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RBI must tell more

A. Seshan

THE Reserve Bank of India's Monetary and Credit Policy is noteworthy also for its detailed review of the previous year, issued as a separate document. Not many central banks prepare such a document. The RBI brings out in October a half-yearly progress re port on the economy. It would do well to come out with a quarterly report for April-June. No other institution in the country has access to such a wealth of information as the RBI. Often, national institutions of lesser standing get the limelight publish ing the limited information they have. In fact, when the RBI Bulletin was revamped a decade ago to bring it out without delay, quarterly economic reviews were published in the place of the traditional monthly financial reviews. The latter had little econ omic content and merely paraphrased the tables. As a result, no serious student of the economy read it. The quarterly reviews, on the other hand, were appreciated by the financial press and economists. It is time to revive them.

The review of the year gone by, that is appended to the Credit Policy document, is done with the rigour that one associates with the Department of Economic Analysis and Policy of the Bank. However, there is the usual tendency to gloss over uncomfortable facts by using economic and statistical jargon and playing around different reference points in computing the inflation rates. While it may be interesting for the expert, to the common man, whose welfare should be at the heart of the central bank as well as the government, what is important is the reality he faces in the market. The consumer has been facing a continuous rise in prices of essential articles over the last several decades. It makes no sense to him to be told that the point-to-point inflati on rate works out much lower than the average one! Such an analysis is no doubt helpful in isolating monetary, structural and administrative factors as causes of inflation. Even from the administrator's point of view, the construction of one more index w ould be useful to understand the magnitude of the burden on the common man. For the millions of poor people, food, kerosene, clothing, etc., are the only important items of family expenditure. Without much effort, a Price Index for the Poor (PIP) can be compiled by isolating the most essential items from the existing indices. There is an index for agricultural labourers which is close to it but it comes out with considerable time lag. For policy-making the Wholesale Price Index (WPI), despite its limita tions, is used to monitor inflation as it is generally out with a time-lag of only a fortnight. The PIP could be constructed out of the WPI.

The review of the external sector has some textbook stuff on the working of the forex market. There is a belated admission that the day-to-day movements in the forex market have little to do with the so-called fundamentals or country's capacity to meet i ts payment obligations, including debt servicing. The world discovered this more than a decade ago when the Exchange Rate Mechanism of the European Common Market collapsed because of one punter, George Soros. The then German Chancellor rued the gentleman making a billion dollars overnight through speculation beating the mighty Bank of England. The RBI stuck to the outmoded doctrine of the Real Exchange Rate until it was given up some time back. Still habits die hard. There is a reference in the policy p aper to the nominal currency values of developing countries being expected to show a depreciating trend particularly if the relative inflation rates are higher than those of the major industrial countries.

On the stance of the Monetary Policy itself, it is a matter of satisfaction that the RBI has taken cognisance of the criticism of its past policies. In projecting the expansion in money supply (M3), it has exercised some self-restraint. For a real GDP gr owth of 6-6.5 per cent and an expected inflation rate of 5 per cent, the planned increase in money supply is 14.5 per cent. This is perhaps the first time in recent years that the M3 growth is projected below 15 per cent under similar assumptions. The RB I is always under compulsion to expand money supply, both from the Government and the industrial sector, to ease the rates of interest.

Under such circumstances even a slight moderation in the projected percentage expansion of money supply should be a matter for satisfaction for the concerned observer, given the massive base running into lakhs of crores of rupees. The central bank should progressively reduce the baker's dozen it provides in the growth of money supply for accommodating expected inflation. Eventually, monetary expansion should be limited to what is required for productive and investment purposes only.

On financial sector reforms and monetary policy measures, the report has much to be commended about. However, one does not understand how instructions such as those relating to a higher interest rate for deposits of senior citizens and lending below the Prime Lending Rate continue to be given. We have been told for many years that banks are operating under a deregulated regime for interest rates. Obviously, restrictions and controls have continued in one way or the other. But we continue to follow the p olicy of neither here nor there in economic policy-making. The relaxation in the daily minimum CRR maintenance requirement is stated to be intended to reduce volatility in the call market. However, this may increase the volatility around the reporting da te. One may expect a change in the instruction after some time. The discontinuation of the 14-day and 182-day Treasury Bills is a welcome step. One unintended spin-off will be a pick-up in secondary market transactions for the other bills.

The RBI is under constant pressure to reduce rates of interest both from the government and the borrowers. Despite the existence of an all-India association for them, the silent majority of depositors, especially those living off the returns from the sav ings of a lifetime, are not well-organised for a counter campaign. Much of their savings is already eroded considerably due to the seigniorage revenue of the government collected through inflation over the years. The projected inflation rate of 5 per cen t is a permanent fixture in policy-making.

Look at the European Central Bank refusing to lower interest rates in response to the Fed action because consumer inflation rate is above 2 per cent. A poor country like India can tolerate an inflation rate of 5 per cent! How does it help the poor deposi tor if the savings bank rate is fixed at 4 per cent? Most small depositors have only the savings bank account and their real return is negative. For many of them, it is really an avenue for accumulating savings and is not a current account in disguise. T he burden arising out of the inefficiencies of the banking system and inability to reduce its spread is borne by the small man.

(The author is a former officer-in-charge in the Department of Economic Analysis and Policy of the RBI.)