Some time in the middle of last year, when the world was still reeling from the aftershocks of the global financial crises, I had asked the RBI governor whether US Fed chief Ben Bernanke increasingly looked like Abhimanyu, the tragic character in Mahabharata who had entered the Chakravyuha but lacked the knowledge of how to get out of it. Bernanke had then made a statement that his biggest challenge would be how and when to exit the massive monetary stimulus package he had delivered to help the $14 trillion US economy come out of recession. With a touch of humility and humour that is typical of his personality, the RBI governor said, ?We are all Abhimanyus in our own ways.? Most central bankers were, therefore, in the same boat as Bernanke.
It was interesting that Duvvuri Subbarao chose to talk about chakravyuha and the dilemma faced by Abhimanyu even as he delivered his first instalment of exit from monetary stimulus on Friday. In Mahabharata, the Chakravyuha was a deadly battle formation used by Kauravas to trap the rival Pandavas. Only Arjuna had the knowledge and ability to come out of it unscathed.
However, in the rather complex world of global finance, there are no Arjunas around. The only one who was hailed as invincible for a while, Alan Greenspan, was soon stripped of that title. History has established beyond doubt that in the world of central banking, wisdom comes only with the benefit of hindsight!
Therefore, one would tend to reserve judgement over Subbarao?s first significant step in monetary tightening. With a 75-basis-point hike in the cash reserve ratio, he managed to deliver a positive surprise to a market that was expecting a small rate hike. Bank stocks fell at first and then recovered sharply, when it dawned that the CRR hike would not represent a significant dent on bank bottomlines. In any case, banks were on a regular basis placing their excess cash of over Rs 50,000 crore with RBI in reverse repo auctions. That much cash was out of the banking system anyway. Only, banks would now lose the small interest they earned earlier by placing the cash with RBI.
Overall, RBI?s liquidity management has been pretty sound over the past year or so. The massive government borrowing programme announced in the last Union Budget had caused tremors in the bond market. Sceptics had expressed grave doubts over RBI?s ability to manage the government?s borrowing programme. Finance ministry officials had also complicated matters by pronouncing that half of the government borrowings might get virtually monetised. Many were sceptical about the gargantuan government borrowings of Rs 4,00,000 crore plus going through smoothly.
Today, government borrowings are nearly complete and there is still enough liquidity in the system for private credit offtake. Indeed, the latter has picked up somewhat in recent months and RBI has pegged credit growth at a reasonable 17%.
Subbarao took charge of RBI at a very difficult time and his first big challenge was to deal with the global credit freeze after the Wall Street collapse. In the trying times that ensued, RBI?s liquidity management has been pretty sound.
As things stabilise progressively, RBI needs to shift attention to the real structural issues in regard to credit flows and financial inclusion. One feels too much energy is expended by economic commentators on monetary policy issues, which are confined largely to whether interest rates are appropriate in the context of inflation and growth trade-off. This is an endless debate and does not lead us anywhere in particular.
It is time the debate shifted substantively to other structural issues relating to financial inclusion and creating market mechanisms for better transmission of interest rate signals, especially to the vast majority of small borrowers. There have never been any liquidity issues for the top 1,000 companies as most of them borrow below PLR anyway. They also have easier access to foreign markets as the government?s external commercial borrowing policy is biased in favour of big companies.
There is a dire need to focus attention on how banks can lend more to the vast majority of the unbanked in rural India in a cost-effective manner through the use of simple technologies. The solutions are available but someone has to take a call. It is even more critical to create capacity in our banking system to mobilise the savings of the unbanked rural folk whose income profile is rapidly changing.
It is all very well to gloat how bank nationalisation in 1971 increased India?s savings rate from 11% to 22 % in a decade through deposits. Those were low-hanging fruits, so we should avoid being ecstatic about them now. The new goal should be to garner another 10% savings from the over 50% of the farmers who are still unbanked. India is in a new phase where agriculture incomes are going up in traditionally backward states like Uttar Pradesh, Bihar, Orissa etc. This is the time for some structural reforms in the financial sector, which give financial inclusion a leg up. If done systematically, this could be Subbarao?s more lasting legacy.
mk.venu@expressindia.com