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In the absence of any regulatory body for the real estate sector, the central bank has but a limited role in arresting real estate bubbles. However, with the only leverage the RBI has banking regulations it has tightened prudential norms for housing loans. The enhancement in provisioning for standard assets to 2% for teaser loans is stiff action against banks for not heeding to RBIs moral suasion against these practices. The RBIs concern is that appraisal of these loans is not undertaken prudentially and that home b uyers are not educated about the financial engineering behind these loans, on which interest rates are initially low (teasers) but then rise. Memory must still be fresh that the US home loan crisis was triggered by large-scale foreclosures of such loans. The increase in risk weight to 125% for loans above Rs 75 lakh and the new loan to valuation norm of a maximum of 80% may not have any significant adverse impact on banks balance sheets since given the present pattern of financing by banks, these threshold levels are reported to be not uncomfortable. These steps have to be viewed more as strong signals to the financial system and, in particular, to the investors about the potential risks in the current trend. Overall, the focus has been on risk containment. Quite unconventionally, the policy statement has taken a view on the exchange rate of the rupee. It considers the real effective exchange rate (REER) based on the 36-currency basket as more relevant for assessing competitiveness than the 6-currency basket since the former includes more countries that are direct trade competitors. From this perspective, it concludes that the impact of the recent nominal appreciation of the rupee may not have a significant implication for competitiveness. Though at a later stage, the policy has identified capital inflows caused by quantity easing in advanced economies as posing a major challenge for exchange rate and monetary management, the RBI looks likely to follow a hands-off approach to the exchange rate, an approach that is not fraught with serious risks. The problem with such a stance is that it will encourage a large volume of foreign institutional investment in the stock market.
editorial
President Kennedy
The relief with which the world has greeted the election of Senator John Fitzgerald Kennedy as the next President of the United States is genuine and well-founded. Mr Kennedy seems to have all the qualities of head and heart which are most needed at the moment for a sensible and enlightened tackling of the international
issuesThe President-elect is, a man who arouses strong reactions among people, not all of them favourable. Personal popularity cannot, therefore, have been the main reason for his election. Is it, then, his programme? That, again, is doubtful though it is fairly clear that his promises of social welfare did prove a temptation for a considerable section of the electorate. there was much in common between the declared programmes of Kennedy and Nixon, especially in the field of foreign affairs. On the great question of disarmament, both proclaimed themselves to be disturbed by the might of Russia; indeed, if anything, it is Kennedy who took a stronger stand on a
rogramme of increasing his countrys military p power furtherBoth favoured a programme of giving technical and financial aid to the new countries of Asia and Africa. What, then, could govern the choice of the electors in so confusingly similar a set of alternatives? the choice became clearer in favour of Kennedy, because the majority of the people obviously felt that his party was more likely to let him honour the pledges he made than the Republicans. The pull of party pressures in the Democratic Party, it is generally recognised, will be on the side of enlightenment and a more daring experiment with new ideas; while the Republicans would have dragged Nixon, whatever his electoral promises, towards conservatism.
Economic & Political Weekly EPW november 13, 2010 vol xlv no 46