On rupee symbol's first birthday, rupee-denominated deals made easier

MUMBAI: A year after the rupee got its Devanagari identity, the RBI has taken the first step to popularise it in international trade.  The Reserve Bank on Thursday made it simpler for overseas buyers and sellers of goods and services to cut rupee-denominated deals while trading with Indian businessmen. It has permitted overseas traders to hedge their currency risks with local and offshore banks for trades invoiced in rupee. While invoicing in rupee was allowed a few years ago, foreign traders have not been accepting such export or import orders in the absence of a mechanism to cover risks arising out fluctuations in the currency.  For Indian traders, however, invoicing in rupee eliminates exchange risks built into all cross-border transactions. Whenever rupee surged against dollar, exporters raised demand for rupee invoicing. But it never took off as most foreign buyers and sellers, often with more bargaining power, feared possible losses in a volatile currency market.  "This is a significant move and will reinforce interest in invoicing in rupee terms by overseas buyers and sellers, given a liquid onshore market. To get this off, block governmental contracts like defence and energy should be invoiced in rupee for overseas sellers as the Chinese did," said Hemant Mishr, head of global markets, South Asia, Standard Chartered Bank.  Since rupee is not a fully convertible currency, foreign investors like hedge funds, large Indian companies as well as diamond houses participate in the non-deliverable forward (NDF) market, which is not recognised by RBI. "RBI's move will boost rupee-denominated trade and reduce number of transactions in the NDF market. A slice of NDF volumes may be diverted to the well-regulated onshore market," said NS Venkatesh, treasurer, IDBI Bank .  In NDF trades, any gain or loss from bets on the movement of the rupee is settled in dollar or any other international currency because the Indian currency - as the term NDF suggests - cannot be 'delivered' abroad. These hedging transactions can be entered with either a bank in India or an offshore bank with a correspondence arrangement with a bank.  In the past, local banks have come up with ideas that could simplify trade transactions and minimise currency losses. For instance, earlier this year, a few banks in India had sounded out the RBI on the possibility of a new currency arrangement between India and its largest trading partner, China. They suggested a simple and inexpensive mechanism that would bypass the dollar and allow trade payments in local currencies. Since the rupee and Chinese yuan are largely non-convertible currencies, export and import transactions between the two countries have dollar legs. The rupees that an Indian buyer pays his bank for Chinese imports are converted into dollars, which, in turn, is converted into yuan with the help of other banks for paying the Chinese seller. It's a transaction that can take 2-3 days due to differences in time zones, and involves certain operational costs that can be pruned, if payments can be directly settled in the yuan and rupee.

ET

RBI to issue new coins of 50 paise to Rs 10 denomination

The Reserve Bank today said it will soon put into circulation new coins in five denominations, ranging from fifty paise to Rs 10. "The RBI will shortly put in circulation... Coins of the fifty paise, one rupee, two rupees, five rupees and ten rupees denominations," the apex bank said in a statement. The fifty paise, Re 1 and Rs 2 coins would be of ferritic stainless steel containing iron and chromium, while the Rs 5 coins would be made of nickel brass with a varying composition of copper, zinc and nickel. The Rs 10 coins would be made of copper and nickel. Fifty paise is the lowest valid denomination in the country now after twenty-five paise coins were withdrawn from circulation from June 30. All the new coins would be circular in shape, with a shape and outside diameter between 19 to 27 millimetres, the statement said. The coins would shall bear the Lion Capitol of the Ashoka Pillar and the word 'India' in English on one side and their denominational value on the obverse side.

Financial Chronicle

ONE MORE RATE INCREASE LIKELY

The backdrop to the Reserve Bank of India (RBI) monetary policy meeting next week is not very different from what it has been in the recent past. Inflation is clearly at an unacceptable level and growth is moderating, but not collapsing. So, it is quite likely that the policy response from RBI will be a 25 basis points rate increase to reiterate its anti-inflationary stance. However, there is considerable uncertainty over the policy trajectory going forward and hence the policy statement will be scrutinized closely for RBI’s assessment of the current economic situation and any forward looking cues. Before we make forecasts about the policy trajectory, it is important to have a quick look through the rear-view mirror. We believe that the annual policy announced in May brought a change to RBI’s way of looking at monetary policy setting. It was explicitly acknowledged that in the near term, we might have to sacrifice some growth to tackle inflation. In line with that, a so-called calibrated soft landing policy was adopted to avoid the possibility of sustained high inflation hampering long-term growth potential.  The general expectation is that the policy rates will be tightened till either inflation starts coming off or growth becomes too “soft”.  Inflation in FY12 (fiscal 2012) has been in line with RBI’s projection even after the recent fuel price revisions. The headline WPI (Wholesale Price Index-based inflation) has been quite flat in the 9.4-9.75% range for the last seven months and we think that the 9-10% range on inflation is likely to continue till at least October. Even on RBI’s preferred measure of non-food manufacturing inflation, there is no flare-up in the last three months. What will further comfort RBI is that the seasonally adjusted month-over-month inflation readings (which better indicates the momentum in prices) have been declining over the same period. Overall, we think that inflation is likely to remain a cause for concern, but the absence of negative surprises should soothe some nerves and keep inflation expectations under check. Inflation uncertainties now stem from three sources— renewed pressure from global commodity prices (particularly oil, oilseeds, edible oil, sugar and metals), a truant monsoon and larger-than-expected pass-through of higher fuel prices on to other commodities. Monetary policy is likely to have limited success in controlling inflation arising out of any of these events. However, in case of these price shocks, inflation could be more protracted, making it difficult for RBI to lower its guard.  The outlook on growth is more uncertain. The industrial production data is trending downwards, specifically in the intermediate and capital goods sectors. However, one is not sure whether robust conclusions can be drawn from this data, which has been volatile and subject to significant revision. Other proxy indicators such as credit growth and non-oil import growth have also moderated, but still hover around healthy levels. On the other hand, business confidence is at a low and new projects in the pipeline are sparse on the back of rising rates, policy inaction and global uncertainties.  RBI in any case has this difficult problem of deciding how much of a near-term growth sacrifice is acceptable. Lack of consensus in growth indicators compounds that problem. Also, further policy action should take into account the lagged effect of the cumulative rate increases and should not choke the supply side completely. Our baseline view is of one more rate increase after the July policy because inflation sustaining above 9% will still keep the real policy rates negative and force RBI to maintain the bias towards inflation management. Disorderly global developments and a declining trend in core inflation might force the central bank to rethink a rate increase post July, which remains a risk to our view.

Samiran Chakraborty is Asia economist, Standard Chartered Bank. These are his personal views (MINT)

Banks see another RBI rate hike on Tuesday

Leading lenders Standard Chartered and HDFC Bank on Friday said they expect the Reserve Bank to hike its short-term lending rate by 25 basis points in the forthcoming monetary policy, a view echoed in an RBS survey of money market participants. "We see a 25 bps increase in the repo rate at the 26 July policy as inevitable...inflation management will remain the priority, but policy statement is likely to be less hawkish," StanChart said in a note. Similarly, a majority 71 per cent of the 151 respondents in a Royal Bank of Scotland (RBS) survey opined that they expect the monetary authority to go in for yet another spike in its key rates by 25 bps, while 5 per cent said it could be 50 bps, and 24 per cent see the RBI leaving the rates unchanged. "The RBI rate action will continue to be driven somewhat mechanically by the inflation data that remain way above its comfort zone. Thus a 25 bps hike in the policy rate seems almost certain," HDFC Bank chief economist Abheek Barua in his report said. The RBI has hiked its key rates 10 times or 275 bps since March 2010 to tame the uncomfortable inflation number, which stood at 9.44 per cent for June, and has clearly articulated that it is ready to sacrifice growth in the short term. However, recent signs like the food inflation cooling down and industrial production data being consistently low has led to a view that RBI may pause the tightening for now.

Business Today

L&T awaits RBI norms to decide on banking foray

L&T Finance Holdings Ltd, the L&T Group’s financial services holding company, is currently waiting  for the Reserve Bank of India (RBI) to announce the guidelines for new bank licenses to decide on foraying into the banking sector, said a top official. Sumeet Maheshwari, chief executive officer, L&T Infrastructure Finance Ltd, told reporters in Hyderabad on Friday that L&T is keen on foraying into banking business as it enables the transaction business revenue among others. “As a country, we are growing and the banking needs will also grow. As the rural incomes better, the banking needs are going to gallop,” he said, adding that “Me too players will not survive. The new private sector banks will have to offer something unique if they have to succeed.” Saying that L&T is growth hungry, he said the company will also look at other opportunities such as acquisitions of existing banking firms. The company already has two bank investments – 5 per cent each in Federal Bank and City Union Bank, which provide synergy to L&T’s customers in terms of transaction services. “‘But there could be other opportunities in the market and we will look at them. We will look at both Greenfield and Brownfield opportunities,” he said. Further, he said, “If the regulations facilitate easier entry, there will be a lot of players. If it reduces the cost of entry into that business, the cost of setting up, it is worthwhile getting into the business.” The costs, he said, includes not just money but also time for setting up of branches for years to stabilize the business and management energy, which needs to be weighed vis-à-vis the benefits the business offers. “Banking comes with a lot of other requirements and you need to weigh them. There is no free lunch,” he said. He said the existing branches of the L&T Finance were only suitable to do the existing business and not suited to address the needs of retail customers in the banking operations. The bank branches will have to be in the visible areas and proper locations to make them convenient for the retail customers. He said RBI has requirements such as SLR and CRR for banks that may fetch lesser returns as both SLR and CRR add up to the costs, influencing the lending and borrowing rates. “As an L&T entity if I am able to borrow at very close to those costs, then is it worthwhile for me to get into banking business? The SLR and CRR ratios may increase or decrease. We need to study the regulations as and when they are announced,” he said. Maheshwari said L&T is yet to decide on whether one of its existing financial services entities should enter the banking business or a separate entity needs to be floated for the banking foray. “It all depends on what the RBI guidelines say,” he said. Further, Maheshwari said L&T will sell its equity holdings in two private sector banks Federal Bank and City Union Bank if the banking regulator requires them to exit from the banking investments. “Otherwise, it is a profitable portfolio investment for us like any other investments.”

Financial Chronicle

Assets and appreciation

Then it was not just the leading commercial bank but also the banker to the government, a role it gave up with the setting up of the Reserve Bank of India in 1935. The bank again played a part in the nation’s history when it became the forward scout of bank nationalisation....

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It's party time, as interest rate inches to 10%

Depositors are laughing all the way to banks and literally so, as interest rates offered by banks on term deposits have almost touched 10 per cent. There are many public sector banks (PSU banks) now offering 9.75 per cent interest and their private peers have already raised rates beyond 10 per cent.....

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Inside RBI's mind : Rajeev Malik

The central bank should raise key policy rates again but avoid becoming a prisoner of its own making

Central banking is an important but thankless job, especially when it has to navigate, as in India’s case, through unnecessary challenges created by a government that appears to have become a question mark. Poor Reserve Bank of India (RBI) continues to be at the receiving end of criticism – unjustified at times – for the high and still rising Wholesale Price Index (WPI)-based inflation and, depending on who you talk to, for either raising interest rates too much or not raising them enough. The interpretation of how the domestic and global economic landscape has changed since the RBI’s last review in mid-June holds the key to the central bank’s action at the quarterly review of monetary policy on July 26. The forthcoming meeting is the first since the government mustered some political courage to increase fuel prices. The move also indicated some effort to check the fiscal’s undermining of monetary tightening. Central banks’ guidance in their policy statements should be viewed as a tapestry of their evolving thinking as the economic cycle evolves. In its last policy statement, the RBI maintained a hawkish stance, felt inflation was uncomfortably high and that it remained its key focus. While it acknowledged some moderation in growth, the slowdown was not interpreted to be either broad-based or undesirable. Also, the softening in commodity prices in the run-up to that policy was not deemed significant enough to downgrade it as a risk factor. Finally, the RBI correctly flagged up the concern that global developments could pose a risk to India’s growth, but these were not meaningful enough to take its eyes off the multi-headed inflation devil. How have economic conditions changed since the last policy review? Domestically, industrial production and the Purchasing Managers’ Index survey indicate further moderation in the growth momentum, as desired by policy. Unfortunately, India’s industrial production data continue to show too much volatility and sizeable revisions, and probably exaggerate the pace of moderation. Indeed, RBI Governor D Subbarao aptly labelled these revisions as “analytically bewildering”. However, direct and indirect tax collection in April-June hints at a better tone of aggregate demand than what industrial production indicates. Still, just as the post-crisis recovery was uneven, the ongoing deceleration, too, is uneven. More importantly, WPI inflation remains uncomfortably high and actually accelerated in June. It will increase further in July as the more complete impact of the recent hike in fuel prices is captured. WPI inflation increased to 9.4 per cent year-on-year (YoY) in June from 9.1 per cent in May. At 7.2 per cent YoY in June, WPI core (non-food manufacturing goods) inflation was similar to 7.3 per cent in May. It should not be overlooked that the data for May and June are preliminary and will be revised upward to show headline inflation hitting 10 per cent. Equally worrying is the pattern of revisions in the preliminary WPI. April inflation figures were revised significantly higher to 9.7 per cent from 8.7 per cent. The magnitude of revisions so far in 2011 has averaged around an outsized 1 percentage point, which should raise qualitative issues with the new WPI data as well. Overall, inflation should remain the the RBI’s key focus, and it cannot just shy away from increasing rates when inflation remains near-double digit, has actually risen and revisions to the inflation data remain worryingly high. Globally, the recovery in the US is losing momentum and the European sovereign issues are becoming more serious by the day. Brent crude oil is slightly higher than where it was at the time of the last RBI review, and the local pass-through remains incomplete. Also, “suppressed inflation” remains a concern since, among other overdue adjustments, electricity tariffs will also need to be raised. Overall, the global backdrop warrants close tracking but cannot be an immediate reason for the RBI to not increase rates, especially given expectations of further acceleration in inflation. Admittedly, significant global financial dislocation could prompt the RBI to hold fire but that outcome is conditional on events outside the RBI’s control. Until then, the apex bank should remain focussed on what it can do. It is striking that core WPI inflation has been moving higher in the past several months, despite the deceleration in industrial production growth since early last year. This should call into question the sensitivity of input price inflation to growth. The RBI remains in a dysfunctional marriage with WPI inflation for setting its interest rate policy. Indeed, the signs of moderating growth are not new, but local financial markets appear less perturbed by rising headline and core inflation than they were a few weeks ago. The key difference is the air pocket that global commodities have hit, not deceleration in growth as the local idiot box keeps blaring. Actually, the latest increase in core WPI inflation – on the RBI’s own guidance – should indicate further strengthening in demand pressures. However, this is an interpretation I do not fully subscribe to and the RBI will probably soon be haunted by it. While domestic demand conditions affect the magnitude of pass-through by businesses, by relying on WPI, the RBI is focusing on input prices. Instead, monetary policy should focus on final prices of consumer goods. It is far from certain that incremental deceleration in growth will positively affect WPI inflation if global commodity (especially crude oil) prices remain elevated or rise further. A crucial aspect of the upcoming policy will be the RBI’s guidance. It is still early to take a final call on the unfolding monsoon season. However, risks from global factors could be two sided. A crisis in Europe could cause commodity prices to correct, thereby offering scope of a breather for the RBI. At the other extreme, adoption of more monetary easing in the US could cause commodity prices to move higher, thereby warranting further tightening by the RBI. The global risks mentioned above warrant mutually exclusive responses from the RBI. Besides, there is uncertainty about the timing and outcome. The central bank should adopt a wait-and-see approach after hitting eight per cent on the repo rate as soon as possible. The bottom line is that a rate hike is a must next week since there is hardly anything to cheer about on inflation to either pause or signal a pause just yet.

The author is senior economist at CLSA, Singapore / The views expressed are personal / BS

BR Shenoy's forgotten voice of dissent

After returning to India Professor Shenoy taught at Wadia College (Pune), Gujarat College (Ahmedabad) and University of Ceylon. He was associated with various Government Bodies of Ceylon (now Sri Lanka) including the Commission on Currency and Department of Commerce. In 1942 he was appointed Principal, L. D. Arts College, Ahmedabad and then joined the Reserve Bank of India in 1945. During his RBI days he was the Far Eastern Representative of the IMF (1948) and an Alternate Executive Director of IMF as well as of the World Bank (1951-53).

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K.J.Udeshi, BCSBI (June 4, 2007) -

I am truly grateful to the Economics Research Centre, Mumbai for giving me the privilege to deliver the Professor B.R.Shenoy Birth Centenary Memorial Lecture. It is more meaningful to me because, he and I belong to the RBI family. Prof. Shenoy’s stint in the Reserve Bank of India (1945-1953) was, according to Professors Mahesh Bhatt and Mukund Trivedi a very fruitful period of his life in terms of intellectual and professional accomplishments. While I do recall meeting Prof. Shenoy’s family, when I was a child, it was only after I joined the RBI in 1965- long after Shenoy left the RBI - that I had an appreciation of his monumental contribution to Indian economic thought. His espousing of causes which were contrary to the popular fashions from the 1950s to the 1970s evokes great awe and respect. Despite being out of the pale of mainstream Indian economic thought, Shenoy made seminal contributions to the debate of his times. What is even more significant is that Shenoy’s prophetic advocacy on a number of issues relating to economic policy are of particular relevance even today. It is in this context that we have to pay homage to Professor Shenoy, the sage counselor who was way ahead of his times.

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Misuse of RBI lending window - K.Kanagasabapathy

The recommendations of the Deepak Mohanty Working Group released in March 2011, were an important landmark. On that basis, RBI inter alia decided to manage liquidity to ensure that it remained broadly in balance, with neither a large surplus diluting monetary transmission nor a large deficit choking off fund flows....

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RBI Guv Meets Pranab Ahead of Credit Policy Review

Amid fears that there would be another round of interest rate hikes to tame inflation, RBI Governor D Subbarao met Finance Minister Pranab Mukherjee here today, ahead of the central bank's monetary policy review on Tuesday. "I have come to review the macro-economic situation with Finance Minister before the policy review, slated for July 26," Subbarao said after meeting Mukherjee. The meeting was also attended by other senior officials of the Finance Ministry. The Reserve Bank is scheduled to announce the first quarterly review of credit policy for 2011-12 on July 26. It is is widely believed that the central bank will increase short term lending (repo) and borrowing (reverse repo) rates by another 25 basis points. RBI has increased these key rates 10 times since March 2010 to tame the rising prices. They have gone up by 250 basis points (2.5 per cent) since then, making loans costlier for both industry as well as consumers. The headline inflation for June at 9.44 per cent is much above the comfort zone of 5-6 per cent. The central bank faces a challenging task of managing the inflationary pressure at a time when the industrial growth has started showing signs of slowing down. Besides, the resulting moderation of overall economic growth, GDP, is a major concern before RBI. The government has already lowered India's GDP projection for 2011-12 to 8.6 per cent from the earlier estimate of about 9 per cent on account of slowdown in industry output. The factory output growth rate, as measured by the Index of Industrial Production (IIP), dipped to 9-month low of 5.6 per cent in May due to a poor showing by the manufacturing and mining sectors and lower offtake of capital goods.

The Outlook

CARRY ON HIKING THE POLICY RATE

Pause in response to building downside risks to global and domestic growth? Or press on with its long-established campaign of lifting policy rates to combat inflation? That, in a nutshell, is the policy choice facing the Reserve Bank of India (RBI) at its latest policy review meeting next week....

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Cabinet clears merger of SBICI with SBI

The government today approved merger of State Bank of India Commercial and International Bank Ltd (SBICI) with its parent bank SBI . SBICI, with two branches, is a wholly owned subsidiary of State Bank of India (SBI) and functions as a private sector bank offering an array of financial products and services. "It's performance over the period of its existence has not been consistent. It has not paid any dividend since its inception...In the overall analysis, continuation of SBICI in its present form would not create a substantial organisation with a separate niche," Information and Broadcasting, Ambika Soni told reporters after a Cabinet meeting here. So also as an independent bank, SBICI has had to maintain a full-fledged, elaborate administrative setup to conform to regulatory requirements, she said, adding, the cost of maintaining such a structure is disproportionate to the level of operations of the SBICI. The proposed merger will help in maintaining the administrative structure of SBICI as both its branches in Mumbai will be easily absorbed in the operations of the parent entity, she said. While no present beneficiary of its parent SBI would be affected, the number of clients of SBICI will have access to the bigger network of SBI, she said. SBICI was set up in 1994 after taking over the Indian operations of the erstwhile Bank of Credit & Commerce International Ltd (BCCI), which went into liquidation in 1991. It's net worth stood at Rs 128.74 crore on the capital base of Rs 100 crore. It had total business (deposits and advances) of less than Rs 700 crore, with a return on asset of 0.49 per cent. As per RBI guidelines, the minister said, for ownership in private sector bank, the bank's capital had to be raised to Rs 300 crore. The existing business model of SBICI and the returns generated by it over the years do not justify capital infusion, she said. As of March 2011, SBICI earned a net profit of Rs 4.21 crore. The board of SBI had cleared amalgamation of SBICI with itself in 2008. SBICI's capital adequacy ratio (CAR) stood at 28.16 per cent at the end of March 2011.

DH

SC panel to preserve Kerala temple's assets

New Delhi: The Supreme Court on Thursday appointed a five-member committee to supervise the unearthing and preservation of assets of the Sree Padmanabhaswamy Temple. The committee will be headed by Director General of National Museum and will consist of representatives of the Archaeological Survey of India (ASI) and Reserve Bank of India (RBI). 

The court also asked the media not to speculate on the worth of assets of the temple before its valuation has been completed.

Marthanda Varma, the eldest member of the Travancore royal family, has said that all the treasure that has been unearthed at the Sree Padmanabhaswamy temple belongs to the presiding deity.

A seven member committee formed by the apex court has completed the stock taking of five of the six vaults of the temple. The chambers had been kept shut for the last 130 years but were finally opened on June 27, 2011 following a Supreme Court order.

IBN Live

Stubborn inflation signals administrative paralysis: Jalan

More than 20 years have gone by since India began its tryst with economic reforms. The nation is at a crossroad today with most crucial reforms stalled, slowdown in economy and stubborn inflation becoming a daily nightmare for administrators and the common man. One may attribute this mess to policy paralysis from the government’s end. In an interview with CNBC-TV18, former Governor Reserve Bank of India (RBI) Bimal Jalan said that it’s administrative inaction and not lack of policy reforms. “It is a kind of systemic failure wherein we have 100 programs for poor, but we still rank highest is poverty line, “he added.

Below is the verbatim transcript of his interview with Shereen Bhan.

Q: How worried are you? How hard is this going to impact us? Are we going to be pushed back several years on account of what we are seeing happen today?

A: As of now, one should consider the growth rate, etc. I don’t assign too much importance to 8.4%, or, 7.9% or 8.2%. These draw headlines and so on but it’s the creative energies of people generating this growth, and, I hope this will continue. However, the more important thing is in terms of public governance, say, delivery of services to the poor-we have 100 programs- and yet we rank the highest in the poverty level.

Q: What to your mind makes us most vulnerable today? And, I am not talking about the global economic environment which is increasingly volatile. I am talking about our domestic environment.

A: What makes us most vulnerable is the fact the government, per se, the government as a whole is not collective entity. The amount of voices that you hear from different centers of power is amazing. You should be asking this question systemically, this anti-defection law for example, that you can have 20 people holding the balance and if they belong to a large party they can’t defect. If they belong to a small party 3 fellows can defect and set up their own party.

Q: As the former RBI Governor what worries you the most today about where India is?

A: What worries me most about where India is, is not the growth rate, it is not the fact whether we have reforms or we don’t have reforms. What worries most about what is going on is one, governance, the administrative decisions and that we take them so late and of cousre inflation. Inflation is another issue. Why are we not able to tackle it? We are not able to tackle it because we earlier use to go back 8 months

Q: Are we going to have to learn with 6% or 7% inflation?

A: I you are going to live with 6% or 7% inflation that will be alright, then you will be living with 6% or 7% but here we don’t know where we are going. So what is happening is that the inflationary expectations have become heightened, sorry to use this sort of a language. What has happened is, that if anybody who has liquidity he would buy more.

Q: Who has failed the most in our battle against inflation?

A: I don’t want to point a finger, but what is want to say is it’s a collective effort. It’s a collective effort and collectively we have failed. You go back six months ago or eight months ago and you would recall in your programs how many times people said it would come down on its own. The great personalities, everybody said it will come down, come down in December, come down in September that is last December, last September. Now they are saying we must do something, but what is to be done nobody is quite clear.

Q: Is it India’s number one problem?

A: In economic sphere, yes.

Q: It is India’s number one problem?

A: Yes because we have been talking about it for 12 months or 18 months and if nothing happens then that means credibility of the system and the authority of the system collapses. 

Operation inflation

This refers to J Mehra’s article “We are paying the price for panic” (July 20). The piece gave a quick review of what is wrong with the policy approach to inflation and the tools that are being applied to tame it. With regard to food inflation, a long-term solution may have to look at improving and increasing production by ensuring remunerative farm gate prices, estimating in advance the state-wise requirement for consumption and increasing local production. About a year ago, the Reserve Bank of India’s (RBI’s) governor, D Subbarao, had stressed on the need for synchronising monetary and fiscal policies. He also mentioned that in a poor country like India, RBI has many responsibilities and it could not focus only on inflation. This implied that the governor expected supportive measures from those in charge of the fiscal policy. The statement should have also been seen as an indirect admission of the limitations of the central bank’s policies in an environment influenced by external compulsions. If the governor is forced to go ahead with continuous rate hikes, it only shows the helplessness of a central bank that is not getting the necessary policy support from the Centre. The problem gets compounded when experts working for different organisations and agencies take the debate to various categories of inflation, the methods of calculating inflation and how inflation (the consumer price index or wholesale price index inflation, for instance) affects different sectors and income-groups. All this confusion then gets reflected in policy formulation.

M G Warrier, Mumbai (BS)

For inclusive banking

The key stated goal of the RBI in considering granting new private sector banking licences is promoting financial inclusion as well as increasing competition. While this is a positive step for the sector as a whole as it reduces barriers to entry, it is important to understand the reasons for lack of financial inclusion to assess how this measure should be implemented in conjunction with other measures to further the cause of financial inclusion............

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Now, more customers willing to shop for banking products, McKinsey survey

Indian banking customers are now willing to shop around for products and services, says a survey on personal financial services by McKinsey. .......

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Credit growth dips rate increase may hurt more

With RBI expected to raise rates further, banks are not sure if they can pass on the rise, and this would further impact loan demand...........

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No time to pause - Mint Road and North Block have promises to keep

To pause or not to pause? That is the question the Reserve Bank of India (RBI) faces in the run-up to next week’s monetary policy statement. While professional opinion is sharply divided, and not just between the traditional monetary policy sceptics and loyalists but also across a wider spectrum of professional opinion, business opinion is united in its opposition to a rate increase at this time. Business persons in the manufacturing and services sectors, including the financial and banking sector, are urging a pause on the grounds that further hike in interest rates would have a debilitating impact on an already slowing growth rate. While the government’s macroeconomic authorities still hope to see fiscal 2011-12 deliver a growth rate of eight to 8.5 per cent, many others see growth slipping well below eight per cent. In itself, this slowdown is not serious enough to set alarm bells ringing, but it would strengthen the opinion that nothing should be done that may further slow the economy’s growth rate. On its part, the RBI laid out all its cards on the table through its mid-quarter policy statement in June when it stated that “the monetary policy stance remains firmly anti-inflationary, recognising that, in the current circumstances, some short-run deceleration in growth may be unavoidable in bringing inflation under control”. Of course, the RBI hedged its position by adding a caveat towards the end of the statement: “The extent of policy action needs to balance the adverse movements in inflation with recent global developments and their likely impact on the domestic growth trajectory.” Between then and now, global economic developments have become more worrisome. Brinkmanship in policy in major developed market economies on both sides of the Atlantic has pushed the global economy back to the precipice. Should India’s policy makers do anything that may further dampen the animal spirits of domestic enterprise at a time when the global economy offers no signs of hope? At home, the monsoon has so far been near normal but not exactly reassuring. Is it better to wait for another six weeks to figure out how the monsoon is likely to impact growth and inflation? These questions are bound to engage the attention of India’s central bankers as they sit this week to figure out what is to be done next week. On balance, however, it would seem that the market expects a 25-basis point (bp) increase in policy rates next week. It is most unlikely that the RBI would want to go against such market expectations and press pause at a time when concerns about inflation are as acute as those about a slowdown in growth. If the RBI has to err, it would prefer to err on the side of caution than bravado. A cautious approach at this time would mean staying with at least a 25-bp hike. A 50-bp hike would be tough action, and some have recommended it. But the overall mood of policy makers in Mumbai and New Delhi suggests they may shy away from such tough action. So, expect a 25-bp hike. It is obvious that monetary policy alone can no longer rein in inflation in India. The fiscal authorities at the Centre and in states must rein in fiscal and budgetary deficits. The supply side needs easing through administrative and policy reform. This will help revive the animal spirits of enterprise. Union Finance Minister Pranab Mukherjee has promised to play his part — and he must.

BS

NO TIME TO SLACKEN POLICY RATE – Ajit Ranade

Imagine the following scenario: The central bank has been trying valiantly to control inflation. It is using every trick in its books to tame the monster. Apart from frequent interest rate hikes, it makes hawkish sounds, curtails credit, and also urges the central government to cut wasteful spending, and rein in the fiscal deficit. It wants to safeguard its integrity and autonomy, especially from the government. It says that in the conduct of prudent monetary policy, undue pressure from the government or the industry is unhealthy and unwelcome. Critics and inflation hawks say that the central bank should be more bold, nay audacious. But the central bank is losing the inflation battle, thanks largely to fiscal undoing. So, what else is the governor supposed to do? Resign in protest? That’s exactly what happened in neighbouring Pakistan. The central bank governor Shahid Kardar resigned this week, saying that the bank was being impeded from discharging its mandate. The days of hyphenating with our notorious neighbour are long gone, but the similarity of the predicament of our central banks is inescapable. The Reserve Bank of India (RBI) is under pressure not just from industry and the bankers’ lobby, but also from the government to pause its rate hikes, as if RBI alone is to be blamed for the visible industrial slowdown. Despite 10 rate hikes so far, the headline inflation is stuck close to double digits, and will go up further in the coming months. The onslaught of global liquidity is not helping either. Inflation is broad-based, no longer confined to food, or attributable only to international commodity prices. Rising core inflation suggests demand pressure, which must be subdued in the short run. A growth moderation of about 1 percentage point would be a small price to pay if it gets inflation quickly below the artificial and unacceptable “new normal” of 7%. Else wage and price expectations will chase each other into an upward spiral, making it even harder to “unspiral” back later. RBI’s own surveys are pointing to a spiral in the making. India’s headline inflation is among the top three in the emerging markets globally. Hence, real rates are near zero or negative, and these alone certainly don’t dampen investment enthusiasm. In fact, borrowers should be drooling, since inflation will eat away some of their cost of borrowing.  It is true that investment spending has slowed, but that is not because of hardening interest rates alone. Sagas of scams have played a role, export optimism is dented by nervousness in euro zone and weak US data, and slowing consumer finance is affecting real estate and automobiles. But credit is still rising at 20% and consumer spending growth is still respectable. If, however, high inflation persists, as RBI has warned, it will hurt growth much more in the longer run.  This is the wrong time to slacken policy stance, since such a signal damages credibility of RBI’s commitment to low inflation. In any case, the inflation battle cannot be won without close coordination and alignment of fiscal and monetary policy. The fiscal authorities are showing no signs of restraint, so RBI’s hawkish determination needs to redouble. The International Monetary Fund too has advised in its recent World Economic Outlook, that policy tightening ought to continue. It also calls for rebuilding fiscal room. Our fiscal spenders need to wake up, but thankfully unlike Pakistan, the RBI governor doesn’t need to contemplate resignation to make his point. 

Ajit Ranade is chief economist, Aditya Birla Group. These are his personal views

Not given up on reforms: Pranab

FM pegs 2011-12 growth at 8.6 per cent, expects inflation to fall to 6-7 per cent by end of the financial year. As the UPA government draws flak on "policy paralysis", finance minister Pranab Mukherjee says this ignores much of the ruling coalition’s work. He stresses efforts to address various issues, carrying forward reforms, addressing issues like black money, creating a conducive environment for investment and engaging with civil society members on their concerns. Interacting with economic journalists, he said a review of the nine per cent growth projections made in the Economic Survey for 2011-12 could only be made after the first quarter GDP figures are out by August 30. The background note given by his ministry pegged the growth at 8.6 per cent, slightly higher than the 8.5 per cent achieved during 2010-11. He said though food inflation is high, it was substantially down at over eight per cent in June this year from over 20 per cent in February 2010. By the end of 2011-12, he believed overall inflation would decline to a six-seven per cent range from 9.44 per cent in June. Mukherjee interacted with journalists on a wide array of subjects, in the wake of Prime Minister Manmohan Singh’s meeting with senior journalists last month to address the impression that he was “ in hiding”. Excerpts from the FM’s observations on various issues:

ON CHARGES OF POLICY PARALYSIS:

“There is a sort of cynicism that we are getting. You are talking of perception of policy paralysis. One shall have to keep in mind that we are not living in an isolated world. We are part of a global development. Therefore, when you look at the recovery process of America, there is renewed weakness as reflected in their retail sales and housing and labour markets. Similarly, the Chinese manufacturing industry expanded in June at the slowest pace in four months. The purchasing managers index dropped to 57 from 61.9. You are all fully aware of slowdown in Europe. Only France and Germany (are growing); the recovery of others are not strong enough. In that context, one should look at our performance. “It is taking long to take a call on entry of more players in the banking space. But I will not call it a policy paralysis. RBI (the Reserve Bank) will issue final guidelines and then licences would be issued.

ON BLACK MONEY

“I cannot make comments on the judgement of a court (Supreme Court). Only the court can make comments. So, we have filed an interim application. Let us see what is the outcome. So much talk has been made on black money. There is no denial that there has been a problem... With about 87 countries, we have initiated negotiations on a double taxation avoidance agreement, tax information exchange agreements. With 57 countries, negotiations have been completed; they are in progress with 29 others. “We signed an agreement with Switzerland in 2010. Their legislature should clear it by September-October.

ON GROWTH

“It (review of growth, pegged at nine per cent in the Economic Survey for this financial year) will always happen during the middle of the year. There is uncertainty in the global economy. There is instability in the global economic recovery process. Therefore, we cannot be insulated from the adverse impact of that uncertainty, to a certain extent. “But you don’t gain anything by saying that there would be no growth, there would be slowdown in the growth without being backed by a trend in at least the first quarter. Exports are growing high, despite uncertainty in Europe. Diversification of exports has taken place. We shall have to analyse these things on the basis of hard facts. It would be possible to do after obtaining the first quarter figures and looking at the trend.

ON INFLATION:

“There is no doubt that high inflation is continuing. But it is equally true that food inflation has come down from 22 per cent to a little over eight per cent, which is also not acceptable. Therefore, whenever I comment, I say that we should take it in a little larger canvas. You have to keep in mind two reasons. To tackle the problem of the impact of the global financial crisis, we had also to go for huge fiscal expansion. “During that period, RBI cooperated by adjusting rates. This has an impact on the demand side of the money. Almost three per cent of GDP was injected as a fiscal stimulus package — Rs 1,86,000 crore. That not only caused huge fiscal deficit, it also spurred the demand side. “On the agriculture side, at some point of time sugar prices were high, then they moderated. Pulses prices were very high last year; this year, pulses’ production increased substantially. Last year, there was 15 million tonnes less kharif production and that also had a delayed impact. These reasons are to be addressed. My assessment is at the end of the year, by March, overall inflation should be anywhere between six and seven per cent, but in between, there would be some fluctuations. By the end of the monsoon, moderation will begin.

ON REFORMS

“There is an impression that I have given up… But the series of major enactments that we have … MMDR (Mines and Minerals (Development and Regulation) Act, Food Security Bill, which we have given more or less a final shape. But, there is a process. We cannot overstep the process. In the last budget session, we had the banking amendment bill, insurance amendment bill; all these are in different stages of consideration. “Legislations have their own time. The basic fact is that the ruling party does not have a clear absolute majority. In running a coalition government, partners will have to agree with the proposals or the reforms agenda. If they do not agree, if they are not made agreeable, legislative support will not be available. It is as simple as that. The ground reality is also to be admitted, when we sit in the government, we take one position; when we sit in the opposition, we take a different position. This sometimes causes problems. PFRDA (the pensions bill structure, now held up) was conceived during the NDA government. On GST (goods and services tax, also stymied), the BJP manifesto had even indicated the rate, 12 per cent.

ON DISINVESTMENT & FISCAL DEFICIT

“I am confident I will be able to get this Rs 40,000 crore (budgeted provision for divestment proceeds). However, I do not roll out a list of the companies, because I do not want to create a situation where the market will be flat. Reining in the fiscal deficit (to 4.6 per cent) is difficult, but the target will be met.

ON EXTENSION TO RBI GOVERNOR

“We have not decided yet. He (D Subbarao) is a good man.

ON LAND ACQUISITION BILL

“So far as this bill is concerned, this is in the final stage. Perhaps it may be introduced in this (monsoon) session. On non-state actors’ taking active role because of governance deficit “Everyone has to play his assigned role. If we fail to do that, then some distortions start coming. Now, what is expected that legislators will legislate, they will debate, they will argue on policies. That is the normal expectation. But if we find that day after day, legislators, instead of doing their normal functioning, are obstructing or disrupting, then questions come to the mind of the common people.

ON GST

“Anyway, it is their (Empowered Committee of State Finance Ministers) job, because it is their association. My role is to provide a helping hand. So, they are to decide. Sushil Modi (Bihar’s finance minister, a BJP member) has been chosen (the committee’s chairman). I hope his leadership will take the steps forward. And, (if) certain hurdles we are able to overcome. Unless there is a consensus, a two-third majority will not be possible (for) the Constitution amendment bill (to roll out GST). So, the timeframe is difficult to say. We’re trying to synchronise with the DTC (Direct Taxes Code, slated to be implemented from April 1, 2012), but that may be difficult

BS

Inflation to remain high till December, says Finance Ministry

The common man will get no respite from rising prices for another six months, with the government today saying that inflation, currently hovering above 9 per cent, will continue to remain high till December.......

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Over Rs 41 lakh fake currency seized in AP this year

Hyderabad : With fake currency of face value of over Rs 41 lakh seized from different parts of Andhra Pradesh, including state capital, during this year so far, senior officials today resolved to coordinate in an effective manner to counter the menace. At a meeting of State Level Committee for detection/ seizures of counterfeit notes, senior officials of RBI, IB, Economic Offences Wing, NIA and Hyderabad City Police discussed recent trends of circulation of fake currency in Andhra Pradesh and other parts of the country and resolved to coordinate by way of sharing data strategically to deal with the menace of fake currency notes. The meeting was informed that there was increased circulation of fake currency in the form of high value currency of Rs 500 denomination in Hyderabad, West Godavari, East Godavari, Vijayawada city and Kadapa. Police seized counterfeit currency of face value of Rs 41,85,540 till May this year and arrested as many as 85 people including many locals who were previously indulged in printing fake currency notes in the state, a senior officer said. Strategies were worked out to counter fake currency menace in high prone areas like Hyderabad, Nalgonda, West Godavari, East Godavari, Visakhapatnam city and Guntur, he said. Most of the fake currency is manufactured in one place and distributed to various places through different persons.It is also noticed that some of the fake notes are high quality notes which are pumped into India from other agencies through Malda district of West Bengal by air, sea and train routes, and the measures to curb them were discussed, Director General (Law and Order) M Ratan said. The Committee also discussed various issues requiring coordination among various agencies relating to lodging of FIRs, investigation in cases and measures reviewed to curb the menace of circulation of forged notes, he added.

IBN Live

Go Easy on Policy Rate Hikes

Bankers reportedly want a pause in the relentless rate hikes initiated by the Reserve Bank of India in recent months, with the policy objective of indicating higher interest rates and dearer cost of funds so as to arrest rising prices. They seem to face decelerating demand for credit, after the central bank has revised its key policy rates for lending and accepting deposits from commercial banks, as many as seven times in the past year. It is true that the RBI’s policy rate for providing liquidity to the system remains below the wholesale price index. But it is also a fact that the continuing price spiral has much to do with supply shocks such as rising crude oil and commodity prices, and buoyant prices of superior foods due to bottlenecks preventing stepped up supply in the face of heightened demand. Given that inflation in manufactures and attendant economic activity is more subdued, the continuing rate hikes across the board can well be questioned, although all indications are that the RBI would in the next several months go slow in the sheer pace of tightening monetary policy. To tackle inflation what’s certainly required is renewed policy attention, but in tandem we ought also to keep tab of credit offtake and the related output gap in the system and take proactive action. Given the panoply of rigidities on the ground, a lower than warranted output gap in goods and services can well rev up the price spiral and defeat the policy purpose of bringing down the inflation rate. The point is that on the issue of monetary policy design, we do need to aim for a nuanced approach when it comes to inflation and growth. In parallel, the pressing policy need is to probe the nonmonetary factors fuelling inflation such as inadequate cold chains, warehousing, and logistics coming in the way of much increased supply and consequent easier prices of protein-rich food articles. The point remains that even as we belatedly attempt to shift policy attention away from cereals, in tandem we need to be wary of the ceaseless use of direct monetary policy tools in the attempt to bring down the overall trend in prices. There seems also the need to re-examine the very conduct of monetary policy here, and compare and contrast it with the trends in the other major economies. For an economy like ours undergoing structural change and developing increasingly sophisticated markets, it would make sense to rely more on indirect controls in shaping monetary and credit policies. The transmission of monetary policy can be made more effective with greater financial intermediation and the better channelling of saving and investment. Abroad, in the mature markets, the fact is that monetary policy making is quite different today — and so is monetary economics — than say two decades ago, the trend has been apparent for over a decade now and precludes the recent financial crisis. The demand for money is far less stressed both for policy purposes and in the formal discourse, given that apart from banks, thriving bond and equity markets, there’s now a huge corpus of funds available with mutual funds, pension funds and insurance companies in the high-income economies. The financial development abroad has its flip side in runaway credit availability and over consumption, and the 2007-09 financial crisis homegrown in the US was essentially due to misplaced bullishness on new-fangled products like mortgage-backed securities even in the face of falling house prices and rising payment default. Be that as it may, the thriving market for single-name securities like conventional bonds, equities etc in the mature markets, to differentiate from the dicey structured products like mortgage-backed securities, has lead to a complete rethink in monetary economics and policy. Key central banks abroad no longer, say, target money supply. For years now, the workhorse model of the IS-LM framework used by central banks for policy purposes has been overhauled. The aggregate demand curve or IS remains in use for policy purposes, which relates the current output level to expected future production. There’s also the aggregate supply curve relating to current inflation and expected future inflation in the standard two-equation models of recent vintage. But the LM curve denoting the equilibrium of money demand and supply, which was a much used analytical tool for decades has been well neigh dropped in policy-oriented discussions, due to the marked development of financial markets oversees. It has led to proffering of policy rules like the Taylor rule, and calls to equate the key central bank policy rate with the GDP growth rate, so as to cool supposed overheating. Note that afew years ago RBI did peg its repo rate, the rate at which it provides liquidity to banks, at 9%, when the GDP growth rate was 9% as well. But the overall environment is different now; in any case we need to boost institutional development, intermediation and financial markets and de-emphasise direct controls, both in the monetary policy setting and otherwise.

ET

RBI flays banks in MP

After coming down heavily on bankers in the state level bankers committee meeting here Reserve Bank of India today said technology in banking system is new and it would take time for bankers to function properly. Bankers in the state have performed very poorly in certain sectors like financial inclusion, distribution of kisan credit cards and education loans besides other social schemes. Speaking to Business Standard, an RBI official said, “Bankers are assured of their salaries and they are lethargic in doing legitimate business. NBFCs, moneylenders and chit-fund are doing business because bankers have become vidharmi from their dharma (religion) of lending the money. Why bankers should fix a target of lending? Do they stop deposits if it is 100 per cent achieved? But it is not the only reason, technology is new for many bankers and it would take some time for the bankers to get used to the system, this scene is all over Madhya Pradesh and other states too.” Bankers have a very poor performance in certain sectors like financial inclusion, education loan and other social security schemes. On state government's complaint of low disbursement of education loans to deserving poor candidates, Chakrabarty warned the bankers that it was their collective responsibility to ensure quality education to deserving students. "If you ensure loans to deserving poor, only then the society will have a future. They must understand." A number of banks like Andhra Bank, Laxmi Vilas Bank, Kotak Mahindra Bank, Karur Vysya Bank and South Indian Bank figured with zero per cent achievement in the performance parameters under agriculture credit, MSE credit, other priority sector credit and total priority sector credit. "I will put up the matter to the chairmen of the banks if they do not improve," said Chakrabarty. State principal secretary finance GP Singhal demanded immediate need to look into the decreasing performance of the bank in the education loan. As against the target of 150% during financial year 2010-11 the bankers achieved only 58% of the target in education loan.

BS

Neco's eco contribution to city

NAGPUR: A few years ago, the avenue between GPO square to Reserve Bank of India (RBI) square up to Shri Mohini Complex in west Nagpur area was called 'Palm Road' because there were several palm trees located on both sides of the road. Over time, the trees vanished but the name stuck. Now, the entire stretch will regain its lost glory of palm trees as the Neco group, one of the biggest industrial groups based in the city, has started plantation of various types of palm tress, especially royal palm, date palm, fish tale palm and champagne palm right on the dividers of GPO square to RBI square while another private agency Raisoni Group has planted similar trees on a stretch from RBI square to Shri Mohini Complex. Along with tree plantation drive, Neco group has also started developing landscapes on 14 main roads in west Nagpur, a senior NMC official said.  In a bid to make city look beautiful and create awareness about environment, Neco Group has recently installed a metallic bird figure of Oriental Honey Buzzard at GPO square. The bird has been declared 'Bird of Nagpur' during the bird race held in January 2011.  The stretches to be maintained by Neco Group are RBI square to Ladies Club square, Bole Petrol pump to High Court (East High Court road), both sides of Bole petrol pump to GPO square, Law College square to Japanese Garden (West High Court Road), RBI quarters square to MLA Hostel to Union Bank square, Ramgiri to Y-Point, Hingna Road to Ring Road junction, Hingna Road to Jaitala road, Road in front of collector's office, Law College square to Ravi Nagar (Amravati Road), Ram Nagar square and Maharajbagh square to St Ursula school (Tagore road). The company will maintain plantation and landscapings on dividers and traffic islands for next five years and against it will put up signboard indicating its contribution every 50 metres on these roads, the official added.

TOI

Asset reconstruction mirage

The Reserve Bank of India's disquiet over the performance or the lack of it of India's first asset reconstruction company ARCIL is only an official and hence more authentic criticism, as it were, of the seemingly impossible business of dealing in impaired financial assets — skeptics were acutely aware of the pitfalls inherent in the business, in fact of the futility of being in that business in the first place. ...

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Speak Asia continues with its ‘golmaal’ answers

....Disposing the petition filed by Speak Asia, the High Court said, "The bank (RBI) is legitimately entitled to protect the integrity of the financial set up, pending an investigation. Neither an investigation nor the directions issued by the Reserve Bank to facilitate it should be obstructed or curtailed. The bank has in our view acted within its statutory power to caution against remittances abroad in the case at hand." .......

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GOVERNOR'S TENURE

We are living in very difficult times and there is a great need for continuity in the positions of policymakers. The RBI Governor will complete his three-year term in September.  It has been a difficult period for him and the economy right from the beginning and he has earned plaudits for his management both from within the country and from international institutions. In an unprecedented gesture, three distinguished ex-Governors are reported to have appealed to government to keep him in the post for another term. Since the 1980s, the central bank has followed a convention of filling the four Deputy Governor posts with an economist, banker and a member each of RBI staff and the IAS. Whenever the Governor is from the IAS, the quota for that service is released for the benefit of the RBI staff. Recently, the RBI staff got a second DG from their ranks. The government might have taken a decision in principle to extend the term of the Governor, who is from the IAS. There seems to be no other contender from that service as of now.

HBL