Rising NPAs are a concern: Pranab

RBI:DIFFICULT TO DELIVER ON 4.6% FISCAL DEFICIT TARGET

Reserve Bank of India Governor Duvvuri Subbarao today said India would find it difficult to achieve its fiscal deficit target this year, unless it made adjustments to account for the rise in fuel and fertiliser prices. The comments sparked market concern that the government would need to step up borrowing to fund the gap. In Budget 2011-12, the government had announced a fiscal deficit target of 4.6 per cent of the gross domestic product. This was widely considered to be ambitious, after its 5.1 per cent deficit target for last year was met by high one-time revenues.  “Since crude fertiliser prices have gone up since the Budget announcements, unless some adjustment is made, either on the expenditure side or the tax side, it is difficult to deliver on a 4.6 per cent target,” Subbarao said, after RBIs board meeting here. “It is difficult to say whether the government can deliver on a 4.6 per cent target. It depends on what decision they take and a number of issues --- the adjustment of fuel prices being the most important one,” he said, adding fighting inflation remained the central banks priority.  The government had said it would borrow a gross `4.17 lakh crore in the current financial year, of which it would raise `2.5 lakh crore in the first half.  Subbaraos comments, which came after the markets closed, raised concerns among bond dealers that the government would increase its borrowing in the second half of the current financial year. “The governors remarks on fiscal deficit raise doubts that borrowings in the second half of the current financial year could be increased. However, there should not be any impact on markets now, since the concern for the market is immediate supply. We will cross the bridge, as and when it comes,” said Manish Wadhawan, director and head (rates), HSBC India.  Last June, the government had allowed state-run oil firms to fix the price of petrol, but had continued to control the prices of diesel, kerosene and cooking gas to shield the poor and try to tame inflation. Staterun oil firms increased petrol prices by about 8.6 per cent from Sunday, a record rise, that is expected to fuel inflation in the country. RBI had, on May 3, raised interest rates for the ninth time since March 2010, by a sharper-than-expected 50 basis points. It had also said fighting inflation was its priority, even at the expense of some shortterm growth. “This is our priority and I only want to reiterate what we said in the annual policy — that we need to bring inflation down to an acceptable level for growth to be sustainable,” Subbarao said. The wholesale price index has remained stubbornly high for months and rose 8.66 per cent annually in April. The prospect of higher energy prices would exert pressure on RBI to raise interest rates in June and maintain a hawkish stance. RBI expects inflation to stay high in the first half of the current financial year before easing to six per cent by the end of the year.

History revisited: The initial years at Infosys

Outgoing Infosys co-founder and chairman N R Narayana Murthy on Wednesday said the sacrifices made by his colleagues in the initial days of the company was unparalleled. The founder members started Infosys with a borrowed capital of only Rs 10,000 but was quick to realise that the money would not last them for even a month. It was then that the dedicated team of professionals decided to lead an austere life to lay a healthy foundation.  “Realising that the Rs 10,000 would not be sufficient, we worked out a transaction deal with one of our prospective customers. We got into an agreement where the customer would give us working capital for a few months,” said Murthy, who has served the company for over three decades. While six of his colleagues went to the US to start work on developing software, Murthy walked from pillar to post trying to get a licence from the Reserve Bank of India (RBI). “Computers were not easily available in the market. It used to take at least three years to import a computer to India at that point in time. So we decided that some of us would be based in the US to start work. But, even before travelling abroad it took us 10 days to get a permission from the RBI.”  “Besides, we did not have a telephone, and it would take one or two years to get a telephone connection. Meanwhile, I was trying to get a licence for a computer here, and every month I had to go to the Reserve Bank. The RBI had two strange rules at that time — if one wanted foreign exchange one had to earn foreign exchange and then bring it to India and share 50 per cent with them. I think, this was the most perverse rule ever invented,” he said. In spite of the hurdles, Murthy and his dedicated team of colleagues accepted the terms and conditions by India’s central bank. “Can you imagine a situation where you have to earn foreign exchange and bring it to India and you will get 50 per cent of it in the next month? But we accepted it because that was the rule then.” Murthy convinced his clients and made sure they paid on time. “I had to make sure that they sent money by the 28th or 29th of every month and then I would wait eight hours outside the RBI to get 50 per cent of that so that I could send maintenance allowance to my colleagues in the US.”  Times have changed, and Infosys has grown from strength to strength to become a Rs 26,000-crore Nasdaq-listed company with over Rs 11,623 crore paid out as dividend. The dedication and sacrifice of the founding members now has become part of the Infosys folklore. “Now, my children don’t believe this. They say that I am exaggerating the facts; but that is the reality. One of our customers in New York offered us to give an IBM compatible computer on loan. They said, we can develop software in Bangalore, but we must report the customer on the progress of the project everyday on telephone.”  But, in India things do not move as fast. “This made us to go to the telephone department to get a connection. However, the department denied as their first priority was for retired government officials. Then, I asked them how can I explain this to my customer? To get a licence to import a computer, it took 50 trips to Delhi covering three years. I think the conditions in those days were extremely tough and we went through many of them.”

Banks’ deposit growth continues to decline

Deposits of scheduled commercial banks continue to decline since the beginning of the current financial year, as banks repay the huge deposits they picked up towards the end of March to meet annual targets.  According to data provided by the Reserve Bank of India (RBI), bank deposits stood at Rs.53,16,009 crore as on May 6, compared with  Rs.53,19,431 on April 22. Bank deposits earlier rose to Rs. 53,24,952 crore on April 8. As on May 6, the growth in deposits compared to same period last year stood at 17 per cent.  “Deposits may have declined because of the repayment of institutional deposits, since banks are now comfortable on the liquidity front,” said a senior official of a public sector bank. Banks had issued more than Rs 1 lakh crore of certificates of deposits in the last quarter of 2010-11. Most of these may not have been rolled over, he said. However, bank advances saw a rise. Bank credit grew to Rs.38,383 crore in the fortnight ended May 6, a rise 22.5 per cent compared to same period last year. While banks had achieved a more-than-expected credit growth last year, they were unable to garner as many deposits as expected by RBI. Credit growth last year stood at around 21 per cent, against the projection of 20 per cent and deposit growth was around 16 per cent, compared with the estimate of 18 per cent at the end of March 2011. RBI has now lowered both both its credit growth as well as its deposit growth rate estimates. RBI has projected a 17 per cent growth in deposits and a 19 per cent growth in bank advances for the current financial year.  According to RBI data, bank deposits stood at  Rs. 53,16,009 crore on May 6, compared with  Rs. 53,19,431 on April 22

Mobile banking, cash at point-of-sales services remain dismal, says RBI

BANKS have shown little progress in the areas of mobile banking and cash at point-of-sales (PoS) terminals, even after nearly two years of the Reserve Bank of India (RBI) allowing banks to run such facilities.  Until March, 34 of the 39 banks that were granted approvals for mobile banking, had launched such services. According to RBI estimates, 6.8 lakh such transactions, worth Rs. 61 crore, are settled through this channel in a month. “Mobile banking is growing, but not very significantly. Though the number of users who registered for mobile banking is substantial in absolute numbers, it is very low vis-à-vis the number of mobile phone subscribers,” said G Padmanabhan, chief general manager, RBI. He said even though the central bank had always deliberated over issues related to payments and settlement systems, implementation had been a concern. “Implementation of some of the policy directives, which were emanated largely on the demands of stakeholders, has been far from satisfactory,” he said. “We were told other than payment numbers, if we could increase the limit, payments on mobile transactions would zoom. We have now increased the limits. Lets see whether or nor that happens, since it took almost one and ahalf years for the people to conduct the first transaction,” he said. Earlier this month, RBI had raised the limits on mobile-based transactions without end-to-end encryption from Rs. 1,000 to Rs.5,000. The limits on mobilebased semi-closed prepaid instruments issued by nonbanks were also raised from  Rs. 5,000 to Rs.50,000. Padmanabhan also pointed to the dismal performance of the ‘cash at PoS’ facility, which enables customers to withdraw cash at merchant establishments. “It has been nearly two years since RBI permitted cash at PoS. However, barring a few banks and ahandful of transactions, nothing much is happening,” he said. According to RBI estimates, 680,000 such transactions, worth Rs. 61 crore, are settled in a month through mobile banking  .“BANKS would roll out the facility (merchant payments through mobile phones) in three months, on a pilot basis,” said A P Hota, managing director and chief executive officer, National Payments Corporation of India. The Reserve Bank of India had, on May 3, allowed banks to allow their customers to make merchant payments through mobile phones. Banks would use the Interbank Mobile Payment Service to launch the service.

Managing debt

It is tempting to interpret Reserve Bank of India Governor Duvvuri Subbarao’s recent statement questioning the need for setting up an independent debt management office as an early indication of yet another turf war between the monetary policy authority on Mumbai’s Mint Road and the fiscal policy authority in Delhi’s North Block. The two authorities have not seen eye to eye in the recent past on many other issues including the one that led to the creation of the financial stability and development council or FSDC with the finance minister as its chairperson. The finance ministry under Pranab Mukherjee was keen on setting up the FSDC that would undertake macro-economic supervision of the economy along with co-ordination among all financial sector regulators. However, the RBI had expressed its opposition to the proposal arguing that the new council could undermine its autonomy. The finance ministry had responded by agreeing to make the RBI governor the chairperson of the only sub-committee created under the Council, and subsequently also the vice chairman of the inter-regulatory co-ordination committee.  The difference this time is that the idea of creating a debt management office or DMO is several years old and is rooted in strong economic logic. The central bank ideally should not undertake the responsibility of managing the government’s debt issues and this job should vest with an independent body. Moreover, the proposal, first mooted in 2007, has crossed several stages and the finance ministry will soon place a legislative bill in Parliament. To raise questions over the need for creating a separate debt management office at this stage, therefore, can draw the charge that the RBI is merely worried about losing its power over this function, not mindful of what clearly should be a better and more effective system. On the other hand, however, the central bank has good reasons to feel worried over the loss of its debt management functions to an independent body. One, it has a few thousand employees who are now engaged in managing the debt issues for the government. Transferring this function to a new body will thus pose a formidable human resources challenge. Two, if indeed the debt management functions should not vest with the central bank, the government must ensure that the new body is sufficiently empowered to function independently and not merely as an extension of the finance ministry. Three, in light of the recent surge in the government’s fiscal deficit, the finance ministry should consider reviewing the logic and relevance of creating an autonomous debt management office. The finance ministry, after all, had mooted the idea of an independent DMO, when the government’s fiscal deficit was on a decline. However, with a rising fiscal deficit, there is perhaps need to retain for some more time the government’s debt management functions with the central bank, which has undertaken this responsibility with fair competence so far. Finally, the central bank is a federal institution that occupies a neutral position between the Centre and states. Given the debt requirements of states, in an era of diverse political parties running state governments, debt management should vest with RBI rather than a central institution. While the idea of an autonomous debt management office is good, these issues cannot be brushed aside. So, better to place the proposal on the backburner for now.

Cross Border Bank Guarantees, LCs under finmin scanner

As part of the stepped-up efforts to track transfer of funds parked overseas in India, the investigating agencies have brought Cross Border Bank Guarantees (CBBGs) and Standby Letters of Credits (SLOCs) under the scanner.  A senior finance ministry official told Business standard funds parked in other countries were indirectly being brought into India with the help of these instruments. He added the process for preparing a list of such cases had already been started. “The list would help zero in on potential cross-border account holders and a letter has been sent to the Reserve Bank of India in this connection,” said the official.  He said these instruments were offered as collateral to banks in India and huge loans taken, which were often not repaid. “The bank invokes the guarantee and collects its dues,” he added.  The official said after the inception of the Securitisation Act, a number of non-performing assets (NPAs) were turned around through cross-border SLOCs and bank guarantees, adding the whole matter had been taken up for speedy action. The investigating agencies have also found critical intelligence on a number of individuals associated with transfer of funds from India to places like Dubai and Singapore.  In one of these cases, critical intelligence involves a resident of Delhi, who earlier worked with a private bank in India and is currently working with a Dubai-based Foreign Institutional Investor (FII). According to the intelligence gathered, he has been luring high net-worth individuals from Delhi and Mumbai to invest their money through the FII for handsome gains and is also promising to take care of their black money.  In the other case involving a Bangalore-based middleman, the person under the garb of non-resident Indian (NRI) status is understood to be handling funds for liquor barons. He is transferring funds through his Singapore operation. Market intelligence by the agencies has also led to a Zurich-based entity claiming to be organising funds mostly from Switzerland and making these available to Indian companies. The ministry official said intelligence suggested the unit was facilitating re-routing of funds parked in Switzerland in the garb of PE to Indian promoters.  He added further surveillance and intelligence were on in all these cases, which gave clear indication of how the funds were being routed in the country and also being parked in other countries.

Prices unlikely to see steep drop in the near term, says Gokarn

Pointing to stickiness of high commodity prices, the Reserve Bank of India on Monday said prices would not come down sharply in the near term. “The pace of rise in food prices, which was 20 per cent few months ago, has softened to 10-15 per cent. Still, we can hardly gain comfort from it,” RBI Deputy Governor Subir Gokarn said, while addressing the India chapter of the International Chamber of Commerce. Though cereals (wheat and rice) have been stable in the last two years, prices of milk, pulses, oil seeds, eggs, fish, meat, and fruit and vegetables had gone up substantially. The global crude oil prices have plateaued. However, they were likely to remain at the present level or go up, Gokarn said. In recent months, crude prices had touched $120 a barrel, reflecting concerns on political upheavals in West Asia and North Africa. Commenting on the inflation data for April, the RBI deputy governor said the pattern of high inflation level was persistent. “It is not a pleasant thing to be proved right. But it (high wholesale price index inflation) is a reality,” he said. Inflation decelerated slightly to 8.66 per cent in April from 9.04 per cent in the previous month but remained above the RBI’s comfort zone. RBI, in its annual policy for 2011-12, had estimated wholesale price inflation at about six per cent by March 2012. Inflation is expected to stay at elevated level for two quarters. Gokarn said the risk of commodity price inflation becoming generalised was now visible. Even though India’s economic growth rate is reassuring, the slowdown in investment activity is not desirable. The rise in industrial production had been volatile, while investment had slowed down.

Nabard staff seeks full-time chairman

State-run National Bank for Agriculture and Rural Development (Nabard) has been without a chairman for the last five months, after the term of its former chairman, UC Sarangi, ended in December 2010. Currently, Rakesh Singh, additional secretary in the finance ministry, holds the additional charge of Nabard chairman. Nabard managing director KG Karmakar’s term was also over on May 4. Nabard officers and employee unions have now approached the prime minister and the finance minister for the early appointment of a new chairman. A full-time chairman is essential for the bank to coordinate with commercial and cooperative banks and help achieve the Centre’s target of agricultural credit of over Rs 4 lakh crore in the current financial year. An inspection report by Nabard had earlier come in handy for the Reserve bank of India to recommend the supersession of the Maharashtra State Cooperative Bank (MSCB). However, Nabard's acting chairman had issued orders prohibiting the release of any bank report or communication pertaining to MSCB. A senior Nabard official, speaking on the condition of anonymity, told Business Standard, “It has been five months now. The bank is functioning without a full-time chairman and even the managing director’s term ended last week. The Centre had already completed the necessary process to shortlist candidates for the new chairman. It is high time the Centre appointed a new chairman. This is also crucial, since the kharif season is going to start and decisions on refinance are crucial.” The bank has been assigned a crucial role to promote rural infrastructure development.

FinMin, regulators meet today on infra debt fund

The finance ministry will meet regulators tomorrow to decide the structure for the proposed Infrastructure Debt Fund to finance the core sector to sustain high economic growth. The government is expected to come out with guidelines on the Fund by June-end and broad indications say it may take the form of a company, as well as a Trust.   Economic Affairs Secretary R Gopalan is scheduled to meet all stakeholders, including the Reserve Bank of India (RBI), Securities and Exchange Board of India (Sebi) and Insurance Regulatory and Development Authority (Irda) to work on the guidelines. The meeting will discuss the capital adequacy ratio for companies to be helped and the exposure limits. Issues involving regulators, potential debt seekers, pension funds and credit rating may also come up in the meeting, said a finance ministry official. The ministry had an internal meeting today to discuss the contours of the Fund. The view is that instead of owned funds, it should be pooled funds. Since both companies and trusts may be allowed in this space, they would issue bonds and units accordingly. Sebi will regulate companies and RBI will regulate trusts. “We will prepare the structure for both and leave it to the promoters to decide. So, both bonds and units could be issued,” the official said.  In the Budget for 2011-12, finance minister Pranab Mukherjee had announced setting up the funds through special purpose vehicles for attracting foreign investment in the infrastructure sector. “To attract foreign funds for financing of infrastructure, I propose to create special vehicles in the form of notified infrastructure debt funds,” he had said in his Budget speech in February. The plan is to invest $1 trillion in ports, highways, power utilities and telecom infrastructure in the next five years. A comprehensive policy framework for a public-private partnership in building of physical infrastructure and social sectors such as health and education is also on the anvil. It will lay down guidelines for the entry of private players and implementation of infrastructure projects. According to the official, financial assistance of Rs 8,661.45 crore was released in 2010-11 for recapitalisation of 53,380 primary agricultural societies (PACs), against Rs 7,972.22 crore for 49,764 PACs in 2009-2010.

LOW INFLATION ESSENTIAL FOR STEADY, HIGH GROWTH

The Reserve Bank of India (RBI) today said growth in the short term may have to be sacrificed to tame rising prices. According to the central bank, steady growth requires lower inflation. “You cannot get high growth by tolerating high inflation in the long run,” RBI Governor D Subbarao said, while speaking at an event held at the Indira Gandhi Institute for Development Research. He said RBI had to manage demand and inflation expectations, which may lead to sacrificing some growth in the short term. Inflation, which remained above the central bank’s projections during 2010-11, stood at 8.66 per cent in April. The steep increase in fuel prices over the weekend is expected to add to inflationary pressures, according to economists. Subbarao said April inflation of 8.66 per cent was high and RBI needed to manage the trade-off between growth and inflation to hasten growth. “The objective of the 12th Plan is faster, more inclusive and sustainable growth. From RBI’s perspective, the primary challenge is to manage faster growth with low inflation. We need low inflation for steady and high growth,” Subbarao said. RBI has pegged gross domestic product growth at 8 per cent for the current financial year — lower than the government’s projection of nine per cent. “Perhaps the threshold for inflation is five per cent,” Subbarao said.  Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia, while speaking at the same event, said any reduction in inflation would happen gradually. “I think inflation remains an area of concern. Inflation results which we are seeing now, are probably the outcome of measures we had taken three-four months back. I think the effect of what has been recently done would be felt two-three months down the road. Overall, I expect inflation to soften in the next few months. It will, however, remain above 6 per cent for some more time,” Ahluwalia said. He added the Planning Commission’s comfort zone on inflation was somewhere between five-six per cent. “It is agreed inflation would remain above 6 per cent for some more time. However, there is no dispute in anybody’s mind that inflation above six per cent is in the danger zone,” Ahluwalia said.  Apart from demand-side pressures, RBI saw rising oil and food prices as key drivers of inflation.  Subbarao said RBI had to manage the trade-off between growth and inflation to hasten growth.

Align tech with business strategy: Anand Sinha

 Hyderabad May 16, 2011:  Reserve Bank of India (RBI) Deputy Governor Anand Sinha asked the bankers to align technology strategy with business strategy in a disciplined way to balance value creation with IT capabilities.  Addressing a two-day seminar on IT governance in banks here on Saturday, Sinha said IT strategy and related processes should be in consonance with business goals as IT governance largely depended on corporate governance.  Among others, technology tools have a role in reducing the cost of banking services, particularly in the rural and unbanked areas in the context of financial inclusion, he said. Adoption of appropriate IT solutions for moving toward acquiring information from the customer- centric perspective along with product-centric perspective would place the banks at a competitive advantage, according to him. B Sambamurthy, Director, Institute for Development and Research in Banking Technology (IDRBT), which organised this first-ever conference for directors of various banks in the country, stressed the need for having good measures, tools, frameworks and guidelines to evaluate IT governance in banks. Former RBI Governor Dr.Y.V. Reddy, who inaugurated the seminar, asked the bankers to draw lessons from the global financial crisis, especially from the perspective of governance.

Micro-reforms

With reference to your editorial “Back on the rails” (May 11) the new microfinance rules framed by the Reserve Bank of India are certainly a good step towards bolstering the system. But there are many concerns for the rails of micro-finance in India to run smoothly and become “win-win” for all stakeholders. First, something should be done to increase awareness regarding microfinance opportunities and develop a culture of repaying loans on time. Second, it is timely and adequate microfinance that is important for the people who need it and this should be facilitated. Third, keeping the repayment period within a year is not enough to stop finance being diverted to consumption. An optimum mechanism should be developed to monitor the end-use of microfinance. Allowing a repayment period of two years is reasonable and would be useful for the people who need it.

Raman Kumar Agrawalla, Bhubaneswar

Govt forms panel to review deemed exports policy

The government today said it has formed an expert committee to review deemed exports policy where there have been incidents of misuse of the scheme. Deemed exports refer to those transactions in which goods supplied to the users do not leave the country and payment for such supplies is received either in Indian currency or in foreign exchange.  Last week, the government constituted a panel to improve drafting of the policy aimed at avoiding multiple interpretations, according to a Commerce Ministry statement issued here today. Besides, the group would examine whether the scheme properly reflects the government priorities. The committee has invited comments from stakeholders in this regard. It would also meet RBI Governor D Subbarao and Planning Commission Member BK Chaturvedi for discussions and is expected to submit its report to the Commerce Ministry by August. The panel, which is chaired by Director General of Foreign Trade (DGFT) Anup K Pujari, comprises members from Planning Commission, RBI and Department of Economic Affairs. The committee was formed on the directions of Commerce and Industry Minister Anand Sharma to review the existing scheme. There have been reports that the policy is being misused, especially in the power sector. The DGFT decided to send recovery notices to those under its scanner, sources had said. Recently, the ministry has also tightened the norms governing the scheme, a move expected to save about Rs 1,800 crore to the exchequer annually.

State launches e-payment for commercial tax payers

Karnataka today became the first state in the country to launch an e-payment system for Commercial Tax payers. Speaking at the launch, Reserve Bank of India Deputy Governor Shyamala Gopinath wanted such a system to be adopted by other states. The system enables dealers to remit their Commercial Taxes anytime, anywhere without physically approaching any office of the Commercial Taxes Department (CTD). Right now, e-remittances can be made from six banks — SBI, SBM, SBH, Syndicate Bank, Canara Bank and Union Bank of India.  Chief Minister B S Yeddyurappa said more public sector banks would be added to the list going forward. He said the system would also help curb tax evasion. Gopinath launched the reconciliation portal of the CTD. Commercial Taxes Department officials said, the new model was a “comprehensive e-payment reconciliation system” that would “run seamlessly from the dealer up to the Government treasury”. The CTD collects over Rs 2,000 crore per month and till now, these collections were by way of cheques by the dealers. Every month on an average more than 100,000 cheques were received by various offices of the CTD and these are then sent to the agency bank, which in turn processed them and remitted to the Government account. This involved a huge amount of manual work and at the same time, delay in realisations of amount and some cases of bounced cheques also. The reconciliation process was very difficult. Also, dealers were inconvenienced as they had to come to the respective offices and wait in a long queue to remit the tax.

Foreign banks' CEOs responsible for regulatory compliance: RBI

Concerned over the way the foreign banks are functioning in the country, the Reserve Bank today said that their Indian Chief Executive Officers (CEOs) would be responsible for oversight of regulatory and statutory compliances.  "It has been decided that for all foreign banks operating in India, the CEO would be responsible for effective oversight of regulatory and statutory compliance as also the audit process and the compliance thereof in respect of all operations in India," the RBI said in a notification.  The notification comes amid reports of fraud in branches of leading foreign lenders like Citibank and Standard Chartered Bank. As many as 34 foreign banks including global leaders like HSBC and Deutsche Bank are having operations in the country.  RBI has also expressed concerns about "the adequacy of regulatory compliance by foreign banks in India" and the practice of the unit heads of foreign banks reporting directly to Functional Heads located outside the country and not to the Indian CEOs.  It further noted that Indian operations of foreign banks functioning in India as branches of the parent banks generally do not have a separate Audit Committee vested with the responsibility of examining and reviewing inspection reports for their compliance.  Following the notification which was communicated to all foreign banks, their CEOs will be responsible for compliance with the norms of the central bank.

Retail investors shouldn't ape FIIs

Since the beginning of this month, foreign institutional investors (FIIs) have been net sellers in the Indian equity market. For a market largely fuelled by the FII movement, it resulted in both the Bombay Stock Exchange’s (BSE’s) Sensex and the National Stock Exchange’s Nifty to lose close to five per cent in the same period. According to BSE data, the net equity sold by FIIs was Rs 3,645 crore between May 2-10. However, in the preceding months — March and April — FIIs were net buyers (Rs 8,399 crore). Although India’s high inflation has been a cause for concern for some time now, the post-Budget buying by FIIs showed that they still expected the corporate sector to deliver. But that didn’t happen. The results for the quarter ended March were not on the expected lines, with corporate margins under pressure. The latest selling spree by FIIs, however, was sparked off after the Reserve Bank of India (RBI) raised interest rates by 50 basis points (bps) rather than the expected 25 bps last Tuesday. Most FIIs have not been enthused by RBI’s stance that it is willing to sacrifice the economy’s growth to curb inflation.

RBI sets up panel on forex facilities to individuals

The Reserve Bank of India (RBI) today set up a committee for streamlining foreign exchange transactions and also invited comments from public and other stakeholders for improving facilities pertaining to investments and repatriation of funds. The RBI, while referring to the Monetary Policy Statement for 2011-12, said in a statement that the committee chaired by former RBI Deputy Governor KJ Udeshi has been set up to streamline and simplify the procedures for facilitating genuine foreign exchange transactions by individuals.  The individuals are categorised into residents, non-resident Indians (NRIs), Persons of Indian Origin (PIOs) and expatriates employed in India under the Foreign Exchange Management Act (FEMA), 1999.  The committee will identify areas for streamlining and simplifying the procedure so as to remove the operational impediments, and assess the level of efficiency in the functioning of authorised persons, including the infrastructure created by them," the RBI said.  The banking regulator also invited comments and suggestions relating to forex transactions by individuals through post or e-mail by June 9, 2011. "The comments or suggestions could relate to deposit account, investment facilities, acquisition and sale of immovable property, remittance or repatriation of funds, remittance facilities for individuals or any other related procedural issue," the apex bank said.

Concerns of capital inflows less acute in India: Subbarao

Reserve Bank of India (RBI) Governor D Subbarao said the concerns of capital inflows in India due to the interest rate differential were less severe than other emerging market economies. This is because capital inflows helped India to finance its capital account deficit. He, however, conceded volatility remained a concern. “Yet, even for us, the composition of the inflows remains an issue. About three-quarters of the current account deficit since 2009 has been financed by volatile capital inflows,” he said.  In August 2010, the US Federal Reserve had announced its plan to buy $600 billion worth of government securities in the second round of quantitative easing. This could have had a significant negative impact on emerging market economies, said Subbarao. He said the quantitative easing also seemed to contribute to rising global commodity prices, which intensified inflationary pressures. “This combination has put some emerging market economies in a policy bind, since rising inflation necessitates tighter monetary policy. However, higher interest rates would only intensify volatile capital inflows, potentially putting more pressure on exchange rates and domestic stability,” he said.  He added while the quantitative easing contributed to a stronger and more durable recovery in the US, it also benefited emerging market economies, including India. While addressing the Swiss National Bank- International Monetary Fund conference on the international monetary system in Zurich today, the RBI governor said there was a need to develop a proper framework for analysing linkages among economies. “We cannot do this by using current trade equations and attributing all the other spillovers to exogenous financial shocks. We need a deeper, truer, understanding of the channels and mechanisms that link our economies together,” he said. In order to deal with spillovers, Subbarao said there could be policy agreements through which countries could abandon policies that create negative spillovers, in exchange for other countries taking policy action with positive external spillovers for them. “Designing such deals and getting countries to agree to them, however, would remain a major challenge,” he said.  He added RBI did not intervene in the foreign exchange market since the last two years. “This policy has served the economy well, since it allowed the exchange rate to serve as a buffer, depreciating to help the economy when it was weak and appreciating to reduce excess demand when it was strong,” he said. The RBI governor also said India’s policy was subject to negative externalities from countries that maintain undervalued exchange rates, undermining competitiveness in third markets and efforts to contain the current account deficit.

RBI against setting up of separate debt management office

The Reserve Bank today opined against setting up a separate entity -- Debt Management Office (DMO) -- to manage the sovereign debt of the government, saying only the central bank has the requisite expertise to manage market volatility. "Only central banks have the requisite market pulse and instruments to aid in making contextual judgements which an independent debt agency, driven by narrow objectives, will not be able to do," RBI Governor D Subbarao said at a meeting of the Central Bank Governance Group in Basel.  The government is in the process of setting up of an independent Debt Management Office, aimed at separating RBI's role as the decider of interest rate in the market, and at the same time being the banker to the government.  At present, both the government's debt and fresh borrowings are managed by the central bank. The Governor further said that in order to achieve monetary and financial stability, separation of debt management from central bank seems to be a "sub-optimal choice". Finance minister Pranab Mukherjee in his 2011-12 budget speech had said that he proposed to introduce the Public Debt Management Agency of India Bill in the next financial year. "The case for shifting debt management function out of the central bank is made on several arguments such as resolving conflict of interest, reducing the cost of debt, facilitating debt consolidation and increasing transparency. These advantages are overstated," Subbarao said. He said market borrowings are the major source of deficit financing at state level and such borrowings are exceeding the absorptive capacity of the market. "That makes it imperative to harmonise the market borrowing programmes of the Centre and the states. Separation of the Centre's debt management from the central bank will make such harmonisation difficult," Subbarao added. He said even internationally, there is closer association between the central bank with sovereign debt management for proper monetary policy and financial stability.