What Reserve Banks do to economy?

What is the jargon like Repo rate and reverse repo rate?

Reserve Bank as called in India or Federal Reserve as called in USA, is regulator of money market. Following imaginary conversation very practically explains the role of RBI or Fed Reserve in economy and many functions it performs to do its job properly:

Adam: I have heard recently that Mr. Rajan (RBI Governor) has reduced Repo Rate by 50 basis points and everyone is saying that this is good for the market. Loan EMI may also come down. What is this rate cut means actually? I want to understand this.

Eve: To understand this you first need to know, how does a bank function. 

Adam: Why? 

Eve: Because all these are inter-related. Tell me – what does a bank do? 

Adam: Bank takes money from depositors and gives loan to earn interest. That way they keep everyone happy and make a profit also. 

Eve: Correct, but there are more to it. Let me explain this in a very simplistic way. Bank needs money. Bank can get money from depositors like you and me and also from RBI. But bank also needs to pay certain interest to us and to RBI.  Continue reading

Celebrating inflation under economist Prime Minister Man Mohan Singh

These are days of celebration in India. We are celebrating inflation. High prices of food products. Instead of importing the expensive food stuff, the Govt. has decided that it will bring in Multi Brand Retailers like WalMart into India to share the loot. At what price this decision was taken will remain unknown till the Auditors will assess it. Considerations will be known when some journalist will investigate in genealogy of all concerned. Why such a sudden rush? It has no clue what to do with inflation. Does government knows what to do? RBI has decreased Cash Reserve Ratio. Last time it had reduced repo rate. So how bad is the situation? What is the worth of one rupee? This:

GarlicRs. 0.89 buys this one small Garlic.

And if we can afford to spend slightly more than a buck, we can buy this vegetable:

Bitter Gourd or Karela

It costs Rs. 1.08 only. Just the above one small piece. No More.

While Government is digging new holes to fill old ones, the Stock Markets are rejoicing over the decision of permitting foreign retailers to do business in India. However the past track record of Multi National Corporations indicate that they are the worst exploiters of the system. When a system with extremely weak/corrupt law enforcement, like that in India, exists, Corporations have treated consumers like fodder.

Any way I had one question: How the Prime Minister sleeps at night?

Does it not bother him that Millions of poor household in India has very meager fixed income and any increase in prices of food stuff is a punishment to go hungry at least once?

Or as every one says; He does not care at all?

Or he really has no clue? Like every one else.

Does a person holding highest position in the country for 8 years owes it to nation to explain what is wrong? Even if he was not elected directly by people but is in Office by being member of Upper House.

Can such questions be asked under Right to Information Act?

Several years ago, I saw a very meaningful painting and I shot a clipping which is now my desktop picture. The painter has illustrated the scenario very well. Here is a screenshot:

King and his courtiersThanks to the imagination of painter.

© Sandeep Bhalla

RBI repo rate cut

RBI has today announced that it is reducing the repo rate by 50 basic points. It is to be noted that there is no substantial reduction in inflation nor there is any respite from high import bill due to high prices of Crude. So why is this cut. Last October on 25th to be exact I had predicted that RBI is trying to extinguish fire with oil by raising the repo rate because such measure is inflationary. While inflation could not be controlled, high repo rate certainly adversely affected the cost of production resulting in steep fall in industrial production. Two steps forward, one step backward. The dance rhythm of RBI is amazing. Question is:   If increase in repo rate was to control inflation and it worked, why reduce it now?  There can be no answer for these steps are taken only for psychological effect. In reality it has no meaning or very little effect. In any case the economy is tumbling. I wonder if the Humpty Dumty has already tumbled? Let us wait and see!

© Sandeep Bhalla

Fire Fighting with Oil

On 25th October the Reserve Bank has again raised the Repo rates by 25 BP. Thus the Repo Rate Now stands at 8.5%. It is the highest anywhere in the world. The Rupee has reacted sharply to this and there has been an appreciation of Rupee by over 2% in a single day on 28th October 2011.
The reason for this increase and the past increases as well is stated to be that it will contain inflation. I find it illogical. For two reasons:

1. The depreciation of Rupee by 10% in past about a month itself had been inflationary.

2. The increase in repo rate by the Reserve Bank itself is inflationary. The Repo rate is the base lending rate for the Banking Industry. If lending rate goes up, it carries with it the cost of production as it is also an input component for goods produced.

I am no economist but I do not feel it right. It is compounded by the fact that same medicine which has already been administered by the Reserve Bank for many times in the past one year has not produced any result. I wish this persistence may bring some tangible result this time.

© Sandeep Bhalla