Why deflation is worse than inflation

...To be clear, what the RBI and the Government in India may be hoping for, currently, is disinflation, and not deflation. Confused? Disinflation is a drop in the rate at which prices rise, while deflation is a decline in the prices.....

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May her soul rest in peace

Smt. Leela, wife of late Shri.V.G.Pendharkar passed away on 5th October, 2011 in Pune. She was 92 years old. Some of you must have met her. I conveyed condolences on behalf of RBI  friends to VGP's son Jayant.  

As reported by P.P.Ramachandran (via e-mail)

FSDC to review fall in rupee

The sharp fall in the value of the rupee against the dollar in the last one month has left policymakers worried, even as the Reserve Bank of India (RBI) says the fall in the currency is due to global changes and nothing specific in the country is driving the fall. The issue is likely to come up for discussion at the next meeting of the Financial Stability and Development Council (FSDC) this month. A source in the council confirmed that the sharp fall in the rupee was a concern and would be discussed at the next meeting. In the last two months, the rupee has weakened by 11.52 per cent, while it has lost 7.75 per cent since September, against the dollar. Such a sharp decline in the currency was last seen in August-October 2008, when the world financial markets were facing a crisis. Between August and October 2008, rupee had fallen by 18.02 per cent, while the dollar index had risen by 17.73 per cent. However, this time, while the rupee has lost 11.5 per cent in two months, the dollar index has risen by six per cent. This means that the fall in rupee this time has been much sharper than the rise in dollar index and, hence, is seen as a run on rupee rather than just an impact of the global phenomenon.

RBI has not completely ignored the issue, but a serious response from the central bank has yet to come. RBI Deputy Governor Subir Gokarn last week said: “It is a matter of some concern that we depreciate so much in such a short time.” But he watered down the remark by adding: “But we have to put that into perspective, as this is a global phenomenon. There is nothing specific in the country that is driving this process.” Besides the concern that the fall in rupee has been sharper than the rise in dollar index, a reason for worry has been that the domestic industry has not been able to encash the fall in global prices of commodities, especially crude oil. While in dollar terms the Indian basket of crude oil has fallen 11.18 per cent since August to $101.24, in rupee terms the fall has been only 0.94 per cent to Rs 4,977 a barrel. For steel making raw materials like coking coal and iron ore, the decline in global prices have been three and five per cent, respectively, but their cost of import in India has gone up three-four per cent in the last one month. Exporters in the gems and jewellery sector may be getting better realisations for their produce, but the demand in the markets like the US and Europe has been weak. Sharp fall in rupee is a point of discussion for FSDC as measures to address the issue require the involvement of multiple agencies. RBI is known for its conservative approach in opening up capital account to increase dollar inflow, but liberalising external commercial borrowing norms and portfolio norms need contribution from other regulators too. Some tariff measures may also have to be taken. Economists, however, have been advising caution and saying the issue needs to be deliberated upon objectively. JPMorgan Chase Asia Economist Jahangir Aziz said: “While there are concerns about the depreciation of the rupee, policymakers need to study the factors driving the fall in August and September separately and objectively to avoid any knee-jerk reaction.” Aziz also believes, if global financial conditions stabilise, there is a possibility that the rupee could rebound quickly. HDFC Bank Chief Economist Abheek Barua said: “If rupee continues to fall further, it will be a worry. However, while discussing the issue, FSDC should remember RBI’s independence in responding to exchange rate volatility. It may take more measures but it cannot guide RBI on rate management.”

BS

You can be jailed for default in fund transfer via ECS

Hyderabad : If you pay your loans through the electronic clearing service, you better ensure there is sufficient fund in your account.  Else, you can land up in jail, according to a latest circular from the Reserve Bank of India. Increasingly, people are opting to repay loans or other financial commitments electronically by giving a mandate to banks for monthly deduction from their accounts on a specified date instead of giving post-dated cheques. But many of these commitments are apparently not being honoured as there is no clarity on the punishment. However, in a circular sent to banks a couple of weeks ago, the apex bank communicated that the same set of rules against dishonour of cheques, according to Section 138 of the Negotiable Instruments Act, 1881, would apply for dishonour of electronic fund transfer instruction. “Section 25 of the Payment and Settlement Systems Act, 2007 accords the same rights and remedies to the payee (beneficiary) against the dishonour of electronic funds transfer instruction as are available to the payee under the Negotiable Instruments Act,'' the RBI said. The implications of this circular for individuals and banks are significant.  “This is a welcome clarification as it brings parity between cheque-based payments and electronic fund transfers,'' Mr Nagesh Pydah, Chairman and Managing Director, Oriental Bank of Commence, told Business Line.  According to a senior official of Andhra Bank, many loan repayments through ECS mandate submitted to a bank are regularly dishonoured while maximum care is taken to honour post-dated cheques.  Most of these commitments are not being honoured as there is no clarity on punishments prescribed legally till now while remedies are available for dishonour of cheques.  “As a result, banks are also collecting a few post-dated cheques even for electronic funds transfer commitments,'' said an HDFC Bank functionary.   “The RBI's circular will give banks more teeth to ensure that the repayments through electronic mode would be more regular,'' he added.

HBL

Teaser vs. dual rate loans

...The RBI however, says that all dual rate loans are considered as teaser loans and banks must make the mandated provisions. It clarifies that such products are legitimate and they have not banned such products, but only laid down certain rules for them.....

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Bizmen, RBI trade charges over loose change

MUMBAI: A tug-of-war has erupted between traders' associations and the Reserve Bank of India (RBI) over dispensing of loose change for business. Shopkeepers allege the RBI is keeping its coins close to its currency chest. The bank, in turn, accuses unscrupulous storeowners of misusing its facility to melt coins and extract metal to make illegal profit. Coins are produced at government mints across the country. The RBI's currency chest, which is the sole carrying and forwarding agent, then transfers them to bank branches which become retailers for petty change. Businessman Sidharth Jain, who owns a medical store in the Fort area, says that the RBI has referred all shopkeepers to their respective banks to procure change. "We, for instance, require coins to the tune of Rs 20,000 a month. Initially, our needs were met by the RBI but once we approached the local bank branch, it only agreed to give us change worth Rs 2,000," he says. "Now even that is not available. We are forced to ask customers to hand out coins of all denominations, which causes friction at times." Federation of Retail Welfare Traders' Association president Viren Shah has written to the RBI to say that his members are inconvenienced by the central bank's reluctance to provide change. "We are being denied coins of Re 1, Rs 2 and Rs 5. Local banks that are obliged to give loose change as per RBI guidelines are declining this facility saying they, in turn, do not receive change from the RBI," Shah says.  This is causing concern to businessmen who are sometimes forced to pay 15-20% extra to procure change from agents. Shah has urged the RBI to ensure a resolution before demand peaks during the upcoming festival of Diwali and traders are exploited further.

However, sources in the Reserve Bank allege that their hand has been forced by certain storeowners with "dubious reputations" who have been making illegal use of loose change. "These traders are creating pressure groups to procure vast amounts of loose change in order to melt coins and extract the metal. We do keep a tab on the volume of coins that individual shopkeepers procure from us and we have found that these shopkeepers seek far more than their requirements for normal business transactions," says a senior RBI official.

This, if true, is a serious criminal charge that could invite prosecution and penalty. It is a well-known fact that coins of certain denominations are worth more than their face value once they are melted down to extract metal. However, common shopkeepers like Jain say they are unaware that coins can be misused in this manner, and wonder why all should suffer for the sins of a few.

TOI

Protein shake up

..Gokarn, the Reserve Bank of India's Deputy Governor and one of India's well-regarded economists, knew something was firing up prices. In northwest Delhi's More Megamart, one of India's largest retail foodstores, homemaker Baharuna Sultana's shopping cart may hold a clue to the puzzle. ............

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Crude surprise

...It cannot be anyone’s case that India will come out unscathed of a US-EU recession, but the fall in commodity prices has to be a major saving grace. Perhaps something RBI will keep in mind later this month when it is deciding on whether to hike rates once more? Additional factors that signal a fall in economic activity are the contraction in the services PMI as well as the very flat yield curve......

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Foreign exchange transactions made easier for NRIs

The Reserve Bank of India (RBI) relaxed some foreign exchange facilities recently for individuals - NRIs and persons of Indian origin (PIO). The RBI has further liberalised foreign exchange facilities for individuals under the Foreign Exchange Management Act (FEMA). The move is expected to ease the procedures and offer more freedom to both residents and their non-resident relatives in their foreign exchange transactions.

Joint account

NRIs can now be joint holders in resident SB, EEFC, and RFC accounts. Individuals, residents in India, are now permitted to include non-resident close relatives as joint holders in their resident bank accounts. So, they can have savings bank accounts jointly with residents. It can be on 'former or survivor' basis. However, such non-resident close relatives will not be eligible to operate the account during the lifetime of the resident account holder. NRIs and PIOs are also permitted to open non-resident external ( NRE) rupee account schemes and foreign currency non-resident (FCNR) accounts with their resident close relatives as joint holders on a 'former or survivor' basis now. The resident close relative should be eligible to operate the account as a power of attorney holder in accordance with instructions during the lifetime of the NRI or PIO account holder. Gift
Now, residents have been permitted to gift shares and debentures up to USD 50,000 in value per financial year. Earlier, the limit was USD 25,000 per calendar year. Resident individuals are now permitted to make rupee gifts within the overall limit of USD 2 lakhs per financial year to a NRI or PIO who is a close relative through a crossed cheque or electronic transfer to a non-resident (ordinary) rupee account (NRO) of the NRI or PIO.

Loan
Resident individuals are now permitted to lend in rupees within the overall limit under the liberalised remittance scheme of USD 2 lakhs per financial year to a NRI or PIO who is a close relative through a crossed cheque or electronic transfer, subject to certain conditions . The loan should be free of interest. The minimum maturity of the loan should be one year.  Also, the loan should be used to meet the borrower's personal requirements or for his own business purposes in India. It should not be used for any purpose in which investments by persons resident outside India is prohibited, such as the business of chit funds, agricultural activities etc. In addition, the loan amount should not be remitted outside India.

Loan repayment

Residents can repay a loan given to a NRI close relative. Resident individuals can repay loans availed of in rupees from banks in India by their NRI close relatives. Earlier, repayment of rupee loans by close relatives here was restricted to housing loans only.

Medical expense

Residents can bear medical expenses of NRI close relatives. Earlier, residents were allowed to make payments in rupees towards meeting expenses on account of boarding, lodging and services related to it or travel to and from and within India of a person resident outside India who is on a visit to India. Now they have been permitted to meet the medical expenses as well.

ET

Only a third of bank deposits covered by default insurance

...“We have never witnessed a scenario of liquidation of a commercial bank. The RBI manages systemic risk by taking pro-active steps before the failure, by asking existing well run banks to take over the weak/potential failure cases. In other cases, banks have been asked by the RBI to infuse additional capital,” ......

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Banks must reverse wrong debit in 7 days or compensate

... would suggest that you write to the Deputy Governor (in-charge of the Banking Ombudsman scheme), RBI, bringing these facts to his notice and send it to the Customer Service Department......

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