SAD NEWS

We are extremely grief-stricken to inform the untimely sad demise of our beloved comrade Shri Manohal Lal , Organizing Secretary of  Local Reserve Bank Retired Employees Association (RBREA) Chandigarh and most active member of our group Exrbites.   May God help his family to bear this loss.  All members of Exrbites and RBREA pay their tribute to him and pray to God that his soul may rest in peace.

The cremation will take place  at 1 PM today ( Wednesday, 22nd June) at Manimajra cremation ground, Near Housing Board Chowk, Panchkula.

R K Pahuja,
Secretary,
Reserve Bank Retired Employees Association
Chandiarh.

Noted Economist Suresh Tendulkar Passes Away

Eminent economist and a former chairman of the Prime Minister's Economic Advisory Council, Professor Suresh D Tendulkar died in Pune of cardiac arrest this morning. He was 72. He is survived by his wife and two daughters. Expressing grief, Prime Minister Manmohan Singh said the country has lost one of its most eminent economists. "In Suresh’s demise, our country has lost one of our most eminent economists. His work on poverty was path-breaking and will continue to guide and inspire the coming generations of economists," Singh said in his condolence message to Tendulkar's wife Sunetra Tendulkar. Calling it a personal loss, Singh said, "he (Suresh) was a very dear friend and a colleague whose advice I valued immensely."   He was also a member of the Central Board of Directors of the Reserve Bank of India. Prof. Tendulkar contributed significantly to the Central Board's deliberations, also serving as Chairperson of the Eastern Region Local Board and Chairperson of the Human Resources Sub-Committee. "The Reserve Bank mourns the sad demise of Tendulkar and expresses its heartfelt condolences to his family," the central bank said in a statement. Well known for his extensive work on poverty, Tendulkar was Professor of Economics at the Delhi School of Economics, University of Delhi, from 1978 to 2004. Tendulkar was a member of the Economic Advisory Council to the Prime Minister from 2004 to 2008 and chairman of the Council from 2008 to 2009. He chaired an expert group on methodology for estimation of poverty constituted by the Planning Commission, which submitted its report in November 2009.

Outlook

Prithviraj Chavan condoles death of Suresh Tendulkar

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The other Tendulkar - T. C. A. Srinivasa-Raghavan

Suresh Tendulkar, who passed away in Pune yesterday, was the economist's economist. Soft-spoken, self-effacing, and forever shy of the limelight, Prof Tendulkar had taught Indian economics to several generations of students at the Delhi School of Economics (DSE). Prof Tendulkar instilled in his students not just a detailed and rigorous knowledge of the way the Indian economy functioned, he also taught them the value of precision and clarity. Not for him vague statements that were not backed by indubitable facts as revealed by data; nor for him the tendency to make predictions on a hunch. Prof Tendulkar liked to get it right. He often did. Much of the research that Prof Tendulkar conducted after joining the DSE pertained to the dynamics of the Indian economy. His room on the first floor used to be filled with hundreds of dusty reports lying all over the place. His desk was a clutter that only he could navigate. From this emerged a body of work that ought to have informed policy but, such was the disjunct between government and academia, that it did not happen. But you cannot keep a good man down, and state recognition was extended to him when he was made a member of the last Pay Commission. He took a good, hard look at the way government servants were paid and was appalled. He concluded (a) that government servants were paid far more than the public realised through all sorts of hidden benefits and (b) that their emoluments needed to be linked to efficiency in some manner. But the others on the panel had a different agenda. In the end Prof Tendulkar was forced to write a dissenting note. Some years later, in 2008, when Dr C. Rangarajan left his post as chairman of the Prime Minister's Economic Advisory Council (PMEAC) to go into the Rajya Sabha, it was to Prof Tendulkar that Prime Minister Manmohan Singh turned. It was a short stint. He enjoyed it thoroughly, except one aspect of it. Once, visibly bewildered, he asked me how he should deal with the media. I told him not to and to leave it to his secretary. In 2009, Dr Rangarajan came back to the PMEAC, and Prof Tendulkar was entrusted with making an estimate of poverty in India. His report concluded, much to the consternation of those who have a vested interest in poverty studies, that not as many Indians were as poor as generally perceived. There was a furore, based more on subjective and anecdotal evidence. Bemused, Prof Tendulkar was left wondering when, if ever, Indians would accept facts as gospel, rather than opinion.  He also undertook to write a detailed analysis of the 1991 crisis. One day he phoned me to ask what my understanding of it was, and I gave him the background, which included the inertia of the finance ministry during 1990, as also the political reasons that led to a sudden outflow of capital in India during September-December of that year. Prof . Tendulkar heard me out, and asked, "Can you prove it?" At that time, I could not. But in about 18 months, the proof he needed will be available when the fourth volume of the Reserve Bank of India's (RBI's) history is published. The vacillations and lack of sure-footedness of the then finance secretary will, hopefully, be fully documented.  A few months ago Prof Tendulkar underwent a heart bypass surgery, which seems to have not worked. He is no longer with us, but it must be hoped that his single-minded pursuit of knowledge based on facts will eventually become the bedrock on which economic research and policy in India stand.

Business Line

Suresh was simple in the truest sense of the word

... Some time ago, he had re-migrated from Delhi to Pune, the city of his youth where he studied and topped his bachelor’s degree; had taken ill and was hospitalised a week earlier; and at 72 years and bit, had breathed his last. At least 10 years before his time......

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Self-help groups to get loans at lower rates: Jairam Ramesh

Hyderabad :The central government has decided to reduce the rate of interest for Self-Help Groups (SHGs) from 12 percent to seven percent to bring it on par with crop loans, a central minister said here Tuesday. Addressing an international meet on microfinance, Environment and Forests Minister Jairam Ramesh said SHGs would now get loans from banks at the same interest rate as crop loans. He also supported the demand for bringing the interest rate further. Later talking to reporters, the minister said the decision was taken a couple of weeks ago as part of National Rural Livelihood Mission (NRLM) launched by United Progressive Alliance chairperson Sonia Gandhi in Rajasthan. He said the subsidy on the loans would be borne by the central government. Stressing the need for regulating microfinance institutions (MFIs), the minister claimed that the central government was working on MFI bill. He hinted that the process may take 12 to 18 months. Lauding the legislation enacted by Andhra Pradesh government, Ramesh pointed out that the Y.H. Malegam committee appointed by Reserve Bank of India (RBI) supported it. Earlier, addressing the international summit on "Microfinance and Inclusive Development", he noted that most of MFIs look upon poverty only as a business, not a "serious business" and are looking only at share prices, balance sheets, bottom lines and foreign institutional investors. He praised Andhra for being pioneer of SHG movement in the country and assuming the leadership role, accounting for 40 percent of all the bank credit to all SHGs in India. Andhra Pradesh has one million SHGs with 10 million members. The minister said this achievement was now being replicated in states like Bihar, Uttar Pradesh, Rajasthan and Orissa. He said while many want bank-linked SHG model of Andhra to succeed, some want it to fail. "There is a constituency out there which says Andhra SHG model is not sustainable and that it is sustainable only through government subsidy," he averred. Ramesh, who is a Rajya Sabha member from Andhra Pradesh, suggested that to face this challenge all 1,100 mandal samakhyas or federations of village-level SHGs in the state become financially independent of the government and government subsidies by making a monthly income of Rs.50,000 each.He also advised SHGs to become self-sustaining and financially independent by looking at growth engines. He wanted them to emulate the example set by their counterparts in Chittoor district through milk procurement. Today 10 percent of the milk supplied in Delhi everyday comes from Chittoor district. The minister underlined the need for SHGs to offer financial support of the kind and time the borrower wants. He said SHGs should learn a lesson from MFIs who give money for the purpose the borrower wants and at a time when the borrower wants. He pointed out that the market is not ejecting MFIs because they are fulfilling a need which bank-linked SHGs are not in a position to perform.

http://mangalorean.com/news.php?newstype=local&newsid=246472  

India Sees Coin Denomination Die

People in the United States are spoiled in regards of their currency. No matter the age of a coin or bank note, as long as it was issued by the federal government, it is still legal tender. The Trade Dollar has been the only exception to this rule. U.S. issued currency may have additional value to a collector, but the idea that even a coin or bank note that is more than a century old is still money brings a certain confidence to our financial system in the eyes of the public. This isn’t true regarding coins and bank notes elsewhere in the world. Bank notes are often demonetized when a government or its financial system changes. Coins can sometimes retain acceptance because of their intrinsic value, rather than their legal tender value. But, a coin comprised of a base metal that is demonetized is unlikely to retain any value. This appears to be what will happen to the 25-paise coin on June 29 in India.  Reserve Bank of India Regional Director P. Vijaya Bhaskar gave the eulogy when he announced, “they shall no longer be a legal tender for payment.” The ‘they’ of which Bhaskar spoke was any coin of India with a face value of 25-paise or less. Bhaskar was quoted in the May 5 Times of India newspaper, saying, “people can exchange the coins in banks. However, we won’t accept them if submitted after June 29. Those living in rural areas can exchange them in banks closer to villages.” Coins in denominations of 1, 2-, 5-, 20-, 10-, and 25-paise are being demonetized. None of these denominations have been issued in the last seven to eight years. For practical purposes, the coins have such low purchasing power that they are unlikely to be missed.  The RBI is going out of its way to ensure no one who wants to dispose of these unwanted coins missed the deadline. All banks maintaining small coin deposits were advised to make arrangements to exchange these low denomination coins, with the branches of all banks being ordered to accept the coins during working hours every day through until June 29. Banks in India are not well known for being consumer friendly regarding providing or accepting small change. Still, the central bank has also made arrangements for the soon to be demonetized coins at the counters of its own offices, further helping redeem these coins in a timely manner. While these small change coins will no longer serve as currency, according to the current edition of the MRI Bankers’ Guide to Foreign Currency, “all older [bank] notes up to 500-rupee issued by the Reserve Bank of India are legal tender.” The MRI (Monetary Research Institute, Houston, Texas) guide identifies bank notes in denominations of 10-, 20-, 50-, 100-, 500-, and 1,000-rupee being in circulation, with the exchange rate being 44.05 rupees to the U.S. dollar. It takes 100-paise to equal one rupee, and the exchange rate is a definite indication that the 25-paise coin has little value. The now defunct 25-paise is a stainless steel 19mm diameter coin with the reverse depicting a rhinoceros. (Yes, the rhinoceros is an endangered species.) Coins remaining in circulation include the stainless steel 50-paise and 1 rupee as well as the copper-nickel 2- and 5-rupee. Coins of higher denominations exist, but are commemoratives.

http://www.numismaster.com/ta/numis/Article.jsp?ad=article&ArticleId=21253

Change? Get some toffees instead / Vendors in a fix over coin shortage

Five years ago, it came to the knowledge of the authorities of RBI Bhubaneswar during periodic meetings that coins of Rs 2 are being smuggled to Bangladesh and they were converted into eight or 10 blades of high quality. So, from a Rs 2 coin, the racket was making a profit of more than Rs 10.......................

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Public debt mgmt body will compromise RBI efforts: Gopinath

The proposed separate public debt management agency would compromise the effectiveness of the Reserve Bank actions in managing market volatility and the market expectations arising out of government borrowings, according to ex-deputy governor Shyamala Gopinath. "The concern is that even after the separation of debt management, RBI would continue to be expected to manage the market volatility and market expectations arising out of government borrowings. The effectiveness of RBI actions in that scenario would obviously be compromised," Gopinath told PTI in an exclusive interview on the eve of her retirement from the Mint Road office after 39 years of service. She was answering to a question on how the government proposal to set up a separate entity to manage its market borrowing programme will impact the RBI autonomy. "Management of public debt, in my view, has to be seen as part of a broader macroeconomic management framework, particularly when huge government borrowing has a predominant impact on the markets. It is in this context that the necessity of central bank involvement becomes evident. "Only central banks have the requisite market pulse and instruments to aid in making contextual judgements which an independent debt agency, driven by narrow objectives, may not be able to do," Gopinath asserted. The Centre is in the process of setting up of an independent debt management office, aimed at separating RBI's role as the decider of interest rate in the market, and at the same time being the banker to the government. At present, both the government's debt and fresh borrowings are managed by RBI. Finance Minister Pranab Mukherjee in his 2011-12 Budget speech had said he proposed to introduce a public debt management agency bill in the next financial year. Hailing from Karnataka, Gopinath was in-charge of the departments of internal debt management, foreign exchange, government and bank accounts, non-banking supervision, external investments and operations, financial markets, communication and legal, at the time of hanging up her boots. She was appointed deputy governor on September 20, 2004 for a five-year tenure which was extended by two years.  On how autonomous the RBI is, she said, "I think our institutions are very strong. Our institutional framework is very insulated from any unnecessary interference. This is particularly true in regard to the RBI. "Our regulatory institutions have achieved a level of maturity and prominence and the people at their helm are really good statesmen and are highly experienced professionals," she said. Asked how it will continue to remain insulated with the super regulator FSDC (Financial Stability and Development Council) coming in play, Gopinath said, "the Finance Minister has assured on several occasions that FSDC will in no way prejudice the autonomy of regulators. "The FSDC has already met twice and there has been no occasion to apprehend any whittling down of regulatory functioning."

Moneyontrol

Cap on bank exposure in liquid MFs will curb volatility

"Such circular flow of funds between banks and the DoMFs could lead to systemic risk in times of stress/liquidity crunch. Thus, banks could potentially face a large liquidity risk. It is, therefore, felt prudent to place certain limits on banks' investments in MFs," RBI had said..........

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Shyamala Gopinath on four decades with the RBI

In an exclusive interview with NDTV, the outgoing Reserve Bank deputy governor, Shyamala Gopinath, talks about small savings rate deregulation, RBI monetary policy, financial market development, and her stint with the RBI.

Aim of forex reserves is safety, not high return: Gopinath

The main objective of maintaining the forex reserves is not getting higher yields, but insulating the economy from any sort of vulnerabilities and shocks, said Shyamala Gopinath, who retired yesterday as the Reserve Bank of India (RBI) Deputy Governor. "Ensuring the safety of the economy and liquidity in the system are the top priorities of the forex reserves management, and the return from them is only secondary. We cannot sacrifice our safety and liquidity just because we can get higher returns," Gopinath, who left the Mint Road office after 39 years of service, told PTI in her exit interview. "We got to operate within the framework of safety and liquidity of our system and return comes later," said the former RBI Deputy Governor, who was in charge of the Forex Management Department. Further buttressing her point, she said, "There is no assurance that we will get an assured return in a particular period. There is no instrument that fully protects our capital and at the same time offers an assured high return." The return on forex reserves more than halved to 2.09% in the fiscal year ended June 2010, which if adjusted against current inflation, was a negative return on the asset. The RBI could earn only Rs 27,000 crore as interest yield from its nearly $300 billion forex reserves during the period. But if RBI chose to deploy these funds locally, it would have fetched nearly five times more, or a whopping Rs 1,35,000 crore, at the prevailing interest rates. This happened so because RBI has chosen to invest the money in foreign markets/assets and not in the domestic market/assets. However, it should be noted that RBI could not have done otherwise under the prevailing rules governing the forex management.

BS

She’s called Simply Great

Signing off as Deputy Governor of RBI, Gopinath tells Shobhana Subramanian how she came to join the central bank instead of Central Bank

Her nickname in RBI is ‘Simply Great’. After all, it was she who held the Indian economy together when Lehman Brothers collapsed in September 2008, making sure Indian banks weren’t cash-strapped. Even earlier, way back in 1991, she helped handle a foreign currency shortage by crystallising the foreign currency liabilities of IOC so that the oil major could honour its payments. If RBI is held in high esteem by governments across the world for having regulated with prudence and pragmatism, much of the credit belongs to Shyamala Gopinath. Indeed, at the end of an illustrious career, one is glad she signed on with the central bank and not Central Bank, from whom she had an offer. As all her colleagues will tell you, the mild-mannered Gopinath is so generous she would make you believe you’re the one who came up with the bright idea, even though in reality the solution would be hers and you might not have a clue about what you’re saying. Having spent a lifetime at RBI, the last few years as deputy governor, Gopinath tells FE she wants to remain gainfully employed, perhaps working with corporates on governance issues. And also learn some classical and devotional music, which she enjoys so much. It’s a Sunday morning and we’re at the RBI guesthouse on Nepean Sea Road in south Mumbai. Although it’s her last Sunday as a deputy governor with RBI, the workaholic in her doesn’t mind that she has a packed schedule. In any case, she says most Sundays are spent catching up with work or reading up on subjects related to what she’s working on, with little time really left to do the household chores. If she does find some time on her hands, she picks up a book; right now she’s engrossed in Ori Brafman’s Sway: The Irresistible Pull of Irrational Behavior. She tells me of how The Washington Post carried out an experiment to judge whether people really understood and recognised talent or whether it was more herd mentality and snob value. The Post asked musician Joshua to play on a Stradivarius in a New York subway but although the music was sublime, he was largely ignored and some even threw a few coins his way. When the same musician played in Boston, tickets were sold out at $100 each. It’s understandable that Gopinath would empathise with the story because she’s as simple it gets, wearing her achievements ever so lightly. We’re served some light fluffy upma and some poha. Gopinath tells me she’s a breakfast person, making sure that she gets something to eat in the mornings before rushing off to work, though she doesn’t really get to spend too much time in the kitchen. Of course, when her daughters are home from the US, she makes sure they get some of the traditional south Indian fare that they miss. Gopinath confides that, of late, her daughters have been complaining that her bisi bele bhath isn’t quite what it used to be. “My daughter says I’ve forgotten how to cook. I must have messed up a little bit.” Although from Karnataka, Gopinath is pretty much a Mumbaikar, having gone to Fatima High School in Ghatkopar, recalling how the institution was just being set up and how classes were added so that she pretty much grew up with the school. The family moved back to Bangalore after a couple of years in Jaipur where Gopinath pursued a degree in commerce. “You could call it incidental or accidental that I studied commerce. The way it happened was that I had to join the university and my father went to fill out the forms. The combinations of subjects available were geography, economics and commerce or history, economics and politics. My father thought I didn’t like history or politics so he enrolled me for commerce, though actually I had wanted to do science.” Gopinath recalls how there were hardly any girls in the commerce stream. “There were four or five sections and hundreds of boys and we were just four girls.” However, she was interested in banking and had been selected by both Bank of Baroda and Central Bank of India. But her father insisted she take the RBI entrance examination, which, in those days, was held in Chennai. “In those days, the application fee was R50 and I thought it was high. I felt it would be too much of expense because someone would have to accompany me to Chennai.” But her father, who she says was “overawed by RBI”, persuaded her to take the examination that she topped. Gopinath said she didn’t even know that she belonged to the first batch of Grade-B officers and what it meant to be one. “RBI at the time was only recruiting Grade-A officers. She recalls a letter from Bank of Baroda when she didn’t take up their offer. “Please think twice. Why do you want to join RBI? There’s hardly any expansion there while we are going to open hundreds of branches.” Gopinath says she doesn’t really regret joining RBI. But now that she’s no longer going to be a central banker, would she like to take some pace off her schedule? “Unfortunately I didn’t learn classical music, that’s something I must find time for,” she says, adding that her Mumbai upbringing has made her fond of film music and ghazals. But for someone who works 24/7, it can’t be all leisure. “I’m committed to regulatory practices and want to continue learning and applying what I have learnt, so I would not mind being involved with corporates and helping them evolve governance.” Since she has been on the board of SBI, I ask whether she was somewhat disappointed with its governance. Gopinath points out that it is hard to understand public sector governance because while SBI is listed, the governance structure is in the SBI Act. That means the role of the shareholders is not what it is in the case of other listed companies. Moreover, it’s not the board but the government that makes the appointments. “I’m not saying it hasn’t worked but in the case of private sector banks we have tried to separate the chairman from the managing directors whereas in PSBs we have CMDs. We have tried to understand this difference but perhaps because the government is the owner there are certain boundaries within which the board functions, so may be one doesn’t need this kind of separation. But we do need to think about this,” she says. Wasn’t RBI miffed with the SBI management because it took some decisions without the knowledge of the board? Gopinath downplays the issue. “During the crisis, corporates needed money and we were not upset with the decisions. There was just the one matter relating to the Tata bonds where they had interpreted the circular differently but it was an off-balance-sheet transaction, not a loan.” Will the holding company structure make it easier for RBI to regulate corporates that may run banks? Gopinath believes that one lesson she learnt from the financial crisis is that no model came out as being the best model and the crisis was actually model-neutral. She concludes, therefore, that eventually the success of any model depends on the regulatory environment and the intensity of supervision. “What the holding company does is encourage transparency and makes the structure less complex so that one clearly knows the inter-connections and liabilities,” she explains, adding that “whether the arm’s length piece can be dealt with better, that is another question”. Is India far away from full convertibility on the capital account? “Of late, I’ve been wondering what exactly is full convertibility and I would like to see a country where there is full convertibility on the capital account,” says Gopinath, who points out that the current framework has been liberalised to the extent needed for the economy to grow with stability. “Corporates today have a fair amount of freedom but perhaps not individuals. That’s because remittances tend to be pro-cyclical and the pro-cyclicality gets accentuated when individuals are given more freedom,” she explains. We can’t be oblivious to the financial stability implications of capital flows, she asserts. Does she see the renminbi becoming the reserve currency in the near future? Clearly, as of now, the dollar is the reserve currency, though the Chinese do have the capacity to experiment because their reserves are so large, she explains, also pointing out pertinently that China is using the Hong Kong route to liberalising. “The renminbi can become the reserve currency if it becomes truly convertible, which is not the case now,” she says. The coffee arrives and after a few sips we have to conclude our conversation because, you guessed it, Gopinath has to rush for an appointment.

FE

Taking stock: Pranab to meet bank chiefs on July 8

Finance minister Pranab Mukherjee will meet the chiefs of public sector banks on July 8 to take stock of the current environment of high lending rates, which is hampering the credit need of the industry and threatening to slow down economic growth.  Though the official agenda of the meeting is likely to be reviewing the performance of banks last year and examining the plans for this year, bankers said since the macroeconomic scenario had significantly changed since the beginning of the current financial year, the ministry would review the present situation as well. Most of the banks are yet to receive a detailed agenda of the meeting. They have, however, been informed about the meeting by the finance ministry. The growth in loans during the April-June period was significantly lower at around Rs 42,000 crore, compared to Rs 1.23 lakh crore during the same period of the previous financial year. This was owing to a sharp increase in the lending rates, following successive increases in policy rates. While the base rate of banks rose 200-250 basis points (bps) since July last year, the repo rate rose 250 bps since March 2010. On an annual basis, credit growth moderated from 21.3 per cent in March to 20.6 per cent in early June, but remained above the Reserve Bank of India's (RBI) indicative projection of 19 per cent for 2011-12. The central bank had increased the policy rates 10 times in the last 15 months to tackle inflation. However, since inflation is still high, analysts and economists expect RBI to continue with the rate increase cycle. Government-owned banks are now in discussions with finance ministry officials to finalise the statement of intent for 2011-12. The statement of intent is a document through which banks indicate their target for the year on various parameters like credit growth, low cost-deposit growth, net interest margins and financial inclusion plans.

BS

RBI’s unanswerable 29 questions and lessons for merchant bankers

.........If RBI’s goal is to prevent mis-selling by banks, possibly the information collection could begin with focusing on the big potatoes rather than ask for wall-to-wall information that will finally serve no purpose..........

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A primitive drug with many side effects : Subir Roy

For over a year now the Reserve Bank of India has been engaged in monetary tightening to contain inflation. While that remains stubbornly high, there is a clear deceleration in the growth rate, putting paid to hopes of starting off the next plan on the elevated path of 9 per cent growth. The inflation and lower growth are being cited together as symptoms of all not being well with the Indian economy, which has been a star performer in recent years. A clear distinction is not being made between the two – inflation and lower growth – even though the former is the disease and the latter a side effect of the medicine used to fight it. In fact, there is not much sign of satisfaction that the policy rate instrument is working quite effectively, doing what it was supposed to do – suppress demand. The fact that the ultimate aim of tightening, sharply bringing down the inflation rate, has not yet been achieved has not raised doubts about the efficacy of the medicine. Over time it will achieve the desired effect, but possibly at great cost. The initial impact on consumer demand and sentiment will translate into a downswing in business sentiment, resulting in a cutback in investment expenditure (gross fixed capital formation has begun displaying negative signals). If this consolidates, it will slow down growth for several years as had happened after the tightening of 1996. The finance minister has already expressed the first sign of worry: if the slowdown becomes pronounced, it will affect revenue buoyancy, render awry his fiscal projections and raise a question mark over future fiscal stability. With a slowdown in capacity creation, the export surplus may diminish, affecting the current buoyancy in exports. All this will have the most negative of social consequences — job growth will suffer and with it the battle against poverty. With so much at stake, it is necessary to re-examine the basic tenets of the anti-inflationary regime that is being followed. Even if there isn’t much scope for change, a detailed look can help clarify priorities — what are the goals and what is the price that can be paid to achieve them? The root of the present inflationary episode is threefold: the rural employment guarantee programme since 2006 imparting a sharp rise in demand for food, the drought of 2009 impacting food output and the rise in global oil prices through 2010, accompanied by a hardening of commodity prices. The rise in the fiscal deficit through 2008-2010 is not seen as inflationary since it owes its origins to the stimulus imparted to counter the global slowdown in the wake of the financial crisis, and insulate the Indian economy from its consequences. As food inflation lies at the core of the present inflation and the employment programme is likely to sustain a high demand for food, the key to tackling the supply-induced part of inflation surely lies in vastly improving agricultural management. Policy failure on this front is the starkest but the positive side is that the list of things that need to be done is both obvious and widely understood. Improved water management leading to better drought-proofing, shifting the thrust of procurement to coarse cereals and rain-fed areas, taking forward the reform in fertiliser prices to restore soil nutrition and storing grain better so that rodents don’t get to it — all this is doable at short notice with a likely quick positive impact on supply. The other area where immediate action is possible is countering what goes under the broad rubric of fiscal profligacy and particularly cutting energy subsidy. The positive impact will be twofold: non-productive current expenditure will be partly reined in and by pricing energy right the correct incentive and signal will be transmitted to raise energy efficiency. Additional gains can be reducing the incentive for diversion of kerosene, driving the oil mafia out of business and removing the perversity of subsidising diesel-powered luxury cars. But for many the need to contain fiscal profligacy also includes arguing against the employment guarantee programme and the right to food security and education. If a job creation scheme is used to construct public assets like tanks, irrigation bundhs and rural roads, and public transfers lead to undernourished poor people being better fed and receiving a minimum of education, then the picture changes. India’s inability to create large numbers of low-skilled manufacturing jobs is rightly laid at the door of its inflexible labour markets. But it is forgotten that countries like Japan, Korea and China all followed the route, now being adopted by Vietnam, which gave them well-fed, healthy and educated workers before the jobs came. So, having a clear idea of what is wasteful non-productive public expenditure is vital to attain the right policy mix. All the foregoing actions should take precedence over that favoured policy instrument of monetarists — raising interest rates. When inflation is caused by a shortage of essentials, or when it results from policy intervention for public transfers to empower the poor, raising interest rates is foolhardy. It ends up extending investment horizons and adding to manufacturing costs. It is like a doctor prescribing a primitive first-generation drug with many side effects. It is necessary to live with some inflation, that which is caused by a net transfer to the poor which eventually leads to a more productive workforce. The simplistic mantra – inflation sighted, ergo raise interest rates – needs to be countered.

BS

Visa & MasterCard gone. Rupay card, bring it on

Finally it's here! The much talked about India card which will replace global payment players MasterCard and Visa in India. CNBC-TV18's Gopika Gopakumar finds out more about the Rupay Cards. It may not be long before the logos of Visa and MasterCard disappear from your plastic cards. Instead these will be replaced by an Indian name Rupay. This is the new card payment scheme launched by the National Payment Corporation of India, a company started three years back by 10 banks, to oversee all retail payment systems in India. Currently, all card payments are routed through Visa or Mastercard which process these transactions outside the country, but this may not be the case in the future. "There should be something domestic. Payment information is very sensitive. So there has to be repository of payment information with some institution. Why should banks in India pay such high fee to MasterCard or Visa," AP Hota, CEO, National Payments Corporation of India said. Currently, banks pay around Rs 300 crore every year to Visa and MasterCard for processing all debit and credit card payments. NPCI says Rupay will reduce the cost for both banks and customers. "We believe that it's possible to reduce the processing fee that banks pay to MasteraCard and Visa by half if not more. Rupay will be aiming at reducing the cost for the bank," Hota added. Bankers too feel Rupay will be a viable option. Alok Mishra, CMD, Bank of India , said, “It is indigenous and will be cheaper. Most people here don't travel abroad nor do they need settlement for Visa, MasterCard. What they require is a settlement here. And I think Rupay will work for them.” To begin with it focuses on tying up with 82 regional rural banks and 100 urban cooperative banks. Having issued 10,000 debit cards, it now plans to scale up by issuing Aadhar-enabled financial inclusion cards. NPCI says it will be a while before the commercial banks start issuing Rupay debit cards as most of them already have tie-ups with global players. Besides, the regulator favours competition in this segment and so unlike the Chinese, may not make it mandatory.

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Near-inverted yield curve shows RBI almost at end of rate cycle

..............while the local inverted yield curve points directionally to a slowdown, what it probably means is that the bond markets are signalling that RBI is near the end of its tightening cycle..........

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Foreign funds shy away from India’s realty

Mumbai: With the Reserve Bank of India (RBI) frowning on structured products and the government stipulating a three-year lock-in period, foreign direct investment (FDI) in real estate has slowed down significantly over the past year. Industry-watchers point out that after the Lehman crisis, investors have turned more cautious and capital flows into Indian real estate have tapered off.  While FDI flows amounted to roughly $14-15 billion in the four years to December 2009, just about a billion had come in till November last year. Regulations apart, poor project execution leading to losses for some investors has made them far more circumspect, especially in a hostile macroeconomic environment

FE

It is Best to leave Debt Management to RBI – R.K.PATTNAIK

There has been some debate in the past on the separation of debt management from the Reserve Bank of India in the Indian context. A perusal of the debate revealed that in the RBI itself there were differences of opinion. Nevertheless, the recent statement of the RBI governor against the separation is praiseworthy, particularly in the context of the proposal in the Union Budget 2011-12 to introduce the Public Debt Management Agency Bill. The ministry of finance (MoF) of the government of India (GoI) should consider revisiting the whole issue in the light of the governor’s public statement as, globally, there is a wide recognition that debt management is no longer a routine exercise. For prudent fiscal, monetary and debt management, it is advisable that debt management should continue with the RBI. The separation of debt management from RBI will not be helpful; it will have an adverse impact on the market. First, in the dynamic environment created by the introduction of the Liquidity Adjustment Facility (LAF) in 2000 and the prohibition on RBI’s participation in the primary market under the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, the primary market interest rates, which are auction-driven, are no longer viewed as interest rate signaling by the RBI. Therefore, the conventional argument that there is conflict of interest does not have much validity. Furthermore, the cost of government borrowings is inextricably linked to the level of fiscal deficit rather than the arrangement for debt management by the central bank.  Secondly, independent management and issuance of government debt could distort the sovereign yield curve in a thin market, jeopardising the monetary signaling and its transmission across the yield curve.  Thirdly, a likely outcome of the separation could be the emergence of multiple debt management agencies, viz one for the state governments’ market borrowings and another for the central government borrowings. What will happen to the public debt offices of the RBI? In such a scenario, coordination among debt managers will be difficult and will eventually lead to conflict and confusion. Fourthly, evidence suggests that the smooth conduct of the government’s large borrowing programme has been facilitated because the RBI, apart from the banker and debt manager to the government, also has broad range of responsibilities, including regulations and surveillance of financial institutions, financial markets and market infrastructure. Thus, the RBI successfully manages the government borrowing programme with its apt knowledge and vast experience in studying market liquidity, investors’ appetite and risk constraints, apart from timing of debt issuance in line with its avowed objective of maintaining financial stability.  Fifth, evidence suggests that the cash management of the government has remained poor and inefficient. The RBI, as banker and debt manager, has been helpful in accommodating the deficit and surplus mode, taking into account the absorptive capacity of the market. One doubts if an independent body will have such experience to handle cash management of such magnitude and varying degree.  Sixth, in the post-crisis environment globally, there has been a rethinking that debt management is again becoming a critical element in the overall conduct for financial stability as events in Greece have shown. Studies undertaken by multilateral agencies like the World Bank, IMF and BIS said there is a merit in leaving debt management to central banks. The BIS study (November 2010) particularly noted that debt management can no longer be viewed as a routine function that can be delegated to a separate, independent body. Instead, such management lies at the crossroads between monetary and fiscal policy. The study further opined that during difficult times, government securities market conditions are better managed by the central banks. In view of this, the study recommended that the central banks should be encouraged to revert to their role of managing national debt. Seventh, the recent handling of the market borrowing programme by the RBI in a non-disruptive manner in its capacity as debt manager and monetary authority clearly indicates that there exists a strong confluence of interest in debt and monetary management, contrary to the conventional view that there is a conflict of interest.  In view of the above factors, it is imperative that debt management continues with the RBI. The Middle Office that has been set up within the MoF may be further strengthened to coordinate and provide technical and analytical input to the cash and debt management committee. The Centre may reconsider the introduction of the Bill on Public Debt Management Agency with an emphasis on separation of debt management from the RBI.

The author is professor of economics at KJ Somaiya Institute of Management Studies and Research, Mumbai

ET

Risk in policy debates

Former RBI Governor Y.V. Reddy began the discussion in the 11 June issue of Economic and Political Weekly. He was commenting on an article by Planning Commission deputy chairman Montek Singh Ahluwalia, on the prospects and policy challenges in the 12th Plan. Reddy complained that the Plan does not discuss the “risks to the economy and economic agents”.......

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