'13 rate hikes count to tame inflation is misleading'

With fears of slowdown rising high and the cause being attributed to the conventional policies of the Reserve Bank of India (RBI), a deputy governor of the central bank said it was “a bit misleading count” to say that interest rates have been raised on 13 times and inflation still has not come down. “Keep in mind, we started from a very very low base. In these 13 times, we also returned to normalcy. The crisis response took the call rate to 3.25 per cent. I think, to argue that we have raised interest rates 13 times and nothing has happened is an injustice,” said Subir Gokarn, deputy governor, RBI at a meeting recently. After the global economic crises of 2008, the RBI took immediate measures to keep the situation under control. The repo rate, which was at nine per cent in early October 2008, was slashed by 100 basis points (bsp)on October 20, then by 50 bsp on November 3 and again by 100 bsp on December 8 the same year. The repo rates went down to 4.75 in April 2009 and were kept stable till March 2010 when the rise began. At the same time, the reverse repo rates were slashed in December 2008 by 100 bps and were gradually brought down to 3.25 per cent by April 2009, from 6 per cent in October 2008. The high inflation of 9.89 per cent in February was followed by the first rise in policy rates on March 19, 2010. Since then, the rates have been raised 13 times from 3.25 per cent to 7.50 per cent for the reverse repo rates, while for the repo rates the rise started from 4.75 per cent and reached 8.50 per cent in the last policy review in October 2011. Justifying the action of the banking regulator, Gokarn said, “Moving from 3.25 to 6 or 7 per cent or whatever the neutral rate might be, was itself a process that would have happened in any case. But after that, we of course, had to deal with inflation pressures. In the last one year, clearly the impact of interest rate rise is visible on the growth momentum.” India’s economy expanded by six-quarter low of 7.7 per cent during April-June and signals of the second quarter of this financial year are also not promising. Industrial growth remained sub-five per cent in the second quarter and fell to a two-year low of 1.9 per cent in September.

BS

Economy: It’s like the 1990s again, so there’s hope yet

The current state of the market and the economy is reminiscent of the 1990s, when India had high inflation and bad loans. Twelve years later, it’s ditto. And the last time, India came out stronger due to forced reforms. Can it rebound thusly from the current mess too? Banks then were facing writedowns on loans given to sectors such as steel, textiles, power and cement and it had become a huge issue. The government had to recapitalise banks and protect institutions such as ICICI and IDBI from going under. Cut to the present and the government has to recapitalise banks as loans given to power, construction, airline and other sectors are going bad. The State Bank of India, the country’s largest lender, had net NPAs of 2.04% in the just-past second quarter against 1.7% in the same period a year ago. Inflation at 9.7% is way beyond the Reserve Bank of India’s (RBI) comfort zone, though RBI has forecast it will come off to 7% by next March end. Inflation in the beginning of the 1990s was consistently over 10% and interest rates were high on the back of high inflation. Ten-year government bond yields were above 10% in the late 1990s, even though inflation had started to trend down in the second half of 1990s. Ten-year yields at present are trading at multi-year highs of close to 9%. On the global front, the 1990s saw the burst of the Asian tiger economies’ bubble, while it is the turn of the developed economies to face the burden of debt at present. Global markets are in turmoil over debt issues of Greece and Italy. Italian bond yields have touched unsustainable levels of 7% given its total debt at $2.7 trillion or 120% of GDP. Markets are worried about the unsustainability of debt levels in European countries leading to a selloff in equities and currencies. European equity indices are down by over 12% since August 2011, while the euro has fallen by over 5% against the dollar on the back of the sovereign debt issues. How will markets behave going forward? The problems facing the economy and markets will not go away in a hurry. It is a slow process as governments cut down deficit and central banks fight inflationary pressures. The bright spot is that markets are forcing the government to do the right things. Euro zone governments are in austerity drives, while the Indian government is fighting to keep its deficit down. The RBI is focused on keeping inflation under control while lenders are becoming risk averse and are focusing on strengthening balance sheets. The effect of fighting turmoil tells on growth. The euro zone is likely to face a recession in 2012, while India’s GDP growth is forecast to drop by 1% in 2011-12. Indian is also facing pressures on its currency due to its current account deficit, which could cross 3% o  GDP this year on a widening trade gap. The trade deficit in October at $19.6 billion was a record high leading to worries on the current account. Markets will be volatile in the short term, but as the dust settles and effects of right policies tell on the economy, markets will look to factor in a stronger period of growth. The process could take at least six months. Till then, it will be a tough time for investors.

DNA

Banks to accept IT dues payment

The Reserve Bank of India on Saturday said it had authorised State Bank of India branches and also those of other nationalised banks to accept payment of income tax dues in cash or by cheque. In a press release here, it said it had opened additional counters to help the public pay their dues as quickly and easily as possible. However, the rush at the counters was increasing and people are forced to wait in queues for long hours. The RBI hoped the new measure would lessen the hardship in remitting tax dues.

HBL

‘Euro crisis may impact investment climate'

NEW DELHI: The Eurozone debt crisis and persistently high crude oil prices will have a direct bearing on future investment climate in India and make it challenging to manage the growth-inflation balance, RBI Deputy Governor Subir Gokarn said on Friday. Addressing an interactive meeting with industry organized by Assocham, Gokarn cautioned that these two external factors have already started taking a toll on Indian exports. However, the bank interest rate cycle appears to have peaked and further hikes may not be warranted, he said.  Gokarn noted that the external turbulence is also impacting currency exchange rates in emerging markets like India. “The rupee has become a floating currency now within the boundaries of structural capital controls. The rupee is the fourth most depreciated currency in Asian region in the past two-and-a-half months,” he said. Gokarn also dismissed any RBI move to interfere with the exchange rate and its monetary policy stance in the coming months would be determined by movement in inflation. The RBI will keep a watch on the liquidity situation to decide on open market operations, he said, ruling out any fundamental stress as of now on the Indian banking system. The RBI has raised interest rates 13 times since early 2010 but failed to rein in inflation, which remains above 9 per cent. Instead, asset quality at banks is eroding and economic growth in Asia’s third largest economy is slowing. Turbulence in the country’s biggest export markets – the US and Europe – have prompted many industry leaders and government officials to predict an exports lowdown and a worsening trade deficit in the second half of the fiscal year ending March 2012.

Gokarn accepted that from growth perspective, the country is facing a slowdown. “India’s economy is expected to grow around 7.5 to 7.6 per cent in the current fiscal,” he said, adding that the impact of rate hikes is visible on economic growth. “There is no point in running away from the fact that there is a slowdown,” said Gokarn, but defended the RBI’s policy, saying that the central bank’s tight monetary policy has slowed the economy’s growth momentum, which may help stabilise inflation. “There are signals that headline inflation may start coming down by January next year and level below 7 per cent in the first half of 2012-13,” he said.  Attributing high food inflation to increasing affluence and changing consumption patterns, Gokarn warned that a persistent risk of endemic food inflation remains.  Gokarn also said efforts should be made to remove infrastructural bottlenecks, speed up new development projects and bring fiscal deficit within manageable limits to contain rising inflation and maintain growth momentum.

Expressbuzz

Freeze

..“There is such overwhelming bad news—the external situation is a disaster, inflation is not under control and economic growth is faltering at home. Worse, nobody knows where we are headed,” says Sudipto Mundle, member of the Reserve Bank of India’s technical advisory committee that advices the central bank ahead of its monetary actions.............

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There’s a lot the ECB can learn from the RBI

....There is not a single case of a state defaulting on its debt as the RBI is actively involved in ensuring that states service their debt. The RBI also closely interacts with the finance secretaries of each state to make sure states do not go overboard in their borrowing and budgets are more or less balanced...........

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Loan growth falls below RBI projection

Banks’ loan growth fell below 18 per cent on a year-on-year basis for the first time in this financial year, with demand for credit showing no signs of pick up even as the busy season started. According to the Reserve Bank of India (RBI) data, loan growth as on 28 October was 17.9 per cent. In October, loan book of banks shrank nearly Rs 60,000 crore. It fell from a high 21.4 per cent at the beginning of the financial year. So far, loan growth has been 5.5 per cent. Banks also reduced their assets in October, with outstanding deposit in the system declining nearly Rs 70,000 crore and as a result year-on- year deposit growth fell to 13.5 per cent. With growth of retail deposits remaining healthy, banks have been shedding high cost bulk deposits to reduce their cost of funds. Loan growth has been tepid in the current financial year so far as interest rates remain high. RBI increased the repo rate 375 basis points in the last 20 months to control inflation.

BS

Money Alerts

....Is your bank not providing you a passbook for your savings bank account or where there is statement facility, refusing to provide monthly statements? Then you may demand it under RBI's circular dated..........

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High interest rate hurting growth, says Reserve Bank of India

NEW DELHI: Admitting that high interest rate is hurting economy, the Reserve Bank today said the country's growth rate is likely to moderate to 7.5-7.6 per cent this fiscal. "Since we had 7.7 per cent in first quarter of 2011-12, we should expect that average for the remaining part of the year to be 7.5-7.6 per cent. This is partly because we have been raising interest rates," RBI Deputy Governor Subir Gokarn told reporters here.

ET

Making wealth from waste

...Mr. Jayaraman further explained that the initiative will be extended to more areas. He said that he had spoken to RBI Colony, Kamaraj Salai and few other colonies. “It is being conducted at the convenience of the people. All they have to do it dump in appropriate bags,” .....

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Is rupee depreciation the new normal?

......Any move by the RBI to support the rupee would put further pressure on the already strained liquidity. Along with all these factors mentioned above, a heightening risk on the current account deficit front, the best for the rupee seems to be over and we are in a new normal where unless we bring inflation under control and reduce the supply-side constraint, the rupee is expected to depreciate further against the dollar.

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