RBI's last window of opportunity – S.S.Tarapore



If we want quick and sharp abatement of inflation, there is no alternative to strong monetary policy measures. And the RBI should take early action before the window shuts



All eyes will be on the RBI Governor, Dr D. Subbarao's monetary policy announcement of October 25. Formulation of the Reserve Bank of India's monetary policy, even in normal times, is an unenviable task, but the ensuing policy comes against the backdrop of an unusually difficult scenario, both global and national. In India, fiscal policy provides no support to monetary policy. On the contrary, the increase in borrowings by Rs 53,000 crore in the second half of 2011-12 will add to the problem of monetary management.  While the RBI needs to signal a continuing tight monetary policy, to enable the borrowing programme to go through, it will have to be liberal in its open market operations and/or provide for a larger accommodation at the repo window. This will inevitably result in upward pressure on the government's cost of borrowing as also in the crowding out of commercial sector credit. And the upshot will be that the overall policy will not be conducive to an anti-inflationary stance. The external scenario is of little comfort to the authorities. Sluggish conditions in the global market will inevitably affect exports while imports would rise, thanks to the distinctly over-valued exchange rate. The balance of payments current account deficit (CAD) will push towards the 3 per cent of GDP level which would cause concern to the authorities. Real GDP growth in 2011-12 could end up close to 7.5 per cent, and while this is a good performance in the context of the global slowdown, the lobbying for a halt to monetary tightening is gathering strength.

Don't change stance

Industry is screaming blue murder, and now economists have joined the chorus crying for a halt to the further tightening of interest rates. It could be argued that credit expansion in the first half of 2011-12, at Rs 1,51,072 crore (3.8 per cent), is clearly lower than the expansion of Rs 1,80,040 crore (5.6 per cent) in the corresponding period of the previous year.  The inflation scenario, which is the primary concern of the RBI, is raging at 9.8 per cent, on a year-on-year basis, which is clearly not acceptable and well above the tolerable level of 5 per cent. It would appear that monetary policy is the only wing of economic policy fighting inflation — the other wings of overall economic policy are merely following an open-mouth policy of talking down inflation without taking any effective measures. In the recent period there have been some pertinent studies by RBI economists. According to the Working Paper by Mr Deepak Mohanty and others on Inflation Threshold in India: An Empirical Investigation, an increase in the Wholesale Price Index (WPI) inflation beyond 5.5 per cent has a negative impact on growth. A premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. The Paper argues that the inflation objective, or target level for inflation, should be lower than the inflation threshold as there are lags in the monetary policy transmission process. Another Working Paper titled Why Persistently High Inflation Impedes Growth concludes that the central bank's objective of containing the inflation perception to 4-4.5 per cent is consistent with the need for balancing growth maximisation, threshold inflation of about 6 per cent and maximising low inflation. These two studies are outstanding seminal contributions on monetary analysis and economists in banks and elsewhere who readily pronounce on monetary policy would do well to imbibe the contents of these Papers.

Strong action

It is sometimes argued that as the RBI did not undertake aggressive policy action earlier, it should now not undertake strong policy action. It has, time and again, been explained that it is important to take strong policy action well before the upper turning point of the cycle. In fact, if this is followed, the upper turning point can be delayed and the economy can creep along the ceiling of growth for a longer period. Now that monetary policy was not used aggressively during the upturn of the cycle, should RBI put a pause to the series of interest rate increases? Such a move would be disastrous as inflation can get totally out of hand. The longer the RBI delays strong policy action the more inflation gets entrenched in the system.  The RBI need be no apologist for its monetary tightening. It would be best if, on October 25, the RBI raises the repo rate from 8.25 per cent to 8.75 per cent and also raises the cash reserve ratio from 6.0 per cent to 6.50 per cent. While these measures may appear harsh, if what we want is a quick and sharp abatement of inflation, there is no alternative to strong monetary policy action. The window of opportunity for strong monetary policy action is very narrow and the RBI should take early action before the window shuts. While there is some advantage in advanced guidance on the course of monetary policy, excessive guidance can severely curtail the effectiveness of monetary policy.

HBL 

RBI must fight inflation despite slowdown: Rangarajan



Inflation remains way above what is considered as the comfort level, said C. Rangarajan



New Delhi: India’s economy will grow at a lower-than-expected pace of 8% during the fiscal year, but a slew of rate rises are not solely to blame, and the Reserve Bank of India (RBI) should keep up its inflation fight, a top adviser to the prime minister said. Inflation remains way above what is considered as the comfort level,” said C. Rangarajan, the chairman of the prime minister’s economic advisory council said on Thursday. “In that situation it becomes absolutely essential for the central bank to act.”  At a time when peers around the world are easing monetary policy to head off a downturn in the global economy, the RBI is widely expected to raise rates again at its 25 October policy meeting. “The primary responsibility of the country’s central bank is to tame inflation,” Rangarajan said at a news conference in New Delhi. In a further sign the rate increases have failed to rein in inflation, the latest weekly data showed the food price index was up 10.60% through 8 October versus a year ago, compared with a 9.32% reading in the prior week. Sluggish industrial output growth, high rates and fallout from the euro zone crisis have all taken their toll on Asia’s third-largest economy, with its main policymakers revising down their growth forecasts for the fiscal year. Businesses have seen a steady rise in their cost of funding following a dozen rate increases by the RBI even as emerging economies such as Brazil and Indonesia have eased policy. “Slow growth in industrial production should not be entirely put at the door of rising interest rates,” he said, adding that economic growth was also hurt by bottlenecks on the supplyside, citing coal shortages and problems in the mining sector. Economists expect India’s slowing growth and inflationary pressures to stretch well into next year, a Reuters poll showed, and consensus predicts inflation at 8.8% in the year ending March 2012, much higher than their previous forecast in July.  Rangarajan, the adviser to Prime Minister Manmohan Singh echoed finance minister Pranab Mukherjee’s comments on Wednesday that most observers expect India’s economy to grow by less than 8% in the fiscal year.  The Union budget had projected economic growth of around 9% for this fiscal year that ends in March 2012. Both officials appeared resigned to another rate hike, despite grumblings from industry leaders that high borrowing costs were damaging investment. Rangarajan said India needs to use both fiscal and monetary methods to tame inflation and to maintain high growth. He predicted headline inflation would ease to 7% by March, when the current fiscal year ends. The council provides economic forecasts twice every year. It had revised downward its initial forecast of around 9% growth to 8.2% in July. Rangarajan said it will be difficult for India to meet the budgeted fiscal deficit target of 4.6% of GDP this year, without controlling subsidies. However, he said he did not expect the deficit to breach 5%. He said India needed to raise controlled prices for diesel to cut oil firms’ revenue losses on retail sales, adding such a move could happen when inflation starts moderating. India freed petrol prices in June 2010, but still subsidizes diesel, which accounts for about 70% of all petroleum products used in the country. Private economists see the fiscal deficit widening to up to 5.6% of gross domestic product in the current fiscal year, against government’s target of 4.6% as the gap between tax receipts and spending widens. India’s industrial output growth has dwindled to low single digits, while car sales are expected to rise just 2-4% this fiscal year, an industry body had forecast, sharply lower than 30% growth last year.  Headline inflation has been above 9% for 10 straight months, driven up by snags affecting food distribution, weakness in the rupee and high oil prices.

Mint

Singh’s Top Aide Signals Need for Higher Interest Rates in India

... “When inflation remains at a level which is way above what is considered to be the acceptable threshold level of inflation, then the monetary authority has a major responsibility to contain inflation, and therefore that becomes the primary focus of the monetary policy.”....

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Coin crunch forces traders to buy change at 15% premium

NEW DELHI: Expect a pocketful of toffees by the end of your Diwali shopping this year as, traders claim, loose change has become scarce. Coins of Re 1 and Rs 2 denominations are disappearing fast, they say, adding that they are forced to buy change from unauthorized agents for a premium that's shot up with the rush for festive shopping. Is it a fact, or a ruse for handing out toffees to customers? TOI asked a shopkeeper to call up one such currency agent who provides low denomination notes to several shops in Khan Market. The recorded conversation revealed that the commission on notes and coins ranges from 1.5% to 15%. "Diwali ki wajah se bhav bahut badha hua hai... Sikka toh bahut mehenga hai... 15% se kam nahin milega (rates are high because of Diwali. Coins, especially, are hard to get for less than 15%)," said Ram (name changed), the agent. As per this agent, the going rate for a bundle of crisp Rs 10 notes, which contains 10 packets of 100 notes each, is Rs 400. For Rs 20 notes, it is Rs 500 per bundle. And coin bags (2,500 coins each) fetch a flat 15% commission regardless of the denomination. Market associations claim they have to depend on agents as banks refuse to provide adequate low denomination currency. "Shoppers don't have change, as they withdraw money from ATMs. Almost all customers give us a Rs 500 note. We can't say no to them, so we have to arrange for loose change every day. We need low denomination notes and coins amounting to Rs 4 lakh every month. Banks don't provide us sufficient change, so we have to buy change worth Rs 1 lakh from the market," said BR Gopala, owner of Gopala Sweets in Lajpat Nagar.  Following repeated complaints from shop owners, Khan Market Trader Association (KMTA) carried out a survey to find out how many shops source currency from agents, and the average amount they pay.  "On average, shopkeepers pay Rs 8,000 to Rs 12,000 to source coins and new notes. Ours is a VVIP market, so we avoid giving soiled notes to customers. Khan Market's monthly requirement of loose currency is Rs 70-75 lakh, but we get only Rs 20-25 lakh from banks. We have informed RBI about the survey, but they have done nothing to address the problem. Most banks say that they don't have low denomination currency," said Sanjiv Mehra, president of KMTA.

While it denied reports of a shortage of coins, Reserve Bank of India accepted that there was a 'slight imbalance' in the demand and supply of small currency. "We have a lot of Re 1 and Rs 2 coins with us. There is no shortage of these coins. The distribution depends upon the supply received from government presses and mints. There may be some transient shortages in particular denominations during the festival season," said Chandan Sinha, Regional Director, RBI. "We have never received any official complaint from banks or individuals regarding agents selling currency (of any denomination). But our market intelligence does suggest that there are stray incidents of small denomination notes and coins being sold at a premium," he added.  The problem is severe in markets like Lajpat Nagar, Sarojini Nagar and Chandni Chowk where shoppers prefer to pay cash. Grocers, eateries and chemists generally need a lot of change. "It really pinches us when we have to pay 15-18% for a bag of coins. A lot of shopkeepers have stopped keeping items that cost less than Rs 10. But traders buy change from these agents, as they want to avoid the inconvenience of going to RBI to get the currency," said KS Bakshi, president of Lajpat Nagar Market Association.  In Sadar Bazaar, currency agents ply their trade openly. An agent in Sadar Bazaar told TOI that this was the time to stock up on change as the rates would shoot up soon. "We get the currency from banks. The rates will shoot up during the wedding season. The demand for notes of Rs 10, Rs 20 and Rs 50 goes up during the wedding season," said Gaurav (name changed).
TOI

A DIFFERENT BRIIC IN THE WALL?

Brazil and Indonesia, members of the motley crew of BRIIC countries (Brazil, Russia, India, Indonesia, and China), have recently seen their central banks cut policy rates. Consequently, there is some speculation that others may follow suit, including the Reserve Bank of India (RBI). However, this perspective, it would seem, is based heavily on a follow-thy-neighbour assumption and not on country-specific considerations......

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'Outcome of EU meeting vital for RBI' - Warren Hogan, Australia and New Zealand Banking Group

The European Union Summit on Sunday would try to work out a plan to solve the region's debt crisis. Warren Hogan, chief economist and head (global markets research), Australia and New Zealand Banking Group tells Parnika Sokhi this would have an impact on India. Edited excerpts:

What are your expectations from the Reserve Bank of India’s (RBI) policy review next week?

The real issue for central banks of Asian countries and RBI is how much of impact the problems in Europe would have on inflation in India. The real issue, in a policy perspective, is if you have the policy settings right, you can afford the pause. Of all Asian economies, India is heavily linked with Europe, and that's why for RBI, the outcome of the EU meeting would be important.

What do you think would be outcome of the EU meeting?

Policymakers in Europe need to demonstrate to the market that their priorities are restructuring of debt and recapitalisation of banks, and that the broad framework of financing these activities is in place. We can wait for the actual plan till the G20 meeting, but the outline is needed now.

Are the problems of the US and euro zone interlinked, and how can the US deal with its own challenges?

The Europeans are going through what the US went through in 2009. Now, US banks have good capital and reasonably healthy balance sheets, the household sector is de-leveraged, house prices have come down and household debt has fallen. But corporate America is not very confident on whether investing is the right thing to do. The final issue is its currency is highly over-valued, and the lower the currency goes, the more likely is it to secure investments from corporate America

Which Asian economies would be more vulnerable to these developments in the West?
India has the highest exposure to Europe, but the economies that are most exposed to the slowdown are economies like Singapore, Hong Kong, Taiwan and Philippines. The slowdown has not had a big impact India, China and Indonesia.

BS

RBI may hike rates by 25 bps on Tuesday: RBS

The Reserve Bank of India is likely to go in for another round of rate hike of 25 basis points (bps) when it meets on Tuesday, and then will pause till March, according to a poll by the British lender RBS. The 10th edition of RBS Clients' Survey, which is the third this fiscal, covered 103 local market participants, including corporates, banks, insurers and mutual funds among others. "...An overwhelming majority of 67% are sure of a 25 bps hike in the repo rate, and then the RBI pause till March," said RBS India Managing Director & Head, Markets, Ramit Bhasin. However, 30% of the polled expected the central bank to pause this time around. None expected any change in cash reserve ratio, which is pegged at 6% for almost two years now. Reserve Bank Governor Duvvuri Subbarao will unveil the second quarter monetary policy on October 25; it is widely expected that he will go for yet another round of tightening. The central bank has increased its key short-term policy rates a record 12 times since March 2010 to contain runaway inflation that has remained at elevated levels despite the government's discomfort. Core inflation stood at 9.72% in September. Interestingly, a majority of the industry believes that the country is near the end of the tightening cycle. They also expect the repo rates to be stable at 8.5% in December and March. On the strength of rupee, majority of those surveyed believed the local unit was likely to trade over 50 against the dollar in the near term, given the weak fundamentals of the economy.

BS

RBI set to enter a 'wait and watch' phase

The Reserve Bank of India (RBI) has a tough task ahead on October 25, when it announces its monetary policy for the second half of this financial year. On one side are industry bosses and consumers, who are keenly looking up to RBI and hoping it does not signal more increases to their borrowing costs. On the other side are inflation hawks, who would still want to see tightening by RBI, irrespective of the growth dynamics. We think RBI should be looking to press the pause button now, a view that I had held from September 16. To reiterate, in the September policy, RBI had indicated its future stance on monetary policy would be influenced by “signs of downward movement in the inflation trajectory”. At that time, RBI also expected the impact of its past policy actions “should now be increasingly felt in further moderation in demand”, and, in turn, reverse the inflation trajectory in the later part of FY12. Some definitive signs of a slowdown have also emerged now. Manufacturing PMI had been consistently dropping from April, but the more pertinent issue is it is now close to the contraction zone, tending to tip below 50. The services PMI is already below 50, indicating a contraction in this segment. Further, some lead indicators for growth such as excise collections have tended to show a very sharp contraction, while earnings growth for the Bombay Stock Exchange-30 companies (ex-energy) is also expected to be lower in the second quarter, compared to the first. Anyway, the slowdown story in segments such as that of passenger cars, is well known. The history of past policy tightening by RBI suggests it has tended to pause after inflation peaked out. In September, headline WPI inflation stood at 9.72 per cent, down from the previous month, while the more relevant non-food manufactured products inflation is now down to 7.62 per cent from 7.74 per cent in the previous month. There also appears to be a close correlation between PMI manufacturing and non-food manufactured inflation, lagged by six months. This should suggest to RBI that the impact of the past rate rises are percolating into the economy. However, the suggestion of a pause in the current rate rise cycle in no way indicates RBI would be changing its monetary policy stance soon. The fight against inflation is likely to be intact, and the rhetoric of RBI on inflation would continue to stay hawkish. The stance is unlikely to change, unless there is a significant drop in headline inflation numbers, which could be much later. If all goes well, and global commodity prices do not surprise on the higher side in the interim, I would expect headline WPI inflation to stand at 5.5-6.0 per cent in the second quarter of the next financial year. Hence, till then, RBI should be seen holding on to its tight monetary policy stance.

BS

Mixed reaction to move on pre-penalty on home loans

... "Pre-payment penalty is not a major revenue earner but used to serve as a deterrent. With exit barriers removed, banks will be at an advantage as they can woo away our customers with lower interest rates while we don't have the same advantage. Unless RBI ensures a level-playing field HFCs will go bust,"...

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RBI defers putting CDS guidelines into effect

The Reserve Bank of India (RBI) said on Thursday said it had postponed putting into operational the credit default swaps (CDS) guidelines for corporate bonds that were issued on May 24. A new date will be announced shortly, the RBI said in a statement. Earlier, the RBI had said the guidelines on CDS would be effective from Oct. 24. Necessary infrastructure required for the launch of the product is being put into place, the RBI said. "Market participants have asked for certain clarifications regarding documentation, operational aspects and the arrangement for the necessary institutional framework. Hence it has been decided to postpone the date," RBI said. A CDS is a swap contract in which the buyer of protection against a bond or loan makes regular premium payments to a counterparty who assumes the risk in the event of a default.

Moneycontrol

Now, Economists can’t Agree on Policy Direction

Some analysts, traders & economists take a u-turn and call for just one more rate hike next week, a few say RBI could continue with the bias

For the first time in more than three years, economists, analysts and traders are at sixes and sevens on what the monetary policy stance should be. They are changing their stance so quick that few are sure as to what should be the direction. Some were calling for a pause in interest rate increase last month itself. But when it did not happen, they said RBI governor D Subbarao would not raise rates on October 25 at the half-yearly review. Now, there is a view he would not just stop with a raise next week, but could prolong it. Indeed, Subbarao himself had reversed his stance, of course, a year ahead of the rest when he indicated at a pause in November last, but soon shifted it. “While the view of the house is that RBI might pause for now, I think this will be the last rate hike and then a pause,” said Ramit Bhasin, MD-global markets at the Royal Bank of Scotland. Bhasin’s RBS is not alone in a confused state. Bond yields are now expected to rise to as high as 9.25%, indicating tougher macro economic environment as government overshoots borrowing targets. Benchmark 10-year Gsecs ended at 8.79% after rising to 8.82% during the day. Goldman Sachs, which termed last policy rate increase unnecessary, given the sharp slowdown in economic indicators, has now taken a u-turn.  “We now think RBI may hike policy rates again on October 25, due to recent hawkish commentary coming from the central bank,” Goldman’s Tushar Poddar said in a report on Thursday.  This is in contrast with what he believed just a week earlier.  “The significant decline in domestic activity, the adverse global environment, falling asset prices and tightening financial conditions suggest to us that RBI will likely pause on October 25,” Goldman said on October 12.  Policy makers and economists are clueless as to where the economy is headed. Inflation remains above 9% despite 12 rate increases, but the index of industrial production growth slumped to 4.1% in August, compared with a forecast of 4.7%. Motorcycle and tractor sales are surging with loans growing at an annual pace of 20% while sales of cars are forecast to grow at an anaemic 4-5%.  ‘We revise our expectation. Inflation is still too high for the central bank’s comfort,” Sidhartha Sanyal, chief India economist at Barclays Capital, said recently. “RBI has made its stance and priorities explicit on the growth/inflation debate. Therefore, the continued weakness in industrial production is not likely to deter the central bank from another rate hike,” he said.  With the macro-economic situation set to deteriorate, many fear yields may get volatile, unless RBI intervenes. “Any delay in the open market operations could further accentuate supply pressure, pushing the 10-year GoI sec yield beyond 9%,” Standard Chartered said in a recent report.

ET 

Acting lessons for RBI- Jamal Mecklai

Many years ago, I went through a very brief – and eminently unsuccessful – period of being a theatre actor. I was living in New York, where everybody was an actor or an artist – this is long before Wall Street became sexy – and, having just quit my job, happened upon an opportunity to – get this – play the lead in an off off – very off – Broadway show. I went to audition, and, despite the fact that I don’t know anything about acting – my wife will tell you that I am genetically unable to take direction – I got the part, playing opposite the director’s wife. There is a strange story behind that, but that’s for another time (and, perhaps, publication). Anyway, we got started, and after a couple of rehearsals, the director – a Malaysian fellow, who I remarkably re-encountered recently after some thirty years – frustrated at my inability to create a character in any way different than myself, suggested we have a few training workshops. We met the next day, just two of us in his living room. We started out with an exercise, where I was to internalise news I had just received that absolutely required me to leave the room but I wasn’t to tell him why; correspondingly, he had to keep me in the room at all costs. So, we began. I tried to push past him and he held me back – no violence or strength, just an exercise. I tried this repeatedly, and each time he held me back. Finally, frustrated after seven or eight attempts, he said, OK, let’s reverse roles. He tried to push past me and I held him back. He tried again; again, I held him back. Then, he suddenly pointed out of the window and shouted, Look at that. Distracted, I looked away, and he slipped out.

Lesson: If you need to achieve something, but pushing steadfastly on the most obvious lever doesn’t work – indeed, appears to have no impact at all – change tack and try something different.

Hardly earth-shattering, but often the most obvious truisms need to be relearned again and again. RBI has been edging rates doggedly higher – 12 times since March 2010 – but inflation is still loudly in the room. The classic approach did appear to work at first, with inflation coming down nicely till November, by which time industrial growth had started showing signs of stress. After that, however, despite RBI’s steadfastness – let us kill inflationary expectations – inflation has started climbing again and appears to have stabilised just below double digits. Till recently, I had felt that RBI was on the right track – inflation hurts the poorest the most and so, in a country like India, policy should err (as, by definition, it will) on the side of hawkishness on inflation. Blinded by this other truism, I paid scant attention to Kaushik Basu’s as-usual-sound comments (recently silenced) that as strong growth is redistributed, we may need to live with somewhat higher inflation. Indeed, the government’s redistributive policies as part of its inclusive growth mantra – notably, the NREGA – has, indeed, resulted in higher rural incomes. This was highlighted to me recently by the fact that even as fertiliser prices have shot dramatically higher, demand at the farm gate is still hugely overwhelming supply. Clearly, farmers – or, I should say, some farmers – are not hurting, despite the higher inflationary environment. Then, of course, there is the fact that higher interest rates have no impact on inflation caused by supply constraints – indeed, they could worsen the situation. Added to this is the recent recognition that China – what a way the world turns – is now exporting inflation; again, something higher domestic rates can only exacerbate. Then there is the point raised by Surjit Bhalla that if we shorten the cycle of inflation measurement, prices are not rising anywhere near sharply enough to warrant further tightening. Indeed, given the increasingly dynamic nature of the world today, perhaps this measurement issue should be carefully considered. The market, too, is saying enough. The devolvement of the last G-Sec auction is a case in point. The inability of the rupee to take advantage of the recent Euro strength (dollar weakness) is another. The continuing demand for foreign currency borrowings, despite extravagant spreads over LIBOR, is a third. Finally, and perhaps most importantly from an operational perspective, the populace at large and, in response, the politicians appear to be more focused on corruption and governance than prices – just the opportunity for RBI to surprise us all, stand pat, and see what happens outside the room.

BS

Control inflation but not at the cost of growth

.....One would like to see that inflation is controlled, but not at the cost of growth. Perhaps, going forward, one could see the inflation numbers coming down probably on account of the various policy initiatives which the RBI has taken. There is always a lag between the action and the result...........

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Pranab’s inflation options: Higher taxes or higher rates?

...Over the last six months, even as Subbarao sounded firm, the government undermined him by talking of rates being too high and indulging in loose talk of inflation-control being just round the corner. This continues to be a pipedream, and inflationary expectations have taken hold in the economy. Both incomes and prices will continue to spiral in this scenario....

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Inflation in double digits, will weigh on RBI policy

....On the negative impact of rate hikes on economic growth, Rangarajan, a former RBI Governor himself, said growth has slowed down due to other factors as well and it would not be fair to blame just rate hike for it.....

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