• APRIL 7, 2014

Policies in an uncertain milieu

The backdrop to the Reserve Bank of India (RBI) monetary policy of April 1, 2014 had a number of imponderables.

  • Although the Consumer Price Index (CPI) inflation appears to be on the 8 per cent trajectory for January 2015, it is still way above comfort levels. Overall GDP growth continues to be in the sub-5 per cent range for close to two years and industrial output is stagnant. The agricultural outlook for the ensuing period is unclear pending the monsoon. As regards fiscal policy it will be necessary to await the regular Budget after the new government takes charge and crucial administered prices and agricultural support prices could impinge adversely on the inflation trajectory during the ensuing few months.

    Monetary Policy Measures

  • Governor Raghuram Rajan has deftly steered the April 1, 2014 monetary policy through troubled waters. While the policy repo rate has been left unchanged at 8 per cent, perhaps signaling a standstill monetary policy, this could be deceptive as there has been a vital shift in the structuring of RBI accommodation. The access limit for overnight repo has been reduced with a corresponding increase in the 7 day and 14 day term-repo access. This will hopefully result in a more predictable liquidity. In turn, from the Common Person's viewpoint, it would appear that deposit rates would not be lower, at least in the immediate ensuing months. Furthermore, there are no give freebies which could be questioned under the Election code of conduct.

    Development and Regulatory Policies

  • There are some interesting thoughts on developmental and regulatory policies:

    • Licensing of New Banks: The RBI appears to have transited through tricky issues on granting in-principle approval for licensing of new banks during the period covered by the election code of conduct. On April 2, 2014, the RBI gave in-principle approval of banking licenses to only two applicants viz. IDFC and Bandhan Financial Services. While the instant reaction on the announcement was that this was just the first round of clearances, it now appears that the four year process has, ended with the granting of two in-principle approvals. All the other aspirants will have to wait for the introduction of a system of on-tap licensing procedures and the emergence of specialised limited banking licenses and those applicants who wish to pursue with their applications will have to apply de novo. While this does sound like an elephant giving birth to a mouse, it needs to be appreciated that the whole governmental machinery is in a melting pot and it is just as well that the earlier ambitious process has been truncated. It is hoped that from a transparency point of view, each aspirant will be given a communication as to reasons for it not getting an in-principle approval.

      The application from India Post is of a different genre. It is good to know that this issue is not closed but will be followed up with the Government of India. While one view is that the government would be unwilling to give up large resources flowing to the government budget, to ensure meaningful financial inclusion it is necessary to give the India Post application careful consideration. No other system matches the postal system in its spread through the country, particularly the rural areas. It is not as if all the 155,000 post offices would be converted into a bank. In the initial stage only a few key offices could be operated under the Postal Bank and other units would perform as agents or extension counters. It is gratifying that this vital issue is still open to consideration.

    • Bank Restructuring: The RBI intends to carry forward work on the Discussion Paper on Banking Structure in India (August 2013). Hopefully, this would be the first step to coalesce the Financial Sector Legislative Reforms Commission (FSLRC) Report, the Mor Report and the Urjit Patel Report. A pragmatic approach would be, it is hoped, developed in the best interests of the common person, who as a depositor is the true owner of banks.

    • Inflation Indexed Securities: There is a glimmer of hope in the RBI policy Statement of April 1, 2014 that the Inflation Indexed Securities will be amended to allow 'issuance of securities with regular coupon flows'. This could be a major bonanza for senior citizens and others dependent on regular interest income which would make this scheme extremely popular.

    • Non-Maintenance of Minimum Balances in Savings Bank Accounts: The measure of withdrawal of ancillary facilities, rather than imposition of penalties on non-maintenance of minimum balances in Savings Bank accounts is welcome. There will be a need for detailed guidelines to avoid hardships to small depositors.

    • Savings Bank Interest Rate Cartel: It is unfortunate that the RBI has not used its moral suasion to urge banks to reconsider their obvious cartelisation of the Savings Bank interest rate at 4 per cent. Apart from a few small banks all large banks have followed the cartelised rate. Sooner or later this issue will explode and one hopes that the RBI does not have to rue its implicit decision not to take cognisance of the cartelisation of the savings bank rate. When lending and fixed deposit rates were freed each bank fixed its own rates. The RBI needs to give serious attention to the issue of cartelisation of the savings bank interest rate.
Please Note: This article was first published in The Freepress Journal on April 7, 2014. 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.