RBI move to help reduce fake diamond export

SURAT: In what is seen as a step to curb the fake diamond exports and the round tripping of the funds and diamonds by the diamond merchants, the Reserve Bank of India (RBI) has reduced the term of letter of credit (L/C) from one year to just 90 days for the import of rough and polished diamonds. The Gems and Jewellery Export Promotion Council (GJEPC), apex body of the Indian diamond industry, has welcomed the step taken by the RBI. "It is a good step taken by the RBI. The reduction in the term of L/C will discourage fake diamond exports from the country and will help the genuine trade to prosper," said Sanjay Kothari, vice-chairman, GJEPC.
Kothari said there were elements in the diamond industry who were taking wrong benefits of interest arbitrage from the local and the foreign banks through the extended period of L/C. Official sources said the GJEPC had made several representations to the ministry of commerce and the RBI for reducing the L/C term in order to discourage the elements in the industry for taking undue benefits of availing cheap bank finance and interest arbitrage. Sources said the diamond importers open L/C with the local bank against fixed deposit as a guarantee to the supplier bank that his payment is secured. Once the foreign supplier's bank receives the L/C, it dispatches the goods to the importer's bank in India. For paying the overseas supplier, the importer takes a loan from a foreign bank, which at Libor plus 200 basis points works out 5.5-6 per cent cheaper than what is charged by a local bank. This loan is given to the importer against a guarantee from the local bank with which the trader has opened the L/C. Since the term of L/C has been reduced to 90 days, instead of one year, the diamond importers could not earn the benefit of interest arbitrage, which he used to get from the local bank till now by selling off his cut and polished diamonds at a certain value and earning 7-8 per cent interest on the fixed deposit.

Is RBI helping or hurting you?

The Reserve Bank of India has been battling for months to protect you from high inflation. Ironically, in its war against high prices-that intensified with a sharp hike in interest rates recently-the RBI has also managed to raise the cost of living for some.  All EMI-funded purchases get more expensive every time interest rates are raised. And if high rates also begin to hurt corporate earnings, dividends and returns from stock investments will also be impacted. So, is the central bank really helping you or not?

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Debt management office may be reality soon: Sources

Days after RBI Governor D Subbarao opposed the proposal to set up a debt management office (DMO), sources in the finance ministry have told CNBC-TV18 that, while more discussions would be held between the ministry and the RBI, the fact remains that the proposed DMO would indeed become a certainty at some point of time. Sources added that the RBI board may meet on May 19 to discuss the proposal. Once the central bank gives its final views on the matter, the government would begin the process of setting up a full fledged DMO. Finance Minister Pranab Mukherjee in his budget this year had announced setting up a DMO.

RBI clamps down on Maha coperative banks

The Reserve Bank's drive to tighten its control over co-operative banks has taken a political twist but CNBC-TV18’s Gopika Gopakumar reports that according to the RBI, this was just another day in the office. The RBI has hit a nerve, as it cracks down on co-operative banks. Its order to the Maharashtra government to supersede the Board of Maharashtra State Cooperative Bank (MSCB) and appoint administrators has political leaders like Maharashtra Deputy Chief Minister Ajit Pawar and Union Agriculture Minister Sharad Pawar miffed. Sharad Pawar blames the state government for the mess and Ajit Pawar says the Congress leadership has instigated this politically motivated action. The reaction is not surprising; say sources, since the bank was a source of funds to run cooperative sugar factories, spinning mills and dairy units.  Sources say that this action has been on the anvil for a while now. In 2005, both RBI and NABARD had issued directives to the bank asking it to reduce its exposure to the sugar sector. They said that 50% of its Rs 7,800 crore loan portfolio was to the sugar sector, and this was unacceptable. They had also directed the bank to reduce the number of board members from 57 to 20. The RBI order says as on March 2010, MSCB had a loss of Rs 800 crore and a negative net worth of Rs 144 crore. Also, its gross non-performing assets stood at 20%. it also said that the bank board had taken several decisions that were not in the bank's best interests. These irregularities came to light at NABARD's annual inspection in FY10. The NABARD report also highlighted a Rs 778 crore shortfall in provisions and said loans to sugar factories were rescheduled in November 2002, March 2005 and March 2007 without sufficient provisions. Sources say the Maharashtra government will now have to either call for elections within the next two months to appoint a new board, or bailout the bank. For the RBI, this is just one more in an ongoing crackdown on errant co-operative banks. This year alone, it has penalised 27 co-operative banks for various irregularities and sources say more cooperative bank boards could be superseded going forward.

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.

MSC Bank was working without licence: Nabard

Mumbai: The NCP-controlled Maharashtra State Cooperative Bank (MSCB) was operating without a licence. Nabard, the cooperative and rural banking regulator, has stated the point in a 169-page report, based on which the RBI dismissed the MSCB board of directors a week ago. While the NCP has cried foul, saying the decision was politically motivated, the Nabard report has revealed one skeleton after another in the MSCB closet.  Nabard has observed that the MSCB board conducted its affairs against the interests of depositors, concealed non-performing assets, completely ignored the RBI’s statutory orders, sold the properties of borrowing units acquired under the Securitisation Act much below the reserve price, sanctioned non-agriculture loans without authorization from Nabard, waived huge interest amounts in violation of the Cooperative Societies Act and enhanced credit limits to units having negative net worth.

Draft norms on new banking licences soon: RBI official

Reserve Bank of India (RBI) would shortly come out with draft norms on new banking licences, a senior RBI official said.  "RBI will shortly come out with draft guidelines on new banking licenses", B Mahapatra, CGM in-charge of Department of Banking Operations and Development, RBI, said.  Last year, RBI circulated a discussion paper on new banking licences which said that corporates and Non Banking Financial Companies (NBFCs) would be allowed to promote banks. The apex bank had already circulated the discussion paper on deregulation of savings rates, Mahapatra said here today.

DNA

Bank on Your Mobile

In India, retail stores like grocery and medical shops have a very important role, especially for the poor and rural people. They sell medications by the pill, shampoo in tiny sachets, cell phone minutes in small denominations, and frequently extend credit when needed. Mobile as an access channel has the potential to bring a whole host of people that have no/little access to land line or Internet connection onto an electronic branch-less banking platform-an innovative way to generate financial inclusion in the country. In the last few months we saw many large Indian banks tying up with large mobile service providers and handset vendors to increase their reach through the mobile channel by providing access to financial services through their mobile phones. The service will enable consumers to transfer money to other individuals, withdraw cash from business correspondents and ATMs and recharge SIM cards by using their mobile phones. The Reserve Bank of India (RBI) has been attempting to make it easier for Indian banks to reach rural people by allowing them to appoint 'banking correspondents' to handle delivery of cash and accept cash deposits, opening of new accounts and other services for the unbanked and under-banked population segments in remote locations where there are no bank branches. The tie up between banks and service providers/ handset vendors will be a win-win situation for both as they can leverage on a large user base of 750 million.  In all the tie ups-be it Bharti Airtel-SBI, Idea-Axis, Vodafone-ICICI bank or Nokia-Union Bank-this system is being tried to cover all areas of India and also to reach out to a larger base of population which is not being connected to the traditional banking route. These tie ups will also help banks to understand the telecom industry. They can also look at financing service providers for their future expansion as the industry is going through a lean phase, and investor confidence is at an all time low. Banks will engage such retailers as Customer Service Points (CSPs) all over India thereby leveraging on mobile retailers as their extended arm. The mobile subscribers will visit these outlets and open their bank accounts and avail of banking products and services closer to their home. The retailers benefit by getting some extra commissions from these innovative transactions. The service providers/handset vendors also benefit by increasing their bouquet of services and making some money from banking transactions as their margins have shrunk due to increased competition between operator/handset vendors. These services have started in a small way but one has to see how this shapes up. The success of this new innovation will open up new opportunities for bankers and service providers/handset players.                           Pravin Prashant 

Loans to NBFCs in agriculture space could get priority tag

NEW DELHI: The government may ask the central bank to accord priority sector tag to bank loans to smaller non-banking finance companies that lend largely to agriculture and small and medium enterprises.  The Reserve Bank, in its monetary policy review last week, had struck down NBFCs from banks' priority list except for those lending to microfinance institutions. Banks are required to lend 40% of their total advances to 'priority' sectors, including agriculture, SMEs and MSMEs and weaker sections. Non-banking financial companies, which now face a cut in financing after the RBI move, have petitioned the different arms of the government, including the ministry of small and medium enterprises, or MSME.  "We expect that RBI should take a lenient view on those asset financing companies, which finance agriculture and SME sector through loans for equipment, plant and machinery, and also to small road transport operators (SRTOs)," said a government official. The Reserve Bank is also expected to take up this issue on May 13 when a working committee on NBFCs, headed by former RBI deputy governor Usha Thorat , will meet industry representatives.  RBI has expressed concern over a 55% increase in credit to NBFCs in the year ended March 2011 as compared to a 20% increase in the overall bank credit. "RBI's concern is that whether this increase is because NBFCs are lending for activities that banks are restricted to. They want to remove such regulatory arbitrage," said a finance ministry official.  The government admits that bank loans to systemically important NBFCs, which are mostly into 'loan and investments', should not be tagged as priority. "We support RBI's view that there should be a more stringent framework for such NBFCs who may have taken exposure in capital markets as well," the finance ministry official said.  Any non-deposit taking NBFC which has an asset size of 100 crore is considered as systemically important. This would mean loans to NBFCs such as Reliance Capital and Indiabulls won't be considered as 'priority' even if RBI relaxes the norms.  Banks, however, feel that any change in regulation is not going to impact their priority sector portfolio. "We have a large network of regional rural banks, and also with financial inclusion agenda being pursued we will meet the targets," said an executive director with a north-based state-run bank.

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.

Subbarao’s debt office view foxes North Block

New Delhi: RBI governor D Subbarao’s statement on Monday against an independent profile for the debt management office (DMO) has surprised finance ministry officials. The draft legislation to set up the office as an autonomous institution is already with the law ministry for vetting, though there is no decision yet on when it should be tabled in Parliament.  A source familiar with the developments said the RBI was involved at every stage of the plan for the DMO. “They have made their observations to the government in the course of the discussions.” The RBI, it is understood, has expressed its reservation, but “the government of India has made a decision”. Mandarins are accordingly puzzled the governor chose to go public on the issue when it was apparently sorted out. However, they refused to speculate on the development as a possible incipient turf war between the heads of monetary and fiscal policies in India. In Budget 2011-12, finance minister Pranab Mukherjee said he would introduce the debt management office Bill to handle the issuance of public debt. The RBI opposition could unsettle this promise as the standing committee on finance in the legislature could decide to stonewall the Bill in view of the differences. The DMO plan was first floated in Budget 2007-08, but got delayed over differences between the RBI and the finance ministry on the need for such an office. It was revived by Mukherjee. Once the Act is in place, the management of public debt including the floating of all government papers will be handled by the office. It will manage the registration of primary dealers and take a call on the types of papers the government should float in the debt market. When the Centre decides to float India’s debt papers abroad, the DMO will be very useful, say experts. It is expected that state government loans will also be eventually managed by the DMO. However, the government has given up its nascent plan to make the DMO a public sector entity to ensure greater control over its functioning. Rajiv Kumar, director-general of Ficci and eminent economist said he disagreed with Subbarao’s take on the DMO.  “It will optimise the performance of the debt portfolio of the government and minimise costs. The DMO is a promising idea that needs to be pushed,” he said. Government experts who have worked on the plan said the DMO will not harm the sovereign right of the finance ministry to set the quantum of market borrowing for the year in consultation with the RBI. Also, the borrowing calendar for the year, which is now issued with a six-month horizon, will also include RBI inputs. Since the draft of the Bill also envisages an RBI nominee in the board of directors of the new institution, the opposition from the central bank was difficult to understand, they said. Subbarao will, however, enjoy the support of state governments which feel the DMO will make them even more reliant on the Union finance ministry, at a time when they have to depend on market borrowing to meet their needs.

Subbarao's debt...

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RBI’s turf wars

RBI Governor D. Subbarao has, for the first time, explicitly and openly spoken against the government setting up its own Debt Management Office (DMO). The world over when central banks have modernised and moved their focus to monetary policy, they have got rid of conflicting objectives and additional responsibilities. And the government has proposed to set up its own DMO which would minimise the cost of its borrowing, go about it professionally, and do so without forcing banks to buy government securities in the statutory liquidity ratio environment. In his budget speech of 2011-12 the finance minister announced that it would be accomplished this year. Yet it seems the RBI would like to retain this job, regardless of whether this is the best allocation of responsibilities for the country or not.  This is especially disturbing in the present context. In the most recent credit policy, Subbarao had indicated that the RBI would conduct monetary policy with a focus on controlling inflation. The difficulty with the RBI’s present framework is that there are conflicting objectives. So, should interest rates be raised with a view to having an impact of monetary policy on inflation when the government has large borrowings and an increase would raise interest expenditure of the government? The moment the RBI says that it opposes setting up an independent DMO, it says more about the RBI’s priorities than raising the repo rate by 50 basis points does. It indicates that inflation control is not its top priority. In this scenario, it will be difficult for the RBI to change the public perception, as it tried to do with the credit policy announcement and the hawkish tone of the governor’s speech.  He suggested there should be a monetary policy committee structure and the RBI should have autonomy. In other countries, when this is so, it is part of giving the central bank a clear single mandate, often inflation-targeting, and then making it accountable for that mandate. Without accepting accountability, the RBI cannot realistically expect to be given autonomy. A public institution should be responsible to the people of India. A clear framework in which this system of accountability will work can pave the way for greater autonomy. However, today, the RBI has, barely a few days after its hawkish credit policy, quickly backed away from accepting responsibility for inflation and is back to fighting turf wars on the DMO. It is a pity, and it will unfortunately take credibility away from the RBI’s credit policy announcements. A monetary policy committee cannot compensate for lack of credibility.

Should the savings bank rate be deregulated?

The initiative will neither help banks nor borrowers since the cost of funds will rise, but it will provide greater scope for product innovation and service excellence.

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Rajeev Malik: Lower growth, higher inflation

The government finally appears to be in sync with the Reserve Bank of India (RBI) on the broader macro management. Fiscal dynamics have been a key factor in making the aggressive tightening in the current cycle less effective. The solution to that is not necessarily even more tightening – which may still be needed – but greater fiscal responsibility, as the long overdue increases in local fuel prices will finally show. Still, more fiscal adjustment is needed.
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Imposing policy discipline among nations may be tough: Duvvuri Subbarao, Governor, Reserve Bank of India

MUMBAI: Imposing economic policy discipline among nations may be elusive for many years as the fundamental analysis required to come out with an acceptable policy is not in place, Reserve Bank of India Governor Duvvuri Subbarao said. Enforcement of policies will also be difficult.  "It is far too early to think of reaching new formal international agreements on policy behaviour," Subbarao had said at the SNB-IMF Conference on The International Monetary System, Zurich. "Instead, countries will prefer to proceed through more exchange of information, peer review processes and ad-hoc international agreements, depending upon the situation prevailing at any point of time," he said. Economic policies practiced by countries have begun to differ widely in the last few months, compared to the 'co-ordinated action' chorus that was advocated during the credit crisis when central banks pumped in liquidity in an unprecedented way and cut rates to as low as zero. With the crisis behind and the outcomes of loose monetary policies varying between countries, leaders may not agree to a common policy. While the West may still need an easy policy, emerging nations may have to make funds expensive to rein in prices. "Developing consensus on a code of discipline will be challenging," said Subbarao, while speaking on a topic 'Policy Discipline and Spillovers in an Inter-Connected Global Economy'. There's difficulty, "in reaching international agreement just in the specific field of financial regulation. It will be even more difficult to reach a consensus on broader economic policy,'' he said.  The two major disruptions in the global economy in the recent past have been the so-called Quantitative Easing 2, or printing currency by the US, and the undervalued currencies in some countries. China has been accused by the US and others of keeping its yuan undervalued to export more. That is hurting producers in other nations.  Global economic analysis that focuses on trade alone to assess the impact of policies in various nations itself is flawed, said Subbarao. Econometric models are not factoring in events such as the financial crisis, tech bubble burst and such developments are making any international consensus difficult.  "Recent experience shows that our understanding of the nature of these linkages is seriously deficient," said Subbarao. "In fact, standard econometric models still suggest that shocks in one country have very small effects on others. They do that because they assume that trade is the primary channel for transmitting these shocks across countries, and trade moves in line with GDP."

RBI lobs inflation into govt's court - S.D.Naik

While the RBI has cracked down decisively against inflation, the Finance Ministry needs to work more on fiscal consolidation. In its Monetary Policy Statement for 2011-12, the Reserve Bank of India has come out boldly and decisively in its battle against raging inflation. For the first time over the past one year, inflation control has received precedence over growth. With inflation showing no signs of abating, the RBI now seems reconciled to sacrifice some growth in the short run. It is now for the government to take the RBI's cue.  Earlier, many commentators had said that the RBI continues to remain behind the curve in raising its policy rates by 25 basis points at a time even as inflation continued to surge ahead. Admitting that headline and core inflation have overshot even the most pessimistic projections over the past few months, the RBI has now opted for a decisive change in stance, according top priority to inflation control. According to RBI Governor Dr. D. Subbarao, the monetary policy trajectory that is being initiated is based on the following basic premise: Over the long run, high inflation is inimical to growth as it harms investment by creating uncertainty.  Announcing the changes in the operating procedure of monetary policy, the central bank has stated that henceforth there will be only one independently varying policy rate, and that will be the repo rate.  This has been done to more accurately signal the monetary policy stance. The reverse repo rate will be automatically pegged at 100 basis points below the repo rate. Also, a new Marginal Standing Facility (MSF) has been introduced. Banks will be able to borrow overnight from the MSF up to 1 per cent of their respective net demand and time liabilities (NDTL) at an interest rate that will be 100 basis points above the repo rate. This is intended to ensure that the banks do not face any sudden liquidity crisis. The repo rate has now been raised by 50 basis points from 6.75 per cent to 7.25 per cent. In a more significant change, it has been decided to raise the interest rate on savings deposits from the prevailing 3.5 per cent to 4.0 per cent with immediate effect. This could be interpreted as a precursor to deregulating this rate in the coming days. This rate had remained unchanged since March 2003 even as the real interest rate turned negative by a big margin because of the high rate of inflation.  Because of high oil and other commodity prices and the impact of the anti-inflationary monetary stance, the RBI expects the real GDP growth during 2011-12 to moderate to around 8 per cent from the estimated 8.6 per cent in 2010-11.  With regard to the WPI-based inflation, the RBI expects it to remain at an elevated level in the first half of the year, before gradually moderating to six per cent by March 2012 with an upside bias. Persistence of high international crude prices as also the prices of other commodities could keep the inflation rate at a much higher level. Moreover, the rate hike of 50 basis points and the increase in the savings bank will increase the cost of funds of the banking sector. This, in turn, will force the banks to raise their lending and also the deposit rates. For ensuring the efficacy of the aggressive monetary policy stance , there is a need for complementary action by the Finance Ministry aimed at fiscal consolidation. Unfortunately, the Centre's fiscal situation continues to remain worrisome. To add to the problem, the fiscal consolidation process that was witnessed in most States during the four years from 2004-05, has taken a turn for the worse during the past couple of years with economic slowdown following the financial crisis. The problem was further accentuated with the implementation of new pay scales recommended by the Sixth Pay Commission. The surging crude oil prices have seen the subsidies on petroleum products zoom to unprecedented levels.  At current prices, the oil marketing companies (OMCs) have been losing about Rs18.19 a litre on diesel, Rs29.69 a litre on PDS kerosene and Rs329.73 per LPG cylinder of 14.2 kg. The OMC's losses are estimated at Rs1,80,208 crore during the current fiscal. Not surprisingly, the RBI has recommended an immediate hike in fuel prices.

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.

For a good central bank

The Economist once wrote that the only good central bank is the one that can say no to politicians. On Monday, the cautious D. Subbarao, governor of the Reserve Bank of India (RBI), came as close as he could to saying that. In his comments at the meeting of the central bank governance group in Basel, Subbarao, among other issues, argued for creating a formalized monetary policy committee (MPC) architecture. The situation today is that while the governor is advised by a technical advisory committee, the final call on setting the policy rate is his alone to make. A proper MPC—which should include the governor, the four deputy governors along with outside experts—would give binding advice on setting of policy rates to the governor. The RBI chief said a precondition for this was to get legally backed autonomy for the central bank, something that the RBI Act 1934 does not provide.  While RBI’s ability to steer independent monetary policy is, by and large respected, there is, however, a catch. Between the arm-twisting by the Union government that the RBI Act enables and legally backed autonomy, there is a wide and opaque space for jousting between the government and the bank. The exact balance depends on circumstances. This is hardly the stuff of rule-based monetary policymaking. The case for independent central banking rests on one fundamental economic reality: in the long run, there is no trade-off between inflation and growth. And the conclusion is that there is no case for political decision making in this domain. In India, there is disbelief among politicians that this is so. It is only for the past 14-15-odd years that the central bank has been allowed to set policy rates without extraneous considerations. Left to their devices, finance ministers would stitch together a patchwork of short-term trade-offs between growth and inflation and call it policymaking. With frequent elections at the state and Central levels, this can only lead to economic chaos and it has for long. So far, the Union government has never seriously implemented rule-based fiscal policy. The Fiscal Responsibility and Budget Management Act was jettisoned at the first opportunity in the name of crisis management. If, however, the central bank were to have an MPC framework with formal autonomy, things could change. Once the central banks set policy rates only with a view to fighting inflation, it could potentially nullify the gains the governments hope to make politically by reckless spending. The short-term growth inflation trade-offs could become history. The Union government is unlikely to listen to Subbarao, but a future reform-minded government could well undertake the necessary steps.

The inflation genie is still out of the bottle in emerging markets

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Now, Sangli bank gets notice from NABARD

Days after the board of directors of Maharashtra State Cooperative Bank was superseded by the Reserve Bank of India (RBI), yet another bank — Sangli District Central Cooperative Bank (SDCCB) — has come under a cloud. The National Bank for Agriculture and Rural Development (NABARD), on Monday sent a notice to SDCCB seeking clarification on wrong loans leading to the bank’s negative net worth.  In its audit report for 2008-09 and 2009-10, NABARD observed that SDCCB’s credit had exceeded its deposits. The bank had offered loans worth Rs 168 crore to three cooperative sugar factories — Vasantdada, Manganga and Mahankali — even though these institutions had their loan accounts in “short margins”, meaning default.  Action against SDCCB came four days after RBI appointed administrators over MSC bank, which is the principal funding agency for all district cooperative banks in the state. Instead of showing those loans as non-performing assets (NPA), the SDCCB showed them as ‘profit making’ in its accounts. The NABARD in its notice under section 11 (1) asked bank directors to reply within 30 days. The bank and the three sugar factories, to whom it has given loans, are largely controlled by NCP and Congress leaders. NABARD has also observed that the bank wrongly allotted 5% dividend to its member credit societies. SDCCB chairman Dilip Vagyani termed NABARD’s action “politically motivated”. Vagyani and other SDCCB directors said NABARD should have referred to bank accounts of 2010-11 instead of the previous two years.  “Accounts of the latest year show that our bank has recorded profit worth Rs 18 crore. NABARD’s hasty action only suggests it was done on other grounds,” Vagyani said. The bank directors have decided to appeal against the notice before the central finance secretary. Meanwhile, deputy chief minister Ajit Pawar said, “When I go to Mumbai I will check all account related documents of the bank and will talk to chairman Manikrao Patil as there have been contradictory reports about its condition.”  Pawar and his party criticised the Congress for the RBI’s decision to supersede the bank, terming it a “political move”. Responding to allegations, chief minister Prithviraj Chavan said in Solapur that the state cooperative bank does not belong to any particular party.

RBI failure cause of reduction in India’s growth to 8%, China leads at 9.5

The International Monetary Fund has revised the growth projection of Asian countries. It has projected a downward trend of Indian’s growth for 2011 to around 8% owing to high inflation and overall global economic turmoil created due to rising prices of commodity goods and oil. Anoop Singh, the director of Asia Pacific department of International Monetary Fund stated on May 9th that as new downside risks have emerged across the globe and particularly in Asia Pacific economies IMF have revise downwards the growth for the region and also for India, where the growth momentum would be reducing to around 8%. On the other hand, China is expected to lead the rest of the region by growing at 9.5%. This announcement was made while presenting the latest reports of IMF on the Regional Economic Outlook for Asia and Pacific -Managing the Next Phase of Growth to the officials of Reserve Bank of India. This news comes as another slap on the face of Reserve Bank of India, who has been annoyingly failing to control the growing Inflation in the country. There is no doubt that the lower growth projection of the country is due to RBI’s step of excessive increase in interest rates, that too repeatedly in the last fiscal. For instance, the RBI has raised interest rates by 50 basis points recently, almost double of what the market was expecting. This was not only excessive but such continuous hike in interest rates by RBI is now proved to be uncalled for and it is evident that the government has failed to understand the root causes of inflation. The RBI has evidently come up with the wrong tackling solutions for tackling inflation and the growth rate projected by IMF has now showed the dark side of RBI’s wrong decisions.

Govt starts process to choose next SBI managing director

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India, Pak Mull Banking Facility for Cross Border Trade

Governments of India and Pakistan are considering a scheme formulated by the Reserve Bank of India for providing banking facility to cross Line of Control (LoC) trade in Jammu and Kashmir, a senior state minister said. Minister for Finance Abdul Rahim Rather told a delegation of Cross LoC traders that the State Government is very keen to give a big boost to the trade between the divided parts of the state, for which all the required measures are being taken. Rather referred to Government initiatives taken for establishing of Bank transaction facilities for the conduct of cross LOC trade through banking transactions. "RBI has already framed a comprehensive scheme which is under consideration of the Governments of India and Pakistan. Once the scheme gets the nod, the Banking facilities would be put in place as per the urges and aspirations of the traders," he said.  The Minister said the traders from other side of the LOC in Pakistan-occupied Kashmir are also keen to have the trade through Bank transactions. "The facility would take over the place of existing barter system of trade, which has various inherent problems concerning the traders’ community," he said. The Minister expressed hoped that respecting the aspirations and expectations of traders in PoK, Government of Pakistan will also take all facilitating steps for promoting this bilateral trade. Rather said the State Government has been interacting regularly with the Centre for including more items in the existing trade itinerary wherein only 21 items have been notified for transaction from Jammu and Kashmir State. Responding to the pleas of the traders, the Minister said legally and constitutionally the cross LOC trade is an intra-State trade.

RBI invites application for post of NIBM director

Mumbai : The Reserve Bank has invited application for the post of director of the National Institute of Bank Management (NIBM).  NIBM was established in 1969 by the Reserve Bank of India in consultation with the Government of India as an autonomous apex institution, with the mandate of playing a proactive role of think tank of the banking system.  The institute seeks a director who shall also be the Chief Executive Officer of the institute, RBI said in an advertisement. The director enjoys the pay scales and other facilities at par with the directors of IIMs and IITs. The appointment will be for a three to five years term or till maximum age of 65 years, it said.

RBI seeks law-backed autonomy to deal with monetary issues

Mumbai, May 9 (PTI) The Reserve Bank of India (RBI) today pitched for ''law-backed'' autonomy to be able to deal more effectively with monetary issues. While maintaining that the government has not interfered so far with the Reserve Bank''s functional autonomy, RBI Governor D Subbarao made a case for its "legally-backed formal autonomy" while addressing a meeting of the Central Bank Governance Group in Basel, Switzerland. He also made a case for setting up a Monetary Policy Committee (MPC) to advice RBI on policy issues. Such a system prevails in the UK, where MPC advices the Bank of England. "My own view is that we should be moving towards an MPC system, but in a phased manner", Subbarao said.  He added, however, that as a pre-conditions for shifting to the MPC system, "...the central bank should be given legally-backed, formal autonomy". Shifting to MPC system, Subbarao said, would become a realistic option with the deepening of financial markets and improvement in operating procedure. Although the RBI Act empowers the Government to give directions to the central bank in public interest, the centre has thus far refrained from doing so. RBI has enjoyed functional autonomy, Subbarao said, adding that there has been no instance so far of the Government exercising its reserve powers to issue a directive. On Financial Stability and Development Council (FSDC), the RBI Governor said, "It is important for the Government and the regulators in India to develop conventions and practices which will serve the goal of preserving financial stability without eroding the autonomy of the regulators". The proposed FSDC structure attempts to strike a balance between the government''s objective of ensuring financial stability to reduce the probability of a crisis and the operative arrangements involving the central bank and other regulators. While the Sub-Committee under the RBI Governor is expected to evolve as a more active, hands-on body for managing financial stability in normal times, the FSDC would have a broad oversight and will assume central role in the time of crisis.

RBI is not an inflation targeting central bank

That will give you the broad context for appreciating the specific issues that I will raise later.

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(Comments by Dr. Duvvuri Subbarao, Governor, Reserve Bank of India at the meeting of the Central Bank Governance Group in Basel on May 9, 2011.)

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.

RBI: Inflation targeting neither feasible nor advisable

MUMBAI: The Reserve Bank of India chief said inflation targeting was neither feasible nor advisable in India and the bank cannot escape the difficult challenge of weighing the growth-inflation trade off. "...In an emerging economy like ours, it is not practical for the central bank to focus exclusively on inflation oblivious of the larger development context," Duvvuri Subbarao said in a speech posted on the Reserve Bank of India's website. "The Reserve Bank cannot escape from the difficult challenge of weighing the growth-inflation trade off in determining its monetary policy stance."  He also said monetary policy transmission in India has been improving but it is still a fair bit away from best practice.

RBI unveils MSF norms for liquidity to banks

In line with the annual credit policy announcement last week, the Reserve Bank of India has unveiled the guidelines for the Marginal Standing Facility (MSF) to help banks tide over short-term liquidity problems. The central bank said in a notification that this facility will be effective today. As per the guidelines, a bank can borrow up to 1 per cent of their total deposits from the RBI under the MSF at a rate which is 100 basis points higher than the short-term lending (repo) rate. The repo rate, which was increased last week by 50 basis points, stands at 7.25 per cent. As such, the rate charged under the MSF would be 8.25 per cent. The facility is expected to contain volatility in the overnight inter-bank market. The call money rate was about 6.75 per cent during the afternoon trading session. “Under the facility, eligible entities can avail overnight up to 1 per cent of their respective Net Demand and Time Liabilities (NDTL) outstanding at the end of the second preceding fortnight,” it said. The notification further said that requests will be received for a minimum amount of Rs 1 crore and in multiples of Rs 1 crore thereafter. In the event the banks’ SLR (Statutory Liquidity Ratio) holdings fall below the statutory requirement on account of the use of this facility, banks will not have the obligation to seek a specific waiver for any default in SLR compliance, subject to a ceiling of 1 per cent of their NDTL. SLR is the percentage of total deposits kept in government securities and other specified instruments. Currently, the SLR requirement is 24 per cent.

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.

Bank employees cry foul over drafts given to Trinamool

Kolkata: A bank employees’ group Monday alleged that officials of two public sector banks were spreading ‘misinformation’ to justify their decision of illegally issuing drafts to the Trinamool Congress. The group alleged that while issuing the drafts last month the banks violated the Reserve Bank of India (RBI) guidelines because of political pressure. ‘The United Bank of India (UBI) and the Allahabad Bank chiefs have stated deliberate misinformation to confuse and mislead the public regarding issuance of bank drafts to Trinamool Congress,’ Bank Employees Federation of India (BEFI) general secretary Pradip Biswas told reporters here. ‘As a responsible organisation of bank employees, we are clarifying the position,’ he said. He said a city branch of the UBI issued 20 bank drafts, each of Rs.49,500, to the Trinamool Congress April 12 and the sole beneficiary of these drafts was M Power Global Access India Private Limited. One branch of the Allahabad Bank in Kolkata issued a total of 11 drafts, 10 drafts each of Rs.49,000 and one of Rs.10,000, to the Trinamool Congress April 13,’ he said. ‘It is understood that the banks had intentionally structured the transactions. This is gross violation of RBI’s Master Circulars issued July 1, 2010. We have come to know that initially the concerned employees of the banks refused to do so, but because of pressure from the higher authorities they allowed the transactions,’ Biswas said. Allahabad Bank chairman and managing director J.P. Dua in a press conference in Kolkata May 2 said no irregularities had taken place in issuing the demand drafts to the Trinamool Congress. ‘No irregularity has taken place. We have followed the rules and regulations,’ he said.

Drabu resigned, was not sacked, says Omar

Srinagar: Chief Minister Omar Abdullah Monday said the government didn’t sack former Jammu and Kashmir Bank (J&K Bank) chairman Haseeb Drabu and also rejected his claims that J&K Bank-RBI agreement was a “sell-out”. Replying to a query about Drabu’s claims that the J&K Bank was going to lose its identity in the next two to three years due to the pact with RBI, Abdullah termed the JKB-RBI pact as “a win-win situation for the state government, the Jammu and Kashmir Bank and people of the state.” He added, “Drabu was not sacked by the government but resigned on his own.” RBI has not bought over J&K Bank. It continues to be the property of Jammu and Kashmir’s people, and the state’s banker but rather than implementing overdraft facility of Jammu and Kashmir Bank we are implementing the ways and mean position of RBI,” he said. Abdullah said the Union Finance Commission had recommended an award of Rs 1,000 crore to the state government and the provision of borrowing another Rs 1,000 crore at low interest rates from the market. "This will save the state government the interest it had to pay to the Jammu & Kashmir bank, while the bank will have Rs 2,000 crore to pump into the market. The only thing is that the J&K Bank(employees) will have to work harder now, " he said.

Subdued growth may trigger MFI mergers

Chennai: Growth prospects for microfinance institutions (MFIs) will remain subdued over the medium-term. Operating challenges arising from RBI’s recent guidelines for MFIs, coupled with expected difficulty in raising capital, are likely to trigger consolidation in the sector. However, RBI’s guidelines should ease pressure on MFIs’ profitability, as it has relaxed some recommendations of the Malegam committee, a Crisil research said. Furthermore, the continuation of priority sector status and steps to enhance transparency and governance should improve stakeholder confidence and enable resumption of bank funding. It is believed that clarity on regulatory jurisdiction for MFIs is a critical next step for long-term sustainability of the sector, the research said. Rupali Shanker, head, Crisil Ratings, said, “The MFI sector’s growth is likely to remain subdued over the medium-term, especially in regions with high microfinance penetration, because of proposed regulatory restrictions on multiple lending, loan size, and end-usage of loans. This will provide an impetus for consolidation in the sector.”  To comply with the new regulations, MFIs will have to enhance their internal systems and processes, strengthen their monitoring mechanisms, and invest in training their employees, she added. “Crisil also expects RBI’s guidelines to provide cushion to MFIs’ profitability and enable resumption of bank funding to MFIs. RBI’s guidelines are largely based on the Malegam committee recommendations, with some modifications: RBI has allowed a higher cap on interest rates and margin (of 26% and 12%, respectively) and has clearly defined the manner of computation for these caps,” she said. Pawan Agrawal, director, Crisil Ratings, said, “The regulatory jurisdiction for MFIs, however, remains unclear. While RBI has created a new category of non-banking financial companies to regulate the MFI sector, multiple regulators continue to oversee the sector. A clearer regulatory framework will remain critical to instill greater confidence in the sector.”

Suman Bery: Monetary policy - where next?

The RBI is becoming more accountable.  What is the Reserve Bank of India’s (RBI’s) view of the Indian economy’s prospects over the next 18 months? Does this view justify the RBI’s move to more aggressive monetary policy actions announced on May 3? These are questions T N Ninan rightly raised in his column titled “The wrong war?” on May 7. These are also questions that are directly, if not wholly, addressed convincingly in the monetary policy statement issued in the name of the RBI governor that day. The early summer statement of monetary policy is by convention the most authoritative articulation of the RBI’s goals and stance. It is based on data for the previous fiscal year, and takes into account the Union government’s fiscal stance indicated in the Budget. The primacy of this statement dates back to a more sedate era when domestic influences were paramount, and it was still possible to speak of a policy for the “busy” and the “lean” season. I am not aware that any of the other major central banks follows an equivalent ritual in the more globalised and fast-paced environment for monetary management today. Nonetheless, I think this practice is worth preserving to provide an accountability benchmark for the year as a whole.  The governor’s case is most compactly enunciated in the introduction. He admits that the resurgence of inflation in the last quarter of 2010-11 came as an unpleasant shock. While asserting that the initial trigger came from abroad, in the form of a surge in commodity prices, he argues that “the fact that these were quickly passing through into the entire range of domestic manufactured goods indicated that domestic pricing power is significant. In other words, demand has been strong enough to allow significant pass-through of input price increases. Significantly, this is happening even as there are visible signs of moderating growth, particularly in capital goods production and investment spending, suggesting that cumulative monetary actions are beginning to have an impact on demand”.  What is one to make of this remarkable formulation? Taken at face value, it seems to assert that pricing power in domestic non-food manufacturing has increased rather than decreased in a slowing economy. A more charitable interpretation would disassociate the recent commodity price spike (mainly in fuels and metals) from pricing power in manufacturing, but this would then raise the uncomfortable question of why this pricing power has surfaced now when it was largely dormant in the golden growth years up to 2008.  In making the case for monetary tightening, the statement cites three proximate factors. These are the outlook for global commodity prices, the overshooting of inflation in recent months, and the fiscal outlook on a business-as-usual, no-reform scenario. These “momentum” factors are only partially offset by the already perceptible slowing of the economy.  The summary judgement is: “Current elevated rates of inflation pose significant risks to future growth. Bringing them down, therefore, even at the cost of some growth in the short-run [sic], should take precedence.” Press reports about reactions from the finance minister, the deputy chairman of the Planning Commission, the chairman of the Economic Advisory Council to the Prime Minister and the chief economic advisor suggest that the decision to sacrifice growth at the altar of inflation control enjoys at least a modicum of support throughout the government, no matter how slender the analytic basis.  To its credit, the RBI has this time committed itself to a more specific view on the outlook for growth and inflation, with a confidence margin associated with each. In the case of growth, the range of outcomes is projected as lying between 7.4 and 8.5 per cent, with a central level of 8 per cent and the balance of risks on the downside. In the case of inflation, the statement frankly acknowledges the RBI’s poor performance in predicting year-end inflation in 2010-11, at substantial cost to its credibility. The baseline projection for March 2012 is placed at 6 per cent with an upward bias. In addition, in an effort to manage expectations, the RBI warns that “inflation is expected to remain at an elevated level in the first half of the year due to expected pass-through of increase in international petroleum prices to domestic prices, and continued pass-through of high input prices into manufactured products”.  It is instructive to link this discussion to controversies on the appropriate framework for monetary management raging elsewhere in the world. Neither of these is particularly novel, but both are relevant to the situation facing India at this time. The first is the familiar debate on rules versus discretion in the conduct of monetary policy; the second is the suitability of a formal inflation target in the Indian environment, something that the RBI has consistently and repeatedly rejected.  It should be stressed that these are quite distinct debates, in that the implementation of an inflation-targeting regime actually requires entrusting the central bank with almost total discretion in the tools it deploys to hit its target. As against this, the rules versus discretion debate essentially revolves around the near impossibility of timing monetary policy actions correctly so that they act as a force for stability rather than instability.  It would be irresponsible to ask the RBI to commit itself to a formal inflation-targeting regime under the fiscal and debt circumstances that currently prevail in India. However, this does not prevent it from giving primacy to what the Raghuram Rajan report called a “low inflation objective”. Indeed, the record of non-intervention in the foreign exchanges under the present team in the RBI, coupled with the finance ministry’s continued maturity on the issue of capital flows, suggests the RBI is now focused on delivering low and stable inflation. It has now publicised the indicator, namely the wholesale price index for non-food manufacturing, which it intends to monitor as an indicator of demand pressure in the economy. And finally we have “fan charts” for growth and inflation, as well as a clean-up of the system of policy rates.  So at the end of the day, despite my initial concerns, I come away with the feeling that the RBI is moving in the right direction in terms of how it should be held accountable. It is now up to the rest of the research community to give it the tools it requires to do its job.

Deregulation may bring added costs on savings a/c holders

With Reserve Bank of India in all favors for deregulating savings bank account rates, customers are expected to be in a win win situation. But the scenario may not completely be a win win for customers in reality with lenders planning to levy charges for the services associated with this account.  The RBI has recently raised the savings bank account rate to 4% during the annual monetary policy of this fiscal.  The transaction charges will go up for the consumers if the rates on savings bank accounts keep on going up...the banks also have to survive," HDFC Bank Managing Director Aditya Puri said.  "The pressure on net interest margins is likely to further increase if the RBI deregulates savings account deposit rates," said credit rating agency Crisil.  Central Bank of India Chairman and Managing Director S Sridhar said, "Levying of transaction charges is a trade-off."  "If you go to any foreign country, banking is so costly...banking is expensive. Try getting a cheque book in a foreign bank," he said.

Corporation Bank opens microfinance branch

Mangalore-headquartered public sector lender, Corporation Bank has opened a new micro-finance branch in Hyderabad in its bid to increase financial inclusion initiative of the bank.  “The basic objective of opening a micro finance branch is to help the weaker sections of the society especially women through financial inclusion, micro credit and financial literacy,” a bank release said.  The other major areas of functioning of this branch will be direct lending to self help groups, NGOs, MFIs among others with provision for micro insurance products like Janashree Bima Yojna, Jeevan Madhur, Jeevan Mangal of LIC through group approach and micro pension.  “The special focus of this micro finance branch in Hyderabad will be to address the banking needs of the urban poor,” the release added. The public sector lender has already opened three micro finance branches across the country and this newly opened branch at Kothapet in Hyderabad is the fourth one by the bank. Earlier, Reserve Bank of India has classified all bank loans to micro finance institutions after April 1 as priority sector lending. Corporation Bank has posted a 10.6 per cent rise in its net profit to Rs 345.3 crore in the fourth quarter of last financial year. “The net profits were low on account of higher provisioning for pension liability,” Ramnath Pradeep, chairman and managing director of Corporation Bank said. The bank had to provide Rs 184 crore towards pension liability in the fourth quarter. Total income of the bank grew by 39.5 per cent to Rs 3046.78 crore in this period as compared with Rs 2184 crore reported last year. Operating profit increased by 37 per cent to Rs 746.57 crore during this period. Meantime, while interest spread rose by 29 per cent to Rs 761.76 crore in this period, net interest margin was at 2.48 per cent, up by 18 basis points from the previous quarter.

Is the task of RBI done?

Said simply in plain English, real interest rates have been too low to foster real savings and investment
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Let committee, not governor, take monetary decisions: Subbarao

RBI Governor D Subbarao on Monday proposed that all monetary policy decisions be taken by a committee of the central bank — as is the practice in the US and UK.  The Federal Open Market Committee of the US Fed and the Monetary Policy Committee (MPC) of the Bank of England decide on actions by a majority vote.  In India, the final call is the RBI governor’s. The governor does hold structured consultations with the four deputy governors with whom he constitutes an informal monetary policy committee, but there is no voting, and the final decision is the governor’s.  “My own view is that we should be moving towards an MPC (monetary policy committee) system, but in a phased manner. There are some preconditions to be met,” Subbarao said at the meeting of the Central Bank Governance Group in Basel today.  “We do have a Technical Advisory Committee (TAC) on Monetary Policy that acts as a proxy policy committee, but it is advisory in nature. It comprises the governor as chairman, the deputy governor in charge of monetary policy as vice chairman and other three DGs as members,” Subbarao said. The committee also has five external members — two experts from the Central Board of the Bank, and three drawn from a wider pool — nominated by the governor. “They give specific recommendations on policy options and these are minuted,” Subbarao said. Listing conditions for the MPC system, he said the central bank should be given legally-backed formal autonomy. “Second, in a situation where inflation dynamics are more often dictated by supply side elements, the central bank’s ability to control inflation is restricted. An MPC mechanism in such a situation can weaken the coordination between the government and the Reserve Bank. However, when our financial markets deepen further, operating procedures improve and monetary transmission becomes more efficient, shifting to an MPC system becomes a realistic option,” he said.  Close to the policy decision, an established practice for the governor is to meet the prime minister and finance minister informally, give them an assessment of the macroeconomic situation, and indicate to them the proposed policy stance. “This is only a matter of courtesy, and the process has not impinged on the autonomy of the Reserve Bank in monetary policy making,” Subbarao said. The consultation with the finance minister, in particular, should be seen as an avenue for fiscal-monetary coordination, since on a reciprocal basis, the finance minister too takes the governor into confidence on the fiscal stance ahead of presenting the budget to Parliament, he said. “The RBI in effect functions with a functionally autonomous mandate and there has been no instance so far of the government exercising its reserve powers to issue a directive. This is all the more remarkable since the interaction between the government and the Reserve Bank is closer and more frequent than is typical in other countries, and this draws from the key role of the RBI in financial sector reforms and economic development...” Systems of accountability are tight, he said. “Since we are not an inflation targeting central bank, there is no formal memorandum of understanding or a ‘results agreement’ between the government and the Reserve Bank. Nevertheless, we render accountability for our performance on inflation. We explain the rationale for our monetary policy stance quite extensively,” Subbarao said.

Core issues in monetary policy

Inflation targeting is neither feasible nor advisable in India. The RBI cannot escape from the challenge of weighing the growth-inflation trade off. Even if we settle on inflation targeting, we have a problem about which index to target.
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‘No quick fix solution for lowering inflation

Reserve Bank of India Governor D. Subbarao on Monday said it was unrealistic to expect the central bank to deliver on an inflation target in the short-term. “In an emerging economy like ours it is not practical for the central bank to focus exclusively on inflation oblivious of the larger development context. The RBI cannot escape from the difficult challenge of weighing the growth-inflation trade off in determining its monetary policy stance,” said Dr. Subbarao while addressing the meeting of Central bank governance group in Basel. The drivers of inflation in India often emanate from the supply side, which are normally beyond the pale of monetary policy. In particular, given the low income levels, food items have a relatively larger weight in the consumption basket in India compared to advanced economies and even many emerging market economies. India has three consumer price indices each covering different segments of the population with the weight for food ranging between 46 and 70 per cent. “Monetary policy, as is well known, is an ineffective instrument for reining in inflation emanating from supply pressures.” “An alternative that is put forward is that we could target core inflation rather than headline inflation. That is not a feasible solution either.” An inflation index, with half the basket excluded from it, hardly reflects reality. Moreover, the exclusion of food from the core index can be justified if average food inflation is the same as the average non-food inflation. “If food inflation is higher, as is typically the case in many low income countries including India, then we would be underestimating inflationary pressures on a systemic basis. That would mislead policy prescriptions,” he added.  Further Dr. Subbarao said India had a problem about which inflation index to target. The headline inflation index was the Wholesale Price Index (WPI), and that did not, by definition, reflect the consumer price situation. However, getting a single representative inflation rate for a large economy with 1.2 billion people, fragmented markets and diverse geography was a formidable challenge.  “The recent introduction of CPI-Urban and CPI-Rural is welcome, but it still does not solve the problem of heterogeneity.” “A necessary condition for inflation targeting to work is efficient monetary transmission. In India, monetary transmission has been improving but is still a fair bit away from best practice,” Dr. Subbarao pointed out. There are several factors inhibiting the transmission process such as an asymmetric relationship between depositors and banks, administered interest rates on postal savings that are not adjusted in line with prevailing interest rate trends and rigidities in the financial markets. All these factors dampen the efficacy of monetary signals and complicate the adoption of an inflation targeting regime in India. Given the compulsions of democracy and the large population of poor, any government in India had always to be, and indeed had been, sensitive to price stability even if it means sacrificing output in the short-term, said Dr. Subbarao, adding, both the government and the RBI had to factor in the short-term growth-inflation trade off in their policy calculations.

RBI team studies mobile banking scheme

PALAKKAD: The Reserve Bank of India (RBI) has deputed a team to study the mobile banking scheme of the Palakkad District Cooperative Bank, introduced last year, to take banking to the remote tribal villages of Attappady. The scheme is part of financial-inclusion programmes of the bank. In the Agali-Attappady area, banking facility is available only at the Agali town now. The mobile bank visits each village once in a week. The people living in the 187 tribal hamlets had no option but walk 20-30 km to reach Agali. Those employed under the MGNREGS in Attappady have benefitted (from the scheme) as the payment is made only through bank, District Cooperative Bank president K.V. Ramakrishnan said.

Wake up Call for Dormant Accounts

RBI asks banks to track down inactive account holders. If you are not operating your bank account due to any reason, you can get a call or an email from your banker very soon for clarifications. Recently, the Reserve Bank of India (RBI) has instructed banks to track dormant accountholders or the person who introduced them to the bank. According to the reports, the central bank has decided to take this step as commercial banks have around 10 million inoperative accounts with unclaimed deposit of around Rs 1,700 crore. The RBI has decided either to revive the dormant account or the balance can be transferred to a new account or legal heirs. An account, whether savings and current, is treated as dormant if there are no transactions in them for over two years. If you give suitable reasons for not operating your account, bank should continue classifying the account as an operative account for one more year.