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Jalan cautions against impending crisis

NetScribes/Sourav Mukherjee

The cat is out of the bag. Read Reserve Bank governor Bimal Jalan's lips and you'll find a hidden message: Estimates of gross domestic product (GDP) growth for 2000-2001 have been scaled down to 6-6.5 per cent from 6.5-7 per cent, the inflation outlook has turned "uncertain", interest rates could climb and the rupee continues to be under pressure.

The RBI chief's Mid-Term Review of Monetary and Credit Policy for 2000-2001 is nothing short of a veiled warning of another crisis in the making. That is, unless "external market conditions" improve -- read skyrocketing crude oil prices -- and investment outflows turn into inflows.

It's also an emphatic acknowledgement that central banks are powerless in the face of the forces of globalization that threaten to change the landscape of a once-controlled marketplace.

That's why, even before the stark announcement, Jalan has drawn up his contingency plan: State Bank of India's India Millennium Deposit program. The proposed mop-up at a high cost is expected to provide enough ammunition to Jalan to combat another Asian crisis-like storm. In the war between markets, India's high foreign exchange reserves could hold the key.

That's also probably why Jalan has steered clear of last-minute surprises that he is wont to spring; just a few weak moves towards a tighter, more prudent regime and international accounting practices. And some more to thwart speculation in the initial public offer (IPO) market. That's good news for the system, not so for the stock markets. (Coincidentally, just after Jalan's announcement, the BSE Sensex tanked to below 4,000).

What then does the future hold in store? Inflation and interest rates seem to hold the key. The inflation rate was at 6.06 per cent on September 23, 2000, on a point-to-point basis, against just 3.20 per cent a year ago. And to make things look worse, without the 25.9 per cent rise in prices of fuel and petroleum over the last one year, it actually stands lower at 2.44 per cent! That's thanks to the price of oil.

Rising inflation is forcing the RBI to keep its monetary stance tight. Although the governor has assured the markets that interest rates will remain stable and liquidity will not be a bottleneck to funding projects, the fact remains that he was forced to raise the Bank Rate and the cash reserve ratio (CRR) of banks on July 21. This time around, he is a tad more frank: "During the rest of the current year, the interest rate outlook would crucially depend on external market conditions, domestic developments in respect of the overall rate of inflation, demand for credit from the commercial sector and the government's borrowing requirements."

This is a reminder that Jalan will not hesitate to raise interest rates once again if the situation so demands. While credit to the commercial sector is growing (7.1 per cent against 3.2 per cent in the same period last year), the government's borrowing programme holds the key. That is already slated to go awry due to the rising oil pool deficit and failure on the PSU divestment front. But not enough to prevent Jalan making a plea to the government: "A reduction in the borrowing program would be desirable as it would make a positive contribution to keeping the interest rate outlook positive and stable."

Despite these cries for support Jalan still knows that the whole equation boils down to playing the rupee game right. And despite repeated denials, this is probably the closest that Jalan has gone to admitting that the RBI has not allowed the rupee to, "find its own level".

Look at the policy seriously. Has Jalan ever gone into such depth about that most undefinable of terms - the exchange rate? The RBI chief has taken care to stack argument after argument in defense of the falling rupee and acknowledged that central banks are not always capable of taming speculators. That is why he has also built up an equally strong offensive argument for larger reserves (read IMD) that according to him can help the country during crises.

The underlying theme though, still remains one of caution: "The recent international experience, particularly during the period of the East Asian crisis, has highlighted the fact that emerging market economies have to largely rely on their own resources during external exigencies as there is no lender of the last resort to provide additional liquidity at short notice."

Take heed. And cross your fingers.

RBI's Credit and Monetary Policy 2000-2001 (Second Half)

RBI's Credit and Monetary Policy 2000-2001 (First Half)

RBI's Credit and Monetary Policy 1999-2000

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