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Liquidity Stance Moved to Positive by RBI

Money creation to pick up pace

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monetary policy
A further implication of this is that domestic net government bond supply between October and March is largely agnostic to whether the government decides to do a foreign currency sovereign bond issue or not. Pixabay

The focus of monetary policy is now conclusively on ensuring better transmission. Towards this, for the first time in recent history the RBI has consciously moved liquidity stance to positive. Indeed, the Governor has lately referred to the Rs 1-1.5 lakh crore positive system liquidity as a comfort factor and facilitator for banks.

It thus seems reasonable to infer, in the absence of an official framework on liquidity ‘targets’, that the RBI will want to ensure sustained liquidity surpluses of this magnitude going forward as well.

The micro aspects:
As per our estimates, the so-called ‘core’ system liquidity (total banking liquidity minus government balances) is around Rs 65,000 crore as on early August. Assuming currency in circulation (CIC) seasonality of last year and superimposing a nominal growth rate to this, the system will lose around Rs 2,20,000 crore from here to March 2020.

Adding back a higher RBI dividend and some balance of payment accretions, we are largely left with zero core liquidity by end of the financial year. However given the RBI’s current liquidity preference, we would assume they would want core liquidity to be at least be in surplus by a similar magnitude as today. This means that one should reasonably expect further open market operation (OMO) bond purchases from the RBI of at least Rs 65,000-75,000 crore between now and end of the financial year.

RBI
Adding back a higher RBI dividend and some balance of payment accretions, we are largely left with zero core liquidity by end of the financial year. Pixabay

A further implication of this is that domestic net government bond supply between October and March is largely agnostic to whether the government decides to do a foreign currency sovereign bond issue or not. This is assuming that say $10 billion raised by government from offshore sovereign bonds would have been entirely converted by RBI into rupee liquidity. Thus the need for OMOs would have fallen to that extent.

Refreshing a table we had done in an earlier note, the Rs 70,000 crore assumed for the sovereign bond issue may just end up getting replaced as RBI OMO should the bond issue not happen.

While on the subject, one has to comment on the conceptual fallacy in the criticism often levied towards RBI’s OMOs as being monetisation of government deficit. Assuming an unwillingness to cut Cash Reserve Ratio (CRR), the only two other tools for policy driven liquidity creation is purchase of forex or bonds. Long term repos are no solution since this is ‘borrowed’ and not permanent liquidity.

Given that purchase of forex is a function of flows that the RBI doesn’t directly influence, it has to resort to purchase of bonds for discretionary enhancements in core liquidity. Now, if this were being done much beyond the requirements of liquidity creation for the explicit purpose of supporting the bond issuance program or was systematically tied to the quantum of such program or didn’t display two-way directionality, then one could have legitimately argued for backdoor monetisation.

However, there is no evidence of this as well. Thus, any impact from OMOs has to be treated as largely an unavoidable cost of policy implementation just as other tools affect other market variables.

RBI
Governor has lately referred to the Rs 1-1.5 lakh crore positive system liquidity as a comfort factor and facilitator for banks. Pixabay

The macro aspects:
As can be seen, after the disruption from the global financial crisis (GFC) had subsided, the ratio of broad money (M3) as proportion of quarterly GDP had largely settled in a range. This broke lower post demonetisation, but hasn’t reverted still to its previous range. This is despite the well acknowledged growth slowdown that has now been underway for some time.

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After largely tracking nominal GDP growth rates between 2012 and 2015, M3 growth had started to fall below GDP growth from early 2016, even before demonetisation. It is only very recently that M3 growth has been catching back with nominal GDP.

It can be argued that a necessary ask from monetary policy in response to the broad-based slowdown is for a higher rate of money supply growth than what has been in the recent few years. Indeed, that seems to have been the case also in the ‘golden’ growth period of 2005 – 2008, where M3 growth was much above nominal GDP growth. Assuming no changes to the money multiplier, this implies a higher pace of expansion in RBI’s balance sheet, including through more aggressive purchases of domestic bonds. (IANS)

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Hotel Chains in Rajasthan Contribute in Growing Local Economy

Big hotel chains help boost local economy in Rajasthan

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Hotels Rajasthan
Hotel chains in Rajasthan play a major role in boosting the local economy. Pixabay

BY ARCHANA SHARMA

Big hotel chains in Rajasthan are helping the local economy grow by providing newer employment avenues to the natives.

These hotels are hiring local people to showcase the colourful heritage of Rajasthan to guests coming from different parts of the world.

Ibis, an Accor brand, recently re-launched its property in Civil Lines, Jaipur, in which locals were engaged in the task to design a vibrant and colourful lobby with traditional Pichwai artwork connecting to the ethic charm of the Pink city.

The property also showcases a quirky auto and bike parked outside the lobby which comes in different shades of pink connecting with the theme of the pink City. Again, in this perspective, the local students’ views were taken into account to make the pretty decor of the auto and bike, said Saumitra Chaturvedi, General Manager, Ibis Jaipur Civil Lines.

Further, the hotel had hired a local band, Marudhar, during the relaunch of the property, which has got six local members who shot to fame after displaying their talent in ‘India’s Got Talent’.

Chaturvedi said, “It gives me immense pleasure to showcase the revamped Ibis property in Jaipur which has been designed after seeking services of local artists. We look forward to serving the best blend of local and global in terms of food, delicacies and experiences, he added.

Rajasthan locals
Big hotel chains in Rajasthan hire the local people to showcase the rich culture of that region. Pixabay

The other property pushing local economy to new heights is Alila Fort Bishangarh where locals are engaged in diverse tasks including garden landscaping, housekeeping, driving and even the kitchen for dishes, said Binny Sebastian, General Manager, Alila Fort Bishangarh’s heritage hotel, some 50 km from Jaipur.

As our property is situated on the outskirts, the surrounding villages had people engaged in farming and hence we are training them in diverse tasks to ensure they have a decent source of earning. Now, the villages look changed as there are many shops and businesses coming around, he adds.

These guests are also taken around for a barber shop where they love to get a hair massage done which is called as Champi in local language. Villagers are getting a decent price for it. We have a chai shop where guests are taken and they pay villagers a decent sum for a tea.

Then comes as zero mile cuisine system we have introduced recently where food produced within the vicinity of one mile is being served to guests. This again boosts local economy, Sebastian says.

This Diwali, we gifted paper bag made from newspapers with an earthen pot having tulsi plant grown in our garden. Again local services were taken to make bags and pots, he adds.

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“Our association with locals is quite strong. Our guests also visit the artisans’ houses and sip tea there while watching them make pottery and weave carpet. In this way, we ensure that locals get a decent livelihood,” Sebastian added.

“We have started getting regular income since this property came up a year back. We have been showing our art to the guests here which gives us satisfaction as well as an income,” said Nizamuddin, a bangle maker engaged in Alila Fort, Bishangarh. (IANS)