One big step at RBI

When D. Subbarao took over as Governor of the Reserve Bank of India (RBI), he promised to make the functioning of the bank more transparent and demystify policymaking.  On Tuesday, RBI took a big step towards that goal: it released the main points of a meeting of its technical advisory committee (TAC) on monetary policy. It promised to release these records in future with a four-week lag.  What is remarkable is that RBI is not mandated by law to release such data, as other central banks such as the US Federal Reserve and the Bank of England are. Therefore, criticism that RBI did not disclose which member voted what way is misplaced. It does not matter if the sum and substance of deliberations, including dissent, are reported accurately. The danger here is that the fear of disclosure of the voting record may prevent members of TAC from speaking freely.

A peek in

Transparency is an essential feature for any public agency in a democracy. The central monetary authority is no exception. This is why Reserve Bank Governor Duvvuri Subbarao must be congratulated on publishing the minutes of the discussion that took place before the RBI released its latest credit policy. This is a welcome step, as the RBI needed to move ahead both on defining clearly the objective of monetary policy, and making the decision-making process by the monetary policy committee open and transparent. The RBI has traditionally been a laggard in terms of transparency; two recent academic surveys found that, while Asian central banks as a whole had been improving their position in terms of openness, the RBI’s performance on this score had stagnated — and, according to one of them, actually worsened between 1998 and 2006. This must not be allowed to continue. The RBI needs to set itself a goal. One that is both tangible and desirable: to achieve the median transparency score among G-20 nations. It should rank at least 10th out of the 20 members.  Full reform of the RBI involves independence, transparency, accountability and inflation-targeting. While at the present time attempting this is difficult, certain improvements of the monetary policy process can now be undertaken. Consider one key element of the process, the executive monetary policy committee or MPC. This committee, through voting, makes decisions that set the interest rate. In the UK, the MPC comprises the governor, three deputy governors, and three economists appointed by the Treasury. (The finance secretary would participate in the discussions but not vote.) This same structure appears to be quite appropriate for India. In such a structure, the committee would sit every month, following a pre-announced schedule. The bank’s research department would make presentations to the MPC about what is taking place in the economy. The MPC would then vote, and interest rates would be hiked or lowered. Each MPC member would write down a 1000-word rationale statement of why she voted how she did; and in a fortnight, full information — how each member voted, as well her written rationale — would be placed on the bank website. The markets would be assured that interest rate changes would almost never take place other than on these dates. The RBI has taken one step forward. It must go still further

RBI defers banks' compensation norms implementation

The Reserve Bank of India (RBI) has deferred the implementation of guidelines on compensation for wholetime directors and other executives of private and foreign banks in India by a year to FY13, it said on Wednesday. The guidelines had been due to be implemented in FY12 but the Reserve Bank of India said the move was deferred to give banks sufficient time to frame their policies.   In July, the RBI has issued draft guidelines on compensation for whole time directors, chief executive officers, risk takers and control function staff of private sector and foreign banks in India. It said it was examining comments received.  It has asked banks to refer to the Basel Committee on Banking Supervision's (BCBS) document on Methodologies for Risk and Performance Alignment of Remuneration, which was issued in October, and start preparatory work for formulating compensation policies.

No blanket nod sought for merging five subs with SBI: Bhatt

Country's largest lender, State Bank of India , on Wednesday said it has not sought a blanket approval from the Government for merging the remaining five subsidiaries with itself. Bank Chairman O P Bhatt said both the mergers which have been done till now -- State Bank of Indore and State Bank of Saurashtra -- have been done with prior permission on a case-to-case basis from all the concerned bodies like the respective Boards, the Government and the RBI.  "We have not sought any blanket permission for the mergers," Bhatt told reporters here when asked about a media report on Wednesday which said SBI is mulling to merge all the remaining subsidiaries in the next 12-18-months.  He further said that SBI did not meet the Parliamentary Standing Committee on Finance on Tuesday.  State Bank of Hyderabad , State Bank of Patiala , State Bank of Bikaner and Jaipur, State Bank of Travancoreand State Bank of Mysore are the subsidiaries which are yet to be merged with the bank and it is argued that merging them will usher economies of scale and reduce administrative costs.  On SBI's bond issue, he said that the bank has received subscriptions of around Rs 6,000-crore for its Rs 2,000-crore retail tax saving bond issue (with the green-shoe option) and expects total subscriptions to touch Rs 10,000-crore by February 28 when the issue closes.

Budget: Long tenure deposits to get a tax break?

Rising inflation has forced the Reserve Bank to tighten its monetary policy. As a result, cost of funds has gone up. The banking industry hopes the finance minister will announce policy measures to reduce the impact on banks’ margins. The biggest demand of the banking sector is tax breaks on longer tenor deposits to help deposit growth. Bankers also expect the government to announce subsidies for each no-frills or zero balance account opened so that banks can service first time customers and meet the target of opening 50 million such accounts in 73,000 villages with a population of at least 2,000 by next year. But, that’s not all. Banks expect the government to come out with a roadmap for takeout financing that will address the issue of infrastructure lending. One such measure could be allowing banks to issue infrastructure bonds with tax benefits. The banking industry also wants government subsidy or concessions on interest rates provided on lending to State Electricity Boards given their weak financial health. That will do away with asset quality concerns in power financing segment.

RBI tightens rules for credit swaps debut

The Reserve Bank of India has laid down foolproof guidelines for the introduction of credit default swaps - an insurance against bonds default , speculation on which brought down the global finance to its knees in 2008. High capital requirements, restricting the participation to a few in financial services, a tight transaction norm and limiting it to just vanilla corporate bonds will ensure there is no trading risk on credit default swaps, or CDS. But the absence of immediate profit opportunity could delay the instrument becoming popular or widely sought after. It may deter many players from taking up the business, including market-making, given the high capital requirement and low profitability, at least in the initial years. Only institutions will be able to buy CDS, or protection against default, only to the extent of underlying value of bonds. All CDS trades should have RBI-regulated entity at least on one leg of the transaction and the protection seller cannot unilaterally cancel the contract.

RBI Raises Red Flag on Surging Current A/c Deficit

Central bank Governor Duvvuri Subbarao pointed out dangers of a widening current account deficit on economic stability at a recent summit of the regulators, which may prompt some policy actions by the government. Subbarao flagged his concerns on the dangers of relying on volatile capital flows to finance the country’s rising current account deficit—the excess of imports over exports of goods and services—at a recent meeting of the Financial Stability and Development Council, or FSDC, ahead of the union budget, said people familiar with the discussions. The deficit, if unchecked, could lead to adverse investor perceptions about the economy. The council, which is headed by Finance Minister Pranab Mukherjee and has the chiefs of all financial sector regulators and senior finance ministry officials as its members, meets periodically to discuss issues relating to financial stability, macro prudential supervision and inter-regulatory co-ordination. Liberalisation of foreign direct investment, making bank deposits attractive for non-resident Indians, and freeing up of petroleum products prices could ease the deficit problem that is nearing levels seen during the 1991 currency crisis when the nation pledged its gold reserves to redeem itself. If the deficit situation deteriorates, the rupee could come under pressure, worrying overseas investors. “Though a weak currency typically boosts exports and trade balance, depreciating the currency may not necessarily address the problem in case of India as a sizeable portion of imports (e.g. oil) are price inelastic to a great extent,” said Siddhartha Sanyal, chief India economist at Barclays Capital.