Why Should Government Not Interfere With Independence of RBI? There is a need for further raising the repo rates / policy rates

Now it has become public that government is using various tactics to pressurize RBI Governor to stop increase in policy rates.  AllBankingSolutions is of the view that a wrong precedent is being set up by government.  There are number of reasons why there should be an increase in policy rates at this stage.

There is a no doubt that the issue of raising the policy rates in the forthcoming mid-quarter monetary policy review on Friday the 16th September, 2011, needs to be discussed at various levels as the change or no change in the policy rates have implications for the Indian economy.   However, the news that government is pushing ahead and trying to put the RBI governor in corner and concede their demand to put a halt to raising the policy rates, is worrisome, and will be a blow to the independence of RBI.  Although, the final call will be taken by RBI (may be under pressure from Government), we at AllBankingSolutions feel that there is a need for raising the repo rate further by at least 25 bps, owing to following factors:-

• There is no doubt that the growth is also an important issue.  However, the issue of  inflation is more bigger.  The benefits of the  growth are being cornered by few rich, whereas the inflation is hitting the most the poor of the poor. To put the issue of growth over the inflation will be setting the wrong priorities

• It appears rich industrial business houses are feeling the pinch of increasing rate of interest on their borrowings.  They are again in the business of twisting the arm of government for putting pressure on RBI Governor to halt the 12th increase in a row;

• The recent trends in term deposits rates vs BPLR (now changed to base rate), gives an indication that the middle class is being further squeezed by banks, specially under pressure from Government, and to increase their profitability / NIM.  Everybody is aware that at present BPLR of most of the banks is at the historical high level.  However, the term deposits rates are still far lower than the historical peak of 13% sometime in the middle of 1990s.    The highest term deposits for long term are between 9.00% to 9.50%.  This clearly indicates that now banks are enjoying a net interest margin of at least 3.50% more than what it was available in 1990s.   We have not yet discounted the high level of SLR and CRR which was prevalent at that time.  

• The high NIM available to bankers is purely at the expense of poor and middle classes.  Senior citizens whose income mainly depends  on the returns from fixed deposits are feeling the pinch as returns have been much lower than the inflation rate.  Thus, we can say the return for them has been negative.  However, as they do not any strong forum, they are being taken for a ride by Government and banks by keeping the term deposits rates at a lower level then these deserve to be.

Thus, there is a strong need for an independent review of the policy rates by RBI and ensure that inflation is checked by increasing the policy rates and ensuring that banks actually initiate steps so that interest rates move as desired by RBI.  It has been seen that RBI's signals are frequently ignored by Banks and no effective steps are taken by them.   Government needs to ensure that interests of the poor and middle classes is also watched, as if negative returns from bank savings continue, the growth in savings will be hit which will ultimately hit the growth of the economy.  

Therefore, let RBI take an independent view.