Industry slams RBI move to increase rate

The Reserve Bank’s move to increase short-term rates has not gone down well with industry chambers and real estate players. Industry representatives said the continuing tight monetary stance from the central bank has dampened the economic growth rate but failed to tame inflation. Confederation of Indian Industry (CII) Director General Chandrajit Banerjee said: “CII hopes that this was the last increase in rates amid growing signs of a slowdown in economic and investment activities in the country.” Banerjee said inflation was supply driven and can be addressed by announcing and approving large projects, increasing investment demand and combating bottlenecks in supply. ASSOCHAM President Dilip Modi said RBI’s measures will further slow down fresh investments and restrict industrial growth. “High input prices, rising finance costs and global uncertainties are adding to negative sentiments and high interest rates will further put brakes on investments, which will make it difficult to maintain the growth momentum.” PHD Chamber President Salil Bhandari said despite the continuous rise in policy rates, inflation still persists, while manufacturing is growing at a slow pace. “Stickiness in the domestic inflation vis-à-vis high international commodity prices coupled with wage rate revisions have generalised the inflationary expectations and dampened the growth prospects.”  Real estate developers, hit due to high borrowing costs, were also critical of RBI’s stance. Pradeep Jain, Chairman, Confederation of Real Estate Developers’ Association of India (CREDAI) said: “Over the past one year, RBI has embarked on a highly ambitious inflation management objective by raising key rates consistently but the results cannot be seen yet.”

BS

Peak not in sight

A 25-bps increase in policy rates by RBI did not spring a surprise. However, the accompanying statement leaves no doubt that the anti-inflationary bias in monetary policy is going to continue. RBI is not swayed by the common perception that growth momentum is slowing across the board and hence, does not view it as a reason to consider pausing now. There is no hint that we are anywhere close to the peak of the rate hiking cycle. We expect at least another 50bps of rate rises in the next two policies, as headline inflation is likely to stay above nine per cent for close to six months more. Th pass-through of diesel and cooking gas prices is still incomplete and the trajectory of global commodity prices and impact of monsoon on food prices will be important determinants of our inflation outlook. However, apart from headline inflation, pricing power of companies and inflation expectation of households will be factors the RBI will be closely watching. So, a sustained decline in non-food manufacturing inflation will be a precondition for RBI to change its policy stance. Also our indicator of monetary conditions, indicates that though some normalisation has taken place since early 2010, it is still not tight enough.

BS

Banks brood over another rate hike after RBI action

Indian banks are considering yet another rate increase after the RBI raised its key lending rate by an expected 25 basis points on Thursday to clamp down on high inflation

Most banks had raised lending rates last month, following the central bank's higher-than-expected 50-basis-point rate rise on May 3. While higher lending rates will take a toll on banks' credit growth and pose risks of higher non-performing assets, bankers said they will have to pass on the increase as their cost of funds has gone up. "We will have to increase rates because ultimately the cost is going up. That is exactly what the RBI wants - transmission. A 25 basis point rise is a possibility," said N. Seshadri, executive director, Bank of India. State-run IDBI Bank and Indian Overseas Bank also said they will have to pass on the increase to their customers. The Reserve Bank raised interest rates on Thursday for the 10th time since March 2010 and said it will persist in its battle against stubbornly high inflation, downplaying worries about slowing growth in Asia's third-largest economy.  A Reuters poll earlier this week forecast the central bank to raise rates by 75 basis points for the rest of 2011, including the latest rate increase. The RBI said though monetary transmission has been quite strong, there is room for improvement. "The higher cost of credit is restraining credit growth, but it still remains fairly high, suggesting that economy activity is holding course," the RBI said in its policy statement. The central bank had forecast banks' credit would grow 19 percent and deposit by 17 percent in 2011-12. However, loan growth has remained almost flat so far in the current financial year reflecting signs of moderation in overall growth outlook. Banks' loans grew a mere 1.1 percent since March end, while deposit accretion remained robust at 3.3 percent. However, bankers are not losing sleep yet and are confident their advances growth will meet the RBI's forecast. "Even for a moment if the high lending rates reduce the demand for credit, the credit growth will be at the expected RBI level because there are sanctions in the pipeline which will get disbursed," said K.R. Kamath, chairman and managing director of Punjab National Bank. However, higher borrowing costs could lead to higher NPAs for the banks. "Rising NPAs is definitely an issue," said Seshadri of Bank of India, adding the state-run bank is unlikely to be aggressive on its loan disbursals given risks of delinquencies. Bankers expect the RBI to raise rates further even though they are worried that the cumulative impact of the 275 basis points rate hike over the last 15 months could hurt India's investment demand. Putting growth ahead of inflation now, however, could eventually hurt growth in a big way, PNB's Kamath said. Bankers and industry representatives, worried about the near-term prospects over growth, met C. Rangarajan, head of the Prime Minister's economic advisory panel, and expressed concerns over the slowdown in the economy and slackening of the investment climate, bankers who attended the meeting said.
http://in.reuters.com/

Thanks to RBI

I will like, through the central chronicle (Bhopal), to give heartiest thanks to the deputy governor RBI Mumbai to take immediate action on my important letters and published articles sent to him regarding troubles of members of Janganna employees credit coop. society Bhopal being overlooked by the cooperative deptt. and also state government of M.P. since long. I will again like to request the governor Reserve Bank of India to instruct his office to see that proper and timely action on my letters sent to the commissioner coop. deptt. Bhopal through Prabhat Ranjan Assistant General Manager Urban Banks Deptt (RBI) Bhopal is taken or not.

KG Shrivastav, Bhopal (Central Chronicle)

Loans to become costlier as RBI hikes rates

Reserve Bank of India (RBI) raised key interest rates by 25 basis points to check rising prices in its mid-quarterly policy review on Thursday. The RBI hiked its repo rate or the rate at which it infuses money into the banking system to 7.5 percent and reverse repo rate, at which it sucks out excess money, to 6.5 percent. Talking to Zee News, an official at the Oriental Bank of Commerce said, "It was quite inevitable to hike the key interest rates keeping in view the stubborn inflation." About impact on ordinary citizens, he added, "Since the cost of deposit is high, it is also possible that the banks would pass on the burden to customers thus makings loans dearer." Inflation, according to the latest data, rose to 9.06 percent in May, much above the Central Bank`s comfort level of 5-6 percent. According to the RBI report, "inflation is likely to continue facing upward pressure". Inflation has continued to remain high despite the Reserve Bank raising the key lending (repo) and borrowing (reverse repo) rates nine times since March 2010.

Central Chronicle

RBI rate hike "right move", says Montek

 

I think it is certainly the right move (of RBI) to contain inflation. This is a widely expected move," Planning Commission Deputy Chairman Montek Singh Ahluwalia told reporters here......

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RBI had no option but to raise key policy rates: Rangarajan

NEW DELHI: Agreeing with the RBI's move to raise interest rates, the Prime Minister's Economic Advisory Council (PMEAC) today said persistently high inflation warranted policy action by the central bank. "I think the Reserve Bank has taken the right decision. Contrary to expectations, the inflation rate in May went up and went up very considerably and therefore, it left the RBI with no other option but to raise the policy rates," PMEAC Chairman C Rangarajan told a private news channel.  The Reserve Bank has raised the key lending (repo) and borrowing (reverse repo) rates by 25 basis points each to tackle price rise.  The RBI, Rangarajan said, would continue its tight monetary policy stance so long as inflation remains at an elevated level. "They have to keep the ammunition still in store for further action against inflation if it becomes necessary. I believe that the RBI will continue to follow the policy of tightening so long as inflation remains at very high levels," he said. The PMEAC Chairman and former RBI Governor also said higher interest rates will have an impact on companies' investments, as the cost of capital will increase. "The hike in the interest rates will have some impact in terms of postponing the investments. But if inflation continues to remain at a high level, it will have a dampening effect on growth in the medium term," he said.  Rangarajan, however, exuded confidence that the economy will grow by 8.5 per cent in the current fiscal, driven by robust investments. "I think there are many factors that are operating in the economy which will propel the economy to grow at 8.5 per cent. While new investments may be slow in coming, the existing investments in the pipeline will be completed...," he said.  Headline inflation in May stood at 9.06 per cent, despite the Reserve Bank's efforts to tackle price rise by continuously raising the key lending and borrowing rates.  What is more, food inflation was recorded at 8.96 per cent for the week ended June 4.  Food inflation, Rangarajan hoped, would moderate in the coming months on the back of a good monsoon.

TOI

Policy highlights

Quick Edit | Mumbai to New Delhi

The central bank has also clearly indicated that some growth will have to be sacrificed in the short run if inflation is to be tamed

The Reserve Bank of India (RBI) has done well to increase its key policy rates by another 25 basis points. The inflation fire shows no sign of abating, so monetary policy needs to become tighter. The central bank has also clearly indicated that some growth will have to be sacrificed in the short run if inflation is to be tamed. The government needs to support RBI in this tough quest, despite the fact that less robust growth will hurt its tax collections. Higher interest rates will also push up the cost of servicing our public debt. Manmohan Singh had backed C. Rangarajan in the mid-1990s while P. Chidambaram had fought with Y.V. Reddy in 2007. We hope the current finance minister lets D. Subbarao do his job. The government has a more positive role to play as well. First, fiscal policy needs to be tightened as part of a coordinated policy response. Second, the government can help by giving a much-needed reforms stimulus.

Mint

RBI’s monetary policy review: Hobson’s choice for the markets

In contrast to the worsening it sees in the global environment, the central bank does not see any change in its domestic growth outlook

The big change between the Reserve Bank of India’s (RBI) monetary policy statement on Thursday and its annual credit policy statement on 3 May is the central bank’s current emphasis on the risks to growth coming from abroad. Both the statements say that the policy action is expected to “contain inflation and anchor inflationary expectations by reining in demand-side pressures”, but the second objective on 3 May was to “sustain the growth in the medium term by containing inflation”, while on Thursday it was to “mitigate the risk to growth from potentially adverse global developments”. In contrast to the worsening it sees in the global environment, the central bank does not see any change in its domestic growth outlook. Indeed, it takes comfort from the fact that the trend in industrial outlook painted by the new series for the Index of Industrial Production is more upbeat than that of the old series. It further says that “even as there is deceleration in some important sectors, notably interest-sensitive ones such as automobiles, there is no evidence of any sharp or broad-based slowdown”. It says that corporate results for the March quarter, as well as credit growth, have been reasonably strong, while demand conditions, too, remain robust.  According to the credit data, it says, “The higher cost of credit is restraining credit growth, but it still remains fairly high, suggesting that economic activity is holding course.”

Mint

Strong diagnosis, weak prescription

The RBI's Mid-Quarter Review is a document not just of the central bank's limited effectiveness, but of New Delhi's wilful failure to lend a helping hand

The Mid-Quarter Monetary Policy Review of the Reserve Bank of India shows that it may be succumbing to an inflexible faith in the role it is meant to play rather than in the cold logic of a complex reality and the colder evidence of the results of its previous actions. When it raised the repo rate by 25 basis points to 7.5 per cent, it followed its script faithfully; inflation, it said, “persists at uncomfortable levels”. Headline numbers, it stressed, “understate the pressures because fuel prices have yet to reflect global crude oil prices.” From the RBI's viewpoint, the logic of its actions appears unarguable. Monetary policy is an effective instrument of inflation control. Students, TV commentators and research analysts believe so. But some feel that domestic inflation originates not in excess liquidity or overheated demand, but in supply shortages unaffected by monetary policy changes. The fact that food prices are still at high levels and that manufactured goods prices have climbed a percentage point in May from 6.3 per cent the previous month, shows that the RBI's actions over the last nine months have not succeeded. Leave alone food prices, non-food prices have remained above the targeted level of 4.5 per cent. To a large extent, global commodity prices have added to the spike in prices, but so have interest rates, that have virtually doubled in the 15 months since the RBI began its tight money policy. Inadvertently, the RBI's rate hikes, along with food and commodity prices, may have contributed to sustaining non-food prices at higher levels. Yet, mindful of its script, the central bank avers “some short-run deceleration in growth may be unavoidable in bringing inflation under control.” In nine attempts, the central bank has failed; it might pass off that failure on “transmission problems” but the manufacturing sector has felt the pinch. At this point, the relevant issue is not whether growth is moderating, but whether inflation is; so far, the verdict is no. But even more significant is the absence of any action from New Delhi from pledging its armoury of fiscal and public policy measures to ease supply constraints and, thereby, control input prices. The RBI's Mid-Quarter Review is strong on diagnostics, but weak in its prescriptions. The principal cause for this weakness lies in the abysmal lack of actions by New Delhi against the systemic weaknesses of the economy. In that sense, the Mid-Quarter Review is a document not just of the central bank's limited effectiveness but of New Delhi's wilful failure to lend a helping hand.

Business Line

Dismantle the forex licence raj – S.S.Tarapore

Ms K. J. Udeshi, former Deputy Governor, RBI, and Chairperson, Banking Codes and Standards Board of India, and Dr K. C. Chakrabarty, Deputy Governor, RBI… Knots in forex management system need to be untied

The RBI has done well to set up a panel to streamline foreign exchange rules for individuals. Most of these rules are vestiges of an earlier era, a throwback to a ‘control mindset'.

Banks, corporates and institutional investors are equipped to deal with procedural hassles, but individuals, both resident and non-resident, are defeated. The 2006 Committee on Fuller Capital Account Convertibility (FCAC) stated that “the knots in the forex management system would need to be untied before the liberalisation can become meaningful” (page 114 of the Report). The members of the FCAC Committee have expressed indebtedness to Ms K. J. Udeshi, former Deputy Governor and current Chairman of the Banking Codes and Standards Board of India (BCSBI), for emphasising, in interaction with the FCAC Committee, that removal of procedural and operational knots is more important than liberalisation. It is in the fitness of things that the RBI has, in May 2011, set up a Committee for Review of Procedures Relating to Foreign Exchange Facilities for Individuals-Resident/Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs).

CONTROL MINDSET

The Committee is to identify areas for streamlining and simplifying procedures so as to remove the operational impediments and assess the level of efficiency in the functioning of authorised persons. As Ms Udeshi stressed, the present anomalies and contradictions emanate from a “control mindset”. Much of the procedural framework was set up when there was a total ban on remittances by residents on the capital account and the procedural regime for NRIs /PIOs was also stringent. Non-resident individuals can now remit from their Non-Resident Ordinary (NRO) Accounts up to $1 million per annum while residents can remit on capital account $200,000 per annum and, in addition, there are liberal limits for current account transactions. Unfortunately, the procedural hurdles remain. Till 1994, non-residents holding NRO accounts were not allowed forex remittances from their accounts. Holders of Non-Resident External Accounts, which were based on remittances from abroad, had full rights of remittances. Accordingly all non-residents were put into two boxes, “repatriable” and “non-repatriable”. It is amazing that even today non-resident accounts are classified in this manner. It could be claimed that this is not the doing of the RBI or the banks but the Securities and Exchange Board of India (SEBI) and the government. No matter which authority prescribes such procedures, it is the individual who suffers.

INEXPLICABLE PROCEDURES

Many procedural hurdles can easily be dispensed with without any change in policy. A few select procedures are set out below:

First, despite denials by banks, a number of them still require an individual using foreign exchange to sign a demeaning declaration on what he is not doing, rather than what he is doing. Individuals are required to sign a declaration to say that they are not chors (thieves).  To the extent that even one bank uses this reprehensible declaration it speaks poorly of the entire Indian financial system. Second, while non-residents are permitted to have an account jointly with a resident as a second name, a resident is not permitted to have an account jointly with a non-resident as a second name. This is observed in the breach as RBI officials, government officials, bankers and others violate this procedure! It is inexplicable why the authorities do not appreciate the convenience that depositors seek, but are obsessed with the concerns of yesteryear. Third, there are absurd stipulations that residents buying a rupee asset from a non-resident are required to undertake a 30 per cent deduction of the proceeds and remit it to the government account and the non-resident has to claim a refund.  This regulation just cannot be implemented in today's screen-based trading system. The government, the RBI, the banks and those undertaking the transaction are aware that the stipulation cannot be implemented, but the authorities cling to it — it is for the tax authorities to remove this ridiculous stipulation. Fourth, individuals utilising their Resident Foreign Currency Accounts (RFC) are required to fill the A2 Form for purchasing foreign exchange and sign the demeaning declaration. At the same time, a resident is allowed to maintain a RFC account abroad where the writ of the RBI does not run! It is reported that the banks undertake these procedures because of strictures by RBI inspectors! It is unbelievable, but true, that non-residents are required to have one NRO Account for their assets before they left India and for inherited assets, and a separate NRO Account to purchase shares after they become non-residents; what is more, the individual has to maintain two separate demat accounts. The RBI and SEBI prescribing these procedures are looking for a black cat in a dark room which is not there. Lastly, the decentralisation of the RBI offices and the delegation of powers to banks has moved the system from a single regulator to a proliferation of regulators, each acting like a satrap. Despite liberalisation, individuals continue to suffer. Ms Udeshi, much before this Committee was set up, said dismantling exchange control procedures is more demanding than imposing controls. The Udeshi Committee is the last hope for individuals.

Business Line

DFSA strengthens ties with RBI

The ceremony at the Central office of the RBI took place in the presence of Dr KC Chakrabarty, Deputy Governor of the Bank. One of the DFSA Board Members, the Honourable Apurv Bagri, also attended the meeting and later in the evening hosted a dinner to mark the occasion............

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Fiscal measures needed

The announcement of policy rates hike for the tenth time in the last 16 months appears to be a mockery and a one-sided show in addressing inflation. The government has once again set aside the tools of fiscal measures, leaving the issue with the Reserve Bank of India to proceed with the single-point agenda of rate hike. It is not known whether the government is honest in sticking to the 8.5 per cent growth projection, as the rate hike is likely to affect the production side. The present inflationary trend has reached near double-digit levels. The government should own up the responsibility and proceed with tight fiscal measures, instead of remaining as a spectator and allowing the RBI to continue hiking rates.

C. P. Velayudhan Nair (Business Line)

Containing inflation

The RBI, in its Financial Stability Report released recently on the health of the financial sector, has expressed concern over the consistent price rise and runaway inflation, which is estimated at around 9 per cent. It has also raised concerns over the rising bad loans in certain sectors, the possibility of European debt crisis spreading to advanced economies, fiscal consolidation, and so on. Inflation has remained above RBI's comfort level for the past one year. In its effort to tackle inflation, the RBI has raised key policy rates by as many as 10 times since March 2010. Yet, inflation is relentless and has assumed a menacing proportion. High interest rates are not good for the economy since that will translate into increased borrowing costs. Yet, the RBI has decided to hike the key policy rates to contain inflation and sacrifice growth in the medium term. While attacking inflation would remain a priority for the government and the RBI, the extent of economic uncertainty prevailing due to internal and external factors would prompt the RBI to work out permutations and combinations to keep the economy going.

S. Umashankar, Nagpur (Business Line)

RBI action will check inflationary expectations: Pranab

The Reserve Bank of India (RBI) move to hike repo rates by 25 basis points was on expected lines, the Finance Minister, Mr Pranab Mukherjee said here on Thursday. By this policy rate action, the RBI has sought to maintain an interest rate environment that moderates inflation and checks inflationary expectations, Mr Mukherjee said in a statement soon after the central bank announced its mid-quarter credit policy review. The Finance Minister said that the further tightening of monetary policy was expected as the core inflation had hardened to 8.71 per cent in May 2011, from a level of 7.93 per cent in previous month. There was need to have better price stability for sustaining growth in the medium term, he said. As part of anti-inflation measures, the RBI on Thursday announced a 25 basis points hike in repo rate from the existing 7.25 per cent to 7.50 per cent.

Business Line

Activists invoke RTI to find out the status of RBI’s report on customer service

Committee chairman M Damodaran has not released the report despite it being ready. The query seeks to know the expected date of the release and the time-frame for implementation of recommendations

After a long wait of more than a year, during which many people submitted their recommendations to the Reserve Bank of India's (RBI) committee on customer services, there is still no sign of the report. Now, an activist has evoked the Right to Information (RTI) Act to find out the status of the report. M Damodaran, chairman of the committee on customer services, has, despite repeated assurances, been sitting on the report. Mumbai-based activists have filed an RTI query with the RBI to get details of the report. The RTI query, a copy of which is available with Moneylife, seeks details such as the number of responses received from the public/NGOs, the time-frame of the submission of the report, the date on which the chairman signed the report, the expected date of release of the report in the public domain, and time-frame for implementation of recommendations. The activist has also sought the date/s when each individual member of the committee signed the report.  In a circular  dated 16 June 2010, the RBI had invited suggestions to be submitted to the Damodaran committee on customer services by 15 July 2010. Mumbai-based chartered accountant Nagesh Kini, who is one of the people who made submissions to the committee, told Moneylife: "Last year, as the per the RBI circular, I made my submissions to the Damodaran committee. The suggestions related mainly to the issues faced by senior citizens. I don't know how many of them have been incorporated in the report since it has not yet been released." The committee was constituted in June last year to review the system of customer service and grievance redressal by banks. The committee was expected to undertake a strict review of the existing system of the Banking Ombudsman Scheme and customer service in banks, including the approach, attitude and fair treatment to customers in retail, small and  pensioners  segments. The committee was also asked to evaluate the existing system of grievance redressal mechanism prevalent in banks, the structure and efficacy, and recommend measures for expeditious resolution of complaints. The report was expected to be released in mid-February, but it has not yet been released. Moneylife has repeatedly written about the report on customer services and that its release has been delayed for unexplained reasons. According to sources, "The report on customer services by the RBI has described solutions to resolve customer issues. The report is believed to be pro-consumer. But the report, despite being ready, has not been released for reasons best known to Mr Damodaran. Even the committee members are unaware of the release date."

Moneycontrol

Hawkish on inflation, softish on growth – Rajesh Chakrabarty

Governor Subbarao has dutifully lived up to the market consensus of delivering the 10th rate hike in 15 months—a 25-basis-point rise in the repo and reverse repo rates, bringing them to 7.5% and 6.5%, respectively. The cash reserve ratio (CRR) remains constant at 6%. But the decision was not really as straightforward as it may appear. In many ways, this review by the Reserve Bank of India (RBI) was close to the sharpest edge of the classical central banker’s dilemma, whether to cut rates and boost growth or raise them to contain inflation. In a rather unusual show of transparency, the Chief Economic Advisor himself had commented publicly a few days ago advising RBI to take into account slumping industrial production and hold back on raising rates. Probably he was just giving an opinion, not really trying to influence RBI, for if it was the latter the choice of communication channel could hardly have been more counter-productive. In any event, the latest inflation figure, northwards of 9%, is away from RBI’s “comfort zone”—and it better be—while the slump in the April’s year-on-year index of industrial production (IIP) to around 6% is equally lacking in comfort for the growth advocates. The governor chose inflation as the bigger evil. The choice is well grounded in both economic theory and central bank wisdom. It is difficult to argue with RBI’s view of things—the relative importance of the two threats—explained in the quarterly review. How much dent a 25-basis-point rise is going to have on inflation immediately is, and will remain, an open question. The rain gods are being invoked to take care of not just inflation but of growth as well. In any case, the direction of the move is beyond question. It signals RBI’s hawkish-on-inflation stance and helps fixing the inflationary expectations at a lower level. It probably also suggests that the tightening phase of monetary policy that the country has entered since October 2009 still has a few notches to go. Indeed, the repo rate stood at a full 9% on the eve of the Lehman collapse. That said, things do not look very bright just now on the investment and growth side for India. The clouds on the international horizon grow darker. At home, projects are being held back or shelved indefinitely. Perhaps the most telling indicator is an unlikely source—the foreign direct investment (FDI) inflow data. FDI in India declined by over 30% in 2010 and the trend shows no sign of turning. One can always blame it on global factors but, given that other Asian emerging markets have shown strong increases—from 14% in Thailand to a whopping 163% in Indonesia—we are clearly losing out projects to other countries. This trend is important because in today’s world what works for foreign investors, holds true for large Indian projects too. Something is clearly amiss in the Indian investment climate that is holding investment—domestic and foreign—back. Regulations would be among the usual suspects, except that investments have grown to higher levels in an era of worse controls. So we are left with something that is clearly Indian and evidently of a recent nature. Policy uncertainty seems to be the most plausible action. The shadow of the multiple crises as well as the recent civil society protests against corruption may well have contributed to this slowdown. The point here is that one cannot expect monetary policy to untangle these knots. Doubts are often expressed about the efficacy of India’s monetary policy on inflation. The link between monetary policy and investment is equally, if not more, tentative. Unless the investment environment in the country is more conducive, a softer monetary policy is not going to help output growth. It would only be akin to the proverbial “pushing on a thread”. Monetary policy is too often expected to do several things—control inflation, bring forth growth, and keep the value of the rupee at desired levels. Sadly, it is just not possible to use the single instrument of interest rates to achieve all that. It is in this connection that one is reminded of possibly the most controversial of the suggestions made by the Raghuram Rajan committee on financial reforms, that RBI adopts a variant of “inflation-targeting”. While clearly the government has not moved towards formally adopting the suggestion, and RBI has opposed it vocally, in effect, RBI actions have been following the spirit of that approach in recent years. It only has to work harder to convince the world that it considers inflation the biggest danger. After all, when it comes to monetary policy, the difference between “comfort zones” and “tolerance zones” is more than just semantic.

The author teaches finance at the Indian School of Business, Hyderabad

FE

RBI UPS KEY POLICY RATES; MAY REMAIN HAWKISH

Post Office savings accounts to be taxed from current fiscal

The government has decided to levy tax on the interest obtained on Post Office savings schemes from the current financial year. The Central Board of Direct Taxes (CBDT) has brought out a notification in this regard recently, which stipulates that any interest earned beyond `3,500 (in case of individual accounts) and `7,000 (in case of joint accounts) will be taxable from the running fiscal. The CBDT — which is the administrative authority of the Income Tax Department-- has issued the notification to all the tax collection ranges across the country for implementation. Taxpayers will have to reflect this investment on their income tax returns. “Taxpayers who now invest in the post office saving accounts schemes will now have to show the interest earned on this scheme while filing their income tax returns. Interest upto Rs 3,500, in case of single accounts and and `7,000 in case of joint accounts, is exempted,” a senior I-T official said. The Assessing Officer (AO) will compute the tax on the interest earned, beyond the exemption limit, accordingly, he said.

The Pioneer

Blunt instrument: have interest rate hikes run their course?

You may quibble with RBI governor D Subbarao about monetary policy being a blunt instrument that hits everything from individuals’ home loans to the country’s economic growth. Or go along with him to make.........

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BANKERS’ TAKE

There is (in the policy review) for the first time recognition of potentially adverse global developments and there are also concerns about an unwarranted slowdown in domestic demand and credit. All this suggests that a re-assessment of the growth-inflation trade-off may now be required that might moderate the need for further policy tightening—Shikha Sharma MD, Axis Bank

While pricing of loans could change marginally the rate hike might not translate into an immediate increase in the Base Rate. Given RBI’s concerns over inflation, one more round of rate hike cannot be ruled out. I expect that credit growth would be around 19-20% and the GDP to grow around 8.5% —M D Mallya Chairman, Bank of Baroda

I feel that interest rates are close to their peak levels. There are three reasons for this; Firstly, the impact of earlier hikes may start showing now; Secondly, with the monsoons starting on a good note food prices may ease. Thirdly, with major economies facing problems commodity prices could ease thereby reducing imported inflation —Keki Mistry MD, HDFC

The rate hike and prevailing systemic liquidity conditions could lead to an increase in funding costs for banks, and in lending rates. Based on the trends across various segments, and the existing pipeline of approved projects, credit growth for the year is expected to be in the range of 18-20% —Chanda Kochhar MD & CEO, ICICI Bank

We continue to expect two more rate hikes of 25bps each taking the repo rate to 8.0% before the current tightening cycle draws to a close. Three factors could however get in the way of further hikes-- unrest in the global economy and financial markets, a resulting correction in commodity prices, and pronounced domestic growth slowdown in response to rate hikes and external factors —Gunit Chadha CEO, Deutsche Bank India

TOI

‘Our main worry is inflation, not growth’

The Reserve Bank of India on Thursday gave ample signals that it is more concerned about inflation, not growth. Hiking the repo and reverse ........

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The Inflation Buck

It does not stop with the RBI; the government must make bold to do its bit

The RBI has raised policy rates by an additional quarter of a percentage point, bringing the rate at which banks can borrow from the central bank to 7.5%. This is still significantly below the 9% effective before the financial crisis and below the rate of inflation, keeping real interest rates still in the negative territory. It is difficult for the central bank to ease off on restoring policy rates to where they were before the crisis when inflation continues unabated, and when a largish current account deficit indicates that the economy’s appetite for goods and services is running ahead of domestic supply. So, the RBI is likely to raise policy rates even further in the coming quarters. Where would this leave growth? The simple reality is that neither growth nor even inflation is determined solely by domestic monetary policy. The government has to step in and take the corrective action that only it can take. It has to act at three levels: at the level of the G20, to initiate action on reining in global commodity prices as they ride a wave of gushing liquidity flowing out of developed economies; at the level of fiscal consolidation, to prevent government expenditure adding to excess demand in the system; and in terms of policy and governance to restore investor confidence and kick-start investment, particularly to remove the supply bottlenecks that feed inflation. Fiscal consolidation and policy reassurance would converge in a long-awaited decision to deregulate diesel prices. It would help anchor inflation expectations as also free up for others the huge chunks of bank lending that oil companies corner at present, to make up for under-recoveries. If the government swiftly moves to shed dither and policy paralysis, the mood would change, definitely for the better. It could easily allow foreign direct investment in multi-brand retail, write off a fifth of the debt of all states that scrap restrictions on farmers’ freedom to market their produce and permit workers to voluntarily shift their retirement savings from the moribund Employees’ Provident Fund to the forward-looking New Pension System. The fields would bloom, and so would the markets. That would revive confidence.

ET