Centre may restore interest subvention

“It has been indicated that if RBI continues with its monetary tightening measures, we may look at restoring two per cent interest subvention once again or else.......

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Will India's economy bounce back?

"If you are growing at even 8% it is fine but we have to see whether it is the beginning of a prolonged slowdown," Bimal Jalan, former Reserve Bank of India Governor, said. But most experts say....

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On inflation, RBI may miss the goal again

Economists expect the RBI to stop its hiking cycle after August. “In terms of quantum they will hike rates by about 50 basis points out of which.............

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The curious case of inflation combat - Madan Sabnavis

In the last 15 months or so, the Reserve Bank of India (RBI) has relentlessly pursued the goal of inflation control as the number appears to be quite intransigent despite all the positive developments in agriculture. The results have not been encouraging so far and the impact has been limited. How do we tackle inflation then? The answer could actually be staring in front of us that we have not taken into account. To understand more, let us look at the composition of inflation in terms of what are the sectors that influence inflation. Broadly speaking, primary products have a weight of 20%, fuel products 15% and manufactured goods 65%. Inflation has been relatively high in all the sectors by the pre-2009 standards and each of them is guided by a different government body that has influence over prices. Let us look at primary products. Here the ministry of agriculture (MoA) has maintained that FY11 has been one of the best for agriculture. Yet prices have been rising and all the assurances of good monsoon, robust kharif and an ecstatic rabi harvest has not helped bring down prices. This is partly due to the fact that the ministry has been instrumental in increasing the minimum support prices (MSP) of all farm products. In the last 2 years, it has been increased by between 10% and 30%, which means that there is an inherent tendency for prices to go up as market benchmarks are increased. Last week, the MSPs were raised once again by the Cabinet Committee on Economic Affairs (CCEA) across pulses, cereals, oilseeds and fibres. This means that there is an inherent upward bias in the market even though the government physically only deals in procurement of wheat and rice. By counter-intuitive reasoning, it may be concluded that MSPs have driven inflation since the government maintains that the high MSPs have helped to shift crop patterns and increase output. Here we are not passing a value judgement on whether it is justified or not. Now let us look at the fuel prices that are increasing by around 13%. Higher crude oil prices make state-run oil marketing companies unviable and there is this constant call to align petro-product prices with those in the market (including by economists). The ministry of petroleum (MoP) decides on the pricing policy. Motor spirit prices directly feed into inflation with a weight of around 1%, while diesel comes with a direct weight of close to 5% and an indirect influence of 0.75-1% on prices. Although it makes economic sense to increase prices, it also adds to inflation. Then there is the ministry of finance (MoF), which has its opinion on the subsidy bill on food and oil. To ensure that the Fiscal Responsibility and Budget Management (FRBM) targets are adhered to, it is reluctant to increase its expenditure and hence deficit, and is exerting pressure on the MoP to increase fuel prices. Curiously, the government can enhance its expenditure without the fear of being caught in the RBI’s web of increasing interest rates as it gets its funds through the regular auctions, which come in at an average rate of around 8.4-8.5%. The last sector, manufacturing, is the one which generates core inflation (non-food and fuel). If manufactured food products and textiles are excluded (as they are agro-based), then this group accounts for 45% of inflation and core inflation would be only 5% in April 2011. In fact, since April 2010, this entire group has shown an increase of between 5% and 6.5% consistently until April 2011 with limited volatility. This is where RBI policy can work. But for this to happen we need to answer some questions. First, is consumption supported by bank finance increasing demand of houses (mortgages) or automobiles or consumer durable goods? Is investment by industry growing rapidly? Is industry holding on to large inventories? If the answer is yes, then interest rate hikes will lower demand by increasing cost of credit. But if the answer is a shoulder shrug then we may be barking up the wrong tree by raising rates. The point that emerges is that we have a situation where different arms of the government are speaking different languages and expecting RBI to tackle inflation. So we have a case of food and fuel prices increasing on which RBI has no control—after all, no one borrows money to eat food. The poor anyway continue to starve as they are not credit worthy. Therefore, RBI may be forced to treat a malaise over which it really has limited control. What is the solution? The MoA, CCEA, MoF, MoP and RBI should all sit together and discuss the inflation strategy. Currently we have every authority looking closely at its own jurisdiction and taking decisions to ensure that their houses are clean, while RBI has the tough job of finding solutions to inflation. We certainly must have all these ‘arms’ talk to each other continuously with a macro eye. This will ensure that we have a singular approach to inflation and eschew this seemingly chaotic situation where RBI is on one side and the others are pulling the strings in the other direction.

The author is chief economist, CARE Ratings. These are his personal views

FE

Macro-economic fundamentals strong despite inflation, fiscal concerns: RBI

....Adding a note of caution, the RBI said the failure of a single bank could have a domino effect on the entire banking system due to the “connected and ......

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BoM convenes 111th state level bankers committee meeting

Dr KC Chakrabarty, Deputy Governor, RBI, Ratnakar Gaikwad, Chief Secretary, Maharashtra state and A S Bhattacharya, Chairman & Managing Director, Bank of Maharashtra and Convenor SLBC, Dr Alok Pande, Director, Financial Inclusion GOI, review the state specific financial inclusion plan and annual action plan for 2011- 12 at a meeting in Mumbai on Tuesday. The state annual credit plan has been increased to Rs 54,618 cr for the year 2011- 12.

Fress Press Journal

Is ICAI overstepping its jurisdiction in seeking to question SBI? - Nagesh Kini

The Institute of Chartered Accountants of India wants an explanation from the State Bank of India on the huge profit erosion in the March quarter, while it turns a blind eye to complicity of its members in cases of financial indiscipline

"SBI faces queries from the Institute of Chartered Accountants of India", read the headline in a newspaper a couple of days ago. The news report went on to say that "Taking a strong note of the SBI's huge profit erosion for the March quarter, due to a rise in the provisions, the president of the accounting regulator ICAI on Friday said it will ask the country's largest bank to explain the reasons for earmarking the higher provisions for bad loans." Does this make any sense?  ICAI, the Institute of Chartered Accountants of India, which ought to be the regulator for chartered accountants and auditors, has chosen to put its foot in its mouth, and it should explain under which provisions of either the Chartered Accountants Act or the Banking Act it is authorised to raise queries of this nature with any bank in the country, and in this case the largest one at that. There already exists another regulator, the Reserve Bank of India (RBI), which is empowered under the RBI Act to regulate, direct and question the banking sector in India, as well as the statutory and branch auditors and chartered accountant directors that are appointed on the boards of banks. Additionally, the appointment of the chairman and managing director for public sector banks, as well as the other banks, requires its nod. Frankly, the ICAI has put its foot in its mouth. It has no jurisdiction over the banks at all. Even morally, it has no business whatsoever to raise questions about the State Bank of India (SBI) and its accounting now, when it has miserably failed in acting in another matter of the Global Trust Bank, where the blacklisted auditor firm, PriceWaterhouseCoopers (PwC), was reinstated on the RBI panel after the deputy governor retired, ostensibly with the ICAI's active connivance. The PwC's partner was the chairman of ICAI's Ethics Committee, now charged in the Satyam fraud! Bad loans and non-performing assets simply do not occur overnight. They incubate over the years, when all signs of incipient or impending illness are winked at, at all levels. The provisioning is carried out at the highest levels going right up to the board of directors, which includes chartered accountants.  The banking sector has a plethora of checks and balances, like periodical submission of stock and receivable statements, reviews at each renewal, internal inspection and stock audit by chartered accountants, and more. If, after all this, the advance turns bad, it goes to prove that there has been definite failure of monitoring and reporting and that it was winked at, at the top too. The cash-for-loans scam had the active involvement of a director who was a chartered accountant. The auditors are additionally required to submit a detailed Long Form Audit Report (LFAR), aptly renamed "Lafda Report" in Mumbai lingo. How the loans got past all these scrutinizes, at various stages, over the years, needs to be specifically inquired into. The auditors need to clarify whether they have reported on SBI and ICICI Bank exceeding the lending limits to RIL, BHEL and ONGC. The ICAI ought to issue notices to its members, chartered accountant bank directors, statutory and branch auditors, inspection and stock auditors, those who prepare project reports and those who arrange loans, each of whom is guilty at some point in time, and not the banks who are answerable to the RBI, their regulator. It has now been proved by these massive provisions being made recently that banks in India have been hiding huge losses on account of non-performing assets (NPAs) year after year. Why they were not provided for in earlier years needs to be explained also by the earlier auditors, in particular, who are equally guilty of dereliction of duty and passive connivance. SBI's chairman and managing director Pratip Chaudhuri, Bank of India's Alok Misra, Bank of Baroda's AK Khandewal blowing the whistle has reportedly not been appreciated by the banking regulator. Deputy governor KC Chakrabarty, himself a former chairman and managing director of a public sector bank, has indeed been candid in his observation that financial reporting should not be "as per the minds of bank chairmen, when chairman changes, profits tend to fall. Things should not turn topsy-turvy if bank chairman changes." That bank auditors are hand in glove with the chairman and managing director is the cause of scams, cash-against-loans, corrupt percentage practices, financial jugglery, political pulls and pressures, as has been the case with the Maharashtra State Cooperative Bank. While the justice system in the US has been swift, prompt and unsparing, like Arthur Andersen paying for the Enron mess, the auditors Ernst & Young being held more responsible for the collapse of Lehman Brothers than the bank's management, and PwC USA being ordered to pay millions in the Satyam affair, our regulators, whether it is the Securities and Exchange Board of India, the RBI or the ICAI, are still mulling over whether each has a cause for action under the law in the Satyam saga.  By questioning SBI and not the chartered accountants involved, the accounting regulator ICAI has turned itself into a laughing stock.
(Nagesh Kini, formerly a practicing chartered accountant-RBI empanelled bank auditor, is now an activist.)

http://www.suchetadalal.com/

New EDs

The Committee of Governor and Deputy Governors has decided to promote: 

S/Shri P. Vijaya Bhaskar, Regional Director, Bangalore and B. Mahapatra, Chief General Manager-in-charge, DBOD, CO as Executive Directors in the Bank with effect from June 13, 2011.

Cause for pause

With the central government basically abdicating the responsibility of inflation fire-fighting to RBI, there seems little alternative to a further jump in the repo rate on Thursday. This is despite a clear acknowledgment by Subir Gokarn, deputy governor of RBI, that the chief drivers of inflation — commodity prices — were outside the influence of the monetary policy. But, as agricultural reforms will not happen soon, the pass-through of the monetary measures have to be through the manufacturing sector, despite the consequences. RBI will, of course, take heart from the sustained rise in bank credit to the commercial sector, which was growing 21.3% year-on-year till the end of May. But within that, weakness is increasing, as the disaggregated sectoral data shows. The sector that has witnessed the fastest rise in credit is services, at 24% compared with 13% a year ago. Against this, the growth rate of credit to large industry has shrunk to 27%. So, overall, the rise in credit to the manufacturing sector is only 12.7%, year-on-year. Obviously the rising rates are beginning to hurt. So, more than the raise, the key indicator will be whether RBI will signal a pause. That will be the forward message which industry and the financial sector will be most interested in. How RBI words the pause will be the basis for all sectors to calculate their annual business plans.  It is rather unfortunate that the management of the short-term goals of the Indian economy has passed almost totally to RBI. The supportive environment that would have allowed RBI to pause earlier in the cycle does not exist. On three key issues, that of expenditure management, reform in the food economy and creating impetus for foreign capital to flow into the economy, New Delhi has stopped working. The government will go through with its borrowing for the year, despite the adverse implication for the rest of the economy, including the hardening of interest rates. No hard limits have been set for subsidy management in the budget. The government, as we have already said, has no clear intention to invest more in the agriculture sector and, therefore, create an incentive to cut down opposition to changes in food marketing. Finally, midway into the year, an OECD report says the tax architecture being planned under the DTC will enhance capital intensity in the labour surplus economy.

Just before the RBI governor decides on his course of action on Thursday, corporate India would have told him what they think this year will turn out for them in the first instalment of advance corporate tax on Wednesday. Will Subbarao read the tax leaves?

FE

Centre mulls booster shot for growth

NEW DELHI: At a time when the Reserve Bank of India is trying to temper growth, the government is contemplating a stimulus of sorts for so-called labour-intensive sectors such as textiles and leather. Commerce & industry minister Anand Sharma told TOI in an interview that he had raised the issue with finance minister Pranab Mukherjee during a recent meeting but no decision has been taken. The stimulus, which could take the form of some sort of an interest rate concession, would be meant only for units in specified sectors that undertake capital expenditure to add capacity.  The industry is already complaining of higher interest rates taking a toll on capacity addition. Economists too said that the nine rounds of policy rate hikes undertaken by RBI since March 2010 had now begun to show its impact on overall industrial growth numbers, which are estimated to have hit a three-month low of 6.3% in April.  The apprehension is that high interest rates would deter companies from adding capacity and once interest rates start moderating and demand picks up, the industry would find itself short of production capability to meet the requirement. Inadequate capacity can again lead to inflation and emerge as a policy headache. After the latest factory output data was released on Friday, Kaushik Basu, the chief economic advisor in the finance ministry, acknowledged the impact of high rates and suggested that RBI balance its monetary policy tightening in view of the growing concerns that growth is affected. Sharma too seems to be taking a similar position.  Though finance ministry officials do not acknowledge it, North Block and RBI have not been on the same page as far as raising interest rates are concerned. Finance ministry has taken a view that undue tightening will take a toll on growth, which it is seeking to fuel. Though RBI was widely criticized for taking what governor D Subbarao had described as baby steps – increase policy rates by 25 basis points every time (100 basis points = one percentage point) – the central bank had to finally signal that taming inflation was its primary concern, even if it meant sacrificing growth. As a result, RBI opted for a 50 basis point hike in policy rates in early May and is widely expected to follow it up with a 25 basis point increase on Thursday.  Following the financial crisis in 2008, the government had announced special measures for sectors such as textiles, rubber, engineering, chemicals, electronics and engineering goods to boost their production and exports.

TOI

Ramdev vs RBI

As with other issues raised by Baba Ramdev, the Reserve Bank of India is not at all convinced that scrapping of Rs 500 and Rs 1,000 currency notes can really help curbing black money in the country. “Is there any study to show that the circulation of Rs 500 and Rs 1,000 currency notes are responsible for creating black money? Rather, it will increase the cost of other currency notes to replace the Rs 500 and Rs 1,000 currency notes. It will create more problems than providing any solution,” thundered KC Chakrabarty, Deputy Governor, RBI.

FE

MSF debut: Banks borrowed Rs 100 cr on Friday

Banks on Friday used the Reserve Bank of India's (RBI) marginal standing facility (MSF) for the first time since its inception in May. According to data released by the central bank on Monday, banks borrowed Rs 100 crore for three-day loans through the facility. To borrow funds through this window, banks have to pay interest at a rate 100 bps higher than the repo rate, which currently stands at 7.25 per cent. Banks are allowed to use MSF only after exhausting the excess statutory liquidity ratio (SLR), which stands at 24 per cent of their net demand and time liabilities. Banks keep excess SLR to pledge securities for funds from the central bank or the overnight market to meet their product needs. In May, MSF had replaced the second liquidity adjustment facility (LAF). Though RBI did not publish the names of banks that used MSF, according to market players, a few small private sector banks facing a liquidity crunch may have used the facility. "The amount borrowed was very low compared to the LAF borrowing on Friday. Maybe one or two small banks have used the window to sail over short-term needs,&" said a treasury head of a large public sector bank. On Friday, banks borrowed around Rs 75,000 crore through the LAF window at 7.25 per cent. Interestingly, though the call money rate, at 7.30-7.40 per cent, was stable last week, banks opted for MSF funds instead of the call market route. When MSF was announced, RBI had said it expected banks to exhaust all other sources before taking this route. "Every bank has an internal limit set for borrowing from the call money market. Exhaustion of that limit would have forced a bank to approach RBI's marginal standing facility. Also, while lending call money, factors like the borrowing bank's net worth, its market standing and its past experience in repaying the debt play major roles, since borrowing in call is non-collateralised,&" said Pawan Bajaj, deputy general manager, Bank of India. Liquidity is expected to remain tight due to the advance tax outflow scheduled later this week. Banks expect Rs 25,000 crore to Rs 30,000 crore to go out of the system owing to the tax outflow. RBI had earlier said the MSF would be tested when the tax outflow takes place. "Every quarter, it (advance tax) happens. I don't think there is anything different in that. A new type of liquidity management facility has come, so it would be tested,&" RBI Deputy Governor K C Chakrabarty had said in the beginning of June.

RBI likely to hike key rates this week

After the Reserve Bank of India hiked key policy rates by 50 basis points in May, most analysts expect further tightening by the central bank when it reviews the monetary policy on June 16. While there’s a strong possibility of RBI hiking repo rates by 25 bps, it could also opt for status quo as growth and investment activity have decelerated. The bank is also grappling with rising inflation. A survey conducted by the RBI says households expect inflation to rise further by 40 and 120 basis points during the next quarter (11.9 per cent) and the following year (12.7 per cent) respectively, from the perceived current rate of 11.5 per cent. “Given the trend in the overall IIP growth numbers as per the new series and the prevailing inflationary pressures, we expect the RBI to continue with its rate tightening regime i.e. increasing the repo rate by another 25 basis points in the upcoming monetary policy review. Going forward, this would lead to a subdued growth in the consumption and investment demand in the near term,” said Arun Singh, Senior Economist, D&B India. The RBI survey said, “households’ expectations of general price rise were mainly influenced by movements in food prices. The percentage of respondents expecting price rise have gone down for all product groups (namely, general prices, food products, non-food, household durables, housing and services).” The Inflation Expectations Survey of Households conducted in the January–March 2011 quarter captures inflation expectations of 4,000 urban households across 12 cities for the next quarter (April-June) and for the next year (April 2011-March 2012). Ashutosh Datar, Economist, IIFL, said, “While growth is decelerating, it is still reasonably strong. And inflation remains unacceptably high… therefore we don’t expect the RBI’s stance on monetary policy to change significantly. Thus, May WPI data will set the stage for RBI’s policy decision on 16th June.” The IIP growth with new base, new components and weightings revealed a better than expected growth of 6.3 per cent compared to 4.2 per cent based on the old index, Singh said. “Food inflation is again inching up, adding to the core inflation pressures we have observed lately. The current expectation on monsoons is closer to 98 per cent normal. The degree of slowdown in growth would have implications on RBI’s rate increase plans,” said Sudhakar Shanbhag, Chief Investment Officer, Kotak Mahindra Old Mutual Life Insurance.  “Though, currently the bias is to control inflation, there would be a close watch on growth numbers as well since the tightening over the last 12 months will start showing impacts now and over the next few quarters.”

IE

Mahesh Bank joins RBI's fund transfer system

Customers of AP Mahesh Co-operative Urban Bank will now be able to transfer funds from their accounts to other locations across the country in no time. According to Mr Ramesh Bung, Chairman of Mahesh Bank, the bank was admitted as member of the National Electronic Funds Transfer (NEFT) system of the Reserve Bank of India (RBI). “This will enable customers to transfer their funds, even small amounts across India instantaneously,” Mr Bung said in a release. Mahesh Bank had also got approval from the RBI to open three more branches at Champapet, Seethaphalmandi and Chintal in the State capital. In addition, two more branches — at Banjara Hills and Attapur in the city — and an ATM at Begum Bazar would be opened shortly. This would take the total number of branches to 36. Plans were also afoot to become the member of National Financial Switch ATM network through which customers can transact their business through more than 70,000 ATMs spread across the country, the released added.

Business Line

Your secured savings landscape is bound to change, and how

Interest rates on Public Provident Fund (PPF) to be linked to the market yields on government securities of comparable maturity,
Annual reset of interest rates of NSC, PPF, etc and Discontinuation of Kisan Vikas Patra instruments. These and many other recommendations shall become reality if the government accepts the last week’s report of the committee headed by Shyamala Gopinath, deputy governor of the Reserve Bank of India (RBI). The committee was formed to recommend reforms required in overall administration of National Small Savings Fund (NSSF). Small savings schemes covered under NSSF and on which the recommendations are made in the report. The report acknowledges the importance of small saving schemes. “Small saving schemes have been always an important source of household savings in India. Although these instruments are technically not government securities and do not have any explicit government guarantee, their legacy has given them characteristic of being equivalent to that of a sovereign liability. These schemes have been extremely popular amongst a large number of small investors in India who seek to invest in a secure instrument. At the same time, these instruments have been treated as a means of providing social benefit to the small savers.” Hence the benefits these schemes provide to various sections of the population, especially small savers, are beyond doubt.In this article, Bachhat lists down key recommendations made by the committee which directly impacts the investors. Changes in interest rates. One of the key recommendations of the committee relates to the interest rates. The committee recommends that, other than for savings deposit, interest rates for all other instruments should be benchmarked against secondary market yields on central government securities of comparable maturities and should be reset yearly. It means that as the interest rates of government securities rise, the interest on these securities shall also increase and vice versa. The committee has, depending on the instrument, its liquidity and its tenure, also recommended a spread of minimum 25 basis points (bps) vis-a-vis government securities of comparable maturities. 100 bps is equal to 1 percentage point. The spread is larger for NSC (50 bps) and Senior Citizen Savings Scheme (100 bps).For eg: If a comparable security for PPF is trading at 8%, then the interest rate on PPF for the reference period shall be 8.25%. Further, to avoid year-on-year volatility, a cap of 100 bps has been recommended so that the rates are neither raised nor reduced by more than 1% from one year to the next, even if the benchmark rates fluctuate by higher margins. These rates shall be fixed in advance and shall be known before the start of the  financial year. The committee recommends that interest rates on postal savings deposits should be in line with rates offered on bank’s savings account and be increased to 4% from current 3.5%. Further, the interest should be calculated on a daily basis on such deposits.

Other recommendations

1. Option of premature withdrawal of time and recurring deposits with provision to pay lower interest rate in such cases.
2. Abolition of 5% maturity bonus on Monthly Income Scheme (MIS) and reduction in tenure from 6 years to 5 years.
3. Increase in annual investment limit for PPF to ¤1 lakh. To discourage premature withdrawal, interest rates on advances against PPF deposits should be 2% higher than the prevailing PPF interest rate (as against 1% at present).
4. NSC to be available with maturities of 5 years and 10 years (as against 6 years NSC at present) with interest rates linked to comparable G-sec rates. No income tax exemption under Section 80C on accrued interest from NSC.
5. The committee has also recommended reduction in commission paid to agents for the products sold.

This and similar changes which happened in mutual fund industry earlier, will lead to emergence of fee based financial service industry wherein agents will start charging customers directly for the services provided by them. Assuming that the government accepts these proposals and implements the same with effect from July 1, 2011, the revised administered interest rates based on above recommendations. Above recommendations, if implemented, will have long term impact on the way individuals save. For eg: One will be required to consider the variation in interest rates, which hitherto were more or less constant, while planning for his retirement savings. Reduction in agency commission will ensure that products are sold to investors on the basis of their merits. Though these recommendations shall bring year-on-year variability in interest rates, provision of cap and floor of 100 bps shall limit the impact of such variability.

DNA

Offers for women: Do women-only products come with a catch?

Banks are wooing women through savings accounts that require a lower average minimum balance compared with that in standard accounts, or by including add-ons, such as free insurance. Currently......

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For operational efficiency, RBI to issue Rs 500 notes in packets

The Reserve Bank said on Monday it will soon start issuing bank notes of Rs 500 denomination in packets, which may not be sequentially numbered, for easier transactions. The measure has been announced to increase operational efficiency, the RBI said in a statement. “With a view to enhancing operational efficiency and cost effectiveness in bank note printing at banknote presses, it has been decided to issue...fresh banknotes of Rs 500 denomination in packets which may not necessarily all be sequentially numbered,” it said. The apex bank said such a practice is prevalent in other countries.

Business Line

Containing inflation

Both the Government and the Reserve Bank have failed to take appropriate measures to contain inflation, and the masses suffer. The economy also suffers. The blame game between the Government and the RBI is only to confuse the masses. The failure of administration and fiscal management are the major factors contributing to price instability, for which the Government is to blame.

T. V. Gopalakrishnan (Business Line)

For PSBs, loss & succession go together

Last week, Reserve Bank of India Deputy Governor K C Chakrabarty slammed public sector banks (PSBs) for the strange phenomenon of profits dipping when a new chairman takes over. Although the outspoken Deputy Governor did not name anybody, the hint was clear. It was the State Bank of India (SBI) which Chakrabarty was referring to. Last month, the country’s largest bank had announced its financial performance for the first time under its new chairman Pratip Chaudhuri. Its net profit for the quarter ended March 2011 was down 99 per cent from a year earlier, due to the higher provisions made to cover delinquencies in the loan book. The fourth quarter of 2010-11 was the worst quarter of SBI in more than a decade. The poor show made investors jittery and they dumped the stock, pulling it down by 7.7 per cent. Though the most recent one, SBI was just one among many banks with such a chequered history. Consider this. Five years ago, Prakash P Mallya took charge as chairman and managing director of Vijaya Bank in Bangalore. In his first press conference, Mallya tried to explain why the bank incurred a net loss of Rs 34.5 crore for the quarter ended March 2006 when it earned a net profit of Rs 155.9 crore in the corresponding period previous year. Despite his best efforts, Vijaya Bank’s share closed two per cent down that day. “It was a difficult situation. There were so many accounts where provisions had to be made. I was left with no other option but to take a hit on my profits,” Mallya, who retired from Vijaya Bank in 2008 and currently a board member of IFCI, recollects. A similar story unfolded in Mumbai when Bank of India’s chairman and managing director T S Narayanasami retired in May 2009. In the very next quarter ending September 2009 the state-run lender’s net profit halved to Rs 323.34 crore, prompting brokerages to downgrade the bank’s share. Gross bad loan of the bank increased by Rs 1,132 crore sequentially to Rs 3,919.7 crore during the quarter. Bank of India’s share shed 12 per cent after the financial results were announced. “Auditors were taking up classification issue (treating loans as non-performing assets) with Narayanasami. When Alok Misra became the chairman (in August, 2009) he made the norms more stringent. As a result, provisions and bad loans increased,” a former Bank of India official who worked in accounting and finance department during Narayansami’s tenure told Business Standard. Similar instances of declining profitability post chairman’s retirement were also witnessed in other public sector banks. It happened when AC Mahajan took charge of Canara Bank in July 2008, Anil K Khandelwal became the chairman and managing director of Bank of Baroda in March 2005 and SK Goel retired as chief of UCO Bank in July 2010. Most bankers remained tight-lipped on this issue and none of them were willing to speak on record. “It is messy out there. The chairman has the final say on how accounts are prepared. A retiring chairman often leaves the task of cleaning the books for his successor as he wants to show higher profitability during his term. This makes the task of the new chairman difficult and erodes shareholders’ confidence,” an executive director of a Mumbai-based public sector bank said requesting anonymity. Bankers, however, said the standard of reporting could only improve if the past chairmen are made accountable for financial performance of the bank during their tenure even after retirement. “We have a situation, where if you are chairman, the moment you retire you are absolved of all responsibilities. In such an environment it is impossible to avoid issues like these,” a former general manager of a state-run bank said. According to the RBI norms, an asset becomes non­performing when it ceases to generate income for the bank. Banks have to classify a loan as non-performing if interest payment remains due for more than 90 days. There is a silver lining, however, which can do away with the under reporting syndrome. The finance ministry wants all public sector banks to shift to a system where all non-performing should be identified by using technology. The move is aimed to reduce discretionary powers of the bank management. The deadline to adopt such mechanism is September 30. Bankers said though the move will increase NPAs in the short term, but it is beneficial for the banking industry in the long run.

BS

India Post may include buyback provision in gold retailing plan

India Post is planning to include the provision of buyback into the gold retailing scheme, which offers gold coins to customers through its post offices. Under the retail scheme launched in 2008, over 700 post offices sell gold coins. Till now, over 900 kg of gold have been sold through the post offices to around one lakh customers. In 2010-11 itself 581 kg of gold coins were sold. The Swiss gold coins of 24-carat purity are available in 0.5 gm, one gm, five gm and eight gm denominations. India Post has tied up with Reliance Money Infrastructure for the scheme and World Gold Council is the marketing partner. “The India Post is working out a plan to introduce buyback provision in the scheme,” said Keyur Shah, head of investments, World Gold Council. The absence of buyback arrangement is one of the key issues that restrict the growth of gold coin retailing through banks and post offices. An investor has to approach a jeweller when he has to sell the coin. Jewellers usually deduct higher melting charges for the coins bought from outlets other than their own stores. “Banks need RBI’s permission to introduce the provision. For India Post, however, it is easier if the partnering agencies agree on it,” said Shah. As per the WGC’s gold demand report for the first quarter of 2011, the investment demand for the metal grew by 26 per cent in and the main growth driver was bars and coins.
http://www.mydigitalfc.com/

There is no liquidity shortage

Official soothsayers are predicting a fall in inflation rate, though the timing differs from one to the other. If so, the RBI may wait for the next quarterly review before making any changes in.......

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Finance minister allays fears of slowdown ahead of RBI policy

Amid fears of an economic slowdown this year and a rate hike by RBI on June 16 to tame inflation, finance minister Pranab Mukherjee did some pep talk, asserting that growth drivers are intact and the economy needed to target 9-9.5 per cent growth in the twelfth five-year plan by deepening reforms. “The overall GDP gro­wth in 2010-11 has now been revised to 8.5 per cent (against projections of 8.6 per cent) with agriculture growing at 6.6 per cent, services by 9.4 per cent and industry at 7.9 per cent. Though there is some slowdown in industrial growth, partly due to the base effect from the previous year, growth drivers of the Indian economy are broadly intact,” Mukh­erjee told an Organisation for Economic Cooperation and Development (OECD) tax seminar. “The medium-term gro­wth prospects of the economy remain buoyant … as we put ourselves to the task of preparing the 12th five-year plan, we need to aim at GDP growth of 9-9.5 per cent for the plan period. It would imply raising the average growth rate by at least one percentage point from 8.2 per cent, likely to be realised in the eleventh plan,” the finance minister said. Though Mukherjee has not indicated what could be the growth forecast for 2011-12, the Reserve Bank of India, the International Monetary Fund and the Asian Development Bank have scaled it down to 8-8.5 per cent. The finance minister had projected GDP growth of 9 per cent plus or minus 0.25 per cent in the 2011 budget. India’s chief economic adviser Kaushik Basu said the finance ministry is yet to carry out a review of growth targets that is usually done in the mid-term economic review in October-November each year. However, with RBI and multilateral agencies downgrading India’s growth, the ministry would carry out a review in June-July 2011. Until then, the ministry will go with the lower end of the range indicated in the budget -- 8.75 per cent. The planning commission too said it would indicate growth projections in the approach paper to the twelfth plan later this year. Though no estimate has been made, it could not be less than 8.5 per cent. Inflation has been a worry for policy makers, particularly with food inflation remaining in double digits for 18 months before it came down in April this year. Inflation has been pegged at 8.66 per cent in April 2011 and some analysts say May inflation figures to be released on Tuesday could be slightly lower. There are also reports that hawkish money policy will continue. RBI has raised rates nine times in the recent past and liquidity squeeze since April 2010 has had its toll with factory output slowing to 7.9 per cent in 2010-11 from double-digit growth in the previous year, that too at a time when capacity additions were taking place. Principal adviser to planning commission Pranob Sen is, however, of the view there will be pick-up in factory output in the coming months and the government should resort to more fiscal tightening rather than monetary measures as it has not had a significant impact on food inflation, which is mainly due to supply constraints. Mukherjee said hard work was needed to ensure incremental improvement in growth rate, which comes from states that so far have been lagging behind the national average. “We are now in the process of deepening policy reforms, especially on both direct and indirect taxation and will provide domestic as well as foreign investors a much simplified taxation regime,” he said. Despite fears of some slowdown in growth this year, India is still the second fastest growing major economy barring China and has clocked over 8 per cent GDP growth after the global economic crisis of 2008, indicating rapid economic recovery. OECD secretary-general Angel Gurria told a news conference on Monday that he was enthused by India’s growth story and said some of the developed countries grew at one-third of India’s rate. Gurria said there was no expectation of yet another global recession and the global economy was picking up slowly and countries like India, with their high growth, are contributing to it. On China’s move to rein in growth to 7 per cent, Gurria said there was some sort of overheating of the economy that was growing around 10 per cent. China has decided to lower it to 7 per cent so that the economy grows at “cruising speed”. Though European growth is not spectacular, there is no debt crisis as feared to be, he said, adding that economic woes in Europe are due to fiscal problems in Greece, bank problems in Ireland and self-inflicted political crisis in Portugal. He said the EU was creating a 500 billion euro safety net to deal with the crisis and the IMF was providing an additional 250 billion euros. Besides, the European Central Bank is setting up a fund of around 250 billion euros for bringing about fiscal discipline, he said, adding that this amounts to one trillion euros to deal with the crisis in Europe. On Christine Lagarde’s candidature for IMF top job, Gurria said OECD want selection process to be “transparent and merit-based.”

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RBI organized financial literacy, awareness program at Tulmulla

Reserve Bank of India (RBI) organised a full day Financial Literacy and Awareness Programme at the Mata Khir Bhawani fair at Tulmulla in Ganderbal today. A dedicated stall was put up for the purpose. A large number of people gathered in the fair and evinced keen interest in the financial literacy and awareness programme. The state Governor N N Vohra , Finance Minister A R Rather and Revenue Minister Raman Bhal also visited the RBI stall and appreciated the initiative taken by the Bank. The programme was organized to disseminate information about various banking services and products being made available by the banks as also about the role and responsibility of the banks in rendering these services. Facility for exchange of Currency Notes and Coins was also provided for general public through the Tulamulla branch of J& K Bank. While speaking to the public assembled at the venue, the officers from RBI informed the people about functions of Reserve Bank of India and how these functions are related to the common man. They requested the people to guard themselves against the fictitious/unscrupulous money offers launched by anti-social elements who approach the people though various means of communication. It was apprised that the RBI had been issuing cautionary advices to the public about these issues which people should take note of. The visitors were also made aware about the Banking Ombudsman Scheme under which the general public can seek redressal of their grievances about the deficiencies in the banking services and the role and responsibilities of the banks under this scheme. On this occasion, pamphlets / information broachers and books on financial literacy were distributed amongst the visitors. The visitors were impressed and admired this endeavour of the RBI.

Jammu Kashmir Newspoint

Economists, bankers predict 25 bps hike in policy rates by RBI

MUMBAI: The Reserve Bank is set to continue its fight against inflation despite a slowdown in economic growth, as price rise is still a threat to the economy, say leading economists and bankers, who expect a 25 bps hike in key policy rates at Thursday's mid-quarter policy review. Economists are unanimous that the RBI has to continue its battle against inflation and expect another 25 bps hike in the repo rate on June 16. If that happens, it will be the 10th consecutive hike since March, 2010. On May 3, RBI had gone in for a tough 50 bps hike in both the repo and reverse repo rates (to 7.25 and 6.25, respectively), but left the mandatory cash reserve requirement at 6 per cent. "I expect a 25 basis points hike in the repo rate, because policy tightening has to continue till inflation is brought under control. But I don't expect the RBI to go in for a 50 bps hike as it had done on May 3," Ernst & Young India partner and national leader for global financial services, Ashvin Parekh , told PTI.  Pointing out that the last policy action did pay off in controlling demand, Parekh said, "Since inflation is still high, monetary tightening has to continue to prevent the economy from heating up again. Another 25 bps hike is more likely as liquidity position is comfortable and so is the call money market, which is also more or less stable now." On the very low factory output data for April, Parekh said, "The IIP numbers were disappointing, but there is no room for worry, it only indicates a slowdown in growth. It is not really a bad thing, as the economy was heating up. More fiscal measures can help stabilise prices as well support growth."   Industrial output in April more than halved to a paltry 6.3 per cent, as against 13.3 per cent in the corresponding period of the previous year, due to a poor showing by the manufacturing and mining sectors.

ET

Now, ICICI Bank breaches RBI norms for loans to RIL

NEW DELHI: After State Bank of India , private sector lender ICICI Bank has emerged as the second major bank to have given loans to Mukesh Ambani-led Reliance Industries in excess of the RBI norms during last fiscal. As per RBI's prudential credit norms, a bank can't give loans in excess of 15 per cent of its capital funds to a single borrower, although banks can exceed this limit by 5 per cent in exceptional cases with prior approval of their boards.  Both SBI and ICICI exceeded the prudential limits in terms of their credit to Reliance Industries Ltd (RIL) during 2010-11, but brought down their credit exposures within the limits as on the last date of the financial year.  Incidentally, their breach of credit exposure limits has been disclosed by the two largest banks of the country within days of Ambani declaring that RIL would become debt-free by the end of the current fiscal. Addressing the shareholders at RIL's AGM on June 3, he said that the company would become debt-free on net basis during the current fiscal ending March 31, 2012.  RIL had outstanding debt of Rs 67,397 crore as of March 31, 2011, as against Rs 62,495 crore a year ago.  The company's cash and cash-equivalents stood at Rs 42,393 crore as on March 31, nearly doubling in a year.  The borrowings from SBI and ICICI are estimated to account for nearly 10 per cent of RIL's outstanding debt.  ICICI, in its annual report for 2010-11, has said, "The bank exceeded the single borrower limit of 15 per cent of capital funds to Reliance Industries Limited." Noting that the limit was exceeded with the board's prior approval, the bank further said that the exposure to RIL came down to 12.4 per cent and within the limit at March 31, 2011 -- the last date of the fiscal. Taking into account ICICI Bank's total capital funds at Rs 78,963 crore as on March 31, its total exposure to RIL stood at about Rs 1,077 crore. SBI's outstanding exposure to RIL stood at Rs 5,645.44 as on March 31, 2011.  While RIL was the only borrower for which ICICI exceeded the RBI-prescribed limit, SBI breached this ceiling for three borrowers -- RIL, BHEL and Indian Oil Corp -- during 2010-11. However, SBI also brought down its RIL exposure to within the limits at the end of the fiscal.  Another private sector lender HDFC Bank has, however, said that it did not exceed the RBI-prescribed single borrower limit for any of its borrowers during 2010-11.  ICICI had exceeded the RBI-prescribed limit for lending to RIL in 2009-10 as well, as also to Barclays Bank and ICICI Prudential Flexible Income Plan. Prior to that, ICICI Bank did not exceed this limit for any of its borrowers during four financial years. It had, however, exceeded the limit in 2004-05 for lending to four companies -- BHEL, Essar Oil,  ARCIL and L&T.  On the other hand, SBI has breached the lending limits permitted by RBI during three consecutive years for RIL.  Detailing the cases where it breached prudential limits for single-borrower exposure during 2010-11, SBI has named RIL along with Indian Oil and BHEL in its annual report.  During 2009-10 also, the bank's credit exposure was in excess of prudential limits for RIL, IOC, BHEL and Tatas.  Prior to that, SBI exceeded prudential credit limits during 2008-09 with regard to its exposure to RIL and IOC.  With regard to single-borrower exposure limit exceeded in 2010-11, SBI said that its credit to RIL breached the ceiling on three occasions -- between April and July 2010, from August to October 2010 and from November 2010 to February 2011.

ET

Markets to remain lacklustre ahead of RBI meet: Analysts

DELHI: Stock markets may continue to remain lacklustre in the coming days as investors await the RBI policy meet and inflation data for May, which will be declared this week, say experts.  The markets have witnessed a lull over the past few days, with the key indices hovering in a narrow range. Moreover, a dip in factory output in April, measured by Index of Industrial Production, and rise in food inflation for the last week of May have also affected the market sentiment.  "The key Indian indices may continue to remain lacklustre amid lack of interest among the traders as well as investors. The recent trend of light trading volumes underscores a general lack of participation for the time being", said IIFL (India Private Clients) Head of Research Amar Ambani.  On the market expectations ahead, Ambani said, "The RBI could boost rates by 25 basis points on June 16 as inflation continues to be sticky."  Further, brokers tell any positive global event may also act as a trigger for the market.  Last week, the US markets declined following a bleak assessment of the country's economy by the US Federal Reserve Chairman Ben Bernanke . Europe continued to be haunted by the sovereign debt problems amid speculation about the fiscal health of Greece.  This also contributed to the sluggish stocks movement at home, with investors concerned about tepid FII inflows in the market. Crucial market benchmark Sensex on Friday lost 107.94 points, or 0.59 per cent at 18,268.54.  Auto, metal and banking sectors witnessed maximum selling pressure last week.  "Auto stocks were among the major losers after an industry body said the domestic car sales had grown by a modest 7 per cent, sparking concerns of a slowdown in the sector. Maruti was a big loser due to a week-long strike at its Manesar plant," IIFL said in a note.  Two-wheeler major Hero Honda Motors plunged by over 7 per cent on concerns that the strike by workers of Maruti Suzuki India's plant at Manesar could spread across the auto belt of the northern state. Maruti shares fell by 0.31 per cent during the week.

ET

Bank a/c - SBI Chairman sets an example

...............Instead of taking the issue of financial jugglery by bank management more seriously and ordering special audits in at least large banks, RBI is unhappy that the action of some of the newly appointed bank chairmen is causing embarrassment to the banking regulator and the government. Obviously, RBI, the least of all the government, is not prepared to face the bitter truth. One will not be surprised if some.........

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Fees will go up, track what you pay

With the cost of funds increasing, banks will fill the gap through fees charged from customers

The Indian banking industry has grown at least four times in the last 10 years. One of the major factors that adds to its income stream, along with interest income, is a steady increase in income from fees and commissions that is charged from the customers.  Over the last five years, fee income as a percentage of total income has progressively risen for a number of banks. For instance, Axis Bank Ltd’s fee income as a percentage of total income is up from 13% in 2007 to 17% in 2011. Similarly, for IDBI Bank Ltd, it has grown from 3.5% in 2007 to 7% in 2011. Changes in the latest credit policy by the Reserve Bank of India (RBI) will impact your net earnings (interest earned and paid and charges) from banks both directly and indirectly. With the latest increase of 50 basis points (bps), the repo rate has increased 200 bps since April 2010. This means higher interest rate on loans as well as deposits. In the last credit policy, RBI also increased the savings account deposit rate to 4%. While hike in deposit rates bodes well for customers, it increases the cost for banks. All put together, banks are likely to see tighter margins. Says K.C. Jani, executive director, IDBI Bank Ltd, “In an environment with higher interest rates, cost of funding increases and companies think twice before borrowing; this trend affects all banks.” Says Gaurang Shah, assistant vice-president, Geojit BNP Paribas Financial Services Ltd, “Credit policy is expected to remain hawkish for the rest of the year and may see another 50-75 bps hike in interest rates in FY12.”  In this scenario, where net interest margins are under pressure, there is merit for banks to look towards fee income to fill the gap. According to a recent report on the banking sector by Ambit Capital Pvt. Ltd (along with its affiliates it is a full service integrated investment bank, investment advisory and brokerage group), HDFC Bank Ltd, which generates consistent fee income and has core fee income at over 2% of loans, is less dependent on interest rate movement and is relatively better insulated from interest rate risk compared with other banks. According to Shah, approximately 25-30% of fees come from the retail segment.

What it means for you

Higher credit cost: As mentioned earlier, you will have to shell out more on loans you take, owing to hike in interest rates. This will be offset, to some extent, by higher deposit rates. Base rates for loans have increased around 200 bps since last year. For example, Union Bank of India has increased its base rate from 8% to 10% and ICICI Bank Ltd’s base rate is up at 9.25% from 7.5%.

Higher outflow on charges: Jaimin Bhatt, chief financial officer, Kotak Mahindra Bank Ltd, doesn’t expect much pressure on margins as increase in costs can mostly be passed on to customers. In other words, the banks may try and increase their income through the fees it collects on various counts. Says Shah, “In an attempt to offset the negative impact on interest income, banks will concentrate on enhancing other sources of income.”  It will become difficult to negotiate your fees on loans and credit cards. Says Pathik Gandotra, head (broking), IDFC Securities, “Credit-linked fees for customers are going to look higher. A couple of years ago such fees got competed out of the market, but are back now—customers will have to pay more.” Banks will not want to forgo any part of the fee income, which means the bargaining power that customers had a few years ago will cease to exist.

Know what you are paying for

With banks’ focus on fee income, it is of immense importance for you to know the precise fees involved in any relationship you may start with a bank. Says Bhatt, “Any change in retail fees would depend on competition in the market, customer acceptance and what other companies are doing.”

Savings account: As we move closer to a system with a deregulated savings rate, you may find a simultaneous increase in service-related fees from banks. With increase in savings account costs, banks are likely to be more vigilant in managing them. Says Gandotra, “Deregulating savings rate may mean that fees on maintaining the accounts will go up. The regulator will have to be more comfortable with higher fees from customers.”  There is likely to be some amount of innovation in products and charges. We may see different types of savings accounts and may see them being linked to usage. Bhatt says, “We operate in a dynamic market, will have to see how things change in this market. If indeed margins come lower, we’ll have to see the market conditions at the time to decide on increasing fees to compensate.”

Read fee detail carefully: These charges can be in the form of non-maintenance of minimum account balance, charge on the number of transactions at a branch (beyond a fixed number) and account-closing charges, among others. Keep an eye for all such account-related charges and any gradual increase.  Also watch out for any growth in credit-linked fees, such as processing charges, late payment of equated monthly instalments, prepayment and foreclosure charges and credit card finance charges. If you’re one who has a car loan, home loan or even personal loan, look out for charges on prepayment, processing, and duplicate loan certificates.

Customer protection

As fee income is rising, so are complaints about excessive charges. Keeping such complaints in mind, RBI had asked the Indian Banks’ Association (IBA) last year to form a committee to look into the issue of unreasonable charges. Says a senior officer of IBA, who did not want to be named, “The committee had met and then a higher committee also met but it was not feasible for banks to do anything (about charges). So the status quo remains.” RBI had also formed a committee under the former chief of Securities and exchange Board of India, M. Damodaran, to look into customer service in banks. The committee, which was formed last year, is yet to submit it’s proposal. Says, Ashok Rawat, honorary secretary, All-India Bank Depositors’ Association (Mumbai), and one of the members of the committee, “The report is ready and should be submitted to RBI in around 10 days. Once RBI reviews the report, the details will be out, but customers can expect some positives as far as service charges go.” While the regulator does its bit, you need to keep your eyes and ears open to protect yourself against unreasonable charges.

Mint

No time to pause yet, rates may go up

At this juncture, RBI should go ahead with its agenda of fighting inflation as by its own estimate it will continue to remain high, around 9% till September, and hike the policy rate..........

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RBI move on foreign banks

The RBI perhaps has taken a cue from its insurance counterpart, the IRDA which right from the inception has been steadfast in its belief that foreign insurance companies can operate in India only through their subsidiary companies.....

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Inflation challenge

So far inflation, despite aggressive monetary signals from the apex bank, has remained stubbornly high

The release of the Wholesale Price Index (WPI), which measures headline inflation, on Tuesday will be a key statistic that the Reserve Bank of India will consider ahead of its policy review meeting on 16 June. So far inflation, despite aggressive monetary signals from the apex bank, has remained stubbornly high. Analysts do not see any early reversal in the trend, especially given that the long-pending increase in diesel prices could soon be implemented. At the same time, the growing cost of capital is squeezing fresh investments and is now threatening the growth trajectory of the economy. Clearly, the debate on inflation versus growth is poised to get more contentious.

Mint

BIS chief seeks a holistic policy to financial stability

........ as in some cases central banks' duties and powers to promote financial stability were being enhanced, they would need to be “careful not to undermine price stability mandates........

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India’s wobbly regulators

Former Sebi chief C.B. Bhave was keen to introduce the IDR to add depth and class to Indian market, but the current thinking of the regulator seems to be different

Early this month, the Securities and Exchange Board of India (Sebi) effectively killed the Indian depository receipts (IDRs) market by saying it will not allow fungibility of frequently traded IDRs. Both Sebi and the banking regulator may have viewed fungibility as a backdoor route to capital account convertibility and hence opposing it, but this position should have been clarified a year before allowing Standard Chartered Bank (StanChart ) to float its IDR. Redemption of IDRs after a year will only be permitted if they are infrequently traded and since StanChart IDRs are not infrequently traded by Sebi definition, the IDR holders will not get a chance to convert them into underlying shares. For all practical purposes, StanChart IDR will be the first and last IDR. Former Sebi chief C.B. Bhave was keen to introduce the instrument to add depth and class to Indian market, but the current thinking of the regulator seems to be different. This is not the first instance of Sebi taking a U-turn on policy issues. Recently, it has reversed its stance and agreed to keep its surplus funds in the so-called Consolidated Fund of India or government accounts. Bhave was in favour of holding surplus funds with itself. Even flak from the Comptroller and Auditor General of India could not force him to change his stance as he strongly, and possibly rightly, felt that the independence of regulatory bodies will be compromised if they have to rely on the government for funds. The Sebi board has also not cleared yet the new takeover code as the government apparently has certain reservations about it. What is more surprising is Sebi’s reluctance to act on the recommendations of the Bimal Jalan committee on market infrastructure institutions. It constituted the committee in December 2009 to take a close look at the role of market infrastructure institutions that has been continuously evolving to meet the challenges of the emerging securities market. As lobbying and counter-lobbying by exchanges intensified to influence decision on the controversial report, Sebi has abdicated its responsibility and left it to the ministry of corporate affairs to take a call on this.  

One can see a definite pattern in this space where regulators are increasingly becoming committed to the government and, given a chance, would not like to take decisions in critical policy matters even those falling within their domain. We have seen the Reserve Bank of India, too, behaving in this manner. It is not willing to release the licensing norms for new banks unless the finance ministry clears it even at the draft stage. Nobody should blame the government for curbing regulators’ autonomy when regulators themselves are not willing to exercise it.

Mint

Policy of pusillanimity

The price of the overall faint-heartedness, both in the government and in the RBI, will have to be paid by the economy

The Chief Economic Advisor, Dr Kaushik Basu, has, in a straightforward statement, suggested that if the Reserve Bank continues to raise the price of money, the industrial growth rate will slow down even further. The Reserve Bank of India (RBI), on the other hand, is pretty clear in its mind that inflation control is its main objective. This is not a new divergence. Nor is it a peculiarly Indian one. The conflict between inflation and growth is a very old one. But what is new this time is the clumsiness with which the government, on the one hand, and the RBI on the other, have gone about resolving it. That India was getting into a growth-induced inflation was known to the RBI since at least mid-2007. At that time, the government did not allow it to act. A year later, just before the parliamentary vote on the nuclear bill, when the government was unsure about its prospects and thought that there might be a general election in 2008 itself, it forced the RBI to raise rates steeply. Then, when the danger passed, it reversed its stand even though there was no evidence that inflation was abating. Since then, partly driven by the need to attract foreign capital inflows to sustain the current account and partly because the Prime Minister had a dream of achieving 10 per cent growth under his watch, the RBI has followed a policy of pusillanimity. The result was a blind embrace of the strategy of baby steps, which the market discounted weeks before it was announced. Inflation roared on and, in the last quarter, the RBI suddenly shifted gears and gave up the baby steps policy, perhaps a year too late. But now that the higher price of money has begun to affect investment, the government, which always wants to have its cake and eat it, is getting jumpy. It knows that the current bout of inflation in India is not originating in the manufacturing sector but in agriculture. The reason for this is staring everyone in the face: whereas the industrial sector has been subject to persistent reform since 1991, including having to face up to import competition, reform in agriculture has remained a gleam in the eyes of some diehards. The political imperative behind this inaction has meant that the entire burden of getting inflation down has fallen on the industrial sector, especially since global commodity prices have also started to come down. The RBI will now have to do the best it can. One could have felt some sympathy for it but not any longer because it failed during 2009 and 2010 to stand up to the government. The price of this overall faint-heartedness, both in the government and in the RBI, will have to be paid by the economy. Truly has it been said that when elephants fight, it is the grass that gets trampled.

Business Line

RBI may hike key rates 25 bps

“Rate hikes by the RBI since March have done nothing to bring down food price led inflation. Now, the focus has shifted to fuel price inflation. But monetary policy action alone cannot address either food or fuel.....

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