Many many happy returns of the day................

Mr Crisis

Some months ago, when Duvvuri Subbarao was at odds with the finance ministry on how quickly new bank licences should be given out and the criterion for deciding these, few thought he’d get the extension that most of his predecessors got after completing their three-year term. But with the US and European crises getting murkier—the odds of a US recession are said to be one in four—the government wisely decided that rocking the boat wasn’t a good idea. More so since Subbarao, who was baptised by fire (Lehman collapsed within a short while of his taking over), has done a good job of keeping India relatively insulated from the extreme volatility that followed Lehman. Indeed, despite the sharp increase in inflows and the rupee volatility, Subbarao stayed away from the traditional policy of buying dollars—given how exports still grew, he appears to have been vindicated.

Given the banking sector has come out relatively unscathed even after a period of high growth, Subbarao’s leadership has been good for RBI. Although some, like the latest issue of The Economist, suggest RBI has been somewhat lax in giving out what it calls get-out-of-jail cards and prefers to not recognise bad loans if it thinks doing the right thing would put the banking system’s stability at risk. Introduction of the base rate, similarly, has ensured the transmission of monetary policy is faster; the policy paper on deregulation of savings rate shows RBI was on the right track, though nothing has come of it so far. Many criticise Subbarao for being in sync with the finance ministry after taking what looked like an independent stand—this, however, is a bit of a myth, since the system will collapse if both are at loggerheads. But since the good that men do is oft interred with their bones, if India’s growth collapses, Subbarao will probably be remembered for his sharp 50 bps rate hike at a time when both global and Indian growth is slowing. While there are divergent views on whether this was the right policy, and even on whether RBI should be looking at CPI or WPI to determine policy action, what was inexplicable was the conclusion, as recently as July 26, that India’s growth momentum was still strong—indeed, it didn’t need the S&P downgrade for RBI to figure out the challenges to global growth were serious. What is true, though, is that this endeared him to the inflation-scarred political class.

FE

Vote for stability

In these turbulent times, the Centre’s timely decision to give RBI Governor Dr Subbarao a two-year extension stands apart as a decisive vote for stability at the central bank. This will strengthen the RBI to pursue the right course it has been following in different areas of its responsibility. A change of guard at this juncture would have resulted in slowing the processes of change in areas like fighting inflation, forex reserves management, financial inclusion and outreach, and transparency in policy prescriptions where Dr Subbarao has made perceptible progress. On his part, the governor should take this opportunity to hasten the initiatives he has taken to make RBI a change agent in the country’s economic development. Beyond the mandated responsibilities, one expects RBI to do much more in the areas of financial inclusion, gold and wealth management (as part of its forex reserve management), revival of grass-roots rural financial institutions like co-operatives, and balanced economic development across regions by ensuring an appropriate realignment of the outreach of institutional infrastructure using financial sector reforms as a tool.

M G Warrier, Mumbai (BS)

RBI should not cut rates now - Arjun Parthasarathy

The worst possible confidence booster is a rate cut now. Reserve Bank of India (RBI) should hold on to its stance of managing rising inflation expectations despite a sharp fall in economic sentiments globally. A rate cut at this juncture will be seen as a knee jerk reaction to a crisis that has not happened yet. A rate cut will pull down the Rupee, worsen investor confidence in the RBI, take up bond yields and will not achieve anything. Turkey cut rates unexpectedly last week, and the result is a central bank fighting to contain selling pressure on the currency. The 125bps rate hike over the last three months is indicating RBI’s worries on rising inflation expectations. The fact that global worries started emerging in May 2011 did not deter the RBI from raising interest rates. Equity markets turned weak post April 2011 on worries of Eurozone debt and impending global economic weakness. The three months equity performance up to 25th July 2011 is hardly a sign of positive sentiments over the economy. Equity indices from the Sensex to the Dow returned flat to negative over the three month period from April 25th to July 25th. Hence a sharp fall in equity indices from July 25th to the present where equity indices have fallen between 11% to 19% across markets is no justification for reversing policy stance. It is a different matter altogether that RBI may have erred in the side of caution, but RBI would have been conscious of that fact when raising rates by higher than expected 50bps in their July 26th policy review.  The signal RBI will be sending out by maintaining policy rates at current levels is that the RBI has been right in its assessment of inflation expectations after taking into consideration global economic issues. One or two weeks of market volatility is too early to judge the assessment. The fact that the volatility is caused by high government debt should keep the RBI on its toes, as the Indian government is facing cash flow issues at present and is overdrawn with the RBI by around Rs 30,000 crores to fund its cash requirements. The central bank should be seen as acting on its judgment of inflation and economic growth rather than the state of government finances.  Bond markets have recognized the fact that RBI’s policies coupled with global economic weakness will have a positive effect of bringing down inflation expectations. Ten year benchmark bond yields have dropped by 25bps from July highs on the back of improved sentiments on inflation. A sudden reversal of RBI stance will confuse the markets and bond yields could reverse its downward trend if the market interprets the move differently. A sudden rate cut when the government finances are weak is seen as the central bank trying to support an enhanced borrowing by the government. The market is not ready for higher than budgeted supply of bonds. Global markets can reverse trends quickly on the back of fresh economic data. Hence a sudden reversal in equity and commodity prices will unnerve markets that have positioned itself on the back of policy reversal by the RBI. The RBI is better off waiting and watching for further signs of commodity weakness before changing its policy stance. The RBI governor Dr D Subbarao has rightfully got a two year extension. Dr Subbarao has had to cut rates and then hike them in his three year period. He will not want to enter into that cycle again.

Moneycontrol

Debt management

Former Deputy Governor Rakesh Mohan was always against separating the debt management office from the Reserve Bank of India. Recently, he also offered examples of advanced economies that are bringing the debt management office back under the central bank’s purview. His former boss Y V Reddy, however, thinks the timing is not right. Why? Reddy’s explanation: “Only when the government of India’s debt comes down can this proposal be taken up!”

BS

IDBI Bank’s ‘Magic Card’

IDBI Bank, on Monday, unveiled 'Magic Card', a debit card with in-built credit for salary account holders in a bid to improve its CASA ratio to 24 per cent from 20 per cent as of now during the year. Though, only basic difference between the magic card and a typical credit card is there is no free credit period but at the same time rate of interest will be much lower and linked to bank rate. The credit limit or overdraft limit will be either two or three times of net salary depending on the rating of the organisation.

Deccan Herald

India Banks Seek More Time to Comply With New Rules on Derivatives

MUMBAI-- Banks operating in India have asked the central bank more time to meet the recently tightened rules on derivatives to avoid a squeeze in trading volumes in the currency-derivatives market, two people familiar with the matter said Wednesday. The Reserve Bank of India last week issued a notification, tightening the rules as part of its efforts to prevent mis-selling of complex currency derivatives to local companies. The new rules make it compulsory for banks to ensure that the company executives to whom they sell derivatives are backed by their board of directors to execute such transactions. The rules also prevent banks from selling derivative products they can't independently price, and make it mandatory for foreign banks to price such products in India. The central bank's notification didn't specify any dates to implement the rules, implying that they would take immediate effect. "Companies need time to go to their boards and secure authorization for their finance people to execute derivatives trades, which was one of the new rules," said a person who was part of the discussions with the central bank. "Immediate implementation as implied in the circular could kill the market," said a currency trading head at a foreign bank. Both people spoke on condition of anonymity. The new rules follow disputes between banks and some mid-sized companies, which claimed they had been sold derivatives without being warned of the risks, resulting in heavy losses to them during the economic crisis.

WSJ

Welcome extension

The continuity at the RBI means good news for an economy increasingly under strain, from volatile times as much as policy paralysis. Dr D. Subbarao has got a two-year extension of his term as Governor of the Reserve Bank of India. This continuity spells good news for an economy that has increasingly been feeling the strain of policy paralysis in a beleaguered government that is fighting a new crisis every passing day. The world economy has not yet recovered from the global crisis of 2008. But another set of challenges is already on its way, given the panic across the world following the recent downgrading of US debt by rating agency Standard & Poor's. These are volatile times in which the macro-economy needs to be steered by a safe pair of hands — which it has in Dr Subbarao. Market participants and observers, both here and abroad, will, no doubt, see it as a confidence-building measure for the economy.  Dr Subbarao, when he took over three years ago, stepped into the rather large shoes of Dr Reddy. Many doubted if he would measure up — especially because, by then, Dr Reddy had developed a halo as a saviour of the Indian economy, when the rest of the world was in crisis. Dr Subbarao has since proved his mettle after his baptism by fire during the global crisis of 2008. Over the past three years he had to first unwind a tight monetary policy and infuse phenomenal amounts of liquidity. Equally, as the economy began recovering and inflation pressures began to mount, he has had to wind the tape back and tighten monetary levers during the last year. He also increased the frequency of policy actions to about 45 days so as to impart a measure of gradualism. Through this difficult period, he has been consistently communicating the reasoning behind various decisions and left the markets with a reasonably clear idea of what they could expect. There were occasional hiccups when his inflation-fighting credentials were questioned. And some wondered whether he could stand up to the government on reining in the fisc or on matters of RBI autonomy, especially in view of his earlier stint as Finance Secretary. The record would probably show that he has passed the test, in his own simple style. He has tried to improve the conduct of monetary policy, bring in more transparency and communication, and demystify the office of Governor — all goals he set for himself at the start of his first term. The decision to retain Dr Subbarao at the central bank's helm for another two years is, therefore, very welcome, although one wishes the government would make up its mind on top positions far sooner than it did in this case, to avoid unnecessary suspense in these uncertain times. The remaining part of his tenure will, no doubt, be devoted to improving on his record besides handling the principal challenge of controlling inflation without choking growth.

HBL

Dear money, quantum's the worry

Unless across-the-board reform is speeded up, the supply situation will not allow inflation to come down to a reasonable 4-5 per cent

If money becomes more expensive, will inflation come down? In a predominantly industrial economy, yes, but in an economy where industry accounts for less than a quarter of GDP, not quite. Yet, the Reserve Bank of India (RBI) is persisting with a monetary orthodoxy that has been shown to have severe limitations. According to this orthodoxy, if money becomes more costly, demand for it will fall, pushing down the overall level of demand in the economy. This will then force producers and distributors to reduce prices. Eventually, even if absolute prices don't come down, the rate at which they are increasing will, and everyone lives happily ever after. Nice, but not good enough if you are not willing to also do something about the total quantum of money in the system. To see why, imagine a man who has had six glasses of whiskey in 90 minutes, making it one glass in every 15 minutes. To reduce his intake, the barman raises the price of each drink. If the drinker can still respond, he will reduce the rate at which he is drinking. But what about the alcohol already in his body?  India's problem is not dissimilar to the drinker's. Unless something is done to reduce the amount of money available for consumption, as it were, increasing its price will only have an impact — as the RBI knows well enough — after such a long time that we will never know what actually worked. In short, the time has come to tackle what, in jargon, are called ‘monetary aggregates' by actually impounding the money available with the banks. But given the structure of the economy and the economy-wide deficiencies, even this may not have much effect. The problem lies in the system's inability to improve productivity and efficiency through technology and competition. In other words, reform. Unless due attention is paid to these two aspects, the RBI will achieve the same result as the barman — a comatose customer.  This newspaper has been arguing for several quarters now that monetary policy shot its bolt quite some time ago. So, unless across-the-board reform is speeded up, the supply situation will not allow inflation to come down to the reasonable level of 4-5 per cent. Primarily, these reforms must aim, in the short run when no great investments can be undertaken, to reduce the transactions costs. These are huge in India, amounting cumulatively for each stage of the process, to around 15 per cent. Even a 25 per cent reduction in these costs will yield good results. Many of these reforms will have an adverse revenue implication but these will be made up by the higher production. Most of what needs to be done is known and can be achieved at the administrative level. What is lacking is not the political will, as is often alleged, but merely imagination.

HBL

Coming to grips with inflation

Monetary policy is moving rather too fast on the inflation front, while government action on the supply side continues to be glacial. The RBI did wait for supply-side improvements before reverting to its historical sharp tightening............

Read.........

World must collectively tackle financial crisis: Experts

Indian stock market has been witnessing volatility on the talks that the S&P may downgrade other counties after the US. In an exclusive interview with CNBC-TV18’s Shereen Bhan, Bimal Jalan, former Reserve Bank Governor and Rajiv Kumar, secretary general of Federation of Indian Chambers of Commerce and Industry (FICCI) discuss the implications of this downgrade.

Below is the edited transcript of the interview.

Q: The downgrade has finally taken place. We have already been in a very fragile and vulnerable state especially with the concerns on the Eurozone, but does this dramatically alter things?

Jalan: There is lot of uncertainty and it has been there for quite sometime. This entire issue of debt ceiling in the US has also caused uncertainty. So the best thing at the moment is to wait and watch rather than to jump to the conclusion. The situation is very difficult, but fortunately, India has been in a strong position since we have strong reserves and we are not much dependent on exports. So, I would wait and watch and I am sure that the US government will respond positively and will try and prevent any big crash or so called double dip.

Q: You are saying that it is a wait and watch position at this point in time, but does this increase the dilemma as far as central bankers are concerned. They have got more problems now to deal with. We have seen very scathing criticism coming in from China; they are saying that the US hasn’t done its bit. This politics has actually created a problem for the rest of the global economy. What do you expect the central bankers especially people in China and the Reserve Bank to do with US treasuries?

Jalan: In this kind of a position, the best thing to do would be to wait. We should not rush into a panic or do something, which destabilises the market further. Emerging markets are very large holders of treasuries and few days are not going to matter very much.

At the moment, the whole world and even the central banks have to work together to try and prevent the crisis form hitting us rather than acting individually because it’s not something, which was unanticipated.

Q: The question mark is on the sustainability of the growth that we are seeing in the US. If we do see another round of quantitative easing, what will it mean as far as global inflation is concerned? Also what does it really mean for the central bank here in India which is already combating record high inflation?

Jalan: If it’s assumed that there is a global problem, then there has to be a globally co-ordinated response. The whole idea is that panic should be prevented from happening, and if each of us takes our own position, then naturally you have to protect your own self.  We should take a collective action to try and stabilise rather than destabilise. We have gone through these kinds of episodes often where there was Asian crisis and before that we had 1991 crisis. So you have a global response and the situation is not worse than what was for example say a fortnight ago.

Q: So you are saying lets not destabilise things further by pressing the panic button?

Jalan: Yes, and it can be prevented from coming to a situation where each of us act in a certain way which destabilises the situation further. If you see China selling treasuries, then there would be a case for every other country in East Asia selling treasuries. If everybody sells treasuries, then naturally the expectations would be fulfilled that the treasury prices would come down.

Q: China has questioned if the dollar should continue as the Global Reserve Currency. We have also got the UK business secretary Vince Cable saying that this would be the way that the world should move but it’s not going to happen anytime soon. What are your thoughts on that?

Jalan: There is a question mark about the Dollar, Euro and Yen. Yen has been in trouble since last 10-15 years. So, the time has come for the world and the major central banks to get together and work out a mechanism for resolving this problem. You say you don't have dollar, which other currency would you go for?

Watch the video...........

RBI steps no substitute for economic reforms

The UPA government showed a measure of decisiveness in extending the tenure of Reserve Bank of India governor D Subbarao for two years from September 4, when he would have completed three years. The decision reflects the government’s anxiety that there should be no uncertainty on this score. He played a major role in steering the economy through the 2008 global meltdown to a reasonably high growth trajectory. This time again the credit rating agency Standard and Poor’s has already cautioned Asia-Pacific countries of a possible downgrade, which will have unimaginable consequences. Seen against this backdrop, it makes sense to have a time-tested person with vast experience in both banking and government sectors at the helm of the RBI. In any case, the government has been trying to manage the inflationary pressures on the economy, which have dented the purchasing power of the common man, by leaving the matter entirely to the bank. Small wonder that it was forced to make changes in bank rates 11 times in as many months. But the point that the interventions by the bank, however welcome they maybe, cannot be a substitute for bold policy decisions has escaped the government’s attention. One reason could be that all its energy is now dissipated on deflecting corruption charges flung at it by the Opposition. Needless to say, time is of the essence in decision-making. If the economic growth rate is not to fall below the projected 8.2 per cent, the government will have to take a whole lot of measures to revive and reinvigorate economic reforms. Privatisation of public sector undertakings – not just the loss-making ones – seems to have been abandoned. Procrastination on land acquisition, environmental clearance, etc, have dampened the enthusiasm of foreign direct investors, while labour, pension and retail business reforms have been put on the backburner. Surely, this is no recipe for growth.

http://expressbuzz.com/opinion/editorials/rbi-steps-no-substitute-for-economic-reforms/302951.html

Tinkering with rules of the game

The granting of a two-year extension to the RBI governor D. Subbarao is a credible move on the part of the Union government

The granting of a two-year extension to the Reserve Bank of India (RBI) governor D. Subbarao is a credible move on the part of the Union government. To that extent, it is a welcome step. That, however, appears to be an exception: The behaviour of ministers and the assorted government officials towards other important institutions has been, to put it mildly, deplorable. The Comptroller and Auditor General (CAG) of India—a constitutional functionary—has been criticized by politicians and ministers alike. The goings on at the Securities and Exchange Board of India, where investigations have been ordered against upright officials—“routine”, of course—are a reason for worry. The reason why any country needs independent institutions is to ensure that citizens—ministers and powerful politicians alike—are subject to the same set of rules as everyone. In India, all governments—there are no exceptions—have tried, at one time or another, to whittle down the independence of institutions. To that extent, all parties are guilty to an extent. But what is happening with the present government is something else. Two distinct processes are at work here. For one, no government in recent memory has had to face a raft of corruption allegations as this one. The CAG’s reports—on spectrum pricing and now the Commonwealth Games—have detailed malfeasance on the part of ministers and officials. These have not only come in handy for the opposition to beat the government with, but have also fed into a crisis of legitimacy. At another plane, the United Progressive Alliance (UPA) government has tried to “claw back” some space that has been ceded to independent regulators over a period of time. This is not the handiwork of some specific minister or party functionary, but is a problem of how this government visualizes its role and relationship with society at large as also its efforts to alter the balance between the market and the state.  When these two trends are seen together, the attack on institutions becomes intelligible. The more it tries to change things, the greater the scope for friction between citizens, government and institutions. The results cannot be happy. A final word is required on the Subbarao extension. There is no exception, so to speak. India, today, is not the India of the 1970s—even if the UPA wants to imagine it that way. It is simply too well integrated into the global economy for it not to be hit if it tries to curb the independence of the central bank. That, and not some abstract respect for rules, explains the exception in Subbarao’s case.

Mint

Wrong treatment

Inflation still looms large for reasons beyond the central bank's control

True to form, the Reserve Bank of India's Monetary Policy Statement for fiscal 2011-12, like its predecessors, documents the economy's trajectory thus far, complete with all its warts and moles. Where it may have erred is in the prescriptive treatment of a fresh dose of tightening up of credit that leaves something to be desired. What makes it all the more unfortunate is that the RBI had in its possession far superior data than was available to the Government at the time of presentation of the Budget or the Economic Survey. The RBI has quite rightly identified that inflation, this time around, is stoked by a boom in global commodity prices. It has talked of a growing “pricing power” of producers that stems from a demand situation that is “strong enough to allow significant pass-through of input price increases.” Equally, the RBI also acknowledges that this is happening despite “visible signs of moderating growth…” — of all the places, in capital goods production and investment spending, for which the central bank immodestly pats itself on the back. To take credit for tightening interest rates to the point that investment spending and the capital goods sector decline is to admit to stifling the engines of capacity creation in core sectors of the economy. This is at a time when the sector is in need of additional funding to shore up capacity and secure higher output in the process. Yet the RBI has raised the repo rate significantly higher, by 50 basis points, whereas so far it had routinely raised it by half that number. The problem doesn't seem to lie in just the core sectors alone. The policy also tells us that its own two surveys, on industrial outlook and on order-books and inventories, in other words, a far broader spectrum of the economy, point to a far more pessimistic view than earlier. Amidst such overwhelming evidence it has chosen to do what it has on the ground that inflation has to be tackled. This is, of course, an old defence for tightening, even though it has little impact on overall inflation. A tighter monetary regime might have released some speculative pressure in the real estate market but overall, inflation still looms large for reasons beyond the central bank's control. The RBI has nevertheless been cautious in its tightening and left the Bank Rate untouched. It has also introduced a new window for banks with the Marginal Standing Facility (MSF) at which banks can borrow overnight funds up to 1 per cent of their Net Demand and Time Liabilities. By creating an additional window, albeit a small one, of liquidity, the RBI must be hoping that banks' ability to lend to critical sectors will not be constrained by any shortage of resources. The treatment the RBI dishes out for the economy's ills — moderating growth and persistent inflation — may prove ineffective. But its diagnosis of slowing investment spending should provide New Delhi food for thought.  

HBL

Vocal Interventionist: Subbarao oversees turbulent times

At the earnest of the Prime Minister, Duvvuri Subbarao - Governor of the Reserve Bank of India - has had his tenure extended by two years, up to September 4, 2013. His original three-year stint as the banking regulator has seen exciting times and a 360-degree turn in his policy management approach. On September 15, just ten days after Subbarao took charge, Lehman Brothers filed for bankruptcy and the sub-prime crisis turned into a global contagion. A financial meltdown followed. Though theories of decoupling were long making rounds, India's economy, its markets and its rupee were not immune, though the financial system was partially insulated. So Subbarao, on his thirty-seventh day at Mint Road, joined global regulators in an interest rate cutting spree, cutting rates frequently in pursuit of liquidity management and insulating the economy from a logjam. What followed was six rounds of cuts in the repo rate by 375 basis points (a hundred basis points make a per cent), four rounds of reverse repo rate cuts summing to 275 basis points and the four cuts in the cash reserve ratio, by 400 basis points total. While reverse repo indicates absorption of liquidity, repo indicates the injection of liquidity. And cash reserve ratio is the percentage of banks' net demand and time liabilities parked in cash with the Reserve Bank. Then Subbarao's priorities were to manage liquidity and combat growth slippage. Loose monetary policy was a catalyst to government's fiscal stimulus packages, meant to bring growth back on track. But then inflation began to inch up. Starting March 2010, inflation rising began to hit unsustainable levels. Subbarao began his 'baby steps' journey to get away from the loose monetary policy of his early days. Suddenly Subbarao's dual focus areas were to manage growth and fight inflation, and there followed eleven rate hikes where the repo rate went up by 375 basis points. Lately, considering the overall growth-inflation scenario, Subbarao is determined to persevere with this anti-inflationary stance. In July, while reviewing the monetary policy for the quarter ended June, Subbarao, unlike many Indian regulators in the past and present, expressed a strong belief that controlling inflation is imperative both for sustaining growth over the medium-term and for increasing the potential growth rate. According to Subbarao, controlling inflation is critical to create a favourable investment climate, on which the economy's potential growth depends. "Fiscal consolidation can contribute to a sustainable growth path by rebalancing demand away from government consumption and towards investment," said Subbarao. "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," he added. That in hindsight was an indication that he knew his job best, and the government had to complement, alongside the Reserve Bank, with appropriate policies to rein in inflation and boost growth. His tenure extension is indicative of the fact that the government, given the state of situation it is in and given the global financial climate, is comfortable to have a "truly" independent regulator guarding the economy. "I am happy that the Government has reposed its confidence in me at this difficult juncture in the world economy," Subbarao commented upon his re-appointment. His extended tenure has extended challenges and uncertainties. In 2008 he faced bank failures. This time round sovereign troubles have swept the developed world.
 

Business Today

Eleventh-hour wisdom

No modern corporation would take a decision on the appointment of its chief executive a few days before the announcement is due and be apologetic about it, saying that further delay was not possible given the exigencies of the situation. That is precisely what the Union government has done in giving Reserve Bank of India Governor Duvvuri Subbarao a two-year extension 22 days before his term expires. Union Finance Minister Pranab Mukherjee claimed that there was no reason why any decision was required to be taken at this point in time since “there was time till September”! True, when Dr Subbarao was appointed RBI governor in September 2008, his appointment was announced five days before the end of the five-year term of Dr Y V Reddy, the then RBI governor. Appointments to senior positions in the Indian government – including the Cabinet, foreign and other senior secretaries, heads of intelliegence agencies and large public sector corporations – are all made at the eleventh hour. This policy of eleventh-hour appointments reveals the kinds of pulls and pressures that operate in such appointments and, in doing so, devalues the final decision, however good. Moreover, the newly appointed person is given very little time to familiarise herself with the job — most of the learning takes place on the job. In recent months senior officials, even in critical ministries, have walked through revolving doors spending barely weeks in a job before retiring. None of this is acceptable modern management practice for a large nation with a professional bureaucracy. In the specific case of Governor Subbarao’s extension, Mr Mukherjee’s bizarre explanation that this was done because of the uncertain global environment only underscores the point that such decisions ought to be taken well in advance. Mr Mukherjee seems to imply that the government has been forced by unexpected global developments to take a decision on the appointment, or the extension of tenure, of a central bank governor at the eleventh hour, rather than a minute before midnight! This is a typical Indian response, which justifies last-minute action on grounds of compulsion and force of circumstance, instead of explaining why action was not taken in advance, which would have averted the need for an eleventh-hour response. Better late than never, the government has done well to extend Dr Subbarao’s tenure because he has offered the central bank mature and reassuring leadership in difficult times. Prime Minister Manmohan Singh has done well to reassure the banking and financial circles and macroeconomic authorities in India and abroad that professionalism will matter more in such appointments. In the coming weeks, Dr Subbarao will have to bite the bullet on several important policy decisions, including the policy on new private sector bank licences. He would now be able to continue to take an independent and professional view, without being pushed around by politicians. To be sure, Dr Subbarao has not pulled any punches. Nor has he shied away from making his views known on a variety of issues such as the distinction between RBI as an institution and other financial sector regulators, and the limits to monetary policy when fiscal policy runs amok. RBI has maintained its focus on fighting inflation and must continue to do so even as it points to the limitations of monetary policy and to the need for a wider policy response.

BS

Welcome extension

The continuity at the RBI means good news for an economy increasingly under strain, from volatile times as much as policy paralysis.

Dr D. Subbarao has got a two-year extension of his term as Governor of the Reserve Bank of India. This continuity spells good news for an economy that has increasingly been feeling the strain of policy paralysis in a beleaguered government that is fighting a new crisis every passing day. The world economy has not yet recovered from the global crisis of 2008. But another set of challenges is already on its way, given the panic across the world following the recent downgrading of US debt by rating agency Standard & Poor's. These are volatile times in which the macro-economy needs to be steered by a safe pair of hands — which it has in Dr Subbarao. Market participants and observers, both here and abroad, will, no doubt, see it as a confidence-building measure for the economy.

Dr Subbarao, when he took over three years ago, stepped into the rather large shoes of Dr Reddy. Many doubted if he would measure up — especially because, by then, Dr Reddy had developed a halo as a saviour of the Indian economy, when the rest of the world was in crisis. Dr Subbarao has since proved his mettle after his baptism by fire during the global crisis of 2008. Over the past three years he had to first unwind a tight monetary policy and infuse phenomenal amounts of liquidity. Equally, as the economy began recovering and inflation pressures began to mount, he has had to wind the tape back and tighten monetary levers during the last year. He also increased the frequency of policy actions to about 45 days so as to impart a measure of gradualism. Through this difficult period, he has been consistently communicating the reasoning behind various decisions and left the markets with a reasonably clear idea of what they could expect. There were occasional hiccups when his inflation-fighting credentials were questioned. And some wondered whether he could stand up to the government on reining in the fisc or on matters of RBI autonomy, especially in view of his earlier stint as Finance Secretary.

The record would probably show that he has passed the test, in his own simple style. He has tried to improve the conduct of monetary policy, bring in more transparency and communication, and demystify the office of Governor — all goals he set for himself at the start of his first term. The decision to retain Dr Subbarao at the central bank's helm for another two years is, therefore, very welcome, although one wishes the government would make up its mind on top positions far sooner than it did in this case, to avoid unnecessary suspense in these uncertain times. The remaining part of his tenure will, no doubt, be devoted to improving on his record besides handling the principal challenge of controlling inflation without choking growth.

HBL

Government's decision to extend the RBI governor's term is welcome

The government's decision to extend the term of the Reserve Bank of India (RBI) governor D Subbarao by two years should bring some cheer to a market sorely in need of some. The last thing the economy (and the country) needs right now is a change of guard at the helm of the central bank.  Given the government's fondness for bureaucrats for the post, any new appointee would have been a greenhorn, unequal to the challenges of steering the economy through troubled times. At a time when three of the four deputy governors are also relatively new, the government can ill-afford to rock the boat.  But it would be unfair to welcome Subbarao's extension (his original three-year tenure ends on September 4) only on the grounds of continuity. Under his leadership, the Bank has shown commendable skill in straddling the twin responsibilities of growth and price stability in a situation where the Bank does not have a free hand. Unlike many central banks, the RBI is not independent.  In such a scenario central bank autonomy is limited and is often determined by the space defined by the government. RBI autonomy, first raised by former RBI governor and present Chairman of the Prime Minister's Economic Advisory Council, C Rangarajan and ably defended by his successors, Bimal Jalan and Y V Reddy, has been dearly won. There are no return favours due to the government.  Unlike elected governments whose timeframe is only till the next elections, the RBI governor must keep his eye on the long-term. His first (perhaps, only) duty is to the country and its people. When in doubt he could take a cue from the story he related some years ago about Dr Reddy's response to a friend who happened to overhear a conversation between the feisty governor and the finance minister of the day.  Intrigued to hear a single 'Yes' in a conversation marked by a series of unending 'No's', the friend wanted to know what the 'yes' was about. To which Dr Reddy's answer was, "Well, the finance minister wanted to know if I could hear him!" As long as the governor reserves his agreement to such harmless questions and on all other matters exercises his own (apolitical) judgment we are in safe hands. All the very best, governor!

ET

Federal Reserve chief decision makes job tough for RBI governor Duvvuri Subbarao

MUMBAI: For Reserve Bank of India governor Duvvuri Subbarao, who was given a second innings on Tuesday, the wicket has just got bouncier, thanks to Federal Reserve Chairman Ben S Bernanke, who has promised to keep interest rates at record low for two more years. That is exactly what Subbarao feared when he raised policy rates way higher than what investors expected last month.  Handling a crisis is nothing new to this career bureaucrat whose entry into Mint Street was anyway a baptism by fire. The credit markets seized up when Lehman Brothers collapsed two weeks after he became the custodian of monetary policy in September 2008.  It is eerily similar now. Pundits in the financial world are singing the same tune that they sang in 2008 - easy monetary policy. But this time Subbarao does not have the room to dance to that because the Indian conditions are different, especially inflation and government finances.  RBI can help boost private investments by lowering rates or pausing, but indiscriminate spending by the government, irrespective of interest rates, rules that out. The noise during the credit crisis was so loud and uniform that no central banker could do anything different from what Bernanke or ECB chief Jean Claude Trichet were doing. The US sub-prime crisis was affecting all nations similarly, except the magnitude.  The difference this time is that economic expansion is accompanied by a sharp rise in prices in India when the West is longing for both. Inflation, if let to persist, can blow up the Indian growth engine. Inflation alone can bail out the West. Divergence of economic policies between emerging nations and the West may be the norm, given what RBI had to say after rating company Standard & Poor's downgraded the US by a notch last week from AAA that roiled markets.  "India is not insulated from such developments," RBI said on Monday. "It may, however, be noted that in the worst phase of the recent global financial crisis, the economy grew 6.8%, suggesting high resilience emerging from domestic factors. While downside risks to growth may have increased in the wake of the global developments, they are likely to have limited impact."  Two things emerge from it - one that global developments may shave off a bit of growth, but won't lead to a kind of recession or a slowdown that the Western world faces. Two - don't expect RBI to react the way it did in 2008 when domestic liquidity issue was misrepresented as a financial crisis. Those series of rate cuts and keeping interest rates too low for long led to many describing Subbarao 'behind the curve', though the same economists argued for keeping rates low to ensure that growth is not compromised till inflation became a menace.

ET

RBI issues draft norms to use internal models for credit risk charge

To enhance banks’ capacity to adopt Basel-II norms, the Reserve Bank of India on Wednesday issued draft norms to calculate the credit risk capital charge, using internal rating models. In July 2009, the banking regulator had advised banks to apply for migration to the internal rating-based approach for credit risks from April 1, 2012. Currently, banks calculate the credit risk capital charge under a standardised approach. Under the Basel-II framework, banks can employ two broad methods to calculate capital requirements for credit risks, a standardised approach and an internal rating-based approach. The internal rating based approach is further classified into a foundation internal rating-based approach and an advanced internal rating-based approach.

BS

Global Economic Crisis: Dark Clouds or a Silver Lining for India?

Subbarao’s early reappointment means that his role as effective fire-fighter has been acknowledged. But it also means that there is a much larger fire to fight…….

Read......... 

RBI will hike rates again on Sept 16, says a CNBC-TV18 poll

Even after the Fed admitted to a weaker-than-expected economic slowdown, Indian market and regulators believe that the economy here is on strong footing, albeit with some marginal risks to growth. A CNBC-TV18's poll of economists suggests that the Reserve Bank will continue with its anti-inflationary stance and hike policy rates during its mid quarter review on September 16. CNBC-TV18’s Gopika Gopakumar reports. RBI is not done with its rate hiking cycle and will deliver one last dose on September 16—that's the majority view of a CNBC-TV18 poll. 70% of the economists polled expect RBI to hike policy rates by 25 basis points before taking a pause. This despite the fall in commodity and asset prices in the past one week and the US Fed acknowledging that growth will be slower-than-expected. Alok Kumar Misra, chairman and managing director of Bank of India, said, “We could see one or two more rate hikes by the RBI. Inflation is still a concern. However, the global scenario will be taken into account before policy action.” Of the 30% who expected no RBI action, 10% were anyway expecting a pause while 20% said they have changed their view in the past week due to the recent global developments. Most economists say that the downside risks to growth have increased. However, they say that the impact of US slowdown on India will be limited as domestic factors continue to be robust. Economists and bankers also point out that lower commodity prices cannot be taken for granted especially if the Fed is set to further purchase bonds and pump dollars. Although NYMEX Crude prices have fallen to USD 80 per barrel and Brent to around USD 100 per barrel, the Indian basket is still at USD 103 per barrel. Besides India's administered prices did not fully pass on the higher prices and hence the maneuverability to cut prices and rates when global prices fall is not there. Economists say inflation management will continue to be RBI's focus going forward considering that the revised may inflation will be 10%. However, other bankers point out that according to the RBI's analysis in its July policy inflation should peak in September. And, hence there is a case for a pause in September.

Moneycontrol

Will RBI opt for a pause?

......“It’s too early to say whether RBI will press the pause button, but it is definitely concerned about the deteriorating investment climate—which had not been the case till recently,” said one economist, who did not want to be identified.......

Read.... 

RBI may remain hawkish till prices of commodities dip

The concerns of a global slowdown after the downgrade of the sovereign US rating, from AAA to AA+ with a negative outlook, notwithstanding, the Reserve Bank of India (RBI) may continue its hawkish stance, unless global commodity and crude oil prices soften enough to impact domestic inflation, economists and analysts said. According to economists, stubbornly high inflation would continue to shape the central bank's monetary policy stance and any change in the stance would only happen if inflation changes its trajectory. “Inflation is still the key macro-economic challenge. We expect a rate rise in September, as inflation is close to 10 per cent and companies clearly have some pricing power. Global softening has still not shown up in Indian exports. Automobile export growth in July, for example, was still a very buoyant 33 per cent,” said Sajjid Chinoy, economist, J P Morgan. The market would closely watch inflation data for July, which would be released next week, to get an indication of the inflation trajectory. “We would like to wait for the inflation data for the month of July, since it would reflect the trajectory, especially the data on manufactured items,” said A Prasanna, economist, ICICI Securities Primary Dealership. Wholesale price index-based inflation stood at 9.44 per cent in June, up from 9.06 per cent in May, despite RBI raising policy rates 11 times in the last 16 months. Once revised, these figures could well be above 10 per cent. RBI, which had scaled up its March-end inflation projection to seven per cent during the first quarterly review of the monetary policy, said inflation would moderate later this year. “A change in stance would be motivated by signs of a sustainable downturn in inflation,” RBI had said. Any movement in global commodity prices, together with how developed economies respond to it, would be crucial for India. 

BS

M’lore: All Banks’ Christian Employees Assn Revels Decennial Year, Aims High

Mangalore : It all started with a small movement in the year 1998, against the decision of the Reserve Bank of India asking the Bank employees to work on Easter Sunday on account of Annual Closing of Bank Accounts. Immediately, Machcha Millar, founder, chairman and general secretary of All Banks’ Christian Employees Association (ABCEA), along with several like- minded friends working in banks in the City came together and started a signature campaign to protest against the directives issued by the RBI to the Public Sector Banks and Co-operative Banks in the State of Karnataka. The Christian Bank employees gave support for the cause in large numbers and as the first step of protest, they started sending telegrams to the RBI against the directive and finally the RBI was forced to concede and modify its directive. This made Millar and team to think that they should be ever ready and stay united by forming an Association to fight against such issues in future. So in the year 2001, they organized a Millennium Meet to seriously discuss about this matter. All the Bank employees extended support for forming an association. Finally, on August 22, 2001, the All Bank’s Christian Employees Association was formed. In the year 2004, the protest against the removal of Good Friday as a public Holiday by the Govt of Karnataka prevailed and they succeeded in retaining the holiday after a great fight, with good support from the media. Ronald Colaco and Philomena Peris also extended their support from Bangalore. Also, during that time there was severe criticism from the public that Bank employees were well placed in society and drawing a good salary; that they were comfortable with their Bank job and least bothered about helping Society, which had given them a lot. This also prompted them to form this Association and they thought they could tell the public that even in the midst of hectic work, they could find time to help the poor and the needy. They took this as a challenge and today are proud to say that by coming together they have done something to Society, if not everything. The activities conducted during the past 9 years and in the Decennial Year show their determination and commitment to help the weaker sections of society and to pay back to Society and make this World a better place to live in, for the less fortunate. The Association was formed with an intention to unite all Christian Bank Employees, working in Public/Private sector and cooperative Banks under one banner and with a sincere effort to serve the community and society at large through various community service activities and welfare measures.

http://www.daijiworld.com/news/news_disp.asp?n_id=111580 

RBI panel for easing up forex transactions by individuals

Seeks to streamline existing FEMA instructions, procedures

Mumbai:  Resident individuals may get to transfer money to London with the same ease as transferring money to Patna, and they could include non-resident close relatives as joint holders in their resident bank accounts, as per the suggestions of an RBI committee. The report of the RBI's ‘Committee to review the facilities for individuals under the Foreign Exchange Management Act, 1999' has pushed for hassle-free current account foreign exchange transactions by resident individuals. The report seeks to rationalise and streamline existing FEMA instructions and procedures with the twin objectives of being in harmony with the existing capital account convertibility and the move toward fuller capital account convertibility.  Resident individuals should be able to undertake any current account transaction up to $0.2 million a financial year on the basis of a simple application form without banks insisting on any documentary evidence or a chartered accountant's certificate, the committee said.

Gift

Since a resident individual can remit up to $0.2 million a financial year under the liberalised remittance scheme, there is every reason to permit residents to gift or bear the medical expenses of NRIs/PIOs (Persons of Indian Origin) in rupees freely in India without the fear of having contravened FEMA, the committee said. According to the committee, general permission may be made available to resident individuals to gift shares/securities/convertible debentures to their NRI/PIO close relative. The gift is however, subject to the NRI/PIO donee being ‘eligible to hold such a security and the value of the security to be transferred by the donor together with any security transferred to any person residing outside India as gift in the calendar year does not exceed $0.2 million.

Joint accounts, loans

Resident individuals could be permitted to include non-resident close relative(s) as a joint-holder(s) in their resident bank accounts. The opening of joint Foreign Currency Non-Resident/Non-Resident External account with a resident could be permitted. Further,  FCNR(B) accounts may be permitted to be opened in any freely convertible currency.  At present, the FCNR(B) scheme is available in only six currencies — the US dollar, pound, euro, Canadian dollar, Australian dollar and Japanese yen. Banks may sanction rupee loans in India or foreign currency loan outside India to either the accountholder or third-party to the extent of the balance in the NRE/FCNR(B) account subject to margin requirements. Sale proceeds of FDI investments could be permitted to be credited to NRE/FCNR accounts. Resident individuals may be granted general permission to lend in rupees to their close relative for any personal purpose or business activities other than agricultural/ plantation activities or real-estate or re-lending business. They may be also be granted general permission to repay loans taken from banks in rupees in India by their close relatives.

Acquiring shares

The committee has recommended that general permission could be granted to resident individuals to acquire ‘qualification shares' of an overseas company for holding the post of a director without the existing limitations. Currently, FEMA prohibits a resident from remitting more than $20,000 per annum for acquiring qualification shares for holding the post of a director in companies abroad.

HBL

Maharashtra urges RBI to end govt guarantees for loans

The Maharashtra government on Wednesday requested the Reserve Bank of India (RBI) to do away with the practice of state government guarantees sought by banks and the National Bank for Agriculture and Rural Development (Nabard) for loans extended to private entities, including cooperatives. At a meeting of bankers’ committee chaired by RBI Governor D Subbarao, the government said it was time the bankers stopped the practice of treating taxpayers’ money with the government fungible with the deposits money with the banks under the garb of prudential norms circulated by RBI. A state government official, who attended the meeting, said it was brought to the RBI governor’s notice that the Maharashtra State Cooperative Bank and 10 district central cooperative banks were yet to receive licences. Subbarao heard their request, but did not give any comment, he added. The licences are required as per the Rakesh Mohan Committee’s recommendations before March 2012. “Most of these banks have negative net worth or capital to risk (weighted) assets (CRAR) ratio much less than four per cent. Some of these banks are also under the directions from RBI under section 35(A) of the Banking Regulation Act. It seems unlikely that the state cooperative and district central cooperative banks will be able to satisfy the conditions for securing the licence before March 31, 2012. The state government, therefore, requested RBI to reconsider the time limit prescribed for obtaining the licence by these banks so that the flow of agricultural credit is not hampered in those areas where these banks operate,” the official told Business Standard on the condition of anonymity. The official further said, “The judiciary has objected to such a treatment to be given to the taxpayers’ money by way of giving guarantees to the loans extended by banks to the private entities, including cooperatives. Such guarantees are being asked for the amount given as loan by Nabard for rescheduling crop loans after natural calamities and these guarantees are also asked for loans extended by Nabard to cooperative sugar mills and spinning mills.” “However, the basic premise of asking such guarantee has been questioned by the courts and, therefore, the courts have opined that the amount as a default against loan which has been guaranteed by the government should be first recovered by selling of the assets of the borrower who was defaulted before the banks approach the government to meet its obligations against the guarantee,” he added. The official said the state government insisted that the let the cooperative banks take their commercial decisions without clutches in the form of government guarantee.

BS

Your Bank Experience may Soon Get Better

RBI panel moots changes. Here’s how you can tackle issues till they are in place

Customer service at banks in India has come a long way since the days when accountholders had to spend a large part of the day for routine banking transactions like cash withdrawal. In yet another step towards making banking more customerfriendly, the Reserve Bank of India had last year constituted a committee to study customer service in banks and suggest ways to improve it. The committee submitted its report last week, detailing the issues faced by customers and the possible remedial measures for such grievances.  It may take a while for these suggestions to be implemented, but you can bank on the current redressal system to make yourself heard. Here’s a look at some of the issues concerning depositors and borrowers as highlighted by the committee, and the course of action you can adopt to tackle them in the existing framework.

ACCOUNTS AND DEPOSITS - MINIMUM BALANCE REQUIREMENTS: Many customers fail to maintain the minimum balance stipulated by banks and realise this only after banks debit charges from their accounts for breaching the limit. The RBI committee has recommended that banks alert customers through SMS, email or letter immediately when the account balance falls below the required minimum also inform them about the applicable penal charges for not adhering to the requirement. As of now, you need to monitor your balance constantly to avoid such charges. “As per the BCSBI (Banking Codes and Standards Board of India) code, banks are obligated to mention the penalty chargeable in case of non-maintenance of minimum balance in their schedule of fees and charges,” says VN Kulkarni, chief counsellor with the Bank of India-backed Abhay Credit Counselling Centre.

RENEWING TERM DEPOSITS: The report advises banks to not automatically renew maturing deposits without notifying the depositors. “Such notices should be sent to customers preferably in the electronic form to enable them to decide the renewal term. Further, the banks should not auto-renew the deposit accounts without the customer's consent in writing,” notes the report. “This rule is already in force, but some banks do not follow it,” says Madan Mohan, chief counsellor, Disha Financial Counselling, an ICICI Bank-supported credit counselling centre. “We intimate customers – at least those who have provided their cell numbers – about a week before the FD’s maturity,” says R K Bansal, executive director, IDBI Bank. Auto-renewal may also happen if you have given your consent while starting the FD. Therefore, make sure you choose carefully the option on the FD application form.

LOAN DISBURSAL: The RBI report states that banks should inform borrowers upfront about the time schedule for disposal of loan applications. Also, banks should take responsibility for not disposing of the application within the time limit. A personal or unsecured loan can take anywhere between 1 and 5days to be approved. In the case of a housing loan, the processing of application can take 10 to 20 days because of the sheer size of the amount. Any delay in the disbursal of loans can have other implications. Typically, an individual borrows due to an urgent liquidity need, which is mostly met by unsecured loans. If the individual is borrowing to buy a house, he/she has to stick to the payment schedule. Otherwise the builder slaps a penalty, which can go up to 21%.

LOAN STATEMENTS: The RBI panel suggests banks issue loan statements to borrowers periodically. These statements should include details of loan disbursed, demands and repayments effected along with the interest and details of charges. “In such long-tenure loans, which span over 120 to 180 months, a borrower often tends to overlook if any cheque has been delayed or bounced for some reason,” Harsh Roongta, chief executive officer, Apnapaisa.com, says. “Then a bank/HFC slaps some penalty. If the borrower does not pay these additional charges, the bank/HFC terms him/her a defaulter even if the principal and the interest component of the loan has been paid regularly.” A statement would help a borrower keep track of such slippage.

LOAN CLOSURE: Another crucial recommendation made in the report is on title deeds, which have to be returned to customers within 15 days after a home loan has been closed. In case of delay or loss of documents, the boards of banks should put in place a suitable compensatory policy to compensate the customer, the report states. “It’s a time-consuming exercise to arrange for the duplicate title of deeds,” says Roongta. The report also says banks should go easy on prepayment penalties for customers who switch to lenders offering lower interest rates.

CREDIT INFORMATION REPORTS : Such reports have been a bone of contention between borrowers and banks. While banks point to their right to report information on defaults to the credit information companies (like CIBIL, Equifax and Experian), borrowers often complain that the information does not reflect the correct picture. The report suggests that in case of any adverse remark in credit report, the bank should inform the borrower for clarification so that errors, if any, can be corrected. It also recommends distinguishing between the various types of settlements. “The report seeks to differentiate between waivers granted to defaulters under a compromise settlement, where a part of the outstanding amount is written off and minor write-offs where, say, only the penal charges are waived off,” says Madan Mohan. At present, the only redressal channel for an aggrieved borrower is informing the credit information company, which can raise the issue with the lender concerned and rectify the error, if the latter admits to it.

RELATIONSHIP MANAGEMENT: Wealth management services offered by banks have been in news in the recent past due to the malpractices of some wealth managers. The RBI panel’s report has recommended that banks follow the “four-eyes” principle, which allows customers to look beyond their dedicated relationship manager. “We have implemented a matrixed engagement grid that provides customers with back up staff contacts - that of service managers and line managers of the main relationship manager,” said HSBC in an official statement.

ET