Being mindful of savers' interests - Outside View by S.S. TARAPORE

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Being mindful of savers' interests
Dec 30, 2013

The Mid-Quarter Monetary Policy Review of December 18, 2013 by the Reserve Bank of India (RBI) was like the proverbial last straw on the back of savers. First year economics would explain that if a country wants to grow, it has to invest and to be able to invest, a country has to save. To ensure adequate savings, it is necessary to adequately reward savers. This basic axiom has been violated in India in recent years and there has been a virtual disenfranchisement of household sector savers in financial assets.

Dec 2013 monetary policy review

Markets and media had reconciled to an increase on December 18, 2013, in the repo rate (i.e. the policy rate at which the RBI provides accommodation to banks). The inflation rate, both, the Wholesale Price Index (WPI) and the Consumer Price Index (CPI), reflected intolerable red hot inflation. Even if some sectors like vegetables were to show some receding of prices from stratospheric levels, it would be of minimal comfort to the common person. The concern that fragile growth could be aborted by tight monetary policy is really not relevant, as a revival of growth requires a lot more than a mere moderation of interest rates. What is of concern is that inflation has become generalized, which warrants strong monetary-fiscal action. Given the political economy constraints on fiscal action, a strong monetary policy is unavoidable.

The prolonged inflation in the recent period has been unprecedented in the last four decades. The experience has been that when inflation touches double digit levels, all resistance to a tight monetary policy disappears and the RBI can, so to say, go to town with strong monetary policy measures. The fear at the present time is that the authorities are taking risks with a new normal (i.e. higher) tolerance level for inflation and perhaps the political economy judgement is that monetary tightening would create more problems for the government in the immediate pre-election period. The historical experience is that in India, a tight monetary policy has been resorted to precisely when there are political economy constraints on other wings of economic policy.

The need of the hour quite clearly is for sharp monetary tightening. The harsh realities are that the government has used its strong, overbearing suasion to dissuade the RBI from monetary tightening. Even so, the holding back of strong monetary policy action by the RBI is a serious error of judgement, which the present government will rue in the next few months. Generalised inflation is a monetary phenomenon and has to be tackled by a strong monetary policy, even though it may be a blunt instrument. Not dousing the inflationary fire could risk a major conflagration.

Governor Rajan's powerful response

In recent days, Governor Rajan has used all his renowned analytical and communication skills to justify the 'wait and watch' policy. Hats off to Governor Rajan for ticking off the monetary hawks. Governor Rajan's post-policy media interviews are so effective that even the few critics of the policy would be convinced of his stand.

Imperative need to curb inflation

As Professor Gita Gopinath puts it (CNBC Interview December 21, 2013), if you want to kill inflation, it can be done through monetary policy. If interest rates are raised high enough, you will bring down inflation. She stresses that no country has been able to bring down inflation without some pain. The problem in India is that action is invariably delayed and remedial action becomes more unpalatable.

In the recent period, the tackling of inflation has been unusually delayed. If monetary policy action is timely, it can be mild. The ideal time for monetary policy action is when the economy is on the upturn and well before the upper turning point of the cycle. But when things are good, there is just no support for monetary policy action and in fact the monetary authority is criticised as a kill joy. But the longer monetary policy action is delayed, harsher measures are needed to curb inflation. In the present instance, the tackling of inflation has been left for too long and it is in this context that the wait-and-watch policy becomes hazardous. It bears mentioning that while the general perception is that the RBI has raised the policy rate since September 2013, the fact is that the weighted average rate of interest on RBI accommodation under all facilities has been lowered.

Savers' Response

With the inexorable high inflation rate and possibility of an acceleration of inflation, it would only be rational of savers to veer away from financial savings. To the extent households have unavoidable expenditures, they would be well-advised to accelerate expenditures. To the extent households are able to move from financial to physical savings, they would do well to shift to physical savings. It is appreciated that there are a large number of households (such as senior citizens) who necessarily have to depend on financial savings to meet their day-to-day expenditures; these hapless savers really have nowhere to go and have to passively accept low returns on their investments. Delayed monetary policy action hurts such segments the most. But sooner or later these segments will revolt and move into higher risk assets.

Inflation Indexed Bonds

The Inflation Indexed National Savings Securities-Cumulative (IINSS-C) linked to the CPI is a cruel joke on senior citizens. It is unconscionable to issue such securities on a cumulative basis and charge a severe penalty for early withdrawal by senior citizens. The proper thing to do would have been to allow half-yearly payment of interest for senior citizens and cumulative for others. But we have an uncanny knack of using bureaucratic brilliance to punish hapless small savers. With a ceiling of Rs 5 lakh per annum on individual investments, senior citizens with small incomes are being punished. The stress on cumulative interest is to throw forward the fiscal burden of borrowing. Such measures are not reflective of a just society.

Please Note: This article was first published in The Freepress Journal on December 30, 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.


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