Finance minister Pranab Mukherjee said today the banking sector faces a huge challenge of financial inclusion with the trillion dollar Indian economy racing ahead on a high growth curve. “Financial inclusion is a major challenge before the banking sector and financial system at large. At the same time, it offers huge opportunities for the national economy to grow at a rate of 9 to 9.5 per cent during the 12th Five Year Plan,” he said while addressing ASSOCHAM’s National Banking Conclave titled ‘Challenges and Opportunities in a Trillion Dollar Economy.’ Mr Mukherjee said the government is deepening policy reforms, considering further liberalising foreign direct investment policy and addressing gaps in overall economic regulatory architecture so that banking services reach rural areas. “Newer perspectives and strategies towards financial inclusion are needed to reach un-banked and the under-banked sections of our country.” He said the Reserve Bank of India is in the process of issuing additional banking licenses to private sector players. Major steps are being taken to simplify and place administrative procedures concerning taxation, trade transfers on electronic interface – free of discretion and bureaucratic delays. This will set the tone for a newer, vibrant and more efficient economy, said the finance minister. A sound and resilient banking sector, well functioning financial markets, robust liquidity management along with payment and settlement infrastructure are seen as pre-requisites for financial stability. “Consolidation of banking services, consistently meeting the capital adequacy requirements, leveraging advanced technology, effectively managing human resources with a focus on pro-active leadership and re-skilling of human resources are emerging as major areas of concern of Indian banks that need to be addressed,” said Mr Mukherjee. Meanwhile, Mr Dilip Modi, president of The Associated Chambers of Commerce and Industry of India (ASSOCHAM), said financial services revenue from rural areas across the country could be 12 to 13 billion dollars by 2015. The opportunity presented by growing asset base is however confronted with several challenges, the most formidable being implementation of a time-bound financial inclusion strategy. “We must synergise financial inclusion with digital inclusion to ensure faster and cost-effective delivery of products and services.” He appreciated government efforts to regulate the micro-finance sector and ensure greater transparency while providing small ticket size loans to rural population at affordable interest rates. Chamber’s senior vice-president R.N. Dhoot said the Indian economy is poised to grow to a size of three trillion dollars and become the third largest worldwide by 2020. Banks will play a major role in the process by meeting capital requirements of all sectors of the economy. ASSOCHAM secretary general D.S. Rawat said India has the second highest number of financially excluded households in the world. About 40 per cent of the country’s population has bank accounts and only 10 per cent have any kind of life insurance cover while a meager 0.6 per cent has non-life insurance cover. Others present on the occasion were RBI's deputy governor K.C. Chakrabarty, member at the Planning Commission Narendra Jadhav, joint secretary (capital markets) at the finance ministry Thomas Mathew, vigilance commissioner J.M. Garg, chairperson of ASSOCHAM's national council for banking and finance M. Narendra, chairman and managing director of Indian Bank T.M. Bhasin, executive director of Vijaya Bank Subhalakshmi Panse, executive director of Bank of India N. Seshadri, and national leader and partner at Ernst & Young's global financial services division Ashvin Parekh.
http://www.orissadiary.com/ShowBussinessNews.asp?id=27326
The very purpose of VITALINFO is to provide a platform for wider dissemination of updated information related to and happening of events in and around RBI.
Saturday, June 18, 2011
In top echelons of RBI, a taste for Taleb
The Fiscal Stability Report released by the Reserve Bank of India earlier this week made headlines for all the insights it gave into the state of the Indian financial system. But away from all the analytics, the RBI Governor turned to the best selling author Nassim Nicholas Taleb and his book, ' Bed of Procrustes', to sum up the complexity of the markets and the challenge in monitoring and regulating the system. " Ensuring financial stability cannot be a formulaic rule- based task," Governor Duvvuri Subbarao wrote in the foreword to the 97- page report, which was released June 14. The endeavour for the policy makers, he said, should be to not get trapped in " commoditised ideas, reductive categories and prepackaged narratives" - trying to fit everything to ' The Bed of Procrustes'. It was a second instance in recent times that the RBI invoked the writings of Taleb, the Lebanese American philosopher, essayist and practitioner of mathematical finance. ' The Bed of Procrustes -- Philosophical and Practical Aphorisms' is a collection of aphorisms which express Taleb's ideas. In Greek mythology, Procustes was a bandit who abducted travellers, offered them a generous dinner and a special bed to spend the night. But he wanted the bed to fit the traveller to perfection. Those who were too tall had their legs chopped off with a sharp hatchet; those who were too short were stretched. Procurstes was eventually decapitated and " fitted" into his own bed. So it is in the real word today, explains Taleb. Humans get modified to fit technology, reality is blamed for not fitting into models built to explain the reality - with disastrous consequences. The aphorisms capture the idea - brevity, beauty and all - like this one: " Modernity's double punishment is to make us both age prematurely and live longer." Those facing the effects of the RBI punishment in form of repeated rate hikes could note this one from Taleb's book: " If your anger decreases with time, you did injustice; if it increases, you suffered injustice." The RBI referred to Taleb also on August 24 last year, when it cautioned against " black swans" emerging in the nature of global shocks that could transmit quickly to the domestic real economy. The remarks came as the RBI released its annual report for 2009- 2010. The " black swan" describes unexpected surprise events, like the rare black swan. The term was first popularised in the book of the same name by Taleb. A former RBI official said this is probably the first time that such references, interesting and explanatory in their own way, have appeared in what otherwise are detailed if dreary RBI documents and statements.
Fres Press Journal
Chellanam achieves financially-included status
KOCHI: Chellanam village has achieved 100 percent financially-included status under the initiative of the Corporation Bank. To mark the occasion as well as the shifting of the local branch of the bank to a new premise, a function was held in Chellanam. The chief guest of the programme, declared the village 100 per cent financially-included. He distributed Smart Cards for branchless banking operations. K P Thankachan, president, Chellanam grama panchayat, distributed the hand-held terminal for BC operations. G J Raju, DGM, RBI, distributed loans under Corporation General Credit Card Scheme. K Ramamurthy, GM, Corporation Bank and A M M G Nair, zonal manager, were also present.
IBNLive
On expected lines
.... The challenge of containing inflation and anchoring inflationary expectations persists. The RBI has in its recent policy statements clearly underlined the role of .........
Read more......................
Growth drivers broadly remain in economy: Pranab
Growth drivers of India's economy broadly remain and fiscal profligacy at this time could be disastrous, Finance Minister Pranab Mukherjee said on Friday. The statement comes in the backdrop of the recent Reserve Bank of India (RBI) rate hike. Sacrificing growth, the RBI raised the short-term lending (repo) and borrowing (reverse repo) rates by 25 basis points each to 7.50 and 6.50%, respectively. Mukherjee endorsed RBI's stance stating, "We need to have price stability for sustaining growth in the medium term." He said there is no room for further expansion in fiscal deficit now. "We have infused 3% of gross domestic product (GDP) to stimulate economy in the last three years." The RBI acknowledged that there is deceleration in some sectors, notably interest rate sensitive ones, such as automobiles. But it acknowledged that in the current circumstances, some short-run deceleration in growth may be unavoidable to bring inflation under control. Admitting inflation as a "major" concern, Mukherjee said, it will have implications on growth in medium-term. However, he added, the medium-term growth prospects of the economy remain buoyant. "The monetary steps may hurt growth if continued for some time," he said.
Moneycontrol
RBI says it has no magic wand to bring down inflation
NEW DELHI: After having raised its key policy rates 10 times in a year-and-a-half to check inflation, which remains stubborn, the Reserve Bank of India on Friday said it has no magic wand to bring down the rate of price rise. "You all want that inflation should come down. Neither the ministry of finance nor the RBI has any magic wand to bring down inflation," RBI Deputy Governor K C Chakrabarty said at an Assocham meet here. Inflation, as measured by the Wholesale Price Index (WPI), was over 9 per cent in May. Despite RBI's monetary policy tightening regime and steps of the government, inflation continues to remain high. The central bank has projected inflation to be at around 6 per cent by March 2012. The deputy governor said the current inflation is because of constraints in the supply chain and only increase in agricultural productivity and use of modern technology could check the rate of price rise. "...instead of saying that RBI should bring down inflation, we must increase productivity and bring down the cost of services and that will only bring down inflation. Otherwise, it will not come down," he said. Earlier, at the same event, Finance Minister Pranab Mukherjee said in the short-term moderating aggregate demand is critical to check inflation, which is "our major challenge". He, however, admitted that anti-inflation monetary measures may impact growth. RBI has been increasing key policy rates since March 2010 and the latest was Thursday's 25 basis points hike in short-term lending and borrowing rates.
TOI
India must cut cost of goods, services to tame inflation: K C Chakrabarty
NEW DELHI: India needs to bring down cost of services and production to control inflation, K.C. Chakrabarty, a deputy governor of the central bank, said on Friday. The Reserve Bank of India raised interest rates on Thursday for the 10th time in just over a year to combat stubbornly high inflation and signalled more increases to come even as growth in Asia's third-largest economy is slowing down. Wholesale prices, India's main measure of inflation, rose more than 9 per cent in the year through May, much more than expected. Worryingly, the figures showed price pressures had spread from food and fuel to manufacturing.
ET
Micro-finance loans have potential to grow exponentially across the country says Karnataka’s minister for rural development
.......... He said the recent RBI intervention by constituting Malegam Committee is a progressive step to regulate this sector and.......
Read more...............
MFIs glad if RBI is the regulator
Last week we told you a finance ministry committee has recommended the Reserve Bank of India (RBI) as the sole regulator for the microfinance industry. And even though the central bank might find it quite a task to regulate the nearly 600 companies that make up the sector, CNBC-TV18’s Vineetha Athrey and Gopika Gopakumar learn that microfinance institutions (MFIs) on their part, are cheering the idea. Suresh Krishna, MD, Grameen Financial Services said, “If we have too many regulators then it's difficult to know what the industry is doing so it's better to have one regulator who will prescribe how MFIs need to operate.” And that one regulator could be the RBI. That is, if a central government bill on microfinance companies comes through. TheMFIs, themselves, are happy with the move as they feel this will ensure a uniform regulatory framework for the sector and avoid conflicts of interest between regulators. But, given the sheer size of the microfinance industry here in India, the question is whether the RBI has the bandwidth to regulate it. Samit Ghosh, Founder and MD, Ujjivan said, “Below a certain threshold limit RBI might outsource this to some other institution to directly oversee or industry associations like Saadhan to enforcing regulations. Also, industry experts say the recent Malegam Committee's recommendations would make it difficult for smaller MFIs to operate, making consolidation inevitable. This, in turn, could end up reducing the burden on the regulator. However, the key question before large microfinance companies that are considering acquisitions would be that, with the same set of customers borrowing from different companies. Acquisitions would not really translate to more number of customers. So, MFIs first have to consider whether there will be value-addition in biting the acquisition bait.
Moneycontrol
Rate hike may lower credit growth in banks: M. V. Nair
............... “Out internal view is that there would be further hike in repo and reverse repo rates by the RBI going forward to tame inflation,” .....................
Click to read..................
Fighting inflation
It is the failure of New Delhi to give a helping hand to the RBI in containing inflation. Of late, the Government has not been able to focus on managing the economy as it is faced with various other problems such as corruption, black money and the multitude of scams. Ministers are found busy sorting out issues with Baba Ramdev and the civil society and do not seem to be concerned with issues such as inflation, GDP growth, and so on. The damage caused to the economy is high and it is time the Government spends quality time with the RBI and comes out with some convincing solution to check inflation.
T. V. Gopalakrishnan (Business Line)
FM to meet RBI, NHB & PSU bank chiefs to talk rising rates, growth risks
Mumbai: In the back drop of rising interest rates and downward growth risks, finance minister Pranab Mukherjee has convened a meeting of all chiefs of public sector banks, Sidbi and India Infrastructure Finance Company (IIFC ) and regulators like Reserve Bank of India, National Housing Bank on July 8 to discuss the strategies to manage the dynamic situation “The finance minister wants to take stock of the situation on several issues linked to inflation and growth. We will give our views about the rising rates, credit growth, non performing assets and our possible performance in 2011-12. The overall situation remains very fluid,’’ said a chief of PSU bank. The minister will also check about the credit flows to the SME sector which has been affected by the spate of rate hikes. The other banking related issues which will be discussed in the forthcoming meeting includes credit flow to education, agricultural sector for which the government has announced subsidies. Also, the issue of financial inclusion, whose target has been revised upward recently, will deliberated in the meeting. Mukherjee recently while addressing the banks at the Indian Banks’ Association (IBA) in Mumbai had expressed his concern over the asset quality of the banks. “There is one area though, where I am little concerned. It is the issue of asset quality. During the year 2010-11, non performing assets (both gross and net) have increased as against the level in the previous year. It is important for the banks to constantly monitor and bring down the NPA to the previous level,” he had said, adding that the government had accorded high importance to financial inclusion to cover the entire gamut of financial services pertaining to savings, credit, insurance and transfers. DL Rawal, CMD, Dena Bank, said the banking industry was able to perform well during the last fiscal. But, this year the industry may not be able to achieve that much growth. “The reason for this is that the GDP growth is likely to be moderated to 7.8% to 8%, compared to the last fiscal’s 8.6%. Rate hike will also have its impact. Secondly, Casa in the industry may not increase that much as term deposits have become more lucrative now,” Rawal said. “Also, I do see some moderation in home loan portfolio this fiscal, Same thing may happen in infrastructure sector too,’’ he added. Bhaskar Sen, CMD, United Bank of India, also agreed that banks had performed better during the last fiscal. But, this year, the case will be different as the banks see lot of challenges on credit and deposit growth, asset quality and financial inclusion. Apart from the heads of all the state-owned banks including the associates of State Bank of India, chiefs of otherPSU organisations like Sidbi and IIFCL officials from the regulators like Reserve Bank of India, Nabard and National Housing Bank (NHB) will also be present during the meeting.
FE
Anomalies in forex transactions
The article “Dismantle the forex licence raj” (Business Line, June 17) is an eye-opener into the hurdles one has to face while effecting forex transactions. The Foreign Exchange Management Act (1999) or FEMA, which became an Act on June 1, 2000, has been introduced as a replacement for the Foreign Exchange Regulation Act (FERA). One of the advantages of the liberalised era is freedom from various controls. The author has pointed out the various anomalies and contradictions that emanate from a “control mindset”, such as NRE accounts under “non-repatriable” and “repatriable” heads, declaration insisted by banks from individual customers transacting in forex, complexities in joint account of residents with non-residents, two separate yardsticks for Resident Foreign Currency accounts maintained within the country and abroad, proliferation of regulators for forex transactions, and so on. The above hurdles in individual forex transactions are indeed disheartening and, therefore, need elimination or modification. The author, an authority on forex transactions, has pinned hope on the Committee for Review of Procedures Relating to Foreign Exchange Facilities for individuals — Resident/Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs). The objective of the Committee under Ms K. J. Udeshi, former Deputy Governor, RBI, is to identify areas for streamlining and simplifying procedures so as to remove the operational impediments and assess the level of efficiency in the functioning of authorised persons.
Mathew Abraham (Business Line)
Fiscal policy and inflation
New Delhi now needs to take the initiative; it is better equipped to yank the economy out of the slowdown fears that have gripped it. Intelligent fiscal policy is the need of the hour, one that pursues fiscal consolidation ..........
Click to read.........
Bihar is best performing state, says RBI study
NEW DELHI: Contrary to popular belief, a Reserve Bank sponsored study today said Bihar (including Jharkhand) was the best performing state during 1980-2004, while Tamil Nadu lagged behind in terms of TFPG, a parameter that measures productivity of the organised manufacturing sector. Although Bihar did well in terms of TFPG (total factor productivity growth), it faltered on employment generation, the study on 'Productivity, Efficiency and Competitiveness of the Indian Manufacturing Sector', conducted by the Development Research Group (DRG), a research wing of the RBI said. "The inter-state performance of TFPG of organised manufacturing sector indicates that Bihar (including Jharkhand) is the best performing state while Tamil Nadu is the worst performing state," it said. Jharkhand was carved out of Bihar in November 2000. Referring the issue of employment generation, the report pointed out that good performance needed to be "juxtaposed with the fact that Bihar witnessed a negative growth rate of employment and Tamil Nadu witnessed a significant higher rate of employment." The better performing states, according to the study, include Rajasthan and Andhra Pradesh. However, Gujarat and Punjab turned out to be bad performers. The study, which covers 1981-2004, was conducted by Development Research Group (DRG), a research wing of the RBI, with a view to estimate productivity and efficiency of the manufacturing sector at industry and state levels. It has estimated efficiency of 449 companies. The RBI-sponsored study also examined the path of efficiency and productivity in the context of economic reforms undertaken by the Indian manufacturing sector and provided a comparative view of the performance in organised and unorganised sectors. On the industry-wise TFPG performance of organised manufacturing sector, the study said Food, Beverages and Tobacco (FBT) industry was the worst performer while Machinery and Transport Equipment (MTE) industry did better than others.
ET
Stressed bank of India
........But Bhatt's run-ins with RBI cost him dearly: he burnt bridges with the regulator and the Union government. As a consequence, he could not convince the government, which holds 59.40 per cent of SBI's equity, to approve a rights issue that could.....
Read full story....................Friday, June 17, 2011
Industry slams RBI move to increase rate
The Reserve Bank’s move to increase short-term rates has not gone down well with industry chambers and real estate players. Industry representatives said the continuing tight monetary stance from the central bank has dampened the economic growth rate but failed to tame inflation. Confederation of Indian Industry (CII) Director General Chandrajit Banerjee said: “CII hopes that this was the last increase in rates amid growing signs of a slowdown in economic and investment activities in the country.” Banerjee said inflation was supply driven and can be addressed by announcing and approving large projects, increasing investment demand and combating bottlenecks in supply. ASSOCHAM President Dilip Modi said RBI’s measures will further slow down fresh investments and restrict industrial growth. “High input prices, rising finance costs and global uncertainties are adding to negative sentiments and high interest rates will further put brakes on investments, which will make it difficult to maintain the growth momentum.” PHD Chamber President Salil Bhandari said despite the continuous rise in policy rates, inflation still persists, while manufacturing is growing at a slow pace. “Stickiness in the domestic inflation vis-Ã -vis high international commodity prices coupled with wage rate revisions have generalised the inflationary expectations and dampened the growth prospects.” Real estate developers, hit due to high borrowing costs, were also critical of RBI’s stance. Pradeep Jain, Chairman, Confederation of Real Estate Developers’ Association of India (CREDAI) said: “Over the past one year, RBI has embarked on a highly ambitious inflation management objective by raising key rates consistently but the results cannot be seen yet.”
BS
Peak not in sight
A 25-bps increase in policy rates by RBI did not spring a surprise. However, the accompanying statement leaves no doubt that the anti-inflationary bias in monetary policy is going to continue. RBI is not swayed by the common perception that growth momentum is slowing across the board and hence, does not view it as a reason to consider pausing now. There is no hint that we are anywhere close to the peak of the rate hiking cycle. We expect at least another 50bps of rate rises in the next two policies, as headline inflation is likely to stay above nine per cent for close to six months more. Th pass-through of diesel and cooking gas prices is still incomplete and the trajectory of global commodity prices and impact of monsoon on food prices will be important determinants of our inflation outlook. However, apart from headline inflation, pricing power of companies and inflation expectation of households will be factors the RBI will be closely watching. So, a sustained decline in non-food manufacturing inflation will be a precondition for RBI to change its policy stance. Also our indicator of monetary conditions, indicates that though some normalisation has taken place since early 2010, it is still not tight enough.
BS
Banks brood over another rate hike after RBI action
Indian banks are considering yet another rate increase after the RBI raised its key lending rate by an expected 25 basis points on Thursday to clamp down on high inflation
Most banks had raised lending rates last month, following the central bank's higher-than-expected 50-basis-point rate rise on May 3. While higher lending rates will take a toll on banks' credit growth and pose risks of higher non-performing assets, bankers said they will have to pass on the increase as their cost of funds has gone up. "We will have to increase rates because ultimately the cost is going up. That is exactly what the RBI wants - transmission. A 25 basis point rise is a possibility," said N. Seshadri, executive director, Bank of India. State-run IDBI Bank and Indian Overseas Bank also said they will have to pass on the increase to their customers. The Reserve Bank raised interest rates on Thursday for the 10th time since March 2010 and said it will persist in its battle against stubbornly high inflation, downplaying worries about slowing growth in Asia's third-largest economy. A Reuters poll earlier this week forecast the central bank to raise rates by 75 basis points for the rest of 2011, including the latest rate increase. The RBI said though monetary transmission has been quite strong, there is room for improvement. "The higher cost of credit is restraining credit growth, but it still remains fairly high, suggesting that economy activity is holding course," the RBI said in its policy statement. The central bank had forecast banks' credit would grow 19 percent and deposit by 17 percent in 2011-12. However, loan growth has remained almost flat so far in the current financial year reflecting signs of moderation in overall growth outlook. Banks' loans grew a mere 1.1 percent since March end, while deposit accretion remained robust at 3.3 percent. However, bankers are not losing sleep yet and are confident their advances growth will meet the RBI's forecast. "Even for a moment if the high lending rates reduce the demand for credit, the credit growth will be at the expected RBI level because there are sanctions in the pipeline which will get disbursed," said K.R. Kamath, chairman and managing director of Punjab National Bank. However, higher borrowing costs could lead to higher NPAs for the banks. "Rising NPAs is definitely an issue," said Seshadri of Bank of India, adding the state-run bank is unlikely to be aggressive on its loan disbursals given risks of delinquencies. Bankers expect the RBI to raise rates further even though they are worried that the cumulative impact of the 275 basis points rate hike over the last 15 months could hurt India's investment demand. Putting growth ahead of inflation now, however, could eventually hurt growth in a big way, PNB's Kamath said. Bankers and industry representatives, worried about the near-term prospects over growth, met C. Rangarajan, head of the Prime Minister's economic advisory panel, and expressed concerns over the slowdown in the economy and slackening of the investment climate, bankers who attended the meeting said.
http://in.reuters.com/
Thanks to RBI
I will like, through the central chronicle (Bhopal), to give heartiest thanks to the deputy governor RBI Mumbai to take immediate action on my important letters and published articles sent to him regarding troubles of members of Janganna employees credit coop. society Bhopal being overlooked by the cooperative deptt. and also state government of M.P. since long. I will again like to request the governor Reserve Bank of India to instruct his office to see that proper and timely action on my letters sent to the commissioner coop. deptt. Bhopal through Prabhat Ranjan Assistant General Manager Urban Banks Deptt (RBI) Bhopal is taken or not.
KG Shrivastav, Bhopal (Central Chronicle)
Loans to become costlier as RBI hikes rates
Reserve Bank of India (RBI) raised key interest rates by 25 basis points to check rising prices in its mid-quarterly policy review on Thursday. The RBI hiked its repo rate or the rate at which it infuses money into the banking system to 7.5 percent and reverse repo rate, at which it sucks out excess money, to 6.5 percent. Talking to Zee News, an official at the Oriental Bank of Commerce said, "It was quite inevitable to hike the key interest rates keeping in view the stubborn inflation." About impact on ordinary citizens, he added, "Since the cost of deposit is high, it is also possible that the banks would pass on the burden to customers thus makings loans dearer." Inflation, according to the latest data, rose to 9.06 percent in May, much above the Central Bank`s comfort level of 5-6 percent. According to the RBI report, "inflation is likely to continue facing upward pressure". Inflation has continued to remain high despite the Reserve Bank raising the key lending (repo) and borrowing (reverse repo) rates nine times since March 2010.
Central Chronicle
RBI rate hike "right move", says Montek
I think it is certainly the right move (of RBI) to contain inflation. This is a widely expected move," Planning Commission Deputy Chairman Montek Singh Ahluwalia told reporters here......
Click to read............
RBI had no option but to raise key policy rates: Rangarajan
NEW DELHI: Agreeing with the RBI's move to raise interest rates, the Prime Minister's Economic Advisory Council (PMEAC) today said persistently high inflation warranted policy action by the central bank. "I think the Reserve Bank has taken the right decision. Contrary to expectations, the inflation rate in May went up and went up very considerably and therefore, it left the RBI with no other option but to raise the policy rates," PMEAC Chairman C Rangarajan told a private news channel. The Reserve Bank has raised the key lending (repo) and borrowing (reverse repo) rates by 25 basis points each to tackle price rise. The RBI, Rangarajan said, would continue its tight monetary policy stance so long as inflation remains at an elevated level. "They have to keep the ammunition still in store for further action against inflation if it becomes necessary. I believe that the RBI will continue to follow the policy of tightening so long as inflation remains at very high levels," he said. The PMEAC Chairman and former RBI Governor also said higher interest rates will have an impact on companies' investments, as the cost of capital will increase. "The hike in the interest rates will have some impact in terms of postponing the investments. But if inflation continues to remain at a high level, it will have a dampening effect on growth in the medium term," he said. Rangarajan, however, exuded confidence that the economy will grow by 8.5 per cent in the current fiscal, driven by robust investments. "I think there are many factors that are operating in the economy which will propel the economy to grow at 8.5 per cent. While new investments may be slow in coming, the existing investments in the pipeline will be completed...," he said. Headline inflation in May stood at 9.06 per cent, despite the Reserve Bank's efforts to tackle price rise by continuously raising the key lending and borrowing rates. What is more, food inflation was recorded at 8.96 per cent for the week ended June 4. Food inflation, Rangarajan hoped, would moderate in the coming months on the back of a good monsoon.
TOI
Quick Edit | Mumbai to New Delhi
The central bank has also clearly indicated that some growth will have to be sacrificed in the short run if inflation is to be tamed
The Reserve Bank of India (RBI) has done well to increase its key policy rates by another 25 basis points. The inflation fire shows no sign of abating, so monetary policy needs to become tighter. The central bank has also clearly indicated that some growth will have to be sacrificed in the short run if inflation is to be tamed. The government needs to support RBI in this tough quest, despite the fact that less robust growth will hurt its tax collections. Higher interest rates will also push up the cost of servicing our public debt. Manmohan Singh had backed C. Rangarajan in the mid-1990s while P. Chidambaram had fought with Y.V. Reddy in 2007. We hope the current finance minister lets D. Subbarao do his job. The government has a more positive role to play as well. First, fiscal policy needs to be tightened as part of a coordinated policy response. Second, the government can help by giving a much-needed reforms stimulus.
Mint
RBI’s monetary policy review: Hobson’s choice for the markets
In contrast to the worsening it sees in the global environment, the central bank does not see any change in its domestic growth outlook
The big change between the Reserve Bank of India’s (RBI) monetary policy statement on Thursday and its annual credit policy statement on 3 May is the central bank’s current emphasis on the risks to growth coming from abroad. Both the statements say that the policy action is expected to “contain inflation and anchor inflationary expectations by reining in demand-side pressures”, but the second objective on 3 May was to “sustain the growth in the medium term by containing inflation”, while on Thursday it was to “mitigate the risk to growth from potentially adverse global developments”. In contrast to the worsening it sees in the global environment, the central bank does not see any change in its domestic growth outlook. Indeed, it takes comfort from the fact that the trend in industrial outlook painted by the new series for the Index of Industrial Production is more upbeat than that of the old series. It further says that “even as there is deceleration in some important sectors, notably interest-sensitive ones such as automobiles, there is no evidence of any sharp or broad-based slowdown”. It says that corporate results for the March quarter, as well as credit growth, have been reasonably strong, while demand conditions, too, remain robust. According to the credit data, it says, “The higher cost of credit is restraining credit growth, but it still remains fairly high, suggesting that economic activity is holding course.” Mint
Strong diagnosis, weak prescription
The RBI's Mid-Quarter Review is a document not just of the central bank's limited effectiveness, but of New Delhi's wilful failure to lend a helping hand
The Mid-Quarter Monetary Policy Review of the Reserve Bank of India shows that it may be succumbing to an inflexible faith in the role it is meant to play rather than in the cold logic of a complex reality and the colder evidence of the results of its previous actions. When it raised the repo rate by 25 basis points to 7.5 per cent, it followed its script faithfully; inflation, it said, “persists at uncomfortable levels”. Headline numbers, it stressed, “understate the pressures because fuel prices have yet to reflect global crude oil prices.” From the RBI's viewpoint, the logic of its actions appears unarguable. Monetary policy is an effective instrument of inflation control. Students, TV commentators and research analysts believe so. But some feel that domestic inflation originates not in excess liquidity or overheated demand, but in supply shortages unaffected by monetary policy changes. The fact that food prices are still at high levels and that manufactured goods prices have climbed a percentage point in May from 6.3 per cent the previous month, shows that the RBI's actions over the last nine months have not succeeded. Leave alone food prices, non-food prices have remained above the targeted level of 4.5 per cent. To a large extent, global commodity prices have added to the spike in prices, but so have interest rates, that have virtually doubled in the 15 months since the RBI began its tight money policy. Inadvertently, the RBI's rate hikes, along with food and commodity prices, may have contributed to sustaining non-food prices at higher levels. Yet, mindful of its script, the central bank avers “some short-run deceleration in growth may be unavoidable in bringing inflation under control.” In nine attempts, the central bank has failed; it might pass off that failure on “transmission problems” but the manufacturing sector has felt the pinch. At this point, the relevant issue is not whether growth is moderating, but whether inflation is; so far, the verdict is no. But even more significant is the absence of any action from New Delhi from pledging its armoury of fiscal and public policy measures to ease supply constraints and, thereby, control input prices. The RBI's Mid-Quarter Review is strong on diagnostics, but weak in its prescriptions. The principal cause for this weakness lies in the abysmal lack of actions by New Delhi against the systemic weaknesses of the economy. In that sense, the Mid-Quarter Review is a document not just of the central bank's limited effectiveness but of New Delhi's wilful failure to lend a helping hand.
Business Line
Dismantle the forex licence raj – S.S.Tarapore
Ms K. J. Udeshi, former Deputy Governor, RBI, and Chairperson, Banking Codes and Standards Board of India, and Dr K. C. Chakrabarty, Deputy Governor, RBI… Knots in forex management system need to be untied
The RBI has done well to set up a panel to streamline foreign exchange rules for individuals. Most of these rules are vestiges of an earlier era, a throwback to a ‘control mindset'.
Banks, corporates and institutional investors are equipped to deal with procedural hassles, but individuals, both resident and non-resident, are defeated. The 2006 Committee on Fuller Capital Account Convertibility (FCAC) stated that “the knots in the forex management system would need to be untied before the liberalisation can become meaningful” (page 114 of the Report). The members of the FCAC Committee have expressed indebtedness to Ms K. J. Udeshi, former Deputy Governor and current Chairman of the Banking Codes and Standards Board of India (BCSBI), for emphasising, in interaction with the FCAC Committee, that removal of procedural and operational knots is more important than liberalisation. It is in the fitness of things that the RBI has, in May 2011, set up a Committee for Review of Procedures Relating to Foreign Exchange Facilities for Individuals-Resident/Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs).
CONTROL MINDSET
The Committee is to identify areas for streamlining and simplifying procedures so as to remove the operational impediments and assess the level of efficiency in the functioning of authorised persons. As Ms Udeshi stressed, the present anomalies and contradictions emanate from a “control mindset”. Much of the procedural framework was set up when there was a total ban on remittances by residents on the capital account and the procedural regime for NRIs /PIOs was also stringent. Non-resident individuals can now remit from their Non-Resident Ordinary (NRO) Accounts up to $1 million per annum while residents can remit on capital account $200,000 per annum and, in addition, there are liberal limits for current account transactions. Unfortunately, the procedural hurdles remain. Till 1994, non-residents holding NRO accounts were not allowed forex remittances from their accounts. Holders of Non-Resident External Accounts, which were based on remittances from abroad, had full rights of remittances. Accordingly all non-residents were put into two boxes, “repatriable” and “non-repatriable”. It is amazing that even today non-resident accounts are classified in this manner. It could be claimed that this is not the doing of the RBI or the banks but the Securities and Exchange Board of India (SEBI) and the government. No matter which authority prescribes such procedures, it is the individual who suffers.
INEXPLICABLE PROCEDURES
Many procedural hurdles can easily be dispensed with without any change in policy. A few select procedures are set out below:
First, despite denials by banks, a number of them still require an individual using foreign exchange to sign a demeaning declaration on what he is not doing, rather than what he is doing. Individuals are required to sign a declaration to say that they are not chors (thieves). To the extent that even one bank uses this reprehensible declaration it speaks poorly of the entire Indian financial system. Second, while non-residents are permitted to have an account jointly with a resident as a second name, a resident is not permitted to have an account jointly with a non-resident as a second name. This is observed in the breach as RBI officials, government officials, bankers and others violate this procedure! It is inexplicable why the authorities do not appreciate the convenience that depositors seek, but are obsessed with the concerns of yesteryear. Third, there are absurd stipulations that residents buying a rupee asset from a non-resident are required to undertake a 30 per cent deduction of the proceeds and remit it to the government account and the non-resident has to claim a refund. This regulation just cannot be implemented in today's screen-based trading system. The government, the RBI, the banks and those undertaking the transaction are aware that the stipulation cannot be implemented, but the authorities cling to it — it is for the tax authorities to remove this ridiculous stipulation. Fourth, individuals utilising their Resident Foreign Currency Accounts (RFC) are required to fill the A2 Form for purchasing foreign exchange and sign the demeaning declaration. At the same time, a resident is allowed to maintain a RFC account abroad where the writ of the RBI does not run! It is reported that the banks undertake these procedures because of strictures by RBI inspectors! It is unbelievable, but true, that non-residents are required to have one NRO Account for their assets before they left India and for inherited assets, and a separate NRO Account to purchase shares after they become non-residents; what is more, the individual has to maintain two separate demat accounts. The RBI and SEBI prescribing these procedures are looking for a black cat in a dark room which is not there. Lastly, the decentralisation of the RBI offices and the delegation of powers to banks has moved the system from a single regulator to a proliferation of regulators, each acting like a satrap. Despite liberalisation, individuals continue to suffer. Ms Udeshi, much before this Committee was set up, said dismantling exchange control procedures is more demanding than imposing controls. The Udeshi Committee is the last hope for individuals.
Business Line
DFSA strengthens ties with RBI
The ceremony at the Central office of the RBI took place in the presence of Dr KC Chakrabarty, Deputy Governor of the Bank. One of the DFSA Board Members, the Honourable Apurv Bagri, also attended the meeting and later in the evening hosted a dinner to mark the occasion............
Read.......................
Read.......................
Fiscal measures needed
The announcement of policy rates hike for the tenth time in the last 16 months appears to be a mockery and a one-sided show in addressing inflation. The government has once again set aside the tools of fiscal measures, leaving the issue with the Reserve Bank of India to proceed with the single-point agenda of rate hike. It is not known whether the government is honest in sticking to the 8.5 per cent growth projection, as the rate hike is likely to affect the production side. The present inflationary trend has reached near double-digit levels. The government should own up the responsibility and proceed with tight fiscal measures, instead of remaining as a spectator and allowing the RBI to continue hiking rates.
C. P. Velayudhan Nair (Business Line)
Containing inflation
The RBI, in its Financial Stability Report released recently on the health of the financial sector, has expressed concern over the consistent price rise and runaway inflation, which is estimated at around 9 per cent. It has also raised concerns over the rising bad loans in certain sectors, the possibility of European debt crisis spreading to advanced economies, fiscal consolidation, and so on. Inflation has remained above RBI's comfort level for the past one year. In its effort to tackle inflation, the RBI has raised key policy rates by as many as 10 times since March 2010. Yet, inflation is relentless and has assumed a menacing proportion. High interest rates are not good for the economy since that will translate into increased borrowing costs. Yet, the RBI has decided to hike the key policy rates to contain inflation and sacrifice growth in the medium term. While attacking inflation would remain a priority for the government and the RBI, the extent of economic uncertainty prevailing due to internal and external factors would prompt the RBI to work out permutations and combinations to keep the economy going.
S. Umashankar, Nagpur (Business Line)
RBI action will check inflationary expectations: Pranab
The Reserve Bank of India (RBI) move to hike repo rates by 25 basis points was on expected lines, the Finance Minister, Mr Pranab Mukherjee said here on Thursday. By this policy rate action, the RBI has sought to maintain an interest rate environment that moderates inflation and checks inflationary expectations, Mr Mukherjee said in a statement soon after the central bank announced its mid-quarter credit policy review. The Finance Minister said that the further tightening of monetary policy was expected as the core inflation had hardened to 8.71 per cent in May 2011, from a level of 7.93 per cent in previous month. There was need to have better price stability for sustaining growth in the medium term, he said. As part of anti-inflation measures, the RBI on Thursday announced a 25 basis points hike in repo rate from the existing 7.25 per cent to 7.50 per cent.
Business Line
Activists invoke RTI to find out the status of RBI’s report on customer service
Committee chairman M Damodaran has not released the report despite it being ready. The query seeks to know the expected date of the release and the time-frame for implementation of recommendations
After a long wait of more than a year, during which many people submitted their recommendations to the Reserve Bank of India's (RBI) committee on customer services, there is still no sign of the report. Now, an activist has evoked the Right to Information (RTI) Act to find out the status of the report. M Damodaran, chairman of the committee on customer services, has, despite repeated assurances, been sitting on the report. Mumbai-based activists have filed an RTI query with the RBI to get details of the report. The RTI query, a copy of which is available with Moneylife, seeks details such as the number of responses received from the public/NGOs, the time-frame of the submission of the report, the date on which the chairman signed the report, the expected date of release of the report in the public domain, and time-frame for implementation of recommendations. The activist has also sought the date/s when each individual member of the committee signed the report. In a circular dated 16 June 2010, the RBI had invited suggestions to be submitted to the Damodaran committee on customer services by 15 July 2010. Mumbai-based chartered accountant Nagesh Kini, who is one of the people who made submissions to the committee, told Moneylife: "Last year, as the per the RBI circular, I made my submissions to the Damodaran committee. The suggestions related mainly to the issues faced by senior citizens. I don't know how many of them have been incorporated in the report since it has not yet been released." The committee was constituted in June last year to review the system of customer service and grievance redressal by banks. The committee was expected to undertake a strict review of the existing system of the Banking Ombudsman Scheme and customer service in banks, including the approach, attitude and fair treatment to customers in retail, small and pensioners segments. The committee was also asked to evaluate the existing system of grievance redressal mechanism prevalent in banks, the structure and efficacy, and recommend measures for expeditious resolution of complaints. The report was expected to be released in mid-February, but it has not yet been released. Moneylife has repeatedly written about the report on customer services and that its release has been delayed for unexplained reasons. According to sources, "The report on customer services by the RBI has described solutions to resolve customer issues. The report is believed to be pro-consumer. But the report, despite being ready, has not been released for reasons best known to Mr Damodaran. Even the committee members are unaware of the release date."Moneycontrol
Hawkish on inflation, softish on growth – Rajesh Chakrabarty
Governor Subbarao has dutifully lived up to the market consensus of delivering the 10th rate hike in 15 months—a 25-basis-point rise in the repo and reverse repo rates, bringing them to 7.5% and 6.5%, respectively. The cash reserve ratio (CRR) remains constant at 6%. But the decision was not really as straightforward as it may appear. In many ways, this review by the Reserve Bank of India (RBI) was close to the sharpest edge of the classical central banker’s dilemma, whether to cut rates and boost growth or raise them to contain inflation. In a rather unusual show of transparency, the Chief Economic Advisor himself had commented publicly a few days ago advising RBI to take into account slumping industrial production and hold back on raising rates. Probably he was just giving an opinion, not really trying to influence RBI, for if it was the latter the choice of communication channel could hardly have been more counter-productive. In any event, the latest inflation figure, northwards of 9%, is away from RBI’s “comfort zone”—and it better be—while the slump in the April’s year-on-year index of industrial production (IIP) to around 6% is equally lacking in comfort for the growth advocates. The governor chose inflation as the bigger evil. The choice is well grounded in both economic theory and central bank wisdom. It is difficult to argue with RBI’s view of things—the relative importance of the two threats—explained in the quarterly review. How much dent a 25-basis-point rise is going to have on inflation immediately is, and will remain, an open question. The rain gods are being invoked to take care of not just inflation but of growth as well. In any case, the direction of the move is beyond question. It signals RBI’s hawkish-on-inflation stance and helps fixing the inflationary expectations at a lower level. It probably also suggests that the tightening phase of monetary policy that the country has entered since October 2009 still has a few notches to go. Indeed, the repo rate stood at a full 9% on the eve of the Lehman collapse. That said, things do not look very bright just now on the investment and growth side for India. The clouds on the international horizon grow darker. At home, projects are being held back or shelved indefinitely. Perhaps the most telling indicator is an unlikely source—the foreign direct investment (FDI) inflow data. FDI in India declined by over 30% in 2010 and the trend shows no sign of turning. One can always blame it on global factors but, given that other Asian emerging markets have shown strong increases—from 14% in Thailand to a whopping 163% in Indonesia—we are clearly losing out projects to other countries. This trend is important because in today’s world what works for foreign investors, holds true for large Indian projects too. Something is clearly amiss in the Indian investment climate that is holding investment—domestic and foreign—back. Regulations would be among the usual suspects, except that investments have grown to higher levels in an era of worse controls. So we are left with something that is clearly Indian and evidently of a recent nature. Policy uncertainty seems to be the most plausible action. The shadow of the multiple crises as well as the recent civil society protests against corruption may well have contributed to this slowdown. The point here is that one cannot expect monetary policy to untangle these knots. Doubts are often expressed about the efficacy of India’s monetary policy on inflation. The link between monetary policy and investment is equally, if not more, tentative. Unless the investment environment in the country is more conducive, a softer monetary policy is not going to help output growth. It would only be akin to the proverbial “pushing on a thread”. Monetary policy is too often expected to do several things—control inflation, bring forth growth, and keep the value of the rupee at desired levels. Sadly, it is just not possible to use the single instrument of interest rates to achieve all that. It is in this connection that one is reminded of possibly the most controversial of the suggestions made by the Raghuram Rajan committee on financial reforms, that RBI adopts a variant of “inflation-targeting”. While clearly the government has not moved towards formally adopting the suggestion, and RBI has opposed it vocally, in effect, RBI actions have been following the spirit of that approach in recent years. It only has to work harder to convince the world that it considers inflation the biggest danger. After all, when it comes to monetary policy, the difference between “comfort zones” and “tolerance zones” is more than just semantic.
The author teaches finance at the Indian School of Business, Hyderabad
FE
Post Office savings accounts to be taxed from current fiscal
The government has decided to levy tax on the interest obtained on Post Office savings schemes from the current financial year. The Central Board of Direct Taxes (CBDT) has brought out a notification in this regard recently, which stipulates that any interest earned beyond `3,500 (in case of individual accounts) and `7,000 (in case of joint accounts) will be taxable from the running fiscal. The CBDT — which is the administrative authority of the Income Tax Department-- has issued the notification to all the tax collection ranges across the country for implementation. Taxpayers will have to reflect this investment on their income tax returns. “Taxpayers who now invest in the post office saving accounts schemes will now have to show the interest earned on this scheme while filing their income tax returns. Interest upto Rs 3,500, in case of single accounts and and `7,000 in case of joint accounts, is exempted,” a senior I-T official said. The Assessing Officer (AO) will compute the tax on the interest earned, beyond the exemption limit, accordingly, he said.
The Pioneer
Blunt instrument: have interest rate hikes run their course?
You may quibble with RBI governor D Subbarao about monetary policy being a blunt instrument that hits everything from individuals’ home loans to the country’s economic growth. Or go along with him to make.........
Click to read...............................
BANKERS’ TAKE
There is (in the policy review) for the first time recognition of potentially adverse global developments and there are also concerns about an unwarranted slowdown in domestic demand and credit. All this suggests that a re-assessment of the growth-inflation trade-off may now be required that might moderate the need for further policy tightening—Shikha Sharma MD, Axis Bank
While pricing of loans could change marginally the rate hike might not translate into an immediate increase in the Base Rate. Given RBI’s concerns over inflation, one more round of rate hike cannot be ruled out. I expect that credit growth would be around 19-20% and the GDP to grow around 8.5% —M D Mallya Chairman, Bank of Baroda
I feel that interest rates are close to their peak levels. There are three reasons for this; Firstly, the impact of earlier hikes may start showing now; Secondly, with the monsoons starting on a good note food prices may ease. Thirdly, with major economies facing problems commodity prices could ease thereby reducing imported inflation —Keki Mistry MD, HDFC
The rate hike and prevailing systemic liquidity conditions could lead to an increase in funding costs for banks, and in lending rates. Based on the trends across various segments, and the existing pipeline of approved projects, credit growth for the year is expected to be in the range of 18-20% —Chanda Kochhar MD & CEO, ICICI Bank
We continue to expect two more rate hikes of 25bps each taking the repo rate to 8.0% before the current tightening cycle draws to a close. Three factors could however get in the way of further hikes-- unrest in the global economy and financial markets, a resulting correction in commodity prices, and pronounced domestic growth slowdown in response to rate hikes and external factors —Gunit Chadha CEO, Deutsche Bank India
TOI
‘Our main worry is inflation, not growth’
The Reserve Bank of India on Thursday gave ample signals that it is more concerned about inflation, not growth. Hiking the repo and reverse ........
Click to read..............
The Inflation Buck
It does not stop with the RBI; the government must make bold to do its bit
The RBI has raised policy rates by an additional quarter of a percentage point, bringing the rate at which banks can borrow from the central bank to 7.5%. This is still significantly below the 9% effective before the financial crisis and below the rate of inflation, keeping real interest rates still in the negative territory. It is difficult for the central bank to ease off on restoring policy rates to where they were before the crisis when inflation continues unabated, and when a largish current account deficit indicates that the economy’s appetite for goods and services is running ahead of domestic supply. So, the RBI is likely to raise policy rates even further in the coming quarters. Where would this leave growth? The simple reality is that neither growth nor even inflation is determined solely by domestic monetary policy. The government has to step in and take the corrective action that only it can take. It has to act at three levels: at the level of the G20, to initiate action on reining in global commodity prices as they ride a wave of gushing liquidity flowing out of developed economies; at the level of fiscal consolidation, to prevent government expenditure adding to excess demand in the system; and in terms of policy and governance to restore investor confidence and kick-start investment, particularly to remove the supply bottlenecks that feed inflation. Fiscal consolidation and policy reassurance would converge in a long-awaited decision to deregulate diesel prices. It would help anchor inflation expectations as also free up for others the huge chunks of bank lending that oil companies corner at present, to make up for under-recoveries. If the government swiftly moves to shed dither and policy paralysis, the mood would change, definitely for the better. It could easily allow foreign direct investment in multi-brand retail, write off a fifth of the debt of all states that scrap restrictions on farmers’ freedom to market their produce and permit workers to voluntarily shift their retirement savings from the moribund Employees’ Provident Fund to the forward-looking New Pension System. The fields would bloom, and so would the markets. That would revive confidence.
ET
Subscribe to:
Posts (Atom)