Obstacle Course

The Reserve Bank of India Governor Duvvuri Subbarao has promised to refrain from raising interest rates, but with a caveat — only if inflationary pressures ease. Investors gave a thumbs up, probably missing the string. Gayatri Nayak analyses the obstacles faced by the man at Mint Street. Will he be able to fulfill his promise, or go back on his word as he did the last time?

The Governor has one tool to contain inflation — interest rate. But the factors affecting it are many. What has been the biggest boon to rural India — the National Rural Employment Guarantee Act (NREGA) — since the loan melas of the 1980s, is probably one of the trickiest issues in emerging inflation dynamics. Slowdown notwithstanding, most companies will tell you that the strongest demand is coming from rural India, be it in consumption of soaps, or motorcycles — they are surging, thanks to the momentum provided by NREGA.  While it is good that the poor have money in their hands, the lack of commensurate jump in supplies is hurting. The demand has pushed up raw material prices that are squeezing profit margins, which the entrepreneur is unwilling to accept after living with 20-30% profit margins. More than anything else, it is the suppressed inflation that could stop the governor in his tracks. Prices of diesel, power, coal and fertilisers are all distorted due to subsidies. Once market rates are charged for these products, then few could guess what the inflation numbers could be. “Expect policy rates to stay at current levels for an extended period of time and do not rule out further rate hikes,” said HSBC India economist Leif Eskesen.  The government, which practices welfare economics, has raised the minimum support price for farm products, further fuelling food prices that trigger inflation. Even if the government does not raise prices, food prices won’t cool, thanks to NREGA-driven rising wages and the demand for them. Although, investments have slowed, the demand for loans is not slowing as much as it should have. It is still close to 20%, well above the comfort level. Developments elsewhere are also loaded against the Governor, with no signs of global commodities prices easing, despite the revival of the debate on double-dip recession.As Subbarao said: “There is only so much uncertainty that we can take into account. If there is some development that has gone beyond our calculation, it will have an impact on our projection.”

Contrasting Loans & Factory Output

Factory output is slowing and even companies such as Larsen & Toubro have cut their order book estimates. But what is intriguing is that loans are surging. Cumulative growth in factory output this fiscal has slowed to 5.6%, against 8.7%, in the same period last year. But loans are growing at close to 20% year-on-year, throwing a paradox at policy makers. Many industrial indicators, which the governor calls analytically bewildering, are showing slowdown, but not the loans. Funds from non-banking sources are also accelerating. So, what do policy makers do? Central bank’s survey on order books, inventories and capacity utilisation shows a decline in new orders during the first quarter of FY12. Even though agriculture and the service sector are expected to do well, industry could take a hit. The October purchase manager’s index, or PMI, which is used to track the growth of factory output is higher at 52.0, against 50.4 in September, indicating some improvement in order books. But the construction sector, which is an indicator of capital formation in the economy has slowed down, though real estate prices are holding up. Contrary to the widely-held belief by many in the corporate sector, studies conducted by the central bank shows that higher interest rates over the past one and a half years have not had a significant adverse impact on the corporate sector performance. This means that the central bank will have to think hard on policy to boost investments.

Global Dilemma: To Do, or Not to Do

Damned if you do. Damned if you don’t. Western central banks are going to hold their rates low for a long time. That’s good, since if the western economies perk up, then demand for Indian products will go up. But the problem with the financial sector is that they take the cheap money and gamble it in the commodities market, pushing up prices of wheat, rice and corn. This, in turn, causes a dilemma to Indian policy makers. The sovereign debt crisis in Europe and the slack US economy could keep everyone on tenterhooks. If the financial crisis in Europe worsens, then there will be calls for cuts in rates. But any cut here, to tackle liquidity issues, could trigger a fresh round of price rises. Also, if, as widely expected, the US decides to have another round of quantitative easing, there could be further pressure on commodity prices as evident from the previous rounds of easing. If European banks flounder and tighten purse strings, then the overall cost of borrowings for corporates will rise. That could also have a spillover effect here, with many turning to local banks, thus putting pressure on rates, even if the RBI wants to pause.

Fiscal Slippage Continues

A new factor to contend with this year is fiscal deficit. Everything seems to be going wrong, making calculations difficult for the Governor. Borrowing limits have already been raised once and investors don’t believe it to be the last.  The treasury will borrow . 53,000 crore more than it budgeted for, breaching the fiscal deficit target of 4.6% of GDP. Disinvestment is in disarray and that means possibly there will be a revenue shortfall of . 40,000 crore more. The government’s initial fiscal deficit target had assumed a 12.5% cut in subsidies. But the story is different, as usual. This has a multi-fold impact on monetary policy-making. Revenue growth is slowing as tax collections falter due to sluggish rise in corporate profits.  If the government keeps tapping the market for funds, as Goldman Sachs forecasts the yield on 10-year bonds could rise to 9.25%, which is not a good sign and may negate the positive impact of the Governor’s desire to pause rate hikes. This government has been particularly generous with welfare schemes. With elections due in many states, including Uttar Pradesh, the desire to throw away gifts at voters could further challenge the financial position.

Flip Side of the Depreciating Rupee

The rupee has depreciated more than 10% against the US dollar since the US sovereign debt downgrade in August this year. That’s a blessing in disguise for Indian exporters. But bad for those praying for inflation to cool — India imports more than threefourths of its crude oil requirement. Prices of other imports such as machinery and equipment also get costlier, which will inevitably reflect in domestic prices. Going purely by the market forces, currency supplies may be constrained if capital inflows dry down, while the demand pressures are likely to continue with demand not only from oil companies, but also from firms that have borrowed from the overseas market. Overseas debt, worth $137 billion, is due for repayment within the next one year.  This is unlikely to be matched by equivalent inflows over the period. Though long-term capital inflows like FDI and external commercial borrowings are buoyant this year, portfolio inflows have almost dried down.  With the Governor declaring that he won’t use currency movements to tackle inflation, higher prices could begin to pinch consumers. Despite moderation, crude oil is still 25% higher than its average for FY11. Oil marketing companies, which are bleeding due to flawed government policies, have ruled out any easing of prices even if crude prices fall. 

ET

'Focus on exports necessary'

RBI’s Deputy Governor concerned about current account deficit

Calling the widening current account deficit a “major concern”, the Reserve Bank of India’s Deputy Governor, H R Khan today asked for a focus to drive up exports. India is among the countries having a current account deficit (CAD). It is an area of concern, he said, addressing a late night award function of Engineering Export Promotion Council here. Being a country where balance of payments is under stress, India has to promote exports to see this does not go out of hand, he added. The country’s CAD hit 3.1 per cent of gross domestic product (GDP) mark at the end of the first quarter ended June. The Prime Ministers’ Economic Advisory Council has pegged CAD at 2.7 per cent for this financial year. Last year, it was 2.6 per cent of the GDP. It rose to $14.5 billion from $12 billion in the same quarter of 2010-11, due to an increase in trade deficit and continued net outflow on investment income. RBI, in its macroeconomic and monetary development report, said the country’s external situation was expected to remain manageable. But overall the balance of payments outlook for 2011-12, although stable, warrants close monitoring, RBI said. Khan also termed the $300 billion foreign exchange reserves as “borrowed money” kept for times of “extreme distress”. Improving the exports, he added, would allow a greater flexibility to imports as well, which would in turn give access to the best of goods and services. Units have flexibility to import quality material, machinery and things which would smoothen bottlenecks in the system. This has implications for the entire economy, he noted.

BS

RBI's Khan warns on widening CAD

Mumbai, Nov 1 (PTI) : Terming the widening current account deficit(CAD) as a "major concern", Reserve Bank Deputy Governor HR Khan today called for special efforts to drive up exports so that this will not deteriorate further. "We are a current account-deficit country and this is a major concern," Khan told an Engineering Export Promotion Council gathering here late this evening. "We are a balance of payments-stressed country. We have to promote exports to see that this is not going out of hand," he added. Despite galloping merchandise exports this fiscal, the current account deficit has been on an upward spiral on rising oil imports, whose price has been on the rise coupled with a falling rupee. Last year the CAD stood at 2.6 percent of the GDP and it is expected to be a tad more than that this fiscal. The Commerce Ministry today reported a robust 36.3 percent rise in September exports while the import number rose 17.2 percent to USD 24.8 billion and USD 34.5 billion, respectively, leaving a trade deficit of USD 9.7 billion. The government has set target of USD 300 billion from exports this fiscal. During H1, exports grew by 52 percent to USD 160 billion from USD 105.2 billion in the same period last year, while imports expanded by 32.4 percent to USD 233.5 billion, leaving a trade gap of USD 73.4 billion for the half-year. Oil imports grew by 14.62 percent to USD 9.2 billion in September, while non-oil imports rose by 18.17 percent to USD 25.3 billion in the reporting. 

IBN Live

RBI's credit policy - a volte-face? - Abheek Barua

 .. must confess that I was a little – and pleasantly – surprised by the Reserve Bank of India’s (RBI’s) volte-face in last week’s credit policy. From an unwavering focus on inflation management that it reiterated in its September review to acknowledging the need to “contribute to stimulating investment activity” is, in my scheme of things, a major change in stance. What could have driven this? I suspect the RBI has woken up to the fact that growth conditions are far direr than it had anticipated. It revised its growth projection for 2011-12 down from eight per cent to 7.6 per cent. Its projections for 2012-13 are possibly worse.....

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RBI's rate hike

If the outstandings in repo borrowings and the reverse repo accounts of banks are netted, the sum will be quite insignificant to create any impact on the economy. Moves such as these seem to give the impression that the banks are dependent only on repo borrowings from the RBI to fund their lending programmes. The major source for the banks to lend comes from the deposits received from public loan repayments from borrowers, and internal accruals by way of profit surplus. The repo borrowings can be resorted to by banks for a very short-term duration of 3 days, to tide over overnight shortfalls. In the huge volume of resources at the disposal of the banks, the repo outstandings constitute a very minute, insignificant percentage and hence can't create any impact on inflation. As suggested by Kaushik Basu, Adviser to the Union Finance Ministry during the previous rate hike, the RBI should think of out-of-the-box solutions to contain inflation rather than the stereotype reaction in the form of a rate hike. Business newspapers should critically evaluate the measures taken by the RBI, instead of showering encomiums every now and then.

V. Raghavan (BS)

Foreign banks may skip savings deposit rate war

Limited branch networks are unlikely to persuade foreign banks in India to increase the interest rate on savings deposits aggressively, since most of these lenders have a high proportion of low-cost retail deposits in their total deposit base. According to bankers, foreign lenders would wait for large Indian private sector banks to revise savings deposit rates before deciding their own. “We will wait and see how the market evolves before taking a call on our savings deposit rate. We will also closely watch the actions of our immediate competitors, typically other foreign banks and large domestic private banks, with whom many of our clients may also have banking relationships,” said Gannesh Bharadhwaj, head (retail banking and wealth management), HSBC India. With 50 offices, HSBC has the second-largest branch network among foreign banks in India. As of March-end, the share of low-cost current account and savings account (Casa) deposits to of HSBC’s total deposits in India was 50 per cent. “Any bank, foreign or domestic, that has a high share of Casa deposits would not be aggressive in taking the lead and increasing the savings deposit rate. Casa deposits are a function of the quality and depth of relationships with clients, and not just the number of branches,” Bharadhwaj said. On October 25, the Reserve Bank of India (RBI) had allowed banks to decide their own interest rate on savings deposits. The central bank, however, asked banks to pay a uniform rate on savings deposits up to Rs 100,000, irrespective of the amount in the account. Lenders may offer differential rates on deposits above Rs 100,000, but should not discriminate between customers on interest rates for similar deposit amounts, it had said. While small and mid-sized private sector lenders like Kotak Mahindra Bank, YES Bank, IndusInd Bank and Ratnakar Bank have raised their savings deposit rates by 150-200 basis points, large private sector banks and state-run lenders are yet to announce any revision in their savings deposit rate. “The de-regulation of savings deposit rate happened early last week. We are examining the situation. It is a little early to say by how much we will raise our savings deposit rate,” said Shyamal Saxena, general manager (retail banking products and consumer banking), Standard Chartered Bank, India and South Asia. Standard Chartered Bank, which has the largest network among foreign banks in India with 94 branches, had a Casa ratio of a little over 40 per cent, as of March-end. “A lot depends on the deposit mix. Currently, foreign banks have a good Casa mix and hence, there are no compelling reasons for us to raise the savings deposit rate aggressively,” said a senior official with a Mumbai-based foreign bank, on the condition of anonymity. Bankers said raising the savings deposit rate alone may not help foreign banks mop retail deposits, since savings accounts were usually used for transactional purposes.

BS

Banking on deregulation

Apropos the edit “Saved by RBI” (October 31), savings rate deregulation could be a mini-bonanza for small depositors and should be welcomed. Within hours of the Reserve Bank of India’s announcement, banks increased interest rates on savings accounts. Banks that do not have a strong “low-cost” deposit base, now, have the opportunity to attract savings deposits by offering higher interest rates. This will set the stage for tougher competition among bankers and, thus, wooing customers will become a top priority for all banks. However, it is noteworthy that the deregulation will have an impact on the profitability of banks that implement the increase. Therefore, one fears that by offering higher rates, banks may increase some hidden costs.

Prem K Menon, Mumbai (BS)

Deregulation of savings bank interest rates: RBI’s move not practical in the present scenario

...........The Reserve Bank of India (RBI) has always been known to be like a proverbial mother-in-law, who would not like to pass on the baton to the daughter-in-law in one go, but empower the latter only in small bits and pieces. Because either the RBI does not wish to give away power easily to the banks to decide what is best for them, or does not feel confident that the banks have come of age to take their own decisions. ..............

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High rates to result in destabilising capital flows: Joseph Stiglitz

Criticising the Reserve Bank's tight monetary policy, Nobel prize winning economist Joseph Stiglitz today warned that rising interest rates could result in "destabilising" capital flows from abroad.  "Raising interest rates generates flow of capital (from abroad) that could itself be destabilising. So, unfortunately they (RBI) will have to be very careful about instruments they use to fight inflationary pressure," he told reporters on the sidelines of a public lecture at Jawaharlal Nehru University. The Reserve Bank, he said, was drawing a "very delicate line" to deal with the problem of inflation by raising interest rates. In its bid to contain rising inflation, the central bank has raised key policy rates 13 times since March 2010. Interest rates have gone up making India attractive for foreign capital and inflation has continued to remain at near double-digit mark. It was 9.72 per cent for September. Answering questions on Euro-zone sovereign debt crisis, Stiglitz said the European Union has not dealt with problems in Greece in a timely manner.  "When the Euro currency was founded, most economist found it as an extremely difficult project. They have taken away interest rate and exchange rate power but did not put any mechanism in its place. "They were very slow to deal with the Greek crisis and now the crisis seems to be spreading. The steps they have taken may not suffice to address the very deep problem that they face," he added. Worried over the global economy slipping into double-dip recession, the G20 leaders at their summit at Cannes in Paris on November 3 and 4 will try to come out with some solution to deal with the sovereign debt problems in Europe. The issues concerning "destabilising" capital flows and the need to impose Tobin Tax were discussed during the meeting of G20 Finance Ministers and Central Bank Governors, but no decision could be taken because of differences of opinion among the member countries. Tobin tax refers to levies on flow of cross-border capital. G20, a grouping of rich and developing nations, has been at the forefront in resolving the global crisis which began in 2008 with the fall of America's iconic investment banker Lehman Brothers. The second global crisis is looming large and several experts, including RBI Governor D Subbarao had emphasised that time is running out for solutions. Subbarao in his intervention at an IMF meeting in Washington in September had said, "We are rapidly running out of solutions. The two big flash-points are: renewed anxiety in the US about recession, and the deepening of the sovereign crisis in the Euro area." 

DNA

Free savings rate: Less lazy banker, more lazy investor?

Last week the Reserve Bank of India freed the savings bank deposit rate. The RBI will no longer fix the savings account interest rate but will allow banks to fix the rate freely. Moreover, for a savings account balance of over Rs 1 lakh, the banks can offer differential rates to different customers. Experts believe the average interest rate on savings account will increase from the erstwhile fixed rate of 4% to at least 5%. Yes Bank has already announced a 6% rate on savings accounts.

There are advantages to this move; this article spells them out. ‘Currently Indians invest half their savings into physical assets like gold and real estate. Higher savings account interest rate would provide stimulus to get people to put their money into banks. Secondly, competition among banks on interest rates would end an era of ‘lazy banking,’ when bankers sat in their air-conditioned offices and waited for customers to walk in and hand them their money.’

Fair enough. But there is one worry that outweighs these advantages; especially among urban investors - this move can make the investor lazier. Today, urban India is going through a sea change; salary levels are higher, lifestyle expenses are greater; aspirations are bigger. At the same time, pensions are smaller. The Government no longer pays for our retirement. The Government has created an environment for us to earn well today, but take care of our own retirement. Another reality is consistently high inflation; the average annual CPI inflation in urban India in the last 5 years has been more than 9%. Savings account interest rate going up from 4% to 5% is not going to matter. Even if banks offer differential rates to customers with more than Rs 1 lakh in savings account, the difference is not likely to be enough to beat inflation. What is important in such a scenario, is aggressive wealth creation during working years. But that is a task that takes analysis and dedication; not something that comes by effortlessly. So even a slight increase in interest rate is likely to create a strong temptation to leave money in savings account. The temptation to think ‘Oh my money is earning 6% instead of 4%’ can make the investor lazier. In an era when average inflation was 4%, an interest of 6 or 7% sounded reasonable. But one side of the equation has changed and is now at 9%. The other side of that equation thus needs to be far more aggressive. So while banks might try to lure in customers with ‘attractive’ savings interest rates, do think about it before you decide to leave large sums of money ‘idle.’

ET

Banks waiting for Big 3 to set savings rate benchmark

The big daddies in the Indian banking industry appear to be playing a ‘Who blinks first’ game, when it comes to revising savings account interest rates. Following the deregulation of rates by the Reserve Bank of India (RBI) last week, only three banks.....

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RBI extends remittance flexibility to exporters

MUMBAI: The Reserve Bank of India today extended the flexibility to exporters to repatriate their remittances upto a year, in the face of difficult business environment in world's developed markets.  The RBI had in June 2008, relaxed the norms for repatriation of payments to be received by exporters of goods and services. It allowed upto one year, instead of six months earlier, for such remittances.  The liberalised norms will continue till September 30, 2012, RBI said in a notification.  "It has been decided to further extend by one year- from October 1, 2011 till September 30, 2012, the relaxation with respect to the period of realisation and repatriation to India, of the amount representing the full value of goods or software exported, from six months to 12 months from the date of export...," RBI said.

ET

AI meets RBI with much-delayed CDR proposal

The much-delayed corporate debt restructuring (CDR) plan of the ailing national carrier Air India got moving today with top honchos of the airline and SBI Caps, which has drafted the proposal, discussing the matter with the Reserve Bank this evening.  The delegation was led by Air India Chairman and Managing Director Rohit Nandan, Aviation Secretary Nasim Zaidi and SBI Caps Managing Director and Chief Executive S Vishvanthan. Sources said that the delegation would be making a CDR presentation to the central bank.  However, a senior SBI Caps official told PTI outside the RBI headquarters prior to the meeting, "We are meeting the Governor (Duvvuri Subbarao) and the Deputy Governor (Anand Sinha). We are paying a goodwill visit and not making a CDR presentation per se to them today."

Moneycontrol

RBI’s move on branch opening norms

Liberalising branch opening norms for authorised money changers (foreign exchange) Reserve Bank of India on Tuesday said it has dispensed with the present condition to open one office in a non metro region respectively, for exchanges already having branches in metro regions.

BS

Guj accounts for 6% of India's dubious bank transactions

.... In fact, for Gujarat the high number of such dubious banking transactions is also coupled with the many cooperative banks violating money laundering norms, which has become a concern for law enforcement agencies. In last two years, Reserve Bank of India (RBI) has fined around 60 cooperative banks for violating know your customer (KYC) norms or anti-money laundering (AML) guidelines. Under the AML guidelines, it's mandatory for banks to report banking transactions above Rs 10 lakh to FIU............

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FSDC panel to meet tomorrow, review crisis preparedness

Financial sector regulators, including the Reserve Bank, will review India's preparedness to deal with the looming global economic crisis and devise steps to mitigate its impact on the country at their meeting here tomorrow. The meeting of the Financial Stability and Development Council (FSDC) sub-committee, to be chaired by RBI Governor D Subbarao, will also see discussion on an additional regulatory mechanism to deal with global problems, a Finance Ministry official told PTI. "We will discuss whether everything is properly functioning and also assess what more needs to be done. We don't want to take any chances," he added. It is feared that the global economy might slip into a second double-dip recession in view of the slowdown in the US and sovereign debt crisis in eurozone countries. Subbarao, in his intervention at an IMF meeting in Washington in September, had warned, "We are rapidly running out of solutions. The two big flash-points are: renewed anxiety in the US about recession and the deepening of the sovereign crisis in the euro area." Although it is quite difficult to accurately assess which sectors of the economy would be hit the most, the regulators are much more proactive now than they were at the time of an earlier meltdown in 2008, which was triggered by the collapse of America's iconic investment banker Lehman Brothers, he said.  Subbarao will chair the meeting using a video conferencing facility. It will be attended by top functionaries of the Finance Ministry, including Secretary R S Gujaral, Department of Economic Affairs Secretary R Gopalan, Department of Financial Services Secretary D K Mittal and Pension Fund Regulatory and Development Authority Chairman Yogesh Agarwal. The members will also share their experiences at various international fora they have attended in the past to outline the additional steps needed to safeguard the economy against contagion of the crisis. Issues concerning inter-regulatory coordination and regulatory gaps will also come up for discussion. According to RBI estimates, growth of the Indian economy will moderate to 7.6% in the current fiscal from 8.5% during 2010-11. The government set up the FSDC under the chairmanship of Finance Minister Pranab Mukherjee to strengthen and institutionalise the mechanism for maintaining financial stability, development and inter-regulatory coordination, sources said. 

Moneycontrol

Engineer falls prey to cyber fraud, loses Rs 2.8 lakh

........Two days later, Lingesh received an email bearing the postal address of the RBI asking him to deposit R1.47 lakh and another on October 25 requiring him to deposit R98,000 in two ICICI Bank accounts. As soon as he made his last payment, needless to say, his seeming internet-based benefactors stopped responding. Lingesh has now approached the Economic Offences Wing (EOW) of the Crime Branch..................

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Responsible Indian microfinance in India: Still a pipedream year after crisis

....As I have been saying for long, much of the failure of Indian microfinance has occurred due to the indifferent attitude of regulators during years of extreme growth—when they assumed that all microfinance was positive and ignored real time (negative) signals from the ground. I am very glad that Dr YV Reddy (former Governor, RBI) has now come out and clarified the various issues and graciously accepted the mistakes committed in the regulatory domain (in a recent EPW article - Microfinance Industry in India: Some Thoughts, vol xlvi no 41, October 8, 2011-......

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