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Friday, March 18, 2011
9.5% interest on PF gets nod
New Delhi The finance ministry approved higher interest rate of 9.5 per cent to over 4.7 crore depositors with the Employees Provident Fund Organisation ( EPFO) for 2010- 11. The EPFO had been paying 8.5 % interest on PF deposits since 2005- 06. In September last year, it had recommended an increase in interest rate to 9.5 % for 2010- 11 after discovering Rs 1,731 crore surplus in their books of accounts. " The finance ministry has ratified 9.5 % rate of return on PF deposits for 2010- 11. We have received a notification in this regard," Central Provident Fund Commissioner Samirendra Chatterjee told PTI. Chatterjee further added that " our calculations regarding Rs 1,731 crore surplus in the interest suspense account were found correct by the finance ministry and so they approved this higher rate of return". The finance ministry's approval is subject to the condition that any shortfall on account of payment of 9.5 % rate of return would be met by making adjustments in the interest rate in 2011- 12. Chatterjee, however, said that there would be no need for making any adjustment in the next fiscal as " EPFO calculations are correct regarding the discovery of a surplus of Rs 1,731 crore in the interest suspense account." The finance ministry has also asked the EPFO to update its subscriber accounts within the next six months.
Cabinet approves PFRDA Bill
The Union Cabinet on Thursday gave its nod to the long-awaited Pension Fund Regulatory and Development Authority Bill (PFRDA) that aims to grant statutory status to the pension regulator and open up the sector for foreign direct investment. The Cabinet also cleared the State Bank of India (Subsidiary Banks Laws) Amendment Bill, which proposes to transfer certain powers vested with the Reserve Bank of India, with regard to its subsidiaries, to the central government. “The PFRDA Bill has been approved and is likely to be introduced in the current session,” said a Union minister, after a Cabinet meeting chaired by Prime Minister Manmohan Singh. If the Bills are not introduced in the current session, they may be tabled in a special session to be convened in end of May or in the Monsoon Session (July-August). The Bill seeks to allow foreign direct investment in pension funds, in line with the insurance sector, in which FDI up to 26 per cent is allowed. PFRDA, which was set up as a regulatory body for the pension sector, is yet to get statutory powers, since the Bill pertaining to that effect lapsed in Parliament with the dissolution of the last Lok Sabha in 2009. An interim PFRDA has been functioning since 2003 through an executive order. The PFRDA Bill was first introduced in Parliament in 2005 and referred to the parliamentary standing committee which submitted its report and recommended that FDI in pension should not be at variance with the insurance sector. An amendment to the Insurance Bill, which seeks to raise foreign investment cap in domestic private insurance companies to 49 per cent, is also pending. The State Bank of India (Subsidiary Banks Laws) Amendment Bill seeks to amend the State Bank of Hyderabad Act, 1956 and the State Bank of India (Subsidiary Banks) Act, 1959. The amendment will reflect the transfer of ownership of State Bank from the Reserve Bank to the central government. The Bill seeks to empower the government to fix the authorised capital of SBI subsidiaries and appoint managing directors. It will also fix the terms of office, salaries and allowances of managing directors of the subsidiaries by the government. The Bill had earlier lapsed with the dissolution of the 14th Lok Sabha.
RATE HIKE SEASON JUST GOT LONGER
The message from the country’s central bank is loud and clear: Expect a series of policy rate increases through the next financial year, as inflationary pressures have accentuated, even as risks to growth are emerging. In its mid-quarter monetary policy review today, the Reserve Bank of India (RBI) increased key policy rates by a quarter point – the eighth increase in ayear – warning that rising oil prices will put more pressure on the already high inflation. This was on expected lines. The repo rate – RBI’s short-term lending rate – has gone up from 6.5 per cent to 6.75 per cent with immediate effect. The reverse repo rate – its short-term borrowing rate – has risen from 5.5 per cent to 5.75 per cent. But what worried the markets was the hawkish tone adopted by RBI while raising its wholesale price inflation forecast for the year to 8 per cent, a full percentage point higher than the number in the third quarter review in January. RBI said rising global commodity prices, particularly of oil, were a major contributor to inflationary pressures. Domestic fuel prices, which were yet to fully adjust to the global prices, might put further pressure on inflation, it said. “Based on the current and evolving growth and inflation scenario, RBI is likely to persist with the current antiinflationary stance,” the central bank said. RBI clearly articulated the risks to growth from high inflation. “The continuing uncertainty about energy and commodity prices may vitiate the investment climate, posing a threat to the current growth trajectory,” it said. Financial sector pundits are thus no longer debating whether there will further rate rises. Their discussions centre on how much. “RBI’s stance clearly makes a case for frontloading rate hikes to cool inflation. RBI is likely to squeeze in more rate hikes in the first half of the next financial year.
Reserve Bank must continue with its anti-inflation stance - C RANGARAJAN
C. Rangarajan, chairman of the Economic Advisory Council (EAC) to the Prime Minister (PM), said the Reserve Bank of India (RBI) must persist with its anti-inflation stance. Edited excerpts: Every time we are close to a 9% growth rate in the economy, we have inflation and all signs of overheating. That is a real quandary for policymakers and the government. I don't think it's the over- heating of the economy in the current situation. The in flationary pressures have been mounting primarily be- cause of the failure on the food front. Last year, it was the decline on the foodgrain output and in the current year it has been the extraordinary rise in the prices of vegetables and certain other agricultural products. It's only recently the manufacturing sector has seen a rise in inflation, but that isn't very high either. I personally do not think that it is the high growth that is creating the inflation. It is the supply- side bottlenecks in specific areas, which is resulting in current levels of inflation. So isn't it high time we looked at the larger picture and took more structural steps to improve the situation? Well, last year when we had the imbalance due to the decline in the foodgrain production, the public distribution centre was activated and more foodgrains were pushed into the system. So you see the impact of it in the current year. As you will see in the case of cereals, the in- crease in the current year has been very modest and also in the case of commodities like pulses, the year-on-year in- flation is negative. Therefore, action taken last year has had the impact of bringing down foodgrain prices. But in the current year, we also had problems with respect to vegetables and fruit, where the prices rose very high and there was no method where we could reduce the inflationary pressures arising from this group, because there is no stock available with the government to re- lease in the market. The only thing that could be done is allow import wherever possi- ble. So I feel inflationary action has been taken. In the coming months, we should see inflationary pressures softening. Where do you see inflation settling? For 14 months in a row, we've been above 8%, even though we've had a couple of rate hikes in the interim. How do you see it panning out? I think it will decline in March, because in the four weeks of March, you'll see a further decline in the food prices. Therefore it will have an effect on the overall head- line inflation. We had expected that by March 2011, the headline inflation will come down to 7%, perhaps it will stay a little higher or a little above that level. Should RBI go easy on increasing interest rates beyond this point? I don't think so. The over- all inflation remains at a high level, even after adjustments in foodgrain prices. Inflation even at the end of March will remain above 7%, which is a very high level and, therefore, RBI must persist, as they have indicated in their review, in the anti-inflation stance.
RBI's policy rate hike is too small to quell inflationary expectations
THE Reserve Bank has hiked the policy interest rate by 25 basis points. While this is a move in the right direction, as long as the rate hike is less than the hike in inflationary expectations, the stance of monetary policy is expansionary as real interest rates have not been raised. Since the inflation forecast of the RBI has gone up from 7 per cent to 8 per cent, a move of 100 basis points, this suggests an easier stance of monetary policy. While both fiscal and monetary policies are responsible for the present high inflation situation, the fiscal situation cannot turn out to be better than what it is estimated in the budget. The risk might be on the downside since oil prices may rise and the oil subsidy bill may be much higher than budget estimates.Unless the RBI believes that the fiscal situation will actually play out exactly as estimated, or may even be better, the policy stance will be easy. The other element of the monetary story right now is the tight liquidity situation in the market. Banks are borrowing at the repo window from the RBI on a regular basis. In this situation, a 25 basis point increase in the policy rate is seen as an effective increase unlike when there is an easy liquidity situation. But even though tight liquidity and small 25 basis point hikes have come to characterise RBI policy for many months now, it has not been effective in controlling inflation. Will the 25 basis point hike be enough to bring inflation down? Unlikely. There has been a long and persistent build-up in inflationary expectation and an upward drift in inflation for more than two years. Full capacity utilisation with growing demand coming from high government spending characterise the Indian economy today. While the 25 basis point policy is a "safe" one, since it cannot do much damage, it is not safe if inflation is the biggest risk as it can pull down investment and growth and damage the Indian growth story. The weak transmission of monetary policy and long lags suggest the policy rate should have been hiked by more. The longer the high inflation stays with us, the greater will be the build-up of inflationary expectations and the harder it will be to get rid of them.
BANKS keen on preserving priority sector status for the microfinance sector
THE Reserve Bank of India (RBI) is likely to implement some of the Malegam committee recommendations on microfinance companies from April 1 this year. "The Malegam panel proposals are likely to be implemented from April 1. Only new loans are likely to come under the guidelines," said a banker. Besides, banks are keen on preserving the priority sector status for the microfinance sector, irrespective of the individual conduct of borrowing microfinance institutions. "Bankers' main reservation is nothing should hap pen by which some act or conduct or misconduct of MFIs should result in the priority sector status being withdrawn," an official of the Indian Banks Association said after a meeting between bankers and top RBI officials. Even though the Malegam committee has suggested the continuance of priority sector status for loans to the MFI sector, there are some conditions wherein the status can be cancelled due to the misconduct of borrowing MFI like using coercion, charging higher interest rate, etc. “If the MFIs don’t do certain things vis-a-vis borrowers, don’t penalise me in terms of regulation by taking out sector,” he said. He said that RBI was appreciative of the reservations expressed by the bankers. To p bankers, including Corporation Bank’s CMD Ramnath Pradeep, HDFC Bank’s MD Aditya Puri, Axis Bank CEO Shikha Sharma met RBI deputy governor K C Chakrabarty to voice their concerns regarding Malegam Committee recommendations on MFIs before they are ratified into guidelines on April 1. vis-a-vis borrowers, don't penalise me in terms of regulation by taking out sector," he said. He said that RBI was appreciative of the reservations expressed by the bankers.Top bankers, including Corporation Bank's CMD Ramnath Pradeep, HDFC Bank's MD Aditya Puri, Axis Bank CEO Shikha Sharma met RBI deputy governor K C Chakrabarty to voice their concerns regarding Malegam Committee recommendations on MFIs before they are ratified into guidelines on April 1.
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