RBI: Need Phased Approach to Monetary Policy Committee System

MUMBAI – India's central bank should move in a phased manner to having a committee to take monetary policy decisions, Reserve Bank of India Governor Duvvuri Subbarao said Monday.  "When our financial markets deepen further, operating procedures improve and monetary transmission becomes more efficient, shifting to a monetary policy committee system becomes a realistic option," Mr. Subbarao said in a speech at a meeting of a central bank governance group in Basel. The speech was posted on the RBI's website.  The RBI governor currently has sole authority to take monetary policy decisions. He consults his four deputy governors, but there is no voting involved and the final decision rests with the central bank chief. A move towards setting up a monetary policy committee with a majority decision deciding the outcome will bring the RBI more in line with international counterparts, including the U.S. Federal Reserve and the Bank of England.  The RBI only consults with a technical advisory committee for monetary policy. The committee comprises of the governor as its chairman, the deputy governor in charge of monetary policy as its vice chairman and the three other deputy governors as members. The committee also has five external members--two of whom are experts from the central board of the RBI while the other three are drawn from a wider pool.  The RBI recently overhauled its monetary policy framework to move to a single independent monetary policy variable--the repurchase rate. The central bank's other main policy rate, the reverse repurchase rate, will now be automatically adjusted one percentage point below the repurchase rate. It has also introduced a Marginal Standing Facility, which banks can access during acute liquidity stress, at a rate of one percentage point above the repo rate.  Mr. Subbarao said some preconditions need to be met before setting up a panel for monetary policy, including giving the central bank legally-backed formal autonomy.  The central bank chief reiterated that inflation-targeting wasn't a feasible option in India.  "[The central bank] cannot escape from the difficult challenge of weighing the growth inflation trade-off in determining its monetary policy stance," he added.

ICICI Plans New Products for Countryside

ICICI Bank Ltd., India’s largest private sector by assets, is getting ready to roll out a variety of financial products for villagers and farmers in rural India, said managing director and chief executive, Chanda Kochhar.  From basic bank accounts to subsidy transfers to basic insurance for farm produce, the bank expects to offer these products in the next six months, she said in a recent conversation with India Real Time. The bank currently offers a basic bank account—known as a no-frills account—in 18 states and has three million such account holders. These provide it with a ready market in which to sell some of these new products. The concept of a no-frills account was first suggested by the Reserve Bank of India in 2005, when it directed all banks to offer this option of a basic account to villagers. Most banks did the bare minimum on that—even today less than half of all Indians have a bank account. Last year, the RBI asked all banks to submit a plan for the inclusion of more Indians into the formal financial system that was approved by their boards. This, said RBI governor D. Subbarao, in a speech at the spring meeting of the International Institute of Finance in New Delhi earlier this week, would create a sense of ownership of the problem among banks. ICICI, which is listed in New York, says it is readying this rural push ahead of others. “Over a period of time all banks will have to look at rural business,” said Mrs. Kochhar. “We are looking at a mix of channels to reach out to farmers including basic accounts, transfer of subsidies, some lending.” Early this year the bank announced a tie-up with Vodafone Essar to eventually offer financial products in villages by mobile phone. ICICI, which had aggressively targeted retail customers during most of the past decade, cut that business back during the recession after it saw a huge number of bad loans in its portfolio of unsecured, personal and credit card loans. For the past two years, its retail loan portfolio has been rising more slowly than at other banks, but in an earnings call last month, Mrs. Kochhar, said the bank would keep pace with the industry in the fiscal year starting in April.

Indian Central Bank Is Addressing High Inflation

BHUBANESWAR, Orissa—India's high food inflation is mainly due to supply-side constraints, and the central bank has been taking steps to control a buildup in inflationary expectations, its governor said Saturday. "Monetary policy becomes the first line of defense, so if inflation persists for a long time, people think inflation is going to be high, and that becomes a self-fulfilling prophecy," D. Subbarao said at an event in Bhubaneswar, the capital of the eastern Indian province of Orissa. "To break that inflationary-expectations psyche, [Reserve Bank of India] has to act, which is why we have been acting over the last year," he said. The central bank has raised its policy rates seven times in the past year.  Authorities have been grappling with high inflation as food prices increased owing to rising demand and choked supplies after unseasonal rains damaged some crops late last year. Mr. Subbarao declined to comment on the likelihood of an interpolicy-meeting rate move by the RBI. Earlier this month, he said that the central bank can act at any time to deal with the evolving macroeconomic situation. This fueled expectations of a rate increase, possibly before the next scheduled policy review March 17 if inflation didn't cool fast. "Notwithstanding scheduled quarterly and mid-quarterly reviews, we reserve the right to alter our policy stance at any time to respond to the evolving macro economic situation," Mr. Subbarao had said. Food inflation climbed slightly after two consecutive weeks of decline, accelerating to 11.49% in the week to Feb. 12 from 11.05% in the previous week, government data Thursday showed. The general inflation rate was at 8.23% in January, and the government expects it to ease to 7% by the end of the current fiscal year in March. High prices have led to protests from opposition lawmakers and public outcry in a country where more than 40% of the 1.2 billion population lives on less than $2 a day. Rising prices of crude oil and other commodities globally have stoked worries of intensifying inflationary pressures, which could further erode the spending power of the country's poor. High inflation also would lead to more monetary action, with most economists predicting the RBI could increase policy rates by 0.5 to 1.0 percentage point in 2011.