Only rapid supply increase can tame food inflation: Gokarn

Though transitory episodes of food inflation do not warrant a monetary policy response, there are strong justifications for acting in the face of more persistent ones, if the objective is to keep overall inflation in check, according to Dr Subir Gokarn, Deputy Governor, Reserve Bank of India. Quickly increasing the productivity of proteins and fruits and vegetables is the highest priority, both from the perspective of development and standards of living and from the viewpoint of monetary policy, he said at the Kale Memorial Lecture at the Gokhale Institute of Politics and Economics. “When prices are rising because demand is growing strongly while supply stagnates or fails to keep up, there is no alternative to curbing food inflation than raising supply rapidly. The current pressure on the prices of proteins and fruits and vegetables is clearly the outcome of this combination of circumstances. “However, raising productivity quickly is itself a serious challenge, given the pressures emanating from both labour costs and, over longer horizon, what appears to be a structural reduction in the absolute amount of rainfall,” explained Dr Gokarn. The RBI, in its second quarter review of its monetary policy in October, said that the inflation outlook will, among others, depend on the supply response in respect of those commodities where there are structural imbalances, particularly protein items. Therefore, concerted policy focus to generate adequate supply response in respect of items such as milk, eggs, fish, meat, pulses, oilseeds, fruits and vegetables will play a major role in shaping the behaviour of food inflation in the near term. According to Dr Gokarn, the transition from a cereal-dominated diet to a more balanced one with a greater appetite for proteins and fruits and vegetables is something that all countries have seen, and India is no exception. “It (the transition) is in full swing today and the absence of a strong supply response means that many aspiring consumers will actually be denied the opportunity to make that transition,” the deputy governor said. The Deputy Governor observed that persistent supply pressures on the economy, whether they are from food, energy, labour or any other critical input, are clearly not very good for maintaining the balance between fast growth and low inflation. “A permanent supply shock leads to lower growth and higher inflation, which could further fuel inflationary pressures through expectations. In this situation, central banks have to choose between the risk of inflation spiralling through expectations and the burden of slowing growth even further by anti-inflation policy measures,” he said. Dr Gokarn felt that an effective strategy for supply enhancement must be compatible with both the nature of the commodities and the state of the economy. “I have no doubt that such a strategy can be devised from existing knowledge and the right kinds of resources being brought together. Co-ordination will be the key,” he added.  

HBL

RBI Deputy Governor announces USD 10 million ECB for all MFIs

At the second day of the Microcredit Summit India 2011, Reserve Bank of India (RBI) Deputy Governor H R Khan announces External Commercial Borrowings (ECB) of USD 10 million for all MFIs. So far only NGO- MFI have been allowed. In his closing speech he also stressed for a multi agency approach. Banks were encouraged to lend to the microfinance sector. He stressed different strengths of different sector. He also stated that “without going into why the crisis happened, I think no crisis should be wasted. I think we have to look forward and think how to move forward.” He’s suggestion was CSR which stands for Credibility, Sustainability and Responsibility. He mentioned that this has been brought out in the Malegam report. In term of credibility, there is a need for fair prices. The loan card should be with the client and in his vernacular language. We need to eliminate abusive collection practices. Mr. Khan mentioned, “I am happy MFIN and Sa Dhan has come out with this Code of Conduct.” The crisis has taught us we need to practice sustainability in the microfinance sector. In the case of responsibility, there needs to be a distinction between making profit and profiteering. We need to eliminate multiple lending and ghost lending, he stated.

Microfinance Focus

RBI panel to discuss raising of capital by urban co-op banks

Growth prospects for banks hampered due to limited options

Mumbai, Dec. 13: The issue of getting a level-playing field for urban co-operative banks vis-à-vis commercial banks with regard to raising capital and lowering the threshold for statutory investments will be taken up at a meeting of the Reserve Bank of India's standing advisory committee next week. Currently, growth prospects for the 1,600-odd UCBs are hamstrung due to limited options for raising capital. These banks primarily depend on plough back of profits and borrowers' subscription to share capital at the time of loan disbursement, to shore up their capital. Though UCBs, which as of March-end 2011 collectively had deposits and advances aggregating Rs 2,12,031 crore and Rs 1,36,341 crore, respectively, have been allowed to issue preference shares and long-term deposits to augment their capital, both these options are not preferred. The constraint for UCBs in issuing preference shares is that they can be issued only at face value. Investment in these shares is unattractive as no exit mechanism is available for investors wanting to liquidate them. In the case of long-term deposits, the RBI's approval is required to pay back depositors even if a bank is financially sound. This is proving to be a deterrent for prospective investors. “We should be allowed to issue shares at book value. Also, to impart liquidity to co-operative bank shares, a market-making mechanism in the form of a trust can be jointly put in place by all banks so that investors have an exit opportunity,” said Mr B.V.R. Sarma, CEO, Greater Bombay Co-operative Bank. Currently, commercial banks have to invest a minimum 24 per cent of their deposits in Government Securities. These investments are required to fulfil the statutory liquidity ratio (SLR) norm. However, in the case of UCBs, this limit is set higher at 25 per cent. UCBs want at par treatment with commercial banks in this case. Further, they want the SLR limit to be suitably split into two – investment in government securities, and cash holding, investment in gold and deposits with the apex bank of a State.  They are also seeking RBI's permission to tap its liquidity adjustment facility to tide over temporary liquidity mismatches. “Many small banks do not have the expertise to trade in Government Securities. In a rising interest rate regime, these banks end up booking losses or making market-to-market provisioning on the balance sheet date. “To overcome this, they should be permitted to hold a portion of their deposits in cash, invest in gold and park deposits with the apex bank of a State,” said Mr Sarma. To overcome short-term liquidity mismatches, UCBs want to leverage their non-SLR investments (or investment in corporate bonds) by offering them as collateral in repo transactions with commercial banks. Currently, every branch that a co-operative bank opens has to be backed up by a networth of Rs 2 crore each. The UCBs want the RBI to do away with this stringent norm and take into account their overall financial health in granting future branch licences. Currently, UCBs cannot lend more than Rs 10 lakh against the pledge of shares. They want this limit to be doubled. These banks want RBI to clearly define bill discounting under letter of credit as a permissible banking activity.“There is some confusion on bill discounting under letter of credit as some RBI inspection officials allow it while others don't,” said a senior UCB official.

HBL

Govt banks get nod to hire 11 more EDs

State-run banks, which are struggling to find talent in the face of a large number of retirements in the sector, may get a boost with the government allowing the appointment of 11 additional executive directors (EDs) for human resources (HR) and technology. The ministry has already issued directives to public sector banks (PSBs) to this effect, according to two persons familiar with the development. One of them is an official of the finance ministry and the other a banking industry official. This follows recommendations submitted by an expert committee headed by former Bank of Baroda chairman Anil K. Khandelwal, which had made critical recommendations to improve manpower management at PSBs. The posts are of the rank of director (HR) in oil and gas public sector units (PSUs) such as Oil and Natural Gas Corp. Ltd and Indian Oil Corp. Ltd. Among the recommendations of Khandelwal committee were the induction of HR specialists, the appointment of an executive director for HR, 50% direct recruitment of officers against 25% now and compulsory three-year rural service for new recruits. The committee had also said that senior officers in PSBs should be appraised on the basis of feedback from colleagues, subordinates and customers. According to the ministry official, the government has sanctioned the appointment of six additional EDs in the large state-run banks and five in small-sized banks. Presently, large PSBs can have two EDs and smaller banks generally have one ED. These banks are Bank of Baroda, Bank of India, Union Bank of India, Punjab National Bank, Canary Bank, Central Bank of India, Dena Bank, Vijaya Bank, Bank of Maharashtra, United Bank of India and Punjab and Sind Bank. The move assumes significance as PSBs are in urgent need of HR reforms in the face of a severe shortage of skilled executives and increasing attrition. India currently has 27 public sector banks, accounting for more than 70% of the country’s Rs.65 trillion banking sector. These banks together employ around 700,000 people. Out of this, more than 100,000 are scheduled to retire over the next five years. “Appointment of a dedicated ED for HR is essential for PSBs as, in the absence of focused efforts, the industry will not be able to cope with the large number of retirements,” said a senior public sector bank official, who is set to be promoted as an ED. He did not want to be named. Attrition has been rising in recent years as younger executives are keen to take up more-rewarding jobs in private and foreign banks. Many PSBs are at a disadvantage as they lack standardized staff appraisal norms. “The intent of this recommendation is to professionalize HR in PSBs and seek board-level engagement in many crucial HR reforms,” Khandelwal said. The Khandelwal committee had recommended that only professionally qualified and experienced persons should be considered for the ED position and that lateral recruitments should be made if necessary. The role of the ED will include developing HR policy, talent management, employee engagement, HR audits, reviewing the learning infrastructure and initiating measures to develop a leadership pipeline, it said. As part of HR reforms at PSBs, the finance ministry had asked banks to effect a smooth transition whenever top executives take charge. For instance, when Nupur Mitra replaced D.L. Rawal as chairman and managing director of Dena Bank in September, there was a 15-day transition period.
Mint

IT in Cooperative Banks: Unbanked, on the Radar

..... The RBI has certainly played a key role in driving the technology adoption in many of the cooperative banks. Until the RBI had not issued a directive, there were very few banks that had gone in for core banking solutions......

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Parliamentary panel pitches for integrated banking law

The parliamentary standing committee on finance has suggested instead of bringing piecemeal amendments time to time, the government should consider the formulation of an integrated modern banking law, consolidating the provisions of other statutes that cover various aspects of banking. “Such an integrated and holistic law would also be in line with the proposed legislation in other areas like the Direct Taxes Code and the Companies Bill,” the panel outlined in its report on the Banking Laws (Amendment) Bill, 2011, tabled in Parliament on Tuesday. The committee stressed on employee-friendly measures in the integrated banking law. These include the introduction of employee stock options, deterrent safeguards against 'wilful default' by a borrower in repaying loans and other forward-looking proposals that reflect emerging realities. On the proposal to make voting rights in private sector banks proportionate to shareholding, the panel said the finance ministry may consider increasing the limit from the current 10 per cent to 26 per cent to keep a balance between conflicting factors — concentration of economic power and control and promotion of corporate democracy. The finance ministry had, in the Banking Laws (Amendment) Bill 2011, proposed that voting rights in private sector banks be proportionate to the shareholding, while removing the existing 10 per cent ceiling. Market participants said the move was in the direction towards financial sector reforms. “It is a positive move, a move in the right direction. However, investors would want to have voting rights in line with their shareholding pattern. So, that goal has not been achieved. But the positive thing is the government is trying to push reforms, may be in small steps,” said Manek Fitter, partner (financial services), Ernst & Young. The committee also emphasised on recent failures of major global private banks and said lessons learnt from these should not be lost sight of, while formulating the new policy on banking licences. “Key issues and concerns such as banking penetration, coverage and financial inclusion should remain paramount and the entire banking industry, including banks in the private sector, should be clearly mandated to achieve the desired objective in this regard,” it said. While supporting the government's proposal to keep bank mergers outside the purview of THE Competition Commission of India (CCI) as of now, the panel said this exemption should be considered a special case and an expedient measure to be revisited in the light of the experience gained by both the Reserve Bank of India (RBI) and the CCI. “This, however, does not, in any manner, convey the committee's view on the mergers and acquisition policy in the banking sector, which is an issue meriting a separate discourse,” it said. “As RBI has been entrusted with the mandate to grant approvals for acquisitions, transfers and mergers in the banking sector, the committee would expect RBI conduct due diligence of 'fit and proper' persons/entities and take sufficient safeguards while stipulating conditions as to credentials, source of funds, track record and financial inclusion before granting approvals under this clause,”the report said. The committee also stressed it would like the government to consider the merits of issuing non-voting shares as an avenue to expand the capital base of banks without allowing concentration of management control in a few hands, as this would also enable banks to grow faster. “Considering the wide scope and amplitude proposed in the definition of 'associated enterprises' of a banking company, the committee would expect RBI's regulatory machinery be adequately beefed up in view of its expanding role and augmented functions as proposed in the Bill,” the panel said in its report. The committee said no serving or retired officer of the central government or a state government should be considered for appointment as administrator on suppression of the board of directors of a banking company. 

BS

RBI should avoid a cut in cash reserve ratio

The Reserve Bank of India (RBI) faces the classical central bank dilemma, with both growth and inflation in uncomfortable territories. While no rate action is expected in the upcoming December announcement, the monetary policy stance and the near-term guidance, if any, would be of sheer interest. Inflation has peaked — it would probably soften to less than 7.5 per cent by March, broadly in line with RBI’s projections. But it can stay fairly sticky thereafter — in an uncomfortably elevated range of 6.5-7.5 per cent for the major portion of 2012. The sharp deterioration in the growth trajectory would now increase the pressure on RBI to ease its policy stance. The central bank would possibly start facing the ‘behind the curve’ chatter again, this time on the easing front. Questions would now arise whether RBI over-tightened in the last few months. But an average headline inflation rate of around seven per cent is a clear deterrent against any rapid reversal in monetary policy stance — RBI would possibly hold the policy interest rate steady for the remaining months of 2011-12. Cuts in the repo rate could start from the April-June quarter. Of late, there has been widespread speculation of a cut in the cash reserve ratio (CRR). I feel that would be a sub-optimal policy move at the moment. It could be perceived as prematurely diluting RBI’s inflation-fighting stance and stoke inflationary expectations, which have started coming down. Rather, the continued use of open market operations (OMOs) to alleviate tightness in liquidity is a superior course of action. OMOs can be conducted at a measured pace, at the discretion of the central bank. OMOs would also help tame elevated bond yields — a CRR cut would not be able to achieve that in a sustained fashion. This is a particularly important consideration now, owing to strong possibilities of further overshooting of government borrowings in 2011-12.

Siddhartha Sanyal, Chief economist, Barclays Capital (BS)

The neurosis of currency

.................. Devaluation is not a big deal. The issue always would be the ability of a country to make growth and productivity a habit.

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RBI to issue notes with rupee symbol

Reserve Bank of India (RBI) will shortly issue Rs 1,000 and Rs 100 denomination currency notes incorporating the rupee symbol. However, it will be without the inset letter as in the case of the Mahatma Gandhi-2005 series which bears the signature of Dr D Subbarao, Governor of RBI. The design of these notes is similar in all respects, except for the rupee symbol. The old notes will continue to be legal tender.

DH

RBI prefers FDIs over short-term debt inflows to finance CAD

The Reserve Bank today said it prefers long-term foreign direct investment (FDI) inflows over short-term debts as the former is more stable in nature and also helps in financing the comparatively large current account deficit of the country. "We prefer long-term equity flow into the country in the form of FDIs. Debt flows, particularly short-term debt flows, are not the preferred form of money flows," deputy governor Subir Gokarn said here today. He was speaking at the 12th L K Jha memorial lecture titled 'Global financial flows, global imbalances and crises' which was delivered by Prof Maurice Obstfeld of the University of California at Berkeley. The function was presided over by the Governor Duvvuri Subbarao. The late Jha was the RBI governor from July 1967 to May 1970 and was also a member of the Brandt Commission that probed the financial crisis of the developing economies in 1983. Referring to the significance of maintaining a lower current account deficit (CAD), Gokarn said the country is far from any threshold of vulnerability on account of CAD, which currently stands at close to 3 percent of the GDP. He, however, said it is crucial to see how the CAD is financed to understand the possibility of instability for the economy and not the threshold per se. 

IBN Live

Now, a dose of pain therapy

Duvvuri Subbarao has successfully managed to choke industrial growth. The first set of numbers out this week shows that output at India's factories, mines and power plants in October 2011 actually contracted 5% from a year ago. Over April-October, industrial growth has slowed to a crawl; it is down to 3.5% from a healthy 8.7% in the same period of 2010. The central banker must draw considerable satisfaction that a series of 16 hikes since March 2010, which saw interest rates climb by 3.75 percentage points, has had its desired effect on deflating demand in the economy. What now? Mr Subbarao will, of course, be watching very closely the inflation numbers due on Wednesday before he crafts his monetary policy stance at a Reserve Bank of India review meeting slated for Friday. Wholesale inflation in October 2011 clocked 9.73%, the eleventh month running it has stayed above 9%, and unless there is a significant improvement here, the central banker will have little reason to lower his guard. Mr Subbarrao's pain therapy, of course, doesn't affect everyone equally, the scope of monetary policy being limited by administered interest rates on the one hand and a large parallel economy on the other. Agriculture and services, which between them contribute three-quarters of India's economic output, are maintaining their trend growth rates. Gross domestic product growth, as a result, has slowed to 6.9% in July-September 2011, from 8.4% a year ago. This is a concern, but nowhere in the league of the bloodbath on the factory floor. Companies are simply not putting up fresh capacity in a season of galloping interest rates and raw material prices. Production of equipment that goes into setting up new plants that churn out the stuff we eventually buy shrank 25.5% in October 2011, a precipitous fall from 21.1% growth in the same month a year earlier. Consumers, likewise, cut hire-purchase of durables like cars that has pulled down the rate of growth from 14.2% a year ago to a 0.3% decline in October 2011. Even when interest rates don't pinch much, Indians have stopped shopping: consumer non-durables like soaps contracted by 1.3% this October. India's famed consumption story is now in jeopardy. Mr Subbarrao's assessment of his own actions over the past year suggests that policymakers will now need to gear up to give growth a push. And he is relying on the government to assist in anchoring inflation expectations. Decisions on raising administered prices will raise the price line in the immediate future, but can tease suppressed inflation out of the system. Fiscal rectitude can help steer demand from a bloated administration to productive investments by companies and households. Fixing supply bottlenecks in agriculture and infrastructure, likewise, can ease structural inflation, for which monetary policy has no answers.  

HT

RBI to wait and watch for now

The Reserve Bank of India (RBI) is expected to wait a little longer before intervening to arrest the falling rupee. As the decline is driven by external factors, the regulator may give some more time for the currency to stabilise. “We have not reached that critical level which will prompt RBI to take direct actions,” said Anis Chakrabarty, chief economist and director, Deloitte Haskins & Sells. The regulator may however go for a cut in Cash Reserve Ratio to increase liquidity. “It is unlikely that RBI will take action to check the rupee as India does not have the comfort of a large forex reserve,” said Moses Harding, head- global markets group, IndusInd Bank. The outlook for the rupee remains bearish, and traders see its next support at R53.75. The rupee has fallen about 14% since the year began.

HT

Can RBI do anything to stop the rupee’s slide?

............. The RBI has been making token interventions in the market to prop up the rupee, mostly to shave some of the “speculative froth” in the currency markets, but experts said those efforts are unlikely to have any sustainable effect on reversing the rupee’s slide...............

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India Inc sends an SOS to RBI as rupee plunges to record lows

..... "Sure, it is a tough act as they (RBI) also have to worry about inflation and liquidity, but unless they step in and give confidence, the market will continue to move in the wrong direction,".............

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Politicians' curse versus the RBI

.... With the local myopic political brinkmanship hurting the economic outlook, the Reserve Bank of India (RBI) will continue to be the key focus for some policy-related clarity. This is unfair to the RBI, as it is not receiving the much-needed support from the government on fiscal matters.........

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Diving Re adds to RBI’s inflation, rate worries

Making the task of the Reserve Bank of India (RBI) to control inflation difficult, the rupee on Tuesday touched a record low for the second day in a row as both foreign and domestic investors snapped up dollars amidst worries about India’s cooling economy...........

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Policy out of focus

Apropos the editorial “Undone by policy” (December 13), I would add that declining inflation is a reflection of the consumer’s silent resistance. The common man, burdened with unprecedented inflation, has had to cut spending, even on essentials. Meanwhile, the government is bent on spending on unproductive popular schemes instead of focusing on development activities, such as infrastructure, hoping foreign direct investment (FDI) will fill the gap. Given the uncertain political situation and unabated corruption at all levels, foreigners will think twice before investing. It is high time the government shed its obsession with FDI and recast economic policy to suit our needs.

-  N Ramamurthy, Chennai (BS)

Wake up, Mr PM! Our economy is running on empty

............ The risk lingers that the policy mandarins may continue to deploy monetarist tools in the short term by requiring the RBI to lower interest rates even if the RBI isn’t convinced that the battle against inflation has been well and truly won. The risk of policy errors feeding the very real fears of stagflation remains high.

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Banks in Kerala see rush of NRE & NRO deposits

The depreciation of the Indian rupee over the past few weeks has helped Kerala-based banks like Federal bank, Dhanlaxmi Bank and South Indian Bank mop up their NRI (non-resident Indian) deposits............

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