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Thursday, May 5, 2011
God incarnate - Gunit Chadha
My parents have been long-standing devotees of Sri Sathya Sai Baba, and I grew up visiting Puttaparthi a few times during the past two decades. I did this morning [April 24] what I have done every day for years—silently prayed to him. So even though Swami has left his physical form, for me he is still omnipresent in spirit and faith.?A few years ago, at a seminar on ethics in the financial world, Sai Baba asked a few of us including K.V. Kamath, chairman, ICICI, V.S. Das, Executive Director, RBI, and me to deliver a talk in the Kulwant Hall. This came as a total surprise to us. Another cherished memory is of the time I received vibhuti from him, which produced tears of joy. We grow up having deep faith in God and in our parents—my faith in Sai Baba is equally deep. To me he is an incarnation of God. One of the things I admired in him was that he was disinterested about your religious faith. His selfless service to society has been truly remarkable. Sai Ram.
Chadha is Chief Executive Officer, Deutsche Bank AG India.
Chadha is Chief Executive Officer, Deutsche Bank AG India.
RBI imposes Rs 1-lakh penalty on Chopda People's Co-op Bank
The Reserve Bank of India (RBI), today said that it has imposed a monetary penalty of Rs 1-lakh on Chopda People''s Co-operative Bank Ltd, based in Jalgaon of Maharashtra. The action has been initiated for violating the provision of Section 5 (ccv) of the Banking Regulation Act, 1949 (AACS) and violation of the Reserve Bank of India''s directive on unsecured advances, the apex bank said in a statement. The RBI had issued a show-cause notice to the concerned bank, in response to which it submitted a written reply, it said. "Based on the reply, the Reserve Bank of India came to the conclusion that the violations were substantiated and warranted imposition of the penalty," it said.
Gokarn says RBI mulling futures with 2-, 5-year gilt as underlying security
The Reserve Bank of India (RBI) is considering introduction of futures contracts with two-year and five-year government bonds as underlying security, Deputy Governor Subir Gokarn said opn Wednesday. Norms for credit default swaps will also be issued soon, he said. “The draft guidelines on CDS were placed on our website in February and we have received a large amount of feedback on those guidelines...we have had certain discussions and we expect to issue the guidelines very soon,” Gokarn said at a National Stock Exchange event. He added the recent financial crisis had brought to light the risks involved in the over-the-counter derivatives market, and the RBI had therefore taken regulatory steps to reduce these risks. “We believe that the OTC derivative markets here are quite well regulated,” he said. The deputy governor said the central bank had a calibrated approach towards developing the financial markets in India.
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RBI raises m-wallet limit to Rs 50,000
Relaxing the norms for payments through mobile phones, known as m-wallets, the Reserve Bank of India on Wednesday increased the money-loading limit from the current Rs 5,000 to Rs 50,000. “The maximum value of such prepaid semi-closed m-wallets shall not exceed Rs 50,000,” said an RBI notification. Leading mobile operators Bharti Airtel and Vodafone had tied up with State Bank of India and ICICI Bank, respectively, to offer such facilities to their subscribers. The central bank also decided to treat semi-closed mobile wallets on a par with other semi-closed prepaid instruments. In a semi-closed mobile wallet, money can be loaded into one’s mobile phone from a licensed company, and can be used to make payments. However, it can’t be used to withdraw money.
Banks on a rate-hike spree after Mint Road action
The Reserve Bank of India's message to increase lending rates in the system and control inflation seems to have found a ready audience in banks. Since the central bank’s repo rate hike on Tuesday, at least five banks have raised their base rates and benchmark prime lending rates by a minimum of 50 basis points (bps). IDBI Bank has raised its base rate to 10% and BPLR to 14.5%; Punjab National Bank to 10% and 13.5%; Yes Bank to 9.5% and 19%; Bank of Maharashtra to 10% and 14.25%; Oriental Bank to 10% and 14.25%, respectively. “The increase in base rate and PLR will enable the bank to fully absorb the increased costs on account of rising interest rates,” Yes Bank said in a statement. The central bank also raised interest rates on savings bank deposits by 50 bps for the first time since 2003. “The impact of the savings rate hike on banks’ margins could be negative, unless banks pass on the higher cost to borrowers… charge higher fees for transactions, require higher account balances,” Goldman Sachs said in its report post the annual monetary policy. Banks across the board are expected to raise lending rates after their respective asset liability committee meetings. Asked if banks at large would be looking to pass on costs to customers, T M Bhasin, chairman and managing director of Indian Bank, said, “That is there. It is the prescription of the policy.” “The overall message from the RBI is that lending rates have to go up in the system. The bankers are taking a hint from it. We think that 50 bps hike in lending rates is something that will happen across the board,” said Vaibhav Agarwal, vice-president - research with Angel Broking. Although the rate hikes have followed the regulator’s move for now, further rate hikes would also depend on the strength of demand, said Nitin Kumar, deputy vice-president, Quant Broking. “Going further, it would be a function of the credit off-take also. If the credit demand sustains and the corporates are able to absorb the rising cost of funds, then we will see more lending rate hikes.”
A ‘priceless’ era begins for 25 paise
As many as 45 banks in the State, designated by the Reserve Bank of India (RBI) will take coins of 25 paise or less in exchange for their face value during working hours till June 29, RBI Regional Director P Vijaya Bhaskar said on Wednesday. While these 45 banks have been designated by the RBI, Bhaskar said that any bank branch will exchange these coins. This follows the announcement that coins of denomination 25 paise or less will literally lose their value from June 30. RBI is embarking on a major drive to withdraw these coins from circulation. The banks will accept these coins till June 29 and will stop accepting them from June 30 onwards. "Coins of denominations 25 paise, 10 paise, five paise, two paise and one paise will not be legal tender anymore," he said. He said 50 paise will still remain legal tender. While the Union government has stopped minting these coins for the past seven to eight years, they have not been withdrawn from circulation until now. RBI undertakes currency management through its issue offices in the States. These issue offices supply currency and coins to currency chests attached to various banks. In all, there are 19 issue offices and 4,300 currency chests across the country. In Karnataka, there are 268 currency chests that are serviced by the issue office in Bangalore.
Calibrated steps to tame inflation failed: Subbarao
The Reserve Bank, on Tuesday, admitted its calibrated steps aimed at cooling inflation have not resulted in desired effects so far, but expressed confidence that its ''hawkish'' stance would help contain rising prices now on. “You are quite right in questioning the reliability of RBI’s inflation predictions and also the ability of RBI in containing it," Governor Duvvuri Subbarao said in his customary post-policy meet when asked whether he was sure to meet the 6 per cent inflation target for this fiscal. But he quickly added, “Over the year, we expect to be preoccupied with inflation control and hope to regain our credibility in predicting more accurately.” However, to a question whether RBI was behind the curve in containing inflation, the Governor answered in the negative and said as the nature of inflation has suddenly changed with many known unknowns (commodity and crude prices, geopolitical unrests in the Middle East and North Africa, and the impact of Japanese tragedy etc) coming into effect. Explaining the reasons for the calibrated approach to batten down inflation, he said, “Why we consistently under-predicted inflation was that last year’s inflation surge was due to a series of unpredicted supply-side pressures. But now many known unknowns have increased and hence the hawkish measures.” “When we started tightening, that was needed to sustain the growth momentum. The aim of monetary policy was then to check inflation by discouraging demand and thus help the economy for a soft-landing,” he added. “But over time this led to a dramatic change in the growth-inflation dynamics. Over time, food-driven inflation has given way to manufacturing inflation. As a result all the risks to inflation are up now,” Subbarao said. Subbarao also admitted that RBI’s inflation numbers for December 2010 to February 2011 went off the track hence March prediction also went off the track and he attributed this mismatch to a series of factors and variables which were at play. The surge in vegetable prices in December and January were quite unexpected, he pointed out. Pointing out that the known unknowns increased overtime, the Governor said since there was no cooling in demand the producers could pass on the input cost increase to consumers, thus pushing up price-pressure. On the view that a higher growth can be a trade-off for high inflation, the Governor was categorical in stating that “we don’t subscribe to that view and that we would rather compromise growth in the medium term to cool inflation off.” On the impact on the hawkish approach to GDP, the Governor said, “We have talked through the GDP numbers, which could be around 8 per cent or a little above or below it.” He also added that industrial growth may take a further hit due to inputs cost rise but private demand may be sustained. However, government investments are to be seen and so is the monsoon forecast to have a better perspective on the actual impact.
RBI classifies bank loan to micro-finance institutions priority sector lending
New Delhi: The Reserve Bank of India (RBI) on Tuesday said that it would monitor the micro-finance institutions (MFI) charging high rate of interest. The RBI also said that loans extended by banks to MFIs from April 1 will be classified as priority sector lending. “The recommendations made by the Malegam Committee for the micro-finance sector have been broadly accepted. Bank loans to all MFIs, including non-banking finance companies (NBFCs) working as MFIs on or after 1 April 2011, will be eligible for classification as priority sector loans,” RBI governor D Subbarao said while announcing the 'Monetary Policy’ for 2011-12'. RBI has broadened some of the parameters, such as increasing the annual income limits for eligible households to Rs 60,000 for rural and Rs 1.20 lakh for urban and semi-urban for seeking households. Apart from it, the tenure of loan has been fixed to not to be less than two years. Loans must be reimbursed on weekly, monthly and yearly basis. The limit of interest charged by MFI will also be decided by the RBI. Several questions were raised over the functioning of MFIS. AFTER Andhra Pradesh government brought an ordinance against MFI. Situation turned worse after banks stopped giving them loan and customers refused to return their loan to MFIs. Following the outcry, RBI set up the Malegam panel to look into the loopholes.
Another 75 bp of Hikes to Come
Before yesterday's (3 May) Reserve Bank of India meeting, we had expected a total of another 50 bp in policy rate hikes, sticking with our long held view that the repo rate would peak at 7.25% in July. That 50 bp move came through in one go, however, inevitably leading us to review our forecasts. We have decided to make a significant change to the view, now expecting another 75 bp of hikes, with the repo rate peaking at 8% by September this year. The key reason for the change is not so much the 50 bp move itself but rather Governor Subbarao's statement. There he surprised us by expressing a willingness to sacrifice some growth to calm inflation, while also indicating a reluctance to wait and see what the lagged effects of the policy tightening to date would be. The additional rate increases make us more secure in our below consensus growth forecasts. Not only do we look for 7.5% GDP growth in 2011/12, but we are expecting the same outturn in 2012/13. The “new” hikes will have a more of an effect on 2012/13 growth given the long lags involved with rate changes. Not only did the Reserve Bank of India increase the repo and reverse repo rates by 50 bp (to 7.25% and 6.25%, respectively, bringing the total increase to 250 bp and 300 bp) at yesterday's meeting but also hiked the savings deposit rate (the administered rate commercial banks must pay on some savings deposits) for the first time in years, from 3.5% to 4.0%, as well as increasing loan provisioning requirements for non-performing loans. All in all, the meeting signaled a heightened disquiet from the RBI concerning the stickiness of inflation and the fear that this would damage the country's medium term growth prospects. Exactly why this has taken so long to materialise given that inflationary pressures have been so high for so long is somewhat puzzling. Better late than never, however. Several commercial banks in India have already raised their deposit and lending rates by 25-50 bp in reaction to the RBI's move, while others have indicated their intention to do so shortly. As such, it is clear, that the vast bulk of the policy rate changes will be passed on to savers and borrowers. The accompanying statement from the RBI surprised us in three ways. First, an open acceptance by the central bank that some growth would need to be sacrificed in the short term at least in order to calm inflationary pressures. Second, the implicit reluctance of the RBI to wait and see what the lagged impact of the tightening that has already taken place would be on growth and inflation. Third, the heavy emphasis on the vagaries of WPI inflation, which most acknowledge is a poor indicator of underlying inflationary pressures. It seems highly likely that the shock March inflation release (where headline WPI was reported at 9.0%, driven up largely by the manufacturing component) was the tipping point for a 50 bp hike, rather than the normal 25bp move. With all this in mind and given the prospect of WPI inflation remaining uncomfortably high over coming months (we expect the headline rate to stay above 8% for the first half of the fiscal year, probably touching 10% in the not too distant future), further rate action looks highly likely. We are therefore lifting our interest rate call - expecting another 75 bp of hikes in total, which would take the repo rate up to a peak of 8.0% before the end of the July-September quarter. The next move is likely to come at the next meeting in mid-June and, at this stage, we have pencilled in a 25 bp hike. Clearly, however, a 50 bp increase can't be ruled out given the RBI's current hawkishness. The prospect of another 75 bp of rate hikes makes us even more secure in our bottom-of-the-range GDP growth forecasts. So far we have focussed 7.5% projection for 2011/12, but we also have the same number for 2012/13. Given that it typically takes 12-18 months for rate increases to feed through to the real economy, it is next year's growth that will feel the impact of the additional hikes. As far as we are aware, no one else has a growth forecast below 8% in 2012/13. Overall, the Indian economy and markets are facing a particularly unpleasant combination of macroeconomic circumstances right now. That is high and rising inflation, high and rising interest rates and the likelihood of downside growth surprises. This is also set to continue for some months, in our view, making it hard to remain anything other than pessimistic about the equity market outlook and somewhat cautious about bonds.
The right priority
It is heartening that the Reserve Bank of India, in consultation with the Centre, has picked up enough courage to bite the bullet and take up the issue of tackling inflation as its main priority. So far, it was taking mere baby steps by way of a 25 basis point hike eight times since March 2010 to ensure that GDP growth does not falter. This time, the central bank surprised the market and a section of economic analysts by turning hawkish and raising its short-term lending (repo) rate by an unanticipated 50 basis points to 7.25 per cent and leaving the borrowing (reverse repo) rate to float lower by one percentage point at 6.25 per cent. Even as the bank rate and the cash reserve ratio have been left unchanged so as not to affect the flow of liquidity, the net effect of the annual credit policy action is that short-term funds the banks borrow from the RBI will be available at a higher rate and, as a result, housing, auto, and consumer loans will cost more to the consumer. The policy move, which will mean marginally lower GDP growth in the short term, has come as a disappointment to India Inc. owing to the negative impact on investment. But the higher-than-expected increase in key policy rates should be viewed as a chemotherapeutic dose to combat the cancer of inflationary expectations. As it is, while food inflation has been ruling high through almost all of the past year owing to seasonal and other factors and a solution lies in easing the supply bottlenecks and increasing production and productivity, the more worrying factor is the headline inflation that has remained at a high of near nine per cent, belying even the scaled-up projection of the RBI at eight per cent for 2010-11. With prices of most commodities, especially oil, skyrocketing in global markets and with the external environment not exactly benign, the apex bank expects overall inflation to stay in the higher regions during the first half of the current fiscal and, in the absence of any further downside risks, moderate to more reasonable levels of about six per cent by the end of the year. It is clear that the reining in of demand pressures to contain inflation will have a negative impact on overall growth. While the government projected a GDP growth of nine per cent for 2011-12 as against 8.6 per cent achieved in 2010-11, the RBI has scaled down the estimate of overall expansion to eight per cent, which is in line with the realistic projections of various think tanks and multilateral financial institutions. Clearly, the country will have to bear the short-term pains if the long-term gains are to be achieved.
Primary dealers need a track record: RBI draft
Mumbai: Unveiling the draft paper on the proposed changes on functioning of primary dealers (PD), the Reserve Bank of India (RBI) has said it is necessary to ensure that the new PDs are adequately equipped to participate in all auctions of central government securities and T-bills, including an underwriting commitment and play an active role in the debt market. “There is a need that the prospective primary dealers have a track record of relevant experience on which an assessment of the entity’s operational performance, control environment, and compliance position may be based. Moreover, if applicant PD is already registered as an NBFC for a year or so, the due diligence and ‘fit and proper’ criteria could be better assessed,” RBI said on Wednesday. The current guidelines to authorise PDs in the Indian G-sec market were prescribed in the year 1995 when the PD system was introduced in India. With a view to putting in place transparent regulatory guidelines on eligibility of a PD, RBI proposed new eligibility criteria for an entity activities to become of a PD. The existing PDs would be given two years time period to comply with the minimum turnover requirement of 15% of their total turnover in the G-sec business.
Decisive moves
RBI Governor D. Subbarao has announced a sharp change in monetary policy, to tightening, with a clear anti-inflationary stance. This is welcome in an environment where the inflation rate has been persistently moderately high, without showing signs of going down on its own. Two years ago when inflation started rising in India, in contrast to the rest of the world, there was confusion on how to deal with it. Today, for the first time, in a clear and firm voice the RBI has announced its commitment to fight inflation. The stance of monetary policy is not defined merely by a change in the repo rate, but also by the increase in the savings deposits rate, the increase in provisioning and the reduction in the expected GDP growth rate. This change has been long overdue and perhaps has come too late to impact inflation quickly and decisively. In that case the RBI has indicated that it will continue to fight inflation, which means we are likely to see rate hikes. The governor held that a low and stable inflation rate was necessary to create certainty about the investment environment and is needed to see greater capacity-building. Since India has seen little addition to capacity after 2008, today growth will come not by increasing shortterm demand, but by higher investment. The change in the monetary policy framework to a 200 basis point corridor in which banks can borrow from the RBI and lend to the RBI; the move to a single instrument, the reverse repo rate; and to a single intermediate target in the liquidity market, the weighted call money overnight rate, will improve the working of monetary policy. The next change the RBI needs to make is to move away from the WPI to the CPI as the measure of inflation on which it focuses. Since the CPI is the rate that affects the lives of people, it is what matters, especially in creating wage-price spirals and inflationary expectations. The RBI's policy is a clear and welcome step in the right direction. After denying the role of monetary policy in inflation (depending on what is causing inflation) the present communication strategy suggests that regardless of what is the cause, controlling inflation will be the guiding objective of the RBI. If the RBI continues to give this strong message, inflationary expectations should hopefully come down -and as monetary policy transmission takes place over the next two years, we will see lower inflation.
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