Jan
7
In order to help the market, RBI injected a massive amount of money in October and then, during the first economic stimulus, Indian Finance ministry backed the bad patches of market again. Since then, RBI has cut interests rates and repo rates four times. Yet the results are not so positive and all policies of RBI and government failed.
Yet again, RBI is facing a demand to cut the interest rates further by another 150 basis points.(The Economic Times)
Even Indian economists, intellectuals, bureaucrats and ministers are not convinced on the opinion, whether RBI should follow American Federal Reserve Bank and Bank of Japan and issue ZERO interest and minimum repo rates in order to cut any chances of deflation. Alternatively, should RBI remain cautious about cutting the rates too sharply to avoid demand-led inflation or causing a US-like rise in indebtedness?
So let us discuss why RBI should NOT inject money in market.
In general, all economists fear of deflation, as if deflation is a monster that will gulp all economic success within months. On the other hand, we all fear of excessive inflation. So, the major task of RBI and official economists remains to control the money supply and hence the rate of Inflation. That is, RBI almost always causes Inflation by increasing money supply, but mostly RBI cannot decide reduction in inflation or deflation as it depends on real wealth factor. Thus induced money pampers various “non-productive activities” in market. These activities does not produce any good or wealth or result, they incite further high inflation of the prices of “wealth producing activities”. The “non-productive activities” divert goods to themselves by means of money that government creates out of thin air by printing currency.
Wealth producing activities generally does not depend on fiat money policies, as the wealth generators may acquire and secure goods and raw material (which is the real wealth) in exchange of the produced wealth or goods they creates. Thus, the ability of “non-productive activities” to control inflation decreases during economic crisis and prices starts declining.
This decline of prices, actually favors the wealth-creators and producers as it decreases the distraction of wealth. That is, if RBI injects further money in the market, the various “non-productive activities” will be pampered again, creating another period of false progress, which in turn will weaken the wealth producing activities. This all will delay the market to reach the point of a sustainable economy.
Economist A. Prasanna, at ICICI Securities says —
“After all, Japan since the 90s and United States in the new millennium are basket cases of how an economy can get trapped in a cycle of low rates and high indebtedness.”
At present, banks are cautious; they are not lending money abruptly. They are regulating their reservoirs and this is all even after massive tries by government to make banks lend money freely. It is a dichotomy of Indian Government. On one hand, Indian government says that India won’t suffer the world economic meltdown much because Indian banks are regulated, they do not lend money for bad/weak assets. On the other hand, government urges banks to lend money freely and pumps money in market for encouraging banks to lend money. 
In October-November ‘08, when government injected first stimulus of Rs 2000 crores in market, it was assumed that it will remove the liquidity crisis and banks will start lending money freely again and market will start booming again. However, it did not happen. Issue is not of liquidity crises; issue is the large amount of bad assets that Banks have accumulated.
Banks lend money based on credits and credit depends on the real wealth producing capacity or real saving capacity of the non-productive activities. Since banks have accumulated bad assets, that is they have lend too much money to non-productive sector or loosing sector which is not able to return back and hence causing a loss for the banks. That indicates that in market, the part of “non-productive activities” is much larger than the part of wealth-producing activities.
In such period, even if government pumps money in banks (as it has done so many times by decreasing interest and repo rates during previous months) banks will not agree to lend money freely; they need to remain regulated and cautious. Why will they risk on bad assets?
Ila Patnaik, senior fellow at the National Institute of Public Finance and Policy says,
“First, there is a case for RBI to cut rates even further. RBI can go all the way to a zero short-term interest rate, as some other central banks have done.”
Thus, according to her, India should follow the same tactics, which American Federal Reserve Bank is following. What she fails to understand is, fiat currency is not Real Wealth.
By simply printing or pumping money out of thin air, we cannot improve economic conditions, if it were possible; Indian government might have eradicated the Indian poverty a long time ago just by printing more and more money. Real economic growth requires real savings to fund various activities that support and promote it; real eradication of poverty requires real wealth, goods, food and articles, which are not made/produced by government stimulus nor by government currency.
Till the “non-productive activities” in Indian market won’t be purged out, Indian economy won’t sustain itself. Any try by government to help the “non-productive activities” will cause further delay in achieving a sustained economy, which is necessary for the real-wealth-producers to start producing wealth again.
Once these “non-productive activities decreases to minimal, and wealth productive activities gain momentum, the banks will also start lending money more freely for profit incentives by the real savings and real wealth production. Any injection of money by RBI in market or any fiscal policy by government to help the market will only increase the “non-productive activities causing further down-turn in economic crisis.
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1 views15 Responses to “The dilemma of Reserve Bank of India”
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The dilemma of Reserve Bank of India | homelessloan.com Says:
January 7th, 2009 at 6:35 am[…] The dilemma of Reserve Bank of India […]
samay Says:
January 7th, 2009 at 10:08 amnice to see you back in your productive cycle.
By simply printing or pumping money out of thin air, we cannot improve economic conditions, if it were possible; Indian government might have eradicated the Indian poverty a long time ago just by printing more and more money.
the process is not as simple as brought out, RBI does have to account for the currency it prints, and is in circulation. the amount of currency with respect to the net worth causes strengthening or devaluation of currency along with other reasons that are beyond the purview in this respect . The printing of currency from thin air is fraud, and no responsible nation does it. Printing more currency and allowing devaluation, which subsequently lead to increase in inflation is a step adopeted by the RBI. the logic is more currency leads to more spending and thus increases circulation which is good for economy The effectivity of the step is debatable as each step of regulation simply steepens the boom bust cycle and can have disatoruos results.
Overall the argument is sound and makes a point…keep writing.
Dsylexic Says:
January 7th, 2009 at 10:50 amsamay:@no responsible nation does it. huh? The US fed is at it ALL the time. you are spouting the keynesian bull of money paper in circulation is good for the economy. hullo?.more paper without real production of goods and services only increases prices. it is unbelievable that you think that killing the purchasing power of the rupee is NOT printing money out of thin air.ofcourse it is. a less valuable rupee is a tax on the rupee holder.and the poorest people get hit the hardest because their meagre income is taken away by inflation.it is unbelievable the stff that is taught in university economics classes.
here is the bottomline: MORE PAPER MONEY DOES NOT EQUAL MORE GOODS AND SERVICES.just printing up paper is zimbabwenomics
samay Says:
January 7th, 2009 at 11:22 amwell…please read the comment in totality, the argument is on how feds go about doing that and not on its effectivity.
All I said is that it not a covert process, they dont print it over night and circulate it without anyones knowlege. It is an overt process thats it.
Most ppl speak of keynesian without even knowing anything about it.
having access to mises .org and a lots of free books and pod casts makes anyone a bull in libertarian economics.
If you really want ever to make had and tail of things then u need to atleast have a workable knowlege on both side of the argument.
so pls dont CAP QUOTE and pretend intelligence, point taken thanks
Chirag Says:
January 7th, 2009 at 2:01 pmCycle, needs to be started, and please stop this Credit Card culture. Which is not healthy for economy anyways.
Dsylexic Says:
January 7th, 2009 at 6:45 pmsamay,
point taken about the caps. in anycase,i dont see any valid points in your arguments . i assume you have some sort of academic degree in economics. considering the degree is a product of consensus brainwashing, its value is specious so your comments about mises.org is asinine
money printing is an overt process -ofcourse it is.there’s all sorts valid entries in the Fed’s balance sheet. all totalitarians kill directly.but it is always for the ‘greater good’ isnt it. it is not a conspiracy .it is just systematic legal plunder .
and pray tell me what part of keynesianism holds you in thrall?
the idea of macroeconomic planning? deficit spending?inflation as a national monetary policy?. ‘devaluation’ of currency?. none of these are economically selfevident truths. suffering from physics envy is not going help economics get the correct answer.
a total misunderstanding of the concept of money and credit is an abomination the mainstream academics have foisted upon millions of sheeple.
“the logic is more currency leads to more spending and thus increases circulation which is good for economy “
This sentence is utter nonsense and betrays a lack of understanding of money and credit.
samay Says:
January 7th, 2009 at 7:40 pmppl have a habit of taking a sentence out of whole text, then attributing it the whole essence of the text. I said its the logic because of which they do it..and added it is debatable. You might have given it an adjunction of deplorable, but it does not put us on opposite side of the fence really. Additionally the post was never a counter point, I wanted to congratulate the author for she is on a roll. Never the less if that small post betrayed my lack of knowledge of money then so be it, but I guess it betrayed your lack of understanding of english, or perhaps patience which most of us lack.
Unpretentious Diva Says:
January 9th, 2009 at 5:29 am@ samay.
Thanks for the greetings :)
About the issue, it is simple reality, there’s nothing hidden about the fact that whatever government/ RBI will do to help market, will cause further problems alone.
The degree in which currency is been increased in market, will cause extreme inflation later in 2012, or 2014? who knows and who cares.
This government is just looking for today’s problem it faces, it is not even sure it will back on power again. So the economic responsibilities are nil for it. What it cares for is, a sudden emotional backup and a show-off in front of citizens, that Market is going down and government is sutaining it Helping it. it is all tricks of politicians and governance nothing else, which hurts the citizens only at the end.
Anyways as I am no renowned person to write about the subject, I strengthen my point of view with views of some others, who are renowned economists.
you may check this article from forbes.com
http://www.forbes.com/2008/12/17/gold-currency-inflation-pf-ii-in_jt_1217currencycurrents_inl.html
Arvind Says:
January 13th, 2009 at 6:26 pmWell written Shanu. keep up the good work.
Unpretentious Diva Says:
January 13th, 2009 at 6:58 pmWhy not look up for the author?
Its not by shanu, it is my writeup!
Arvind Says:
January 14th, 2009 at 3:47 pmIn that case well done “Unpretentious Diva” :-)
Why there are Wars, Terrorists and Militants | Reason for Liberty Says:
February 2nd, 2009 at 11:56 am[…] is there possibility for Indian government to waste money on such needless wars? While discussing Indian Reserve Bank Dilemma, we showed how fear of recession is senseless as it clears out all […]
Electrified Says:
July 29th, 2010 at 12:01 amI’m have no working knowledge of our economy, but by reading the newspaper, watching tv interviews/propaganda etc…i could sense that the Government or RBI does not care about people.
If it did, the fundamental trait of money/finance would not have been “scarcity” = “profits”.
The Federal Bank/World bank/IMF are our real leaders. Rest of us are sucking upto them. Politicians who tried to revolt are either killed/overthrown. What happened to the ppl in gulf who went against the establishment…they got branded as “Terrorists”.
People have this really bad thing called “Hope” that deludes them into thinking it will all be better one day, i think. what happens if half a billion of our country men…quit jobs/militiary, boycotted political/financial lobby’s? it certainly has’nt been tried and it can be no worse than what it already is.
just my.2 paisa
Electrified Says:
July 29th, 2010 at 12:12 amI’m have no working knowledge of our economy, but by reading the newspaper, watching tv interviews/propaganda etc…i could sense that the Government or RBI does not care about people.
If it did, the fundamental trait of money/finance would not have been “scarcity” = “profits”.
The Federal Bank/World bank/IMF are our real leaders. Rest of us are sucking upto them. Politicians who tried to revolt are either killed/overthrown. What happened to the ppl in gulf who went against the establishment…they got branded as “Terrorists”.
People have this really bad thing called “Hope” that deludes them into thinking it will all be better one day, i think. what happens if half a billion of our country men/women…quit jobs/militiary, boycotted political/financial lobby’s? it certainly has’nt been tried and it can be no worse than what it already is.
just my.2 paisa
Electrified Says:
July 29th, 2010 at 12:12 amI’m have no working knowledge of our economy, but by reading the newspaper, watching tv interviews/propaganda etc…i could sense that the Government or RBI does not care about people.
If it did, the fundamental trait of money/finance would not have been “scarcity” = “profits”.
The Federal Bank/World bank/IMF are our real leaders. Rest of us are sucking upto them. Politicians who tried to revolt are either killed/overthrown. What happened to the ppl in gulf who went against the establishment…they got branded as “Terrorists”.
People have this really bad thing called “Hope” that deludes them into thinking it will all be better one day, i think. what happens if half a billion of our country men/women…quit jobs/military, boycotted political/financial lobby’s? it certainly has’nt been tried and it can be no worse than what it already is.
just my.2 paisa