Former central bank deputy governor S S Tarapore today said the Reserve Bank of India's monetary measures to contain inflation have been "appropriate" as of today, but felt the repo rate should be above the 1-2 year deposit rates.
"The repo rate is below the deposit rates for 1-2 year maturity. It should be in between the deposit rate and lending rate, not below both. Otherwise it (the RBI) becomes the lender of the first resort, not last," Tarapore said. Repo rate is the rate at which the central bank lends one-day money to banks against government bonds.
Several banks are offering interest rates as high as 8.25 per cent to 9 per cent for deposits of over one-to-three years, which is higher than the repo rate of 7.50 per cent.
The present repo rate is low considering that on-lending is happening at 11 per cent-plus rates. There is massive advantage to avail of the repo window provided a bank has securities in excess of the statutory liquidity ratio requirement.
"The RBI is the lender of last resort, not the first resort. If the (repo) rate is sub-market. Rationing (of liquidity) is not the neatest way of transacting the instrument of the central bank. It would be far better doing it with a market clearing mechanism," Tarapore argued.
The RBI, in its third quarterly review, had asked banks to eschew use of repo resources for on-lending. RBI today lent Rs 11,910 crore (Rs 119.1 billion) through its repo window.
Asked if the measures taken by the RBI and the government are enough or adequate, he said "Enough is a qualitative word. It is an ongoing action. The government took various measures such as cut in import duties and oil prices."
The RBI increased repo rate by 25 basis points in October, CRR by 50 basis points in December, and again repo rate in January and CRR by 50 basis points on February 13. CRR is the extent of deposits which banks are required to keep as cash balances with the RBI.
Tarapore said the kind of policy that evolves in the immediate future will depend on foreign exchange inflows and the exchange rate movement.
He considered appropriate RBI's intervention in the foreign exchange market to mop up large inflows and prevent too much volatility and then to absorb the rupee liquidity by increasing the CRR. "It's a stimulus response," he quipped.
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