RBI's reversal stance

Last week the Central Bank took us by a surprise with some of the retrograde steps which calmed down the unrest in the fixed income and equity market. The measures included Liquidity infusion amounting to Rs. 8000 Crores through OMO (open market operations), scaling down  issuances of cash management bills hitherto intended to suck out liquidity and letting banks to move their SLR securities to HTM category (held to maturity) from available for sales up to the limit of 24.5% as an one time measure. Else, banks would have ended up booking huge market to market losses to the tune of 40,000 crores.

 

Indian government bonds posted their biggest weekly gain in four-and-a-half years and the new

Benchmark 10-year bond yield fell 62 basis points over the week, the sharpest since January 16, 2009. For the week, the new 10-year bond yield was down by 62 basis point from last week's close of 8.89%.

 

It appears that the antiquated approach of ‘liquidity tightening ‘to prop up the currency proved to be counterproductive as the yield across tenors hardened, adversely impacting the flow of credit to the productive sectors of the economy. With the country’s GDP at a decade low in the last fiscal and the recent downward growth revision to 5% for the FY 2013 -14 is posing a bigger challenge to the country’s economy.

 

Today, the country is experiencing a slow growth accompanied by high inflation, which technically known as stagflation. We are already witnessing the signs of the same like price rise, unemployment, volatility, lack of confidence in capital markets, reactionary manoeuvres by the central bank etc. The effects of stagflation are much worse than recession and inflation experienced separately, as there is no easy fix. Recessionary conditions call for reduction in interest rates and increased government spending. However, these can lead to more inflation, which is half of the problem when dealing with stagflation.

 

But, if we take a closer look at our inflation data, it’s the food inflation which is taking the toll. This can better be managed by addressing the supply side constraints & improving efficiency in public distribution system.  A recent report suggests that fruits, grains and vegetable worth Rs 44,000 crores are lost every year due to inadequate storage facilities.

 

The reversal of RBI’s monetary stance is probably a realization that things are going out of hand due to significant tightening of liquidity and an indication of its focus towards ‘GROWTH’

 

The fiscal deficit during the first quarter jumped to R 2.63 lakh crores i.e.  Half of the Budget target for the entire 2013-14, increasing the anxiety over the state of the economy. The primary reason for the high fiscal gap was due to sluggish revenue growth even though government spending remained robust.

 

The total receipts during April-June were at R 1.19 lakh crores or just 10.6% of the budget estimate for 2013-14, while expenditure were at R 3.82 lakh crores or 23% of the Budget estimate. Of the revenue receipts of R1.17 lakh crores during April-June, tax receipts accounted for R1.02 lakh crores.

 

The capital receipts were just Rs. 2,172 crores during the first quarter in absence of any big-ticket disinvestment. On the spending side, the centre's non-plan expenditure was at R2.67 lakh crores during the first quarter, which was 24.1% of the budget estimate. The plan expenditure was at Rs.1.15 lakh crores or 20.7% of the BE. The revenue deficit in the first quarter was at R2.1 lakh crores or 55.4% of the budget estimate for the entire 2013-14.

 

In the light of all the above, there is a higher need for a co- ordinated effort by the Central Bank and the Government to accelerate growth. Lest, the fiscal deficit projection of 4.8% of the GDP would remain a herculean task.

 

 

 

 

 

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