RBI Shocker

Dr. Subbarao’s era as an RBI governor is the worst in the recent times. He has raised interest rates 13 times during his tenure, and only marginally reduced them twice this year, without significantly reducing real inflation, which according to him is his main concern.

Again, he delivered a shocker a few days back by announcing a series of measures, sucking out a large amount of liquidity from the system, which has effectively raised the repo-rate from 7.25% to 10.25% accordingly to Pratip Chaudhuri, SBI Chairman who has been his biggest critic.

“He could have simply raised the repo-rate instead of doing things in a non transparent way”, says Pratip Chaudhuri, and I couldn’t agree with him more. One of the principle reasons of India’s GDP growth rate within a 10 year low to 5% has been a combination of bad RBI policy and bad governance of UPA. Subbarao himself has admitted several times that simply monetary tightening cannot bring down inflation. He could have paused tightening and forced the government to introduce reforms to contain inflation.

This time around these measures are said to be to contain volatility of a depreciating rupee, but instead has caused huge volatility in the short term in stock markets, bond markets and the rupee itself. “Collateral damage” has been caused to the economic growth which should take a long time to be undone. Also it has damaged the underlying fundamentals of a robust banking system and may severely hurt well-managed banks like ICICI, HDFC, Axis, SBI and especially very well managed banks like Indusind Bank, Yes Bank, PNB, and, in fact the entire banking system will have bad results in this quarter and will take long time to recover. The banking system is the backbone of the economy.

First of all RBI needs to understand that the rupee depreciation is essentially a function of dollar index appreciating from 79 to 82. As the dollar falls, the rupee is bound to fall. It should be allowed to find its own level. While CAD management is much more important, a depreciating rupee will eventually also help exports to the US and other new geographies. Government should be giving much higher incentives to exports. Indian manufactured goods are not only of better quality compared to Chinese but with a depreciating rupee they become very competitive.

Moreover, instead of going out with a begging bowl to attract FDI - of which not a single penny has come to India, in retail FDI. and now Walmart and others like Etihad are dictating terms for FDI because of desperation of India. There is a very large diaspora of Indians in USA, UK and Middle East with a lot of spare money. These countries are offering near 0 interest rates. What the RBI should do instead of damaging growth, they should announce 3 year and 5 year NRI and Sovereign bonds with a coupon rate of 5 to 7 % which will attractive a huge inflow.

What is the guarantee that with all these short term measures the rupee will not go back above the 60 level.

Moreover we also do not need Food Security - what we need is Energy Security. We can easily attract FDI in this sector if it had not been for a protracted price war on gas between the government and Reliance. There is a long coastline and big land mass India has. If India has a proper market related pricing policy for oil and gas there will be huge investments from the likes of BP, Chevron, Reliance, etc., if NELP auctions are conducted transparently. A case in point is that Cairn announced a 3.3 billion dollar investment in Rajasthan over next 3 years. Not only will we get sustainable FDI but lower energy prices, if we strike fair deals with these companies to market X amount of oil in the international markets and the rest to India at much lower cost as our share of the profits. Gold is only 20% of the CAD problem. Oil and Gas is 80% of it. Alternative technologies should be looked into. This should have been done 3 years back. But even now its not too late. We can change the scenario overnight.

I am surprised that nobody is talking of the crude oil bill, which keeps going up with oil, having shot up in the last couple of months to 107 dollars a barrel. This is no rocket science that we are suffering from an energy crisis, while high-level government economists like Raghurajan, Rangarajan, P. Chidambaram,  choose to remain silent on this subject.