The myth of the 'new normal' : A Seshan

We live in this peculiar world where three per cent inflation is stability but a half per cent decline in the price index is deflation. I am not quite up with modern nomenclature.” — Paul Volcker

The country has lived with inflation for about one and a half years. During 2010-11, the rate of price increase was nine per cent. There has been no respite since then and it has been a roller-coaster ride. Every time there is a decline of a few decimal points in the rate, hosannas are sung in official circles, which pats its own back for the achievement. What is worrisome is the government’s somewhat laid-back attitude towards inflation. By the middle of June 2010, the official circles expressed satisfaction with the fact that food inflation had “stabilised” at around 16 per cent. If there is a rise then the base effect is blamed! Since the mid-eighties, the Reserve Bank of India (RBI) has formulated its monetary policy on the assumption of an “acceptable” price rise of five per cent. The rationale is that in the course of economic development certain sectors will grow, while others will decline, thus shifting resources from the latter to the former that would give rise to a general inflation rate of five per cent. It did not produce any study to support its conclusion. I have refuted this fallacious argument elsewhere. Otmar Issing, member of the European Central Bank’s Executive Board, once said: “For the relative price mechanism to function properly, firms must be able to discriminate between relative price adjustments and general changes in the overall price level. They can only be sure of not making mistakes in a situation of overall price stability.” The latest is the talk about 6.5 per cent being the new normal for price rise! The next “logical” argument will probably be that everything is fine till the time there is no double-digit inflation and it is contained at 9.9 per cent! And then you have experts saying a little inflation is good for developing the economy. It is as absurd as saying a little pregnancy is good for a woman. To add insult to injury, the goal post for a reduction in inflation is moved from time to time. From kharif 2009 it was moved to rabi 2010 and then again to the next kharif and so on. The whole concept of a “tolerable” or “acceptable” inflation rate of five per cent, adumbrated by the authorities, is misplaced. Was any opinion survey conducted or was there a discussion in Parliament on the concept affecting more than a billion people? There are a number of reports of restaurants in Mumbai closing for lack of customers. And this is the case in perhaps the country’s richest city in terms of average income. Then there are stories of families cutting down on their consumption of milk, coffee, tea, vegetables and fruit and housewives foregoing the weekend luxury of going to a restaurant with the family for dinner instead of cooking at home. There’s much research on the reduction of the proportion of people below the poverty line. Now, it is time to find out about the neo-poor, which are people formerly above the poverty line but have since gone below it due to inflation. There are reasons for the developed countries having a threshold for inflation at two-three per cent. First, the consumer price index is somewhat biased upwards because it does not take into account the improvements in the quality and performance of manufactured goods. Second, the West is worried more about deflation than inflation because there are no effective policies to tackle the former. Third, the number of people below the poverty line is not much compared to us. Fourth, most families have working couples with double incomes, so they can afford to bear a price rise of two to three per cent. These considerations do not apply to a country with a large number of poor people for most of whom food is the most important item in the family budget. With massive Five-Year Plans and large-scale fiscal deficits, the question of a general deflation is not likely to arise. There are experts who say the RBI and the government should focus on the core, rather than headline, inflation. The former refers to the inflation excluding food and fuel items, while the latter includes all the commodities. This is a case of adopting Western concepts, either unknowingly or deliberately, without recognising the ground realities in the country. In the US, the concept of core inflation developed for two reasons: first, because of the volatility of food and fuel prices that was unrelated to monetary factors and, second, their relative low weights (13.378 per cent and 4.525 per cent, respectively) in the price index. It helped isolate non-monetary factors for policy-making. Further, the Consumer Price Index for the US is for the urban population. These factors do not hold good for India. In fact, our core sector should include only food and fuel. One hopes that in the next quarterly review of its monetary policy, the RBI will take a hard look at its past assumptions and modify them with the sole objective of fighting inflation. We need a Paul Volcker to squeeze inflation out of the economy.

The author is an economic consultant and a former officer-in-charge in the department of economic analysis and policy at the Reserve Bank of India (BS)

WORKSHOP ON FAKE CURRENCY

Srinagar, July 22: J&K Bank conducted a workshop on Fake Indian Currency Notes (FICN) at its business unit Ganderbal on Thursday. The workshop was attended by the representatives of all banks namely SBI, PNB, EDB, State Cooperative Bank and Land Development Bank, operating in district Ganderbal. District Development Commissioner, Ganderbal, Showkat Ahmad Mir was chief guest on the occasion. Besides, Assistant General Manager, RBI, R K Meena, J&K Bank Zonal Head (Central Kashmir), Abdul Hamid Banday, J&K Bank Cluster Head Ganderbal, Muhammad Amin Khan and other officers from different wings of police department were also present on the occasion. Cluster Head Ganderbal, Muhammad Amin Khan welcomed the guests and briefed them about the importance of organizing such workshop. Later, a brief presentation and a short film on different features in a genuine currency note which can be used for differentiating it from fake notes was given by the J&K Bank Cluster office, Ganderbal. However the DDC said that such type of presentations would be more effective for common people if shown on a big projector screen.

Greater Kashmir

Banking 2.0

With banks offering most services on the Internet and Internet penetration in India growing rapidly (a 2009 World Bank report puts the number of Internet users in India at 61.3 million, up from 51.75 million the previous year), it’s of little wonder that a McKinsey report has found that 7% of all banking consumers use Internet banking, up from only 1% in 2007. Coupled with Internet, other modes of banking, like mobile banking, are growing rapidly. The report found that 6% of the banking population used mobile banking services. The sheer savings incurred by the banks through the use of these alternate modes of transactions, as opposed to branch transactions (down 15% since 2007), coupled with the increasing range of services like balance enquiry, stop payment instruction of cheques, transactions enquiry and location of the nearest ATM/branch offered on the phone, suggests that this number is sure to grow in the future. Consider this: officials at the Union Bank of India estimate that transactions through alternative channels account for 53% of total transactions (up from 35% in 2010 and targeted to reach 60% by March 2012), and are at only around 10% of the cost of branch transactions. No wonder, then, that even RBI is urging more banks to launch mobile banking. Presumably, lower costs for the banks result in lower fees for the customers, and the limited availability of bank branches in India (only 79,735 branches across India in 2009, according to RBI) makes using mobile phones and the Internet a much more attractive option. With 812 million mobile subscribers and banks now allowing customers to make transactions using their phones (as semi-closed wallets, allowing customers to exchange physical cash for virtual money stored on the phone, thus enabling electronic payments, like a debit card), mobile banking in India is fast becoming the banking tool of choice. Keeping all these developments in mind, the McKinsey report astutely surveyed the participants on why they wouldn’t use Internet banking, and the results should be illuminating for the banks. Overall, 55% thought that Internet banking was not secure enough, up from 47% in 2007. More relevant for the banks is that 76% of those in the ‘affluent’ group considered Internet banking not secure enough, a whopping 18% rise over 2007. This suggests that even though there haven’t been cases of Internet banking fraud, the various other cases of hacking and phishing have shaken people’s confidence in the security of the Internet. An image change might be a good idea in this regard.

FE

On rupee symbol's first birthday, rupee-denominated deals made easier

MUMBAI: A year after the rupee got its Devanagari identity, the RBI has taken the first step to popularise it in international trade.  The Reserve Bank on Thursday made it simpler for overseas buyers and sellers of goods and services to cut rupee-denominated deals while trading with Indian businessmen. It has permitted overseas traders to hedge their currency risks with local and offshore banks for trades invoiced in rupee. While invoicing in rupee was allowed a few years ago, foreign traders have not been accepting such export or import orders in the absence of a mechanism to cover risks arising out fluctuations in the currency.  For Indian traders, however, invoicing in rupee eliminates exchange risks built into all cross-border transactions. Whenever rupee surged against dollar, exporters raised demand for rupee invoicing. But it never took off as most foreign buyers and sellers, often with more bargaining power, feared possible losses in a volatile currency market.  "This is a significant move and will reinforce interest in invoicing in rupee terms by overseas buyers and sellers, given a liquid onshore market. To get this off, block governmental contracts like defence and energy should be invoiced in rupee for overseas sellers as the Chinese did," said Hemant Mishr, head of global markets, South Asia, Standard Chartered Bank.  Since rupee is not a fully convertible currency, foreign investors like hedge funds, large Indian companies as well as diamond houses participate in the non-deliverable forward (NDF) market, which is not recognised by RBI. "RBI's move will boost rupee-denominated trade and reduce number of transactions in the NDF market. A slice of NDF volumes may be diverted to the well-regulated onshore market," said NS Venkatesh, treasurer, IDBI Bank .  In NDF trades, any gain or loss from bets on the movement of the rupee is settled in dollar or any other international currency because the Indian currency - as the term NDF suggests - cannot be 'delivered' abroad. These hedging transactions can be entered with either a bank in India or an offshore bank with a correspondence arrangement with a bank.  In the past, local banks have come up with ideas that could simplify trade transactions and minimise currency losses. For instance, earlier this year, a few banks in India had sounded out the RBI on the possibility of a new currency arrangement between India and its largest trading partner, China. They suggested a simple and inexpensive mechanism that would bypass the dollar and allow trade payments in local currencies. Since the rupee and Chinese yuan are largely non-convertible currencies, export and import transactions between the two countries have dollar legs. The rupees that an Indian buyer pays his bank for Chinese imports are converted into dollars, which, in turn, is converted into yuan with the help of other banks for paying the Chinese seller. It's a transaction that can take 2-3 days due to differences in time zones, and involves certain operational costs that can be pruned, if payments can be directly settled in the yuan and rupee.

ET

RBI to issue new coins of 50 paise to Rs 10 denomination

The Reserve Bank today said it will soon put into circulation new coins in five denominations, ranging from fifty paise to Rs 10. "The RBI will shortly put in circulation... Coins of the fifty paise, one rupee, two rupees, five rupees and ten rupees denominations," the apex bank said in a statement. The fifty paise, Re 1 and Rs 2 coins would be of ferritic stainless steel containing iron and chromium, while the Rs 5 coins would be made of nickel brass with a varying composition of copper, zinc and nickel. The Rs 10 coins would be made of copper and nickel. Fifty paise is the lowest valid denomination in the country now after twenty-five paise coins were withdrawn from circulation from June 30. All the new coins would be circular in shape, with a shape and outside diameter between 19 to 27 millimetres, the statement said. The coins would shall bear the Lion Capitol of the Ashoka Pillar and the word 'India' in English on one side and their denominational value on the obverse side.

Financial Chronicle

ONE MORE RATE INCREASE LIKELY

The backdrop to the Reserve Bank of India (RBI) monetary policy meeting next week is not very different from what it has been in the recent past. Inflation is clearly at an unacceptable level and growth is moderating, but not collapsing. So, it is quite likely that the policy response from RBI will be a 25 basis points rate increase to reiterate its anti-inflationary stance. However, there is considerable uncertainty over the policy trajectory going forward and hence the policy statement will be scrutinized closely for RBI’s assessment of the current economic situation and any forward looking cues. Before we make forecasts about the policy trajectory, it is important to have a quick look through the rear-view mirror. We believe that the annual policy announced in May brought a change to RBI’s way of looking at monetary policy setting. It was explicitly acknowledged that in the near term, we might have to sacrifice some growth to tackle inflation. In line with that, a so-called calibrated soft landing policy was adopted to avoid the possibility of sustained high inflation hampering long-term growth potential.  The general expectation is that the policy rates will be tightened till either inflation starts coming off or growth becomes too “soft”.  Inflation in FY12 (fiscal 2012) has been in line with RBI’s projection even after the recent fuel price revisions. The headline WPI (Wholesale Price Index-based inflation) has been quite flat in the 9.4-9.75% range for the last seven months and we think that the 9-10% range on inflation is likely to continue till at least October. Even on RBI’s preferred measure of non-food manufacturing inflation, there is no flare-up in the last three months. What will further comfort RBI is that the seasonally adjusted month-over-month inflation readings (which better indicates the momentum in prices) have been declining over the same period. Overall, we think that inflation is likely to remain a cause for concern, but the absence of negative surprises should soothe some nerves and keep inflation expectations under check. Inflation uncertainties now stem from three sources— renewed pressure from global commodity prices (particularly oil, oilseeds, edible oil, sugar and metals), a truant monsoon and larger-than-expected pass-through of higher fuel prices on to other commodities. Monetary policy is likely to have limited success in controlling inflation arising out of any of these events. However, in case of these price shocks, inflation could be more protracted, making it difficult for RBI to lower its guard.  The outlook on growth is more uncertain. The industrial production data is trending downwards, specifically in the intermediate and capital goods sectors. However, one is not sure whether robust conclusions can be drawn from this data, which has been volatile and subject to significant revision. Other proxy indicators such as credit growth and non-oil import growth have also moderated, but still hover around healthy levels. On the other hand, business confidence is at a low and new projects in the pipeline are sparse on the back of rising rates, policy inaction and global uncertainties.  RBI in any case has this difficult problem of deciding how much of a near-term growth sacrifice is acceptable. Lack of consensus in growth indicators compounds that problem. Also, further policy action should take into account the lagged effect of the cumulative rate increases and should not choke the supply side completely. Our baseline view is of one more rate increase after the July policy because inflation sustaining above 9% will still keep the real policy rates negative and force RBI to maintain the bias towards inflation management. Disorderly global developments and a declining trend in core inflation might force the central bank to rethink a rate increase post July, which remains a risk to our view.

Samiran Chakraborty is Asia economist, Standard Chartered Bank. These are his personal views (MINT)

Banks see another RBI rate hike on Tuesday

Leading lenders Standard Chartered and HDFC Bank on Friday said they expect the Reserve Bank to hike its short-term lending rate by 25 basis points in the forthcoming monetary policy, a view echoed in an RBS survey of money market participants. "We see a 25 bps increase in the repo rate at the 26 July policy as inevitable...inflation management will remain the priority, but policy statement is likely to be less hawkish," StanChart said in a note. Similarly, a majority 71 per cent of the 151 respondents in a Royal Bank of Scotland (RBS) survey opined that they expect the monetary authority to go in for yet another spike in its key rates by 25 bps, while 5 per cent said it could be 50 bps, and 24 per cent see the RBI leaving the rates unchanged. "The RBI rate action will continue to be driven somewhat mechanically by the inflation data that remain way above its comfort zone. Thus a 25 bps hike in the policy rate seems almost certain," HDFC Bank chief economist Abheek Barua in his report said. The RBI has hiked its key rates 10 times or 275 bps since March 2010 to tame the uncomfortable inflation number, which stood at 9.44 per cent for June, and has clearly articulated that it is ready to sacrifice growth in the short term. However, recent signs like the food inflation cooling down and industrial production data being consistently low has led to a view that RBI may pause the tightening for now.

Business Today

L&T awaits RBI norms to decide on banking foray

L&T Finance Holdings Ltd, the L&T Group’s financial services holding company, is currently waiting  for the Reserve Bank of India (RBI) to announce the guidelines for new bank licenses to decide on foraying into the banking sector, said a top official. Sumeet Maheshwari, chief executive officer, L&T Infrastructure Finance Ltd, told reporters in Hyderabad on Friday that L&T is keen on foraying into banking business as it enables the transaction business revenue among others. “As a country, we are growing and the banking needs will also grow. As the rural incomes better, the banking needs are going to gallop,” he said, adding that “Me too players will not survive. The new private sector banks will have to offer something unique if they have to succeed.” Saying that L&T is growth hungry, he said the company will also look at other opportunities such as acquisitions of existing banking firms. The company already has two bank investments – 5 per cent each in Federal Bank and City Union Bank, which provide synergy to L&T’s customers in terms of transaction services. “‘But there could be other opportunities in the market and we will look at them. We will look at both Greenfield and Brownfield opportunities,” he said. Further, he said, “If the regulations facilitate easier entry, there will be a lot of players. If it reduces the cost of entry into that business, the cost of setting up, it is worthwhile getting into the business.” The costs, he said, includes not just money but also time for setting up of branches for years to stabilize the business and management energy, which needs to be weighed vis-à-vis the benefits the business offers. “Banking comes with a lot of other requirements and you need to weigh them. There is no free lunch,” he said. He said the existing branches of the L&T Finance were only suitable to do the existing business and not suited to address the needs of retail customers in the banking operations. The bank branches will have to be in the visible areas and proper locations to make them convenient for the retail customers. He said RBI has requirements such as SLR and CRR for banks that may fetch lesser returns as both SLR and CRR add up to the costs, influencing the lending and borrowing rates. “As an L&T entity if I am able to borrow at very close to those costs, then is it worthwhile for me to get into banking business? The SLR and CRR ratios may increase or decrease. We need to study the regulations as and when they are announced,” he said. Maheshwari said L&T is yet to decide on whether one of its existing financial services entities should enter the banking business or a separate entity needs to be floated for the banking foray. “It all depends on what the RBI guidelines say,” he said. Further, Maheshwari said L&T will sell its equity holdings in two private sector banks Federal Bank and City Union Bank if the banking regulator requires them to exit from the banking investments. “Otherwise, it is a profitable portfolio investment for us like any other investments.”

Financial Chronicle

Assets and appreciation

Then it was not just the leading commercial bank but also the banker to the government, a role it gave up with the setting up of the Reserve Bank of India in 1935. The bank again played a part in the nation’s history when it became the forward scout of bank nationalisation....

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It's party time, as interest rate inches to 10%

Depositors are laughing all the way to banks and literally so, as interest rates offered by banks on term deposits have almost touched 10 per cent. There are many public sector banks (PSU banks) now offering 9.75 per cent interest and their private peers have already raised rates beyond 10 per cent.....

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