Surprising market was not the objective: D Subbarao

In an interaction with the media, RBI Governor D Subbarao explained the rationale behind the central bank's surprise move to increase key rates and the likelihood of another round of hikes.

On the reason for a 50 bps hike instead of 25 bps...

Certainly surprising the market was not the objective. It was not to reaffirm our credibility. But it was because of our judgment that the inflation scenario as it has played out and as it is likely to play out in the rest of the year demanded strong action. The underlying strength in consumption shows there is strong pressure from the demand side. These are the polemics of the debate between 25 and 50 basis points. 

Will repo rate touch 9%?

I don't want you to go with the impression that 9% repo rate is the target. We will only tighten till we believe it is necessary to bring down inflation. And we will take action to reverse that to promote growth at the right time. It is not that because we were at the 9% level there in 2008 we will get back to that level.

On the likelihood of corporates turning to cheap foreign loans...

In as much as we allow external commercial borrowings (ECBs) under certain circumstances, corporates that are allowed will do so. But that is the way market operates. Those borrowers who can borrow at better rates will go ahead. But there are limits on how much they can borrow on the end use, the interest cost and the tenure which will ensure that there is no flood of ECBs which will continue to add to demand.

On whether RBI's assessments are based on macro numbers which it feels are faulty...

We live in the real world and I have identified some of the handicaps we face in having right data for policy purposes. But like all analysts we have tried to look behind the numbers and tried to have our own interpretation of how the numbers would be adjusted. It would be far better if we had less frequently adjusted numbers.

On allowing rupee to strengthen to bring down oil prices...

We do not use exchange rate as an instrument for inflation management. If we intervene in the market, it is only to manage volatility in the exchange rate or if there is a likelihood of macroeconomic disruption. RBI does not take a position on the exchange rate. Inasmuch as appreciation of the rupee helps bring down inflation there are costs on the other side too.

Impact of US default...

As far as a US debt default and the current impasse on debt are concerned we have reviewed the position and I believe we have sufficient liquidity to manage the situation. So we are prepared for a possible repercussion on the market. But whether they would actually default and what repercussion that will have on the market is uncertain at this point of time.

TOI

RBI hikes policy rates by 50 bps, raises inflation projection

RBI governor D. Subbarao (C) with Deputy Governors (L-R) H. R. Khan, K. C. Chakrabarty, Subir Gokarn and Anand Sinha before the RBI’s credit policy review meeting in Mumbai on Tuesday

RBI also raised the baseline projection for wholesale price index (WPI) based inflation for end-March 2012 from 6% with an upside bias to 7% but retained the economic growth target at 8%

The Reserve Bank of India (RBI) on Tuesday surprised the markets by raising its key policy rate by a more-than-expected half percentage point, continuing its fight against inflation that’s eroding the benefits of economic expansion in the world’s second-fastest growing major economy. The benchmark repurchase or repo rate, that at which RBI lends short-term funds to commercial banks, was raised to 8% from 7.5%, compared with expectations of a 25 basis point rise. The reverse repo rate, that at which RBI drains excess liquidity from the system, was raised to 7% from 6.5%. Shares tumbled and bond yields rose sharply to the highest level since May after the policy announcement. This is the 11th time since March 2010 that RBI has raised policy rates as part of its fight to control inflation. RBI also raised the baseline projection for inflation based on the wholesale price index (WPI) for end-March 2012 from 6% with an upside bias to 7% but retained the economic growth target at 8%. It revised the bank credit growth projection downwards from 19% to 18% for the current fiscal year. “Going forward, the monetary policy stance will depend on the evolving inflation trajectory, which in turn will be determined by trends in domestic growth and global commodity prices. A change in stance will be motivated by signs of a sustainable downturn in inflation,” RBI governor D. Subbarao said. The higher-than-expected increase in the repo rate will make money costlier for individual borrowers as well as corporations, analysts and bankers said. Shortly after the policy announcement, private sector lender Yes Bank Ltd increased its base rate, the minimum rate at which banks lend, by 50 basis points (bps) to 10.25%. It also increased the benchmark prime lending rate by a similar quantum. One bps is one-hundredth of a percentage point. Senior bankers said the latest round of rate increases will increase pressure on them to pass on the burden to customers. “Banks cannot afford to hold the rates as the cost of funds has increased substantially. However, banks will wait till next quarter to begin the rate hikes,” said Ramnath Pradeep, chairman and managing director of Corporation Bank. Borrowers are likely to have to pay more for loans. “One more round of hike in lending and deposit rates looks inevitable as the cost of funds at the current level is well beyond the absorption capacity of banks,” said Abhishek Kothari, research analyst with Mumbai-based brokerage Way2Wealth Brokers Pvt Ltd. “This can further hit the flow of credit and affect the asset quality in the system.” The apex bank said Tuesday’s moves, while reinforcing the cumulative impact of past actions on demand, will maintain the credibility of the monetary policy’s commitment toward controlling inflation. “In the absence of complementary policy responses on both demand and supply sides, stronger monetary policy actions are required,” the apex bank said. The Bombay Stock Exchange’s bellwether equity index, the Sensex, was down 292 points, or 1.55%, at 18,578.85 at 1:34 p.m. local time. Economists said the central bank’s monetary stance is likely to remain hawkish. “At this point, all major risks point towards inflation remaining on the higher side. Also, core inflation is fairly high compared to the long-term average of 4%,” said Gaurav kapur, vice president and senior economist, Royal Bank of Scotland India. “Fiscal consolidation is important from a perspective of managing inflation from the medium to long term. Given these factors, RBI’s monetary stance is likely to remain hawkish moving ahead.” The apex bank will continue to increase rates until inflationary pressures are lowered, said Rupa Rege Nitsure, chief economist at Bank of Baroda. “RBI has acknowledged that inflation is the real dampener on growth and they will be happy with a 7.5% growth and 7% inflation rather than 8.6% growth and 10% inflation. The price of money is still not high enough because demand continues to be strong,” Nitsure said. RBI said inflation will remain under pressure moving ahead and that reining in prices is imperative to sustaining growth. High non-food manufacturing inflation or core inflation, at 7.2%, is a major concern, RBI said. In the last six months, Indian banks have raised their loan rates by at least 150-200 bps to pass on the burden of the central bank’s successive rate hikes to customers in a bid to protect margins. High inflation has been a persistent worry for the Indian central bank as wholesale price inflation has been staying above its comfort level for quite sometime. It stood at 9.44% in June. On Monday, releasing its macroeconomic review, the apex bank had reiterated that inflation continues to be a major threat to the economy even though it acknowledged a moderation in growth in 2011-12. Further, the central bank said that taming inflation remains an “unfinished task” as price pressures persist.

Mint 

Punjab to launch a drive with banks for easy loan facilities

Chandigarh : In a bid to provide easy loan facility to the poor residing in ''Lal-Dora'' (village premises) without any ownership record, the state government would soon launch a state-wide drive in coordination with various banks. A decision to this effect was taken at a meeting held by Chief Minister Parkash Singh Badal with senior officers of different banks at his residence last night, an official spokesman said here today. The representatives of various banks who participated in the meeting included Chief General Manager, State Bank of India S K Sehgal and General Manager State Bank of Patiala, Abhay Nath. It also included the Deputy General Manager RBI (Rural Planning and Credit Department) Anitha Srinivasan, Assistant General Manager, Punjab National Bank, S M Agarwal and Zonal Manager, Punjab and Sind Bank, Gurnam Singh. The chief minister asked the bankers to facilitate small loans for the poor people to enable them start some business for earning their livelihood. He said they were facing lot of hardships in securing loans from banks due to non-availability of ownership records of their ancestral houses in the Lal Dora. The bankers agreed to organise the first such loan camp at village Badal next week in coordination with Welfare department of the Punjab government.

MSN News

Financial Stability and Development Council to take stock of economy today

NEW DELHI: TheFinancial Stability and Development Council (FSDC) will take stock of country's overall economic situation in the backdrop of global and domestic developments, on Wednesday. The meeting follows aggressive rate increase by the RBI and the central bank expressing concern over high fiscal deficit feeding demand. Finance ministerPranab Mukherjee is expected to discuss the post-policy scenario with regulators at the FSDC.  India's sovereign rating and measures being undertaken by the government will also figure in the discussions.  The finance ministry had set up an internal committee to look at ways to improve country's sovereign rating as an upgrade can make overseas borrowings cheaper for Indian companies as also bolster investments into the country. Standard & Poor has assigned India BBB- rating with a stable outlook, lower than rating enjoyed by countries such as Spain and Ireland facing debt troubles.  The meeting will be attended by all financial sector regulators besides the RBI. The FSDC is high level body for coordination among regulators, which is to look at financial sector development, financial literacy, financial inclusion and macro-prudential supervision of the economy, including the functioning of large financial conglomerates

ET

The controversial Andhra Pradesh microfinance law is set to claim its first victim

Vijay Mahajan-promoted Bhartiya Samruddhi Finance Ltd (BSFL), India’s oldest microfinance institution (MFI), is collapsing under the burden of bad loans. With borrowers in Andhra Pradesh refusing to repay, bad loans are growing and threatening to wipe out its entire net worth and reserves.

Read..... 

RBI is far more worried about rising inflation than what companies and Dalal Street think

MUMBAI: Close to the end of his term and, perhaps at the beginning of a new innings,Duvvuri Subbarao has picked up a sledge hammer to attack inflation. His move is decisive, tone is hawkish and language is unsparing when he blames New Delhi for doing little to bring down food prices. He comes across as a man in a hurry, who is unimpressed by Corporate India's familiar clamour: "give growth a chance". Growth, he feels, will take care on its own. What needs to be fixed is spiralling prices; more importantly, the wage-price spiral. It's a fear that has troubled central bankers down generations, across the globe. When higherinflation is matched by higher salaries, small doses of rate increases fail to pull down demand, particularly among the urban consumers. As people learn to live with high prices, almost unknowingly they prepare themselves for a higher inflation in future. And then one day, inflation spins out of control.  For a central bank governor though, few things in life can be scarier. No central bank chief wants to be remembered for not having done enough on the price front when realtors hold on to ridiculous property prices, commodity speculators laugh their way to banks, and easy money is sloshing around international financial markets. Chances are Subbarao has New Delhi on his side. During times when food prices have eroded the purchasing power in villages and land-grabbing has sowed the seeds of discontent, it's only logical that the powers that be will pick inflation over growth. Perhaps, the presence of a hardcore monetarist like Chakravarthy Rangarajan in the government made Subbarao's job a little easier.  But it's time India Inc and Dalal Street made a mental note of a simple truth: RBI's far more worried about inflation than they think. If companies can no longer pass on the higher cost to consumers, they should be ready to take a hit and reconcile with lower margins and stock prices. It's a price that all have to pay. And, as always, home buyers, small investors and the salaried will bear the brunt of a malaise they are clueless about.

ET

RBI's 50 bps hike: Subir Gokarn explains the rationale

The Reserve Bank of India (RBI) hiked its key policy rates, repo and reverse repo, by 50 basis points each. This surprised the street, which was expecting the regulator to hike rates by 25 bps. In an interview with CNBC-TV18's Latha Venkatesh, Subir Gokarn, Deputy Governor, RBI said, just as the RBI is talking about its trajectory for inflation, it would also start worrying if growth goes down. “If growth were to start slowing down significantly below 8%, it would most likely be accompanied by a decline in inflation rate as well,” he added.

RBI hikes key rates: Here's how it affects you

Below is the transcript of his interview. 

Q: When would Reserve Bank start worrying about growth? When would you estimate that growth has fallen significantly? I know your fan chart indicates that you estimate a 90% probability that growth would be between 7.5-8.5%. So, would your worry start, if it is below 7.5%?

A: I think it is difficult to put that sort of mathematic precision on the number. Just as we are talking about our trajectory for inflation, we would also start worrying if growth goes down. I also want to say that the more realistic trajectory or the pattern is going to be that if growth were to start slowing down significantly below 8%, it would most likely be accompanied by a decline in inflation rate as well. And that is really how we are expecting to bring inflation down. So, the two will go hand-in-hand. If that happens, then that is really not inconsistent with our objective because at that point we can start changing our stance on the anti-inflation front.

Q: But circumstances could play a different trick on us. We understand from our correspondents in Delhi that North Block was pretty shock by 50 bps hike. Apparently, they weren’t expecting it. Do you think it will become politically more difficult raising rates here on?

A: I can’t really comment on the politics of this.

Q: The argument would be that you would expect inflation to come down, when growth starts wearing off. But it is quite possible under the current circumstances that you have had your impact on growth, but inflation is not coming down entirely because of global factors. What will you do if global factors propel?

A: That is incomplete reading of the combination. The equation is very straight forward. There are two factors that are driving inflation today. There are global commodity prices and there is domestic demand. Now if one of these were to start easing, within our control is domestic demand, then at whatever level commodity prices are that should bring inflation down.  On the other hand, if commodity prices were to go down sharply, just visualise the scenario, then I had a given level of domestic demand, inflation would come down sharply. So, it is really a combination of these two factors that we are giving as guidance. Now what is the outlook on commodity front? At this point, given the pattern of the last few weeks, it appears that while they may remain high for sometime, the prospect of very significant further increases is not seen. It may happen. But the baseline outlook does not seem to be very malignant there. They may not come down very sharply. But even if they remain where they are, the slowdown in demand should help to bring inflation down. And that is the broader scenario with which we are looking at or in which we are visualising the trajectory of inflation over the course of the year.

Q: There are some economists who are visualizing other scenarios as well, for instance six months down the line or even earlier its not improbable that the ECB will be printing Euros, some kind of quantitative easing, buying back debt, may be Greek debt, Portuguese debt because they have run out of other options because politically asking more money from the richer countries or fiscally surplus countries is going to be difficult. A QE3 in the US is also not really ruled out if unemployment continues to be the way it is. So if there are really more Euro’s and Dollar’s in the system six months down the line the probability of continued global commodity inflation really cant be ruled out?

A: Yes, absolutely but the comparison has to be with what inflation would be without our action versus what it would be with our action. Because of impact we are having on domestic demand the inflation rate will be lower as a result of having acted than as a result of not having acted. We can’t control global commodity prices. The scenario that you are laying out may well happen although I don’t think at this point it’s a very high probability scenario. Not that the responses are not likely to happen but the impact on commodity prices may not be as dramatic as it was in the last round. But that’s not something we can sort of make a policy decision today on. We have to watch the developments and respond to them as appropriate. But for the moment domestic inflation number is high, clearly commodity prices are contributing to it but so is a relatively buoyant state of demand which is something we are trying to address through our policy action.

Q: I completely agree, today your response is completely logically supported by the arguments you are making. I am only visualizing a situation where not just India other emerging markets will also possibly face this quandary where they have done their bit to bring down growth but there are other factors that have taken inflation even beyond current levels?

A: In that situation you have to decide on what is the maximum level of inflation you are going to be willing to leave with particularly given the risk of spiraling. Even in that situation, we keep talking about the limits of monetary policy and what it can do and what it cannot do. But at the end of the day if inflation is being driven by factors that are not amenable to monetary action, the minimum objective of monetary policy should be to contain the spill over. That means keeping demand at a level which tries to minimize that spillover happening. That’s been the broad approach which we followed over the last one year but as of end of 2010 we saw commodity prices moving to different trajectory. That in combination with still buoyant domestic demand took inflation to new trajectory and that over a period of time required stronger response and we have continued to do that because the trajectory has not changed yet.

Watch the video.... 

RBI googly stumps industry, markets



The key policy rate, or the repo rate, raised 50 bps to 8%.



The smile stayed on Duvvuri Subbarao’s face throughout the day — during the customary meetings with bankers in the morning and with the media in the afternoon. But what the Reserve Bank of India (RBI) governor said at those meetings wiped the smiles off bankers and those representing industry and markets.

• Repo rate increased by 50 basis points;
• Banks may pass on the entire increase to customers;
• RBI says focus will remain on fighting inflation;
• Industry asks RBI to indicate when the cycle will end

A majority of them said immediate lending rate increases were inevitable, making life extra tough for companies and individual borrowers. After stunning everybody by raising the repo rate, the rate at which it lends to banks, by 50 basis points (bps) to 8 per cent, Subbarao hinted at continuation of the rate increase season, catching unawares most economists and market participants, who had expected RBI to signal the end of its tightening spree. Tuesday’s rate increase was 11th since March 2010, making RBI one of the most aggressive inflation fighters among central banks, and sent bond yields and swap rates higher and stocks lower. The Bombay Stock Exchange Sensitive Index fell 353 points, the most in five weeks. RBI in effect debunked the government’s rosy projection of inflation cooling to around 6 per cent by March 2012. It instead raised its projection to 7 per cent, up a sharp 1 percentage point from the May figure. It, however, chose to retain the gross domestic product growth projection at 8 per cent, which surprised many. Jahangir Aziz, chief economist at JP Morgan, wondered how this was possible when RBI had revised the credit growth projection and expressed concerns over the global slowdown. But more than Tuesday’s rate increase, what worried market participants was RBI’s signal that it had no time frame for easing the policy. Announcing the First Quarter Review of the Monetary Policy on Tuesday, Subbarao said, “Considering the overall growth and inflation scenario, there is a need to persevere with the anti-inflationary stance. A change in stance will be motivated only by signs of a sustainable downturn in inflation.” While few were willing to make any prediction given Tuesday’s experience, some said they won’t be surprised if there was another 25 bps increase in the next review on September 16. “We still think the monetary policy is in a neutral gear and policy rates have to go further up to slow growth. Going ahead, we see another 25 bps increase at least,” said Leif Eskesen, chief economist, India & Asean, Hong Kong and Shanghai Banking Corp. Bankers said their response would be quicker this time. While private sector lender YES Bank increased base rate by 50 bps, HDFC Managing Director Aditya Puri said rates would certainly go up, though he refused to say by how much. State Bank of India Chairman Pratip Chaudhuri said the increase would be passed on to customers and deposit rates at the shorter end would increase. All of them agreed that credit growth would be hit, may be more than RBI’s scaled-down figure of 18 per cent. Industry was quick to express displeasure. The Confederation of Indian Industry said the increase was a matter of great concern since there could be a tipping point beyond which coming out of the downward growth spiral could be an arduous task. The chamber pleaded with the governor “to pause and indicate when this tight monetary stance would be eased”. Ficci termed the move a “major disappointment”. Others preferred to be more colourful. Mahindra Group Vice Chairman Anand Mahindra tweeted: “First, the loss of the test match yesterday and then the oversized increase in interest rates on Tuesday. Feels like we have been bowled out twice in two days.” Significantly, RBI said the measures were expected to “reinforce the point that in the absence of complementary policy responses on both demand and supply sides, stronger monetary policy actions are required.” Justifying his decision, Subbarao cited two factors: Strong demand-side pressure, as reflected in more than 7 per cent core inflation, and no evidence of broad-based or sharp economic slowdown, though signs of moderation are evident in some interest rare-sensitive sectors. Subbarao said Tuesday’s action was expected to “maintain the credibility of the commitment of the monetary policy to controlling inflation.” RBI also recognised the fact that banks’ asset quality would be impacted as rates had hardened. However, both banks and RBI said rising non-performing assets did not pose any systemic risk.

BS

Retail FDI can help tame inflation: RBI

The Reserve Bank on Tuesday said it believes FDI in multi-brand retail will bring down inflation and expressed its readiness to discuss any contrary view. "The understanding is that it (FDI in multi-brand retail) will bring down inflation. Logically it will bring down ... but if there are contrarian views we will discuss them," RBI Governor D Subbarao said in the customary post-policy press conference in Mumbai. Last Thursday, a committee of secretaries recommended 51% FDI in multi-brand retail. A final view on this will be taken by the Cabinet. Already 100% FDI is allowed in single-brand retail. Proponents of FDI in retail, paving the way for the entry of global chains like Wal-Mart into the country, have earlier expressed that the professional expertise and the wiping out of middlemen would help improve supply side management, which in turn, will help cool price pressure on food articles. Subbarao said that inflow of longer term capital through the route will also help tide over issues regarding the current account deficit. "If FDI comes in through that route, that is good in terms of financing current account deficit," Subbarao said, but added that "we have to closely monitor the end-use of the proposed 51 per cent direct capital investment by interested parties in the back-end operations." Opposition parties are vehemently objecting to FDI in multi-brand retail, saying it will kill the mom-and-pop shops in the neighbourhood and render hundreds of thousands unemployed.

DNA

Time ripe for introducing inflation-indexed bonds, say market participants

With the rate of inflation back to double digits in just two years, demand for inflation-linked bonds is likely to be robust, say market participants. Keeping in mind the rising interest rate scenario, the Reserve Bank of India (RBI) has initiated discussions on introducing Inflation Indexed Bonds (IIBs) to deepen the government debt market. IIBs are debt instruments issued by the government and the coupon rate is linked to the Wholesale Price Index (WPI). Such bonds were first issued in 1997 in the form of Capital Indexed Bonds, which witnessed a tepid response. RBI then issued a technical paper on IIBs, inviting suggestions and comments from market participants in December 2010. RBI Governor D Subbarao on Tuesday said the central bank was in talks with the government and banks to introduce IIBs now, though the launch was not successful earlier. “Our view is that we have to test it (IIBs) once again. There might be a tipping point that didn’t work in the past but may well work on Tuesday, as conditions have changed,” he said. Market participants said conditions were apt for introducing the IIBs. “These bonds have twin advantages. First, the rates are aligned to WPI, and second, mark-to-market is lower than in other government securities,” said a bond dealer with a large public sector bank. The RBI governor said bankers had expressed concerns on the demand for these bonds since the floating rate bonds similar to IIBs were not doing well. But market participants are of a different view. “Investors are looking for instruments that can give good returns even in a high-inflation environment. So demand should not be a problem,” said a bond dealer with a domestic brokerage. Also, hikes in deposit rates by banks have seen good response from investors. According to RBI data, the deposit grew 18.4 per cent as on July 1, 2010, as compared to 17 per cent just two months ago. “There could be a good demand now if the issue size is between Rs 2000-2500 crore at around 8.50-8.60 per cent levels,” said the bond dealer. According to the technical paper issued in December 2010, final WPI with a lag of four months will be used as the Reference WPI for the first day of the calendar month in which ‘Issue Date’ and ‘Set Date’ falls. In June 2010, provisional WPI was at 9.44 per cent which economists say will touch double digits on revision.

BS

Not myopic to growth, but inflation needs greater focus: RBI

RBI Governor D Subbarao on Tuesday said growth concerns were always on the central bank's radar and it will shift from the tight money policy stance only if economic expansion falls consistently below 8 per cent, which was not the case as of now. Allaying fears that RBI may be myopic towards slowdown in growth momentum in trying to tame inflation, Subbarao said, "I want to assure all of you that growth is never far away from our policy radar screen. We are always worried about it. But we have to balance between growth and inflation. And now inflation is significantly above our comfort level." Addressing the press after announcing the credit policy, he said, "If we consider 8 per cent as the trend growth rate and if it falls consistently below that, then perhaps the balance would shift." But, the Governor was quick to add that a one-time slippage will not warrant a change in the RBI stance. So far, it has not fallen below 8 per cent barring once in Q4 of the last fiscal and in FY09 when the overall GDP clipped to just 6.7 per cent, following the global financial crisis. Explaining RBI's hawkish policy stance, Subbarao said, "First of all we have to understand that certain moderation in growth is an inevitable price we have to pay for bringing down inflation in the short-term, but it is something that will make growth in the medium growth more sustainable." On not pegging down growth forecast to below 8 per cent despite all these negatives, the governor said, "We have to first look at it from demand side, which does not point to any serious slowdown." On one hand, private consumption is intact as the wages grew over 20 per cent last year while consumer price inflation rose only 10 per cent. This led to steady private consumption, Subbarao said. On another level, government consumption has not come down as this is largely insensitive to short-term interest rate increases, he added.

Business Today

Rate cut not happening till mid-2012

The credit policy aims to maintain an interest rate environment that moderates inflation and anchors inflation expectations. After Tuesday’s 50-basis-points (bps) rate hikes, we expect another 25 bps hike in September. It is only if inflation peaks in September that we expect the Reserve Bank of India (RBI) will be able to stop in October. Given rates are now so high, we expect RBI to cut these as soon as possible. At this point, we do not see this happening till mid-2012, as inflation is not likely to come off to the level of 6.5-7 per cent till March 2012. The 50 bps rate hike surprised most market participants. One-year OIS (overnight indexed swap) rates moved up by 22 bps, while the five-year OIS rates moved up by 12 bps. Ten-year G-Sec yields jumped 12 bps from 8.30 per cent to 8.42 per cent and 10-year corporate bond yields also moved up by 10-12 bps. The rupee remained largely unchanged. We have to accept some sacrifice in terms of growth on Tuesday to bring inflation down and ensure higher growth tomorrow. Our channel checks suggest growth is likely to slow to 7.5 per cent levels from 8.5 per cent levels. After all, we are seeing a peak off in loan demand that is a pretty good lead indicator of economic activity. This, of course, is still very respectable, but our national aspirations are now set much higher, at eight-nine per cent. As inflation comes off, we will have to work to rejuvenate growth through appropriate interest rate adjustments.There is no doubt that the primary challenge of monetary policy on Tuesday is to bring down inflation. RBI is doing a sterling job of tightening monetary policy at a steady pace, trying to balance the twin objectives of growth and inflation. We recognise that RBI’s choices have become more complicated because uneven monsoons and rising global commodity prices that are driving inflation are beyond its control. Unfortunately, we are living in a world of uncertainty that is posing great challenges to all of us in financial markets.

BS

RBI MEANS BUSINESS

The monetary policy action of the Reserve Bank of India on Tuesday is being billed as a negative surprise in some quarters, a picture of stiff action that went beyond what the market in its conventional wisdom expected and even a hardening of policy stance that, it is being said, will ` kill’ growth. The collective noise built in the run up to the policy was that the RBI would hike its key policy rates at the most by 25 basis points, and reach a maximum further tightening of 50 basis points by the end of the year. After all, hasn’t the RBI already given us ten rate hikes since March last year, and, it was being asked, how much can it tighten further? The RBI’s answer has been quite different, even uncharacteristic. What the market expected to be doled out through the full calendar year in doses of 25 basis points has been dished out in one stroke. So the repo rate and the reserve repo rate have both been moved up 50 basis points in the first quarter review of monetary policy for 2011- 12 announced by Governor Dr. D Subbarao. This is a heavy hammer which the central bank now wants to make clear will be used with force to fight inflation. In fact, the RBI action comes not a day too soon. The headline WPI inflation rate for the first quarter of this fiscal was close to double digits; its level and persistence has surprised many in the establishment. Non- food manufactured product inflation, which is essentially demand driven, has been at seven per cent and higher since April 2011 as against four per cent during the last six years. So as the RBI itself has pointed out, inflation continues to be the dominant macroeconomic concern. What the RBI did not say explicitly is that inflation stays put at the forefront despite the series of steps that have raised rates slowly but surely. Those baby steps, as they have come to be called, of 25 basis points at a time have yielded little. The RBI did raise the repo rate by 50 basis points in May 2011 which was a salutary measure; it then went back to the small increase of 25 basis points in June 2011. Now, this is the second time RBI has come in with a 50 basis points hike. Questions are bound to be asked on whether the RBI should have moved faster in its earlier rounds of tightening to achieve its goal of controlling inflation and anchoring inflationary expectations. If it had, there are those who will argue that its goals would have been reached earlier, easier and with probably lesser action. Given the poor monetary transmission process in India, the 25 basis point variations are ineffective. As a senior central banker like S S Tarapore, who has handled monetary policy for three decades has pointed out in this context, the old Bank of England dictum used to be ` up by ones and down by halves.’ There is a useful message in this particularly for India, where the government, industry and banks are all against strong monetary policy measures, and the case now has become presented as one of growth versus inflation as if growth can be sustained if inflation is not in check. Given the noise and aspirations that were raised this time of little or no action, the RBI deserves to be commended for not succumbing and standing up for a bold measure that maybe unpopular among important or influential sections but is very appropriate in the larger interests of the nation. As it is, the country is facing turbulent times. The UPA government has been reeling under a series of scams and there is no telling what will come next and who it will take down. The government has been accused of a policy paralysis just at a time when the economic environment is uncertain. The government must also soon prepare for State elections in key states like Uttar Pradesh and the Punjab. It can ill afford to live with the alarming levels of inflation that have been ruling our country for long now. In that sense, the RBI action should also fit into the urgent priorities of the government. The question that many are asking is now a simple one: will the RBI pause from here on, or are we likely to see the hammer being wielded again and again. The RBI policy has a pointer: ` A change in stance will be motivated by signs of a sustainable downturn in inflation.’ It will be good if the RBI sticks to that goal and delivers a ` sustainable downturn’ in inflation.

FPJ

RBI's action: a suboptimal policy mix - A. PRASANNA Vicepresident, ICICI Securities Primary Dealership Ltd

Inflation likely to persist

...Inflation in all three components – food, fuel, and manufactured products — is expected to remain at higher-than-RBI-comfort-zone levels. There is evidence that inflationary pressures are expected to persist for some more time; the issue is that this has been partly factored into the monetary policy and partly not. ........

Read...

Yes Bank's Rao on Reserve Bank of India Policy, Economy

Shubhada Rao, chief economist at Mumbai-based Yes Bank Ltd., talks about India's economy and central bank monetary policy. The Reserve Bank of India raised its benchmark interest rate more than economists forecast to quell the highest inflation rate among major economies, spurring a slide in stocks and a gain in the rupee. Rao spoke with Rishaad Salamat on Bloomberg Television's "On the Move Asia" prior to the RBI announcing its rates decision

No pain, no gain - RBI uses its only weapon, the government can do more

There were several reasons why few expected the Reserve Bank of India (RBI) to take youthful strides rather than baby steps this week. Few expected an increase of 50 basis points (bps) in the policy repo rate. Ignoring the purely ideological, rate-hike sceptics fall into two categories — those who believe that protecting growth and corporate bottomlines is more important than curbing inflation and those who believe that monetary policy may have reached its limits and only action on the supply side can break inflationary expectations. To be sure, RBI itself has admitted that there are limits to what it can do and that the government must do more. As RBI Governor Duvvuri Subbarao put it ever so politely, “The Reserve Bank’s efforts of achieving low and stable inflation could also be supported by concerted policy actions and resource allocations to address domestic supply bottlenecks, particularly in respect of food and infrastructure.” When saying “could”, he probably meant “should”! The central bank can do precious little about “cost-push” inflation, given the externally set crude oil prices and politically determined administered prices of food. Since RBI cannot control cost-push inflation and supply-side rigidities, it uses the only weapon in its armoury, namely rate hikes, to combat demand-pull inflation, weaken pricing power of producers and alter inflationary expectations. Having declared inflation its number one enemy, the central bank had no option but to increase rates. And since most expected a 25-bp hike, including this newspaper, RBI chose to defy expectations and double the ammo for the second time this year. It would seem the central bank is convinced that its determined actions over the past year are bearing fruit and in at least two sectors – real estate and automobiles – demand- pull pressures have been considerably deflated. This pain, RBI seems convinced, is the price that must be paid to achieve better-quality growth. All this is well taken. The only caveat we would add is that while many expect a further 25-bp hike six weeks from now, the time has come for the central bank and the government to put their heads together and ask the question whether monetary policy alone can wage and win the battle against inflation and whether the acts of omission and commission of the political establishment are weakening the government’s ability to curb inflationary expectations. Be it global factors like the policy actions of the United States, European Union and China or exogenous factors like the monsoon or political economy factors like the government’s ability to break inflationary expectations, each plays its own role and needs to be handled by macroeconomic authorities. It would seem the government’s strategy is now based on the assumption that it is unlikely to ease the supply constraints in the short term, nor are external and exogenous conditions likely to turn much favourable in the near future, so use as much of the monetary policy firepower as possible to bring down prices, even if it hurts growth in the short run.

BS

Welcome crackdown on inflation

.......The RBI has done well in revising the policy rates upward by a stiff 50 basis points to contain the growth in credit demand. The process of credit creation is the process of money creation...........

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Comparing inflation under various RBI Governors

This strong persistence of inflation and not a great inflaiton record could have pushed RBI Governor into taking some highly hawkish measures. He has a great record in managing financial crisis, transparency but inflation record is where it matters most. Atleast for a central bank governor...

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RBI’s message to finmin

If the country’s stock markets fell 353 points (they fell 463 points in May when rates were hiked 50 bps) after RBI announced its shock decision to raise the repo rate from 7.5% to 8%—the markets were looking at a 25 bps hike—this is for two reasons. One, RBI has sharply increased the inflation target for the year, from 6% earlier to 7% now—so this means, RBI is echoing the government’s view that inflation may probably even rise a bit more before it starts to fall. Which also means it is by no means certain this is going to be the last rate hike. Indeed, some of the factors pointed to by RBI, primarily a QE3-type stimulus, suggest there may be more rate hikes. Two, and more worrying, is what RBI is saying on GDP growth. While RBI has kept to its 8% GDP growth figure, it’s difficult to see how this will happen if the only way to battle inflation is to lower demand—RBI seems to set store by the good export performance but even the commerce secretary is on record saying he sees tough days ahead. RBI’s report, in any case, documents falling credit from all sources, including capital markets, to the commercial sector in the year’s first quarter. More interesting is what RBI has to say about the government’s role in creating this inflation. First, RBI points to the hike in petroleum product prices that will lead to a 100-plus basis points hike in inflation—since this took place with a lag, and R1,00,000 crore of oil subsidies still remain, RBI says this will continue to add to inflation. RBI also talks of the hikes in MSPs of rice and pulses that have been increased significantly; ditto for the coal prices that were hiked in February. While talking of fiscal slippages, RBI adds, “Fiscal consolidation is therefore critical to managing inflation”. There is also the overall policy paralysis that has prevented fresh capacity from coming up. The finance minister would do well to read the message in RBI’s policy.

FE

Problem of perspective

Reading the first quarter review of the Credit Policy 2011-12 and its curtain raiser, the macro-economic survey of the economy, one could be forgiven for an initial confusion about the rationale for its current upward adjustments in the repo rate of 50 basis points that now stands at 8 per cent. The reverse repo rate has been automatically adjusted upwards to remain 100 points below the repo rate at 7 per cent; the current increase in the repo rate is similar to the hikes carried out at the time of the last mid-quarter review in early May. The RBI informs us that it has been forced to take this position because of the persistence of demand pressures that have been higher than expected, largely on account of non-food, manufactured goods prices. In the same breath it also tells us that growth has moderated and that it may level out even more if inflation continues: thus, the spike in its key rates, it avers. The key element in this Credit Policy review, thus, remains inflation that, since last December, has been stoked not just by supply-side pressures but also demand stresses. Step back a minute to let this soak in: the high growth that policymakers in New Delhi are so starry-eyed over has been led by demand that the RBI considers excessive. The central bank (unlike North Block) is worried about overheating; as it notes in its macro-economic review, in the 15 months since March 2010 it has raised its rates by 425 basis points, one of the “sharpest monetary tightenings (sic) seen in the world.” Even though credit growth has consequently slowed, global price spurts “have spilled over in the face of strong demand pressures.” The villain of the piece, it is now clear is not the supply constraints but the excessive demand that has yet to be reined in. The RBI dourly notes that growth may moderate but inflation will stay high through the second quarter too, “before moderating.” An inflation fuelled by an overheating demand whose steam has been only partially vented poses a real challenge to the central bank. The markets may have factored in repeated rate hikes and such repo rate increases now only evoke yawns; but their cumulative effect is already apparent in a slowdown as interest costs begin to pinch firms. The RBI has warned of high inflation into the festive season which may mean more hikes to tackle that excessive demand the RBI alone seems to dread. Getting the message from the review, one wonders if the New Delhi policymakers are on the same page with the RBI. Given the latter's insistence on above 8 per cent growth, it doesn't seem so.

HBL

The central bank, which seems to dread excessive demand, and the high-growth focussed planners don't appear to be on the same page.

RBI says no urgency to rejig project financing norms

Mumbai : The Reserve Bank today turned down bankers'' demand for rejigging project lending norms, saying no open-ended approach is needed as of now. During the post-policy meet with Reserve Bank, bankers urged the monetary authority to rework the project lending norms, which in the current form lead to asset-liability mismatches in the system due to the long-term nature of such loans. "There are signs of pressure on asset quality. We told RBI that the NPA identification and NPA classification definition (for project lending) also needs to be revisited," SBI Chairman Pratip Chaudhari told media after meeting the RBI. "Today for any project whether the account is standard or substandard, it is linked to whether the commercial production stage has been achieved. I think that needs to be delinked and we have to look at the ultimate collectibility of all debt," he said. In the absence of a corporate debt market, companies are forced to depend on bank funding for project financing, and banks are not well capitalised to continue to fund such long term projects. During the post-policy meet with the media, RBI Deputy Governor Anand Sinha said, "There is enough flexibility in commercial lending operations. We have given initially some margins to banks and that margin can be increased on a case to case basis. But such higher margins cannot be given on an open-ended approach. Also there is no need for reworking the existing norms". Sinha said there are two reasons for this. If a project does not start on the due date, or within a reasonable time, then the viability of the project become suspect and that needs to be looked at, he said. Another problem, said the Deputy Governor, is that long-term projects in the country are financed on floating rate basis and not on fixed rate basis. This also is a source of risk. Therefore, we have to be careful and we have enough leeway on that, he added.

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The subtext of what governor D. Subbarao said : Niranjan Rajadhyaksha

D. Subbarao has clearly indicated that the RBI cannot fight the battle against high inflation on its own, especially when the government has not done enough to increase the productive capacity of the Indian economy

Reserve Bank of India (RBI) governor D. Subbarao has been unusually blunt in his monetary policy statement released on Tuesday, when the Indian central bank took the markets by surprise by raising the key policy rate by an unexpected 50 basis points.

The following three statements stand out, to which we have been added our own comments.

• Statement One: “The economy’s ability to grow rapidly for any length of time without provoking inflation is dependent on implementing policies, with corresponding resource allocations, which will allow the supply of various products and services to keep pace with demand.”

Comment: Subbarao has clearly indicated that the RBI cannot fight the battle against high inflation on its own, especially when the government has not done enough to increase the productive capacity of the Indian economy. In other words, the government in New Delhi will have to get into the act through polices to encourage investment, especially in agriculture and infrastructure.

• Statement Two: “There are signs that growth is beginning to moderate, particularly in respect of some interest sensitive sectors. However, there is no evidence of a sharp or broad-based slowdown as yet.”

Comment: This is perhaps a signal that the Indian central bank will be convinced that its tighter monetary policy is working only when the economic slowdown is broad based, and not concentrated in a few sectors like automobiles as it is right now. If that is indeed the case, then we are headed into a prolonged growth recession.

• Statement Three: “Going forward, the monetary policy stance will depend on the evolving inflation trajectory, which, in turn, will be determined by trends in domestic growth and global commodity prices. A change in stance will be motivated by signs of a sustainable downturn in inflation.”

Comment: This guidance suggests that the RBI will stop increasing interest rates only if inflation comes down on a sustained basis. It is not bothered about the growth trajectory right now, however bitterly banks and business groups complain. Going by the implict message in these three statements, the rate-tightening cycle is not near its end.

(Niranjan Rajadhyaksha is executive editor of Mint)

Montek terms RBI's rate hike as aggressive

Describing the Reserve Bank of India's (RBI) decision to raise key rates by 50 basis points (bps) as "aggressive", Planning Commission Deputy Chairman Montek Singh Ahluwalia today said it would help in controlling inflation. "The (RBI) governor has chosen a little more aggressive stance," he said, pointing out that many people were expecting a hike of 25 bps in key policy rates. "I don't think this is improper. You do need to send signals and if situation improves, he can reverse the position later. It [the decision] is bound to be effective in controlling inflation," Ahluwalia said. Asked if the high interest rates will moderate economic expansion, Ahluwalia said that long-term growth was not affected by small variation in rates. "Some people will worry that impact on interest rates will be too high... It is a matter of balance. If you really want to have good environment for growth you must bring inflation under control. Long-term growth is not affected by small variations in short-term interest rates," he said. The RBI today raised its short-term lending (repo) and borrowing (reverse repo) rates by 50 bps to 8% and 7%, respectively. The apex bank has hiked its policy rates 11 times since March 2010, to curb inflation. Wholesale price-based inflation stood at 9.44% in June.

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Economists, analysts hail RBI's rate hike

Leading economists and analysts have welcomed the strong monetary measures announced by the Reserve Bank of India (RBI) today to bring down high inflation, saying rising prices are a bigger worry than a growth moderation. They remained mixed in their view on whether this signals a pause to the spate of rate spikes in the near term. "The RBI perhaps is doing the right thing by focusing on inflation and sacrificing 50-75 bps on the growth front. An 8% growth rate, with moderate inflation, is a much more desirable scenario than a higher growth, but with double-digit inflation," Ernst & Young national leader for global financial services Ashvin Parekh said. Parekh also said this probably could be a signal to the spate of rate hikes even as there is a drop in credit offtake since the Q1, which is expected to further slow to around 18% from the current 20.1% due to today's action. "However going forward, I do not expect any rate hikes for the next quarter," Parekh said. Earlier in the day, RBI upped its key short-term lending rate by 50 bps to 8% and warned that inflation would continue to rule high and revised its projections upwards to 7% from 6% in May. Today's move signals that the RBI is taking a much stronger anti-inflationary policy stance and the regulators' concern seem to tilt towards caution as with the rising signs of growth moderation RBI could have paused (hiking lending rates), Parekh pointed out. "The monetary policy was announced in the backdrop of sticky inflation, growth moderation and uncertain global economic conditions. Today's hike in the repo rate by 50 bps is mainly to control inflation, especially non-food manufactured inflation, which is going out of hand," Fitch Ratings India Director Devendra Kumar Pant said.

BS

RBI to govt: You aren’t doing your job, hence my rate hike

The Reserve Bank of India overturned market expectations by opting for a hawkish stance on inflation. In its quarterly review of the monetary policy announced on Tuesday, Governor Duvvuri Subbarao announced a 50 basis points hike (0.5 percent) in the repo rate, the rate at which the central bank lends overnight money to banks. The new repo rate, which rises from 7.5 percent to 8 percent, will force banks to push up lending and deposit rates in due course. Home and personal loan rates could see an increase, too. But what is most significant about Subbarao’s tough statement is its indirect indictment of the government’s policies, which it believes have enabled inflation to take root. To emphasise this fact, the Reserve Bank has debunked the government’s rosy projections of inflation cooling off to around 6 percent by March 2012. The bank has, instead, raised its own inflation projections to 7 percent, up by a solid 1 percent from its May projection. It has, however, chosen to retain the GDP growth projection at 8 percent for 2011-12. Clearly, the RBI has a different view of the country’s economic prospects compared to the government or the finance ministry. The policy document says the burden of maintaining the “credibility of official action” to contain inflation has fallen on the monetary authority in “the absence of complementary policy responses on both demand and supply sides.” Translated, this means the government is not doing its bit to increase food production and invest in infrastructure (which is the supply side), nor is it showing any signs of managing its budget deficits sensibly (which is worsening the demand side by pumping in money indiscriminately). But when will the Reserve Bank ease up on tight money? Subbarao’s answer: not till the  economy slows down significantly or inflation falls steadily. But since he has raised his own inflation projections, this means not too soon. Subbarao said: “Going forward, the monetary policy stance will depend on the evolving inflation trajectory, which, in turn, will be determined by trends in domestic growth and global commodity prices. A change in stance will be motivated by signs of a sustainable downturn in inflation.” The RBI gives three reasons for its strong stand on inflation, where it is willing to risk a serious slowdown by jacking up the cost of money. First, it feels that oil prices will push up inflation both in terms of its primary impact, and its secondary effects, when transport costs raise prices. The RBI feels that even after the June price increases in diesel, cooking gas and kerosene, there is inadequate pass-through of price increases to the consumer. An increase in coal prices will push up energy costs all around once again. Second, the government has raised the minimum support prices of food and pulses significantly. This, too, will strengthen inflationary pressures. Third, costs are rising in the manufacturing sector, which means inflation is now spread all over. Since the next monetary policy review is scheduled for 16 September, the RBI is clearly digging in for the long haul. One uncertainty is about the governor himself: his term ends well before that review. Will he get another term?

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