Dr KC Chakrabarty is not the first to roil markets with comments. But he is the first Deputy Governor to pay a stiff price. Successive RBI governors and deputy governors have easily got away for very serious lapses of judgment or inaction
Evidence that Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India (RBI) may have been singled out for humiliation continues to mount. On 5th August we wrote that he might have been the victim of a deliberate set up through an exceptionally savage piece by Newswire 18 (belonging to the TV18 group) that exaggerated the impact of his statement on the bond market. His crime: he allegedly expressed an off-the-record view that the monetary policy should have been more aggressive in hiking interest rates and hinted that the Finance Ministry really dictated decisions.
Dig just a little into the RBI's recent past and you find that the "loose cannon" epithet that described Chakrabarty could have just as easily fit one of our most illustrious Governors ever - Dr Yaga Venugopal Reddy. Dr Reddy is correctly lauded around the world for his tough stand against mindless financial liberalisation, which ultimately protected India from the global financial crisis. At Moneylife, we are especially aware of his phenomenal contribution to tightening customer service regulation of banks through personal interest and commitment. If the banking sector today is far more responsive to customer complaints than insurance or capital markets, it is because of the systems he helped put in place. It is also because of him that the Banking Ombudsman scheme works effectively for must customers, unlike the grievance redressal mechanism of the capital market and insurance regulators.
But if Dr Y V Reddy had been dubbed a 'loose cannon' and humiliated on the basis of media reports, he may never even have become the Governor. In August 1997, as Deputy Governor, Dr Reddy unleashed massive turmoil in the currency market when he told forex dealers at a conference in Goa that the rupee was overvalued compared to the then real effective exchange rate. The RBI faced severe heat for a while, but he wasn't gagged nor were his powers curtailed. In fact, he went on to become RBI Governor, despite rumours about his uneasy relationship with former Governor Bimal Jalan under whom Reddy worked.
Even as the Governor, in January 2005, Dr Reddy caused another panic in the capital market with his speech at the Indira Gandhi Institute of Development Research where he spoke of a cap on Foreign Institutional Investment (FII). It sent the market into a panicky downward spiral forcing the then finance minister to make a public statement to cool things down. In fact, Governor Reddy had to call an urgent press conference and issue a retraction that very evening.
Also, let us also not forget Global Trust Bank, which was given a clean chit by the RBI in 2002. Many of us continue to believe, with adequate evidence, that GTB's cowboy banking and nexus with Ketan Parekh and his corporate cronies would never have happened but for the kid glove treatment by the RBI and the systematic suppression of inspection findings until its ultimate collapse in 2004.
No deputy governor ever paid the price for such a colossal failure in supervision.Again, Dr Reddy was not the only Deputy Governor who was protected by the establishment. In 1997, Governor C Rangarajan divested the then Deputy Governor S P Talwar of his key portfolios, which were later restored during Governor Bimal Jalan's tenure. There were whispers that it was Talwar who was responsible for granting provisional banking license to the dubious CRB Group, which later went bust. But it was a quiet move, not the public humiliation that Dr Chakrabarty was subjected to.In fact, it has always been our charge that senior RBI officials have done more damage to the system by their failure to initiate timely action and have got away without any censure. When the 1992 scam happened only Governor S Venkitaraman faced some heat. When the Ketan Parekh scam occurred, it was discovered that the RBI had completely failed to regulate Overseas Corporate Bodies (OCBs), some of which had been set up with a $10 capital. Only the system and hapless investor paid a price. When finance companies were running amok in the 1990s, a sudden change in rules destroyed the entire sector, but RBI's decision makers were never questioned.
Nobody in the RBI paid a price for deposit-taking plantation companies that were essentially running a Ponzi scheme. Even today, the loan-against-gold schemes are mushrooming to dangerous levels without inviting any scrutiny from the RBI. At current gold prices, it is a time bomb that is bound to explode when gold prices crash. But is the RBI paying attention? It is passionately lobbying to protect its turf in the name of protecting its autonomy.
In fact, what we need today is more sunlight and transparency in the RBI's decision-making process on regulation, supervision and also monetary policy. As we said earlier, monetary policy discussions must be put in the public domain with a lag, so that policy makers are allowed to have divergent views and policy decisions are the result of a true debate. What better time to have an open discussion and to push for transparency in RBI itself when Governor D Subbarao is writing repeatedly to the government to preserve RBI's powers.
Washington: The US has initiated talks with countries like India, UAE and Saudi Arabia, besides the Canada-based firm Research in Motion (RIM) that owns BlackBerry so as to address the "legitimate" security concerns of these nations, reports PTI.
"We are reaching out to those countries—the UAE, Saudi Arabia, India and others—to understand the security concerns and see if we can work collaboratively to find solutions.
"So that's a process that is ongoing here at the Department of State. I've got no, you know, announcements to make at this point," state department spokesman P J Crowley told reporters at his daily news conference.
The United States has also been in touch with RIM, the Canadian company that operates the BlackBerry network worldwide.
"We're going to have follow-on meetings with RIM to try to understand fully the issues that have been raised to the company and see if we can determine how to meet both the security needs that these countries are expressing and also ensure the free flow of information as we are advocating," Mr Crowley said.
Earlier in the day, secretary of state Hillary Clinton said: "We are taking time to consult and analyse the full range of interests and issues at stake because we know that there is a legitimate security concern, but there's also a legitimate right of free use and access. So, I think we will be pursuing both technical and expert discussions as we go forward."
If some of these countries follow through on the BlackBerry ban that they have announced, it would have an impact on the US government and its diplomats operating in different countries.
"So we are directly affected by what has been suggested. But obviously, we know that both American businessmen, American citizens travelling abroad, the citizens of other countries would be affected as well," Mr Crowley said.
At this point, the US is gaining information and perspective.
"Then once we understand all of the issues involved, and there are technologies issues involved, there are security issues involved, there are regulatory issues involved," he said.
"Once we gain a better understanding then we'll see what we can do about developing and suggesting particular solutions," Mr Crowley said.
The pressure on liquidity appears to be easing now; but the second half of this fiscal is likely to witness renewed concerns on banks’ liquidity position
For the moment, banks in the country are breathing easy, after witnessing prolonged suffocation on the liquidity front until a few weeks ago. The limited action in the central bank's liquidity adjustment facility (LAF) in the past few days is reflective of this. However, the question is whether this liquidity position is sustainable over the second half of this fiscal year.
Some analysts are not entirely comfortable with the cash position of banks. In fact, Nomura Financial Advisory and Securities mentions in its report that a sharp rise in currency in circulation will add to the liquidity strain by the second half of this fiscal. Rising economic activity, coupled with high inflation, has led to a pick up in currency in circulation. This will gain further momentum in the latter half of this year on account of the festival season, food procurement and pick up in agro-based industrial activities, states the report.
"An increase in currency in circulation will likely be a further negative for systemic liquidity, which is already close to zero. We expect advanced tax outflows in mid-September and the seasonal increase in currency in circulation to add to liquidity pressures as we head into H2FY11, offsetting most of the gains from higher government spending," says the Nomura report.
This is contrary to the normal phenomenon when a surge in money circulation tends to ease liquidity pressures in the system. Given the high level of inflation and the festive season around the corner, people will prefer to keep large cash levels with them. A banking sector analyst from BRICS Securities told Moneylife, "During inflationary times, currency with people is at a high - strange howsoever it may seem. There will also be (the) seasonality effect because during a festive season, cash in hand with the people goes up. The more the currency with people, the less there will be with the banking system."
Clyton Fernandes, banking analyst at Anand Rathi, feels that the liquidity position may change depending on how the credit demand in the second half pans out. "The liquidity position is looking comfortable as of now because credit demand has not picked up across segments - it is still tilted towards infrastructure and housing. When it starts getting broad-based in the second half, that is when liquidity will tighten a lot more."
Deepak Tiwary, banking sector analyst with KR Choksey said, "Currently there is not much pressure on the system. Except for Monday, when banks borrowed heavily from the LAF window of the RBI, banks have been sitting pretty on the liquidity front. However, some banks might have to resort to borrowing." He feels that if liquidity problems start to pose a serious challenge, the RBI will intervene in the way it did in June.
DK Joshi, chief economist at CRISIL, has a different perspective on the situation. He believes that the liquidity situation will ease further from the current level when government spending picks up in the second half of this year.