RBI's Third Quarter Review of Monetary Policy 2011-12

RBI’s Third Quarter Review was announced on this Tuesday (i.e. 24.01.2012). The Press statement on the Policy Review stated that “Based on an assessment of the current macroeconomic situation, we have decided to:

Ø   Cut the cash reserve ratio (CRR) of scheduled banks by 50 basis points from 6.0 per cent to 5.5 per cent of their net demand and time liabilities (NDTL). This will be effective the fortnight beginning January 28, 2012.

Ø   This reduction in the CRR will inject around Rs. 320 billion of primary liquidity into the system.

There is no change in the policy interest rate. Accordingly, the repo rate under the liquidity adjustment facility (LAF) remains at 8.5 per cent.

          Consequently, the reverse repo rate under the LAF, determined with a spread of 100 basis point below the repo rate, will continue at 7.5 per cent, and the marginal standing facility (MSF) rate, determined with a spread of 100 bps above the repo rate, at 9.5 per cent.”

The Monetary Policy Stance said that three broad contours of our monetary policy stance. These are:

Ø   to maintain an interest rate environment to contain inflation and anchor inflation expectations;

Ø   to manage liquidity to ensure that it remains in moderate deficit, consistent with effective monetary transmission;

Ø to respond to increasing downside risks to growth.

The RBI’s expected outcome from these policy move are as follows:

Ø First, liquidity conditions will ease.

Ø Second, downside risks to growth will be mitigated.

Ø Finally, medium-term inflation expectations will remain anchored on the basis of a credible commitment to low and stable inflation.

This time RBI had come with risks to our projections of growth and inflation for 2011-12 and it had listed Seven as follows:

1.  Sovereign debt concerns in the euro area pose a major downside risk to the overall growth outlook.

2.  Slowdown of capital flows in the face of a widening current account deficit.

3.  Global energy prices continue to pose a risk to growth and inflation due to geo-political factors and the global macroeconomic situation.

4.  There are signals of increasing risk aversion by banks, which could adversely affect credit flow to productive sectors of the economy.

5.  Inflation in respect of protein-based items remains high due to structural imbalances. In the absence of appropriate supply responses, risk to food inflation will continue to be on the upside.

6. There is a large element of suppressed inflation as domestic prices of some administered products do not reflect the underlying market conditions. Revision in domestic administered prices will add to inflationary pressures, although I should note that such revisions are necessary to maintain the balance between supply and demand. 

7. The fiscal deficit of the government could potentially crowd out credit to the private sector.  Moreover, slippage in the fiscal deficit has been adding to inflationary pressures and it continues to be a risk for inflation.

My Reflection:

          I am glad to see that RBI had finally found out some major risk factors to their Growth projections and Inflation. Hats off RBI!!!  At the same time, it’s surprised many people by cutting CRR rate by 50 basis points from 6.0 per cent to 5.5 per cent. Many people would have expected no action from RBI; but this move would have surprised many, if not many, at least me. I think it would have been better if RBI had not taken any policy measure at this juncture. The new injection of Rs. 320 billion in the economy may lead to increase in inflation again, which slowly cooling down. We need to wait and watch how the Economy reacts for this RBI's policy measure. I am also, looking Forward for the Annual Monetary Policy 2012-13 in order to know RBI’s Inflation Projections for the financial year 2012-13.  

Greek debt is running out of time - Unending Austerity Measures - When it will End?

The Austerity Measures for Greece is still continuing without any opposition. In Greek Mythology there was a king named Sisyphus, who condemned by the Gods to roll a boulder up a hill for all eternity. The name is used now to describe a never-ending Task. This is what now happening in Europe in the case of Greece. There was talks between European officials, during last Friday (i.e. 13.01.2012), aimed at reaching agreement with creditors to cut Greece's debt burden.

The talks are seeking to slice €100 billion ($126.7 billion) from the Greek government's €350 billion in debt without delivering an ultimatum to private bondholders, who together hold more than €200 billion of bonds. (For Full Article here)

Greece's continued access to bailout loans depends not only on delivery on its austerity promises but also on negotiations with private creditors on a bond swap deal aiming to cut its debt by 100 billion euros ($129 billion.) It needs to get an agreement soon if it is to secure more rescue loans, with a bond repayment of 14.5 billion due on March 20 that the country currently lacks the cash to pay. (For Full Article here)

The International Monetary Fund (IMF) is planning and proposing to lend a $1 trillion to insulate the global economy against any waning of Europe’s debt crisis, according to an official at a Group of 20 nations.  The interesting part is that IMF is pushing China, Brazil, Russia, India, Japan and other oil-exporting nations to make the huge contribution for this lending. It is expected that the agreement would stuck at the meeting of G-20 Finance Ministers and Central bankers which is going to held on February 25-26 in Mexico city.

My Perception

The IMF as a financial watch dog is doing its work more sincerely than any other institution across the globe. But, the real question is, whether it can avoid the financial catastrophe in Europe. Those who follow the Greece Crisis knows that the officials from the European Union and International Monetary Fund, which are lending money to Greece to keep it from bankruptcy, is expected to coerce the government to have faster cost-cutting measures. Greece had access to the bailout loans not only on the delivery of its austerity promises but also on the negotiations with the private creditors on bond swap deal aiming to cut its debt by 100 billion Euros. Remember that, Greece needs second bailout of 130 billion euros in order to pay its creditors. Despite that, IMF is ready and planning to lend $ 1trillion to wane the Europe’s debt crisis. The question which is frequently asked by many people is how long the current and additional austerity measures will be carried out. Interestingly, many of the European countries itself are not ready for further austerity measures. 

I again and again repeat the quote of Ludwig Von Mises, from his book Human Action, "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

People may say sooner (or) later, that in order save Euro we may not continue the austerity measures.  Greece should be either ready for Voluntary abandonment, if at all it wants to save Euro and other European nations else there may be total Catastrophe.

INDIA’S R&D EXPENDITURE AS A PERCENTAGE OF GDP

Recently, in the 99^th Indian Science Congress (ISC), Prime Minister of India Dr. Manmohan Singh said that “Over the past few decades, India's relative position in the world of science had been declining and we have been overtaken by countries like China." The prime minister also emphasised the need for increasing spending in the science sector. "As far as resources are concerned, the fraction of GDP spent on research and development in India has been too low and stagnant. We must aim to increase the total R&D spending as a percentage of GDP to 2% by the end of the 12th Plan Period from the current level of about 0.9%,"

Prime Ministers announced the Six Key Objectives of S&T for the Twelfth Five Year Plan. Yesterday (04.01.2012), one of Senior Official of the Government of India said in an interview that it’s good that PM had announced 2% of GDP for R&D. He also stated that “India is spending only 0.8% of GDP whereas Germany is spending nearly 6-8% of GDP and most of the developed nations are spending more than 4% of their GDP on R&D”.

My reflection

After hearing the Interview, I got perplexed on the figure of expenditure as a percentage of GDP; which resulted in small research on R&D expenditure as a percentage of GDP. No doubt, India is spending only 0.80% of GDP; but what about the remaining countries. Here is what I found, as per world bank, India spends 0.80%, Germany spends 2.54% of their GDP, France spends 2.04%, USA spends 2.72% of their GDP, UK spends 1.82% of their GDP, China spends 1.44% of GDP, Brazil spends 1.10%, South Africa 0.93% and Russian Federation spends 1.12% of their GDPs.

The Senior Government official should be  little careful and also should have done some research before making such a public statement. India is trying its level best to do good in R&D, here are the few budget measures which was announced during last year budget speech: 

1. To further encourage R&D across all sectors of the economy, weighted deduction on expenditure incurred was enhanced from 150 per cent to 200 per cent.
2. Weighted deduction on payments made to National Laboratories, Universities or IITs or a specified person, with a specific direction that the said sum shall be used for scientific research undertaken under an approved programme was also enhanced from 125 per cent to 175 per cent.
3. Payments made to associations engaged in research were allowed as weighted deduction of 175 per cent. The income of such approved research associations shall also be exempt from tax.

   Despite these measures, India spends very less on R&D even among the BRICS nations. India is still lacking behind among BRICS nations which is really a concern because even the small BRICS nation like South Africa and Brazil are spending more than what INDIA does. Even though, India is slowly emerging as one of the focused  R&D  place across the globe it still needs to go a long way to become real R&D hub.