widespread in metropolitan areas among the disadvantaged and low-income groups. This will require a very different approach, as compared with the rural areas, as in the urban areas, these segments are itinerant.

Financial Literacy and Awareness

In order to link financially excluded segments with the banking system, models for conduct of literacy camps by banks have been prepared to culminate in effective financial access. The RBI is now empowered to establish a Depositor Education and Awareness Fund (DEAF), which would be credited with balances in deposit accounts which are not operated for ten years. The fund would be used for promotion of depositors' interest. If a rightful beneficiary comes up with a valid claim, DEAF would provide a refund of the amount.

Consumer Protection

It is increasingly recognized that contracts between banks and customers are invariably stacked against the customer and while a lot has been done to provide customer protection, much remains to be done.

Informal and Formal Financial Sectors

It is well-known that many disadvantaged persons hold bank deposits and yet borrow from the informal market at rates as high as 60 per cent per annum (without security) or 24 per cent (with security). Rudimentary financial literacy would avoid such pathetic situations. These are not minor issues, but are widespread, hence there is a need to strengthen the law as well as the regulatory system. It is well-known that for the disadvantaged, what is vital is the availability of credit and not its cost. Excessive preoccupation with low interest rates is counter-productive, but somewhat higher interest rates in the organised financial sector, albeit much lower than in the informal sector could ultimately benefit the disadvantaged.

Way back in the late 1960s and the early 1970s, considerable work was undertaken on developing links between the indigenous banking system and the formal banking system. In this context, the Banking Commission had undertaken useful work. In the aftermath of the bank nationalisation in 1969, the view taken was that the formal banking system would eventually supplant the indigenous banking system and, as such, there should be no link between the two systems. Unfortunately, 44 years after the nationalisation of banks, the indigenous banking system still thrives.

The Rajamannar Working Group, set up by the Banking Commission) had drafted a legal code for indigenous banking and provided for the revival of the link between the formal and informal segments, with the rediscounting of the Hundi by banks. Incidentally, the first class Hundi had an immaculate track record, without failure of payment of the Hundi on due date. In the context of the current comprehensive review of the financial legislative structure, a detailed assessment needs to be made of restoring the link between the formal and informal markets through the Hundi. One cannot just wish away the indigenous banking system

Please Note: This article was first published in The Free Press Journal on May 20, 2013. Syndicated.

This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Monetary policy: Common man's perspective". Click here!


More Views on News

Two Meetings That Nailed the Idea of Owning Brilliant Smallcaps Without Buying Them (The 5 Minute Wrapup)

Mar 22, 2018

Certain blue chips hold the potential of delivering returns comparable to small-cap stocks. With these stocks, you can get the best of both worlds.

What They Forgot to Tell You About Sensex at One Lakh (Profit Hunter)

Nov 29, 2017

Stocks that could beat Sensex returns in the long term.

Is Your Bank Gambling With Your Money? These Banks Should be Declared Dangerous... (Profit Hunter)

Jul 17, 2018

Tanushree Banerjee bets you would not want to leave your money with these unsafe banks...

Your Rescue Plan from the Cave of Poor Quality Stocks (The 5 Minute Wrapup)

Jul 17, 2018

And there will be no getting trapped with Amtek, Vakrangee, or Manpasand like stocks.

2019 Lok Sabha Elections and the Perils of Populism (Vivek Kaul's Diary)

Jul 17, 2018

Evidence from around the world shows that populism can only lead to more populism and this is clearly not good news for the Indian economy.

More Views on News

Most Popular

The Real Truth About India's FDI, Beyond WhatsApp(Vivek Kaul's Diary)

Jul 4, 2018

The FDI numbers do not look very impressive once we adjust for repatriations as well as the overall growth in the economy.

How to Avoid a 90% Loss Suffered by This Super Investor(The 5 Minute Wrapup)

Jul 12, 2018

Blindly following super investors is a dangerous game to play. Here's how you can avoid such mistakes.

The Answer to Your Wealth Worries: Small Caps (Especially Now)(Profit Hunter)

Jul 10, 2018

If you're worried about the markets - you are on the wrong track. This is opportunity - put your wealth-building hat on, instead - Richa shows you how...

New Fund Offer - ICICI Prudential Pharma Healthcare and Diagnostics Fund - Should You Invest?(Outside View)

Jul 6, 2018

ICICI AMC launches an open -ended equity fund following Pharma, Healthcare, Diagnostic and allied theme.

When Disappointment Panda is Around. Buy Quality Stock like This!(Chart Of The Day)

Jul 6, 2018

Buy Companies that can fight all kinds of Pandas and Bears in the long run.


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Jul 17, 2018 (Close)