SBI chairman presses for abolition of CRR

Mumbai, August 27 (PTI) Making a strong case for abolition of cash reserve ratio, country's largest lender, the State Bank of India (SBI) chairman today said the banks were unable to use the resources more productively, which is lying with the central bank without any interest earning. Though CRR, the amount of capital that banks park with the RBI, doesn't pay any interest to banks, RBI views it as a cushion against any liquidity crisis in the system.
Earlier in the day, the deputy governor of RBI K C Chakrabarty had said that banks had to work in the regulatory environment of the country. "If the SBI chairman is not able to do business as per our regulatory environment, he has to find some other place," RBI Deputy Governor K C Chakrabarty said in a sharp reaction to Chaudhuri's recent comment that CRR does not help anybody and it was unfairly put on banks.
However, Pratip Chaudhari, chirman of SBI also defended his views on CRR saying that when the deputy governor was a bank chairman, he was asking for the same. Chaudhari also said that when the CRR rate was high and GDP was low, there was a strong inverse co- relationship. He also said if CRR is a inflation tool, then other sectors like insurance and NBFC should also have such norm.

RBI Dy. Governor's remarks on SBI chairman are in bad taste

The RBI deputy governor's reported remarks on the SBI chairman are in bad taste. The issue here is not whether the SBI chief has a point when he says that cash-reserve requirements on banks are an unfair imposition considering there is no such demand from insurance firms, non-banking financial companies and mutual funds.
The RBI deputy governor would have been well within his rights in disagreeing. Where he has gone overboard is in suggesting that the SBI chairman can work somewhere else if he does not like the RBI's regulatory framework.
A regulator, especially one like the RBI that prides itself on its independence, should have the tolerance to hear its decisions being questioned by stakeholders. Flying off the handle at any dissent is unwarranted.

Cutting fuel subsidy can cause 2.6% spike in inflation: RBI

New Delhi, August 6: Reserve Bank ofIndiaGovernor D Subbarao has said the proposed elimination of fuel subsidy can lead to a massive 2.6% spike in inflation, an assessment that makes it even more difficult for the government to bite the bullet.

While a hike in diesel and cooking gas prices may be long overdue, the government is hard-pressed to contain inflation ahead of crucial assembly polls inGujaratand Himachal Pradesh later this year. A hike in the price of diesel, which is used as fuel for transporting goods, immediately leads to a spiral in the wider economy.

Subbarao, who shared his assessment with Parliament’s standing committee on finance on Monday, pitched for a healthy single-digit growth coupled with low inflation. The RBI governor‘s approach was in stark contrast to the former economic advisor to the government, Kaushik Basu, who has said that the country can settle for an 11% inflation in the event of 10% growth. “The ideal situation would be a 7% growth and 5% inflation,” the RBI governor told the panel, as he appeared to emphasise on the need to contain price rise.

However, the government is not completely convinced with the central bank‘s approach. A recent note from the government to the parliamentary panel expressed its disquiet over the central bank’s decision to keep money supply tight. At the meeting of the standing committee, the panel’s chairman, Yashwant Sinha, said there was a difference in the approach of the government and RBI. The high subsidy bill and lower tax revenue have resulted in the government’s fiscal projections for 2011-12 going awry. The fiscal deficit during the fiscal was 5.8%, wider than the initial target of 4.6%.

In his presentation before the panel, Subbarao said that while liquidity was not an issue there was lack of appetite for investment. He agreed that deficient monsoon, high fiscal deficit, food inflation, suppressed inflation and rising global commodity prices posed a major challenge to the government. According to a member of the standing committee, the governor conceded that there was a sharp decline in investments. “It has now gone into the negative territory,” said a member, who did not wish to be identified.

What is adding to the problem is the reluctance of the banks to pump funds into the economy. “The banks have large exposures in depressed sectors such as power, fertiliser, civil aviation and real estate. How long can the banks go on extending loans to these sectors,” asked a member, who participated in the deliberations. Members of the opposition parties on the panel said the risk-averse approach of the banks was hurting critical sectors that require large investments.