RBI seen easing tone, not rates, as economy falters

The best that investors can hope for from the Reserve Bank of India (RBI) on Friday are measures to improve market liquidity and an acknowledgement that economic conditions are worsening. The RBI is not expected to draw a line in the sand to defend the rupee, which hit a record low on Thursday, and rate cuts are out of the question as inflation remains above 9 percent. Dovish talk at its mid-quarter policy review would fuel expectations that the central bank accelerates moves to begin easing monetary policy after raising interest rates 13 times since March 2010, most recently in October. However, the tumbling rupee, which hit a record low on Thursday at 54.30 before central bank intervention pulled it back, puts upward pressure on import prices and complicates inflation management task, traders said. The rupee is down more than 18 percent from its July peak. "Quite clearly, weaker rupee is creating its own damage on the inflation front and on growth, (which) keeps the central bank that much further away from easing rates," said Shubhada Rao, economist at Yes Bank in Mumbai.Hopes that a worsening growth outlook might push forward the central bank's move to begin easing monetary policy have run up against the uncertainty caused by the plunge in the rupee, which has caught policymakers off-guard. The inflation picture, meanwhile, is mixed. Food inflation fell to a nearly four-year low of 4.35 percent in the year to December 3, data on Thursday showed. However, manufacturing inflation rose in November from the previous month, helping keep wholesale price index inflation above 9 percent for the 12the straight month. Mahindra & Mahindra Ltd, India's largest maker of utility vehicles, unveiled a price rise on Thursday. The fall in the rupee has exacerbated poor investor sentiment, with Indian stocks down nearly 23 percent this year, and the market will be looking to RBI Governor Duvvuri Subbarao for reassurance, even if his options are limited given the need to fund a widening current account deficit. The RBI steps in to smooth volatility but is otherwise officially agnostic about the rupee's level versus the dollar. "They will not, obviously, target a rupee level, but how do they manage the concerns emanating from a weaker rupee? That will be the question," Rao said. The central bank may also lay out more measures to ease tight market liquidity through open market operations (OMOs). In the past three weeks the RBI has injected more than 240 billion rupees into the banking system through bond buybacks. "I think he might announce the quantum of OMOs that the RBI might do until February or March," said Harish Aggarwal, a dealer with First Rand Bank in Mumbai. The RBI has kept banking system cash tight to help fight inflation and has said it is comfortable with a deficit of about 600 billion rupees. With a deficit now at about 1 trillion rupees, Aggarwal said he expects a further 300 billion-500 billion rupees in bond buybacks by March. These are troubled times for Asia's third-largest economy. Data showed on Monday that India's industrial output slumped more than 5 percent in October from a year earlier, far worse than expected and the first drop in more than two years, with capital goods output down 25.5 percent. Overall economic growth slowed to 6.9 percent in the September quarter, its weakest in two years, and some economists expect India to struggle to reach 7 percent growth in the fiscal year that ends in March 2012. The government had been targeting 9 percent earlier this year. India's central bank has been criticised for acting too late in taking the fight to inflation despite the series of rate increases since early 2010. In October, the RBI indicated its tightening may be coming to an end even though inflation remains well above its comfort zone "The central bank's burden right now remains to establish its credibility with respect to fighting inflation," said Taimur Baig, economist at Deutsche Bank in Singapore, who like most analysts expects the RBI to keep interest rates and the cash reserve ratio steady on Friday. The central bank has lifted the policy repo rate to a three-year high of 8.5 percent from 4.75 percent. That has helped to brake economic activity, as has the global downturn and poor local sentiment driven by policy gridlock in a government weakened by corruption scandals. While inflation prevents the RBI from becoming more accommodative to stimulate growth, lower-than-targeted tax receipts and a worsening fiscal outlook curtail the government's room to maneuver to prop up growth."Options for fiscal steps as well as monetary measures are increasingly limited," Finance Minister Pranab Mukherjee said on Thursday.

Reuters

Policy Review | Central bank’s focus may shift to growth

......... Much weaker growth will prompt RBI to ease monetary policy, our expectation of the sequence of easing remains first injecting liquidity through open market operations (which RBI has been doing), then cut the reserve requirement ratio of banks in January, followed by repo rate cuts in March 2012,”.....

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Growth must take centre stage now, says finance ministry

Recent slide in inflation no consolation amid exceptional shrinkage in industrial growth

Growth seems set to return as the key mantra tomorrow when the government will come out with its mid-quarter review of the Reserve Bank of India’s monetary policy, sources said on Thursday, sensing the “underlying thinking” in the finance ministry. A senior official with the ministry said growth would “now take the centre-stage” with a cool-down in prices. “Even so, inflation still remains a matter of concern,” he told Business Standard. Only yesterday had RBI governor D Subbarao met Finance Minister Pranab Mukherjee. The central bank’s head was reportedly briefed about the ministry’s view on the matter. Another official said on Thursday that the administrative circles did now expect a major change in the RBI’s stance immediately. That apart, the RBI governor “may make” a move in the direction tomorrow, he claimed. The review announcement comes close on the heels of news breaking that the October industrial growth registered a negative 5.1 per cent growth — the lowest figure in more than two years. This has raised serious concerns across the board, triggering fears of a re-run of the gloomy economic scenario after December 2008, when a global financial crisis led to contraction in industrial production for seven months in a row. Further, economic growth fell to nine-quarter low of 6.9 per cent in the second quarter of this fiscal. With 7.7 per cent growth in the first quarter, this has delivered 7.3 per cent growth in the first half. The finance ministry hoped the second half would witness a slight recovery compared to first, so that overall growth this fiscal would be 7.5 per cent. However, in the current scenario, experts feel the growth will be below seven per cent in 2011-12. The overall inflation fell to a one-year low of 9.1 per cent in November from 9.73 per cent in October. But, inflation has been over nine per cent for a year now.Food inflation, on the other hand, has been coming down quite fast. It stood at just 4.35 per cent for the week ended December 3. Chief economic adviser Kaushik Basu pegged food inflation to fall below 3 per cent in a month’s time. Analysts say RBI’s move of raising policy rates for 13 times since March 2010 has not pulled overall inflation to below 9 per cent. Food inflation has fallen because of supply issues and base effect. As such, RBI should not increase any rate further, as it is not killing inflation but growth.

BS

Inflation would ease further: R Gopalan, Economic Affairs Secretary

........ The government today expressed hope that price situation would ease further and said moderation in food inflation will give some space to RBI to address the worrying level of economic growth.............

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Make it a two-way bet

As a regulator of the forex market, the RBI must be seen to be in control

The rupee has been falling for months, losing 17.3 per cent of its value vis-a-vis the dollar since September. Many observers have come to believe that there is little reason to suppose that the rupee will recover before as late as March next year. The Reserve Bank of India (RBI), meanwhile, insists its mandate is merely to minimise volatility in the foreign exchange market, and not to defend the value of the rupee. While sensible in theory, in practice this is clearly beginning to show some flaws. A serious question needs to be raised: does this continuing precipitous decline reflect a sense taking hold in global markets that the rupee, the worst-performing currency in Asia this year, is a safe one-way bet? The rupee market is still thin, and not invulnerable to speculative action. In the presence of one-way bets, speculation can create a vicious cycle, making a falling rupee a self-fulfilling prophecy. The reason the RBI was given the mandate to manage volatility was that while the decision was taken, for the best of reasons, to allow the rupee to float, it was nevertheless known that a key purpose of regulation is to manage the impact that speculation can have on the real economy. That producers are now feeling the pinch is obvious; while net exporters, like information technology firms, are happy, an extensive array of companies with foreign-currency borrowing are being hit, as are those globalised companies that import a good deal of their inputs. No regulator should act merely to insulate market participants from the negative consequences of a business decision. But the purpose of regulation, in this case, is to ensure that markets function properly — and for financial markets, that they do not dash off uncontrolled by a concern for fundamentals. Yet, in its attitude to the rupee fall, the RBI has chosen to appear weak, a cardinal sin for a regulator. The belief is becoming universal that it could not affect or arrest a slide of significant proportions, even if it wished to; this further empowers speculators. Statements like that from the chairman of the Prime Minister’s Economic Advisory Council, C Rangarajan, indicating that the RBI is helpless, add to the damage. The point of a well-functioning financial market is that participants should never be faced with a one-way bet. There is little chance, then, of prices – in this case, the rupee exchange rate – finding their true value. The RBI stayed out of the foreign exchange market for nine months, leading participants to believe that it was incapable of intervening. Yet unless it does so occasionally, people will not be properly wary of taking positions, and insufficiently thoughtful about the positions they take. Like inflation targeting, regulating a floating currency is all about managing expectations. The RBI cannot manage expectations if it appears helpless. The game is psychological; it must be prepared to play the game well. And to play the game well, it has to show that it’s willing to play the cards it has.

BS

RBI may not hike rates as growth slows

...."The RBI should reduce interest rates to gradually reverse the impact of the 13 interest rate hikes it has undertaken over the last two years,"........

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Policy pundits clueless on inflation

.At a recent seminar on September 21, on inflation, Kaushik Basu, Chief Economic Adviser in the Department of Economic Affairs (DEA), apparently agreed with the comment of Govinda Rao, (Director of NIPFP and a member of the Prime Minister's Economic Advisory Council) that “the country's economic managers have not been able to fully grasp the processes underlying the persistence of high inflation.” Such a conclusion by the two senior policy makers is deeply disturbing. ..........

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Basix, Swaws seek RBI approval for debt recast by banks

..... Both Basix and Swaws want a special dispensation from the Reserve Bank of India (RBI) that can enable the banks to restructure loans without categorizing them as substandard assets, according to two persons familiar with the development..................

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The Great India Microfinance Credit Bureau: Questions that beg an answer…

.......... I would also like the DFIs like SIDBI, commercial banks, regulators like RBI and multi-laterals like IFC to come out and vouch safe the integrity and quality of the data being supplied to the credit bureau by Indian MFIs—in terms of data integrity, internal consistency and physical compatibility with client existence and records. Without question, they must make themselves accountable and responsible for the quality and integrity of such data, given the implications for financial inclusion and inclusive growth. ..............

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R.I.P one dollar coins

Thank you sirs, we can't afford you. Henceforth, the U.S. Mint will not produce one dollar coins bearing the images of former Presidents who have passed into the pages of history. A one dollar coin not produced is a dollar saved for the Obama Administration, which finds itself in a tough economic situation. In the face of poor demand, 1.4 billion surplus one dollar coins are stacked in the vaults of the Federal Reserve. Also, 1.6 million one dollar coins are scheduled to be minted over the next five years. The move to suspend production of one dollar coins is expected to save at least $50 million in production and storage cost. That is a huge saving in a downturn environment. For a recession-hit America, every one dollar coin is a pain on the economy, it appears.

HBL

Debit, credit card uses hit a new high

...Indians shopped for Rs 8,997 crore worth of goods and services using their credit card in October this year, compared with Rs 6,760 crore spent in October last year, an increase of 33 per cent, at a time when the number of outstanding credit cards fell to 1.76 crore in October 2011, against 1.82 crore cards in October last year, according to data available with the Reserve Bank of India (RBI). ...........

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'Banks not that transparent on loan pricing'

Chakrabarty Says Customers Must Approach Banking Ombudsman Over Rate Anomalies

NEW DELHI: RBI Deputy Governor K C Chakrabarty is known to speak his mind. In a freewheeling chat with TOI recently, he spoke on a host of issues ranging from transparency in interest rates to charges levied by banks and corporate governance issues. Excerpts:
Moody's has expressed concerns over the health of Indian banks. Do you agree with it?
We may or may not agree with them. Overall, the economy has slowed down and you cannot say that banks will not be affected adversely. We feel that banks will be able to overcome (the stress) and banks also say so. But banks will have to work hard, they must take corrective measures and they must be cautious so that they are able to withstand the pressure. The more you diversify, spread your risks, go for inclusion, you will be better off.
What should banks do?
One of the first things that they need to do is, improve the quality of management; they must improve the quality of asset management, they must control expenses, avoid unnecessary risk taking and they must see to it that they do not have unduly high exposure to sectors those are under stress. They should improve corporate governance. In terms of sectors, there is concern on power, aviation... Power and aviation are concerns. But these are all necessary vital sectors. We need more flights, more airports because the country needs them. We should collectively find out how we should deal with them. It does not mean that banks should not finance them. Banks being the provider of finance need to influence a company's decision in improving its performance. Power companies need to build efficiency - both generation and distribution costs need to come down and even transmission loss should be reduced. Banks can say that they will not provide fresh funds till power companies build in efficiencies. Wherever required, tariffs should go up. But we can't let the power sector close down.
There are comparisons between now and 2008 and there are demands for a special dispensation for loan restructuring...
This is a very controversial thing. The issue is whether we are out of 2008 crisis or if it is the same crisis? The second thing is, in 2008, the crisis started from banking sector and spread to the real sector. This time, it is a sovereign crisis that is spilling over to banks. We have to contain this spillover. If it spills over to the real sector we all will suffer. Unfortunately, central banks and governments are not in a position to provide the same kind of relief that was possible in 2008, hence need for more collective efforts.
In the past you had discussed the issue of pricing of loans and transmission of interest rate by banks...
What we are saying is, increase interest rates if the cost of funds go up. If one is saying that cost of funds has increased by one percentage point and one has increased base rates by two percentage points but average yield on advances has increased by only one percentage point. That means benefit in cost has been not passed on in an equitable manner. One may say that cost of operation has gone up, that is, inefficiency has gone up, we need to avoid that. Pricing has to be transparent and non-discriminatory. If petrol price goes up, everyone pays a higher price. This is what we want.
Do banks have the ability to do that? They say that they don't have data.
Banks cannot say this as the very meaning of having licence to do banking business is the ability to assess and price the risk. Anyhow, we are appointing a committee to examine the issue in totality.
There are also concerns about usurious charges and they have a huge interest margin. What are your comments?
I find some banks have prime lending rate of 21% and base rate is 12%. That is a huge gap. What kind of risk we are taking when we are lending to someone at 21%? If the risk is too high, don't lend to them. It does not make sense for the good borrowers to pay for that and in the process they also suffer. The second is the economy, which will suffer.
But didn't banks jack up PLRs to get customers to move to base rate, which was expected to usher in transparency?
If that was the case, everyone should have moved to base rate by now. We have no evidence on whether banks are doing it in a scientific manner. The committee will look at all these aspects and if there is a need, we will tighten the guidelines. What we are saying is that in the matter of pricing, banks are not that transparent, especially for small customers, and definitely they are not non-discriminatory.
Old customers have to pay higher rates than a new customer who walks into a branch now. Is that fair?
First, we have to conclusively prove that this is happening. If it is the case and if a customer complains, Banking Ombudsman will uphold the customer complaint and ask banks to rectify.
After a meeting with ombudsman, you had asked banks to come up with a fixed rate product. While there are products I will have to pay 15% for a fixed rate home loan, which does not make sense. What are you doing about this?
I have seen one bank offering a home loan at 11% fixed rate. We don't want to micro manage banks on pricing but in the interest of customers and in the interest of banks, there must be a fixed rate product because banks are better manager of risk than individuals. If the banks want to hedge their risk, they can go for interest rate swap, for which market exists.
Are you happy that banks are again offering loans where the rate is fixed for two years?
We have absolutely no problem with them. But if the objective is to deprive the existing customer the benefit of lower rates then we have objection. That is why we must give the customer a choice to exit free of cost.
Some banks levy very high penalty. For instance, if you go below the Rs 10,000 minimum balance to Rs 9,990, then they charge Rs 600-700. Is this fair?
All banks are not doing this. I am unable to understand the justification for Rs 10,000. Further, how can one charge him Rs 500 penalty if the balance goes to Rs 9,900? Banks must examine the charges and explain the reasonableness of these charges. But then a customer has to come to the Banking Ombudsman.
TOI

HOUSE CALL



RBI governor D Subbarao at Parliament House in New Delhi on Wednesday two days before the Policy meet



Regulations are essential for financial inclusion

With Reserve Bank of India stepping in to regulate NBFC-MFIs and a Microfinance Regulation Bill pending for enactment, industry experts discussed the role of regulators in achieving financial inclusion at the Microfinance India Summit in New Delhi today. Kate Mckee, Senior Advisor of the CGAP said that regulations clarify ambiguities and play a role in product diversification. “I do think it is very important to set a certain floor on the behaviour of markets and is important in building consumers confidence”, she said. Hassan representing the Central Bank of Bangladesh, pointed out the dichotomy in policy and regulation. “In Bangladesh, in addition to financial stability, we’ve included the role of promoting financial inclusion by strengthening payment system especially the mobile banking system. Similar to the RBI, we have certain targets of agricultural lending. And we do have targets to the SME sector as well. And several of these targets are done by commercial banks through MFIs.” Vijay Mahajan, Founder and Chairman of BASIX group, thinks that the RBI regulation is a very good step forward but it should not be the final point. He commented that, “It is the first time in the industry that a regulator has put down in writing that 26% interest rate is fine. The last time was 12%. To go from 12% to 26% is a huge leap.” P. N. Vasudevan, Managing Director of Equitas Microfinance India also remarked that the RBI regulations are much better than the AP government act. Therefore, it is more welcomed.

Microfinance Focus

Activist invokes RTI to find out truth behind a bank fraud pardoned by National Consumer Forum

RTI activist Sharad Phadke who successfully pursued a case of his failed ATM transaction which was not credited to his account for 65 days, has now taken up cudgels against bank frauds against small time loan takers. A report…............

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Loans disbursement by banks picks up

.......Currently, the year-on-year non-food credit growth is at 17.72 per cent. The banking system could face a liquidity crunch over the next fortnight due to outflows on account of advance tax payments by India Inc even as demand for credit is gathering pace. Given this scenario, if the RBI does not reduce the amount of cash that banks are required to park with it (cash reserve ratio), then banks could find themselves in a bind, said a banker........

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Banks must support land development to conserve arable lands: Nabard

..........banks have the responsibility to support land development to conserve arable lands which are being unutilised every year. But this has largely been ignored by the banks though the Reserve Bank of India classifies funding for purchase of agriculture land as priority sector lending...........

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Chart view: Why the RBI can’t use forex reserves to rescue the rupee

...... The fall in the rupee — it hit a new record of 53.74 against the dollar today — makes repaying those debts an even heavier burden. It also makes the Reserve Bank of India less inclined to spend the country’s forex reserves to prop up the rupee...........

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Furnish Accounting Details: RBI to ARCs

Worried about the accounting practices followed by asset reconstruction companies, the Reserve Bank of India (RBI) has asked them to furnish complete details on accounting policies, in a bid to take a closer look at the systems. The move comes as an aftermath of loopholes detected in accounting policies of the country’s largest ARC, Asset Reconstruction Co of India (Arcil). In a letter to all ARCs, the banking regulator has said: “Please inform us about practice or system followed in your company and furnish complete details of accounting policy relating to income recognition on all items such as management fee, yield on security receipts, booking of upside, interest on funded expenses, expenses incurred on behalf of trust for valuation and due diligence extra.” Earlier, the RBI had found gaps in accounting policy of Arcil and the company had to restate its profits from . 51 crore to . 3 crore for fiscal year 2010-11.  “The regulator may want all ARCs to follow standard and sound accounting practice. The collection of information could be a prelude to it,” said an official from an ARC, who did not want to be named.  The RBI’s inspection report on Arcil observed that “Arcil’s accounting practice of recognising income on accrual basis and its reversal only if the same is not realised for more than two years was not in conformity with RBI rules which require reversal of income that is due for more than 180 days.” A big part of Arcil’s income was on accrual basis. Sources from the ARC industry said even as the RBI has asked ARCs to reverse income after six months, a few ARCs continue to accrue income for three years while there are some ARCs who book income only after receiving income.  While restating profits, Arcil had said it has done so “for making an additional provision of . 71.05 crore against accrued yield on investment in senior class security receipts not realised till date.”  In a parallel development, the finance ministry has formed a committee to look into the different aspects of ARCs’ operations and measures that can be taken to stimulate the sector in the backdrop of few banks resorting to selling their bad loans portfolio to them.

ET

With our bucks to the wall

.........The government has allowed oil companies a facility to source their dollar requirements from the Reserve Bank of India (RBI). This is band-aid, it doesn't cover the hit the oil marketing companies are taking on account of the rupee's fall..............

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Soft RBI stance is okay as India is liquid now: Expert

........ People are expecting 9% or thereabouts, a good improvement compared to last month. That sets tongues wagging whether the Indian Central Bank would follow suit of other emerging markets in either CRR cut or rate cuts. The RBI would be thinking twice before doing that because of the ugly rupee number. But today, even if the RBI adopts a soft stance, that would be okay for the market because in terms of liquidity, the Indian markets are one of the most liquid markets...............

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RBI likely to prefer open mkt operations over CRR cut

Despite headline inflation falling to its lowest level in 12 months, owing to a contraction in factory output, economists said the central bank would not resort to a cut in the cash reserve ratio (CRR) when it meets to review the policy on Friday, but would opt for open market operations (OMOs) to tide over the liquidity crunch. Wholesale price index-based annual inflation rose 9.11 per cent in November, compared with 9.72 per cent in October, primarily due to the statistical impact of a higher base. Noticeably, the headline inflation for September was revised to 10 per cent from the provisional 9.72 per cent. The revision to double digits was seen after a gap of 14 months. Abheek Barua, chief economist, HDFC Bank, said, “Given today’s inflation release, it is unlikely that the Reserve Bank of India (RBI) would opt for a CRR cut when it meets this Friday for its mid-quarter review. Instead, it would focus on using tactical measures such as OMO buybacks to ease the recent drag on liquidity.” Today, banks borrowed about Rs 80,000 crore from RBI’s repo window. This is above the central bank’s comfort zone of +/- 1 per cent of net demand and time liabilities. According to RBI estimates, headline inflation would cool to seven per cent by March. Economists said RBI may not be in a hurry to change its stance from an anti-inflationary one to a pro-growth one, though inflation’s current trajectory is expected to sustain. “Despite the moderation in November, inflation, especially core inflation, continues to remain significantly above RBI’s comfort level. With core inflation also coming under pressure because of rupee depreciation, we believe the anti-inflationary stance of the central bank would remain intact,” YES Bank said in a research note. “We believe OMOs would be the preferred route for RBI to alleviate the liquidity stress in the economy, rather than a cut in CRR, since CRR is essentially a monetary policy tool, not a liquidity tool.” A pro-growth stance is expected to be adopted only next month, when the central bank would meet for the third quarter policy review on January 24. “With growth slowing much more than expected and the likelihood that headline inflation could cool to seven per cent by March, the central bank is, however, likely to build in a dovish rhetoric in its monetary stance, leaving the door open for a possible CRR cut in January and a repo rate cut in the first quarter of FY13,” Barua said. Economists said RBI’s decision to adopt a pro-growth approach would be complicated, as inflation and wage expectations remained high. RBI may not adopt measures to support growth until headline inflation is close to its tolerance zone. Inflation has stayed around the double-digit mark for the last 21 months, despite a series of rate rises by RBI. The central bank has raised the key policy rate by 375 basis points since March 2010. RBI is widely expected to leave the key policy rate unchanged in Friday’s policy review. Taimur Baig and Kaushik Das, economists at Deutsche Bank, said, “In our view, significant monetary-easing measures would require another 200 basis points of disinflation, along with evidence of both a decline and stabilisation of inflation and inflation expectations. We believe unless growth and financial markets begin to deteriorate in a disorderly manner, RBI is still three to four months away from taking major easing measures”.

BS

Inflation versus rupee

.....In other words, if RBI wants to keep inflation under control, it has to start devising ways to at least slow down the fall in the rupee.........

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Urban households expect inflation to be 12.9% by Sept: RBI survey

.............The survey was conducted in July-September 2011 and covered 4,000 urban households across 12 cities for the October-December 2011 quarter and the July 2011-June 2012 period. The RBI and the government have forecast headline inflation to moderate to around 7% by March 2012.

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Rupee's tumble

....The RBI apparently thought it prudent to keep a close watch and tweak policy here and there to ease fund inflows, reserving its firepower for use should the situation deteriorate. With the macroeconomic numbers unlikely to improve in the next few months — if anything, they might worsen — the rupee appears to be really up against it...........

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Rs free fall continues, worst not over yet

.. In a poll conducted by Business Standard, a majority of respondents said the rupee would fall further at least till March, taking cues from global economic conditions and strong demand for dollar in the country............

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RBI must stay focused on how to rein in rising prices: Rangarajan

New Delhi: Even as economists say high interest rates are choking the growth momentum in the country, Prime Minister’s Economic Advisory Council chairman C Rangarajan on Wednesday said the central bank should continue to focus on controlling rising prices. “According to latest (inflation) numbers, it is still above 9%. Therefore, concerns regarding inflation cannot be taken away from the monetary authorities,” he said on the sidelines of Delhi Economics Conclave. The inflation data released on Wednesday showed that the rate has declined marginally to 9.11% in November from 9.73% in the previous month. Both the government and RBI have pegged the year-end inflation at around 7%. RBI, which has raised interest rates 13 times since March 2010, to rein in inflation, is scheduled to review the monetary policy on Friday, December 16. In the last review, it had indicated that it may take a pause in rate hike in December if inflation situation improves. Industry has maintained that RBI’s tight monetary policy regime is hurting investments and industrial production. Asked if the central bank should intervene to arrest the slide of rupee against the US dollar, Rangarajan said India can do little to check the movement in the rupee, which is driven by external factors He added, “the stated policy of RBI is to prevent volatility in foreign exchange market. I think RBI will act but it is really a call of RBI and it will depend on what is happening on market.’’ He said behaviour of the rupee, which touched an all-time low of 53.75 vis-a-vis the US dollar on Wednesday, is a reflection of current account deficit and extent of capital flows. “If there is a temporary mismatch, this will lead to pressure on capital flows, but if capital flows pick up, then what we are now seeing, can also get reversed,” he added.

FE

Immediate RBI rate cut unlikely: SBI chief

With inflation at uncomfortable levels, the Reserve Bank of India (RBI) is unlikely to opt for a rate cut in Friday’s mid-quarter monetary policy review, growth slippage notwithstanding, State Bank of India (SBI) Chairman, Pratip Chaudhuri, said today. “I do not think so (that RBI would cut rates) because food inflation has to come down significantly and steadily...at that rate (9.11 per cent WPI inflation), I don’t think RBI would take a view that inflation and inflationary expectations have been controlled,” he said at a conference on economic policies for emerging economies here. Most market participants expect RBI to hold its repo rate, the interest rate at which it lends to banks under the liquidity adjustment facility, on Friday.Chaudhuri doesn’t expect the central bank to cut the cash reserve ratio either, as the move would be seen as contradictory to its anti-inflationary stance. Many market participants expect RBI to cut the cash reserve ratio to ease the liquidity situation in the banking sector, especially due to the payment of the third tranche of advance tax by companies.

BS

There is no stopping bad news on the economic front

There is no stopping bad news on the economic front. For, if the currency woes were not enough, the wholesale price index (WPI)-based inflation came in at a very high 9.11% in November compared with street expectations. Sure, the number has fallen from 9.73% in October due to a substantial decline in food inflation to 8.54% from 11% in October but the figure remains very high. And the rupee’s 20% depreciation in this year will likely push up prices of goods that have a substantial import content, particularly fuel products that are not administratively adjusted, wrote Taimur Baig and Kaushik Das, economists with Deutsche Bank, in a note. So all eyes are now on what RBI Governor Duvvuri Subbarao will do this Friday when he announces the mid-quarter review of monetary policy. Will he be forced once again to hike policy rates or will he stand pat? “The RBI will estimate if the current inflation will sustain before making that decision,” said Rajrishi Singhal, chief economist at Dhanlaxmi Bank. Analysts believe the central bank’s aim to bring down inflation to 7% by March still looks reasonable considering the drop in prices of foodstuff and primary articles — and the fact that the statistical high base effect of last December comes into play. “Today’s inflation print makes the RBI’s case even stronger to maintain status quo on rates,” Anubhuti Sahay, economist at Standard Chartered, told Bloomberg. “Weakening growth will find space in the policy statement, but they are unlikely to completely remove inflation from their radar.”

DNA

Giving trouble currency

........It is true RBI Deputy Governor Subir Gokarn’s statement about RBI’s reserves not being sufficient to seriously defend the rupee was probably ill-advised, but that’s in the past. Indeed, the sharp fall in the rupee adds to inflationary pressures—........

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Inflation eases marginally, all eyes on RBI now

..... The latest figures may complicate matters for the Reserve Bank of India (RBI), which was expected to shift its bias towards growth from inflation in its Friday policy review as the pace of economic growth eased........

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Time to start cutting interest rates

.RBI’s system liquidity band at plus/minus 1% of banks’ funds has been breached in the past month or so. The situation is likely to worsen over this week, even if transiently, with advance tax payments by corporates, before they flow back into the system through expenditures. How best to mitigate this, though, is another story.......

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India inflation tops 9%, adds to cbank headache

Indian inflation held stubbornly above 9 percent in November, maintaining pressure on the central bank to keep interest rates steady this week, although signs of a rapidly weakening economy mean it is likely to adopt a more dovish tone. The wholesale price index (WPI), the main inflation gauge, rose 9.11 percent from a year earlier, slowing from a 9.73 percent rise in October and above the 9.04 percent increase forecast in a Reuters poll. The pull-back from October’s pace was largely due to a sharp drop in food inflation, with price pressures in manufacturing and fuel rising as a tumbling rupee pushes up import costs. “The rapid depreciation of the rupee is going to throw out of the window all the calculations on inflation, given the contribution of imported inflation to manufactured product price inflation,” said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai. The rupee is down 18.4 percent from its year-high in July and hit a fresh record low on Wednesday, undermining the central bank’s forecast for inflation to drop to 7 percent by March and making its job of shifting to a looser policy of cutting interest rates all the more tricky.  “Even though the RBI will definitely pause on rates (on Friday), the exact timing from which it would have started easing interest rates has once again turned uncertain due to the tumbling currency,” Nitsure said. Reuters.

http://www.dailytimes.com.pk/default.asp?page=2011%5C12%5C15%5Cstory_15-12-2011_pg5_28

Rupee depreciation: Are we on the same page?

That is what the Reserve Bank of India (RBI) Governor D Subbarao would like everyone to be on while discussing the sharp rupee depreciation against the US greenback. The Indian rupee has been mauled nearly 20 per cent in the last one year. And the downslide is unstoppable. The rupee closed at $52.22 on Tuesday, the second week of December 2011. Why the dramatic slide? Subbarao isn't the only one in the hot seat. ...........

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Only rapid supply increase can tame food inflation: Gokarn

Though transitory episodes of food inflation do not warrant a monetary policy response, there are strong justifications for acting in the face of more persistent ones, if the objective is to keep overall inflation in check, according to Dr Subir Gokarn, Deputy Governor, Reserve Bank of India. Quickly increasing the productivity of proteins and fruits and vegetables is the highest priority, both from the perspective of development and standards of living and from the viewpoint of monetary policy, he said at the Kale Memorial Lecture at the Gokhale Institute of Politics and Economics. “When prices are rising because demand is growing strongly while supply stagnates or fails to keep up, there is no alternative to curbing food inflation than raising supply rapidly. The current pressure on the prices of proteins and fruits and vegetables is clearly the outcome of this combination of circumstances. “However, raising productivity quickly is itself a serious challenge, given the pressures emanating from both labour costs and, over longer horizon, what appears to be a structural reduction in the absolute amount of rainfall,” explained Dr Gokarn. The RBI, in its second quarter review of its monetary policy in October, said that the inflation outlook will, among others, depend on the supply response in respect of those commodities where there are structural imbalances, particularly protein items. Therefore, concerted policy focus to generate adequate supply response in respect of items such as milk, eggs, fish, meat, pulses, oilseeds, fruits and vegetables will play a major role in shaping the behaviour of food inflation in the near term. According to Dr Gokarn, the transition from a cereal-dominated diet to a more balanced one with a greater appetite for proteins and fruits and vegetables is something that all countries have seen, and India is no exception. “It (the transition) is in full swing today and the absence of a strong supply response means that many aspiring consumers will actually be denied the opportunity to make that transition,” the deputy governor said. The Deputy Governor observed that persistent supply pressures on the economy, whether they are from food, energy, labour or any other critical input, are clearly not very good for maintaining the balance between fast growth and low inflation. “A permanent supply shock leads to lower growth and higher inflation, which could further fuel inflationary pressures through expectations. In this situation, central banks have to choose between the risk of inflation spiralling through expectations and the burden of slowing growth even further by anti-inflation policy measures,” he said. Dr Gokarn felt that an effective strategy for supply enhancement must be compatible with both the nature of the commodities and the state of the economy. “I have no doubt that such a strategy can be devised from existing knowledge and the right kinds of resources being brought together. Co-ordination will be the key,” he added.  

HBL

RBI Deputy Governor announces USD 10 million ECB for all MFIs

At the second day of the Microcredit Summit India 2011, Reserve Bank of India (RBI) Deputy Governor H R Khan announces External Commercial Borrowings (ECB) of USD 10 million for all MFIs. So far only NGO- MFI have been allowed. In his closing speech he also stressed for a multi agency approach. Banks were encouraged to lend to the microfinance sector. He stressed different strengths of different sector. He also stated that “without going into why the crisis happened, I think no crisis should be wasted. I think we have to look forward and think how to move forward.” He’s suggestion was CSR which stands for Credibility, Sustainability and Responsibility. He mentioned that this has been brought out in the Malegam report. In term of credibility, there is a need for fair prices. The loan card should be with the client and in his vernacular language. We need to eliminate abusive collection practices. Mr. Khan mentioned, “I am happy MFIN and Sa Dhan has come out with this Code of Conduct.” The crisis has taught us we need to practice sustainability in the microfinance sector. In the case of responsibility, there needs to be a distinction between making profit and profiteering. We need to eliminate multiple lending and ghost lending, he stated.

Microfinance Focus

RBI panel to discuss raising of capital by urban co-op banks

Growth prospects for banks hampered due to limited options

Mumbai, Dec. 13: The issue of getting a level-playing field for urban co-operative banks vis-à-vis commercial banks with regard to raising capital and lowering the threshold for statutory investments will be taken up at a meeting of the Reserve Bank of India's standing advisory committee next week. Currently, growth prospects for the 1,600-odd UCBs are hamstrung due to limited options for raising capital. These banks primarily depend on plough back of profits and borrowers' subscription to share capital at the time of loan disbursement, to shore up their capital. Though UCBs, which as of March-end 2011 collectively had deposits and advances aggregating Rs 2,12,031 crore and Rs 1,36,341 crore, respectively, have been allowed to issue preference shares and long-term deposits to augment their capital, both these options are not preferred. The constraint for UCBs in issuing preference shares is that they can be issued only at face value. Investment in these shares is unattractive as no exit mechanism is available for investors wanting to liquidate them. In the case of long-term deposits, the RBI's approval is required to pay back depositors even if a bank is financially sound. This is proving to be a deterrent for prospective investors. “We should be allowed to issue shares at book value. Also, to impart liquidity to co-operative bank shares, a market-making mechanism in the form of a trust can be jointly put in place by all banks so that investors have an exit opportunity,” said Mr B.V.R. Sarma, CEO, Greater Bombay Co-operative Bank. Currently, commercial banks have to invest a minimum 24 per cent of their deposits in Government Securities. These investments are required to fulfil the statutory liquidity ratio (SLR) norm. However, in the case of UCBs, this limit is set higher at 25 per cent. UCBs want at par treatment with commercial banks in this case. Further, they want the SLR limit to be suitably split into two – investment in government securities, and cash holding, investment in gold and deposits with the apex bank of a State.  They are also seeking RBI's permission to tap its liquidity adjustment facility to tide over temporary liquidity mismatches. “Many small banks do not have the expertise to trade in Government Securities. In a rising interest rate regime, these banks end up booking losses or making market-to-market provisioning on the balance sheet date. “To overcome this, they should be permitted to hold a portion of their deposits in cash, invest in gold and park deposits with the apex bank of a State,” said Mr Sarma. To overcome short-term liquidity mismatches, UCBs want to leverage their non-SLR investments (or investment in corporate bonds) by offering them as collateral in repo transactions with commercial banks. Currently, every branch that a co-operative bank opens has to be backed up by a networth of Rs 2 crore each. The UCBs want the RBI to do away with this stringent norm and take into account their overall financial health in granting future branch licences. Currently, UCBs cannot lend more than Rs 10 lakh against the pledge of shares. They want this limit to be doubled. These banks want RBI to clearly define bill discounting under letter of credit as a permissible banking activity.“There is some confusion on bill discounting under letter of credit as some RBI inspection officials allow it while others don't,” said a senior UCB official.

HBL

Govt banks get nod to hire 11 more EDs

State-run banks, which are struggling to find talent in the face of a large number of retirements in the sector, may get a boost with the government allowing the appointment of 11 additional executive directors (EDs) for human resources (HR) and technology. The ministry has already issued directives to public sector banks (PSBs) to this effect, according to two persons familiar with the development. One of them is an official of the finance ministry and the other a banking industry official. This follows recommendations submitted by an expert committee headed by former Bank of Baroda chairman Anil K. Khandelwal, which had made critical recommendations to improve manpower management at PSBs. The posts are of the rank of director (HR) in oil and gas public sector units (PSUs) such as Oil and Natural Gas Corp. Ltd and Indian Oil Corp. Ltd. Among the recommendations of Khandelwal committee were the induction of HR specialists, the appointment of an executive director for HR, 50% direct recruitment of officers against 25% now and compulsory three-year rural service for new recruits. The committee had also said that senior officers in PSBs should be appraised on the basis of feedback from colleagues, subordinates and customers. According to the ministry official, the government has sanctioned the appointment of six additional EDs in the large state-run banks and five in small-sized banks. Presently, large PSBs can have two EDs and smaller banks generally have one ED. These banks are Bank of Baroda, Bank of India, Union Bank of India, Punjab National Bank, Canary Bank, Central Bank of India, Dena Bank, Vijaya Bank, Bank of Maharashtra, United Bank of India and Punjab and Sind Bank. The move assumes significance as PSBs are in urgent need of HR reforms in the face of a severe shortage of skilled executives and increasing attrition. India currently has 27 public sector banks, accounting for more than 70% of the country’s Rs.65 trillion banking sector. These banks together employ around 700,000 people. Out of this, more than 100,000 are scheduled to retire over the next five years. “Appointment of a dedicated ED for HR is essential for PSBs as, in the absence of focused efforts, the industry will not be able to cope with the large number of retirements,” said a senior public sector bank official, who is set to be promoted as an ED. He did not want to be named. Attrition has been rising in recent years as younger executives are keen to take up more-rewarding jobs in private and foreign banks. Many PSBs are at a disadvantage as they lack standardized staff appraisal norms. “The intent of this recommendation is to professionalize HR in PSBs and seek board-level engagement in many crucial HR reforms,” Khandelwal said. The Khandelwal committee had recommended that only professionally qualified and experienced persons should be considered for the ED position and that lateral recruitments should be made if necessary. The role of the ED will include developing HR policy, talent management, employee engagement, HR audits, reviewing the learning infrastructure and initiating measures to develop a leadership pipeline, it said. As part of HR reforms at PSBs, the finance ministry had asked banks to effect a smooth transition whenever top executives take charge. For instance, when Nupur Mitra replaced D.L. Rawal as chairman and managing director of Dena Bank in September, there was a 15-day transition period.
Mint

IT in Cooperative Banks: Unbanked, on the Radar

..... The RBI has certainly played a key role in driving the technology adoption in many of the cooperative banks. Until the RBI had not issued a directive, there were very few banks that had gone in for core banking solutions......

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Parliamentary panel pitches for integrated banking law

The parliamentary standing committee on finance has suggested instead of bringing piecemeal amendments time to time, the government should consider the formulation of an integrated modern banking law, consolidating the provisions of other statutes that cover various aspects of banking. “Such an integrated and holistic law would also be in line with the proposed legislation in other areas like the Direct Taxes Code and the Companies Bill,” the panel outlined in its report on the Banking Laws (Amendment) Bill, 2011, tabled in Parliament on Tuesday. The committee stressed on employee-friendly measures in the integrated banking law. These include the introduction of employee stock options, deterrent safeguards against 'wilful default' by a borrower in repaying loans and other forward-looking proposals that reflect emerging realities. On the proposal to make voting rights in private sector banks proportionate to shareholding, the panel said the finance ministry may consider increasing the limit from the current 10 per cent to 26 per cent to keep a balance between conflicting factors — concentration of economic power and control and promotion of corporate democracy. The finance ministry had, in the Banking Laws (Amendment) Bill 2011, proposed that voting rights in private sector banks be proportionate to the shareholding, while removing the existing 10 per cent ceiling. Market participants said the move was in the direction towards financial sector reforms. “It is a positive move, a move in the right direction. However, investors would want to have voting rights in line with their shareholding pattern. So, that goal has not been achieved. But the positive thing is the government is trying to push reforms, may be in small steps,” said Manek Fitter, partner (financial services), Ernst & Young. The committee also emphasised on recent failures of major global private banks and said lessons learnt from these should not be lost sight of, while formulating the new policy on banking licences. “Key issues and concerns such as banking penetration, coverage and financial inclusion should remain paramount and the entire banking industry, including banks in the private sector, should be clearly mandated to achieve the desired objective in this regard,” it said. While supporting the government's proposal to keep bank mergers outside the purview of THE Competition Commission of India (CCI) as of now, the panel said this exemption should be considered a special case and an expedient measure to be revisited in the light of the experience gained by both the Reserve Bank of India (RBI) and the CCI. “This, however, does not, in any manner, convey the committee's view on the mergers and acquisition policy in the banking sector, which is an issue meriting a separate discourse,” it said. “As RBI has been entrusted with the mandate to grant approvals for acquisitions, transfers and mergers in the banking sector, the committee would expect RBI conduct due diligence of 'fit and proper' persons/entities and take sufficient safeguards while stipulating conditions as to credentials, source of funds, track record and financial inclusion before granting approvals under this clause,”the report said. The committee also stressed it would like the government to consider the merits of issuing non-voting shares as an avenue to expand the capital base of banks without allowing concentration of management control in a few hands, as this would also enable banks to grow faster. “Considering the wide scope and amplitude proposed in the definition of 'associated enterprises' of a banking company, the committee would expect RBI's regulatory machinery be adequately beefed up in view of its expanding role and augmented functions as proposed in the Bill,” the panel said in its report. The committee said no serving or retired officer of the central government or a state government should be considered for appointment as administrator on suppression of the board of directors of a banking company. 

BS

RBI should avoid a cut in cash reserve ratio

The Reserve Bank of India (RBI) faces the classical central bank dilemma, with both growth and inflation in uncomfortable territories. While no rate action is expected in the upcoming December announcement, the monetary policy stance and the near-term guidance, if any, would be of sheer interest. Inflation has peaked — it would probably soften to less than 7.5 per cent by March, broadly in line with RBI’s projections. But it can stay fairly sticky thereafter — in an uncomfortably elevated range of 6.5-7.5 per cent for the major portion of 2012. The sharp deterioration in the growth trajectory would now increase the pressure on RBI to ease its policy stance. The central bank would possibly start facing the ‘behind the curve’ chatter again, this time on the easing front. Questions would now arise whether RBI over-tightened in the last few months. But an average headline inflation rate of around seven per cent is a clear deterrent against any rapid reversal in monetary policy stance — RBI would possibly hold the policy interest rate steady for the remaining months of 2011-12. Cuts in the repo rate could start from the April-June quarter. Of late, there has been widespread speculation of a cut in the cash reserve ratio (CRR). I feel that would be a sub-optimal policy move at the moment. It could be perceived as prematurely diluting RBI’s inflation-fighting stance and stoke inflationary expectations, which have started coming down. Rather, the continued use of open market operations (OMOs) to alleviate tightness in liquidity is a superior course of action. OMOs can be conducted at a measured pace, at the discretion of the central bank. OMOs would also help tame elevated bond yields — a CRR cut would not be able to achieve that in a sustained fashion. This is a particularly important consideration now, owing to strong possibilities of further overshooting of government borrowings in 2011-12.

Siddhartha Sanyal, Chief economist, Barclays Capital (BS)

The neurosis of currency

.................. Devaluation is not a big deal. The issue always would be the ability of a country to make growth and productivity a habit.

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RBI to issue notes with rupee symbol

Reserve Bank of India (RBI) will shortly issue Rs 1,000 and Rs 100 denomination currency notes incorporating the rupee symbol. However, it will be without the inset letter as in the case of the Mahatma Gandhi-2005 series which bears the signature of Dr D Subbarao, Governor of RBI. The design of these notes is similar in all respects, except for the rupee symbol. The old notes will continue to be legal tender.

DH

RBI prefers FDIs over short-term debt inflows to finance CAD

The Reserve Bank today said it prefers long-term foreign direct investment (FDI) inflows over short-term debts as the former is more stable in nature and also helps in financing the comparatively large current account deficit of the country. "We prefer long-term equity flow into the country in the form of FDIs. Debt flows, particularly short-term debt flows, are not the preferred form of money flows," deputy governor Subir Gokarn said here today. He was speaking at the 12th L K Jha memorial lecture titled 'Global financial flows, global imbalances and crises' which was delivered by Prof Maurice Obstfeld of the University of California at Berkeley. The function was presided over by the Governor Duvvuri Subbarao. The late Jha was the RBI governor from July 1967 to May 1970 and was also a member of the Brandt Commission that probed the financial crisis of the developing economies in 1983. Referring to the significance of maintaining a lower current account deficit (CAD), Gokarn said the country is far from any threshold of vulnerability on account of CAD, which currently stands at close to 3 percent of the GDP. He, however, said it is crucial to see how the CAD is financed to understand the possibility of instability for the economy and not the threshold per se. 

IBN Live

Now, a dose of pain therapy

Duvvuri Subbarao has successfully managed to choke industrial growth. The first set of numbers out this week shows that output at India's factories, mines and power plants in October 2011 actually contracted 5% from a year ago. Over April-October, industrial growth has slowed to a crawl; it is down to 3.5% from a healthy 8.7% in the same period of 2010. The central banker must draw considerable satisfaction that a series of 16 hikes since March 2010, which saw interest rates climb by 3.75 percentage points, has had its desired effect on deflating demand in the economy. What now? Mr Subbarao will, of course, be watching very closely the inflation numbers due on Wednesday before he crafts his monetary policy stance at a Reserve Bank of India review meeting slated for Friday. Wholesale inflation in October 2011 clocked 9.73%, the eleventh month running it has stayed above 9%, and unless there is a significant improvement here, the central banker will have little reason to lower his guard. Mr Subbarrao's pain therapy, of course, doesn't affect everyone equally, the scope of monetary policy being limited by administered interest rates on the one hand and a large parallel economy on the other. Agriculture and services, which between them contribute three-quarters of India's economic output, are maintaining their trend growth rates. Gross domestic product growth, as a result, has slowed to 6.9% in July-September 2011, from 8.4% a year ago. This is a concern, but nowhere in the league of the bloodbath on the factory floor. Companies are simply not putting up fresh capacity in a season of galloping interest rates and raw material prices. Production of equipment that goes into setting up new plants that churn out the stuff we eventually buy shrank 25.5% in October 2011, a precipitous fall from 21.1% growth in the same month a year earlier. Consumers, likewise, cut hire-purchase of durables like cars that has pulled down the rate of growth from 14.2% a year ago to a 0.3% decline in October 2011. Even when interest rates don't pinch much, Indians have stopped shopping: consumer non-durables like soaps contracted by 1.3% this October. India's famed consumption story is now in jeopardy. Mr Subbarrao's assessment of his own actions over the past year suggests that policymakers will now need to gear up to give growth a push. And he is relying on the government to assist in anchoring inflation expectations. Decisions on raising administered prices will raise the price line in the immediate future, but can tease suppressed inflation out of the system. Fiscal rectitude can help steer demand from a bloated administration to productive investments by companies and households. Fixing supply bottlenecks in agriculture and infrastructure, likewise, can ease structural inflation, for which monetary policy has no answers.  

HT

RBI to wait and watch for now

The Reserve Bank of India (RBI) is expected to wait a little longer before intervening to arrest the falling rupee. As the decline is driven by external factors, the regulator may give some more time for the currency to stabilise. “We have not reached that critical level which will prompt RBI to take direct actions,” said Anis Chakrabarty, chief economist and director, Deloitte Haskins & Sells. The regulator may however go for a cut in Cash Reserve Ratio to increase liquidity. “It is unlikely that RBI will take action to check the rupee as India does not have the comfort of a large forex reserve,” said Moses Harding, head- global markets group, IndusInd Bank. The outlook for the rupee remains bearish, and traders see its next support at R53.75. The rupee has fallen about 14% since the year began.

HT

Can RBI do anything to stop the rupee’s slide?

............. The RBI has been making token interventions in the market to prop up the rupee, mostly to shave some of the “speculative froth” in the currency markets, but experts said those efforts are unlikely to have any sustainable effect on reversing the rupee’s slide...............

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India Inc sends an SOS to RBI as rupee plunges to record lows

..... "Sure, it is a tough act as they (RBI) also have to worry about inflation and liquidity, but unless they step in and give confidence, the market will continue to move in the wrong direction,".............

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Politicians' curse versus the RBI

.... With the local myopic political brinkmanship hurting the economic outlook, the Reserve Bank of India (RBI) will continue to be the key focus for some policy-related clarity. This is unfair to the RBI, as it is not receiving the much-needed support from the government on fiscal matters.........

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Diving Re adds to RBI’s inflation, rate worries

Making the task of the Reserve Bank of India (RBI) to control inflation difficult, the rupee on Tuesday touched a record low for the second day in a row as both foreign and domestic investors snapped up dollars amidst worries about India’s cooling economy...........

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Policy out of focus

Apropos the editorial “Undone by policy” (December 13), I would add that declining inflation is a reflection of the consumer’s silent resistance. The common man, burdened with unprecedented inflation, has had to cut spending, even on essentials. Meanwhile, the government is bent on spending on unproductive popular schemes instead of focusing on development activities, such as infrastructure, hoping foreign direct investment (FDI) will fill the gap. Given the uncertain political situation and unabated corruption at all levels, foreigners will think twice before investing. It is high time the government shed its obsession with FDI and recast economic policy to suit our needs.

-  N Ramamurthy, Chennai (BS)

Wake up, Mr PM! Our economy is running on empty

............ The risk lingers that the policy mandarins may continue to deploy monetarist tools in the short term by requiring the RBI to lower interest rates even if the RBI isn’t convinced that the battle against inflation has been well and truly won. The risk of policy errors feeding the very real fears of stagflation remains high.

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Banks in Kerala see rush of NRE & NRO deposits

The depreciation of the Indian rupee over the past few weeks has helped Kerala-based banks like Federal bank, Dhanlaxmi Bank and South Indian Bank mop up their NRI (non-resident Indian) deposits............

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RBI’s sepia-tinted conflicts



Visitors at the Reserve Bank of India's 'Newsibition' which was inaugurated in Mumbai on Monday

Nothing has changed in the relationship between India’s central bank and the government since the inception of the Reserve Bank of India (RBI) in 1935, if the historical documents and news reports exhibited by RBI at its Mumbai office are anything to go by. The issues that created tussles between RBI and the finance ministry include nationalization of the central bank and major commercial banks in the country, the bank rate, and management of RBI’s investments. These are highlighted at the RBI exhibition, where most documents are sourced from newspapers. RBI has been hosting such shows across India to educate the public about its history and increase transparency in its functioning. Former RBI deputy governor Usha Thorat inaugurated the exhibition in Mumbai. The turbulence at the top began in 1936-37, shortly after the central bank became operational, between then governor Osborne Smith and deputy governor James B. Taylor, who had the backing of finance member of the Viceroy’s Council, James Grigg. The differences were on two critical issues—RBI’s autonomy and the monetary policy stand on controlling inflation vis-à-vis fiscal policy. Even today, RBI and the finance ministry have differences on such issues. The “turbulence” between Smith and his deputy—“two men with a strong and pugnacious personality” or “temperamental incompatibility”—according to former governor Chintaman Deshmukh, led to the governor’s resignation. Even today, the debate on many of these issues, notably the central bank’s autonomy, monetary policy stance on fighting inflation and deficit financing, continue to strain the relationship between RBI and the government, even though senior central bankers prefer to dub them as “creative tensions”. Former RBI Deputy Governor S.S Tarapore, who joined as a research officer in 1961, said the differences between the first RBI governor and the then finance member of the Viceroy’s Council was the most acrimonious in RBI’s history. “The English didn’t trust Osborne because he was Australian and not from the British civil services. They doubted him because he was considered to be close to the Indian nationalists. He became governor just because he had the support of the then Bank of England governor, Montagu Norman,” Tarapore said. Norman was Bank of England governor between 1920 and 1944. According to Tarapore, change is a natural process in the central bank, especially because the complexities the economy is facing have increased over time. “When I joined RBI in 1961, M3 was just Rs.3,000 crore and a Rs.1 crore loan was considered to be huge. Now, a Rs.1 crore loan is given out by individual bank branches daily,” he said. M3 is the broadest definition of money supply. RBI numbers show M3 in the banking system is currently at Rs.70.13 trillion. The exhibition has not not only attempted to chronicle the evolution of central banking, but also the nation’s history. For instance, it features events of currency notes being used as a means of propaganda against the British in 1942, with protestors defacing notes with slogans such as “Down with the Union Jack” and “Quit India”. The government soon passed the Legal Tender (Inscribed Notes) Ordinance that made such defaced notes with political propaganda illegal with immediate effect. One of the earlier hiccups or early-stage challenges RBI had to face was handling the failure of the Travancore National and Quilon Bank in the Travancore region and this highlighted the need to strengthen the regulatory framework of banking institutions. Another interesting moment in Indian banking history—the nationalization of 14 major banks by then Prime Minister Indira Gandhi—was front page news in The Hindu on 26 July 1969 along with another news item of Apollo 11 being placed in lunar orbit. RBI, the banker for banks and the government, was nationalized in 1946, after nationalization of the Bank of England. This was immediately followed by a reconstitution of its central and state boards. The public appearances of top central bank executives, which are keenly watched and scrutinized by the media today, was not a big event in the old days—probably a reason that prompted R.K. Hazari, a deputy governor between 1969 and 1977 to light a cigar even when presiding at one of the conferences of RBI staff to discuss the Tandon committee report on bank loan norms. A young Thorat is also seen in the photograph. The exhibition also depicts the evolution of Indian currency. RBI issued Rs.5 notes in January 1938, followed by Rs.10 in February, Rs.100 in March, and Rs.1,000 and Rs.10,000 in June that year. The first note issued by the Indian central bank carried the portrait of George VI and the signature of the second governor, Taylor. A note with a design of Edward VIII was never issued after signed by then governor Smith as the design had to be changed following his abdication.

Mint

'IIP data reflects weak global and domestic economic outlook'

Mumbai, Dec 12: Industrial output numbers for October, which contracted significantly by 5.1 percent, are reflective of the global and domestic economic outlook, former Deputy Governor of Reserve Bank Ms Usha Thorat said here on Monday. The industrial output shrunk by 5.1 percent in October after witnessing a sustained slowdown over the past few months, hitting a 34 month low. Factory production had grown 11.3 percent last October. “The general message is that the outlook internationally and nationally is very clearly reflected in the IIP numbers,” Ms Thorat, who now heads the Centre for Advanced Financial Research and Learning (Cafral) as director said after inaugurating RBI’s ‘Newsibition’ here. ’Newsbition’ is part of the central bank’s outreach and financial literacy effort in which RBI depicts the 76 years of its history. The evolution has been depicted through newspaper clippings and photographs. “It gives a glimpse of the spirit of the times and events not only as they happened but also how they were viewed by the public at large through media reports,” RBI said in a release. The exhibition, which will remain open from December 12 to January 14, is divided into nine sections representing different phases in the apex bank’s evolution. “In addition to the history of RBI, it also has panels and films on currency and its security features among others,” the release added.  

HBL