Interest rates must be in line with inflation: Chakrabarty

New Delhi : Declining to be drawn into the issue of another interest rate hike, the RBI Deputy Governor, Dr K.C. Chakrabarty, said that rates have to be in line with inflation. “The exact inflation figure does not matter; what is important is that inflation is still high. Given this situation, the RBI has no other instrument to rein it in other than rate hikes,” he said speaking on the sidelines of a seminar organised by FICCI on Friday. Advocating a possible solution to the high inflation situation, Dr Chakrabarty said: “If inflation goes up, interest rates also go up everywhere in the world. If we want inflation to go down, we have to use technology to bring down the cost of products and services. It has happened in the case of mobile delivery charges where costs have not gone up over so many years.” “The supply side issue has to be addressed to produce more with lower cost and that would bring down the production costs and hence inflation,” he added. RBI's next monetary policy review is expected on October 25. A recent data released showed headline inflation remained close to double digits at 9.72 per cent in September.

HBL

‘Supervision of MFIs cannot be outsourced'

New Delhi : The Reserve Bank of India has no plans to outsource its existing regulatory and supervisory framework for microfinance institutions (MFIs). This was stated by the RBI Deputy Governor, Dr K.C. Chakrabarty, at a FICCI seminar on “Financial Inclusion: Partnership between Banks, MFIs and Communities” held on Friday. “We cannot outsource the supervision for effective monitoring of MFIs in India as we want to keep that area under the RBI's jurisdiction. However, we are not opposed to decentralising their monitoring but it has to be done through opening of RBI's own branches in remote locations where MFIs are operating,” he added. The proposed MFI Bill envisages a greater role for RBI in regulating the MFI sector. It is meant to enable the orderly growth of microfinance institutions, provide universal access to such finance by the poor and disadvantaged classes, and regulate the sector.

HBL

Canara Bank - Change in Directorate

Canara Bank has informed BSE that in exercise of the powers conferred by of Clause (c) of sub-section 3 of section 9 of the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970/1980 read with sub-clause (1) of clause 3 of The Nationalised Banks (Management & Miscellaneous Provisions) Scheme, 1970/1980, the Central Government, hereby nominated Smt. Meena Hemachandra, CGM-in-charge, Reserve Bank of India, Foreign Exchange Department, Central Office, Mumbai as Director under RBI Nominee Category, on the Board of Directors of Canara Bank in place of Shri G. Padmanabhan with immediate effect and until further orders, vide Notification dated October 13, 2011 of Department of Financial Services, Ministry of Finance, Government of India.

Moneycontrol

RBI conducts TAFCUB meeting

Jammu, Oct 13: The 7th meeting of the State Level Task Force on Urban Cooperative Banks (TAFCUB) was held at RBI Srinagar under the Chairmanship of K K Saraf, Regional Director for J&K. The meeting was attended by Co-Chairman M Abbas, IAS, Registrar, Co-operative Societies, J&K, Subhash Gupta, Chief Executive, National Federation of Co-operative Urban Banks, New Delhi and CEOs of Urban Co-operative Banks also attended the meeting. The meeting reviewed the performance of the Urban Co-operative Banks in the Urban Beanking Sector in the State of Jammu and Kashmir along with latest policy developments were the major issues discussed in the meeting. Recommendations of Y H Malegam Expert Committee on licensing of new Urban Cooperative Banks were also discussed.

Greater Kashmir

RBI unveils rating symbols

The Reserve Bank has announced uniform and standard rating symbols to be used for indicating financial health of a bank.  The change in rating symbols and definitions, however, does not effect, in any manner, the rating methodology followed by the credit rating agencies (CRAs) for rating such instruments and will have no bearing on the existing ratings assigned by the CRAs under the Basel-II framework, the Reserve Bank of India said. Under the revised standardised system, there is no change in the long term rating symbols except that they will henceforth display the rating agency’s name as a prefix, it said. “In case of short term ratings, a rating scale denoted by ‘A’ on a scale of ‘1’ to ‘4’ (i.e. A1, A2, A3 and A4) and ‘D’ has been prescribed,” it said. Four domestic CRAs namely CARE, CRISIL, FITCH India and ICRA have been accredited for the purpose of risk weighting the banks’ claims for capital adequacy purposes.

DH

RBI's tight monetary policy to continue: Dy Guv

A day after RBI Governor D Subbarao dashed hopes of a pause on hiking rates, his deputy K C Chakrabarty hinted at continuation of the tight monetary policy, despite the country showing a decline in economic growth parameters.All the same, Chakrabarty said monetary policy had its own limitations when it came to arresting high inflation in the long run, saying price pressures could only be brought down by addressing supply-side issues and reducing manufacturing cost. “If inflation remains high, interest rates will also be high,” he told reporters on Friday on the sidelines of a seminar organised by the Federation of Indian Chambers of Commerce and Industry in association with United Nations Development Programme, India.When asked if the Reserve Bank would further hike the policy rates, he said that the deputy governor said he could not answer the question based on just one figure (monthly inflation for September). The decisions in the policy review are taken after due research and analysis of many factors, he added. “There is something called minimum medicine that needs to be given,” he said when questioned on the series of policy rate hikes. Yesterday, the RBI governor had indicated that it might not soon give up on its tight monetary stance. “Had we not raised the rates, how much would have been the inflation,” asked Subbarao. “Despite so much tightening, inflation runs as high as 9.8 per cent as of August,” he said in Jaipur. RBI has raised policy rates 12 times since March last year, but inflation still remains over 9 per cent for months. The bank is now slated to come out with its monetary review on October 25. Chakrabarty, earlier addressing the participants from the banking sector and micro finance institutions, asserted that RBI has removed all the roadblocks in effectively carrying out financial inclusion. “The poor are more bankable than the rich. The only expectation that I have from you people is that I do not exploit the poor people,” he added. Chakrabarty also criticised banks and the MFIs for “poor financial inclusion”. MFIs are “themselves responsible” for their current state. “You cannot claim that you are doing financial inclusion by charging 80 per cent interest rates,” he said. Responding to a query on proof of address having become a hurdle for the poor to open a bank account, he said just a simple self-declaration was sufficient for the poor to open a basic account.

BS

Mumbai on alert

Mumbai: Mumbai has been put on alert after a huge cache of explosives was recovered from Ambala Railway Station yesterday. Other parts of Maharashtra including Pune, Nashik, and Nagpur are also on high alert. Security has been beefed up outside vital installations and sensitive points including the Chhatrapati Shivaji International Airport, BARC, Mantralaya and an RBI building.  The Mumbai police have also been asked to carry out surprise checks at hotels, motels and the lodges in the city. An alert has been sounded in the neighbouring state of Goa. On Wednesday, a large quantity of RDX was recovered from a car parked outside the Ambala railway station. According to reports 5 kg of RDX, 3 timers and 5 detonators were retrieved in the search operations.

Daily Bhaskar

What’s the rate beyond which inflation hurts growth?

RBI Working Papers:

Why Persistent High Inflation Impedes Growth? An Empirical Assessment of Threshold Level of Inflation for India by Sitikanta Pattanaik and G.V. Nadhanael. Inflation Threshold in India: An Empirical Investigation by Deepak Mohanty, A.B. Chakraborty, Abhiman Das and Joice John

The chief domestic concern for the economy is currently the high level of interest rates and inflation. Elevated interest rates have slowed down the economy and are impeding investment. Will the Reserve Bank of India (RBI) continue to raise its policy rates? How much growth is it willing to sacrifice to tame inflation? These questions are considered in two recent working papers from the RBI. Both these papers show that, above a certain level, inflation starts to hurt growth and there’s no trade-off between inflation and growth—the only objective, at these high levels, would then be to reduce inflation, without bothering about growth. That’s exactly what the RBI has done. The paper by Sitikantha Pattanaik and G.V. Nadhanael of the Department of Economic and Policy Research at the RBI gives a number of reasons why high inflation hurts growth. The authors say that inflation has an adverse impact on private investment, because price signals become distorted, leading to misallocation of resources. Higher inflation could make domestic firms less competitive relative to imports and could hurt exports. Input costs, including wages could go up and would hurt profits, thus restraining entrepreneurs from investing. Inflation could lead to lower demand, affecting growth. The researchers explain that the Philips curve, which shows the relationship between the inflation and unemployment rates, will start to bend backwards above a certain point, which means that higher inflation would lead to more unemployment. The authors quote deputy governor Subir Gokarn, “Below the threshold, workers and producers do not raise their wage and price demands very often because the impact of inflation is not too visible. By contrast, they respond very quickly above the threshold because they are worried that high inflation will rapidly erode their living standards or profitability. In short, when inflation is high, the behaviour of workers and producers increases the likelihood that it will increase further.” The authors cite three trends in India that show inflation is well above the threshold: first, inflationary expectations, seen from RBI surveys, are above the headline inflation rates; second, the pace of increase in wages has also been much more than inflation and third, corporate finance data suggest that growth in staff costs in recent quarters have been higher than the rate of growth in earnings. So what is the threshold level of inflation in India? The researchers use three methods to arrive at this cut-off point, which they put at a wholesale price inflation rate of 6%. A rate of WPI (Wholesale Price Index) inflation above 6%, therefore, hurts growth in India. The second paper also empirically estimates the threshold level of inflation for India. Its conclusion: “For WPI-inflation up to 5.5%, there is positive impact on growth, which is statistically significant. The relationship reverses when WPI-inflation is beyond 5.5% and inflation effect on growth turns negative.” The Reserve Bank has indicated that it expects the WPI inflation rate to be 7% by the end of March 2012. But that is much higher than the threshold rates worked out by both these papers. Does it mean then, contrary to market expectations, the central bank will continue to have a tight monetary policy beyond March 2012?

Mint

Informal meet on inflation today

As inflation has remained above nine per cent throughout this calendar year till September, Prime Minister Manmohan Singh has called an informal meeting tomorrow to take stock of the situation. An official termed the meeting as informal, in-house consultations. The meeting will be attended by Planning Commission deputy chairman Montek Singh Ahluwalia, Prime Minister’s Economic Advisory Council (PMEAC) chairman C Rangarajan and chief economic advisor Kaushik Basu. Wholesale price index (WPI)-based inflation stood at 9.72 per cent in September, even though it came down slightly from 9.78 per cent in the previous month. “The latest WPI inflation figure is not encouraging. The decline is very low... It (inflation) is still very high. The only encouraging point is it has not moved up,” finance minister Pranab Mukherjee said in Paris, the venue of the G20 finance ministers’ and central bankers’ meeting. Twelve rates hike by the Reserve Bank since March 2010 could not bring inflation down much. Many experts believe the RBI might not pause its tight monetary stance.

BS

No moderation in inflation for RBI to change policy : Rangarajan

NEW DELHI: Citing the near double-digit inflation, the Prime Minister's Economic Advisory Council (PMEAC) today said there is no sign of moderation in the rate of price rise to prompt the Reserve Bank to change its policy of monetary tightening. "It is not a very comfortable situation. For the monetary policy stance to change, inflation has to come down and show signs of definite decline. But that kind of an indication has not come...," PMEAC Chairman C Rangarajan told a private news channel. His comments followed the release of data which showed that the overall inflation remained close to the double-digit mark, at 9.72 per cent, in September on account of costlier food products, fuel and manufactured goods. Inflation, as measured by the Wholesale Price Index (WPI), stood at 9.78 per cent in August. For 10 months in a row, inflation has remained above the 9 per cent mark. According to experts, the elevated inflation level is likely to put pressure on RBI to continue with its policy of monetary tightening. The apex bank has hiked key policy rates 12 times since March 2010 to tame inflation. The bank's next monetary policy review is scheduled for October 25. During the central bank's meeting at Jaipur this week, RBI Governor D Subbarao said the rate hikes have affected industrial activities, but asserted that inflation continues to remain above the comfort level of around 5 per cent.  He also said that interest rates would come down only if inflation eased. Meanwhile, in its Economic Outlook for 2011-12, the PMEAC had said that inflation is likely to remain elevated till the third quarter of the fiscal because of high prices globally.

TOI

RBI hikes Paypal payments ceiling to USD 3,000 per transaction

New Delhi : Users of online payments gateway PayPal in the country can now receive up to USD 3,000 per export-related transaction in their accounts, with the RBI raising this limit from USD 500 per transaction earlier. The increase in the limit is with immediate effect, but merchants using Paypal accounts to receive funds would need to add their PAN (Permanent Account Number) and bank account details to comply with the RBI guidelines, PayPal said today. The step will help the Indian SMEs and consumers who use Paypal to receive their payments. In addition, the move will support PayPal and the budding India business of its parent company eBay, an online marketplace. "This is a huge step forward for PayPal and for Indian SMEs, who can grow their export business through e-commerce by tapping our 100 million active users in 190 markets across the globe, right from the US to the UK to Australia," PayPal India Country Manager Mayur Patel said in a statement. "We are thrilled about the increase in transaction limit and would like to thank the RBI for understanding and being supportive of the needs of SMEs who wish to expand their business through cross-border trade," Patel added. eBay, which claims to have an online community of 2.5 million in India, has about 12,800 registered merchants in the country, who consider selling through eBay either their primary or secondary source of income.

MSN News

India Inc chooses CPs over banks for short-term funds

A series of rate hikes by the Reserve Bank of India over the last 18 months has forced India Inc to rely more on commercial papers (CP) than banks for short term funds. In the first five months of 2011-12 (April to August), the volume of CP issuances has risen 83 per cent over that in the same period last year. CPs are unsecured debt instruments issued by companies to meet their short term fund requirement. Their maturity period is less than a year. According to the data sourced from credit rating agency CRISIL, CP issuances between April and August 2011 stood at Rs 2.31 lakh crore compared with Rs 1.26 lakh crore during the first five months of the previous year. The outstanding CP amount stood at Rs 1.49 lakh crore at the end of August 2011. Bankers said most large corporates were not approaching them for their short-term funding needs. “Almost all big corporates are raising funds through CPs since we can't lend them below the base rate,” said a senior banker with the State Bank of India, the country's largest bank.

IE

Stagflation ahead?

Not unexpectedly, WPI inflation at 9.72% was not much below August’s 9.78%. So, going by the statements by various RBI officials, we may see yet another rate hike by RBI later this month. Although RBI is of the view that the demand situation doesn’t show a suitable contraction, most indicators—whether the services or the manufacturing PMI and investment numbers—are screaming red. In which case, this is one of the most important decisions for the central bank—getting a rate hike decision right at this juncture will probably mean the difference between sustainable growth and stagflation. Much of the demand RBI is seeing at the moment is part of legacy momentum—like inflation—and will start slowing further as prospects of jobs keep declining. Not surprisingly, the Prime Minister has called for a meeting of his crack team of economists—C Rangarajan, Montek Singh Ahluwalia and Kaushik Basu—later today. A few points need reiteration, even if it is for the nth time. One, if food inflation is driven by sharp hikes in procurement prices, there is little monetary policy can do to control this—perhaps a large import plan should have been put in place months ago. Two, with the global crisis getting worse, it doesn’t seem likely that commodity prices will recover—so, despite the depreciation of the rupee, this will start impacting Indian inflation. Three, as many point out, not just our columnist Surjit Bhalla today, inflation has been falling for several months on a seasonally adjusted basis (see Goldman Sachs’ post-WPI data flash)—on a quarter-on-quarter basis, Sachs’ (saar) headline inflation has fallen from 11.3% in April to 6.4% in September, and non-food inflation from 11.3% to 4.8%. It is true that seasonally adjusted data differs from one analyst to another, depending on assumptions made, but the trend looks by and large the same—perhaps it would be a good idea if RBI started putting out its seasonally adjusted numbers since it does do this exercise on a regular basis. The other question RBI needs to ponder over is whether a wage-price spiral (based on its understanding that inflation’s back is not broken) is a more potent threat at this juncture or whether a slowdown-induced fiscal slippage-foreign-liquidity one is more of a danger. Right now, the latter seems more critical.

FE

Stubborn inflation: Here's why economists are getting edgy

September inflation came in at an ugly 9.7%. The only relief was that the number was not uglier than expected. Economists note that the prices of non-food manufactured products have risen more modestly that they did in previous months. Nevertheless a rate hike in the next RBI policy meeting on October 25 seems imminent. CNBC-TV18's Latha Venkatesh and Gopika Gopakumar report. The big push comes from food prices, which rose by 1.4% over their August levels; primary articles which rose by 1.3% month-on-month and fuel prices which rose by 0.84%. The positive was that manufactured products rose by only 0.2% over August, and excluding food products, the manufacturing index was up only 0.1%. Yet policy makers worry that the trajectory is still a rising one and the headline inflation is too high for too long. C Rangarajan, Chairman, PMEAC said, "The number is not very encouraging. The inflation rate more or less remains at the same level as the previous month and therefore, it is not a very comfortable situation. It's not an easy decision to make because there are no definite signs of decline from the inflation picture. So long as the headline inflation remains so high, well above 9%, I would think monetary policy has still a role to play in containing demand pressures." Economists also worry that given the rise in rail freights and electricity tariffs the inflation levels in October and November may also remain well above 9%. Gaurav Kapur Senior Economist, RBS said, “We are expecting headline inflation to hover over 9% for the next couple of months at least. In October-November, you would most likely see numbers hovering above 9%. December onwards, when the base effect comes into play and comes into play very significantly, you will see numbers coming off.”  There is a hope that with the harvest coming into the market in October, global commodity prices falling and Indian growth faltering we may see a fall in the momentum of inflation. But not every one is sure. Post October 25, the RBI may continued to be faced with the cruel dilemma of falling growth and high inflation.

Moneycontrol

Another Rate Hike?

The RBI, which will meet on Oct 25 to review policy, has raised interest rates a dozen times since mid-March 2010 to combat stubbornly high inflation and is expected to tighten them further one last time this year before a pause...............

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Inflation above comfort level industrial production concern too: RBI

“We have to weigh growth, inflation and factors affecting the economy of our country,” 

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