Monetary Policy: finally there?

The RBI stance has shifted for the first time in many months to accommodate growth concerns



RBI governor D. Subbarao (C) along with Deputy Governors H. R. Khan, K. C. Chakrabarty, Subir Gokarn and Anand Sinha on their way to announce second quarter review of the monetary policy in Mumbai on Tuesday



The monetary policy stance thus shifted, for the first time in many months, to accommodate growth concerns through stimulating investment; liquidity conditions will henceforth remain moderately in deficit in accordance with a shift in balance between inflation and growth......

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RBI has been too hawkish

The rest of the economy should not be punished for the fiscal excesses of the government. The Reserve Bank of India (RBI) has continued its policy of monetary tightening in its latest announcement. The Repo rate has been hiked by 25 basis points with corresponding hikes in the other two under the Liquidity Adjustment Facility. One thought of a dovish change in the policy stance reading in between lines in the document on macroeconomic developments issued a day in advance of the policy review.  Thus it says: “Of late, there are signs of aggregate demand softening reflecting a combination of factors including monetary tightening, hindrances to execution of projects and deteriorating business confidence.”  It refers to the declining trend in investment that might affect growth in the next fiscal. Inflation risk, however, persists. In this backdrop, the monetary policy trajectory will need to be guided by the emerging growth-inflation dynamics even as the transmission of the past actions is still unfolding.  I felt that the low level of confidence in the economy revealed by various surveys pointed to a need to rethink the monetary stance. In addition to domestic factors, global factors may slow down growth. Capacity constraints seem to be easing in some manufacturing segments.  Construction activity has slowed. Thus, in my view, the prime objective of the bank to slow down growth to enable the economy to have a soft landing has been achieved, providing a case for a pause in the tightening cycle. The RBI expects that its policy action and guidance will result in the following three outcomes. First, on the basis of a credible commitment to low and stable inflation, medium-term inflation expectations will remain anchored; Second, the emerging trajectory of inflation, which is expected to begin to decline in December 2011, will be reinforced; and Finally, it will contribute to stimulating investment activity. I have my doubt only on the last outcome. Having admitted that the rising rates have adversely affected investment activity with the danger that it may spill over to the next fiscal year, how does the bank expect its policy to stimulate it?  The one major concern of the central bank is with reference to fiscal slippages over which it has no control. The rest of the economy cannot be punished with rate hikes to compensate for the excesses of government expenditure. Monetary overshooting is a risk in the face of fiscal pressures. Liquidity conditions remain comfortable and credit growth stays above trajectory. However, real interest rates are still low and supportive of growth. 

A.Seshan (HBL)

Rate hike pause is guidance, not commitment: RBI's Gokarn

On Tuesday, the Reserve Bank of India (RBI) raised the benchmark interest rates by 25 bps , the 13th increase since March last year. RBI Governor D Subbarao announced that the probability of hiking rates in the future is low. Deputy Governor of the Reserve Bank of India, Dr Subir Gokarn clarifies that not hiking rates is not a commitment, but a guidance. “The RBI is committed to keeping rates stable to help investment decisions. Guidance on rates is given on the basis of some scenarios,” he adds.  According to Gokarn, the central bank is acting now as inflation will be high for next two months. In an interview to CNBC-TV18's Latha Venkatesh, Gokarn says, food inflation is a structural issue. “It is driven not by cereal, but protein foods,” he adds. He sees inflation moving down from December. Falling inflation, he says, will continue beyond March 2012.

Below is the edited transcript of his interview on CNBC-TV18.

Q: The Reserve Bank says that the inflation level will fall to 7% by March 31. That comes to a calculation of 160. September, the last number we have is 155.8. Now, if you do the math, inflation every month will go up by 0.9 ticks. So, clearly you are not expecting inflation to fall month-on-month. You are only expecting the base effect to work.

A: There is a little bit of a misunderstanding on this. A 0.96 month-on-month is not the same. There is a lot of seasonality in inflation series. In order to compare month to month changes, you have to de-seasonalise the series. We don’t do month-on-month because there is a lot of volatility. But quarter-on-quarter, I will give you some comparisons from Q1 of 2011-2012 to Q2 of 2011-2012 to make the point. In Q1, the rate of inflation was say 7.9% headline. It’s dropped to 6.8% in Q2.  On WPI, non-food manufacturing, which as you know we have been trading as our core inflation measure, has dropped from 6.6% in Q1 over the previous quarter to 4.6% in Q2 over the previous quarter.  So, these are indications that when you de-seasonalise the series that is you take out the seasonal effect, you see a clear moderation in the momentum in the inflation series. And then you can build back upto the year-on-year, that 7%. Broadly to say that it’s changing at a constant pace month-on-month does not take into account the seasonality and there is lot of it. So, these are the momentum indicators. The 7% really comes out of this assessment.

Q: It would be nice if Reserve Bank could release its de-seasonalised numbers. Otherwise it’s a little difficult.

A: Absolutely. We all believe it’s going to be very nice for us to release lots and lots of things. It’s work in progress, we will keep that in mind.

Q: During the months November-December-January, traditionally you see a fairly decent fall in food prices. Inspite of it if you are building in a 45 tick jump in inflation then it doesn’t look like inflation is falling.

A: Let’s again keep in mind that we are looking at three separate components here. We are looking at headline overall, which is the aggregate. We are looking at non-food manufacturing. We are looking at energy and we are looking at food.  For a long time, atleast for the last two years, we have been saying that let’s not make the mistake of believing that because we have a good monsoon, we are going to get a fall in food inflation. We have been arguing that food inflation now is a structural issue. It’s being driven not by the standard cereal items, but by more protein content items. These are not very sensitive to the rainfall. This is essentially a surging demand not being met by adequate supply. So, food inflation is likely to remain high. De-seasonalised quarter-on-quarter numbers, from Q1 to Q2, food inflation has gone up from somewhere around 7-7.5% to somewhere between 8.3% and 8.7%. So, we have seen despite monsoons, we are still seeing a rise in food inflation.  What's driving it? It’s been driven by proteins, milk, pulses and to some extent fruits and vegetables that are being driven by demand. Pulses have actually moderated, but milk is a very sharp contributor. So, there is some element of seasonality in food, but there is also a much stronger driver in terms of structural forces.

Moneycontrol

Fake notes menace: RBI blames it on poor detection at banks

Flagging the issue of the rising menace of counterfeit currency, as majority of banks are failing in effective detection, the Reserve Bank today said urgent steps will be taken to sensitise those within the system on the issue. "When we looked at the data of detection, it was very skewed across banks. There were only one or two banks which were reporting this which means that a lot of other banks were not paying adequate attention to detection and reporting of counterfeit notes," RBI Governor D Subbarao told reporters at the customary post-policy interaction here. Stressing on the importance of the issue, he said he raised the issue with the bankers at his post-policy meet -- the first time that it cropped up at such an important meeting. Bankers, in turn, assured the Governor that adequate steps towards sensitising those within the system will be undertaken and 20 per cent of the front-office personnel will be trained in detecting fake notes by end of 2012. "It was agreed that banks will train on detection and reporting of counterfeit currency," he said. Additionally, there is also a need to undertake consumer awareness, the Governor said. 

IBN Live

RBI to form panel to suggest ways to boost bond market

MUMBAI: In order to deepen the bond market and iron out liquidity issues, the Reserve Bank of India will set up a working group that will have representatives from various stakeholder entities like banks, mutual funds, corporates, primary dealers and self regulatory bodies like FIMMDA (Fixed Income Money Markets and Derivatives Association of India) or FEDAI (Foreign Exchange Derivative Association of India). Among the 25-30 odd government securities, only about 5-6 securities are liquid and have trading value, which has been a concern for the bond market regulator.  "We don't have liquidity on major points of the yield curve," said H.R. Khan, Deputy Governor, RBI, on the release of its second quarter policy review. He said that public sector banks do not participate actively in the derivatives market. The RBI mentioned that guidelines on credit default swaps trading will become effective from November end, while the final guidelines on cash settled 2 year and 5 year interest rate futures will become effective from December end 2011. Dealers will be able to short sell government securities for a period of three months, only by December this year.  "There is skewness in the market. There is some amount of disconnect between the cash market and derivatives market and there are accounting issues too," Khan said. The yields on 10-year government bonds cooled to 8.73% after falling to the day's low of 8.67% as RBI signalled a pass in the rate hike cycle.

ET

Don't anticipate intervention as liquidity is comfortable: RBI

The Reserve Bank feels that liquidity in the system is comfortable and therefore it does not anticipate any intervention in the form of an open market operations (OMO) in the near future. "We don't anticipate that kind of a situation (shortage of liquidity) to emerge and will keep a watch on it," RBI Deputy Governor Subir Gokarn told reporters at the customary post-policy meeting. He said the current strain on liquidity is a seasonal phenomenon. "The current situation is simply a seasonal effect. We do expect (that) during the Diwali period, there is high demand for money... So, banks have to rely on repo to meet the CRR requirements. This money will come back to the system sooner." Gokarn added that the week preceding Diwali week, there was a daily transaction of around Rs 40,000 to Rs 50,000 crore, which is in a comfortable range of the central bank. As per the monetary authority, liquidity in the banking system should be maintained at 1 per cent above or below the deposit base. "Obviously, that is the signal we have sent out with the 1 per cent. If that persistently stays above that number, that provides us some basis to act," he said, adding but RBI will not intervene only to check rising yield in G-Sec. "OMOs will not be conducted to keep yields down. It will only be initiated, if at all, for liquidity management. Though it has a bearing on the yield, it can't be used primarily for yield," he added. 

IBN Live

Subbarao Goal to End Rate Rises May Hinge on Policy

Indian central bank Governor Duvvuri Subbarao’s plan to end a record cycle of interest-rate increases may hinge on the government’s ability to rein in its “expansionary” budget.....

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RBI’s monetary policy aimed at taming inflation: Subbarao

The Governor of Reserve Bank of India, D. Subbarao on Tuesday assured that RBI’s monetary policy will remain aimed at taming inflation and also be sensitive to growth. While addressing a press conference in Mumbai on Tuesday after the announcement of the second quarter review of RBI’s monetary policy, the RBI governor said, as an assurance to investors that if inflation trajectory conforms to projections, further rate hike may not be warranted. He said that RBI’s policy will be independent of Government borrowing but variable fiscal deficit during inflation will be taken into consideration while calibrating monetary policy. He also said that since the rupee exchange rate is dependent entirely on external factors it will not be used as an instrument for managing inflation. While speaking about the savings bank interest rate deregulation, which is effective from on Tuesday, the RBI Governor said that banks have been given discretion to devise their own policies and plans on their products and rate subject to conditions. He added that the RBI will be willing to intervene if the banks feel the need for regulatory interference. He suggested that banks should have friendlier policies for savings bank account holders from lower economic households. The RBI Governor said that the deregulation will be beneficial for the economy as it will also support financial inclusions.

http://newsonair.nic.in/news.asp?cat=National&id=NN1481

RBI raises repo rate by 25 bps, says may not need further hikes

The Reserve Bank of India raised interest rates on Tuesday for the 13th time since early 2010 but said it was likely to hold off on further increases as it expects high inflation to ease beginning in December. The RBI raised its policy lending rate, the repo rate, by 25 basis points to 8.5 percent, in line with expectations in a Reuters poll last week. It also revised down its growth forecast for the fiscal year ending in March to 7.6 percent from 8 percent with a downside bias earlier, while sticking with its forecast that headline wholesale price index inflation will ease to 7 percent at the end of the fiscal year. The likelihood of a rate move at its December review is "relatively low," the RBI said in a statement. "Beyond that, if the inflation trajectory conforms to projections, further rate hikes may not be warranted," it said. The RBI under Governor Duvvuri Subbarao has been one of the most aggressive central banks anywhere and has continued to take its fight to inflation even as its global counterparts have refocused monetary policy towards promoting growth. Despite continued policy tightening, inflation in India remains sticky, with the headline wholesale price index up 9.72 percent annually through September, its 10th straight month above 9 percent and highest among the BRIC grouping of economies that includes Brazil, Russia and China. Meanwhile, India's economy grew at 7.7 percent in the June quarter, its weakest in six quarters, while industrial output growth was below 5 percent in July and August. In last week's Reuters poll, 17 economists had expected the central bank to raise rates on Tuesday but 13 had expected it to pause, with most respondents expecting rates to remain unchanged after Tuesday for the remainder of the fiscal year through March.

Has RBI thrown the baby out with the bathwater?

We are happy that the Reserve Bank of India (RBI) has indicated a pause after today’s 25-basis point policy rate hike, assuming inflation remains in check. In any war against inflation, some sacrifice has to be made in terms of immediate growth to ensure future growth. At the same time, monetary policy must be forward-looking. We share RBI forecast that inflation would moderate to 7 per cent levels by March, 2012. In our view, the current 7.5 per cent growth rate is an achievement in itself, relative to the global context. The policy rates are very high in terms of transparency, as RBI has made its forward-looking stance very clear. Giving a hint that probably this is the last rise, would help borrowers to take more informed decisions. The deregulation of the savings deposit rates is indeed a big step in interest liberalisation. This would lend flexibility to banks to introduce different products in the interest of the retail customers. Introduction of instruments like new two-year and five-year cash settled interest rate futures, credit default swaps and changes in short sales of gilts would lend depth to our markets. We expect, lending rates to come off by 100 basis points in the coming April-September slack season, once RBI begins to cut policy rates and the 10-year government bond yield to calm down to mid-cycle eight-8.5per cent levels by March. The government's disinvestment programme would be key in guiding further action by the RBI.

Sajjid Chinoy - India Economist JP Morgan (BS)

Competition on rates could hit banks with large savings a/c base

The Reserve Bank of India (RBI) decision to deregulate savings bank deposit rates could shave off nearly 13% from the profits of India’s banks if they offer even 1 percentage point more on deposits to their customers..........

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Fixed deposit rate hike, a remote possibility

The interest rate on fixed deposits in banks may not go up with the RBI increasing the repo rate by 25 basis points. Banks generally revise interest rates on deposits and advances whenever the central bank increases the repo rate. However, this time bankers say that the deposit rates have already peaked leaving little scope for any upward revision. At present, the interest on term deposits between 46 and 60 days is in the range of 5 per cent to 8.50 per cent. It is between 8 per cent and 10.50 per cent for varying periods from six months to five years, and bankers say that this range is the maximum in view of the increasing costs of deposits. There are other factors that make hiking deposit rates a remote possibility. The credit growth during the first two quarters was sluggish which means a rather humbled growth in net interest income and net interest margins. The apex bank also observed that planned corporate fixed investment in new projects declined significantly since the second half of 2010-11 and has stayed low in the first quarter of 2011-12. Consequently, the pipeline of investment is likely to shrink, putting growth in 2012-13 at risk. This would make credit offtake a tough proposition for banks. Further, to push up retail advances, banks are also offering some concessions and incentives which will add up to the cost of funds.  Any increase in deposit rates in these circumstances might lead to an additional burden adversely impacting the profitability. Most of the banks had revised deposits rates during August-September and claim that today's hike in repo and reverse repo rates has already been factored. So, while you may have to pay a little more interest on loans, the earnings from your term deposits are unlikely to go up immediately.

HBL

We will not cut rates even if inflation drops to 7% - Economy and Politics - livemint.com : D Subbarao

...But certainly, you cannot go away with the impression that March 2012 will be a marker when interest rates will start coming down. Certainly not. That will be a wrong inference. Because we have said in the policy document that the long-term inflation should come down even below that. So 7% is not the threshold.......

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Pain and promise of RBI hike

The RBI has done it again. However, it took the sting out of the latest hike in interest rate by virtually committing itself to no such hike in the immediate future. So, the pain of the 13th straight 25- basis point increase in the repo rate since early 2010 was smothered by the improbability of another such hike in December. The relief from further hikes was enough to send the markets into a celebratory spiral. The Sensex ended the day with a gain of 362 points. The downward trend in the indices was happily broken on the eve of the Mahurat trading on the auspicious occasion of the Deepawali on Wednesday. Market men had been starved of good news. A simple announcement by the RBI that it might be, at last, through with its recent cycle of benchmark interest rates hikes did the trick. Regardless of the merit or demerit of the latest interest rate hike, RBI Governor Duvvuri Subbarao ought to be congratulated for his resolve to persist with his bitter prescription to tame inflation. Even if the inflationary fires are proving hard to be tamed, Subbarao cannot be faulted for wanting to douse them with the only tool available to him. Economic pundits agree that there are limits to what the central bank can do to contain inflation. Using monetary policy as the lone anti- inflationary tool has met only a partial success. The repo rate following the latest hike of .25 percent has now reached 8.5 percent but the back of the inflationary monster is far from broken. At the end of the September quarter, the Wholesale Price Index was ruling 9.72 percent higher than the same period last year. However, at the retail level, where it matters most, the price- rise was nearly double that figure. Indeed, food inflation was higher than what the aggregated WPI or the CPI would suggest. Thus, the RBI cannot be faulted for persisting with its homeopathic doses of interest rate hikes, even though some critics argue that its objective would have been better served had it administered the bitter pill of a full 100- basis point hike in a single- shot when the inflationary fires were at their peak. As we noted, the pain of the latest increase was very nearly killed by the promise of no more hikes, but Finance Minister Pranab Mukherjee did well to express concerns about the impact on growth. Projections of growth in the current fiscal have been scaled down. Even RBI on Tuesday revised it from the earlier eight percent to 7.6 percent. Increasingly, the official figures for growth in 2011- 12 are getting closer to the independent assessment which puts it at about seven percent. Simply put, the nine percent growth talk has virtually vanished even from the official quarters. Sector after key sector of the economy is under stress. Whether it is the automobile or iron and steel, cement or construction, the economy is in the grip of a creeping slowdown. Credit off- take is slow. Banks are once again suffering the pain of rising non- performing assets. Power sector is in the grip of a veritable debt crisis, with the Government proposing to write off at least fifty percent of their outstanding loans. There is little the RBI interventions in the policy rates can do here to remedy the worsening economic scenario. Fiscal measures are required. Unfortunately, the Government continues to be the worst culprit, spending far beyond its means. There is no way the budgetary deficit targets can be met in this fiscal. Growing demands on the Government from the Sonia Gandhi- led National Advisory Council to distribute largesse, without any consideration of the fiscal situation, is bound to make Mukherjee's task much more difficult. Besides, his expectation to raise Rs. 40,000 crores from disinvestment has been belied. So far, only Rs. 1,000 crores has been collected thru disinvestment. Given the bleak management of the economy, especially due to the current policy paralysis in the Government, it is doubtful if the RBI hikes in interest rate alone can contain the inflationary fires. The ‘aam aadmi’ is actually on ‘Ram Bharose’. 

FPJ

The final destination

The Reserve Bank of India took savings interest rates in the banking sector to its final destination by announcing deregulation with immediate effect. We can only compliment the merits of deregulation that facilitates efficiency in allocation of resources and strengthens the transmission mechanism of monetary policy by allowing the entire term structure of interest rates to move in tandem with the policy rate. As the Indian economy witnesses a rapid structural transformation, on the back of an increase in formal employment and a greater degree of financial intermediation, saving accounts penetration (a basic indicator of financial inclusion/ penetration of banking services) is set to witness a secular rise. The increase in savings interest rates & the eventual deregulation of the same is a transformational positive step towards enhancing the rights of the small retail customer, who are typically not savvy enough to maximise the returns on small savings through FDs/investments and will greatly benefit through this alignment towards market based savings rates. The initial phase of deregulation may see some competition amongst banks manifesting in higher rates. However, as the system evolves we could see the savings rate stabilise and converge. This phenomenon is akin to what was witnessed in Insurance, Airlines, Telecom and Pharmaceuticals sectors as they aligned to free market orientation. Banks in a deregulated environment will have a greater scope for product innovations around the savings account and a better opportunity to cross-sell. 

Rana Kapoor, Founder, MD & CEO, YesBank (BS)

One-trick pony

Ordinary Indians would be justified in asking why the RBI hiked the repo rate for the 13th time, when 12 earlier increases haven't calmed inflation.

The Reserve Bank of India (RBI) has done the only thing it knows to do when faced with intractable inflation: Raise the price of money in the hope that it will help dampen overall demand. This, in an economy where the output of goods and services are lagging behind demand, causing their prices to rise uncomfortably. All very textbook and straight bat, though ordinary Indians can be excused for wondering that if the increases in RBI's repo or lending rate haven't worked 12 times in the past, why should they the 13th time. A better solution to inflation, perhaps then, would be to augment supply. But in this case, if higher interest rates reduce investment demand – which the RBI admits is what its previous rate hikes have actually ended up doing – how would output increase? Only the central bank can explain this mystery. Rather than doing so, it has promised – just as an insistent child doing something naughty would – that this is the last and there will be no more rate increases hereafter. Or like the God who, having created conditions for a recession, chose to rest on the seventh day and press the pause button. But if raising interest rates is the only trick a pony knows, there is no telling how much money would cost in India, even as elsewhere in the world its price nears zero. The RBI, further, has also de-regulated savings bank interest rates. This could mean banks offering higher rates on these deposits, which will then force them to raise lending rates as well. At the end of it, when the dust settles, it is growth that will come down (the central bank has, indeed, revised its own earlier GDP growth estimate for 2011-12 from eight to 7.6 per cent). Meanwhile, the Government, with its eye on the coming Assembly polls in Uttar Pradesh, has raised its minimum support price for the new wheat crop by 14.7 per cent and rapeseed-mustard by over 35 per cent – at a time when food inflation has again crossed double-digits. What is won at the races would, thus, be lost at the roundabouts. It is nobody's case that monetary policy should not be used to control inflation or the central bank just be a silent bystander. But it beats comprehension that — when its own Deputy Governors have been maintaining that the inflation problem is structural, emanating from persistently high fiscal deficits, and also due to high global energy and commodity prices — the RBI should rely on the same stock delivery each time: Hike in the repo rate. There are times when non-action is sensible action. This was one of them. But the RBI, possibly a result of systemic inertia, felt compelled to do something. And it has done the wrong thing. 

HBL

A struggling balancing act

In raising policy rates on Tuesday, the Reserve Bank of India (RBI) can still claim to be the last bank standing as almost all other central banks have either paused or cut rates over the past month. And in doing so, RBI showed remarkable strength standing up to intense public pressure to pause. But for all purposes, it also signalled this would be the last rate hike at least till March 2012. These contradictory actions underscore the inherent struggle between public pressure to pause and the lack of any real evidence to support the action. The uneasy balancing act was most apparent in Tuesday’s almost tortured policy statement. Since last January (following the inexplicable pause in December 2010), RBI had repeatedly stressed that curbing inflation dominated all its other objectives. To justify Tuesday’s rate hike, it fell back on the old argument of moving in “baby steps”, i.e. a sudden shift in stance would unhinge inflationary expectations. The promise of a pause was justified by falling back on another old argument that inflation would come down in the next six months. That inflation will come down in January-March next year rests to a very large extent on the impact of base effects arising from a sharp rise in inflation in the first quarter of this year. But these base effects are fleeting at best; May onwards, even the most modest projections of sequential inflation points to headline inflation rising again. Isn’t monetary policy supposed to be forward looking with lagged effects on the economy that can stretch anywhere between six and 18 months? Does a signal to pause actually anchor inflationary expectations or make it come unhinged even more? Ah well! To make the promised pause consistent with growth, RBI cut its growth forecast for this year to 7.6%. Activity has been slowing undeniably and a bit more realism from policymakers is always a good thing. In downshifting its growth forecast, RBI cited the slowdown in investment, driven by slower clearance and execution of projects, high inflation and rising interests as the major factors. What it did not mention is that corporate investment has been languishing since 2008. What appeared to be a cyclical malaise then is now threatening to become a structural malady. Macroeconomic uncertainty both about the near term—when inflation will peak and growth trough—and about the medium term—whether India will go back to the 9% growth trajectory—is the reason why despite tight capacity, corporate India hasn’t been investing. The government clearly has the dominant role to play in calming fears that India’s medium-term growth prospects are tarnishing. But ending the current inflation cycle quickly and decisively falls in the central bank’s purview. Pinning one’s hope on fleeting base effects doesn’t fill one with confidence that this inflation cycle is over. All that said, RBI needs to be congratulated unequivocally for finally deregulating the interest rate on savings accounts. In doing so, it dismantled one of the last remaining vestiges of our paternalistic attitude to protect the “less-sophisticated” investors such as pensioners and the poor. There may have been many reasons for doing so, but presuming them to be naïve was both untrue and disrespectful.

Jahangir Aziz, Senior Asia economist, JPMorgan Chase (Mint)

Two policy poles

On a day when the RBI raised policy rates by 25 basis points, the Union govt raised the minimum support price of wheat for the 2012-13 procurement season by Rs. 165

The contradiction could not be more glaring. On a day when the Reserve Bank of India (RBI) raised policy rates by 25 basis points, the Union government raised the minimum support price of wheat for the 2012-13 procurement season by Rs. 165. Constant increases in the minimum support price for farmers are one big factor in fuelling prices of wheat and rice. This will add to food inflation, which is close to double digits. Law minister Salman Khurshid said the raise has been made after thoughtful consideration. “We hope that this will be a good news to all our farmer friends at the time of Diwali.” Such decisions are irrational when RBI has highlighted food inflation as a key reason for the structural nature of inflation. Instead of giving away festival gifts —and taking them back at a later date as inflation —the government should display some seriousness in tackling this problem.

Mint

Monetary policy review: Battle to get back is still on, says RBI governor D Subbarao

... The battle with inflation, and the battle to get back up is still there and I'm sure that battle will be on with us for some more time.....

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Fitch on RBI's focus on inflation

The Reserve Bank of India's (RBI) decision to raise interest rates underlines its commitment to tackle inflation even as the economy slows, which is one factor supporting the Stable Outlook on the country's BBB- rating.....

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Consumers set to earn more on savings accounts as RBI de-regulates interest rates

NEW DELHI: Consumers are set to earn more on their savings accounts with the Reserve Bank of India (RBI) on Tuesday de-regulating interest rates, the last administered bank rate in the economy. The move will push up cost of funds, sending bank shares sharply lower.  "It is felt that the time is appropriate to move forward and complete the process of deregulation of rupee interest rates," said Governor Duvvuri Subbarao during the second quarter review of the apex bank's monetary policy for this fiscal. Currently, the savings rate stands at 4 percent, which was last raised in May after remaining unchanged for 8 years. For deposits up to Rs 1 lakh and irrespective of the amount in the account within this limit, a bank will have to offer a uniform interest rate. For savings bank deposits over Rs 1 lakh, a bank may provide differential rates of interest, if it chooses to do so. "However, there should not be any discrimination from customer to customer on interest rates for similar amounts of deposits," said the RBI Governor. The market gave a thumbs down to the proposal with shares of major lenders State Bank of India, HDFC Bank, Axis Bank, Bank of Baroda, Allahabad Bank falling as much as 2-6 percent. The key banking sector index was down 2.66 percent in recent trade. "It will definitely increase cost of funds for banks towards maintaining current account savings account deposit growth," Moses Harding, head of global markets group, IndusInd Bank said. IDBI Bank executive director R.K.Bansal said that he expects the savings rate to rise to 6 percent.  Bansal estimates that banks with lower share of savings rate deposits will take a 10-20 basis points hit on margins, while banks with larger share of savings account deposits will see a 40-50 basis points fall. Already banks' cost of funds have gone up after the RBI mandated that banks calculate interest paid on savings deposits on a daily basis while the savings bank rate was last raised by 50 basis points. Savings deposits are a source of low-cost funds for banks, which form 22 percent of banks' total deposit base and 13 percent of savings of the household sector. This makes it a politically sensitive interest rate as savings deposits are held largely by households, particularly in rural areas where financial literacy is not widespread.  New age private banks are likely to aggressively move now to mop up low cost deposits, which traditionally has been the prerogative of the larger banks. 

ET

RBI warns banks against floating rate manipulation, prepayment fee

MUMBAI: The Reserve Bank of India (RBI) has warned banks against taking customers for a ride by manipulating interest rates on floating rate loans. The regulator also wants them to voluntarily waive the prepayment penalty on home loans.  At the Annual Conference of Banking Ombudsmen, banks and RBI mutually agreed to ban prepayment fees on floating rate home loans as one of the 10-point action plan to improve customer services. Subsequently, banks made a representation to RBI against it. "Banks had agreed...now they have a problem. We are giving them some time but we are very clear that this 10-point action plan has to be implemented," Dr.K.C.Chakrabarty, Deputy Governor of RBI told media persons on Tuesday.  RBI governor D Subbarao also sounded the same note. "We will pursue with banks to do this (banning prepayments penalties) as soon as possible but should the system require time to adjust to this, we will be prepared to give them some time," he added. Meanwhile, in the mid-year policy review, RBI has expressed its discomfort about old floating rate customers getting a raw deal while new customers are being offered a better rate, though both have received the same rating.  There are instances where the spread charged to a customer has been revised upward frequently during the tenure of the floating rate loan, it said in a statement.  "These have also resulted in a situation where existing customers are at a disadvantage, compared to new customers with the same credit rating, leading to customers complaining about discrimination," it said. This is particularly the case in home loans where banks kept offering attractive rates to new customers while old customers paid a higher rate. In order to bring uniformity in differential rates, RBI said on Tuesday that it is setting up a working group which will look into the "principles governing proper, transparent and non-discriminatory pricing of credit."

ET

Govt approves Rs. 3,000 crore capital infusion in Nabard

This would raise the paid up capital of the apex agriculture and rural development bank to Rs. 5,000 crore

New Delhi: The government on Tuesday approved Rs. 3,000-crore capital infusion over a period of two years in National Bank for Agriculture and Rural Development (Nabard) to help the lender mobilise higher resources from the market. The Union cabinet approved the proposal for augmenting the capital base of Nabard by infusing Rs. 3,000 crore, as the government equity in two instalments of Rs. 1,000 crore in 2011-12 and Rs. 2,000 crore during 2012-13, information and broadcasting minister Ambika Soni said here. This would raise the paid up capital of the apex agriculture and rural development bank to Rs. 5,000 crore, she said after the Cabinet meeting. As per RBI’s guidelines, the outstanding total resources mobilised at any point of time by a Financial Institution​ should not exceed 10 times its Net Owned Funds (NOF). It becomes important to raise NOF such that Nabard’s ability to mobilised resources from the market can be enhanced, she said. The infusion of the additional share capital by the Government of India will increase the NOF and thus the borrowing capacity of Nabard to enable it to extend its various activities, she said. At present, the authorised capital of Nabard is Rs. 5,000 crore, of which, the paid up capital is Rs. 2,000 crore. The Government of India holds 99 per cent share capital of Nabard. It is to be noted that the Reserve Bank of India (RBI) divested its 71.5% stake in Nabard to the government last year.

Mint