April 15 (Bloomberg) -- The Reserve Bank of India is facing conflicts in its dual role of fighting inflation and managing the government's debt issuance, according to former governor Bimal Jalan. The most-active 2022 bonds are headed for a third week of losses, with the yield reaching a two-month high of 8.26 percent as the Reserve Bank held the first government debt auction of the fiscal year on April 8 and prepared to meet to set monetary policy on May 3. Jalan, chairman of the Centre for Development Studies, said policy makers may be discouraged from raising interest rates to keep price increases in check. Rupee notes have lost 0.6 percent this month, the worst performance among 10 Asian local-currency debt markets outside Japan, according to indexes compiled by HSBC Holdings Plc. Wholesale prices rose 8.98 percent last month after gaining 8.31 the previous month, four times the rate in the U.S. and the highest among BRIC economies except Russia. "There is always some tension and some trade-off if you're managing government debt," Jalan said in an interview on April 11. "If you're a borrower, whether you acknowledge it or not, the only way is to try and keep interest rates lower than they should be." The yield on 7.8 percent notes due April 2021 rose six basis points, or 0.06 percentage point, to 8.00 percent today, according to data compiled by Bloomberg. The Reserve Bank raised 120 billion rupees ($2.7 billion) from the April 8 sale, which included new 10-year bonds. Inflation in the nation, where 66 percent of the population lives on less than $2 a day, has climbed from an 11-month low of 8.08 percent in November. The difference in yields between the nation's 10-year bonds and similar-maturity U.S. Treasuries has widened to 451 basis points from this year's low of 436 reached on April 8. "The RBI needs to be vigilant and look at whether these increases are becoming more persistent," Namrata Padhye, a Mumbai-based economist at IDBI Gilts Ltd., said in an interview on April 13. In the U.S., the Federal Reserve sets interest rates while the Treasury manages government issuance. Most OECD countries established independent debt-management offices in the 1980s and 1990s, while emerging-market economies including Brazil, South Africa and Argentina have restructured public finances. Most countries "don't have this sort of a problem, but in our situation it has evolved over years," said Jalan, 70, who led the central bank from November 1997 to September 2003. The Reserve Bank and the Finance Ministry have examined the separation of roles since 1991, with the central bank's 2000-01 annual report "unequivocally" recommending the move. There is a "severe conflict of interest between setting short-term interest rates and selling bonds," according to a finance ministry report in 2008. Finance Minister Pranab Mukherjee said in his budget speech on Feb. 28 the government will introduce legislation to set up an independent debt-management office. "Establishing a separate debt office earlier would have helped," said Deepali Bhargava, an economist at the Indian unit of ING Groep NV in Mumbai. "Maybe the Reserve Bank could have had a better hold on inflation today." Finance Minister Pranab Mukherjee aims to reduce the shortfall in the government's finances to 4.6 percent of gross domestic product from an estimated 5.1 percent in the prior 12 months. The International Monetary Fund estimates the gap in the government's finances will be the highest among the BRIC economies at 8.5 percent of gross domestic product in 2011, including the gap in state government budgets. The central bank, which next meets on May 3, will raise the benchmark repurchase rate to 7 percent by end-June from 6.75 percent now, according to Royal Bank of Canada. "The deficit is falling at a very slow pace and that just means that the onus is on the RBI to do all the work" on fighting inflation, Brian Jackson, an emerging-markets strategist at Royal Bank of Canada in Hong Kong, said in an interview on April 8. The deficit "is a consideration which guides how quickly they can go on interest rates," he said. The rupee has dropped 1 percent this week on speculation oil refiners stepped up dollar purchases to pay for costlier crude imports. Oil for May delivery was at $108.23 a barrel on the New York Mercantile Exchange, taking this year's gains to 18 percent. The currency traded at 44.461 per dollar today, according to data compiled by Bloomberg. "Inflation globally is being caused by a rally in commodity prices like oil," said N.R. Bhanumurthy, a New Delhi- based economist at the National Institute of Public Finance and Policy. "The RBI has limited tools at its disposal to influence" external factors, he said. The cost of protecting the debt of government-owned State Bank of India, which some investors perceive as a proxy for the nation, has increased three basis points to 166 this month, according to CMA prices. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. A basis point equals $1,000 annually on a contract protecting $10 million of debt. "The setting up of a debt management office is overdue, but at least it is getting done now," Dharmakirti Joshi, Mumbai-based chief economist at Crisil Ltd., a unit of Standard & Poor's Ratings Services, said in an interview on April 13. He predicts inflation will range from 7 percent to 8 percent over the next six months if oil prices drop to $90 a barrel.
The very purpose of VITALINFO is to provide a platform for wider dissemination of updated information related to and happening of events in and around RBI.
Saturday, April 16, 2011
RBI Penalizes Four Gujarat Co-operative Banks for KYC/ AML Violations
Mumbai (ABC Live): The Reserve Bank of India imposed a monetary penalty of Rs. 5.00 lakh (Rupees five lakh only) on The Siddhi Co-operative Bank Ltd., Ahmedabad. The penalty was imposed for violation of RBI instructions/directions on Know Your Customer (KYC) / Anti Money Laundering (AML) and for submitting improper compliance of the observations made in its last inspection report. The Reserve Bank had issued a show cause notice to The Siddhi Co-operative Bank Ltd. The bank submitted a written reply in response to the Show Cause notice and after considering facts of the case, the bank's reply and personal submissions in the matter, the Reserve Bank concluded that the violations were substantiated and warranted imposition of penalty. The Reserve Bank of India has imposed a monetary penalty of Rupees five lakh on Shri Vinayak Sahakari Bank Ltd., Ahmedabad, Gujarat for violation of Reserve Bank of India instructions on unsecured advances, Know Your Customers (KYC) norms and Anti Money Laundering (AML) guidelines, shortage in cash balances, opening of benami accounts and violation of Dos' and Donts' prescribed for board of directors. The Reserve Bank of India has imposed a monetary penalty of ` 1.00 lakh (Rupees one lakh only) on The Suvikas Co-operative Bank Ltd., Ahmedabad, Gujarat for violation of Reserve Bank of India instructions on Know Your Customers (KYC). The Reserve Bank of India has imposed a monetary penalty of Rupees one lakh on The Botad People's Co-operative Bank Limited, Botad, Dist. Bhavnagar for violations of Reserve Bank of India instructions in respect of reporting of cash transactions above ` 10.00 lakh to Financial Intelligence Unit-India (FIU-IND), New Delhi, non compliance of Know Your Customers (KYC) norms and persistence of irregularities pointed in previous inspection report.
Single rate, multiple realities : A Seshan
There are several caveats in the assumptions made by RBI?s working group. The working group on operating procedure of monetary policy – appointed by the Reserve Bank of India (RBI) – has done a timely and professional job in its report. Its findings are supported by empirical evidence and provide the rationale for recommendations it made in relation to the liquidity adjustment facility (LAF). However, a few caveats are in order. First, the working group refers to the policy rates of different central banks. The proposal is that following them, India too should have a single policy rate and other official rates should be linked to it. The fact is that there is a hierarchy of policy or official rates. The cut-off or implicit yields in the auctions of treasury bills and dated securities are as much indicative of the policy stance of the central bank as the repo rate recommended by the working group. These rates cannot in any way be linked to the repo rate because they depend on the demand and supply factors in the market. As a governor of the Bank of England once said, the central bank is as much guided by the market in rate setting as it is the other way round. The single policy rate obtains in the UK and Japan and it is the lending rate. The three key interest rates of European Central Bank (ECB) are: (1) the interest rate on the main refinancing operations (MROs), which normally provide the bulk of liquidity to the banking system. The Eurosystem may execute its tenders in the form of a fixed rate or variable rate tenders; (2) the rate on the deposit facility, which banks may use to make overnight deposits with the Eurosystem; and (3) the rate on the marginal lending facility, which offers overnight credit to banks from the Eurosystem.(See http://www.ecb.int/mopo/decisions/html/index.en.html). As far as the US Federal Reserve is concerned, its Discount Rate is as much a policy rate as the targeted Federal Funds Rate (FFR). In the normal course of things, purchases or sales of securities by the Federal Reserve, whether outright or temporary, are its principal tool for influencing the supply of balances at the Federal Reserve Banks and FFR. It is not clear whether the working group expects RBI to intervene in the market through open-market operations on a daily basis, as in the US, to influence the market rates. The linking of a comfortable level of deficit or surplus as a proportion to the total Net Demand and Time Liabilities (NDTL) of banks, based on the results of the econometric exercises presented in Technical Appendix II, raises the question on its relevance to the estimated growth of the gross domestic product (GDP). Since the central bank has a multiple-indicator approach, it should take an overall view of conditions in the economy in relation to the expected GDP growth rate (nominal as well as real) and decide on the deficit or surplus that it can live with. A mechanical linking of the amount to NDTL can be misleading, especially when there are technical or autonomous factors, like currency in circulation and government balances with RBI that are beyond the central bank’s control. The reverse repo rate needs to be determined keeping in view, inter alia, the problem of carry trade and not the repo rate alone. The proper course is to intervene in the market to bring its rate within the desired corridor, irrespective of the size of the deficit or surplus. The working group’s preference for the deficit mode in liquidity is influenced by its finding that monetary policy is more effective when the market is in surplus. Monetary policy is a means to an end. The objective is to promote growth with price stability. If the surplus mode does not pose a threat to price stability, then so be it. It keeps the rates lower than otherwise. One should normally expect a deficit situation in a growing country devoted to price stability unless there is money creation to finance fiscal deficits or there is a foreign inflow of funds that are not sterilised. The cash reserve ratio (CRR) is still very much in the armoury of many central banks, developed or developing. China has been using it to the hilt as RBI did in the past. Although I have argued elsewhere that it is not financial repression, as claimed by Western economists, the central bank may revisit the idea of paying interest on the reserves of commercial banks. In fact, both the Fed and European Central Bank pay interest not only on the required reserves but also on excess reserves — consider it yet another instrument for monetary policy! The cash reserve ratio should be the ultimate brahmastra for RBI to deal with liquidity problems, although in Hindu mythology it could be used only once.
The author is an economic consultant and was a former Officer-in-charge in the Department of Economic Analysis and Policy at the Reserve Bank of India.
Malegam report may be part of monetary policy
Mumbai: Banks and microfinance institutions (MFIs), which are eagerly waiting for the implementation of the Malegam report by the Reserve Bank of India (RBI), will have to wait till May 2 when the central bank will announce its annual credit and monetary policy. It was expected that RBI will announce the implementation of the report in April first week. “RBI will make announcements on Malegam panel in the credit policy,” sources at RBI said. In October 2010, RBI constituted the Malegam Committee to study the state of MFIs in the country. The committee, which submitted its report on January 19, suggested among other things capping interest rate at 24% for MFI loans. The committee also suggested that small loans cannot exceed the Rs 25,000 ceiling and asked for creation of a separate category of non-banking financial companies (NBFC-MFI) for the MFI sector. Finance minister Pranab Mukherjee in his Budget 2011-12 had announced creation of an equity fund of R100 crore for MFIs, which would help the cash-strapped sector to continue lending to small borrowers. Dalli Raj, CFO, SKS Microfinance, said, “We think it is a very positive report for the sector. First, it brings in regulatory clarity and it says that the RBI will act as a sole regulator for the sector.” Raj further said the implementation of the report would ensure in funding certainty, because it had reinstated priority sector status for the bank loans to MFIs. Finally, the report called for the withdrawal of Andhra Pradesh MFI Act. “SKS has not asked for any kind of restructuring of exposure of banks to the company as we have go a strong networth of R1,850 crore and our exposure to the state of Andhra Pradesh was only 25% of our total loan portfolio. Still, our concern being that banks must start funding to the sector in a big way so that it results in augmenting the credit flow from the banks to the MFI sector,’’ he said. However the microfinance industry, which of late has witnessed slowdown in business said banks are shying away from advancing loans to them.
Gokarn to lead working group on savings
Mumbai: The government has formed a working group on savings for the 12th Five Year Plan under the chairmanship of Subir Gokarn to suggest measures to boost savings in the country. The 12th Five Year Plan begins in 2012-13. The committee, which met for the first time in New Delhi last week, has been asked to submit its report before the government within six months from now. Chaired by Gokarn, the meeting also was attended by officials from the Planning Commission, RBI, State Bank of India, Nabard and Sidbi. Being the first meeting of its kind, the panel asked different members of the committee to come up with their notes on various issues relating to savings like how to estimate the small savings in the future and how to bridge the savings gap and so on, a member of the committee told FE. “We also discussed what could be the savings estimate for the proposed plan period,” a member of the committee said, and added it was also decided to form another sub-group to dwell upon financial issues on small savings.
Mobile Banking In India Dominated By State Bank of India
Mobile transactions in India have not yet reached the scale of online banking transactions yet, but a significant majority of transaction volumes are being dominated by one bank – State Bank of India, the country’s largest public sector bank. According to data retrieved from the Reserve Bank of India (RBI) by MediaNama using the Right To Information Act 707,496 mobile banking transactions, Rs. 61.61 crore were reported for the month of February 2011, of which as many as 529,318 transactions (74.81% of total) and Rs. 32.63 crore transacted (52.96% of total) were from customers of State Bank of India. There was a decline in transactions month on month, with 7,24,682 transactions and Rs. 62.77 crore reported in total for January 2011. Readers might recall that in February 2011, the One Time Password second factor of authentication was introduced by Banks, following a notification from the RBI. Cleartrip, for one, had reported a decline in mobile ticketing at the beginning of the month. All in all, there has been growth in transaction volumes and amounts since September 2010, when 499039 transactions of value Rs. 43.79 crores had been reported. As as aside, Central Bank of India reported just one mobile banking transaction in Feb 2011, worth Rs. 5000. We’ve received fairly granular information today – transaction volumes and value, segmented by bank, for every month since May 2009. Unfortunately, we’ll have to type out all this information, since what we have is in the form of printouts. Hopefully, by the end of next week, we should have responses to six other RTI requests, made of DAVP, DoT, the Income Tax department, Indian Airlines, MTNL and BSNL. As we’ve mentioned before, we believe government data should be made public, accessible and usable.
medianama.com
DARE TO LEAD: THE TRANSFORMATION OF BANK OF BARODA
The refurbishing of the BoB brand is one of the success stories of public sector banking in India. The story of how it was done, told by the former CMD Anil K Khandelwal . He presents it as a memoir, in problem-diagnosis solution format.
Sage, Rs. 795 THE WANDERING FALCON
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