Suman Bery: Monetary policy - where next?

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

Deregulation may bring added costs on savings a/c holders

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

Corporation Bank opens microfinance branch

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

Is the task of RBI done?

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

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

Core issues in monetary policy

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

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

RBI team studies mobile banking scheme

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

Wake up Call for Dormant Accounts

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

Act now

The government has done well in starting the process of selecting a new deputy governor (DG) of the Reserve Bank of India (RBI) to fill in the vacancy arising in June (“RBI to interview all 7 EDs for Dy guv job”, May 6). But the question is whether the authorities will be equally fast in making the appointment. Contrary to what the report says, the convention that started in the early 1980s is that, of the four posts of DGs, one each is for RBI, commercial banks, Indian Administrative Service and the profession of economics. When an IAS officer is the governor, as is the case at present, the quota for that service for DGs goes to RBI as an additional post. My own hunch is that until the present Governor’s extension in office or otherwise is decided, bureaucrats would like to delay the appointment of the DG. There are economists with powerful connections aspiring for the governor’s post. If an RBI official becomes a DG now and then an economist is appointed as governor later in the year, the IAS fraternity would have lost its opportunity. The proper course for the government is to take a decision now on the post of Governor.

A Seshan, Mumbai

Diamond jubilee of RBI staff association in city

GUWAHATI: Reserve Bank Employees' Association, Guwahati, celebrated its diamond jubilee at district library auditorium of the city on Saturday. Inaugurating the programme, Meghalaya Governor Ranjit Sekhar Mooshahary has expressed his happiness over the gathering of RBI employees here. Celebrating the glorious service of 75 years for the nation, the workers of the central bank organized a seminar on foreign institutional investment in the Indian scenario. Resource persons like Alok Sen from Assam University and Nanigopla Mahanta from Gauhati University delivered their lectures on the topic. The association said other programmes were also held.

RBI may make it mandatory for foreign banks to adopt WOS route

NEW DELHI: The Reserve Bank is likely to make it mandatory for foreign banks in the country to operate as wholly-owned subsidiaries, in line with the international practice, so that the central bank can have better control over their working. Initially, according to sources, the new banks and the existing ones with a few branches will be asked to convert into wholly-owned subsidiaries (WoS).  The larger banks, they said, could be given some more time to adhere to the guidelines that are likely to be announced by June-end.  At present, the foreign banks operate through their branches. Under the WOS model, the foreign banks will be required to set up a subsidiary under the Companies Act and operate as an Indian entity. Sources said that in several countries, including the US and Singapore, it is mandatory for banks to operate as WOS.  In order to align Indian laws with the international best practices, the RBI had come out in January with the draft guidelines on the mode of operations for foreign banks in India.  At present, foreign banks like Citi, Standard Chartered and HSBC operate as branches, mainly in bigger cities, and do not have the freedom to expand like the banks incorporated in India.  In its discussion paper, the RBI has said that it expects large banks to convert them from branches to WOS and that the banks who adopt the subsidiary model would be given preferential treatment for opening of branches.  The RBI has further called for making it mandatory for foreign banks with more than 0.25 per cent share in the Indian banking industry to convert themselves from a branch into a WOS.  It points out that the government has clarified that a company with a foreign holding of over 50 per cent is a foreign company.  At present, there are 34 foreign banks operating in India , with five major banks, including StanChart, HSBC, Citibank and Deutsche, accounting for over 70 per cent of the the total asset size.  The discussion paper also said the WOS may be allowed to raise rupee resources through non-equity capital instruments.

The wait for new private banks might just get longer

The Reserve Bank of India (RBI) and the government are unlikely to push through with the final guidelines for issuing licences to new banks until the Parliament approves the Banking Laws (Amendment) Bill 2011. "The passing of the Bill is a necessary condition that will have to be fulfilled before guidelines for new bank licences are finalised," said a finance ministry official on the condition of anonymity. A Parliamentary standing committee is examining the Bill, which was introduced in the Lok Sabha in March. The Bill may come up for approval in Parliament only in the winter session, said sources. The Bill, when legislated, will empower the RBI to dismiss a bank's board and force a reconstruction to protect interests of depositors, shareholders and employees. Conferring the RBI with such powers will allow the central bank to take swift action if it suspects that the board is not functioning objectively or pushing for decisions favouring promoters of the bank. At present, the RBI is not empowered to supersede a bank's board, but can force an amalgamation or a merger among banks. The Bill will also allow the RBI to seek details of associate enterprises of banking companies. The RBI has prepared draft guidelines to allow private players in the banking sector and is awaiting comments from the finance ministry. "It has become necessary for the RBI to be aware of the financial impact of the business of such enterprises on the financial position of the banking companies," the Bill stipulated in is statement of objects and reasons. "This is necessary before allowing industrial houses to set up banks," the official said. The Adiyta Birla Group, Religare Enterprises, the Tatas and Reliance have shown interest in entering the banking sector.

Make it free and be fair to bank customers

RBI is all set to free interest rates in savings bank accounts. The deregulation will help household depositors and the economy in the long run, writes Dilip Maitra

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WHY THE HURRY TO HIKE LOAN RATES

Quite a few banks last week raised their loan rates. Unlike in the past, this time around, the quantum of hike is half a percentage point. This should make Reserve Bank of India (RBI) governor D. Subbarao happy as he has been harping on faster transmission of the monetary policy. The central bank raised its policy rate on 3 May by half a percentage point. Normally, banks take time to pass on the higher cost of borrowing to consumers and there have been instances in the past when despite RBI hiking its policy rate, banks did not raise their loan rates. Apart from raising its policy rate, RBI also raised the rate of interest that banks pay to savings bank account holders by an identical margin. This has pushed up the cost of savings deposits immediately. When they raise rates on their term deposits, it takes time to feel the impact as only the new deposits earn higher rates while the existing deposits continue to be priced at old rates till they mature. While the industry’s savings account portfolio is roughly about 22% of the overall deposit kitty, the impact on individual bank’s cost varies between 10 basis points (bps) and 15 bps, depending on their composition of deposits. One basis point is one-hundredth of a percentage point. This apart, higher provision requirement for bad loans and restructured loans will also affect banks as they need to set aside more money for such assets. The combination of all three—a hike in policy rate, savings rate as well as higher provision of bad assets—has made money more expensive and banks have no choice but to raise loan rates instantly. Following this, their loan growth will probably slow and quality of assets, too, may deteriorate as some firms may find it difficult to service higher interest cost. The Indian banking industry’s loan book grew 21.4% in fiscal 2011, higher than RBI’s projection of 20% growth. In 2012, RBI wants banks’ credit growth to be 19%. A drop in credit growth will bring down banks’ interest income and, on top of that, if their bad assets grow, they will have to set aside more money to provide for them. This will affect their profitability unless they find ways to bring down their cost of operation and become extra-sensitive to the quality of assets. This means a close monitoring of all loan accounts and a very strict appraisal of new loan proposals. They can earn high interest rate from a loan given to a relatively weak corporation but such an exposure runs the risk of loan default. If that happens, a bank not only stops earning interest on that loan but also is required to set aside money for such an asset. RBI allows banks to restructure bad loans (so that they do not need to provide for them) when there is an economic downturn but no such concession is given when loans turn bad because of indiscreet lending. So 2012 could be a year of conservative banking with a hawk eye on quality of assets, operating cost and fee income. The impact of the policy rate hike is sharper on short-term money. For instance, the yield on 10-year benchmark government bond rose from 8.14% on 2 May, a day before the announcement of monetary policy, to 8.25% on 5 May, but the three-month treasury bill yield, during this time, moved from 7.52% to 7.95%, and that of one-year treasury bill from 7.76% to 8.20%. Bond yields dropped on Friday, 6 May, as a sharp fall in commodity prices encouraged the market to bet on a lower inflation. The price of crude dropped around 12% last week. A bond auction on Friday, the first after the policy rate hike, saw good demand from buyers and no dramatic change in yields. This is good news for the government as there will not be any drastic rise in its cost of borrowing. The Indian government plans to borrow Rs.2.5 trillion from the market in the first six months of the fiscal year till September, 60% of its Rs.4.17 trillion annual borrowing programme. The February budget has pegged the government fiscal deficit for the year at 4.6%, and the money raised from the market will bridge the gap. Analysts are sceptical about the fiscal deficit target as the budget has not made adequate provision for crude oil, fertilizer and food subsidies, and a lot will depend on the crude price movement. For the time being, though, the government is tiding over its short-term cash mismatches by raising money through cash management bills. It raised Rs.32,000 crore in the first five weeks of the fiscal year through such bills and also raised the size of weekly treasury bill auctions. This extra borrowing has, however, got nothing to do with fiscal slippage. It’s just to take care of cash mismatches due to changes in the government’s spending pattern. It is making income tax refund faster to corporations, which, till recently, used to take around six months. Indian firms pay advance tax every quarter on their projected profits and in case the payment turns out to be higher than what they should have paid, the government refunds the difference. RBI will have wholesale price inflation data of April and May, and factory output data of March and April, apart from the gross domestic product figure for the January-March quarter to look at before taking a call on yet another rate hike when it announces its mid-quarter review of monetary policy in mid-June. Of all these, the most critical data to watch out for is non-food manufacturing inflation, which rose to a two-and-a-half-year high of 7.1% in March. The policy rate will probably be kept at a higher level than non-food manufacturing inflation.

Did You know ? | Soon, you’ll get online alerts for all types of card transactions for all amounts

Earlier banks were mandated to send online alerts to cardholders for all credit as well as debit “card not present” transactions for values of Rs 5,000 and above. As per the Reserve Bank of India’s (RBI) circular, you will soon get online alerts for any transaction you make through your debit/credit card, irrespective of the amount, at various channels. RBI has asked all commercial banks to take steps to put in place a system for such online alerts by 30 June 2011. This will make tracking payments a lot easier for you.  Until the guidelines were issued, banks were mandated to send online alerts to cardholders for all credit as well as debit “card not present” transactions (when you are not physically present for the transaction such as during online shopping) for values of Rs. 5,000 and above. So if you used your credit or debit card at an online shopping website and the transaction amount was Rs. 5,000 plus, you got an online alert. As per the latest guideline, irrespective of the fact whether it is a “card present transaction” (where you are physically present such as at the automated teller machine or ATM) or a “card not present” transaction, you will get an online alert. This alert is applicable on transactions made over the interactive voice response (IVR) and point of sales (PoS) as well. The mode of sending online alerts has been left to the banks. So you could get email alerts as well as SMS alerts if your email address and mobile number are registered with the bank. The good part is that most banks are already sending alerts to their customers. For instance, ICICI Bank Ltd and Axis Bank Ltd.  Many customers have direct debit facility activated on their credit cards—to pay utility bills or even insurance premiums. In such cases, too, the bank will send an online alert. A few banks are already providing such a facility.  There is no doubt that online as well as offline financial fraudulent deals are on the rise. In fact, according to RBI, unauthorized and fraudulent withdrawals at ATMs have also been noticed recently. This step will help arrest possible fraudulent activities on your cards, besides helping you track your payments.

In high rates scenario, look for defensive bets

The Reserve Bank of India, in its monetary policy announced on May 3, raised the repo rate by 50 basis points to 7.25% and savings bank rate to 4% from 3.5%. With inflation and crude oil prices staying high, the central bank had little choice but to raise the rates. Soon after the rate hikes were announced, the markets went into a downward spiral. The Sensex lost as much as 617 points in the last week. Interest rate-sensitive sectors like banks, automobiles, real estate, construction and infrastructure fell much more. In response to the RBI policy, banks have raised base rates since their cost of funds has gone up. This would increase the borrowing costs for corporates, hitting their profitability. Market experts also worry that this may hamper growth in the near future. In such a scenario, what should the retail investors do with their portfolio?

NCP banks ensure their money is safe

NAGPUR: The NCP, which holds sway at Maharashtra State Cooperative Bank (MSCB) perhaps knew what was in store for the bank. Even before NABARD submitted a report to the state government damning the bank, five district central cooperative banks (DCCBs) withdrew their deposits amounting to Rs 3,305 crore. The list included the Pune DCCB, known to be the forte of deputy chief minister as well as state's finance minister Ajit Pawar. The other banks are from Ahmadnagar, Sangli, Satara and Kolhapur. The management in all these banks is dominated by NCP leaders. DCCBs and urban cooperative banks normally park their funds to meet the statutory liquidity ratio (SLR) requirements and for other purposes. "There is no urgency of withdrawing SLR money in totality as done by these banks," say sources. It was on the basis of this NABARD report the RBI finally ordered the state government to sack the board of directors. However, by withdrawing the money, the five banks were already safe. Only a select few were privy to the report as well as the likely decision on the board of directors being superseded. Sources say the NCP got a whiff of the likely move and five of its key DCCBs withdrew the money parked here. They probably smelt a rat when inspection notices were issued to MSCB. "The report was submitted to the state government on March 8 but withdrawals were already made. Even today the report remains to be a confidential document and the sudden decision to withdraw the money in lumpsum certainly raise eyebrows," said BJP MLA from Southwest Nagpur Devendra Fadnavis. This matter came to the fore through a legislative assembly question (LAQ) raised by Fadnavis in which the withdrawal was confirmed. The government justified the move saying that the deposits had matured. Even as a majority of the DCCBs in the state have the NCP dominance, these five banks are considered to be premium institutions in Maharashtra's cooperative fabric. It seems that the banks knew that MSCB board would be sacked leading to a panic run by the individual depositors. Though these deposits constitute a small part of the total figure, a run can certainly lead to a larger cooperative crisis with the funds parked by the banks also under threat. "The management seems to have showed financial prudence by acting on the insider information they received," alleges Fadnavis.

MFIs caught between RBI and AP Govt norms

Microfinance Institutions (MFIs) in Andhra Pradesh are in a state of confusion as some of the recommendations made by the Reserve Bank of India (RBI) for the sector are contradicting the rules prescribed by the State Government in its Microfinance Act.  Andhra Pradesh accounts for almost 25% of the Rs 30,000-crore microfinance trade in the country. As many as 24 of the total 44 MFIs recognised by the RBI are operating in the State.  The central bank, while accepting the Malegam Committee report, recently suggested that the repayment schedule (weekly or monthly) of loan can be chosen by the borrower. However, the AP Micro Finance Institutions (Regulation of Money Lending) Act, 2011 clearly says that the repayment cycle should not be less than a month. The dissimilarity may further affect the already crippling microfinance sector in the State, said Microfinance Institutions Network (MFIN), the representative body of micro lenders. "There is absolutely no clarity on the issue of repayments schedule. There are two people (AP government and RBI) trying to regulate the system. It can only increase the confusion. We will approach RBI, Finance Ministry and also the State Government for further clarity on the whole issue," Alok Prasad, Chief Executive Officer of MFIN, told PTI. The AP Government has no expertise in financial sector regulation. The RBI is the only institution that possesses the expertise and its regulation should be followed, he said. "There is a duality crisis in Andhra Pradesh. The AP government must step out from trying to regulate financial institutions," Prasad said. On the other hand, the state government is up in arms against the RBI's recommendations for the lenders. The government has decided to oppose some of the recommendations announced by the RBI last week as a part of the monetary policy announcement. Reddy Subrahmanyam, Principal Secretary (Rural Development), said the RBI did not address many critical matters like the issue of old loans extended by the MFIs at rates as high as 60%. The interest rate being charged by MFIs should have been capped at 24% as recommended by the Malegam Committee, instead of allowing it to be 26%, he said. "We are going to write a letter expressing our reservations to the RBI and Ministry of Finance," he added. The Rural Development Department of the state is gearing up take the apex bank head on. In a recent communication to its officials, the Society for Elimination of Rural Poverty (SERP), a state government body that is empowered to regulate MFIs, said despite the RBI's recommendations, the Microfinance Act will continue to apply to all MFI operations in AP. "The government has got legislation powers from the Constitution, whereas the RBI's power to issue executive instructions is a statutory power. Therefore, it is not in the domain of the RBI to annul the state legislation," a government circular said. "More so, the Act regulates the money lending aspects and transactions of the MFIs, which (fall) exclusively within the domain of the state government," it added.

A departure from conventional approach

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Three factors that shaped the monetary policy

Three factors have shaped the outlook and monetary policy for 2011-12. First, global commodity prices, which have surged in recent months are, at best, likely to remain firm and may well increase further over the course of the year. This suggests that higher inflation will persist and may indeed get worse. Second, headline and core inflation have significantly overshot even the most pessimistic projections over the past few months. This raises concerns about inflation expectations becoming unhinged. The third factor, one countering the above forces, is the likely moderation in demand, which should help reduce pricing power and the extent of pass-through of commodity prices. This contra trend cannot be ignored in the policy calculation. However, a significant factor influencing aggregate demand during the year will be the “fiscal situation”. The budget estimates offered reassurance of a fiscal rollback. However, the critical assumption that petroleum and fertilizer subsidies would be capped, is bound to be seriously tested at prevailing crude oil prices. Even though an adjustment of domestic retail prices may add to the inflation rate in the short run, the Reserve Bank believes that this needs to be done “as soon as possible”. Otherwise, the fiscal deficit will widen and will counter the moderating trend in aggregate demand. The latter portion of the third factor is the operative and crucial part which shapes the monetary policy outlook for the current fiscal. The RBI is in a hurry to pass-through the high oil prices to consumers. Otherwise, navigating inflation to a soft landing of 6 per cent at end March 2012 would end up as an unfinished agenda for the central bank. The monetary policy trajectory that is being initiated in this annual statement is based on the basic premise that over the long run, high inflation is inimical to sustained growth as it harms investment by creating uncertainty. Current elevated rates of inflation pose significant risks to future growth. Bringing them down, therefore, even at the cost of some growth in the short-run, “should take precedence”.

Bank lending to Microfinance companies: A question of priority

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NEED FOR DEREGULATION OF SB RATE – S.S.Tarapore

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Freeing the SB deposit rate

There has been much talk and debate about the Reserve Bank of India monetary policy that increased the key policy rate by half a percentage point. That headline grabber hogged so much limelight that the other significant prescription on increasing the savings bank accounts rate from 3.5 percent to 4 per cent almost went buried under the anti- inflationary hammer of the RBI. The monetary policy of last week marked a significant shift from drawing a balance between growth and inflation to fighting inflation and sacrificing growth. But no less significant was the RBI action on savings deposit rates which have remained unmoved for more than eight years. The increase in the rate of savings deposits has gone without due recognition that the RBI has used its mandate for the first time in many years to bring direct and immediate relief to the common depositors. It is pertinent to point out that in our country, the term “savings bank” is more of a misnomer: it brings access to the banking system but is not a tool to building savings. As such, the rate of 3.5 per cent has remained unchanged since as far back in time as March 1, 2003. The rate of interest on savings deposits was stipulated at 6 per cent in 1992. The rate has been progressively reduced by the RBI until we have arrived at this stage of 3.5 percent, and now 4 per cent with effect from last week. It is remarkable that in the period that saw the biggest and most successful push for liberalisation, a time when our leaders and policy makers repeatedly spoke of opening up the system to take our country on the road to a much touted economic stardom, the one rate that remained pegged and fixed at a ridiculously low level was for the money of the smallest of depositors who would add up to be the largest base of ordinary Indians in the banking system. As much as 84 per cent of the total savings deposits come from the household sector, according to the RBI. This is only typical of the Indian manner of governance where the one with the weakest voice is heard the least, and last. So it would be now in order to congratulate the RBI Governor for taking a step in favour of small depositors, embedded right within the monetary policy and for doing so at a time when the RBI has already put out a discussion paper on the deregulation of the savings bank deposit rate. There will be those who will argue that there was no need for the RBI to act on the savings bank rate even before the voice of the various participants on the discussion paper is heard. Indeed, there are already those who argue that the time is not right for freeing the savings rate, that the banks could suffer asset- liability mismatches and the net interest margins of banks would be badly hit. We have heard all of this before. As the RBI discussion paper itself points out, the central bank weighedin on the subject in 2002- 03 but held back the time was not considered right. It again came up in 2006- 07, when, interestingly, the Indian Banks’ Association (IBA) favoured deregulation “in the long run” but not just yet! The IBA wanted status quo; the RBI delivered it. It would be heartening to see the RBI not succumb this time. Already, the discussion paper has been praised for the quality of its inputs as well as its clear approach in favour of deregulation. This is the approach that sends out the right signals, that sets the ball rolling for change and will deliver the one message that the RBI must and needs to deliver -- that the marble white headquarters building is not an ivory tower for bureaucratic economists, that the RBI is an institution that will stand up for the common man. This is something that the RBI rightly aspires to. And it is the Governor, no less, who spelled out this aspiration earlier this year when speaking to graduate students at the University in Orissa. Here, Dr. D Subbarao candidly admitted that most people, even educated Indians, did not know much about what the RBI does. “ Many people think of the Reserve Bank as a mysterious institution, a sort of monolith doing obscure things that have no real relevance for the everyday lives of people,” the Governor told the audience at the University of Sambalpur. The perception needs to change. And it will change faster when the RBI stands up for the common man, the ordinary Indian and that faceless depositor whose money and trust is the real power behind all that the banking system delivers.

RBI team to visit Moreh

Imphal, May 07 2011 : A four member team of officials of Reserve Bank of India, Foreign Exchange Department headed by DGM A Bhaskara Rao would visit Moreh tomorrow. The RBI team would convene a meeting of traders, importers and exporters of Moreh on May 9 at the Moreh Trade Centre.  Later in the evening, another meeting of traders, exporters and importers of Manipur would be held at Classic Hotel here. The RBI team is expected to be accompanied by officials of other public and private sector banks. United Bank of India is coordinating the programme with the help of Government of Manipur. A team of UBI officials headed by Chief Manager Ananda Kumar would also visit Moreh along with the RBI team.  The RBI team would take stock of logistics and infrastructure at Moreh and also visit UBI Moreh Branch, which is a B category authorised dealer of foreign exchange. This UBI branch is authorised for monitoring barter trade in the Moreh border for import and export of goods of value above $ 1000 to $ 20,000.  Besides barter trade, other normal trade is also allowed through Moreh Land Customs Station but so far no normal trade except the barter trade through banking channel is materialised. The RBI officials would analyse the bottlenecks of formal trading through Moreh border and would take stock of the weaknesses of the banking channel, if any, conveyed a press release issued by the United Bank of India.

RBI dissolves board of Pawar-run co-op bank

MUMBAI: A day after the Reserve Bank of India dissolved the NCP-controlled Rs 20,000 crore Maharashtra state cooperative bank board for dismal performance, the Congress and the NCP seem to be on a collision course.  Political analysts view the RBI's decision as a personal setback to agriculture minister Sharad Pawar and his nephew, deputy chief minister Ajit Pawar who were controlling the bank for over 15 years.  On the recommendation of the National Bank for Agriculture and Rural Development ( NABARD), the RBI asked the Maharashtra government to forthwith dissolve the board of directors and appoint bank administrator. Chavan on Saturday appointed agriculture secretary Sudhirkumar Goel and planning secretary Sudhir Srivastava as administrators. They have already taken charge. Sharad Pawar was also in Satara. He took strong objection over the way administrators were appointed. "There was no corruption in the bank, there were certain irregularities, which could have been rectified after discussion, there was no need for dissolving the board of directors and appoint administrators on the bank," Pawar said. The cooperative bank chairman Manikrao Patil, a senior NCP leader, called it unfortunate since the bank had taken several corrective steps to restore its financial situation.

Sharad Pawar sore, others welcome change in Maharashtra bank

Mumbai, May 7 (IANS) The Reserve Bank of India’s (RBI) move to recommend supersession of the board of directors of the Maharashtra State Cooperative (MSC) Bank Saturday evoked mixed reactions from state politicians. Union Agriculture Minister Sharad Pawar expressed displeasure over the RBI move, saying it should have consulted the bank authorities before superseding the bank’s board of directors. ‘The RBI should have discussed the issue with the bank board before taking any steps,’ Pawar told reporters in Pune, some 160 km from here. To a question, Pawar denied that there were any financial irregularities in the MSC Bank. His nephew and state Deputy Chief Minister Ajit Pawar is on the board of directors. On the other hand, Chief Minister Prithviraj Chavan assured the peiople that strict action would be taken against anybody found guilty of irregularities in the bank. The bank had been served several warnings before the action was initiated and the depositors need not worry about their deposits with the bank, Chavan said Saturday afternoon in Satara, some 250 km from here. He said that the bank’s position would improve after the new developments and dismissed contentions that there was politics behind the move to supersede the board. Swabhimani Paksha MP from Hatkanangle in Kolhapur Raju Shetti welcomed the RBI move to supersede the bank board. Shetty alleged that the bank was exploited by various political parties to further their own interests over the past many years.  Despite many complaints about the irregularities plaguing the bank, the state government failed to take any action, he said. ‘The government should probe the bank’s affairs and bring out a white paper on its finances. Those found guilty should be put behind bars,’ Shetti demanded.The MSC Bank’s board comprises leaders and legislators from different parties including Ajit Pawar, Diliprao Deshmukh, Anandrao Adsul, Diliprao Sopal, Minakshi Patil, Rajni A. Patil, Pandurang Phundkar, Vijaysinh Mohite-Patil, Rajan Telli, Vijay N. Vadettiwar, Yashwantrao Gadakh and others.

Pawar irked at RBI's call on Maha state co-op bank

PUNE: Union Agriculture Minister  Sharad Pawar on Saturday expressed his displeasure over the Reserve Bank of India's decision to dissolve the board of directors of Maharashtra State Co-operative Bank Ltd (MSCB). Pawar said, "If an institution is performing well, it should be given some time to recover from the financial crisis."  Pawar was speaking at the 60th foundation day of city-based Pune People's Cooperative Bank Ltd.  The RBI on Friday evening dissolved the board of directors of the MSCB after finding deficiencies in the working of the bank. Dinesh Oulkar, temporarily holding the charge of cooperation commissioner and registrar, appointed Sudhir Kumar Goel, principal secretary (agriculture) and Sudhir Shrivastava, principal secretary (planning) as the members of the board of administrators on the MSC bank.  Pawar said, "There have been allegations that the bank has not recovered outstanding loans worth Rs 1,000 crore. The recovery was slow but happening. For many loans, the state government is the guarantor, which means the loans are recoverable, but the RBI authorities ignored it."  MSC bank, working as an apex bank for cooperative societies, sugar factories and other cooperative institutions in the state, has been a prominent political establishment. The bank, being a major source of funds for the cooperative establishments, has attracted political intervention in its functioning. There have been allegations against opposition parties as well as state leaders of Congress party for using the bank and network to make political gains.  Based on the audit report of 2009-10 and statutory inspection of the bank, conducted by the National Bank for Agriculture and Rural Development, the cooperation department found adverse features and irregularities and violations of guidelines and laws. According to the corporation department's finding, as on March 31, 2d010, the net worth of paid up capital and reserve was estimated at Rs 144.22 crore and capital adequacy ratio was estimated at -1.5% in the report. The non-performing assets were at 13.12%, the report stated.  Nabard's findings were also similar with the audit reports where progressive deterioration in the financial position was attributed to the sanctioning of loans without obtaining credit authorization for financing infrastructure projects. The letter has also claimed that some loans have been sanctioned contrary to recommendations made by the department.  The decision was taken on a requisition sent by V K Sharma, Executive Director of RBI by a letter composed on May 4.

RBI doing its best to contain inflation

MANGALORE: Inflation is a major cause for worry. Liquidity management is a challenge for the Reserve Bank of India, which is doing its utmost to contain runaway inflation. In its latest monetary policy, the RBI has increased repo rate and reverse repo rate. It has also raised the savings bank rate from 3.5% to 4% thereby, bringing marginal relief to small savers. Moderation in CD ratio is being stressed in view of the mismatch between the two. Making this observation during regional heads review conference of city-based Karnataka Bank held at banks head office here on Saturday to review the performance of the regions for the quarter ended March 2011, P Jayaram Bhat, managing director of the bank said RBI is emphasizing the need for banks to reduce spread between deposit and lending rates. Under this emerging situation, the bank should look for low\no cost deposits, Bhat said.  Further, the quality of assets is of vital importance. Non-performing advances should be curtailed, he said, calling upon the regional heads to understand their role well and guide the branches to achieve the desired results by improving operational efficiency and increasing fee based income as well. General manager P Jairama Hande welcomed the members and briefed them about the implications of monetary policy statement announced by the RBI.

Steroid Deficiency

Will the RBI’s balancing act revive flagging investment sentiments?  More often than not, clarity emerges at times of immediate distress. Over the past year or so, we have been witness to a game of ping-pong between the government and the Reserve Bank of India over “spiralling” inflation. From the prime minister and finance minister onwards, the government has been claiming that high inflation is a corollary of high growth and has put the ball in the RBI’s court. RBI governor D. Subbarao’s recent statement and raising of rates for the ninth time in 14 months has reinforced that “there is no tradeoff at our levels of inflation” for high growth. That means two things. Despite repeated claims, the government has failed to control inflation, which still shows signs of reverting to double digits and remaining there for the next six months. And the RBI’s big rate hike reflects how inflation is now hurting the growth story. Scaling down the GDP growth forecast to 8 per cent—a percentage lower than the 9 per cent projected by the finance minister in the 2011-12 budget — Subbarao stated: “If inflation comes down to 6 per cent (by March 2012), then we can get on to a higher growth trajectory.” Defending the 9 per cent projection, “which was based on January data”, Planning Commission deputy chairman Montek Singh Ahluwalia stresses: “It is reasonable, in light of the subsequent data, to scale it down slightly to 8.25-8.5 per cent.” He, however, adds that growth projections are constantly changing. As such, he states: “We could have a better assessment in September.”

CBI has 10,000 pending cases: Director

Ghaziabad: About 10,000 criminal cases are pending with the Central Bureau of Investigation (CBI) due to severe shortage of staff, the probe agency's chief said here Saturday.  CBI Director A.P. Singh said: 'We are short of officers. At least 30 percent of the posts within the CBI are vacant. The central and state governments are also not meeting our requirement through deputation of additional officers. We are loaded with the fresh cases from states, the union government and from the courts.'  The director was the chief guest at the investiture ceremony of sub-inspectors at the CBI Academy here.  He said that it had become the Herculean task for the agency to deal with the finance related crimes.  'We had requested the Reserve Bank of India (RBI) to provide us some skilled officers to deal with the financial crimes. But the RBI also had shown its inability to provide such skilled staff. Hence about 10,000 criminal cases are still pending,' the officer said.  He said the agency is hopeful of early disposal of its cases as 71 new special CBI courts are being set up across the country.

The price tiger is free

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RBI'S annual policy for 2011- 12: An assessment - B BISWA SWARUP MISRA

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ICICI, five PSU banks hike rates

Mumbai, May 6: ICICI Bank and five state-owned banks today raised their lending rates by about 50 basis points each, making auto, home and other loans expensive. The Union Bank of India, Indian Overseas Bank, the United Bank of India, Andhra Bank and the State Bank of Bikaner and Jaipur are the public sector banks that raised interest rates today. The decision of the banks to raise rates comes within days of the Reserve Bank increasing short term lending (repo) and borrowing (reverse repo) rates by 50 basis points (bps), with an aim to calm down inflation, which has hovered above the government’s comfort level. Several other banks, including Punjab National Bank, Canara Bank, the Bank of Baroda, Allahabad Bank and Indian Bank, have already increased their rates. ICICI Bank today raised its base rate by 50 bps to 9.25 per cent and the benchmark prime lending rate (BPLR) to 18 per cent. The new rates will come into effect from tomorrow, it said. A hike in lending rates will increase the cost of credit for new borrowers and the existing ones who had obtained loans at a floating interest rate. According to ICICI Bank, the floating reference rate, on the basis of which interest rates are determined for existing borrowers, will now be 15 per cent. The decision, the bank said, will not impact the customers who had obtained loans at fixed interest rate. After the hike, the base rate of the Union Bank of India, Indian Overseas Bank, the United Bank of India and Andhra Bank stands at 10 per cent. The base rate of State Bank of Bikaner and Jaipur will be 9.25 per cent. Besides, BPLR of all banks, except ICICI Bank, now stands at 14.25 per cent. The base rate system replaced the BPLR system from July 1, 2010. However, BPLR is applicable to older customers who took loans earlier. The higher lending rates would make loans dearer to both new and existing auto, home and corporate borrowers. Banks have been on a rate hike spree since the Reserve Bank’s decision to raise short-term key rates, including the repo and reverse repo by 50 basis points in its annual credit policy on May 3. The repo and reverse repo rates now stand at 7.25 and 6.25 basis points, respectively. Besides, the RBI also raised the savings bank deposit interest rate to 4 per cent from 3.5 per cent.

'Monetary policy alone can't tackle inflation beyond a point' - Aditya Puri, HDFC Bank

Aditya Puri, managing director of the country’s second largest private sector lender, HDFC Bank, believes raising of rates would not suffice to control inflation; instead, it may slow the growth of the economy. He tells Somasroy Chakraborty how HDFC Bank plans to sustain its growth in this period of elevated interest rates.

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High inflation posing risks to growth: Subbarao

Reserve Bank of India (RBI) Governor D Subbarao on Friday said the current high level of inflation was posing significant risks to future growth and it was imperative to bring it down even if that meant sacrificing some growth in the short term.  In a presentation to the Inter Ministerial Group (IMG) on inflation, Subbarao said the monetary policy measures, announced in the bank’s Annual Statement for 2011-12, were based on the premise that bringing inflation down, even at the cost of some growth in the short term, should take precedence.  The RBI, in its credit policy statement on May 3, reduced growth estimates to eight per cent, as it increased the policy rates for the ninth time in over a year. It decided to go for a sharper-than-expected 50 basis points rise in the policy rates to rein in inflation. “We said everything we needed to say in the policy document. The RBI’s understanding of short-term and long-term inflation situation was explained to the IMG,” Subbarao told reporters after emerging from the third meeting of the IMG that lasted about two hours.  He explained that experience in India as well as globally suggested that in the long run, there was no trade-off between growth and inflation. He said any attempt to push growth above the potential level would only lead to higher inflation, but no durable growth or employment gain. He, however, emphasised that containing inflation was imperative to sustain growth over the medium term.  “This is a critical attribute of a favourable investment climate, on which growth sustainability depends. Fiscal consolidation will also contribute to improving the investment climate,” he said.  Chief Economic Advisor Kaushik Basu, who heads the IMG, agreed there was no conflict between the objectives of high growth and low inflation in the long run. In the short run, lowering inflation can have a dampening effect on growth, as the traditional Philips curve analysis suggests. But this is desirable, according to him, if the aim is to achieve high, sustainable growth.  Basu said all emerging economies were troubled by the resurgence of inflationary pressures and there was a concern that the very nature of global inflation might be changing.  The Wholesale Price Index-based inflation for March was 8.98 per cent. Although food inflation came down to 8.53 per cent for the week ending April 23, from 20 per cent in February last year, actual prices of food items continue to remain high.  The IMG was set up at the suggestion of Prime Minister Manmohan Singh in February ‘to review inflation situation and suggest corrective measures’. The meeting was also attended by secretaries from finance, commerce, Planning Commission, food and agriculture ministries, who are part of the IMG.

Getting policy act together

The Finance Ministry, while revising the growth estimates, must find ways to use its vast and varied armoury to fight sticky prices.  Recently, the Economic Advisor to the Finance Ministry, Mr Kaushik Basu, told presspersons that the Ministry might just revisit the forecast for GDP in the current year and lower it a notch. Global commodity and fuel prices are rising, putting pressure on growth worldwide, and India, he said, will have to take stock of that. In a break from past practice, the Finance Ministry will undertake an interim review of the economy that will analyse current developments and, accordingly, fix a new and more modest GDP forecast. As Mr Basu added, India will be following a trend prevalent all over the world, with several economies pegging their growth for the current year at lower levels. That should not become an excuse for not exploring policy options on revitalising the engine of growth. The downside risk is real. The RBI's annual statement, released a few days ago, has already sounded the cautionary note in its analysis of the year gone by and its prognosis of the one we are in now. According to the central bank, it is the inflationary pressure brought about by global commodity prices that is now adding to the “downside risk” of subdued growth. In fact, the RBI has found evidence of “moderating growth” with a sluggish capital goods industry and slackening investment spending. What spending there is, a good chunk of it is flowing to overseas suppliers, especially the Chinese, starving domestic producers, in the process, of much needed incremental demand. Take a look at external commercial borrowings and it is evident that a number of firms in power and telecommunication sectors are importing capital equipment; and no prizes for guessing what they regard as the most attractive source of such imports. China has built up a sizable capital goods industry and now is considered a major exporter of even alternative energy equipment. What the Ministry will have to remember is that the review will be gauged against the sombre mood that permeates the RBI report. What it essentially points to is slowing growth coupled with rising inflation and, as a central bank, it has done what it can do. Now, North Block, while revising its growth estimates, will have to find out just how its vaster and more varied armoury can be utilised to fight sticky prices. So far, New Delhi has simply waxed eloquent on the prospects of high growth without a thought to inflation, treating it as a problem for the RBI to handle. Restoring the past momentum of growth, combating inflation on multiple fronts and easing regulatory bottlenecks must top the Finance Ministry's policy agenda.

The wrong war? - T N Ninan

No one should cavil at the new repo rate of 7.25 per cent (up from 6.75 per cent earlier), since inflation is at 9 per cent. Still, in a week when the Reserve Bank of India (RBI) has said that combating inflation is now its primary focus, it is important to ask: is RBI fighting yesterday’s war, instead of peering into the future to glean what might be coming — as monetary policy is supposed to do? Rewind to where the inflation debate started. From the middle of 2009-10, sundry government spokesmen predicted that the year would end with 5 per cent inflation. It wasn’t to be. Then they switched to making the same forecast for 2010-11. Several reasons were given for the expected drop in inflation: a high base effect would kick in, a good harvest was coming, and so on. None of it made a difference. Last year, wholesale price inflation was 9 per cent, and the year before 10.2 per cent. Retail price inflation was comparable, if not worse (8.8 per cent and 14.9 per cent).  Forecasting is a hazardous business, especially about the future, as a rueful Dr Subbarao wisecracked the other day. So if you were to ask why RBI and the government got their inflation numbers way off track, the truth is that no one could have seen that international oil prices would treble in the last two years, from $40 per barrel to $120. Or that global commodity prices as a whole (including oil) would see an 80 per cent price surge. The domestic backwash was clear too: primary articles went up 22.4 per cent, and fuel and power 13.8 per cent in 2009-10; both went up a further 13 per cent in 2010-11. How could any governor achieve 5 per cent wholesale price inflation in such a context?  Having got it wrong twice, the RBI wants to be third time lucky —except that global commodity prices have just taken a tumble. Oil has dropped below $100, and silver is down 30 per cent. Copper, tin, coffee, cocoa … they have all dropped. From the country demand perspective, China is slowing down and US indicators look shaky. As for the domestic signals, from January 2010 till now, consumer price inflation has virtually halved (from over 16 per cent). There is more room to fall, but in the most recent months, between November and March, the consumer price index went up from 182 to just 185. So, has the inflation beast already been tamed — especially if global commodity prices are falling? And if so, is the anti-inflation thrust in danger of curbing growth?  Note that the index of industrial production for the latest four months (till February) has shown average annual growth of less than 3 per cent. Despite the surge in commodity prices last year, import growth was just 17 per cent. Discounting for the price surge (think oil and commodities), import growth would have been in the low single-digit region — pointing to a lack of domestic demand. If you look at sectors, the demand for capital goods has already slowed. With higher interest rates, the demand for consumer goods should slow too. And the government has become less of a spendthrift; with lower deficit numbers, it is no longer pumping up demand as it was doing through 2008-11 (a period in which 43 per cent of the increase in money supply was accounted for by fresh credit to the government!). Finally, agricultural growth this year is likely to be modest, since it comes on top of a good harvest last year. In short, you might be lucky to get even the lower 8 per cent GDP growth that is now forecast.

RBI makes first move in savings account rate change

The Reserve Bank of India (RBI) has said in a draft paper that the savings account interest rate should be deregulated. This rate is currently 3.5% and is the only interest rate offered by banks that is enforced across all banks. Even though knowledgeable investors do not keep a significant proportion of their money in savings accounts, this is a useful move.  On Tuesday, the RBI announced a hike of 0.5 percentage point in the savings deposit rate — the first increase in 19 years — taking it to 4% with immediate effect.  Savings bank accounts are the primary savings vehicle, almost by definition, of the least well-informed class of savers. As such, the only way these people have of maximising their returns is if the RBI creates conditions that facilitate that. A few months ago, RBI had forced banks to change the method of calculating the savings bank interest on the daily average balance instead of the minimum balance. This made the calculation fair and enhanced returns for customers. Interestingly, after the RBI's draft on rates was released, some bankers seemed to suggest that rates may actually come down because they claim that small accounts are uneconomic at even the current levels. My guess is that the banks will end up giving different interest rates to different categories of customers. Whether that achieves the RBI's goal remains to be seen. Savings bank returns apart, banks products are the default 'investment' that a majority of Indians use, and it's a fact that bank's rules and regulations are not setup to maximise your returns. This means that if you are using fixed deposits as an investment vehicle—and a lot or people are—then you need to track their expiry carefully because lapsed fixed deposits are major source of leakage of returns. The ideal would be if the RBI would fix the underlying rules, but failing that, investors need to take care of their interest themselves.

Opening up the last spoon-fed rate

The Reserve Bank of India (RBI) has published a discussion paper on deregulation of the interest rate on savings bank deposits, seeking feedback. The RBI, in its latest monetary policy review, did decide to increase the savings bank deposit interest rate from 3.5% to 4% with immediate effect, pending a final decision on doing away with the administered rate and leaving it up to banks. The paper seems cautiously optimistic that deregulated, market-determined interest rates on savings bank deposits would bring about better allocation of resources, boost savings and lead to better transmission of monetary policy. The interest rate on savings bank deposits is the last remaining administered rate in the domestic banking system. Now, in the days of pre-reform , what was essayed was a conscious policy of financial repression so as to coagulate funds at fine rates for investment. Back then, most deposit and lending rates were controlled by the finance ministry, including for entire segments of consumers. With thoroughly suboptimal results, it needs to be said. The paper mentions that financial sector reforms here were initiated in the path-breaking 1990s, as part of structural economic reforms begun during the period. There were missteps and wrong moves along the way, notes the paper. For instance, in April 1985, there was a tentative move to deregulate deposit interest rates with banks allowed to decide interest rates for maturities between 15 days and one year, subject to a ceiling of 8%. But the end-result was a race to the bottom with banks offering the highest possible rate for the shortest period and a general shift of deposits from current accounts and even from savings accounts to 15-day deposits! The freedom to decide on interest rates was withdrawn in May 1985. The paper adds that the process of deregulation restarted in the early 1990s, and was largely completed by October 1997. When it comes to bank lending, a few categories of interest rates continued to be regulated: for small loans up to . 2 lakh and rupee export credit. These two rates were deregulated in July 2010, when the RBI replaced the benchmark prime lending rate (BPLR) system with the base rate system. It meant curtains for all administered rupee lending rates. So, the only interest rate that continues to be regulated today is the savings deposit interest rate. The paper enunciates that deregulation of the deposit rate, with interest rates decided by individual banks as per liquidity conditions, would be favourable to savers. It cites empirical evidence to suggest that widening interest rate differential between term deposits - long deregulated - and savings deposits leads to reduction in the share of savings bank deposits in total deposits. Apart from reducing relative attractiveness, administered interest rate policy on savings deposits also adversely affect the transmission of monetary policy , avers the paper. And the fact that the savings deposit interest rate has not been changed since March 1, 2003, does imply that changes in RBI's policy rates - for example, the dearer cost of funds indicated by the central bank of late - have not been transmitted to savings bank deposits. The study hastens to add that if the overall cost of deposits moves in tandem with the policy rates, then monetary transmission is not so adversely affected. Be that as it may, savings deposits are about 13% of financial savings of households, and the interest rates on such funds do need to be market determined and not by administrators at RBI. International experience also corroborates such deregulation. For instance, well into the 1970s, commercial banks in the US faced a panoply of restrictions on interest rates, both on deposits and extending credit. And subsequent deregulation did allow banks to offer better services at lower prices. However, for banks, savings deposits are a low-cost source of funds, and could deregulation mean unhealthy competition and asset-liability mismatches? If deregulation of interest rate for term deposits , which constituted more than 60% of deposits, did not have a destabilising impact, deregulation of interest rate for savings deposits, which constitute about 22% of total deposits, may not have a significant adverse impact on the system, concludes the paper. It makes sense to begin deregulation of the savings deposit rate in a phased manner, subject to a minimum floor initially, and with builtin flexibility on cheque issuance and withdrawals. (Deregulation of Savings Bank Deposit Interest Rate: A Discussion Paper, RBI, April 2011).

Pushing growth beyond potential to boost inflation: RBI

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RBI asks Tamilnad Mercantile Bank to list shares through an IPO

TUTICORIN , TAMIL NADU: The Reserve Bank of India has asked the Tamilnad Mercantile Bank (TMB) to list its shares through an IPO, a top official of the bank said on Friday. "We are one of few unlisted banks in the country and the Reserve Bank of India wants us to get listed as soon as possible .... We would be considering this proposal provided a couple of pending cases are resolved," A K Jagannathan, managing director and chief executive officer of the Nadar-dominated , Tuticorin, Tamil Nadu-based bank, said. He was speaking after the release of the bank's results.
The RBI suggestion is important as a few weeks ago the banking regulator had declined to acknowledge the sale of a 33.54% stake by well-known serial entrepreneur C Sivasankaran to a group of investors. The group's members included Rajat Gupta, former McKinsey chief, and Ramesh Vangal , the former Asia Pacific president for PepsiCo Foods . The investors were acting as a group, the banking regulator said and asked them to cut their stake to about 5%. TMB was one of the many community banks that were set up in the 20century in many parts of the country to finance local entrepreneurship and take care of community needs. Over the years, it became successful and started attracting attention from corporate and takeover artists like Sivasankaran. The Essar Group tried to get a foothold but were rebuffed. Siva, who belongs to the Nadar community, also could not get full control and decided to sell to the
Vangal-led group a few years ago. The issue has got more complicated now due to a shareholder's suit in the Madras High Court challenging the RBI's order. The shareholder alleged that the central bank's order is vague since it did not include B Ramachandra Adityan and his family members as part of the Vangal-led group. Asked whether the IPO would be the way for these investors to cut their stake to 5%, Jagganthan said the bank can go for IPO on its own and it is up to the investors to decide what they want to do. "After the Reserve Bank of India order , the bank's hands have been freed to make key operational decisions . Now the annual general meeting holds the key, where the proposals for IPOs, bonus and rights issue can be made. However , there are a few lawsuits in courts which have to be settled to go ahead with the annual general meeting," he added. After the Reserve Bank of India order, the bank had planned to conduct its annual general meeting on June 15. On a thin equity of Rs 28.45 lakh, Tamilnad Mercantile Bank has reserves of Rs 1,366.02 crore and the book value of the Rs 10 share is at Rs 48,022 a share as of March 31. The bank has been roiled by ownership tussles for two decades but the latest round does not seem to have affected its performance in the past year. In fiscal 2011, the bank's net profit rose 35.97% to Rs 250.90 crore, while business grew 23.17% to Rs 24,679 crore. The net interest margin was at 4.25%, while gross NPA was 1.30%. The bank has declared a dividend of Rs 1,000 per share for fiscal 2011, up from Rs 800 a share last year, pending shareholders' approval.