RBI chief isolated in battle against inflation

For months, the hawkish, inflation-fighting RBI has been in a shrinking minority of its emerging market peers. Now the recently re-appointed central bank governor is facing stiff opposition to his crusade at home. As recently as last week, the RBI made clear it will stick to its anti-inflationary stance despite censure from the Congress-led government that is signalling 12 rate rises within 18 months are hurting growth and its electoral prospects. India's inflation is near 10%, one of the highest among major economies in the world. It is among a handful of countries such as Kenya and Nigeria still raising rates while the world frets over headwinds from a European debt crisis and a sputtering US economy. Neighbours in Asia have turned dovish, some such as Brazil and Turkey have already cut interest rates. Subbarao appears undeterred by the criticism. RBI sources say he is determined to keep policy tight, maybe even tighten it further. "Growth has a floor, but inflation has no ceiling," said a senior RBI official with direct knowledge of monetary policy making. "If we don't do anything, inflation expectations will rise." Until now, the government and the RBI have largely been on the same page when it comes to monetary policy, with near double digit inflation not only an economic 'worry but a political headache as prices of foods and fuel jump. But over the past few weeks, criticism and advice for the RBI chief have been more blunt than usual. "I have had hesitation on a rate hike this time which in the past I did not", Kaushik Basu, chief economic advisor to the finance ministry, said after the RBI raised the repo rate by 25 basis points on Friday. "I would personally, yes, vote for pause", he told reporters when asked what the RBI should do at its October policy review. Basu is a top adviser in the finance ministry and is known to be not only close to finance minister Pranab Mukherjee but also a key strategist on economic policy, one who often echoes Mukherjee's thinking on key issues. The top adviser, who was widely believed to be in the race for the RBI top job, has asked the central bank "to think out of the box" and consider the examples of Brazil and Turkey that cut rates to protect growth. Montek Singh Ahluwalia, the deputy chairman of Planning Commission and Prime Minister Manmohan Singh's close advisor, also questioned Subbarao's monetary action. 

The Sunday Guardian

Teller-A.T.M. Hybrid Takes Banking to Rural India

Time was, banks employed armies of human tellers. Later, they replaced many of them with automated teller machines. Now, India is using a hybrid of the two — the human A.T.M. — to expand banking to its vast rural population......

Read........ 

Central Bank Of India : 144th SLBC Meeting

State Level Bankers’ Committee, Madhya Pradesh held its 144th meeting today at the Zonal Office of Central Bank of India, Bhopal. The meeting was chaired by Shri Avani Vaish, IAS, Chief Secretary to Govt. of M.P. and attended, amongst others, by Shri R. Parasuram, IAS, Additional Chief Secretary, Shri R.K. Dubey, Executive Director, Central Bank of India, Shri P.K. Panda, Regional Director, Reserve Bank of India, Shri A. Krishna Kumar, Managing Director, State Bank of India, Shri Ashok Shah, Commissioner-Institutional Finance and Shri Pravin Rawal, Deputy Secretary, Ministry of Finance, Govt. of India. Shri B. Mondal, General Manager, Central Bank of India and Convenor, State Level Bankers’ Committee, Madhya Pradesh, conducted the meeting and welcomed the dignitaries and other participants. The meeting reviewed the performance of banks during the first quarter ended June, 2011, 

Zee News

Govt officials, bourses to discuss Jalan panel proposals

Senior government officials and top stock exchange executives will discuss tomorrow the long-pending proposals made by a Sebi-appointed panel for sweeping changes on how the bourses should be owned and run. The recommendations of the committee, headed by former RBI governor Bimal Jalan and submitted to market regulator Sebi in November last year, would be discussed at a workshop organised by the industry chamber Ficci here. Those expected to participate in the discussions include R Gopalan, Economic Affairs Secretary R Gopalan, Joint Secretary (Capital Markets) Thomas Mathew, and Jalan himself. Besides, top executives of three national stock exchanges -- NSE, BSE and MCX-SX -- as also representatives from a host of smaller bourses and other market entities are expected to be present alongside other industry experts. The implementation of the recommendations made by the Jalan committee has been pending for almost a year now. Among other proposals, it has strongly recommended capping the profitability of bourses and barring them from getting listed to safeguard their front-line regulatory role. The committee, set up in January 2010 for review of ownership and governance norms for market infrastructure institutions, submitted its report to Sebi in November last year. Sebi then invited comments on it till December 31. The proposals generated intense debate and opposition was raised to proposals like non-listing of bourses and cap on profitability, terming them as anti-investor measures. In the wake of stiff opposition to the proposals, Sebi later put the ball in the government's court. Thereafter, a committee was set up by the Ministry of Corporate Affairs (MCA) to discuss the proposed rules, which held its consultations in May. In its meeting with the representatives from the bourses, industry bodies, accounting bodies and other market entities, the MCA sought suggestions a roadmap for segregation of regulatory and commercial roles of the exchanges. It was proposed that steps need to be taken to keep the front-line regulatory role of the bourses unaffected by their profit-making and other business interests after they become publicly held companies following their listing. On its part, the Sebi board has not been even discussing the matter in its last few board meetings, as it was waiting for suggestions from the government on the contentious issues emanating from the Jalan committee proposals. It is expected that the matter could come up for the Sebi board's consideration in its next meeting, once the government takes a final view after consultations with various parties.

BS

Being sensible

“Time running out to find solutions for global crisis, warns RBI chief” (Business Line, September 24) brings up an interesting fact. India has crossed many mile stones — $1 = Rs 21 in 1991 to $1= Rs 50. This is even after the US dollar is in doldrums (by printing more dollars). Dr Subbarao, Governor, RBI, the Finance Minister and the economist Prime Minister always talk about the US and the global economy and don't seem very concerned about the state of the Indian economy. When they could reduce the interest rates for the benefit of unscrupulous real estate and crony politicians in one step, why are they taking 13 steps to come to the old level of interest rates? The RBI is intervening when the rupee is going up and watching tamasha when the rupee is going down. What happened to the shareholders of the erstwhile GTB merged into OBC? 

Murthy (HBL)

Operation inflation

This refers to Subir Roy’s column “Old remains gold in fighting inflation” (Value for Money, September 28). The author, while elaborating on former Reserve Bank of India governor I G Patel’s views on inflation, has underlined the importance of balancing monetary tools with fiscal instruments to control inflation. While RBI’s initiatives in controlling inflation can be commended, its approach is flawed on several counts. First, RBI’s stance of treating inflation purely as a monetary phenomenon is completely incorrect in the Indian context. Second, the Bank has been merely been raising repo and reverse repo rates at periodical intervals. What about other instruments of monetary policy? During the seventies and the eighties, RBI controlled inflation through other instruments of monetary policy — selective credit control (SCC) measures, open-market operations and moral suasion, to name a few. Of these, SCC directives to commercial banks have had the desirable effect in monetary expansion by way of bank credit. Finally, RBI should have apprised the finance ministry of the futility of a monetary policy without the back-up of a prudent fiscal policy. IG’s prescription to combine fiscal discipline with monetary policy, thus, is quite right.

K V Rao, Bangalore

Subir Roy wrote succinctly about I G Patel’s views on how to tackle inflation. IG was not dogmatic about any economic ideology but was a believer in Karl Popper’s Open Society principles. His experience as director of London School of Economics is important to analyse again in the present context of volatility in the world economy. Policy-makers need to be flexible in the allocation of resources at margin. When an economic downturn is expected because of the downturn in the global market, policy-makers should be flexible to shift resources towards the “less tradable” rural sector in which growth is likely to be more equitable. This will also help in dampening inflation.

Chandrashekhar G Ranade, Washington DC (BS)

Profiting from inflation

RBI Governor D Subbarao recently commented in New York that “inflation has been fairly stubborn”. Over the last few months, there has been growing pessimism on the efficacy of monetary policy to tame inflation. Reasons proffered range from supply-side constraints, increasing rural income and changes in dietary habits, to conspiracy theorists proffering that developed countries with unmanageable debt burdens are inflating their way out of trouble and passing the contagion to their less developed brethren. Whatever be the reason, the fact remains that the last 20 months have seen the highest inflation in the last 20 years in India. Many businesses may believe that inflation may not be a bad thing as long as they can pass on the cost increases to their customers as price increases. And these businesses are not wrong as inflation does have beneficial effects. Company revenues increase not only in nominal terms but also in real terms. This can result in a positive effect on wages and employment, which can lead to further demand and more economic growth. For governments with unsustainable debt overhang, it can lower the real burden of servicing debt. However, any benefit from persistent high inflation is an illusion, and, in fact, has serious negative impact on businesses. It retards productivity growth as managerial decisions fall prey to the so called ‘money illusion’ (for a more detailed discussion of the topic, please read the Boston Consulting Group white paper, Why Companies Should Prepare for Inflation, November 2010) or the tendency to mistake price increase for real gains. Because managers believe they are doing better than they actually are, they become complacent and do not take a hard look at their businesses. Inflation also encourages underinvestment and distorts allocation of resources as depreciation allowances, based on historical costs, prove inadequate. BCG research shows that despite initial positive economic effects of inflation, total shareholder returns (TSRs), which combine share price appreciation and dividends, are typically disappointing, particularly when measured in real terms. Also, companies that destroy more value relative to their peers during inflationary period are much less likely to catch up and compensate their shareholders when inflation falls. Thus, inflation creates losers—and winners of those who manage its risks well. Inflation can change the rules of the game by establishing new sources of competitive advantage—from advanced pricing and sourcing strategies to superior asset productivity. When hit by inflation, companies with the highest capital can end up as big losers as they are unable to generate additional ‘inflationary’ cash for their high asset-intensity businesses or to replace old assets and end up making sub-optimal capital allocation and investment decisions. The sure winners are those companies that increase price faster than rate of inflation to provide for not just cost increases, but also increased valuation of assets and thus protect gross margins from erosion by inflation. It was just a little over 24 months ago that the country was patting itself on the back, having come out strongly from the economic crisis of 2008 that had severely crippled the economies of many developed countries. Inflation was negligible and the country was looking forward to accelerating GDP growth towards double digits. Within 6 months, the economy hit the inflation bump, with the headline (WPI) inflation rate going over the 9% mark. Twenty months later, despite several rate hikes by RBI, we see no respite. No wonder Subbarao was forced to make his comment. For Indian businesses, this raises a fundamental strategic question: When will the inflation moderate, and how aggressively should they react to it? Many experts believe that we are in for a period of sustained inflation due to an unprecedented combination of global and local conditions. Clearly, India faces major supply-side issues that are driving inflation, particularly non-food manufacturing inflation, which has remained high even as food inflation has  moderated somewhat in recent weeks. This is unlikely to change in the near term, unless the slowing investment cycle reverses itself and global commodity prices fall significantly. Crude oil prices are, of course, a fly in the ointment, and can have a dramatic effect up or down on headline inflation. This only strengthens the case for Indian companies to make their business models ‘inflation proof’. To do so, they have to adopt a four-step programme. The first step is to assess the risks, and develop a detailed understanding of potential exposure to different inflation scenarios and identify the specific areas of weakness, which may vary from business to business or one product to another. The second step is to know the real costs and prices—and avoid money illusion mentioned earlier. Companies should closely track inflation-adjusted financial indicators that track the real performance of their businesses. The third step is to protect gross margins. The key to this is superior pricing strategies and processes, which could range from creative contract design to pass inflation risks to customers, eliminating price leakages, reacting quickly and frequently to raw material price increases and reducing price sensitivity of customers by unbundling products and services, etc. The fourth and final step to become an inflation winner is to safeguard investments, which is particularly relevant for high capex companies. This calls for adopting a conservative financial policy of low leverage, increase asset productivity and carefully prioritise planned investments. The last time Indian companies faced inflation rates close to current levels for a prolonged period of time was 20 years ago. Very few of the leaders who had navigated through that period remain at the helm of their companies. If inflation is going to become a ‘given’ in the medium term in India, today’s business leaders have to learn not just to live with it, but how to win in the market place. As Bruce Henderson, the founder of BCG, said in one of his essays, while the negative impact of inflation is quite clear with real profits being squeezed despite higher profitability, it also offers unique opportunity to differentiate one’s performance. The winners are those who will find the way to profit from inflation! 

FE

RBI pulls up Islamic bank

The Reserve Bank of India has asked the country’s first and only Shariat-based NBFC, the Kozhikode-based Alternative Investments and Credit Limited (AICL), to commit sacrilege. The NBFC, for which charging interest is ‘haraam’ or forbidden, has now been asked to publish an interest rate structure just like any other conventional banks. The charge is that the AICL, which has been operational for over a decade, has flouted RBI’s fair practices code under which a financier has to specify the interest structure. The AICL has been given two weeks to respond to the RBI’s directive. “We have met RBI officials in Mumbai last week and put our points across,” said the AICL managing director, Mr K.M. Abdul Salam. “Shariat teaches us to abide by the law of the land. But we also have our spiritual commitments,” Mr Abdul added. The AICL’s immediate challenge is to find a middle-path between Shariat principles and existing banking regulations, which does not recognise interest-free transactions as a banking activity. Instead of interest, an Islamic bank like AICL takes funding charges, which is the share of profits the borrower has to pay to the lender. Banks based on Shariat principles function on the basis of a participative finance model. The borrower needs to pay only if he had earned a profit. In case there are unavoidable losses any year, the borrower need not pay any funding charges. 

DC

The Economic Experts Who Advise our PM



Duvvuri Subbarao, Governor, Reserve Bank of India



Subbarao is a 1972 batch Indian Administrative Service (IAS) officer of Andhra Pradesh cadre. He is the 22nd and current Governor of Reserve Bank of India, serving under Prime Minister Manmohan Singh. He did his schooling from the Sainik School in Korukonda, Andhra Pradesh. He graduated in Physics B.Sc Hons. from Indian Institute of Technology Kharagpur (class of 1969) where he was the recipient of Director's Gold Medal. He received a M.Sc degree also in Physics from Indian Institute of Technology Kanpur. Subbarao topped the IAS examination in 1972 and was assigned the Andhra Pradesh cadre. He later did a Masters degree (MS) in economics from Ohio State University, United States and was a Humphrey Fellow at Massachusetts Institute of Technology. Although the RBI governor works autonomously, his role in shaping the country's economic policies cannot be overstated. Subbarao has earned more critics in recent months for supposedly killing growth, but a few admirers too for his conviction. "Subbarao is a pragmatic and astute central banker who has taken independent decisions based on his well-researched conviction," says Madan Sabnavis, chief economist at rating company Care. "He has recognised inflation as being the single most important malaise afflicting the economy and pursued the goal of increasing rates, notwithstanding the pressures being exercised from different quarters, displaying a lot of character."

C. Rangarajan, Chairman, Prime Minister's Economic Advisory Council

He is an Indian economist and a distinguished former Member of Parliament and Governor of the Reserve Bank of India. Currently, he is the Chairman of the Prime Minister's Economic Advisory Council. He is also the Chairman of the Madras School of Economics, and the Founding Chairman of the CR Rao Advanced Institute of Mathematics, Statistics and Computer Science. Rangarajan graduated from the prestigious Loyola College of the University of Madras in the commerce stream (where he was a contemporary of the Yale University economics professor T N Srinivasan). He later took Ph.D. in economics from the University of Pennsylvania in 1964. Rangarajan taught at several institutions including the University of Pennsylvania and the IIM-A where he also served as the Director. Commenting on the rate hike, Dr. C. Rangarajan, said, "This is the right decision... in the background of rising inflation...Inflation has been above 9 percent since January this year and taming inflation is the most important concern of the central bank." 

http://www.siliconindia.com/shownews/The_10_Economic_Experts_Who_Advise_our_PM-nid-93260.html

'Aadhaar valid to open bank a/c'

NEW DELHI: Contrary to the Reserve Bank of India's notification, an  Aadhaar card is a valid residence proof for opening a bank account. "Aadhaar is a valid "Know Your Customer" (KYC) document for opening a bank account," Unique Identification Development Authority of India (UIDAI) chairman Nandan Nilekani said. "The Aadhaar letter has two parts - identity and address. If the address that a person shows to the bank is the same as on the (Aadhaar) letter, it is also a proof of residence," he said. The Reserve Bank of India's (RBI) notification issued on Wednesday stated that Aadhaar is not a valid residence proof. However, the central bank reportedly accepted its validity as identity of a person. Nilekani said, "In a few days, we will be starting online authentication of address and identity. If the address matches through online authentication, it will be treated as current address (of the person applied for a bank account or a service)." He clarified, "As of now, the banking system has declared Aadhaar as a valid KYC norm for all bank accounts as per the RBI notification issued on Wednesday." The telecom and petroleum ministry also consider Aadhaar as a valid KYC norm for issue of SIM cards and cooking gas connections. He said about 37 million people across the country have been given unique identity cards and another 1.2 million people will get it daily by October. "New people are getting enrolled across the country at the rate of 6 lakh a day, by October the figure will be one million people per day," he said. Nilekani pointed out that there is little possibility of duplicates arising out of the system because only one ID is issued to a person taking his biometric signature. Asked whether the UIDAI was on a collision course with the Planning Commission, the UIDAI boss asserted that the Authority - set up for issuing national identity cards - was working under the powers delegated by the Prime Minister. "My powers have been delegated by the PM," Nilekani said, adding that UIDAI is an attached office of the Planning Commission. The issue came up after the Plan panel reportedly expressed concerns that the UIDAI is departing from set government procedures and suggested a re-look into its structures.

TOI

'Wage hike creates new challenges'

MUMBAI: The RBI has said that India's per capita income is likely to double between 2006 and 2017-18. While the increase is a positive development, it creates new challenges to the central bank in managing demand.  Speaking at the Harvard Business School, Boston, on Tuesday, Deepak Mohanty, Executive Director, RBI, said that India's per capita income, which had taken four decades to double by 1991, doubled thereafter in 15 years. "If India could maintain the current pace of growth, it will lift millions out of poverty and enrich the global economy. While India has come a long way, maintaining the current pace would itself be challenging and require continued reform efforts," he said.  Mohanty said that India will have to raise agricultural productivity. "Demand for protein-based products like meat, egg, milk and fish as well as fruits and vegetables have increased substantially with rise in income. The demand-supply mismatches in the case of these items have resulted in rise in their prices There is, therefore, a need for another technological breakthrough to give fresh impetus to agriculture," he said.  He said that increase in farm productivity will require a substantial part of labour force to be `ejected from agriculture' not only to improve the productivity in agriculture but also in the overall economy. "It is unconceivable that they can all be absorbed gainfully in the services sector. Hence, industrial employment will have to expand so also the relative contribution of industry" he said.  To support industrialization, he said it was necessary to to step up investment in infrastructure. "The Planning Commission suggests an investment of Rs 45 trillion (US $ 1 trillion) over the Twelfth Plan (2012-17). Given the large requirement of long-term funds, financing infrastructure would be a big challenge. Besides budgetary support, the bulk of the funds has emanated from banks" said Mohanty.

TOI

Infrastructure loans: Banks ‘averse’ to RBI counsel on ‘risk’ from nature

During these edgy times when ‘risk aversion’ is the marauding theme across the financial world, banks in India have only accreted risk, though of a different ‘nature.’..............

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RBI's PTC ruling to impact NBFCs' capital adequacy

MUMBAI: The capital adequacy and net interest margins (NIMs) of non-banking finance companies (NBFCs) could be under pressure following the Reserve Bank of India issuing fresh guidelines on securitisation, according to the latest report of Standard Chartered Bank. The RBI on Tuesday disallowed credit enhancements in transactions where banks buy loans from NBFCs. The regulator has proposed that banks follow the pass-through certificate (PTC) route instead. Currently, most priority sector portfolio sales by NBFCs to banks are done through the credit enhancement route. "For NBFCs, if the buyouts happen through PTCs rather than assignments, capital requirements will rise. For Shriram, tier-I capital adequacy will fall from 18% to 14.3%," said the Stanchart report. "This will have some mark-to-market implications for banks and will also impact their loan growth as PTCs are treated as investments while portfolios bought out by loan assignments are treated as loans," added the report. Unlike a credit enhancement transaction, there is an underlying asset to fall back upon in a PTC transaction.

ET

Police Commissioner release book titled “Reaching Out to the Unreached: the Corp Bank Way”

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Mangalore, Sep 29: City police commissioner, Seemanth Kumar Singh released a book titled “Reaching Out to the Unreached: the Corp Bank Way” based on Corporation Bank’s financial inclusion model and written by Dr. N. K. Thingalaya, Dr. M. S. Moodithaya and Dr. N. S. Shetty in the conference hall of Corporation Bank’s Corporate Office on September 29, Thursday. Dr. K. C. Chakrabarty, the deputy governor of Reserve Bank of India, wrote the foreword for this book, which also carries a message by Mr. D. K. Mittal, the secretary for the department of financial services, Ministry of Finance, Government of India.

Banks see huge fall in requests for demand drafts

The Demand Draft (DD), a popular financial instrument for transfer of funds or payment till recently, is losing its sheen. Banks are seeing a significant dip in the requests for issue of DDs, thanks to use of electronic mode of transfer and net-banking facilities. “The issue of DDs in banks is showing a 50 per cent decrease of late. I think, it is going the legendary Indian postcard way in terms of decreasing patronage from customers,'' Mr Anil Girotra, Executive Director, Andhra Bank, told Business Line. The use of DDs were inevitable till three-four years ago for payment of fees for recruitment tests, academic exams and Government transactions. “On an average, a bank branch used to issue 300-500 DDs a day earlier. But now we don't find the number of DDs crossing even a hundred in some branches,'' said a senior official of Punjab National Bank. Almost all major recruiters such as Public Service Commissions, banks and some academic institutions have now switched over to online payments making the DDs almost obsolete. The expanded use of National Electronic Fund Transfer (NEFT) and Real Time Gross Settlement (RTGS) also made DDs less popular. “Many businessmen are using the electronic mode now as it is faster. There is no blocking of funds. Clearance of DDs may take up to 10 days in some cases,'' Mr K.T. Ajit, a senior executive of State Bank of India, said.  Then, there is also a cost factor. The RBI had advised banks to reduce commission on DDs as early as 2007 though commission/service charges continue to be on the ‘higher' side, according to experts. As of now, commission for issue of DD up to Rs 10,000 is around Rs 50. For Rs 1 lakh it is upwards of Rs 400.  Banks are not forthcoming to share exact numbers on the dip in overall revenue due to decreased demand for DDs. 

HBL

Banks make U-turn on prepayment

The Indian Banks’ Association (IBA) lobby group has written to the Reserve Bank of India (RBI) arguing against the move, fearing mismatches in liquidity owing to early payment.....

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RBI penalises MNSBL for violating anti-money laundering rules

Ahmedabad : The Reserve Bank of India has penalised Gujarat-based cooperative lender Mansa Nagarik Sahakari Bank Ltd (MNSBL) for violation of Anti-Money Laundering (AML) guidelines. A penalty of Rs 1 lakh was imposed on Gandhinagar- headquartered MNSBL for violating the RBI''s instructions for submission of reports on cash transactions above Rs 10 lakh to the Financial Intelligence Unit-India (FIU-IND) under the AML guidelines. The RBI had issued a show-cause notice to the bank, in response to which the bank had submitted a written reply. "After considering the facts of case and the bank''s reply, as also personal submissions in the matter, the Reserve Bank of India came to the conclusion that the violation was substantiated and warranted imposition of the penalty," an official statement said. Over a dozen cooperative banks from Gujarat have been fined by the RBI in the recent past for violation of AML and KYC norms.

MSN News