Sunday, August 14, 2011

'Current inflation an amalgam of both supply constraints, demand pressures'

ALLAHABAD: Prolonged high inflation even if originating from supply side would give rise to increased inflation expectations and cause general prices to rise, said Deepak Mohanty executive director Reserve Bank of India (RBI). He was delivering a lecture on Inflation Dynamics in India organised by School of Management Studies (SMS), Motilal Nehru National Institute of Technology (MNNIT) here on Saturday. An eminent economist Mohanty said that poorly anchored inflation expectations make long-term financial planning more complex with potential adverse effects on investment and growth. The recent surge in inflation has become more generalised. Food inflation, prone to supply shocks, is also assuming a structural character given the change in the dietary habits and high demand, in absence of adequate supply response. Sharp increase in non-food manufactured product inflation suggests that producers are able to pass on the cost increases, given higher demand? He explained while replying to the queries raised by students of MBA and other streams. While the persistence in non-food manufactured products inflation is high, the persistence of food inflation has increased making the overall inflation rate sticky. The current inflation process, therefore, is an amalgam of both supply constraints and demand pressures. Laying stress over the containment of upward trajectory of inflation, he said that since high inflation is the most regressive form of taxation, particularly on the poor, it is, therefore, important to contain inflation and keep inflation expectations anchored so that consumers do not mark up their long-run inflation expectations by reacting to a short period of higher-than-expected inflation. On the issue of supply chain management in India, he said that there is an urgent need to address the issue of structural supply constraints, particularly in agriculture, so that these do not become binding constraints in the long-run hampering the task of inflation management. Director of the Institute, Prof P Chakrabarti presided over the session, while HOD, SMS, Prof Geetika welcomed the guests and Prof Peeyush Ranjan Agrawal, Head HSS summed up the session. The lecture was attended by Faculty of MNNIT and Allahabad University and students of MBA and B Tech programmes.

TOI

Tulu on currency notes?

Regarding Tulu's inclusion the 8th schedule of the Constitution, Karnataka Chief Minister D V Sadananda Gowda. said that RBI has created an obstacle to the process. There are 35 languages in the waiting list and as the RBI cannot print in Tulu on currency notes, the process has suffered a setback. Discussions on this issue are going on with union home minister Chidambaram and a request has been made to use Kannada script for Tulu on currency notes.

http://www.daijiworld.com/news/news_disp.asp?n_id=111978

Don't blame the RBI for economic ills

.......The RBI's inflation forecast for March 2011 was grossly underestimated, given the prevailing inflationary pressure in the system. But the central bank cannot be solely blamed for misreading inflation and giving preference to growth over inflation as its policy decisions have been based on a set of largely unreliable/provisional data. ..........

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Upgrading workforce skills key to high growth: Gokarn

The Reserve Bank of India on Friday said that “inflation versus growth” is not a debate as long-term high growth is directly co-related with low inflation. “When it comes to choosing between short term trade-off between inflation and growth, and long-term growth prospects, it is important to control the risk of spiralling inflation,” Subir Gokarn, Deputy Governor, RBI said in Delhi today at a conference organised by the Confederation of Indian Industry (CII). “It is the mandate of the RBI to take steps to control inflation,” he said. The government can only facilitate the process to help it (inflation) come down by taking some supply side measures. Gokarn said that the failure of the growth strategy lay in the inability to transition the workforce from low productivity areas to high productivity areas. “If we can’t achieve this transition, then labour force is dependent on a shrinking source of income in the economy,” he said. The major hurdles to this transition lay in infrastructure, skill development and the non-existence of a security net for labour.

RBI: Inflation likely to moderate later this year

Inflation is likely to moderate towards the later part of the year on the back of possible softening of global prices and tight monetary action, the Reserve Bank of India said on Saturday. At the same time, the central bank emphasised on the urgent need to address supply side bottlenecks which could hamper inflation management over the long run. “While inflation is expected to moderate towards the later part of the year reflecting monetary tightening and likely softening of global commodity prices, fiscal policy needs to be supportive in containing aggregate demand,” Deepak Mohanty, Executive Director of RBI said on Saturday in a speech delivered at the Motilal Nehru National Institute of Technology, Allahabad. He said that RBI expects global commodity prices will peak in 2011 which will provide some relief to domestic inflation scenario. “In addition, there is an urgent need to address the issue of structural supply constraints, particularly in agriculture, so that these do not become binding constraints in the long-run hampering the task of inflation management,” he said. While RBI’s medium term objective is to bring down inflation at 3 per cent, monetary policy aims to contain perceptions of inflation in the range of 4 – 4.5 per cent with a particular focus on non-food manufacturing or core inflation. “Going forward, both global and domestic factors will shape the inflation outlook. With increasing global integration, global commodity prices are having an increasingly significant influence on domestic prices,” he said. The central bank has raised the key policy rate by 11 times in the last 16 months to tackle inflation which has stayed stubbornly high for more than a year now. In July RBI revised March end inflation projection at 7 per cent from 6 per cent projected in April. According to RBI the current level of inflation is an amalgam of both supply constraints and demand pressures. “High inflation is the most regressive form of taxation, particularly on the poor. It is, therefore, important to contain inflation and keep inflation expectations anchored so that consumers do not mark up their long-run inflation expectations,” RBI said.

RBI promises to carry on inflation fight

Dr.K.C.Chakraborty, Deputy Governor, RBI with Axis Bank MD Shikha Sharma in Calcutta on Saturday

Baruipur, Aug. 13: The priority of the Reserve Bank of India (RBI) is to control inflation for which it might raise interest rates further. “You cannot have low interest rates and low inflation at the same time. The focus of the RBI now is to contain inflation and in the process interest rates have to be regulated,” said K.C. Chakrabarty, deputy governor of RBI, said on the sidelines of the launch of ABHA, a financial inclusion programme of Axis Bank in association with microfinance institution Bandhan. According to Chakrabarty, the RBI is looking to bring down inflation to 6-7 per cent in the short term and to 3-4 per cent for the long term. In June, the wholesale price index stood at 9.44 per cent. “Rather than worrying about interest rates we should focus on bringing down costs of goods and services. That will help to curb inflation,” Chakrabarty added. Meanwhile, Chakrabarty stressed the importance of making more people credit worthy as part of the financial inclusion programme. “The objective of the RBI is to make people credit worthy. Alliances like this (ABHA) is a positive step towards that direction.” “Banks have vested interest in these sort of projects. It is in their interest to make people credit worthy as well because it fits in the long-term business strategy of the banks as their credit offtake increases,” Chakrabarty said. ABHA or the Axis Bank Bandhan Holistic Assistance, will have a Rs 100-crore corpus. While Axis Bank Foundation, the CSR arm of the bank, will provide Rs 75 core, Bandhan will contribute the rest. As a pilot initiative, 500 low-income families are being targeted. Gradually, 50,000 families from the two districts of Murshidabad and South-24 Parganas will be covered under the initiative. “We (Axis bank) shall contribute 1 per cent of our total profits as part of our CSR initiative to the Axis Foundation. The focus is on creation of sustainable livelihood,” said Shikha Sharma, managing director and CEO of Axis bank.

The Telegraph

Dollar loans are risky, Chakrabarty tells corporates

Kolkata : The RBI Deputy Governor, Dr K.C. Chakrabarty, has discouraged Indian corporates from raising dollar-denominated borrowings due to associated risks. He also expressed concern over the volatility of rupee against the dollar. “In any efficient market, the currency you borrow does not change your cost of funds. However, in some currencies, if the cost is lower the risk will be more,” Dr Chakrabarty said addressing newspersons on the sidelines of the launch of a financial inclusion programme called ‘Axis Bank Bandhan Holistic Assistance' here on Saturday. The successive rise in domestic interest rates and the consistent appreciation of rupee against dollar in the recent past seem to be encouraging companies to opt for raising dollar-denominated funds. “We do not encourage dollar borrowings as cheaper loans only attract higher risks. If the risk manifests then you [the companies] are out of business,” he pointed out. To a query on the movement of rupee against the dollar, he said the RBI was more concerned about the volatility in the currency. “If you consider only the economic factors then ideally rupee should depreciate. However, it is determined by several other factors such as the demand-supply situation,” he added. To tame inflation, the central bank has hiked interest rates 11 times since March 2010. Though he admitted that high interest regime might impact the investment climate, Dr Chakrabarty said it was difficult to keep interest rates low in a high inflation regime. It was, therefore, the RBI's prerogative to keep the inflation rate low. On the deregulation of interest rates on savings bank deposits, he said: “If all other interest rates are deregulated then that on SB accounts should also be done. However, when and how it is done is something which needs to be seen.”

HBL

Savings rates should be market-determined: Chakrabarty

Kolkata, Aug 13 : RBI Deputy Governor K C Chakrabarty today said interest rates on saving desposits should be determined by the market. "If all the other rates are deregulated, then why savings rates should not be deregulated? The only question is when and how," Chakrabarty told reporters on the sidelines of an event near here. When it was pointed out that there was a difference of opinion among banks on deregulation of savings rates, he said that a decision would be taken on the basis of a consensus by all stakeholders. Indian Banks'' Association (IBA), a group of public and private sector lender, had recently written to the RBI and expressed the view of lenders against freeing up of saving bank interest rate, which is pegged at 4 per cent. The apex bank had already circulated a discussion paper on deregulation of savings rates. Asked about whether the RBI was worried over the possible appreciation of the rupee vis-a-vis the dollar in view of the downgrading of the sovereign rating of the US, he merely said, variation of the domestic currency would have to be uniform and without much volatility. "When the rupee depreciates, the exporters are benefitted," he said. RBI does not discriminate between exports and imports, he said. He said that the high interest rate regime prevailing now was because of high inflation in the economy.

MSN News

Remittances by Ramdev under ED scanner

NEW DELHI: The stage is being set for action against yoga guru Baba Ramdev, with a multi-agency probe revealing that companies owned by his trusts have clandestinely sent large amounts of money abroad, official sources said. RBI has been asked to look into the case and verify if an approval was sought before these fund transfers were made, sources claimed.

TOI

RBI positive to allow INR 500 and INR 1,000 under the governments’ pact

KATHMANDU - Visiting Governor of Reserve Bank of India (RBI) D. Subbarao said on Friday that the RBI could permit operation of Indian currency denominated INR 500 and INR 1,000 in Nepal if the governments of two countries decide to this regard. Amid concerns involving the use of the fake and counterfeit note of IC denominated in bigger amount, India has been prohibiting their use outside its territory. IC notes are used in Nepal and Bhutan but upto denomination of INR100. “We are concerned on the growing usages of fake and counterfeit IC notes and also about money laundering,” said Subbarao at an interaction at Nepal Rastra Bank. “The RBI is ready to change the existing policy if the governments of two countries decide to change it.” Subbarao, whose term as RBI governor extended this week for 2013, arrived here at the invitation of the NRB governor Yubaraj Khatiwada. At the interaction organised by Nepal’s central bank at its office premises, Subbarao also showed similar concern regarding allowing Nepali money transfer agency to work in India to cash in on the possibility of bringing remittance from millions of Nepalese working there. “Looking at the possibility of transfer of the fake and counterfeit currency, we have put some restriction on money transfer from such agencies,” said the RBI governor. He was not supportive to the idea of permitting Nepali money transfer agencies to enter into India for job. During the interaction, NRB governor Yubaraj Khatiwada said that Nepal was always adjusting its policy with that of India symmetrically in order to maintain ongoing peg of Nepali currency with that of India. The RBI Governor arrived for a courtesy visit will return back on Saturday.

http://arthakoarthanews.com/?p=3407

RBI ready to help NRB track unauthorized transfers, investments

KATHMANDU : Top official of India´s central bank -- Reserve Bank of India (RBI) -- said that RBI was ready to track unauthorized flow of money and investments by Nepalis in India, if Nepal Rastra Bank (NRB) formally requested for it. “Controlling movement of illicit money is part of our job. We will extend all possible support to NRB to check the flow of illegal money and trace investments made by Nepalis in India if the two governments entered an understanding or we received formal request from NRB,” said RBI Governor Dr D Subbarao. Such statement from the visiting Indian governor came at a time when NRB has been trying to establish formal ties with the Indian central bank to control capital flight, which grew rampantly in the current political transition. NRB has been trying to tighten knots against capital flight mainly after its research hinted that corrupt politicians and bureaucrats, and private individuals that amassed huge money through illegal means were parking their earning in India. Even as a portion of that money is again channelled to third countries, officials say a substantial chunk of such money has been invested in housing and real estate sectors in India. In this context, Republica had caught up with Dr Subbarao and asked what will be RBI´s response if NRB formally requested for its support to trace and control such investments. “We will extend full cooperation to NRB,” he replied. Dr Subbarao was in Kathmandu for a two-day visit and Republica interviewed him before he left for India on Saturday.

http://www.myrepublica.com/portal/index.php?action=news_details&news_id=34695

Expanding economy can offer investors good opportunities

After increasing interest rates by 3.25 percentage points over 18 months, the most by any central bank, the Reserve Bank of India (RBI) had said it will continue with its tightening cycle to control persistently strong price pressures and markets have been discounting a quarter-point rate rise in September. Policymakers in New Delhi, however, are likely to lobby for a halt to the rate increases in the wake of the gloomy outlook for major economies such as the US and Europe which could further slow down domestic growth.....

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Loose change boon for traders in capital - RBI distributes coins to vendors to meet shortage in Bhubaneswar

Bhubaneswar : Reserve Bank of India (RBI) has started distributing coins to vendors at market places in an attempt to meet a shortage of loose change in the capital. Coins worth Rs 12 lakh were given to businessmen in Unit I market today for the first time this year. For the past several months, there has been a scarcity in coins in the market and this had become a problem for day-to-day business transactions in the city. Traders had been complaining of the lack of coins that had been affecting their business. “Since coins were few and far between, we had to give our customers other items instead of the change. Sometimes we had to get coins from unofficial sources who try to make profits out of this,” said Trilochan Jena, a vendor in Unit I market. He said the coins given by the RBI would help. RBI officials said each individual was provided with coins worth Rs 1,000. “We gave them Rs 500 in denomination of Rs 5, Rs 400 in the denomination of Rs 2 and Rs 100 in Re1 denomination,” said Muralidhar Nayak, Deputy Treasurer, RBI Bhubaneswar, who was in charge of the coin exchange programme. Sources said that 1,200 people were provided with coins today. Nayak said that in the coming days many such drives would be carried out in the city at various market places. “Such a drive will be carried out at Unit IV market tomorrow and at other places such as Damana, Khandagiri, Rasulgarh and so on later,” he said. RBI officials said that the shortage in coins in the city was artificially created. Everyday, coins worth more than Rs 5 lakh are supplied through the RBI counter and 13 currency chests all across the capital. Sources said that all over the state coins worth more than Rs 2 crore are provided to the general public every month through 130 chest offices present across the state. A senior official of the RBI said that there were several reasons for the shortage in coins in the state. Some people stockpile coins at their homes contributing to the artificial shortage. Besides, coins from Orissa are transported to other states where RBI counters and chest offices are fewer in number. The other reason was illegal racketeering of these coins to outside the state as well as to neighbouring Bangladesh. Sources said that five years ago, it came to the knowledge of the authorities of RBI Bhubaneswar during periodic meetings that coins of Rs 2 were being smuggled to Bangladesh and being converted into eight or 10 blades of high quality. So, from a Rs 2 coin, the racket was making a profit of more than Rs 10.

The Telegraph

Bhandari bank depositors rush to withdraw cash

MUMBAI: Depositors have been making a beeline to the Bhayander (east) branch of the Bhandari Cooperative Bank Limited to withdraw cash ever since the bank chairman and directors were arrested by the Anti Corruption Bureau for misappropriation of funds to the tune of Rs 35 crores. The bank having six branches across Mumbai and Thane is headquartered in Dadar. The bank has over 32,000 customers. As news of the bank turning bankrupt spread, depositors have been queuing up at the bank since morning to withdraw cash. Depositors are allowed to withdraw only Rs 1,000 per day and customers have been returning to the bank every day to withdraw the amount. Tight police security has been put in place at the Bhayander branch fearing a clash by depositors'. Policemen have been deployed both outside and on the bank counters. The frauds were committed between 2005 to 2009. The ACB received a complaint regarding the fraud in 2011. The Reserve Bank of India (RBI) had warned the bank over its irregularities and a monetary penalty of Rs five lakhs was imposed on the bank.

TOI

Microfinance bill: Shouldn't MFIs come under state law

Microfinance practitioners insist their embattled industry should not be regulated by state governments. State governments, they say, do not know how to regulate financial organisations. Keeping microfinance institutions (MFI) under the purview of the state government, they add, will leave microlenders vulnerable to political pressures. It is a set of arguments that has been accepted by an expert committee that wrote the draft microfinance Bill. The draft Bill, put up by the finance ministry, promises to override state laws. It also proposes that state advisory councils be set up to, among other things, monitor MFIs' field-level conduct and give a feedback to the central government. Further, it says that if the RBI feels an MFI's actions are hurting clients, it can issue orders to stop the functioning of the organisation. It is not clear, however, if these measures can protect the MFIs' poor and vulnerable borrowers. For instance, while the draft Bill gives sweeping powers to the RBI, it is far from clear if the apex bank has the capacity to supervise and monitor MFIs. Says microfinance expert Ramesh Arunachalam, "During 2008-10, the five largest MFIs - SKS, Spandana, Share, Basix and Asmitha - added a gross loan portfolio of 78.55 crore per month." The department of non-bank supervision, he says, should supervise every NBFC that has a loan portfolio of over 100 crore. However, despite each of these five MFIs adding almost 78% of that threshold value every month, their growth went unscrutinised, resulting in the collective default Andhra Pradesh saw last year. Similarly, while the draft Bill empowers the RBI to derecognise an MFI that violates borrower rights, this provision of punitive action was available to the RBI even as a regulator of NBFCs. But it was never used even when the reports of suicides among MFI borrowers and corporate misgovernance began trickling in. One reason for this relative inaction is that microfinance is still a small piece of the country's financial system. Last year, just before the Andhra Pradesh Ordinance was promulgated, the industry stood at just 27,000 crore. Today, it stands at about 15,000 crore - a minuscule portfolio when compared to the banks. And the RBI seems to be allotting proportionately limited mindspace to the industry. Further, the work of microlending and collecting is done - in multiple, small transactions - in bastis and villages. These are not transactions the RBI is geared to track. What about the state advisory councils that the Bill proposes? Can they safeguard the interests of the borrowers? No. These are problematic as well. Take their composition: two nominees from the state(s) covered by the council, one nominee from the convener bank of the state-level bankers' committee, one representative of the MFIs operating in the state(s) and one member nominated by the RBI. Who is speaking on behalf of the borrowers? Further, it is not clear how these councils will track events in the field. The borrowers are poor. Some of them will live in isolated hamlets. It is unfair to expect them to travel to the state capital (or the adjoining state's capital) for registering their grievances. This is also an architecture that fails to spell out how investigations will be carried out, nor is it clear how swiftly corrective steps can be taken under this structure. The Bill also says that the "Reserve Bank may, with the previous approval of the central government delegate, any of its powers conferred under this Act to the National Bank in respect of any microfinance institution or a class of microfinance institutions". This might be Nabard. Which is another problematic suggestion. Its self-help group programme competes with MFIs. According to IIM professor M S Sriram, "The current problems of MFIs have not occurred on account of their registration, capital structure or governance structure. They are on account of practices at the client end." The state government is the only institution with both the investigative and grievance-redressal mechanisms in place at the local level. Yet, it has no role. Remember, even the state advisory councils relay their comments to the Centre, not the state government. What is needed is a system where the RBI lays down prudential norms for the sector. But the state governments should have a role in monitoring the industry's conduct with its borrowers.

ET

Should MFIs be allowed to fail?

....To create sustainable changes we need something more fundamental than financial inclusion. We need ways to enhance human capability and the creation of value and then let the funds follow, not lead.....

Who should regulate the microfinance sector?

There are far too many serious issues that require attention so that they are not repeated again and the Reserve Bank of India or some central institutions cannot undertake this task as they do not have the resources or the local presence...........