Saturday, October 13, 2007

Answers to shout-box queries-16

I answer below two questions raised by Vikraman in the shout-box.

12 Oct 07, 16:36
vikraman: Sir, There is a debate about changing the basket of goods that constitute the WPI index. Though the inflation has been "tamed", the food prices are still climbing as indicated by CPI(AL) and CPI(IW).We must soon adpot newer basket of G&S to calcluate the WPI. The present one idicates the taste and preferences of 1993-94.

Answer:Yes, my take is that the WPI basket should be reconstituted once in every five years to reflect ground realities. Actually, my preference is for the CPI's adoption for measuring inflation. Any idiosyncracies that may arise out of its adoption have to be/can be tackled at the time of revamping the basket of goods and services itself. I hope the government comes out with a committee to examine the issue ind detail. It should be also mandated to look into the issue of which of the inflation figures have to be taken into account by the monetary authorities while deciding the monetary policy -- is it the core inflation or should it be the headline inflation?

Sir, regarding the introduction of Innovative perpetual debt instrument(IPDI) and debt capitals to help banks generate funds in view of tighetening monetary policies, BASEL II which requires 15% of (capital) to be set aside for operational risks, IPDI has been exempted from SLR/CRR+ call option is disabled which idon't understand why.

Answer: I am not able to understand your question well. Are you wondering as to why the call option on the IPDIs is disabled? If that is so, my initial reaction is that it is termed 'perpetual'. How can there be a call option at all? Can you call back your capital? You can't; know? IPDI is capital. So it can't be called back by the investor. He can only divest it; provided there is a market for it.

If you are wondering as to why IPDI is exempted from SLR/CRR computations, (though I really can't confirm whether this was done) it appears quite logical. SLR/CRR are on net demand/time liabilities; isn't it? Can capital figure under 'net demand/time liabilities'? It can't. So it should stay excluded from the SLR/CRR computations.

Those of you who have a penchant for detail can take a look at the RBI's circular in this regard.


vikraman said...

Thanks for the resolution sir,
I was confused because call option was disabled for IPDI while put was disabled for 'debt capital'.


Do we need to go to this detail for civil services? Would issues like say "New company law Bill" be important?

ramkyc said...

It's a tough call. You can never be sure. If the bill ushers in far reaching changes, it can certainly. Are we all experts on Constitution of India? Certainly not. But we are all expected to know all the major amendments being carried out to it. Though company law is not Constitution, if it brings in far reaching changes; nothing wrong in staying informed about it.