Monetary policy review: RBI Governor D Subbarao likely to raise repo rate

... Subbarao is torn between a central banker's commitment to rein in inflation and the demands of the business community to stop raising rates that is affecting profitability. The prolonged low rate of interest rates after the 2008 credit crisis had created such a strong demand momentum that even after the 12 hikes, bank loans are growing at an annualised pace of 20%, above the RBI's target of 19%.....

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It is time for another RBI policy statement

...This time, the clamour has been more voluble than at any time in the recent past. Apart from economic slowdown, which is now felt across several sectors and the macroeconomy, the RBI, should take note of the worsening global economic situation and signal a pause. Many central banks, those of the U.K., South Korea, the Philippines and Malaysia have recently signalled their intention to wait and watch. However, it is highly unlikely that the RBI will follow suit. A 25-basis point hike in the repo rates seems to be the most likely policy option.....

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Everyone wants a rate hike breather from RBI

WHEN you give a gun to a soldier and then send him into battle to fight an identified enemy, he’s bound to shoot. So those who blame the Reserve Bank of India (RBI) for shooting by increasing interest rates in its declared battle against inflation are of course being unfair. Monetary policy is the only credible weapon in the central bank’s armoury and it is bound to deploy it. A central bank can squeeze out liquidity from the market in a variety of ways and raising interest rates is certainly one of them. The RBI must expect medals for soldiering on, even though it has not yet fully vanquished the enemy, and must wonder why so many are throwing darts at it. It is in recognition of this fact that this newspaper has backed the RBI’s rate hike moves for most of the last few months. However, at the time of its last policy statement we expressed for the first time in more than a year our doubts as to whether further rate hikes were worth the pain. At that time, as has since been revealed by the RBI itself, the central bank’s external policy advisory group had in fact advocated a pause. RBI Governor Duvvuri Subbarao chose to ignore that advice on the grounds that he was not convinced that he had broken the back of inflationary expectations and was duty-bound to deploy firepower. Since then professional economic opinion, with the almost singular exception of his monetarist predecessor, C Rangarajan, currently chairman of the Prime Minister’s Economic Advisory Council, has increasingly joined the naysayers on interest rate hike.  While many analysts think that the RBI governor is not going to let go, and a great majority of economists want to see inflationary expectations further blunted and price levels lower, the vote in favour of apause in the rate hike cycle is gaining popularity. Apart from business and trade, bankers and other policy makers feel the government must act on other fronts, especially fiscal. An important factor that is making the “pause” argument stronger is the current environment of global uncertainty and fears of recession. While “business” may be “better than the mood”, the fact that the mood is so downbeat is beginning to worry many players.  A pause in rate increases, with adequate warning that the hike cycle may be resumed without warning and that the RBI will remain hawkeyed and keep its finger on the trigger, may help improve the mood. This may be a risky strategy, but given the global environment it is a risk worth taking. Long-distance runners know that a pause for a breather is not likely to come in the way of their winning the race. Finally, if the RBI liberates itself from this six-week cycle of making policy statements, it may feel less obliged to act every six weeks. This being the Deepavali week, the central bank can light up the markets with a pause. 

BS

RBI's expected rate rise may prove one too many

The Reserve Bank of India (RBI) is likely to raise interest rates again on Tuesday, but that doesn't necessarily mean it should. This would be the 13th rate rise since March 2010 for the Reserve Bank of India. It defies the growing case for standing pat as local and global conditions worsen, adding to the prospect it may be forced soon to reverse direction.....

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Run-up to Policy - No Curves on This Policy Street

Most Economists See 25 bps Hike - RBI may also revise upward its year-end inflation target to 7%, finds an ET poll

A sliding rupee, the government’s deteriorating finances and the persistence of a cheap money policy in the West may prompt Reserve Bank of India (RBI) Governor Duvvuri Subbarao to toughen his stance against the call for a pause in raising interest rates on Tuesday, despite a dozen increases since March 2010. The governor will raise the key repo rate — the rate at which the RBI lends to banks — by 25 basis points to 8.5% and probably cut economic growth forecast from the current 8%, when he places the quarterly monetary policy review on Tuesday. Indeed, there are chances of a possible upward revision of year-end inflation forecast of 7% due to little signs of price pressure easing, and missing it last year, an ET poll of 20 economists show. “Whichever way one looks at it — headline, core, food, fuel — inflation is unacceptably high and remains a big concern,” says Brinda Jagirdar, chief economist at the State Bank of India. “Besides, with the rupee weakening, imported inflation is another worry. Higher market borrowing by the centre and a potential fresh quantitative easing in developed economies could add to domestic liquidity, fuelling inflationary pressures,” she adds. Subbarao is torn between a central banker’s commitment to rein in inflation and the demands of the business community to stop raising rates that is affecting profitability. The prolonged low rate of interest rates after the 2008 credit crisis had created such a strong demand momentum that even after the 12 hikes, bank loans are growing at an annualised pace of 20%, above the RBI’s target of 19%.  Inflation — as measured by the Wholesale Price Index (WPI) — was at 9.72% in September, above the 8% mark for the 19th month in a row, defying expectations. This is despite the ‘analytically bewildering’ Index of Industrial Production (IIP) data that came in at 4.1% for August, showing slowing output. Although, car sales growth is slowing, other businesses such as motorcycles and televisions have been witnessing strong growth. “We need to bring inflation down in order to bring interest rates down,” Subbarao said recently in Jaipur. “When inflation is as high as 9.8% it is difficult to bring it down without compromising on growth. So, we are trying to trade off at this time on bringing down inflation, even if that means bringing down growth by a few basis points.’’ But business climate is worsening with companies postponing new projects due to higher cost of funds and unpredictable raw material prices that make business forecasting difficult. L&T cut its full-year orders forecast two third to 5%. Thermax, an electrical equipment manufacturer & Crompton Greaves, its competitor, also said that business is becoming difficult.  “There is zero demand for loans for new projects,” said State Bank of India chairman Pratip Chaudhuri. On the contrary, HDFC Bank, Axis Bank and other lenders are reporting more than a quarter jump in their net profits with retail segment contributing the biggest growth. The macro numbers and micro developments are diverging substantially, creating a paradox for policy makers. More than the inflation, it is the government finances that may be creating bigger trouble for policy makers in Mint Street. “We believe India’s policy mix is worsening with a much tighter than expected monetary policy and looser-than-expected fiscal policy,” says Tushar Poddar, chief India economist at Goldman Sachs. “With market and consensus expectations of a rate hike on October 25, monetary policy is likely to tighten further. Along with this has come a worsening fiscal balances due to higher subsidies on oil and fertilisers but more importantly, a significant slowdown in revenues.”  The treasury has said it will borrow Rs. 52,800 crore more than what it budgeted for in February.

ET  

The quality of inflation - T.C.A. SRINIVASA RAGHAVAN

If what you buy today is better than what you were buying in the past, the cost of that improvement in quality has to get reflected in prices

There has been much debate on, around and about inflation in India because, since early 2008, it has been soldiering on at about 10 per cent per year. The Reserve Bank of India, after having shot its monetary bolt, now says it is because of shortages. The Government says it is because of high prices of energy and other commodities. The Left says it is because of speculation by international investors. The economists say it is because of the high fiscal deficit. And many others say it is because of growth. All these explanations are true but there is one other reason that no one is talking about. It was pointed out to me by the former editor of this paper. He says it is also because of better quality. That is, if what you buy today is better than what you were buying in the past, the cost of that improvement in quality has to get reflected in prices.  Costs are bound to increase when loosely sold items get packaged, when investments are made in supply chains, when manufacturers start building in energy efficiency, and so on.  I posed the question to two people who should know: the chief statistician and the chief economic advisor.Both said that at present there is no way of assigning the cost of improvements in product quality and, therefore, no way of knowing how much of the inflation is being caused by it. But think about it: the reason you don't mind paying more for the “same thing” today could well be because it is better than what that thing was in the past.

The good, the bad and the undeserving

Sometimes, you tend to look back and wonder about this and that. My time has been largely misspent in the company of economists who, I have concluded, are of three types: the good, the bad and the undeserving. The best amongst the good ones speak in murmurs, the bad ones do regressions and the ugly ones preen like a brigade of frogs at a beauty parade. I write this because recently I had to put up with some very self-congratulatory talk. My own view, after having studied the matter in depth, and at close range, is that the worst of the last group are the ones who served as chief economic advisors (CEAs) between 1982 and 2002.During this period there were five and a half, the half being a “chief consultant”. He was the best by far and therefore ousted after 15 months. In the 1980s, one left after two years and another after about a year and half. What did the two longest serving ones achieve? After all, one served through most of the 1980s and the other through most of the 1990s? The first, because of his political astuteness, became finance secretary in December 1989 and, thanks to his nervous cautiousness, watched helplessly as the economy wrecked itself in 1990; the second simply played fourth fiddle to the Manmohan Singh, Montek Ahluwalia and C. Rangarajan trio that oversaw the liberalisation of the economy in the early 1990s. In the last 10 years there have been four CEAs. All have had excellent technical skills but, as their short tenures show, not political skills. As a result, they have not tried to anticipate what the Prime Minister wants to hear and tailor their reports accordingly. They have served their ministry, not the PM. This has stood the country in good stead. The current incumbent's term will end soon. I have just the person in mind for the job.

HBL

Why a rate hike is warranted

...There is widespread belief in the market that RBI will raise its main policy instrument, i.e., repo rate under liquidity adjustment facility, by 25 basis points. The recent pronouncements by the RBI Governor Dr. D. Subbarao and Deputy Governor Dr. Subir Gokarn, appear to point in that direction.....

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Time for RBI to cut rates

....High interest rates are to be blamed the most. An overwhelming majority of the respondents — 67% — felt it is time for the Reserve Bank of India to reverse its hawkish stance and start cutting interest rates......

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Price heat: brace for another rate hike from RBI

....“While the RBI’s policy decision remains a close call, we expect the central bank to deliver another rate hike of 0.25 percentage points — in contrast to most other central banks — as headline and core inflation remain too high,” ....

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Global turmoil impacts rupee

....More than a month, domestic foreign exchange markets were testing low levels the rupee could reach against the dollar. Markets expected the central bank to intervene to check the fall of the rupee. But instead of doing so, it allowed the rupee to decline gradually ensuring no volatility affecting the market......

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'RBI should link saving deposits return to repo'

Reserve Bank of India should deregulate savings deposits and link the return on these deposits to its repo rate as depositors are being ripped of Rs 36,000cr under the present system, says an Indian Institute of Technology report

The repo rate - the rate at which RBI lends overnight funds to banks - is used by the central bank as a benchmark for signaling policy rates. While all other interest rates, including fixed deposits, are decided by banks themselves, the return on SB (savings bank) accounts is fixed by RBI. According to the study, the fixed rate (4%) is low even as cost of servicing customers has shrunk because of technology. At the same time the real returns to the depositors are negative as rate of inflation is more than double the savings deposit rate. The study has been undertaken by Ashish Das from the Department of Mathematics, IIT, Mumbai. In the past a study by Das had prompted the central bank to change the mode of calculating interest on savings deposits from minimum balance during the month to a daily interest calculation. Now Das has pointed out that banks are saving close to Rs 36,000cr in interest payments because account holders are not getting their due. The research shows that on an average there have been about Rs 13 lakh crore parked under SB deposits and about Rs 4.5 lakh crore in current account deposits in the past 12 months. These current account and savings deposits are termed as CASA or 'demand deposits' and are much sought after by banks as they are a source of low-cost funds. According to Das, although depositors have the freedom to withdraw funds at will on an average, 92% of the total amount of SB deposits held by banks always remains with the bank throughout the year. Given the present rates prescribed by RBI on savings deposits, banks pay roughly Rs 48,000 crore a year. Now if banks were to provide depositors a return equivalent to what they pay on one-year deposits, which on an average is around 7%, they would have to pay 84,000 crore on these same deposits. "The prime reason why depositors' money is not receiving more interest is the RBI's choice to give the balance Rs 36,000 crore to the banking sector to retain their profitability and to cross subsidise their expenditures," said the report. According to Das, the floor rate for savings deposits can be around half the repo rate. The system can be made pro-consumer by rounding rates to the higher percentage point.  Bankers agree that there is scope to increase returns on savings deposits. However, all the large banks are against complete deregulation of savings rates as they feel this could trigger a rate war by upstart banks, who have little to lose. Bankers also admit that technology has vastly increased profitability and that money is likely to lie longer in bank account as more depositors use electronic modes for payments.

TOI

Eurozone woes, RBI meet to set mood for markets

Taking positive cues from the US markets, Indian bourses may open with gains but the mood is likely to stay cautious as the RBI meets on Tuesday to take stock of inflation and European leaders moot a solution to the eurozone debt crisis, say analysts.......

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Banks to decide on ending loan pre-payment penalty

Close on the heels of the National Housing Bank (NHB) waiving off prepayment penalty on old home loan borrowers and pressure mounting from the Reserve Bank of India (RBI) on banks to follow suit, the management committee of Indian Banks’ Association (IBA) will be meeting on October 25 to decide on the next course of action............

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Mobile banking for financial inclusion

............What is needed is an innovative business model addressing the key concerns of security of deposits, low transaction costs, convenient operating time, minimum paper work, frequent deposits and easy access to credit and remittances — all tailored according to the income and consumption pattern of the targeted population.

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Value of cheque transactions down 8% in Aug: RBI

The total value of transactions carried out through cheques across the country in August 2011 amounted to Rs 7.43 lakh crore, down by 8.3% over that in the same month last year......

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JKB, RBI conduct awareness programme

SRINAGAR: With a view to inculcate the spirit of entrepreneurship in youth from a cross section of society to check the menace of rampant unemployment in the state, J&K Bank Rural Self Employment Training Institute (RSETI) Baramulla on Saturday organised awareness programme in collaboration with Reserve Bank of India (RBI) at Government Degree College Sopore. The programme witnessed good presence of students especially from the Departments of Commerce, Business Management and Economics. R.K Meena AGM RBI was Chief Guest and Nasreen Malik Principal Degree College presided over the function. Departmental Heads M.D Khandwaw, Ab. Majid Dar, Ab. Rashid and Firdous Ahmad also took part in the deliberations and made the discussion interested. Speaking on the occasion, Meena AGM RBI gave a detailed lecture touching upon various functions RBI including monitory, fiscal and financial policy, currency circulation and control, regulations, bankers to the last resort, financial inclusion, fake currency, ATM, debit/ credit card operations, lotteries, NBFCs, impact of recession, market investment, banks ombudsman, Lead bank scheme, role of RSETIs and setting up of Financial literacy and counseling centers by banks. Speaking on the occasion, Director RSETI Riyaz Ahmad Mir said, “RSETI attempts to turn job seeking youth into job providers after giving them free training under the programme entrepreneurship development for a period depending on the line of activity they choose.” After giving them certificate, he said, the institute hand holds them for a period not less than two years so that they establish their own enterprise without hassles from government departments or financial institutions. Senior Executive Manager J&K Bank Ghulam Rasool Hajam, Lead District Manager Gh. Hassan Wani also spoke on financial inclusion and banking schemes particularly of J&K Bank. Muzaffar Hurra APO from DRDA Baramulla spoke on SGSY, MGNREG and functions of DRDA. Post lecture session, Meena interacted with the students and faculty members of the college and also presented gifts as a matter of good gesture during quiz session amongst the winners. Informative literature was also distributed among the participants. Principal Nasreen Malik concluded the proceedings thanking J&K Bank for organising such an educative programme at the college that tries to ensure that financial literacy also is carried forward by the students’ community to large sections of people across the north zone.

http://statetimes.in/news/index.php/2011/10/23/jkb-rbi-conduct-awareness-programme/

Of teaser loans and prepayment

....The RBI is on the dot, except that the rider that the borrower should be prepared to prepay from his own sources, which means he should not be asking a new bank to pay off the loan, may be a tad hard on him, in addition to the difficult task of proving that the prepayment is from his own sources. The banking ombudsman can certainly work out a compromise formula, especially when a borrower is unable to take on the might of the lender. .....

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'Many in body, one in mind'

... clearly, the macroeconomic canvas is complex. But is this enough to force the Reserve Bank of India’s (RBI) hand? Inflation remains stubbornly high, global commodity prices are high despite a weakening global recovery and there are as yet little signs of downward movement in the inflation trajectory that RBI wants to see....

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Investors wait for RBI rate tweak and Diwali

...For those long on equity, a 50 basis point hike is negative; while a pause by the RBI would have the same effect on those with short positions on equity. .....

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Business confidence of SMEs declines

New Delhi: The business confidence of small and medium enterprises (SMEs) on the economic outlook for the October-December quarter has declined due to high inflation and fears of a further hike in interest rates by the RBI, industry body CII has said. The Business Confidence Index (BCI) of SMEs for the third quarter stood at 54.7, a decline of 2.5 points as compared to the July-September period, CII said. The survey is calculated on the scale of 0-100, moving from unfavourable to favourable situation. "Inflation and high credit cost have certainly affected the Micro, Small and Medium Enterprises' (MSMEs) sentiments regarding credit availability," CII said. The Reserve Bank, in its mid-quarterly credit policy review on September 16, hiked key short-term lending (repo) rate and the short-term borrowing rate by 25 basis points each. The central bank has hiked interest rates by 350 basis points since March, 2010, to curb inflationary pressure. It is scheduled to review interest rates again on October 25. There are expectations of another rate hike in view of spiralling prices. Besides prices of edible items, the general inflation has remained stubbornly over 9 per cent since December 2010. "We live in an age where everything is interlinked and nothing happens in isolation and the tightening policies around the world will affect MSMEs in particular," CII Deputy Director General Gurpal Singh said. The slowdown in economies like Europe and US is also impacting the business of these companies. The chamber, however, said the situation is somewhat ameliorated by RBI's initiative of providing two per cent interest subsidy to exporters who are operating in sectors like handicrafts, handlooms and carpets. Within the confidence index, respondents expected the manufacturing sector (in terms of input cost) to outperform the services sector. The BCI for manufacturing industry stood at 27.7 for the October-December period, compared to 20.1 for the services sector.

FE

AP police arrest Nigerian online fraudsters

Hyderabad  : Cyber criminals from Nigeria continue to dupe gullible Internet users by sending emails with lottery results and other bites. The Andhra Pradesh police have busted yet another Nigerian cyber criminal gang that is duping several Indian nationals of lakhs of rupees. Acting on a complaint by a Guntur resident, a special police team swooped down on a Juhu (Mumbai) hide-out of the Nigerian clique and seized several mobile phones, Internet datacards and 60 SIM cards from four Nigerians. The fraudsters were arrested on Friday evening. The Nigerian gang had sent an email to one K Lakshmi Narayana of Dachepalli (Guntur district), saying that he had won a cash prize of one million British pounds and that their diplomat was coming down to India to personally handover the prize. They collected a small fee of Rs 8.82 lakhs towards processing and ‘RBI clearance’ charges. A few months later, he realised that he was duped and registered a complaint with the Cyber Police Department. The police tracked the phone calls to Mumbai and raided the hideout and arrested the four allegedly involved in the crime. They were being brought to Hyderabad, the police said here on Saturday.

HBL

Economic history repeats thru symptomatic SBI downgrade

...As the appeal against higher interest rates gathers momentum (ahead of the RBI's upcoming monetary policy review), one cannot but note the eerie similarities between the situation in the Indian financial sector now and that of the US in the late 1970s and early 1980s. .....

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