The cut in the rate of interest for repos, and the half a percentage point reduction in bank rate point to a reversal of the January measures by the Reserve Bank. The repo rate was higher than the yields available on 14-day and 91-day T-bills. Even the yield on 364-day T-bills was lower than the fixed repo rate of 9 per cent. This obviously affected T-bill subscriptions.The Reserve Bank of India has been unwilling to go in for higher interest rates on its longer dated securities, and there was little option but to signal a monetary easing. Easing the monetary policy stance may also be a fallout of the fact that investment in government securities has been falling, with cash-strapped banks selling securities in order to garner funds.
The central bank needs to prepare for its borrowing programme next fiscal, and the indications are that a loose fiscal policy may result in a higher government borrowing requirement. Add to that the increasing draft on local bank resources due to the drying up of ECBinflows, and we have a stage set for upward pressure on interest rates.
The RBI's action is therefore a pre-emptive strike, aimed at containing the fall-out of pressures expected to materialise at a later date. The central bank has also been extraordinarily cautious, mainly because it wants to wait and watch what effect its measures have on the rupee. But downward pressures on the rupee seem inexorable, given the arthritic performance put up by exports.
The caution, therefore, is eminently justified. With the fiscal affairs of the central government in shambles, the RBI will need all its ingenuity to walk the monetary tightrope. Thankfully, the low inflation leaves some room for manoeuvre.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
