Open market operations can hurt price stability: Subbarao

Dr D. Subbarao, Governor, RBI (right), along with Mr Benjamin Friedman, William Josep Maier Professor of Political Economy, Harvard University, at the Second Internaional Research Conference organised by the RBI in Mumbai on Wednesday

Mumbai, Feb.1: The Reserve Bank of India Governor, Dr D. Subbarao, on Wednesday cautioned that conducting open market operations — buying and selling of government paper — for liquidity management could end up hurting price stability. If the motivation for central banks to conduct OMOs is to help out a fiscally vulnerable sovereign or reduce the cost of borrowing for the sovereign, then they could end up holding price stability hostage to sovereign debt concerns, said the Governor at the Second International Research Conference. In financial year 2012 so far, the RBI has conducted OMOs aggregating Rs 71,878 crore.  The OMOs are timed just a day before the auction of government securities, thereby ensuring that banks have adequate liquidity to subscribe to these securities. Out of the expanded borrowing programme of Rs 6-lakh crore (including 364-day treasury bills), the Government has completed 87 per cent of its borrowing programme in the financial year so far. The Governor observed that at times, OMOs could be motivated by the objective of providing liquidity to support government borrowing or of reducing the yield on treasury bonds and, thereby, enhance debt sustainability. It then becomes a case of acquiescence in fiscal dominance. “There is often only a thin line, and the interpretation of the motivation for outright OMOs could vary depending on the circumstances,” said the Governor. In the presence of large sovereign borrowing that makes the Government's fiscal stance unsustainable, central banks typically have little choice, explained the Governor. “If they (central banks) do not conduct OMOs to bring systemic liquidity within reasonable limits, they risk losing control over financial stability. If they do conduct OMOs, they risk losing control over price stability. “What this really says is that fiscal responsibility is much more than a question of whether monetary policy is independent or not. It is a question of sustaining macroeconomic stability,” said the Governor. Dr Subbarao said that in India, the question has been whether the OMOs conducted by the Reserve Bank to manage systemic liquidity are acting as a disincentive for fiscal discipline. The Governor underscored that there is a need to cap total public debt as a proportion of GDP even as he cautioned that excessive borrowing is bad. Emphasising that the quality of public expenditure is important, Dr Subbarao explained that if the Government borrows and squanders that money away on unproductive current expenditure, both fiscal sustainability and growth would be jeopardised. Governments need to spend on merit goods and public goods, in particular on improving human and social capital and on physical infrastructure, he emphasised.

HBL 

Talking heads

Stability mandate

Financial stability will be made an explicit mandate for the central bank by amending the Reserve Bank of India Act, said Mr Harun Rashid Khan, Deputy Governor.  The Financial Sector Legislative Reforms Commission (FSLRC) is considering proposing an amendment to this effect, he added. The RBI is already committed to price and monetary policy stability, Mr Khan explained. To secure the health of the country's financial sector, the term “financial stability” could be incorporated in the RBI”s Preamble. Currently, the Preamble describes the basic functions of the Reserve Bank as: “...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."

NPA provisioning

The RBI is not considering any proposal to give special dispensation for banks regarding provisioning, despite the rise in non-performing assets. The NPA situation, according to Dr K. C. Chakrabarty, is not a cause for concern. As announced by the Governor, Dr D. Subbarao, in the third quarter review of the Monetary Policy for 2011-12, Deputy Governors Dr Chakravarty and Mr Anand Sinha will have a meeting with about 10 large banks later this month to discuss the NPA situation. The meeting will also look into the measures that need to be taken by the banks, the Reserve Bank, the State governments, and the Central Government to ensure that the profitability and the viability of the banking system is intact as it is now. On the widening trade deficit, Dr Chakrabarty quipped that the rupee has appreciated by 6 per cent and the media should not focus only on the negative news.

Role reversal?

Referring to a meeting with the Finance Ministry, Dr Subir Gokarn, in a lighter vein, spoke about the role reversal between the Finance Ministry and the RBI. At the meeting, while Dr Gokarn spoke on food inflation, Dr Kaushik Basu, Chief Economic Advisor, Finance Ministry, held forth on monetary policy.

HBL

Rs 1,000 denomination banknotes to be issued non-sequentially: RBI

New Delhi: The Reserve Bank today said it will soon start issuing banknotes of Rs 1,000 denomination in non-sequential numbering. The packets of banknotes in non-sequential number will have hundred notes, the apex bank said in a statement. In June last year, RBI had started issuing Rs 500 denomination notes in non-sequential numbering.  "It has now been decided to issue banknotes of Rs 1000 denomination also on similar lines," the statement said. The bands of the packets containing the banknotes in non-sequential number will be superscribed with the words 'the packet contains 100 notes not numbered sequentially'.

FE

Business correspondent model to be changed to aid inclusion

The Reserve Bank of India (RBI) has in principle agreed to permit interoperability of business correspondents (BCs), aimed at helping customers in rural areas access banking services such as cash deposits, withdrawals, remittances and balance enquiries from anywhere in the country on the lines of ATM facilities available to customers in urban areas..............

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Rein in public debt, Subbarao tells Centre

With the Union Budget in the horizon, the Reserve Bank of India on Wednesday cautioned the government against “excessive borrowing” and called for a cap on total public debt as a proportion of GDP. “Like with the other two legs (price stability and financial stability) of the new trilemma, even in the case of sovereign debt, there is an inflexion point beyond which fiscal deficits militate against growth. Government borrowing is not bad per se, but excessive borrowing is,” RBI Governor D Subbarao said. The Thirteenth Finance Commission had recommended that the total debt of Centre and states as a percentage of GDP should be cut to 68 per cent in 2014-15 compared with 81.9 per cent in 2008-09. “What is equally important in respect of fiscal management is the quality of public expenditure. If the government borrows and squanders that money away on unproductive current expenditure, both fiscal sustainability and growth would be jeopardised. Governments need to spend on merit goods and public goods, in particular on improving human and social capital and on physical infrastructure,” he said at the International Research Conference of the RBI in Mumbai. This is the second time in the last two weeks the RBI voiced concern against fiscal slippages. “In the absence of credible fiscal consolidation, the Reserve Bank will be constrained from lowering the policy rate in response to decelerating private consumption and investment spending,” Subbarao said after announcing the policy review last week. The fiscal deficit in 2011-12 is expected to exceed the budget estimate of 4.6 per cent of the GDP on account of subdued receipts and overshooting of the subsidy bill by at least Rs 1 lakh crore. To bridge the receipt-expenditure gap, the government plans to exceed its borrowing target for the current fiscal by Rs 92,000 crore over budget estimate of Rs 4.20 lakh crore.

IE

'Thin line' in motive for open market operations, says Reserve Bank of India Governor Duvvuri Subbarao

MUMBAI: When central banks conduct open market operations (OMOs) driven by a need to provide liquidity to support government borrowing or reduce yields rather than for liquidity management, it "becomes a case of acquiescence in fiscal dominance," RBI chief said on Wednesday.  "There is often only a thin line, and the interpretation of the motivation for outright OMOs could vary depending on the circumstances," Reserve Bank of India Governor Duvvuri Subbarao told a conference.  On Tuesday, the RBI said it will buy up to 100 billion rupees ($2 billion) of government bonds via open market operations on Friday. "In the presence of large sovereign borrowing that makes the government's fiscal stance unsustainable, central banks typically have little choice. If they do not conduct OMOs to bring systemic liquidity within reasonable limits, they risk losing control over financial stability," he said. 

ET

RBI urges Govt to cap public deficit

Mumbai, Feb 1: Cautioning the Government that excessive borrowing is bad, the Reserve Bank of India Governor, Dr D. Subbarao, has urged the Government to put a cap on public debt as it would hurt growth. “There is an inflexion point beyond which fiscal deficits militate against growth. Government borrowing is not bad per se, but excessive borrowing is. There is therefore a need to cap total public debt as a proportion of GDP,” Dr Subbarao said in an address at the International Research Conference here today. The Government’s fiscal deficit in 2011-12 is expected to exceed the budget estimate of 4.6 per cent of the GDP on account of subdued receipts and overshooting of the subsidy bill by at least Rs 1 lakh crore over and above the original projection. In order to bridge the receipt-expenditure gap, the Government plans to exceed its borrowing target for the current fiscal by Rs 92,000 crore over the budget estimate of Rs 4.20 lakh crore. The RBI had also flagged the issue of rising fiscal deficit at several occasions earlier, including in its third quarter monetary policy review in the last week of January. The Government, as indicated by the Finance Minister, Mr Pranab Mukherjee, is expected to announce steps to contain fiscal deficit in the budget for 2012-13 to be unveiled sometime in March.

HBL

RBI may not give one-time leeway on NPAs' provisioning

The Reserve Bank of India is not looking at giving banks a one-time leeway on provisioning towards non-performing assets at the moment, Deputy Governor K C Chakrabarty said on Wednesday. “At present, no,” Chakrabarty said, when queried if RBI would dole out the special dispensation, given the trend of rising non-performing assets and loan recast for banks. In the aftermath of the global financial crises in 2008, RBI had given some leeway to banks on provisioning for loans, which were advanced to companies that had been restructured once. It provided the one-time leeway to relieve companies from repayment pressure.

BS

India’s new impossible trinity

.....RBI will continue to seek what can clearly be called an ‘impossible trinity’ of three ‘expected outcomes’ – easing liquidity conditions, mitigating downside risks to growth and continuing to anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation. And yet, as RBI Governor Duvvuri Subbarao has loudly decried for several years now, most recently in his quarterly monetary policy statement last month, fiscal expansion is inflationary and further complicating its monetary stance. Mr. Mukherjee, are you listening?

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Freeing up of savings A/c rates: No unhealthy competition, says RBI

... After interest rates on savings bank accounts were freed, the early signs are that there are no major shifts in preference on the part of account holders towards those offering higher rates or any big product innovations. None of the top banks has raised interest rates on savings bank accounts beyond the mandatory levels, but none seems to have been impacted either......

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Going Bottom Fishing

.... While the rupee has seen a rapid reversal to 51, the RBI’s intervention, however, is showing up in depleting foreign exchange reserves, which have fallen by $27 billion since October 2011 to $293 billion at present — the lowest in more than a year. This depletion of reserves might just play on the RBI’s mind and stifle an aggressive lowering stance if there is no visible resolution to the European debt problem......

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Platinum Jubilee Function - IOB Exclusive Interview

Indian Overseas Bank, ITC Kakatiya, Begumpet, Hyderabad, Andhra Pradesh. Indian Overseas Bank grandly celebrated its Platinum Jubilee Function. Dr. Y.V Reddy, Former Governor, Reserve Bank of India-RBI was the Chief Guest. Platinum Jubilee Commemorative Oration on “Development and Regulation of Financial Sector” By Dr. Y.V Reddy, Former Governor, RBI. Outstanding personalities, eminent speakers, legendaries & dignitaries attended the function. Felicitation was done by IOB staff to Dr. Y.V Reddy on this auspicious occasion. The inaugural lamp was lighted by the guests and the hall was crowded with good number of people’s gracious presence

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Lending rates may fall before RBI's rate cut, says SBI

.... “Rates are high and obviously it is hurting the industry. We are all hoping for that (lending rates to fall). In the long term, one of the things that will make industry viable and investment come back is to have lower lending rates,” Diwakar Gupta, managing director and chief financial officer of SBI, said on Wednesday....

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Chit Fund frauds on rise, RBI cautions public

KOCHI: The rising number of chit fund fraud cases reported in the past few months have become a cause of serious concern for the state Police. The Reserve Bank of India, which has come across numerous complaints with respect to chit fund frauds, has alerted the cyber police. The RBI has received complaints that some of the chit fund companies are operating using SMS and emails for propagation of their business, especially in the central part of the state. According to cyber cell officials, complaints have been pouring in day by day. “More than 30 complaints have come within two months from Ernakulam district alone. These companies generally make offers through letters, e-mails and SMSs. In addition to their usual practices, the fraudsters have now resorted to issuing certificates, letters and circulars on letterhead that look similar to that of RBI with forged signatures of its executives or senior officials,” an official added. Elaborating upon their modus operandi, the official stated that the fraudsters even resort to posing as senior officials of the central bank and lure the public into depositing money in their accounts which they have in branches of certain Indian banks. “Once the funds enter the account, they withdraw the money and vanish,” he said. Reserve Bank senior officials in Mumbai said that it has come to their notice that certain overseas organisations have been advising individual companies and trusts in India that huge sums of money for disbursal of loans in India at cheap rates has been kept in an account with the central bank and the funds, to be released after the RBI’s approval. To substantiate the claims, even copies of certificates and deposit receipts purportedly issued by the Reserve Bank are being produced by such operators, they said.“The RBI had cautioned the public against such fly-by-night operators. The losses that we have reported amount to lakhs of rupees. The RBI has never authorised any foreign lottery or chit funds that work through SMS and emails. People must ensure that the institutions where they invest money are authorised and they can seek assistance from the RBI officials to ensure safety of their deposits,” said a senior RBI official in the Thiruvananthapuram unit.

IBN Live

Social enterprises in microfinance

... All the big players who are in the microfinance space and who are in trouble are the ones who followed the route of starting charitable organisations; started by being social, but ended up becoming crassly commercial or tilted more towards enterprises. These are the ones which did above the line skimming by taking fancy compensation for the MFI employees, and below the line skimming through special purpose vehicles that invested in for-profit operations. Clearly they have lesser credibility and a poorer image than those who started as pure for-profit enterprises. The change of stripes has eroded their credibility and brought their intent into question. ......

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How “the crisis” changed microfinance and where we go from here…

.... The Reserve Bank of India implemented an interest rate cap and limits on margins. The subsequent proposed Microfinance Law brings microlenders under RBI control, and empowers it to set margin caps, repayment schedules and maximum interest rates. The world has been watching closely......

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Ombudsman at SKS Microfinance

SKS Microfinance, the country's only listed mirofinance entity, announced on Wednesday that it has appointed Verghese Jacob as its ombudsman, making SKS arguably the only Indian NBFC-MFI (non banking microfinance company- microfinance institution) to have such a structure in place for customer protection and grievance redressal............

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