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Money market feels the pinch

Money market feels the pinch
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First Published: Thu, May 29 2008. 12 41 AM IST

(Illustration by: Jayachandran / Mint)
(Illustration by: Jayachandran / Mint)
Updated: Thu, May 29 2008. 12 41 AM IST
India’s largest bank reportedly borrowed Rs13,000 crore from the Reserve Bank of India (RBI) on Tuesday to tide over a temporary shortage of money. Bankers say that State Bank of India (SBI) went knocking at RBI’s repo window because cash-strapped oil companies have been withdrawing money from their accounts with SBI. The government’s refusal to hike domestic oil prices has pushed oil companies into a severe cash crunch. SBI was thus forced to hand over securities to the central bank and borrow money against them.
A lot has already been written on how the government’s myopic refusal to let the market decide fuel prices is destroying oil company finances and pushing the government budget deeper into the red. The effects of this obdurate refusal to obey the basic laws of economics are now being felt in the money market.
(Illustration by: Jayachandran / Mint)
Here we have the SBI borrowing. There we have the minor panic in the bond market after the government said that the fertilizer subsidy for this year would be Rs95,000 crore, twice what was budgeted for. The current fashion is to fund subsidies through bonds. So, a higher subsidy means a greater supply of bonds in the market. That usually sends bond prices down and interest rates up. The rate at which banks lend overnight money to each other has inched up from 6% to 7.4% over the past month.
Higher interest rates show that liquidity is not as abundant as it was a few months ago. Part of the reason is undoubtedly because RBI has been selling dollars and buying rupees as the rupee loses ground against the US currency. But the major part of the blame has to be put at the government’s door. Its fiscal profligacy will eventually drive up interest rates.
RBI governor Y.V. Reddy was unusually blunt about the mess in government finances during a speech he gave earlier this week. He had pointed out that India’s fiscal deficit, as a proportion of its economy, is one of the highest in the world. He also added, “several underlying fiscal pressures are not entirely evident in the numbers.” That’s a euphemistic way of saying that the real fiscal deficit is far worse than the reported one. These are criticisms that this newspaper wholeheartedly endorses.
The only way out of this mess is to take the tough decision to increase domestic petrol and diesel prices. But a ruling alliance that has been rocked by the electoral defeat in Karnataka seems too shell-shocked to do this. We’d love to be proven wrong.
(Will interest rates rise? Write to us at views@livemint.com)
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First Published: Thu, May 29 2008. 12 41 AM IST
More Topics: Ourviews | Oil | Fuel price hike | RBI | SBI |