RBI Governor D Subbarao has earned more critics than admirers for his bold decisions

MUMBAI: When career bureaucrat Duvvuri Subbarao took the wheel at Mint Street in September 2008 at a time the financial world was crumbling, the popular belief was New Delhi would get a firm handle on monetary policy. The Lehman Brothers collapse and the 'synchronised' handling of the crisis between the government and central bank strengthened the belief. Three years later and the next crisis possibly round the corner, the story is different. Subbarao has earned more critics in recent months for supposedly killing growth, but a few admirers too for his conviction. Events are unfolding to create a landscape similar to the one that confronted his predecessor Yaga Venugopal Reddy - heaps of criticism for supposedly stifling growth and innovation. "It was unnecessary given the sharp deterioration in the global environment and a significant slowdown in domestic activity," said Tushar Poddar of Goldman Sachs after the governor raised policy rates 25 basis points last Friday amid slowing economic growth. A basis point is 0.01 percentage point.

INDUSTRY WAS NOT FAR BEHIND

"At a time economic policy should focus on the creation of jobs, it is unfortunate that the economy is being forced into a sluggish growth phase," said B Muthuraman, president, Confederation of Indian Industry.  Subbarao, who parroted the policy stance of global central bankers during much of his first term, is deviating significantly. Policymakers in developed nations are keeping rates near zero and Federal Reserve Chairman Ben Bernanke has promised to keep it low till the middle of 2013. Most Asian central bankers have left rates untouched this month and Turkey and Brazil have cut interest rates. Subbarao is the odd man out by promising to keep raising rates till prices cool.

MANY ADMIRE HIS INDEPENDENCE

"Subbarao is a pragmatic and astute central banker who has taken independent decisions based on his well-researched conviction," says Madan Sabnavis, chief economist at rating company Care.  "He has recognised inflation as being the single most important malaise afflicting the economy and pursued the goal of increasing rates, notwithstanding the pressures being exercised from different quarters, displaying a lot of character."  Industry has been seeking a halt to raising interest rates, which started with 'baby steps' in 2010 with the governor's public admission of confusion with reference to his position being similar to a warrior caught in 'padmavyuha', a battle formation that is easier to get in, but difficult to get out.  

ET

Time constraint.........

Sincerely regret that due to time constraint, very few posts could be included in today's VITALINFO.  Please bear with......

Inflation effect: Equal number of Rs 1000 and Rs 500 currency notes to be printed for the first time

NEW DELHI: Rising prices are eating away the value of money, literally. The government is phasing out or printing fewer low-denomination currency notes, and printing more notes of higher denomination such as the 1,000 note. For the first time, India will print as many new Rs 1,000 denominated notes as Rs 500 ones in 2011-12. In value terms, this will be the first time Rs 1,000 notes will account for more money printed than Rs 500 notes, which were the mainstay of high-value cash transactions for some time. Thanks to inflation, the Rs 500 note is losing its position of pre-eminence among the currency notes printed by the Reserve Bank of India. Eleven years after the Rs 1,000 note was introduced in October 2000, the RBI has ordered 2,000 million new amber-red Rs 1,000 notes. This is double the number ordered last year. The order for olive-and-yellow Rs 500 notes, which came into circulation in 1987, has been halved to Rs 2,000 million from last year. In value terms, the new Rs 1,000 notes will add up to Rs 2 lakh crore, and Rs 1 lakh crore of Rs 500 notes. "ATMs can now dispense up to Rs 40,000 in one go. The Rs 1,000 notes are more convenient to dispense, fueling greater demand," said a finance ministry official. Even banks want more Rs 1,000 notes to stock their ATMs, cutting down on the number of trunks full of cash they need to move between banks and cash dispensers. The Rs 100 note is still the most-printed one, its print order growing from 4,300 million to 6,100 million this year. But most banks have minimised the volume of Rs 100 notes at automatic cash-dispensing machines. Printing of the Rs 50 note has been slashed to 1,200 million from 2,000 million last year. "Lower denomination banknotes run out sooner and increase both capital cost and operating costs (of ATMs)," the RBI said in its annual report for 2004-05, commenting on the rise in demand for Rs 500 notes. The Rs 1,000 currency note is the biggest one printed in India, measuring 17.7 cm by 7.3 cm, a good 1 cm longer than the Rs 500 note. The RBI did not respond to queries by ET. Banknotes worth Rs 1,000 and Rs 10,000 each were in circulation before Independence, but were demonetised in January 1946 to curb unaccounted money. The Rs 1,000, Rs 5,000 and Rs 10,000 face-value notes were reintroduced in 1954, but were demonetised again in January 1978. The RBI is authorised to issue notes with a face value of up to Rs 10,000, and coins that are each worth Rs 1,000. 

ET

Hic, hic hurray

RBI Governor D. Subbarao is an artful speaker who always spices up his high-finance speeches with real-life anecdotes from the wide and varied positions he has held. He recently told his audience, which consisted mainly of students of the International Institute of Foreign Trade, who were just about born when India liberalised its economy in 1991, how before 1991 PSUs would be used to solve every problem. He was in the government when N.T. Rama Rao was the chief minister in Andhra Pradesh. Rama Rao was concerned about growing alcoholism among the poor and discussed with Mr Subbarao.  Mr Subbarao decided that banning liquor would not help and finally said that if they had to drink, the government could at least see that they get good bottled liquor. And that’s how Mr Subbarao had to set up the Andhra Pradesh Breweries Corporation. It’s a pity that the RBI did not put his brilliant speech on its website. Perhaps it is not too late!

Deccan Chronicle

Rangarajan pegs FY12 growth at 8%



PMEAC chairman says rate increase by RBI may have some impact on economic growth



After the Reserve Bank of India (RBI) effected another round of increase in key interest rates, the Prime Minister’s Economic Advisory Council (PMEAC) Chairman C Rangarajan, has projected the economic growth in this financial year to slow to about eight per cent from 8.6 per cent a year ago. PMEAC had earlier projected the economic growth for this financial year at 8.2 per cent. Rangarajan, clarified he did not mean that the economy would definitely not grow by 8.2 per cent. “GDP growth at around eight per cent means in the region of eight per cent, which might even be 8.2 per cent,” he explained. He said the rate increase by RBI might have some impact on economic growth. However, Rangarajan called further monetary tightening by the central bank as the ‘correct’. “With inflation at over nine per cent, the central bank had no other alternative.” On Friday, RBI raised policy rates by 25 basis points in its mid-quarter monetary review, its 12th such increase since March 2010. As a result, the repo (short-term lending) rate stands at 8.25 per cent and the reverse repo (short-term borrowing) rate at 7.25 per cent, which means real policy rates are still negative if the wholesale price index-based inflation is taken into account. Inflation has been over nine per cent for the ninth month in a row in August, when it stood at 9.78 per cent. The successive increase in rates by RBI has decelerated economic growth for the second quarter in a row when it stood at 7.7 per cent during April-June, against 8.8 per cent growth in the corresponding period last financial year. Industrial growth also plunged to a 21-month low of 3.3 per cent in July against 9.9 per cent in the same month a year ago. Earlier, Rangarajan had said the economy would grow by 7.9 per cent in the second quarter and 8.3-8.4 per cent in the third and fourth quarters of this financial year. These estimates are seen as very optimistic, as most economists have revised their projections for India’s economic growth to below eight per cent for 2011-12.

BS 

FUNDING ECONOMIC SOVEREIGNTY

After having tried unsuccessfully for many years to get the Union ministry of finance and the Reserve Bank of India (RBI) to agree on using a part of foreign exchange reserves to finance infrastructure, the Planning Commission has now mooted the idea of a sovereign wealth fund (SWF).

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Discard old prescription

This refers to the news report, “Aam admi done in again as RBI tweaks repo rate further” (September 17). The Reserve Bank of India has once again used an old prescription to contain inflation, and increased the interest rates for the twelfth time. Practically speaking, the RBI’s monetary mechanism has fallen flat in containing, let alone curbing, inflation. The lack of a co-relation between the two is puzzling economic pundits as well. In the process, industrial activity has come down because the RBI mops up liquidity from the market in an attempt to bring down inflation.  Investment is being diverted from productive sectors into bullion. A jittery world economy is unable to discipline commodity pricing and crude oil prices no more correlate with demand. The latest tightening of rates by RBI can only serve to further disturb market sentiments.  What merits serious concern here that is the distributor/retailer nexus which has been leveraging the overall uncertain mood of the economy with predatory pricing. The latest fuel hike that will justify mark-ups to consumer pricing must be seen through this prism, and accordingly action must be taken by the authorities.

The Pioneer

How to tame hunger

Food inflation in August accelerated to 9.78% year on year, the fastest it has been in 13 months. This is over and above the high inflation of last year. As it has been doing all along, an alarmed RBI has tried yet again to combat this by hiking interest rates by 25 basis points - its 12th hike in the last 18 months. But obviously, this is not going to reduce demand for food nor food inflation.....

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RBI likely to hike key policy rate till Jan 12: Experts

New Delhi: The Reserve Bank of India (RBI) is likely to maintain its hawkish stand and further increase key policy rate up till January 2012, to tame inflationary pressures, say experts. The Reserve Bank on Friday hiked its key rate by 25 basis points, the 12th time since March last year, to tame high inflation overlooking sliding growth. The short-term lending (or repo) rate to banks by RBI stands revised to 8.25 percent, while the borrowing (reverse repo) rate is set at 7.25 percent. Industry experts project the WPI inflation, which rose to 9.78 percent in August-- much higher than the RBI's comfort level of 5-6 percent-- to remain above 9 per cent level until December this year. The next policy review is due on October 25. According to a research report by global banking giant Standard Chartered, "RBI will increase the policy rates by 0.25 percent at the October policy as well. If anything, the tone of the policy statement keeps the door open for further rate hikes after October." "We do not rule out further rate hikes up to January 2012," brokerage firm Angel Broking said in a research note. Rating agency Care expressed similar views. "RBI is likely to continue with its anti-inflationary stance till the year end," it said. Brokerage firm Elara Securities also expects the central bank to further raise policy rates by 25 basis points in the October policy review.  "If the domestic inflation scenario does not worsen and macroeconomic scenario stabilises at current levels, we view rates peaking at 8.5 percent," the report said. More rate hikes by the Central Bank are in store as the RBI in its mid-quarterly review of monetary policy has cautioned that the current level of high inflation makes it imperative to continue with the anti-inflationary stance and tight monetary policy. The future monetary policy stance, it said, would depend on the level of inflation. The RBI has raised rates by a total 350 basis points since March 2010. Despite this, the inflation has stubbornly remained near double digit, while the first quarter GDP slipped to 7.7 per cent from 8.8 percent a year ago. Standard Chartered, however, believes that India is only using one policy lever -- increase in interest rates – to counter inflationary pressures, and there is very little emphasis on other policies. "Fiscal policy remains accommodative and might have contributed substantially to demand-side pressures in the recent past," it said.

Zee News

RBI mid-quarter review: the preoccupation with inflation

...Monetary policy operates with a lag. Hence, a premature withdrawal of monetary tightening will be counter-productive and harden inflation expectations. The mid-quarter policy statement does not give a clue as to when the monetary tightening will begin to be phased out. Evidently the central bank will wait for a reversal in the inflation trajectory. Global developments will, of course, play a part......

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Value of cheque transactions up 11%: RBI

The total value of transactions carried out through cheques across the country in July 2011 amounted to Rs 8.99 lakh crore, which is 11 per cent higher than that in the same month last year. Banks had cleared cheques worth Rs 8.10 lakh crore in July 2010, according to the Reserve Bank of India (RBI) data. The total number of cheques cleared by banks across the country in July this year, was, however, down by 2.17 per cent from the same month last year. A total of 11.61 crore cheques were cleared by banks during the month under review, compared to over 11.87 crore in the corresponding month of 2010. During the April-July period, the total value of the transactions carried out using cheques stood at Rs 33.51 lakh crore, as against Rs 33.27 lakh crore in the first quarter last fiscal, a marginal rise of 0.7 per cent. In addition, a total of 44.03 crore cheques were cleared by banks during the first four months of the current fiscal, a decline of almost 3.8 per cent from 45.77 crore in the April-July period a year-ago. In July, the Mumbai region reported the highest number of cheque clearances as well as the maximum transaction value for any zone. Banks in the Mumbai region cleared a total of 1.99 crore cheques, with a total value of over Rs 1.27 lakh crore. In the Delhi region, banks reported that 1.35 crore cheques with a total value of a little over Rs 1.18 lakh crore were cleared in July.

IE

Global financial crisis II: the challenges for India

“Even as RBI justifies this rate hike to dampen inflationary expectations, it is difficult to fathom that this will be achieved when a cumulative rate hike of 325 basis points since March 2010 could not achieve this objective,”........

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Implications of RBI rate hike in credit policy

This credit policy review was in line with market expectations. The Reserve Bank of India (RBI) has raised the repo rate by 25 bps to 8.25 percent, and the reverse repo rate also by 25 bps to 7.25 percent, to arrest the rising inflation rate. The cash reserve ratio (CRR) was left unchanged at six percent.  The RBI raised the key lending rates for the 12th consecutive time in 18 months to 8.25 percent. According to the RBI, the annual inflation rate surged to 9.78 percent for the month of August - the highest in over a year - driven by rising prices of food and manufactured products. The latest inflation number indicated the need for the continued tightening. Current global and domestic factors led to the continuing anti-inflation stance.  The repo rate is the rate at which banks borrow money from the RBI. When the repo rate increases, borrowing from the RBI becomes more expensive. The RBI raised its repo rate, at which it lends to commercial banks, by 0.25 basis points to 8.25 percent and increased the reverse repo rate, the rate it pays banks for deposits, to 7.25 percent.  This move is different from what other central banks are doing. The European Central Bank, Bank of England, and Swedish Central Bank continued to hold rates steady at reviews last week, amidst easing inflationary pressures in the Euro zone and concerns of weakening growth prospects. Some Asian central banks, including Malaysia's and South Korea's, paused in their fight against inflation, while Brazil recently cut interest rates.  Each successive credit policy review has been tough for the RBI. The unfavourable micro and macroeconomic indicators make the RBI's job unenviable. Considering the present situation , analysts were expecting a rate increase of 25 basis points. It had to take a call on interest rates - whether to raise them further in the face of continuing inflationary pressures or pause temporarily based on the latest disappointing factory output data. The RBI, in its last review meet in July, raised the repo rate by 50 bps to eight percent and the reverse repo rate by 50 bps to seven percent. The apex bank has hiked the key policy rates 11 times since March 2010 to curb inflation, which has been hovering above the nine percent mark since December last year.  There were concerns of growth slipping below the seven percent mark in 2011-12 . There are negative developments such as the sovereign debt crisis in Europe, concerns of a US slowdown, lower-thanexpected July 2011 IIP growth of 3.3 percent as compared to 8.8 percent in June 2011 and 9.9 percent in July 2010. Despite all efforts, inflation has not abated.  Most analysts felt the central bank may tighten the monetary policy further considering the August inflation number , which came stronger than expected. There is significant global turbulence right now. The slowing pace of economic growth and the worsening global economic outlook were major considerations. 

ET