Time to stop the chorus against RBI rate hikes

The chorus of voices against a rate hike is getting far too loud. And it is dangerous both for the cause of reining in high inflation, and guaranteeing the independence of the Reserve Bank of India (RBI). A few days back, the Department for Industrial Promotion and Policy (DIPP) in the commerce ministry wrote to the RBI asking it to desist from raising rates. This is a strange and unheard of step. Finance ministry officials have never missed a chance to similarly advise the RBI. And now a committee of parliamentarians has told the governor not to hike rates when he deposed before it. Parliament is a law-making body and the RBI’s authority comes from it. Yet, as the guardian of the longer-term interests of the nation, and which has the expertise to take a call on interest rates, the RBI’s independence on matters of rate setting is necessary for the health of the economy. One would assume the governor would have strongly informed parliamentarians about the donwside of continuing inflation. While their tears over growth are well taken, India, or for that matter any country, can post strong GDP growth only when prices are reasonably stable. High rates are a much smaller disincentive to growth than erratic government policy, politicking and corruption. Also, a big input to inflation has been the government’s runaway fiscal deficit. From around Rs 1,50,000 crore in 2007-08, the fiscal deficit has ballooned to over Rs 4,00,000 crore per year in the past three years. This creates massive aggregate demand and has been a big factor in boosting inflation over the last three years. The push to rural demand through the National Rural Employment Guarantee Act (NREGA) has come on top of decades of agrarian neglect. In the past 10 years, the compounded annual growth of agricultural output has been only 1.8 percent. It’s not surprising then that when a stagnant pool of foodgrain output is chased by rising wages, it has inflated food prices by over 40 percent in the past few years. It is important that parliamentarians ponder over these long-term issues of neglect instead of attacking the independence of a central bank which has but only one instrument to tackle inflation. Sure, they can express their concerns about growth. But the chorus against rate hikes is getting worrisome. It is important for the RBI to maintain its anti-inflationary stance when the WPI has been over 9 percent for the past 10 months and over 8 percent for 18 consecutive months. Such structural inflation can reverse the country’s healthy savings growth too, as people see the value of their savings being dented by inflation. India’s long term growth trajectory can be endangered if parliamentarians and bureaucrats in Delhi don’t see the real dangers to growth — sustained inflation and bad policies, and the real triggers of inflation. These include runaway deficits and neglect of agriculture and infrastructure. Rate hikes are not the main villains.

Firstpost

Ombudsman rues lack of complaints

Guwahati, Oct. 18: The Banking Ombudsman for the Northeast, B.B. Sangma, has expressed dissatisfaction over the inadequate complaints received compared to the number of bank branches in the region.In 2010-11, the ombudsman received 584 complaints which is not satisfactory given that there are 2,645 bank branches in the region. “I am not satisfied with the number of complaints received as compared to the bank branches. The low number of complaints does not mean that customer service in the banks of the region is very good,” Sangma said here today. The office of banking ombudsman in the Northeast has been functioning since June 1996. He said the people in the region do not give their complaints in writing which was one of the major problems. “I have disposed a few complaints over the phone itself as the people were hesitant to give their complaints in writing,” he said, adding that banks have responded positively to complaints over the phone. The RBI had introduced the Banking Ombudsman Scheme in India on June 14, 1995 to provide an expeditious and inexpensive forum to bank customers for resolution of their complaints relating to deficiency in banking services provided by commercial banks, regional rural banks and scheduled primary co-operative banks. The scheme has undergone extensive changes in 2002, 2005 and 2007 and underwent more changes in 2009 whereby the RBI has widened the scope to include deficiencies arising out of Internet banking. A customer will also be able to lodge a complaint against a bank for its non-adherence to the provisions of fair practice code for lenders or the code of bank’s commitment issued by the Banking Codes and Standards Board of India.He said it was mandatory for banks to display the name of the nodal officer dealing with customer grievances and the Banking Ombudsman Scheme with contact details. “We conduct surprise checks and have found that it has been complied satisfactorily. There are, however, no statistics in this regard,” he said.  Connectivity and logistics are another set of problems being faced in the region. “A person from a remote place finds it difficult to attend the hearings, which are organised to redress grievances,” he said. Many letters delivered by the office of banking ombudsman come back undelivered.

The Telegraph 

RBI & India's financial growth

...This definitive analysis of India’s monetary policy and its financial sector reforms by Rakesh Mohan — a former Deputy Governor of the Reserve Bank of India who was a part of its policy group during a crucial period in the last decade — is a timely contribution to the debate on these issues. ...

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Allahabad Bank - Change in Directorate

Allahabad Bank has informed BSE that in exercise of the powers conferred by clause (c) of sub-section 3 of section 9 of the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970, read with sub clause (1) of clause 3 of the Nationalised Banks (Management & Miscellaneous Provisions) Scheme, 1970, the Govt. of India, Ministry of Finance, Department of Financial Services vide their Notification dated October 13, 2011, have nominated Shri A. Udgata, CGM-in-Charge, Reserve Bank of India, Urban Banks Department, Central Office, Mumbai as Director of the Bank under RBI Nominee Category, in place of Shri S. Ramaswamy, with effect from the date of Notification i.e. October 13, 2011, until further orders.

Moneycontrol

Two more Members join RBI Board

The Government of India has appointed two more members on the Central Board of Directors of the Reserve Bank of India. The new Directors are:

1.  Shri Y.H. Malegam, who has been re-appointed from October 7, 2011 vice Shri H. P Ranina.

2.  Prof. M.V. Rajeev Gowda who has been appointed from October 17, 2011 vice Shri Lakshmi Chand.

Shri Malegam is a renowned Chartered Accountant. He is also the Chairman of the National Advisory Committee on Accounting Standards, and has been a past President of Institute of Chartered Accountants of India. Prof. Gowda is Professor of Economics and Social Sciences, Indian Institute of Management, Bangalore. Both the members have been appointed for a period of four years. Prof. Gowda has also been appointed as a Member of the Local Board Southern Area. Last month, the Government of India nominated seven new members reconstituting the Reserve Bank of India Central Board. 

Moneycontrol

RBI grants banking license to Co-op Bank

Srinagar, Oct 18: In a significant move, Reserve Bank of India has granted license to the J&K State Co-operative Bank Ltd, Srinagar to carry on the business activities in any part of the country. Giving this information at a high-level meeting of officers held here today, the Minister of State for Cooperatives, Finance & Planning, Dr Manohar Lal Sharma said that it is a matter of pride for the State to get the license for a public sector bank. He hoped that the bank will be able to expand its activities in other parts of the country besides Jammu and Kashmir. This is an indication towards excellent performance of the bank which has paved way for granting the license, the Minister asserted. The Minister directed the Managing Director, J&K State Co-operative Bank Ltd to further speed up its efforts to promote the business activities of the bank. He asked him to identify potential areas for establishment of more branches so that the network of the bank can be strengthened. While reviewing the functioning of the SCARDB, the Minister issued instructions to the Managing Director, SCARDB to initiate measures to improve the functioning of the bank as per the laid down benchmarks so that the bank is revived as per its full capacity. He maintained that Government has already agreed to provide Rs. 25 crore as State equity for the revival of the bank over a period of ten years.

The Greater Kashmir

RBI may hold fire after 25 bps hike

....... Beyond October, the central bank is likely to hold fire as the cumulative effect of its past actions start rippling through the economy. On the growth front, I expect RBI to revise down its projection for the year, thereby recalibrating financial markets’ expectations on growth and its role in monetary policy...........

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Food inflation: Barking up the wrong tree?

It's Monetary Policy Review time again and, ahead of it, the media reports a full meeting of the ‘War Council' — the Prime Minister, the Finance Minister, their Economic Advisers, and the RBI Governor. Not likely that any new ideas emerged and none was announced. But the key architects — the Prime Minister's Economic Adviser, Dr C. Rangarajan, and the central bank chief, Dr D. Subba Rao — have made their choice: they want to increase interest rates till inflation dies down — in fact, they don't seem averse to cutting growth to achieve this. For, the goal clearly is to kill ‘evil inflation expectations' and encourage those of the ‘right' kind — ‘rational expectations'. (‘The RBI won't stop till inflation cools to its target level'). Shorn of the jargon, it means making businesses and consumers feeling less confident about the future — so less spending, and falling inflation. But less spending on what? Food? Surely not. Armchair advice from desi, videshi and Indian expat economists is not in short supply. But it's obvious that, if not exactly, the situation bears recognisable resemblance to the old story of nine blind men describing an elephant.

Wage policies

In a sense, inflation is entrenched in the Government's own wage policies, which incorporate automatic cost-of-living adjustments. Inflation rises, so, pronto, do Government salaries. They are as far away from productivity link as one can imagine. One desperately looks for a reference to this in official economic documents. The closest is the ritual advice found in the annual ‘Economic Surveys' and RBI reports on containing the fiscal deficit. The truth is that the RBI ‘accommodates' Government's completely elastic wage expenditure and the two are in ‘collusion' in stimulating demand amidst their professed concern about inflation. What about the private sector? Are its actions inflation-enhancing? Unlike in Government, there's a clear connect between wages and productivity. The Chief Economic Adviser is right that wages have gone up but, therefore, wrong in his inflation attribution to wages. And Indian industry has little leeway in pricing, exposed as are most segments of it to domestic and global competition. Price trends in consumer durables are generally soft and price increases are offset with more or less equivalent discounts. There's a pretty high degree of absorption of rising fuel and freight costs. No culprits here.

Key areas

Thus we are left with two major areas responsible for general inflation — energy and food. The former is a pass through, at the mercy of international prices. The sub-10 per cent rise in overall food prices actually masks the high rate of increase in several individual categories, including necessities. But will monetary policy do the trick of controlling food inflation? The fact is food inflation is less important in a rapidly-growing economy characterised by productivity-backed rapidly-growing incomes even in the bottom rungs of the population. On the other hand, the net effect of policy-tightening may be eroding consumer and investment confidence, risking private sector job creation and the need to employ the massive additions to the labour force year after year. What's required is razor-sharp focus on non-productive incomes, profits and activity, not the loose cannon of just increasing interest rates. 

S. Balakrishnan (The author is Chennai-based financial consultant.) HBL

‘Growth may not cross 9% threshold’

The finance ministry on Tuesday said the economy may register a lower growth during the current financial year as against the earlier projections of 9 per cent given a fragile recovery of the global economy and a subdued industrial growth. However, it said India could clock 9-10 per cent growth in the medium- to long-term given its strong focus on inclusive growth and economic reforms.  Recently at the G-20 forum, Finance Minister Pranab Mukherjee said that India is likely to grow by 8-8.2 per cent during the current fiscal while chief economic advisor Kaushik Basu has pegged the growth for the current fiscal at 7.5 per cent. However, Mukherjee has maintained that the economy will succeed in recording 8-9.5 per cent in the long run. According to a background statement prepared for the annual Economic Editors’ Conference (EEC) to be held here from Wednesday, the government said India managed a fast turnaround from the global economic crisis due to its strong fundamentals.

IE

‘Lower economic growth the new normal for RBI’

Credit Reporting and the Indian MFI Bill: If not a silver bullet, at least a silver lining?

... By compelling registered MFIs to participate in credit reporting, the RBI could facilitate the development of vastly more comprehensive databases on base-of-the-pyramid borrowers than presently exist....

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Inflation to drop to 7% by March: R. Gopalan

The stubbornly high inflation is likely to prompt the RBI to hike rates at least by another quarter percentage point on October 25.

India’s wholesale price inflation rate may fall to about 7% by the end of March 2012, Economic Affairs Secretary R. Gopalan said on Monday.  “I expect around 7% (inflation) by March-end. It (current inflation) is too high from comfort level,” the Economic Affairs Secretary told reporters in New Delhi. It is possible to achieve 9% economic growth in the next five years, Gopalan said. Inflation increased to 9.72% in September 2011 from 8.98% in the year-ago period. However, inflation, as measured by the Wholesale Price Index (WPI), was marginally lower than the 9.78% figure recorded in August. The stubbornly high inflation is likely to prompt the RBI to hike rates at least by another quarter percentage point on October 25. The RBI has already hiked rates 12 times since March 2010, to rein in inflation. 
http://www.indiainfoline.com/Markets/News/Inflation-to-drop-to-7-percent-by-March-R.-Gopalan/5267828720

Economic growth to be around 8% this fiscal: Montek

.....“We must remember that the current financial year is very unusual year for the world economies. And the euro zone crisis has made virtually every country revise its growth rate downwards,”......

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RBI against letting MFIs collect small deposits

.... India’s central bank has objected to a government proposal to allow microlenders to collect thrifts, or small deposits, from poor borrowers.......

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FinMin questions need for another rural bank

Rural development ministry wants a bank for women self-help groups; finance ministry says Nabard is enough

New Delhi: The rural development ministry’s plans to set up a dedicated national bank for women self-help groups (SHGs) may have hit a roadblock with the finance ministry questioning the feasibility of the proposal, especially given the existence of the National Bank for Agriculture and Rural Development (Nabard). The proposed new bank is intended to promote self-employment among women living below poverty line. Rural development minister Jairam Ramesh, who took charge of the ministry in July this year, had on 18 July said the ministry would prepare a detailed paper on the subject before taking up the matter with the finance ministry.  Ramesh had also mooted lowering the interest rate on the credit women SHGs receive from any nationalized bank. While crop loans are available to farmers at 4-7% interest, SHGs pay more than 9% interest on loans. The rural development ministry then sent the proposal to the Reserve Bank of India for consideration. The finance ministry, however, does not seem keen on the proposal, particularly since Nabard is already in place. “There is no point in setting up another bank when Nabard already exists. Setting up a separate bank will require large-scale investments for infrastructure creation, especially since the bank will need to have a presence in rural areas,” said a senior finance ministry official, who did not want to be identified.  Nabard was set up by the government as a development bank with a mandate to ensure credit flow to agriculture and promote integrated rural development. It is the apex institution that refinances banks for onlending to critical sectors, including agriculture and rural infrastructure, and administers many funds on behalf of the government.  Finance minister Pranab Mukherjee, in this year’s budget, had also announced the creation of “Women’s SHGs Development Fund” with a corpus of Rs. 500 crore, to empower women and promote SHGs. “The fund that was announced for women SHGs in the budget can be administered by Nabard,” the finance ministry official said. “There is no need for another organization to dispense with the funds,” he said. Ramesh, however, says he is still in talks with the finance ministry. “We are waiting for final comments from the finance ministry,” Ramesh said. “We will then take up the matter with the Union cabinet.” S.L. Rao, former director general of the National Council of Applied Economic Research (NCAER), says another specialized institution is not needed. “As far as lending to SHGs is concerned, the existing structure is enough particularly with the proposed Microfinance Bill. Overall, Nabard does suffice,” said Rao. “For the poor, the best system is where SHGs save to create a pool and then use funds out of that for further activities. Further, commercial banks and non-banking financial companies have also started lending much larger sums of money to SHGs.”  
Mint

PSU bank CEOs seek elbow room

...The finance ministry, which is now looking into the issue, however, could soon relax the overseas travel norms, a senior government official who did not wish to be identified told Hindustan Times. The government and the Indian Banks Association (IBA) have also held discussions on the issue.....

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Federal Bank to beef up SME, agri lending

At a time when corporate credit growth appears to be slowing, banks like Kerala-based Federal Bank are discovering immense lending opportunities in SME and agriculture sector, especially in providing credit to large-scale farmers...............

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MFIN-NACER study unearths agents’ role in microfinance, but does not find these middlemen in Chennai

....As the Ministry of Finance and the RBI (Reserve Bank of India) are trying to solve the Indian microfinance regulatory puzzle, there is further evidence on the use of agents in Indian microfinance. The question to be asked then is whether and how the proposed Microfinance Bill will prevent use of such middlemen in the future. .............

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