Conducting monetary policy has often been likened with driving a vehicle with a shattered windscreen in inclement weather, looking at the rear-view mirror, with one foot on the accelerator and the other on the brake.
But what happens when the vehicle has just been serviced and you are driving on a bright sunny day with a clean windscreen and little traffic around? The road is too clear and the brake need not be pressed. Get the idea?
The mid-term review of the Annual Policy Statement is to be presented at a time when there is little to be done, in terms of either policy actions or even an economic review. The Central Statistical Organisation (CSO) has already told us about the bright real economic performance in the first quarter of financial year 2006.
GDP is flourishing with industry and services leading the way. Agriculture is growing at 2 per cent, which is apparently disappointing. But this does not matter since the true picture of the kharif prospects emerges after September. And given that rainfall has been adequate, the overall performance would be at least satisfactory.
The finance minister has also spoken of a growth rate of over 7 per cent this year, and hence there is nothing new to be added except the decimal places involved, which is more of academic interest.
With growth being more or less agreed upon, the other objective of monetary policy is inflation. Monetary policy affects inflation when there is excess money supply which triggers demand-pull forces a la Keynes.
Today inflation is in the region of 4 per cent (on a point-to-point basis) and has been caused by cost-push factors, that is, higher fuel prices in particular. Higher growth in money supply has not really put pressure on prices.
In fact, the monetisation of forex reserves has also been quite moderate this year. Further, while the international oil price situation is still not comfortable, it is believed that the prices would settle down in the range of $60-65 per barrel and the spectre of a $100-mark is no longer under discussion. Therefore, inflation would be in the range of 5-5.5 per cent, which was the Reserve Bank of India (RBI) position to begin with.
Hence, the broad objectives of monetary policy are well within the periscope viewed by the RBI and do not require any attention.
The other concerns of the RBI would be with respect to liquidity and interest rates where monetary policy instruments such as cash reserve ratio (CRR) and bank rate come in. It may be mentioned here that since last year's Annual Review, the CRR and reverse repo rates have been up by 50 bps while the bank rate has remained unchanged. Do these two need to change today? Not really, since the situation does not warrant any such action.
Bank credit has accelerated by 11.2 per cent up to mid-September as against 9.5 per cent last year. Deposits on the other hand have risen by 9.2 per cent (5.3 per cent). The difference between incremental bank deposits and credit is as high as Rs 30,000 crore (Rs 300 billion), which also gets reflected in the form of surplus funds with banks which are parked in reverse repos, which range from Rs 15,000-25,000 crore (Rs 150-250 billion) a day. This means that, growth in credit notwithstanding, there is plenty of liquidity in the system.
Higher government borrowing typically puts pressure on the overall liquidity and could pre-empt resources for the private sector. But borrowing is at the same level as that last year at Rs 81,000 crore (Rs 810 billion), and accounts for 60 per cent of the projected borrowing of Rs 1,39,000 crore (Rs 1,390 billion). With the calendar for borrowing being spelt out by the RBI, there are no surprises here too.
Interest yields on government bonds have moved northwards, with the 10-year yield touching 7 per cent after quite a large hiatus. But the basic bank deposit and lending rates have moved up only marginally.
In fact, while the average deposit rate on a one-year deposit is up by 50 bps, the prime lending rates range has remained unchanged over the year. Therefore, there is little need for any further alteration in interest rates.
What all this means is that the RBI has really little to say this time. The quarterly review has been superseded by the CSO-GDP numbers and the FM's statement. If nothing has to be done, the next issue is whether or not there is wisdom in having such reviews.
Even earlier, it was debated whether there should be a mid-year review, which was a euphemism for the busy season credit policy, especially since the RBI has been proactive with the market developments and used fine tuning to effect them.
However, while markets are rational, its players aren't. They keep expecting changes that are not warranted, which in turn create ripples and the hype that goes along with it. A review of the economy also appears to be quite unnecessary and should be timed in a manner where it does not overlap with information already available.
There is in place a long list of official economic reviews in the form of the Economic Survey and RBI Annual Report besides the CSO quarterly updates and the RBI's own quarterly reviews. Quite clearly such a torrent of information does not always carry a lot of novelty with it.
The author is chief economist, NCDEX Limited. Views expressed are personal.
