Hi, Naveen and Tenzin
To start with what Naveen told that yes anybody cant predict what will happen looking to the present scenario, however, nobody cant predict what amount and to what intensity will it happen and effect the economies (yes starting with the U.S. where the epicenter lies!!), that's nobody is stating and predicting that is it over yet or still to go? (read the losses)
Now, moving towards Naveen's 4 point solution (I call it his, as he introduced it to us..!!), I have another view to that, our RBI Governor and PM are going ahead with reducing the interest rates and thus boosting more liquidity in the system. I agree that it will not create inflation. However, consider these facts:
1. RBI as a regulator can only reduce the rates and advice the banks to follow the same, however, it cannot force the banks to reduce the interest rates at their end. Will the banks pass this benefits to its customers? The banks are more cautious towards credit now. Only a few banks have reduced the PLR.
2. To justify the above point, as of today the RBI received few or no bids for it LAF (first or second) for repo rates, however, it received 14 bids for LAF (first and second) for reverse repo rates to the tune of approx. Rs.23000cr. This means the banks are parking money with the RBI to earn interest of the idle money lying with the banks with no credit creation.
3. Yes, the government has reduced the fuel prices to ease the burden on the common public; however, it is as we all know a political gimmick by the government in view of the coming elections. I think the government (or I should say our profound PM, a well-known economist) should have not reduced the fuel prices. It should have used this for eradicating with the deficits of the OMC's and cutting down on the taxes which contribute most to the fuel prices. How long will a government postpone this activity, until it creates a serious situation of deficits?
What I feel is, fuel prices will surely spike again and haunt us, however, are we prepared for that? Slowly, reduce the subsidies; pass on the burden of prices to public, at some point of time we have to face the reality of increased prices with no other option left to the government but to increase the prices, than to see the OMC's falling and then bailing them out..!!! Hence, reduce the subsidies and simultaneously reduce the taxes on fuel to adjust some price change. Accumulate the reserves of oil at these reduced prices for future.
4. Closely, looking to the inflation figures till now, it is clearly evident that its the fall in fuel or energy index that is bringing down the inflation from double-digits to single-digit, however, the food index is heading upwards. Yes, the additional rate cuts will increase the liquidity and people will have disposable income in their hands (unless they are not handed Pink Slips..!!), however, don't you think the increase in the prices of food articles will eat up their budgets and people will tend to save in CASH rather than banks (yes you read it correctly. If a person keeps the money with the banks for 350-400 days as fixed deposit, as the banks currently are offering a handsome interest of around 11% and thus locking the funds when they might need it for current consumption).
Hence, folks that are my side of 4 pointers, hope Mr. Naveen is not fuming while reading this and carry on with discussion further.. .
Oops!! the Bottom Line:
Yes, the government have good set of cards with it to combat the present situation, however, its the U.S. JOKER which is still be fooling our every move.
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Thanks and Regards,
Udit Mehra
My response…
First I would like to appreciate Mehra’s effort to read all my postings regularly and in addition to that he has taken VALUABLE time to respond to my previous posting (Where I replied to Tenzin’s query).
I completely I agree with all his 4 POINTS. But in this type of crisis time government needs to take steps which are in its control. Like RBI reducing CRR, Repo & Reverse Repo, LAFs, Refinancing facility (what RBI did today for reality sector/housing sector by inducing 4000 crore rupees). Otherwise we may end up in DEPRESSION due to RECESSION.
1. I don’t have a single word against his 1st point. He is right; RBI is a regulator not an AUTHORITY to reduce the interest rates of the banks. But in this type of crisis it can requests banks to do so. 1930s GREAT DEPRESSION happened/worsened not because lack liquidity/credit but because of lack lending & lack of trust. Finally what happened, through out the world, 9000 banks ended up in collapsing. So in this time of crisis government/RBI has to interfere or request. And that’s what Mr. Manmohan Singh is doing by urging industry personalities in terms of reduction of rates or avoiding mass lay offs & etc.
2. My reply to his 2nd point simple one line. TODAY RBI REDUCED THE REVERSE REPO BY 100 BASIS POINTS FROM 6% TO 5%. In simple terms, RBI wants liquidity to rotate in the economy instead of lying with itself. And why RBI didn’t receive any/few bids for LAF for repo rates. That’s because nobody is borrowing from them @ this high level of interest rates and that too in this kind crisis situation. Everybody is expecting to rates to cut. So when expectation didn’t meet, then markets starts shrinking. Why nobody is borrowing from banks? That’s because of shrinkage in the whole economy. And exactly at time markets needs government & central banks needs to act & act smartly. That’s what Mr. Keynes & Mr. Milton proposed in terms of rate cuts, boost packages, tax cuts & helicopter money respectively. So point 1 & 2 are interrelated.
3. Yes Oil price reduction is a Political Gimmick. I also want government to think about the OMC’s conditions. I also want government to pass on the burden to common man. I asked same question to VK. He told me that Manmohan Singh was the economic advisor of Indira Gandhi when whole world faced Oil shock (wherein crude oil price quadrupled) in 1970s. She directly passed on the burden to common people. At that time inflation shot above 20%. So Manmohan Singh can’t take that risk that too on verge of completion of his tenure now. But I still believe in burden should be passed on to common man. And it will be done only when all parties have their Manmohan Singhs, Chidambarams, Montek Singhs, Sam Pitrodas!!!
4. Yes I completely agree with Mehra’s 4th point. Query in his 4th point can be addressed by better supply chain management in terms of effective Public Distribution System (PDS) and that is done by better infrastructure to our rural areas from where we get all our food particles. And its complex & circuitous thing.
Bottom line:
Mehra I think in your 4 point you talked only about the MONETARY SIDE. You didn’t talk about FISCAL POLICIES, BOOSTING PACKAGES & so on. And you didn’t mention any solution about the handling of this kind of crisis situation. I think you forgot that. No problem, some other time…
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