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Mixing business with protocol
- Nowadays almost everyone wants to take a business delegation along.
- Take President Pratibha Patil, who has clearly decided that Indian businessmen should tag along wherever she goes. In recent months she has taken a 30-member delegation to Mongolia and a 45-member business team to Switzerland and Austria.
- Vice-President Hamid Ansari, on his recent trip to Turkey, wanted a business delegation as well.
Coordinated measures needed to control price rise
- Fiscal measures still continue to influence the monetary policy of the central bank and only a coordinated approach by the government and the RBI could bring down inflation.
- Several factors have contributed to this trend. These include: increasing independence of central bank in the conduct of monetary policy; stability and growth pact (SGP) and formation of European Monetary Union (EMU) under which individual countries pursue independent fiscal policies, but have a common monetary policy; and the demonstrated need for a coordinated response of monetary and fiscal policies during the recent global crisis.
- Specifically, the reaction of the two policies to shocks in inflation and output is mostly in the opposite direction. While monetary policy reacts in a counter-cyclical manner, fiscal policy reaction is primarily pro-cyclical in nature.
- expansionary fiscal policy is effective in raising the level of output over the potential level only in the short run. In the medium- to longer term, however, fiscal expansion leads to economic slowdown.
- The positive impact of expansionary fiscal policy on output is highly short-lived, while there is a significant negative impact in the medium- to long-term
- In India, several changes have taken place in the monetary and fiscal policy frameworks, particularly since the beginning of the 1990s.
- These include complete phasing out of automatic monetisation of fiscal deficit through creation of ad hoc treasury bills (also called ad hocs) in 1997 and prohibiting RBI from buying government securities in the primary market from April 2006 under the FRBM Act, 2003.
- Further, the operating procedure of monetary policy underwent a paradigm shift in the early 2000 with the introduction of liquidity adjustment facility and the interest rate channel becoming the main monetary policy signalling instrument.
- These changes are quite significant and have altered the basic nature of the interaction between monetary and fiscal policies. However, the Central Government continues to incur large fiscal deficits, which has implications for the demand management by the RBI.
Larger lessons from the downgrading of SBI
- On October 4, Moody's — one of the big three rating agencies, Standard & Poor's and Fitch Ratings being the other rating agencies — reduced its rating on SBI's financial strength (basically credit worthiness) from C minus to D plus amidst concerns over deteriorating asset quality and adequacy of capital.
- That SBI is just one of the several banks facing the downgrade is no consolation however.
- Many of them had contributed to the global financial crisis through their reckless lending and underwriting practices, especially in the sub-prime home loan mortgage segment.
- Whatever the problems SBI is facing now they are certainly not due to past recklessness. Yet, in a rising interest rate scenario and economic slowdown, the quality of its assets has come under strain.
- For almost a year now, the bank has been contemplating a Rs.23,000-crore rights issue. If the proposal had materialised, the bank would have easily met the required capital adequacy standards.
- Looking ahead, Moody's feels that SBI will run into capital constraints soon.
- Some private sector banks too are facing the problem of rising NPAs in a rising interest rate environment.
The difference is that they have much more flexibility than SBI in raising capital. - In fact the lack of freedom is an attribute that fits in very well in their operational aspects too.
