Why RBI should, and likely will, raise rates

It’s that time again. Inflation continues to remain dangerously close to double digits. Wage growth remains buoyant. Input prices increased across the board in September, and inflationary expectations remain elevated. Yet, public pressure on the Reserve Bank of India (RBI) to pause gets stronger and stronger! Proponents of a pause would look at last week’s data and conclude the momentum of growth and inflation are slowing. They would add central banks around the world have moved to a pausing, even an easing, mode. And, this should be reason enough for RBI to call it a day.  Given the pressure on RBI from the industry and the market, this is undoubtedly a close call. But, while a pause cannot be ruled out, we expect RBI to continue on a path of monetary tightening and raise policy rates by 25 basis points at the next review. And, they would be perfectly justified in doing so. Here’s why.

First of course, the economy is slowing. But that’s not the relevant question. The question is whether or not it is slowing enough to dent pricing power across the board. There is no evidence to suggest we have reached that point yet. Yes, the momentum of core inflation slowed in September. But one swallow does not a summer make. Several times last year, the momentum of core slowed one month, only to re-accelerate sharply the next. What was ominous, and largely missed, in the September inflation print is input prices rose across the board and are likely to pressure core inflation in time to come. Until the momentum of core slows on a sustained basis, it would be premature to conclude the economy has slowed enough. Second, much is made of the global uncertainty. Yet, recent data flow has surprised consistently on the upside, with Euro area industrial production, for example, stronger than expected for a second month. As a result, commodity and crude prices are at their highest levels in a month. Third, there are increasing fears that fiscal policy would not be as tight as once thought. The looser the fiscal conditions are, the higher the commodity prices are, the tighter the monetary conditions would have to be. And, here’s the irony: The sharp currency depreciation over the last two months has meant that despite the rising policy rates, overall monetary conditions have actually loosened over the last month! The weaker rupee has increased the domestic cost of tradables and thereby, undercut some of the impact of previous rate increases. The implication is policy rates need to do more of the heavy lifting.  For all these reasons, we expect (and hope) the central bank would ignore the rising chorus and continue raising rates. To pause now would be to undo much of what was courageously done in the recent past. 

BS

MPs want auction of bank licences

A senior banker said, banking licences cannot be auctioned as unlike telecom, banks play a different role and deal with public money

Mumbai: Reserve Bank of India (RBI) Governor D Subbarao on Monday met the Parliamentary standing committee on finance to discuss the issuance of new banking licences to companies, a person familiar with the development said. According to the person, the members of Parliament suggested auctions of new banking licences to the aspirants, citing the controversies in the allocation of second generation airwaves or 2G. Mint could not immediately reach any member of the standing committee. A senior banker said, banking licences cannot be auctioned as unlike telecom, banks play a different role and deal with public money. In August, RBI had released its draft licensing norms for a new set of private banks and said firms that have 10% or more exposure to real estate and brokerage businesses in terms of income or assets, will not eligible to set up a bank. Also, a corporation or an NBFC will need a ”diversified ownership, sound credentials and integrity”, and a 10-year track record, the RBI said. Releasing the draft, the RBI had said it will give licence on a ”very selective basis” and ”it may not be possible for RBI to issue licences to all the applicants meeting the eligibility criteria”.

Mint

New products to revive interest rate futures

The joint technical committee, comprising officials from Sebi and the Reserve Bank of India (RBI), are deliberating on the specifications of the instrument and a decision is expected in the next two-three months. More important, the new contracts will be allowed to be settled in cash, which has been a long-standing demand of industry participants.....

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India's economy 'is slowing sharply': Moody's

India's slowing economic growth is a "cause for worry", research group Moody's Analytics said Monday, highlighting the failure of aggressive interest rate hikes to curb near double-digit inflation.............

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Slowdown fear grips industry as RBI policy meeting looms

Mumbai: A growing uneasiness is palpable among Indian companies, individual borrowers and even commercial lenders as the central bank may increase its policy rates, the 13th such hike since March 2010, to rein in a persistently high inflation in the world’s second-fastest growing major economy........

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Ind Min against notification of some clauses of FDI policy

New Delhi: Taking note of the objections raised by the SMEs, the industry ministry has asked its finance counterpart to refrain RBI from notifying certain clauses of the FDI policy relating to financial instruments. In a letter to Department of Economic Affairs Secretary R Gopalan, the DIPP has said that RBI need not notify "the provisions" related with definition of instruments that would qualify to be foreign direct investment (FDI) or external commercial borrowing (ECB). The Department of Industrial Policy and Promotion (DIPP) is an arm of industry ministry which deals with FDI related issues. The clause, on which objections were raised by the SME sector, was inserted in the recently issued consolidated circular on FDI policy on September 30. According to the clause "only equity shares, fully, convertible and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares, with no in-built options of any type, would qualify as eligible instruments for FDI. "Equity instruments issued/transferred to non-residents having in-built options or supported by options sold by third parties would lose their equity character and such instruments would have to comply with the extant ECB guidelines." The DIPP, the letter said, had received number of objections from the SME sector on the clause relating to FDI and ECB classification. The issue, it added, would have to be "revisited urgently. "In the circumstances, it is requested that RBI may kindly be advised not to notify the provision for the present and maintain status quo until we arrive at a suitable formulation after consultation," the letter said. 

Zee News

BALANCING GROWTH AND INFLATION

The perception in the market before the 25 October monetary policy of the Reserve Bank of India (RBI) is that we are very close to the peak of the rate hiking cycle, although the possibility of another rate hike next week cannot be ruled out. Apart from the rate decision, we will also be looking for any subtle or explicit change in the guiding principles of monetary policy because the economic cycle is changing. There are always multiple considerations that go into framing monetary policy, but in our view, belief in three hypotheses has prompted RBI to adopt a more hawkish policy stance in FY12. First, low and stable inflation encourages investment and promotes growth over the medium term. In this context, a recent RBI working paper estimates that inflation can retard GDP (gross domestic product) growth if it stays above the 4-5.5% threshold. So the target of monetary policy should be to keep inflation below this threshold and high inflation cannot be tolerated in search of higher growth. Needless to say, inflation has been much above that threshold for a sustained period of time. Second, near-term growth might have to be sacrificed to keep inflation under check. This hypothesis connects well with the idea of engineering a calibrated soft landing where the economy might have to grow at below the potential growth rate for a while to moderate demand side pressures. Third, monetary policy is effective in not only bringing down demand-side price pressures but also tackling persistent supply-side shocks which dehinge inflationary expectations.  At this juncture, we probably need to delve a little deeper into some of these hypotheses. For example, while evaluating the second hypothesis there is considerable uncertainty over whether the potential growth rate of the economy has already been adversely affected by lack of supply-augmenting reforms. Most analysts peg the potential growth around 8% but there is a downside risk to that estimate. Also, it is not clear how far below the potential growth rate, RBI will let growth fall. It is quite likely that in the October policy, RBI will be more explicit in acknowledging that growth moderation has occurred but it will probably be difficult for it to give even a subtle hint of whether the extent of slowdown has crossed its tolerance limit. However, there are two important considerations in deciding the timing of a pause in RBI’s quest for an engineered soft landing.  Monetary policy works with a long and uncertain lag, especially in developing countries such as India. So, RBI is likely to pause much before inflation actually falls close to its comfort level. Unfortunately, in late 2010 when RBI paused, inflation flared up again prompting its current worries about a “pre-mature” exit from its anti-inflationary stance. The second factor is the ability of monetary policy to perfectly fine tune the moderation in growth. Once growth starts slowing, a set of chain reactions can trigger a much sharper decline in growth than anticipated, especially when the investment climate is buffeted by global uncertainties. Inflation management does require sacrificing near term growth but allowing growth to drop beyond a threshold could come with its own set of problems.  Persistent inflation is also posing the difficult question of whether interest rate hikes are having the desired impact. It is tough to say what would have happened to inflation if rates had not been raised aggressively. Still, stubborn inflation can change people’s perception about effectiveness of monetary policy and complicate matters. I think RBI will hike rates by another 25 bps (basis points, or 0.25 percentage point) in the 25 October policy because of uncomfortably high inflation and uncertainty over whether hidden price pressures can derail the early signs of inflation finally coming under control. A signal that the balance of risks is getting spread more evenly between inflation and growth is likely to precede a pause in the rate action. For that, growth data needs to worsen further or RBI needs to recalibrate its guiding principles.

Mint

SFIO to have powers to prosecute companies

The bill seeks to define 'fraud', and also outlines the punishment to go with each category of fraud. It also makes out a case for setting up a National Company Law Tribunal with its appellate body. The provisions have been brought in tandem with laws of Sebi, RBI and other regulators.......

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House panel questions RBI's bid to allow corporate, non-banking finance bodies to set up banks

NEW DELHI: Members of Parliament's standing committee on finance have questioned the Reserve Bank of India's move to allow industrial houses and non-banking finance entities to set up banks, wanting to know the rationale behind the decision and when precisely the policy was framed. RBI governor D Subbarao was quizzed by finance standing committee members on Monday over his assertion that the new policy flowed from finance minister Pranab Mukherjee's 2010-11 budget speech, who had promised greater access to banking in terms of both geographical spread and services.  The MPs contested the argument that Mukherjee's speech - that had dwelt on increasing banking access with India having successfully negotiated the 2008-09 global slowdown - provides the framework for the RBI proposing to allow industrial and business houses to set up banks. They said Mukherjee's remarks did not indicate the proposed policy.

TOI

View from the IMF - ANOOP SINGH

The global economy has entered a dangerous new phase. Growth in the West has slowed while downside risks to the global economic outlook have increased further. Financial market volatility has surged as private demand in the US failed to pick up sufficiently and sovereign debt and banking sector problems in Europe proved more tenacious than expected. International efforts are being made, including by the Group of Twenty (G20), to coordinate policies so as to avoid a major global disruption like the one we experienced in 2008-09. How is Asia faring amid this turbulence? In our recently released Asia-Pacific Regional Economic Outlook,  we find that while growth in Asia has also moderated, domestic demand remains resilient. As a result, Asia is poised to grow at about 6¼% during 2011, increasing to 6¾% in 2012 under the baseline scenario. The latter reflects a lowering of only ¼ of a percentage point since our April forecast, compared to ¾ percentage points for our advanced economy growth projections during the same period. However, there are large downside risks to this benign outlook. The advanced economies are at the core of an effective resolution of current global stresses, and a lot depends on them to prevent the risk scenarios from materialising. But emerging market and developing economies’ ability to maintain their stability and growth is also key to an effective global response. The moderation in growth notwithstanding, our Outlook shows that inflation remains generally elevated in the region, with average headline inflation increasing to 5½% (year-over-year) in July 2011, from 4½% in January. This requires a balancing act on the part of Asian policymakers, as they need to guard against risks to growth, but also limit the adverse impact of prolonged easy financial conditions on inflation and balance sheet vulnerabilities. Where does India lie in this balance of risks? India’s inflation remains stubbornly high, registering at 9.7% in September (WPI, year-onyear), while growth is slowing from 8.5% in 2010-11 to 7.6% this year by our current estimation. This confluence has led to understandable public debates about the efficacy of the RBI’s actions. We are clearly of the view that the RBI’s monetary tightening has been necessary and is bearing fruit on the inflation front, and is not the dominant factor in the growth slowdown — that is already showing the early effects of the global slowdown. Thus, although some further monetary tightening is likely necessary under our baseline scenario to quell the entrenched inflationary momentum, the RBI certainly has the room to act quickly if major risks materialise. Indeed, as in 2008-09, the RBI’s ability and readiness to supply liquidity will play a critical role if a major external financial shock materialises. Fiscal policy has an important role to play in the balancing act as the authorities have emphasised. Restraining expenditure to the level of Budget FY2012 would help recreate the fiscal space to counter external shocks. It will also assist the RBI in combating inflation by moderating domestic demand pressures. Finally, a shift in government spending from consumption towards infrastructure, health and education, would help increase the economy’s capacity to grow strongly over time, while also making the growth process more inclusive as we argue in the REO. The government also has a role to play outside of fiscal policy. There is a sense that a reinvigorated pursuit of the outstanding structural reform agenda — such as the introduction of the goods and services tax, further liberalisation of the FDI regime, passage of long-pending financial sector legislation, and measures to improve the business environment — would attract investment currently being held back. This reinvigoration would help bring growth back to potential in the short run while relieving supply bottlenecks that could, otherwise, continue to stoke inflation.  India has felt the repercussions of the current global uncertainties in its currency and equity markets. This is a natural outcome of India’s increasing integration with the global economy and reflects the sharp increase in global risk aversion in recent weeks and months. Nevertheless, India’s vulnerability to external shocks is relatively low at present. This is due, in substantial part, to the fact that banks are well regulated and have strong balance sheets, exports are surprisingly buoyant, and external debts are limited. And India has demonstrated its resilience by navigating the global financial crisis in 2008-09 relatively unscathed. Nevertheless, a high level of vigilance is needed in the coming months, and calls for continued efforts to create policy buffers.

(The author is director of the Asia and Pacific department of the International Monetary Fund) ET

Focus on reforms

Apropos of the column “Let’s kill GDP, inflation will fall” (FE, October 15), for months now inflation has been looming as the greater threat on this government than slowing growth. RBI interventions on checking money supply as a tool to rein in inflation have elevated the borrowing costs. A combination of relentless global economic stasis coupled with adamant inflation at home have elevated input costs. Fiscal considerations are not allowing fuel prices to be toned down either. This does not augur well for industrial growth. The added worry is that a weak industrial sector performance is now being followed by weak services sector performance. The one brighter spot is that the agriculture sector has improved in FY2011. But tardiness in agri-market reforms will not allow the gains of this sector being transmitted to the consumer. And food inflation has remained the Achilles’ heel for close to two years now. So, we should now focus on effective governance and push for reforms, which have been put on the back burner. The route to rate interventions will not take us out of the current crisis as would energetic pursuit of reforms.

R Narayanan, Ghaziabad (FE)

Banks start lending to microfinance institutions

The Kerala Association of Microfinance Institutions (KAMFI) has said that the microfinance crisis cropped up due to some unfortunate happenings in Andhra Pradesh seemed to come to an end, as banks have started lending to microfinance institutions (MFIs).  After the embargo in lending by commercial banks to microfinance sector, the RBI had issued guidelines on microfinance lending inter- alia directing banks to resume lending to microfinance sector and treat them as priority sector advances, Mr K. Paul Thomas, Chairman, KAMFI, said in a statement.

HBL

Return to indebtedness

This July marked the completion of two decades after India experienced the balance of payments crisis of 1991. With substantial reserves, the external situation today appears and is different. But there are similarities as well........

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Public holidays

This refers to the news item ‘Three public holidays in India against 15 in Pakistan’ (October 16). The Indians may have only three national public holidays but they leave us behind when it comes to the various religious and cultural holidays.  For example, the website of the Reserve Bank of India (www.rbi.org.in) informs us that its regional office at Nagpur will observe 26 bank holidays during 2011 of which six holidays fall in the single month of April. Incidentally the bank remains closed on Eid-i-Milad, the two Eids and Ashura.

Dr Faiz Ahmad, Islamabad

http://www.thenews.com.pk/TodaysPrintDetail.aspx?ID=72979&Cat=11 

Cooperative Banking in India

This report covers the cooperative banking sector in India comprehensively, presenting a full view of the types of cooperative banks, their governing structures, the financial parameters, the technology adoption and the products and services offered. Additionally it also covers NABARD and its subsidiaries and defines the role it plays in the development of the cooperative banking sector as well as the Indian economy. Cooperative banks form the backbone of the rural economy. Especially in an agriculture dominated rural sector (Like the one we find in India), cooperative banks play a pivotal role in bolstering the common individual and financing his business and personal needs. The sector is strongly regulated in India by sub apex organizations like NABARD, closely monitored by RBI’s hawkish policies. Of late RBI has acknowledged the enormous role of cooperative banks in extending microfinance amongst the rural population.  The regulations surrounding cooperative banks in India are likely to be relaxed in the next few years to enable the banks to come up with newer products and services for the upliftment of the rural sector. Currently, barring a few, majority of the banks are operating in the low-profit, low-diversity quadrant of banking business.

www.marketreportportal.com

UID project hits job plan roadblock

....Nilekani had recently told reporters that Aadhaar number will be linked for MGNREGA bank accounts for electronic transfer of wages. It was the next step UIDAI was looking at after the Reserve Bank of India (RBI) declared Aadhaar as enough for one to open a bank account. ......

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