Addressing the slowdown

The challenge is growth RBI must cut rates next week

The Reserve Bank of India’s next review of monetary policy is scheduled for Tuesday, when it will announce whether it is cutting rates or holding them steady. This comes after a sequence of 13 increases, during which the central bank raised the policy rate from 3.25 per cent to 8.5 per cent. Last month, as signs that the economy was slowing became unmistakable, the RBI indicated a shift in its stance, saying that future changes in the policy rate would likely be downwards. Yet the timing of this much-anticipated downward shift is as yet unknown. It would be a mistake to leave it for later. It is of course evident that the RBI continues to be concerned about inflationary pressure in the economy. Headline inflation, which had been driven up by a combination of factors – including increases in the prices of food products and oil, and the sharp decline of the rupee against the dollar – has moderated sharply. This movement has been thanks to the fact that food inflation has come down to near zero. However, inflation hawks point out that the manufacturing sector, in particular, is continuing to show high inflation. That is of course true. But there is little doubt that, as growth slows, India is moving towards a deflationary environment. The Reserve Bank must not be caught on the wrong foot; monetary policy must anticipate such changes. When rates were rising, the question of the lag with which monetary policy works was bruited about. Because of the weakness of many of the links between the financial and real sectors in India, monetary policy’s impact on prices and output is not as immediate as it is in more developed economies. The RBI is not making policy for January; it is making policy for several months down the line. Its own estimate of the the lag time is between three and six months. It will need to sensibly extrapolate recent data to come to a conclusion as to what it should do. Recent data, of course, paint a worrying picture. The recovery of industrial production in November 2011 – after a poor October – was patchy, with capital and intermediate goods continuing to show no growth or an absolute decline. GDP growth estimates keep being revised downward, and it is possible that 2011-12 will end up being the worst performing since the drought year of 2002-03. The outlook for next year is cloudy, because the external environment continues to be unfavourable and indeed unpredictable. Businessmen’s wary calculations of the future have to be jogged to change, and reduced cost of capital is always a trigger for an uptick in investment, which is what the system needs. The time has come for Mint Road to signal unambiguously that restoring growth has become its priority. On January 24, the RBI should announce that it is cutting the repo rate by 25 if not 50 basis points.

BS

Women set to lead top public sector banks

NEW DELHI: In a first, the government is expected to appoint three women chiefs of public sector banks (PSBs), helping the state-owned entities match their private sector peers. An initial list prepared by the finance ministry has identified Central Bank of India executive director (ED) Vijayalakshmi R Iyer as the next chairman and managing director (CMD) of Bank of India. Two banks headquartered in West Bengal will also get women CMDs with Archana Bhargava, ED at Canara Bank, expected to be move to United Bank of India and Vijaya Bank ED Shubhalakshmi Panse shortlisted for the top job at Allahabad Bank. Women bank chiefs are not new to Indian banks. After all, Chanda Kocchar is the managing director and CEO of ICICI Bank, while her former colleagues Shikha Sharma and Kalpana Morparia head Axis Bank and JP Morgan India, respectively. The trend started a decade ago when Ranjana Kumar was appointed Indian Bank CMD. While Central Bank of India is headed by H A Daruwala, Dena Bank has a woman CMD in Nupur Mitra, who is due to retire in December. Even the Reserve Bank of India has had its share of women Deputy Governors - ranging from K J Udeshi to Shyamala Gopinath and Usha Thorat.

In all, six candidates have been shortlisted for filling up the corner offices in PSBs that fall vacant in 2012. Going forward, the number may go up as droves of women joined state-owned banks in the 1980s and 1990s. At present, about 17% of employees in PSBs are women. Central Bank of India ED R K Dubey is also likely to move to Canara Bank as CMD, while S S Mundhra, who is in Union Bank of India, is expected to stay in Mumbai and head Bank of Baroda (BoB). Ashwani Kumar, who is ED at Corporation Bank, is said to be the candidate to take over as the Dena Bank CMD when Nupur Mitra retires this year-end. While finalizing the list of candidates, the finance ministry is breaking from tradition by appointing just-promoted CMDs as heads of large PSBs. Dubey's shift to Canara Bank, the proposal to appoint Mundhra as the next BoB chief and Iyer as the new Bank of India CMD are cases in point. Earlier, the government had done the same thing when it appointed S Raman as the head of Canara Bank. Subsequently, a clear cut policy was put in place and the change is stance is already a talking point in banking circles.

TOI

RBI cracks down on violations by co-operative banks

Every four-and-a-half days during this fiscal, at least one cooperative bank has been either penalized or stripped of its licence to operate, as the Reserve Bank of India (RBI) cracks down on rule violations by these banks.............

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Banks to issue loan statements now

....“The Reserve Bank of India (RBI) is of the view that customers may not have the time to go through the entire product information as it would be voluminous and may also be in technical language. So, banks should give the most important terms and conditions of their products while marketing them to customers. The most important terms and conditions would contain the penalties that can be levied, fees and charges on the product,” .................

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RBI to hold rates steady next week, CRR cut unlikely: Poll

...... "The inflationary potential in the economy remains huge. So the Reserve Bank of India is unlikely to risk an interest rate cut or cash reserve ratio on Jan. 24,".......

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Bank of Maharashtra appoints new CMD

Narendra Singh has been appointed as Chairman & Managing Director of Bank of Maharashtra with effect from 01- 02- 2012. He has been the Executive Director of Corporation Bank since 07.12.2009. Narendra Singh reported to head office of Bank of Maharashtra at Lokmangal, Pune on 17th January to take charge of the new assignment.

FPJ

Show me the money

Rezwan Razack the Joint MD for Prestige Groups and an avid collector of Indian bank notes recently launched his book, ‘The Revised Standard Reference Guide to Indian Paper Money’ in association with Kishore Jhunjhunwalla. At the launch he also showcased some rare notes from his personal collection to his guests and well wishers. The book chronicles the evolution of Indian currency dating back to 1770. It captures the various nuances of modern day currency as well as incidents that helped shape this sector over the years. The book can probably be considered as a ready guide to answer any and every question related to the Indian currency. Razack says, “Collecting rare bank notes has been my hobby and passion for many a decade now. I have been doing this for the past 40 to 45 years. This penchant has led me to travel the world over in pursuit of rare currency notes to add to my growing numismatic collection. Although there are several Numismatists today in India, I have over the years developed a passion specifically for rare notes and primarily those pertaining to early period.” He further added, “I would like to dedicate this book to Indians to help them better understand the important role of currency in the history of our great nation and how it has transformed over the years.” The exhaustive compendium features bank notes issued by other colonial powers such as the French and Portuguese, as also bank notes issued by the banks of the princely states of Kashmir and Hyderabad, and “prisoner of war” notes — currency tokens issued during war to prisoners. Besides bank notes from the pre- 1861 private banking era and those issued after the British government took over the business of issuing currency post 1861, as a part of his collection Razack also possess rare printers’ proofs, and pre-printing notes showing signatures of early master engravers like Sir George Willis and Henry Archer. Among the other rarities depicted are specimens of bank notes developed by the Reserve Bank of India in 1947 which had Mahatma Gandhi’s portrait on it. This banknote did not come into circulation because in the end, the RBI decided to depict instead, the Ashok Pillar, the national emblem. It was only in 1996 that Gandhi’s portrait replaced the Lion Capital on the rupee banknote. Later this year, Razack also intends to open a museum that will display his collection of rare notes in a custom designed museum in Prestige Shantiniketan in Whitefield. This is slated to be India’s first museum of bank notes,

IBN Live

RBI to issue Rs 100 note with rupee symbol

MUMBAI: The Reserve Bank will shortly issue Rs 100 notes which will have the rupee symbol. The design of the notes to be issued is similar in all respects to the existing Rs 100 in Mahatma Gandhi Series-2005 issued earlier, except for the rupee symbol. RBI had announced last month that it will soon introduce notes of Rs 1,000, Rs 500 and Rs 10 denomination featuring the rupee symbol. The Rs 100 notes will be of the Mahatma Gandhi-2005 Series bearing the signature of Reserve Bank of India (RBI) Governor D Subbarao and with the year of printing mentioned on the back of the banknote, the apex bank said in a statement. All the banknotes in the denomination of Rs 100 issued by the RBI in the past will continue to be legal tender, it said. The Indian rupee got an unique symbol -- a blend of the Devanagri 'Ra' and Roman 'R' -- last year, joining currencies like the US dollar, euro, British pound and Japanese yen in having a distinct identity. The new symbol, designed by Bombay IIT post-graduate D Udaya Kumar, was approved in July 2010.

ET

How the rupee went from 54 to 50 against dollar in one month

.... intermittent intervention by the Reserve Bank of India (RBI) by selling dollars in the foreign exchange market has helped remove the froth off speculation — and provided some support to the rupee. In addition, after the rupee hit its lifetime low last month, the central bank introduced curbs on currency contracts, which......

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Getting to the Core of Inflation

To tackle inflation effectively, several government departments have to coordinate policy action

First we were in denial about inflation: the supply-shock explanation fell flat with very good production numbers in FY2011, likely to be replicated this year. The excuse that the poor were less poor and eating more was used to show that inflation was due to prosperity, with the MGNREGA being the motivator. While this factor could be at play at the margin, it has not been decisive and is no longer harped on. The RBI is firing away at inflation with a relentless policy of rate hikes, which has not worked quite the way it was expected to. But we need to know how this inflation has come to tackle it appropriately. The answer seems to be a shrug. One way to tackle this issue is to actually analyse threadbare the mechanics of inflation. This is so because inflation combat has to be a joint action from various ends and cannot be the sole responsibility of one agency, which today is the RBI. The accompanying table provides the contribution of various products to inflation along with the ministry or agency responsible. To calculate the contribution of various sectors to inflation, the weighted change in the overall WPI and individual products has been calculated. Various products have then been grouped under different ministries that oversee their operations. The major cause of price increase has been noted so that the respective body can address price issue. There are multiple factors that have contributed to inflation. The highest share has come from the so-called core sector: non-food, non-fuel manufactured products over which the RBI has control. Globally, prices of metals have started declining, but we have not seen that in India. So, around 40% of inflation may be attributed to possible demand-pull pressures. While global prices have come down, the rupee has depreciated, nullifying those gains. We can see that there are various arms of the government that should take some responsibility for inflation. First, the agriculture ministry has to review its policy of minimum support prices (MSP). The MSPs have been increased relentlessly by the Commission on Agricultural Costs and Prices (CACP) to reward farmers. While production has increased for cereals and to a certain extent in pulses, it has had the tendency to increase benchmark prices in the market resulting in higher inflation. Second, the ministries of petroleum and finance have tried to align the prices of petroleum products to the market, which actually makes us work on a delicate three-dimensional trade-off: higher prices, fiscal deficit and health of oil marketing companies. Around 11% of inflation has resulted from this factor. Third, the ministry of consumer affairs has to address the issue of warehousing and the Warehouse Development and Regulatory Authority should put in a structure to improve storage to cut down on wastage in fruit and vegetables. Around 40% of our horticulture output goes waste due to absence of cold storages. In this segment, we have witnessed high growth and where supply outstrips demand provided we can harness it through lower wastage. These organs need to make the system more efficient. While the contribution to inflation was negative in December, it was as high as 8.18% in October, prior to the decline in prices. Fourth, the area of milk, dairy products, eggs, meat and so on comes under the department of animal husbandry. Higher cost of animal feed and fodder has hiked the cost of production of these products. The significant aspect of these prices is that they are never mean-reverting, which happens for horticulture and cereal products. Fifth, the higher prices of textile products have to be looked at jointly by the finance ministry which hiked taxes on readymade garments and the ministry of agriculture, which oversees the MSP. But they might have limited control because of global factors. Sixth, there is the global factor in the form of oil prices that directly impacts the prices of domestic crude as well as nonregulated oil products. Global prices translate into domestic ones through the exchange rate mechanism. The RBI could have a role to play in stabilising exchange rates to smoothen price volatility. The inflation matrix is, hence, quite complex and there is evidently no singular solution. And the conundrum really is that as every constituent is impacted by inflation — as the producer of a product consumes other products whose prices are increasing, there is an inherent motivation to increase one’s own price to maintain the standard of living. This inflationary spiral, or rather the vicious circle, needs to be broken, and it appears that it can happen only in the medium run.  Roughly 70% of inflation can be addressed by various departments while the balance, which includes global influences, would still be beyond anyone’s purview. What is most important is that all these departments should start talking to one another. 

- Madan Sabnavis, CHIEF ECONOMIST, CARE RATINGS  (ET)

Indian Banks’ Capital Edge

With the RBI flagging off the implementation of Basel 3 guidelines, Indian banks will have to plan for more capital in the years ahead. They are wellplaced to meet higher capital requirements and indeed can strengthen their competitive position vis-à-vis international banks — provided the government can deliver on its own responsibilities towards public sector banks. The RBI has set a more demanding schedule for Basel 3 implementation than the Bank for International Settlements. The BIS has set the deadline for full implementation as 2019; the RBI would like Indian banks to comply by 2017. The total regulatory requirement of total capital (tier 1 and tier 2) in India is 9%, higher than the BIS norm of 8%. It will remain so under the new guidelines. Under Basel 3, two important changes happen. One is that the quality of the 9% capital required is higher. At present, bank capital is split almost evenly between tier 1 and tier 2. Under Basel 3, tier 1 will constitute 7% out of the total 9%. The other change is that banks will be required to have a capital conservation buffer, comprising common equity, of 2.5%. That takes the total capital requirement to 11.5%. Also, between 2013 and 2017, banks will be expected to operate at a minimum tier 1 leverage ratio of 5%. At the regulatory requirement of 9%, Indian banks were operating with a capital adequacy ratio of 13% in 2011 (under Basel 1). At a regulatory minimum of 11.5%, banks can be expected to be operating with capital in the range of 15-17%. This is the new bottom line where capital is concerned. Indian banks will have to make their plans for capital accordingly. Are they equal to the task? There are several reasons for optimism. First, investor appetite is likely to be healthy because returns to primary issues of Indian banking stocks, including PSB stocks, over the years have been good. Secondly, banks are seen as a play on the economy. In putting money in banks, investors are looking at an economy with a growth potential of 8-9% and bank loan growth upwards of 20%. Thirdly, return on assets in Indian banking is among the highest in the world today: it has been above 1% every year since the subprime crisis. While banking systems in the west are still reeling under the impact of the crisis, it is almost as if no crisis happened in Indian banking. Western bankers have expressed two big concerns about the higher capital requirements imposed by Basel 3. One, it will depress banks’ profitability. Two, it will depress economic growth because some of the higher cost of capital will be passed on to borrowers. Neither is particularly worrying in India. Increases in capital have made little dent on banks’ net interest income (as a proportion of assets) over the years. Any impact in coming years will be small, if at all, because there are still numerous highyielding products that are still open to banks on both wholesale and retail sides: SMEs, vehicle loans, personal loans, credit cards, etc. Besides, PSBs have only recently woken up to the potential for fee income. Increases in fee income will sustain return on assets even if net interest income is dented. For the same reasons, the impact on corporate borrowers and hence on economic growth will be negligible. (Even in western economies, BIS estimates the impact on growth to be a mere 0.04% per year). High growth and high returns will continue to make Indian banks attractive to investors in India and abroad. Some banks, such as HDFC Bank, are generating substantial surpluses and hence may not need a great deal of capital from the market. Overall, capital is unlikely to be a constraint for Indian banks in the coming years. There could be constraints arising from one or two other factors. One is the low prices of stocks in the Indian market: banks may not find it attractive to issue capital at current prices. A possible answer is to raise small sums through rights issues in such periods and approach the broader market when things look up. A bigger constraint is the government’s shareholding in PSBs. As SBI finds to its cost, the government may not find it easy to contribute its share in order to retain its shareholding. It may not be willing to reduce its shareholding below 51% either. If majority government ownership is to stay, the annual budget must factor in annual requirements towards bank capital. Basel 3 is likely to impact western and Indian banks in very different ways. Banks in the west are raising their capital adequacy levels through deleveraging, that is, by shrinking their balance sheets. In India, in contrast, banks will be raising capital to finance growth. The fear with Basel 2 was that large international banks would increase their competitive advantage by using advanced risk management models that would lower their capital requirement. In contrast, Basel 3, with its enhanced capital requirements, is likely to improve the competitive advantage of banks in India and some other emerging markets.

ET

Poll panel keeping eye on large cash withdrawals in Goa

Large cash withdrawals from banks in Goa are being monitored and the Election Commission of India (ECI) has asked the Reserve Bank of India (RBI) to take steps against money withdrawls from banks with the possible intention of bribing voters, a poll official said Monday. Speaking to reporters, state chief electoral officer (CEO) S. Kumaraswamy said that every withdrawal upwards of Rs.2.5 lakh from banks was being monitored in view of the election commission's guidelines.  "We are talking to banks about it. The moment a withdrawal above Rs.2.5 lakh is made, it is monitored both by bank officials and income tax department," he said. He also said that border checkpoints were also being sensitised to intercept the flow of liquor and other contraband as well as large amounts of illicit cash, which could be used to influence voters during elections.  "Border checkposts have already been alerted. We are working on motivating the election staff too," Kumaraswamy said.  The ECI on Thursday wrote to the RBI to ensure banks were not "misused by unscrupulous persons" for influencing voters with cash.  The ECI communication followed an incident earlier that week (Jan 9) when the Income Tax department officials seized cash of Rs.12.38 crore withdrawn from a bank at the Delhi-Uttar Pradesh border.  

India Today

Borrowings Test RBI’s CRR Resolve

Tight liquidity forces banks to borrow Rs. 1.56 lakh cr from RBI, double the amount borrowed 2 weeks ago

Bank borrowings from the Reserve Bank of India has doubled in two weeks, testing the Reserve Bank of India’s resolve not to signal a shift in monetary stance of fighting inflation by easing the cash reserve requirement. The maturity of forward contracts where the central bank had sold US dollars to prevent the rupee slide last month, and higher demand for funds from companies that no more want to borrow overseas due to higher rates, could push up interest in the domestic market in the short term, traders say. “The selling which was done by RBI for intervention was partly extended by receiving the forward sales,’’ said Ashish Vaidya, executive director, trading, UBS AG. “So, the impact of that in terms of systemic liquidity will be felt on the day the forward sale matures.” Banks borrowed . 1.56 lakh crore from the central bank, double of what it was two weeks ago, setting off speculation that the RBI may have to take some measures to ease the pressure, which may be even cutting the cash reserve ratio from 6%. They also borrowed . 200 crore by paying penal rate that is 1 percentage point more than the 8.5% repo rate in the so called marginal standing facility. The borrowing under this window is done when a bank pledges securities by breaching the minimum 24% limit of mandated government bond holdings. The rupee has already appreciated by almost 6.2% this year, partly due to the impact of the RBI measures to curb speculative trading. The call, or overnight rates, touched a high of 9.55%, reflecting the tight cash position in the market. Loans demand could also be leading to tight liquidity, some say. “There is a shift in credit demand from foreign currency to rupee-denominated loans, since it will now be more expensive to take the dollar route,” said Moses Harding, head, asset-liability committee at IndusInd Bank. Although the RBI is likely to continue with its open market operations, ie, buying of bonds from investors that leaves with more cash in the system, traders say buying back may not be of much help since government again sells bonds to take the cash away from the system. “OMOs will not add to the liquidity of the banks,” said a treasurer at a state-run bank who did not want to be identified. RBI in the past had cut the statutory liquidity ratio, the amount of deposits to be held in government bonds, to boost liquidity but such a move may be difficult this time due to high government borrowings.

ET

World Bank reduces India economic growth estimate

.... “As far as contingencies are concerned, the RBI (Reserve Bank of India) is holding on to its forex reserves to deal with the possibility of a sharper rupee depreciation and large companies are keeping cash reserves for difficult times,”.....

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World Bank sneezes, India shivers

...According to the latest RBI figures, India's foreign exchange reserves stood at $293.54 billion as of January 6, down from $296.69 billion as of December 30, 2011.......

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Bank ‘bounty’ shocks Bengal teacher

How would a person feel when the bank balance in his/her account shows Rs 49,570,08,17,538, an amount which is almost equivalent to the country’s annual Rail Budget (Rs 58,000 crore)?..........

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