22nd April

Hobson’s Choice

The article comments about the policy rate cuts that RBI announced yesterday. While the rate cuts clearly reflect the limited options RBI has, it also signals the banks to react to this and reduce their lending rates. 

As the 25 basis points cut comes on both, repo rate and reverse repo rate, the bank has done a little for both the opinions i.e. those who believed that the bank should succumb to industry pressure and drastically reduce the interest rates and those who believed that the bank should wait and see the effects of its policy measures. However, its statement answers almost everything except the major problem faced by the banks today which is of increasing credit risk in the times of slowdown and reduced growth rate. However, RBI has clearly signaled that the interest rates are sufficiently low and that banks should reduce their lending rates further. While RBI’s urgency to bring down the retail lending rates is understandable, there is very little it can do about it owing to the abysmal fiscal policy status which would remain so in the near future. 

With low interest rates, huge government borrowings would act as a villain as RBI tries to spur investment demand. The net result would obviously be 6% project GDP growth.

Reality Check for Aviation

The article expresses necessity to restructure the cost structure in the Indian aviation sector since the present one doesn’t allow the airlines to reduce the air fare without which they would run out of volumes and deepening their losses.

While Jet Airways reduced its fleet size due to reduced demand, Air India reduced its fares by up to 70%. With high growth rate that the airline industry saw in the past three years up to 2007-08 (15.1%, 31.4% and 21.2%), the large part of it was owing to the low fares that airlines offered. But these fares weren’t viable with the operating costs of the airlines because of which they were sitting on huge losses. But now most airlines have raised fares despite dropping volumes. At this time Air India’s decision to slash down fares comes as a paradox. However, Air India is a state-owned enterprise and would definitely be there for eternity with the use of public funds. While such a large player’s tactics obviously affects the market, AI shouldn’t abuse its public sector strength. At the same time the airline shouldn’t also be burdened with its social commitments. Airlines have started adjustments through capacity cuts and reducing flights as the domestic traffic goes down by almost 10% in February 2009. Current costs are high as new airports are being developed and existing airports are modernized. But the costs should go down as these airports become more efficient. 

As the bulk of these costs are in govt domain like fuel charges and mandatory capacity on unviable routes, unless govt pitches in, aviation prices would settle at levels beyond a common man’s reach.