PATNA: The state government is likely to create a special police force to extend security support to banks and nominate nodal police stations to tackle the menace of forged currency notes. The decisions, among others, were taken at the State Level Security Committee meeting, convened by RBI Regional Director G Mahalingam here on Monday. While Home Secretary Amir Subhani chaired the meeting, other participants included top government officials as well as officials of the RBI and banks. They felt that overall security situation for the banks has improved. In another development, Mahalingam cautioned people against companies/entities mobilising deposits offering high rates of interest/return in the guise of Cumulative Convertible Preference Shares or even Cumulative Redeemable Preference Shares. He said the RBI has not authorised such companies and entities to mobilise such deposits and, accordingly, the RBI does not guarantee repayment by these companies.
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Tuesday, March 15, 2011
CM inaugurates Customer Service Point
Nagaland State Chief Minister, Neiphiu Rio on March 14 inaugurated Customer Service Point (CSP) of banking correspondent at Panchayat Hall Kigwema Village. In his inaugural speech he stated that the success implementation of this project would go to other villages of the state. He said that opening of this CSP Banking Correspondent is to provide loan to all the villagers of the rural areas and called upon the villagers to avail the opportunity. Today some people lent money at the rate of 10% per month whereas Bank provide loan at the rate of 1% per month, where Rio said that people lost their belonging or fail in their business due to high rate of interest charged by the public and encouraged the gathering to avail loan at the lowest rate of interest. Rio also said that college students are encouraged to open their Bank Account to draw their scholarship for easy transaction and further added that within six months about 50000 people has opened Bank Account in the state. He said that many of our people take loan and not pay/refund the loan in time. One must know the procedure to seek loan from the bank and pay back the loan in time, one must also get insured from the insurance company so that if their business failed they can get compensation from the company, Rio said. The inaugural programme was chaired by MLA, Advisor IT & C, Vikho-o Yhoshu while the invocation was pronounced by Pastor, Kigwema Baptist Church, Zhavi. Chairman, Kigwema Village Council, Zapuo Zhasa delivered the welcome address and AGM, State Bank of India, RBO Dimapur, A.K. Das gave a briefing on CSP. Short speeches were also delivered by K. Ashi Khieya OSD (Revenue) Finance Department, N. K. Gayan G.M RBI, Guwahati and Tilok Das DGM SBI Guwahati. Cultural item was also presented by Kigwema Village and vote of thanks was proposed by VDB Secretary Kigwema Village, Thorie.
Upward bias in interest rate: O P Bhatt
Ahead of the mid-quarter review of the monetary policy by Reserve Bank of India (RBI) on March 17, State Bank of India (SBI) Chairman O P Bhatt said there was an upward bias in interest rate. But he clarified that whether RBI chooses to tinker with key policy rates or keeps them unchanged would depend on its thinking and other factors, including external. "The current problem is not of liquidity, but inflation and the task is to balance growth and inflation.&" RBI has increased key policy rates seven times in 2010-11. He was at the 150 years celebration of SBI in Uttar Pradesh, and inaugurated 21 branches and 51 ATMs in Lucknow circle through video link. He also inaugurated the 300th customer service point in Lucknow circle.
RBI to rewrite FEMA notification on foreign investment
The Reserve Bank of India (RBI) is rewriting the 11-year old Foreign Exchange Management Act's (FEMA) notification on foreign investment. The revised FEMA notification No. 20 will reflect the changes made to the FDI policies over the last 11 years. It will touch on the issue of securities by persons residing overseas. The notification will define control and ownership of an Indian company as in Press Note 2. It will also remove ambiguity on the definition of capital by excluding warrants and partly-paid shares and non-convertible debentures. The new notification will have seven schedules and three annexures.
Tight liquidity forces banks to borrow more from RBI
MUMBAI: Advance tax outflows worth Rs 80,000 - 90,000 crore, coupled with year-end pressures to shore up their books, forced banks to borrow up to Rs 94,250 crore from the Reserve Bank of India on the first day after the reporting Friday. Banks are always looking at strengthening their balance sheets during this time of the year by shoring up their deposits and credit figures. This requires them to build up regulatory reserve requirements. Banks have to park a portion of the deposits they raise as cash with the central bank. As deposits gather pace, the cash requirements also go up, requiring them to raise funds from the market to meet the shortfall. Liquidity had begun to ease in the system after the government started spending, which is reflected in the government balances with RBI at minimum Rs 101 crore. However, tight liquidity on account of advance tax outflows made it necessary for them to borrow from the Reserve Bank in repo by pledging securities. The traded volumes in the collateralised borrowing and lending obligation, or CBLO, market went up to Rs 66,633 crore from Rs 3,453 crore.
SBI CMD, OP Bhatt says merger of subsidiary units a time taking process
LUCKNOW: The Chairman, SBI, OP Bhatt said that the merger of its subsidiary banks with the parent will not happen in one go and they will take it up one at a time. He said that though there are no roadblocks in the merger of its subsidiary banks it is a time taking process and certain steps need to be followed before a merger is initiated. He said that in the past the merger of two of its subsidiary banks with the parent, SBI, took about 2-3 years and therefore the merger of the remaining five subsidiaries would take about 3-5 years time. Also the merger would be subject to governmental clearances and addressing concerns if any raised by certain quarters about SBI becoming too big a bank for a balanced economic system, Mr Bhatt said on Monday on a visit to the state capital. With the Finance Minister proposing giving licenses to new private sector banks, Mr OP Bhatt said that a few more banks would only help the economy and there is enough space for each bank to grow. He said that the way the Indian economy is booming banking would also need to keep pace with the growth. In this scenario a few more banks which follow governance standards would only help in the overall growth of country. He said that the Indian banking system has proven itself to be strong and has been praised after the aftermath of Lehman Brothers, and the new banks would come up in a closely monitored sector. Mr Bhatt said that with inflation continuing to be a concern there seemed to be an upward bias towards an interest rate hike. Mr Bhatt who was here as part of SBI's 150th year celebrations, said that the bank had taken to spreading its network to the rural areas much before financial inclusion became a buzz word. He said that among other things they have introduced kiosk banking to spread its reach deeper into the rural parts of the country. He said that with economic progress trickling to rural India banking services were much needed in these remote locations. Also with many villagers still migrating to large towns, banking network was needed to send back remittances.
Subbarao's date
Assume for a moment that the Reserve Bank of India (RBI) did not have to come forward with any press release on monetary policy this coming Thursday. After all, there was a time when the central bank took a view on monetary policy only twice a year and it was not long ago that it yielded to the markets Q-culture. RBI Governor Duvvuri Subbarao, a half marathon runner himself, chose to become more quick footed in his responses and decided to come forward with a mid-quarter statement. While he did say in a recent speech that "Notwithstanding the scheduled quarterly and mid-quarterly reviews, we (RBI) reserve the right to alter our policy stance at any time to respond to the evolving macro-economic situation,&" the fact is that once a date for making a statement gets fixed, the RBI comes under pressure, from public expectations, to say something or the other. If there was no scheduled mid-quarter statement to be made this Thursday, the question of what signals the central bank would like to send on inflation management would not have arisen quite as sharply as it has. Should the RBI raise rates? If so, by how much? If not, why not? Such are the questions being asked. Given conflicting expectations of bankers, who dont seem to want a rate hike, and markets, that seem to expect a 25 basis points hike, it would appear the RBI has trapped itself into a position where it would be damned if it did, damned if it didnt. Has inflation gone away as a problem? While economists seem divided both on this question, and the related one of whether monetary policy can address the problem, business expectations are that growth would be hurt by seeking to contain inflation through more rate hikes. In India, there is always some confusion about what indicator should be used to draw conclusions about inflation. If core inflation is to be the policy barometer, the jury is still out on whether or not current trend warrants a rate hike. Equally, credit growth has not gone out of control. On the other hand, with sceptics questioning the Union finance ministers fiscal numbers, the RBI may feel obliged to act on the monetary side to rein in expectations. It is a Hobsons choice for the governor. If he had kept the option to respond when he must and when he can open, and not tied his hands by fixing a mid-quarter date, he may have been able to fudge his choices a bit more. With recent trade and industrial production data suggesting a slowdown in economic activity, and given current global uncertainties, this may have been a good time for RBI to lie low and wait, rather than act. If RBI had taken more decisive action last time, with a 50 basis points hike, it may have had good reasons for inaction at this time. Between no hike and a 25 basis points hike there isnt much choice. Since no one wants a higher hike, and RBI may not feel sanguine enough to avoid a hike, it may settle for a neither-here-nor-there compromise. Since there is a date, one might feel compelled to make a proposition!
RBI POLICY REVIEW: NAVIGATING ON THE CURVE
All eyes are on the Reserve Bank of India’s (RBI) midquarter monetary policy review on March 17. It has so far been aggressive in its actions, having raised policy rates seven times, and effectively increasing rates by 325 basis points (bps) since early 2010. The actual monetary transmission has been even more potent since market rates have been well above the repo rate owing to tighter liquidity conditions, even if we discount the fact that banks woke up late to transmit the hikes in policy rates. The RBI will probably raise rates by 25 bps and stay the course with the hawkish bias. More open to debate is how much more aggressive is the RBI poised to be here on, as economic growth is most likely to moderate in 2011-12 even as trend inflation will be higher for longer. A gross domestic product (GDP) growth of 9 per cent in the next fiscal year despite an even more aggressive RBI appears to be an extremely low probability outcome. Moreover, given the global dynamics in commodities, more adjustments in local prices are likely, which, in turn, will sustain core inflationary pressures. India’s improving headline inflation trajectory for much of calendar 2010 that followed from the severe drought of 2009 was thrown off course in December by the unexpectedly large hit from the fresh fruit and vegetables component of the wholesale price index (WPI). After hitting a high of 11 per cent year-on-year (YoY) in April 2010, WPI inflation eased to 8.1 per cent YoY in November, before reversing course to 8.4 per cent in December. The food composite index (weighted average of food components of the primary and manufactured goods subindices of the WPI) jumped in December to 8.6 per cent YoY after having declined to 6.8 per cent in November from 20.2 per cent in February 2010. Partly owing to government measures and improved supply, food inflation began to ease from the second-half of January. Indeed, the February WPI food inflation rate is likely to show a significant decline, though core inflation will rise. Despite the reams that were written on the jump in food inflation being triggered by improving affluence and existing structural deficiencies, one of the key drivers of the jump in inflation in particular was the fruit and vegetable category. The surge in the prices of that category alone contributed a massive 1 percentage point to the 8.4 per cent YoY inflation rate in December. It can’t be denied that a risk of a structural demand supply imbalance in the food economy remains, as policy initiatives have not enhanced agriculture productivity even as higher incomes have boosted demand. But this risk is not entirely new, and still asserts itself mainly via amplification of the impact of supply shocks, such as poor monsoons. However, the government needs to get its act together on this important issue. It is often overlooked that India’s food inflation is not correlated with global food inflation. The claim by some that agood monsoon last year did not have a favourable impact on food inflation is incorrect, since food grain shows no pressure points owing to improved supply. So far, most of the structural pressure on food inflation has been concentrated in protein-rich food items such as eggs, meat and fish, and milk, which have been affected by improving demand and inadequate gain in supply. Indeed, eggs, meat and fish and milk categories together contributed half of the 8.6 per cent YoY increase in the food composite in December. While food inflation is softening, core (in India’s case non-food manufactured goods) inflation is likely to increase, especially owing to the pass-through of higher global commodity prices to local prices. Depending on the magnitude of the pass-through, inflation and the government’s subsidy bill will be higher. While sensible economics dictates that the pass-through should happen, the schedule of state legislative elections suggests that a hike before that won’t be preferred, but some action thereafter is highly likely. The RBI’s focus on WPI rather than the consumer price index (CPI) inflation means that core inflation will be quicker in adjusting upwards owing to the pass-through of higher commodity prices. The central bank is essentially trying to target prices of inputs and tradeables rather than final goods prices. Core inflation has already seen an uptrend in seasonally-adjusted sequential terms, but the RBI’s response appears to be more geared to the YoY inflation rate, possibly because that is what the public identifies with and reacts to. Higher crude oil prices remain a legitimate risk to the inflation outlook, and inflation is likely to be higher for longer. Apart from local factors, a new global normal for commodity prices suggests that inflation is likely to be higher than what we have been used to. The adverse impact of high inflation on corporate margins will be more pronounced given the stronger presence of the cost-push drivers of inflation and softening aggregate demand. However, some deceleration in economic growth will soften demand-driven inflationary pressures, and the spending restraint in the Budget will be a constructive input in inflation management. The likely slippage in the fiscal deficit does not necessarily mean that domestic market borrowing will necessarily increase, as the government could again increase the foreign institutional investment limit in local currency government debt. In any case, the slippage will come more into focus later in the year. Unseasonal rains late last year upset the inflation trajectory, but, in my humble view, the RBI is not behind the curve. It has aggressively raised rates, but hasn’t formally targeted inflation, even if that means killing economic growth. Additionally, the uncertainty around the revision of administered fuel prices messes up the inflation trajectory. While managing inflation, the RBI is also ensuring that higher rates do not suffocate the much-needed supply enhancement in the supply-constrained economy. Also, the investment upturn in the current cycle is much weaker than in 2004-08, real lending rates are well in positive territory, and the actual monetary tightening is much more aggressive than what the current level of repo rate at 6.5 per cent indicates. Thus, critics of the RBI overlook that the current monetary tightening cycle is dramatically different from that in 200708, despite the repo rate being lower now. The magnitude of the pass-through to higher local fuel prices remains a key unknown for mapping the inflation trajectory. Still, the full impact of the 325 bps tightening so far has not been fully transmitted, and some moderation in growth is already appearing even if the industrial production data overstate it. Since crippling growth is not on the agenda to win the inflation battle, the RBI will likely adopt a go-slow approach here on, unless sharply higher global commodity prices mess up everything. RAJEEV MALIK -The author is a senior economist at CLSA, Singapore The views expressed are personal.
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