VITALINFO

Sunday, July 24, 2011

Banking on Bharat

“At one end of the spectrum lies the demand to achieve financial inclusion because nearly 50% of the country’s population is yet to be covered under the formal system of banking and at the other end lies the task to fulfill the needs of the existing customer.”

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Cops nab cash-filled car after long chase

Sahibrao Nalawade (right) and Kiran Phalke

Swift Dzire with Rs 20 lakh in Rs 10 denomination notes intercepted in Kalyan; three men detained

A car full of cash headed towards Navi Mumbai from Nashik. A man who claimed he was an officer of the Reserve Bank of India. A story about where the cash came from and where it was being taken that did not wash with the cops. The Kalyan police on Saturday were left grappling with a mysterious case after they intercepted a car in which three men were transporting Rs 20 lakh in Rs 10 denomination notes. The cargo was so heavy -- Rs 20 lakh in Rs 10s is 200,000 notes -- that the car's rear was tipping. The car was intercepted after a 45-minute chase, just as it was entering Dombivli. The three men detained have been identified as -- Sahibrao Nalawade, who claimed to be an RBI employee; Ganesh Phalke, who was driving the car; and Kiran Phalke, his brother, who was in the rear seat with a travel bag full of cash in his lap. The cash was in eight bags -- four in the car's cabin and the rest in the boot. At the time of going to the press, the cops had been told two stories and they were not buying both. Nalawade told the cops that he had nothing to do with the cash or the other two in car and that he had taken a lift. However, cops said he had tried to jump out of the car and escape just minutes before it was intercepted. Also, they found an RBI officer landing in a car full of cash too much of a coincident. The other two occupants of the car said the money was withdrawn from a Bank of India branch in Nashik and that it was being taken to Sanpada in Navi Mumbai to be distributed to big restaurants and malls that require large amounts of small change. They said they did this for a small commission. It being a weekend, the cops found it difficult to get through to Bank of India branch in Nashik to cross-check the brothers' claim.

When Mumbai Mirror contacted RBI spokesperson, Alpana Killawala, she said: "I cannot comment off hand without knowing facts. I will find out on Monday and let you know." Assistant Commissioner of Police DS Thakur received a tip-off at 1 pm about a blue Maruti Swift Dezire laden with cash entering Kalyan. The message was relayed through control room to all police stations and at least five team scrambled to chase the suspect car. Around 1.45 pm the car was spotted near Durgadi Fort by one of the teams. "I saw the car first at Shivaji Chowk. As soon as I saw the car, I knew it was the one we were tipped off about. Its boot was almost touching the road and I could see two men in the rear seat," said ACP Thakur. The car had now picked up speed and the cops were finding it difficult to catch up with it. However, thanks to bad roads they managed to intercept the car on the Kalyan-Dombivli border. "Just before the car was intercepted, one of its occupants (later identified as Nalawade) jumped out and tried to escape. However, one of my teams caught him," said ACP Thakur. The car, the money and the three suspects were first taken to the Manpada police station, but the case was later transferred to the Bazarpeth police. ACP Thakur said they will be looking at three angles in the case. "First we want to check if the cash is genuine currency notes. Second, since they came from Nashik, where a security press is located, we want to check if freshly minted notes were pilfered out. Third, of course, is what were they going to do with all this cash," he added.

Mumbai Mirror

Fai, fake notes, terror: Pak’s multi-pronged war on India

A whole section of the Pakistani establishment seems to be revolving around and thriving on a single-point agenda: destabilise India. The Ghulam Nabi Fai episode now and the Tahawwur Rana-David Coleman Headley affair a couple of months earlier have already exposed the extent and intensity of the engagement of powerful state forces with the anti-India terror elements. It now comes to light that the racket involving the printing of fake Indian currency is not the handiwork of some lone isolated outlaw or a group of such characters backed by rogue officials of the ISI. The link leads straight up to the state-owned mint in Pakistan. According to a report in DNA, sources in the National Investigative Agency (NIA) have revealed that the fake currency notes circulated in India to sponsor terror agents and destabilise the economy are manufactured in the same state facility where Pakistani currency notes are also printed. The expert committee, which compared genuine Pakistani notes with the fake Indian ones, has found startling similarities. The initial report of the committee says that the dry offset printing method was used to manufacture both; the PH value found on fake Indian currency notes of the denomination of 500 and 1,000 was exactly the same as in the Pakistani notes; and the grammage – the grams per square metre of paper, an indicator of the nature of the paper used – was identical too. The last one and the presence of poly vinyl alcohol on the surface of the papers used, make it clear that the paper for both types of currency notes came from the same source, the report says. The committee concludes that the quality, scale and other technical values make it clear that both sets of currency notes could be manufactured by machines owned by a country only. The Pakistani origin of the fake notes doesn’t surprise anyone. Such notes have been in circulation in India for a long time now and conduits are picked up by intelligence and law enforcing agencies on a regular basis all over the country. The CBI and other agencies are right now probing how the terror outfits on the other side of the border lay their hands on the security features of the secret templates for Rs 500 and Rs 1,000 notes. Investigators link the theft to the ISI’s desperation to make the fake currency notes look authentic. The earlier notes, though cost effective, were detected easily. After getting hold of the template, the manufacturers have also shifted to imported paper for printing from the wood pulp-based paper earlier used. The ISI’s dogged efforts at counterfeiting have made the fakes hardly distinguishable from the original. The threads, the watermarks, the Ashoka Pillar, Mahatma Gandhi’s image, the denomination and the RBI mark in the new bunch of notes are sharp and nearly as good as in the original India notes. The investigators have been hinting for sometime that the operation has been moved to government presses in Quetta, Lahore and Peshawar to achieve more sophistication. The final product is then routed from the presses into India through conduits in Nepal, Bangladesh and Sri Lanka. The NIA expert committee’s revelation only confirms the suspicion. What is surprising here is the scale of the conspiracy against India and it multi-prongedness. At one level Pakistan is spending an enormous amount of energy to influence intellectuals across the globe against India — the Fai episode makes it evident — and at another level it is directly unleashing forces such as terror outfits and the counterfeiting racket to weaken us. There could be many other undetected fronts too. If only the country spent that much energy in putting its house in order. But since Pakistan seems so keen to print Indian currency, maybe as a confidence-building measure we can hand out the contract to the Quetta mint. This way the RBI saves the cost of printing the notes, and the Pakistanis can send us the money through the Samjhauta Express instead of low-level couriers.

First Post

Balancing helped us to avoid instability: Y.V. Reddy

The importance of ethics in all walks of life, common sense and the precedence of intuitive understanding over technical mastery are among the key lessons from the global financial crisis, Y. Venugopal Reddy, former Governor of the Reserve Bank of India said on Friday. Delivering the 48^th convocation address at the IIT Madras, Mr. Reddy said the main reason why India was only marginally affected by the crisis was the importance given here to a “balance between several factors.” While the policy view in the US was that asset bubbles being difficult to define are best managed after a burst, the Indian approach is different and concerned with distributing “gains and pains” among the people if the bubble builds up and bursts, Mr. Reddy said. Putting restraints on banks extending credits or investing in housing or equity markets was the Indian way of ensuring that innocent victims were not victims of an asset bubble burst, according to Mr. Reddy, who is currently Professor Emeritus, University of Hyderabad. “The balancing helped us to avoid financial instability and record the highest growth rates with price stability,” he said. Mr. Reddy recalled that once when asked how the RBI intervened in foreign exchange markets without basis for knowing in advance the right forex rate, he had stated: “I cannot define God. That does not mean that I cannot identify the devil…” According to him, the financial crisis also brought into focus severe weaknesses in current economic thinking and demonstrated how some learned policy makers and leaders in financial markets were lacking in intuitive understanding of the world. “Many of them had impressive technical understanding, but in their role as leaders, they needed intuitive understanding,” he said. Mr. Reddy stressed the need to have good values on a continuing basis that determine relative weights to competing considerations, especially, between personal welfare and public interest. Citing an anecdote about a Lieutenant in the French Army being told by his General that at his level there was no difference between tactics and strategy, Mr. Reddy said the take-away lesson was that as one shoulders higher responsibilities, one needed to go beyond measurables in decision-making. Mr. Reddy told the graduands to get ready for an exciting future when India would offer plenty of attractive opportunities and surpass China as the nation that creates maximum wealth. The IIT-ian would also be the best equipped to deal with the challenge of multiple transitions ahead, he said. M.S. Ananth, IIT-M Director and chairman of the Senate, presented a report highlighting the academic, co-curricular and socially relevant activities undertaken by the IIT over the past year. He later presented degrees to 1,385 candidates, including 245 in absentia. M.M. Sharma, Chairman, Board of Governors, urged students to consider a career in the academic world that held many rewards as the economic prosperity of a nation hinged on the output of doctorates per million of population. “We in the academia have the spiritual freedom to pursue blue sky research, innovate and yet not be affected by oppressive corporate and management pressures,” he said.

HBL

Policy pressure on portfolio

The successive increases in policy rates by the Reserve Bank of India have necessitated changes in investors’ portfolios. Some ideas on how one should go about those. The policy measures of the Reserve Bank of India (RBI), the country’s apex bank, are watched with a lot of interest. These are among the most significant drivers of the economy and financial markets. RBI is in charge of the monetary policy, which has a great impact on liquidity conditions and interest rates. The Bank has been entrusted with managing liquidity and inflation in the country. The investing class, therefore, needs to understand the basics of monetary policy and how it impacts investment. RBI has several tools in its hands to release or control liquidity in the system. Two of the most important tools are the cash reserve ratio (CRR) and the liquidity adjustment facility (LAF). CRR is the proportion of their deposits that banks have to keep with RBI. Raising CRR is one of the most effective ways for the RBI to suck liquidity out of the financial system, reducing demand in the economy and, thereby, helping curb inflation.LAF is a mechanism through which RBI lends to and borrows from banks for very short periods, typically just a day. The repo rate is RBI’s lending rate and the reverse repo rate is RBI’s borrowing rate. These two rates help RBI influence short-term interest rates in the rest of the financial system. When RBI increases these rates, the banks also increase deposit and lending rates. The effect of increase in policy rates is that the banks increase deposit rates and lending rates. Rising interest rates are adverse news for the stock markets. The high cost of capital directly affects the performance of companies in rate-sensitive sectors. For example, banks may not be able to pass on the entire increase in cost of funds to their customers, thereby affecting net interest income. Higher loan rates may force individuals to postpone purchases of homes, vehicles, consumer durables, etc, and thereby bring down the overall demand for loans affecting banks and supplier companies such as real estate, auto, infrastructure, etc. Most businesses need capital to run their day-to-day operations that require a mixture of debt and equity. Companies with huge debt on their balance sheets and those needing greater funds in the form of debt for expansion are worse affected. For, when interest rates rise, so does the cost of borrowing. Higher rates also increase the interest cost burden of indebted companies and thereby bring their profits down. With inflation becoming a major issue, interest rates can only go up. So, investors should avoid rate-sensitive sectors like financial services, real estate (and, to some extent, automobiles) at least for some time. Cash-rich companies sit pretty during these times. They don’t have to borrow capital and can earn from short-term investments of the cash in their hoard. The benefit they earn on the treasury income won’t be substantial. But cash becomes handy now because they can fund their growth without resorting to high-cost debt. Companies with surplus cash are able to benefit by way of higher yield on investments. Sectors such as pharmaceuticals, fast-moving consumer goods and information technology are considered non-interest rate sensitive by investors and are safe to park money during a high-rate regime. This is because you can postpone buying a house, but you cannot postpone buying day to day things like biscuits, cosmetics, detergents, toothpaste, etc, which are a daily necessity or medicines. It is the rate at which RBI borrows from banks. RBI increased the reverse repo rates by 200 basis points in less than a year’s time. The table above gives the return for one year for the CNX NIFTY and various sector indices. As seen in the table, due to increasing interest rates, the NIFTY has given nominal returns. However, sectors such as pharma and FMCG have better returns. The auto segment has given the best returns but it was primarily because of hammering last year. As far as individual stocks are concerned in Nifty, those that have given greater than 25 per cent returns are Sun Pharma (49 per cent), ITC (41 per cent), Hindustan Unilever (27 per cent). These stocks are from defensive sectors such as pharma and FMCG. The worst performers have been realty sector stocks such as DLF (minus 24 per cent), Unitech (minus 58 per cent), IDFC (minus 27 per cent), Maruti(minus 15 per cent), etc. With the impact of all the hikes yet to take place, investors may position their portfolio with less of interest rate-sensitive stocks. However, that should not make them completely disinvested from these stocks , as these may give bumper returns later. Having a proper balance of the stocks will help optimise returns.

Yet another 25bps rate hike on July 26, says CNBC-TV18 poll

Industrial production numbers were down to 5.6% in May; corporate results are showing telltale evidence of falling sales and margins. Falling margins indicate an inability of producers to pass on prices. And yet on the other hand inflation remains high at 9.4% and is set to go higher if producers pass on the fuel price hikes. The Reserve Bank of India (RBI) faces an ugly contradiction-slowing growth and rising inflation. So what's the market expecting it will do on July 26, in its credit policy? CNBC-TV18's Gopika Gopakumar and Vidhi Godiawala give a lowdown. RBI Governor is expected to continue his anti-inflationary stance in the first quarter monetary policy review on July 26. 85% of the respondents polled by CNBC-TV18 expect RBI to hike the repo rate by 25 basis points, 15% say the RBI will acknowledge slow growth and pause its tightening cycle and a small minority argue there is a case of a 50 bps repo rate hike. Leif Eskesen, chief economist, ASEAN and India, HSBC, said, "We think there is a case for 50 bps in the next policy meeting but we do think the RBI will move by 25bps. They will also look at what's happening globally that will temper their degree of aggressiveness." While the July hike is expected by a high majority, opinion is divided on what thereafter. 55% of those polled expect RBI to hike the repo rate by another 25 basis points after the July 26 rate hike. 45% said they don't expect RBI to increase rates further in FY12. Rana Kapoor, founder, managing director and chief executive officer, Yes Bank, said, "We are probably at a peak level in terms of interest rates. While there may be some correction and calibration in repo rates as the market is generally expecting, the damage on industrial production and industrial growth, on output and structural implications are severe now of any further interest rate hikes. We are probably at the very end of increasing cycle." Rate hikes will mean slower growth, but 75% of those polled expect RBI to retain its gross domestic product growth forecast at 8%, 25% see the central bank scaling down its growth forecast between 7.5-8%. As for inflation, 65% said RBI will leave its March end inflation forecast unchanged at 6%. 35% expect RBI to raise its inflation forecast above 6%. A majority (65%) doesn't expect banks to increase lending or deposit rates immediately if the RBI hikes the repo rate on July 26. 35% see banks passing on costs to their borrowers. Bankers will decide post the policy announcement and their decision will depend on their bank's cost of funds. Arun Kaul, chairman and managing director of UCO Bank, said, "We'll have to wait and see how liquidity shapes up. If my cost of fund moves up I have no option but to pass it on to my customer." While, MV Nair, chairman and managing director of Union Bank, said sees no reason why deposit rates should be raised at this point. "When you have positive return to the depositors, the deposit growth is expected to be higher. So to that extent there is no need why it should take place. Whether to pass on to borrowers or not is a call that we may have to take post policy because it gets linked to the deposit costs," he explained. Majority of the economists and bankers say RBI's tone will continue to remain hawkish and inflation control will precede its policy stance. But there is a small group which believes the central bank will prepare the market for an exit from its tightening regime. This minority feels the regulator will give growth its importance, acknowledge global uncertainties and the possibilities of its negative spillover effects.

Watch the video........

Bank staff, officers to strike work on Aug 5

Around ten lakh employees from all nationalized government banks, domestic and international private banks, cooperative banks and regional rural banks will strike work on August 5. A release from The Maharashtra State Bank Employees Federation says that the strike is not for any financial demands but for pending demands of the employees. The federation - demands not to privatize public sector (nationalized) banks, not to reduce central government’s share capital in public sector banks, not to take World Bank loans for fulfilling capital requirements in public sector banks, opposes merger of five banks in the SBI group with SBI. The federation also says that it would not be in public interest to allow uncontrolled access to foreign capital in banking industry and has demands not to cancel Section 12 ( 2) of the Banking Regulation Act because of which foreign banks are bound to takeover the private banking sector.

FPJ

central bank policies to underpin shares

The Reserve Bank of India (RBI) has had a tough job on its hands, wielding monetary tools to slam down on inflation that was largely caused by supply bottlenecks. It is widely tipped to raise rates by a quarter of a percentage point this week, which would be its eleventh increase — the most by any central bank — in 16 months.......

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Saturday, July 23, 2011

The myth of the 'new normal' : A Seshan

We live in this peculiar world where three per cent inflation is stability but a half per cent decline in the price index is deflation. I am not quite up with modern nomenclature.” — Paul Volcker

The country has lived with inflation for about one and a half years. During 2010-11, the rate of price increase was nine per cent. There has been no respite since then and it has been a roller-coaster ride. Every time there is a decline of a few decimal points in the rate, hosannas are sung in official circles, which pats its own back for the achievement. What is worrisome is the government’s somewhat laid-back attitude towards inflation. By the middle of June 2010, the official circles expressed satisfaction with the fact that food inflation had “stabilised” at around 16 per cent. If there is a rise then the base effect is blamed! Since the mid-eighties, the Reserve Bank of India (RBI) has formulated its monetary policy on the assumption of an “acceptable” price rise of five per cent. The rationale is that in the course of economic development certain sectors will grow, while others will decline, thus shifting resources from the latter to the former that would give rise to a general inflation rate of five per cent. It did not produce any study to support its conclusion. I have refuted this fallacious argument elsewhere. Otmar Issing, member of the European Central Bank’s Executive Board, once said: “For the relative price mechanism to function properly, firms must be able to discriminate between relative price adjustments and general changes in the overall price level. They can only be sure of not making mistakes in a situation of overall price stability.” The latest is the talk about 6.5 per cent being the new normal for price rise! The next “logical” argument will probably be that everything is fine till the time there is no double-digit inflation and it is contained at 9.9 per cent! And then you have experts saying a little inflation is good for developing the economy. It is as absurd as saying a little pregnancy is good for a woman. To add insult to injury, the goal post for a reduction in inflation is moved from time to time. From kharif 2009 it was moved to rabi 2010 and then again to the next kharif and so on. The whole concept of a “tolerable” or “acceptable” inflation rate of five per cent, adumbrated by the authorities, is misplaced. Was any opinion survey conducted or was there a discussion in Parliament on the concept affecting more than a billion people? There are a number of reports of restaurants in Mumbai closing for lack of customers. And this is the case in perhaps the country’s richest city in terms of average income. Then there are stories of families cutting down on their consumption of milk, coffee, tea, vegetables and fruit and housewives foregoing the weekend luxury of going to a restaurant with the family for dinner instead of cooking at home. There’s much research on the reduction of the proportion of people below the poverty line. Now, it is time to find out about the neo-poor, which are people formerly above the poverty line but have since gone below it due to inflation. There are reasons for the developed countries having a threshold for inflation at two-three per cent. First, the consumer price index is somewhat biased upwards because it does not take into account the improvements in the quality and performance of manufactured goods. Second, the West is worried more about deflation than inflation because there are no effective policies to tackle the former. Third, the number of people below the poverty line is not much compared to us. Fourth, most families have working couples with double incomes, so they can afford to bear a price rise of two to three per cent. These considerations do not apply to a country with a large number of poor people for most of whom food is the most important item in the family budget. With massive Five-Year Plans and large-scale fiscal deficits, the question of a general deflation is not likely to arise. There are experts who say the RBI and the government should focus on the core, rather than headline, inflation. The former refers to the inflation excluding food and fuel items, while the latter includes all the commodities. This is a case of adopting Western concepts, either unknowingly or deliberately, without recognising the ground realities in the country. In the US, the concept of core inflation developed for two reasons: first, because of the volatility of food and fuel prices that was unrelated to monetary factors and, second, their relative low weights (13.378 per cent and 4.525 per cent, respectively) in the price index. It helped isolate non-monetary factors for policy-making. Further, the Consumer Price Index for the US is for the urban population. These factors do not hold good for India. In fact, our core sector should include only food and fuel. One hopes that in the next quarterly review of its monetary policy, the RBI will take a hard look at its past assumptions and modify them with the sole objective of fighting inflation. We need a Paul Volcker to squeeze inflation out of the economy.

The author is an economic consultant and a former officer-in-charge in the department of economic analysis and policy at the Reserve Bank of India (BS)

WORKSHOP ON FAKE CURRENCY

Srinagar, July 22: J&K Bank conducted a workshop on Fake Indian Currency Notes (FICN) at its business unit Ganderbal on Thursday. The workshop was attended by the representatives of all banks namely SBI, PNB, EDB, State Cooperative Bank and Land Development Bank, operating in district Ganderbal. District Development Commissioner, Ganderbal, Showkat Ahmad Mir was chief guest on the occasion. Besides, Assistant General Manager, RBI, R K Meena, J&K Bank Zonal Head (Central Kashmir), Abdul Hamid Banday, J&K Bank Cluster Head Ganderbal, Muhammad Amin Khan and other officers from different wings of police department were also present on the occasion. Cluster Head Ganderbal, Muhammad Amin Khan welcomed the guests and briefed them about the importance of organizing such workshop. Later, a brief presentation and a short film on different features in a genuine currency note which can be used for differentiating it from fake notes was given by the J&K Bank Cluster office, Ganderbal. However the DDC said that such type of presentations would be more effective for common people if shown on a big projector screen.

Greater Kashmir

Banking 2.0

With banks offering most services on the Internet and Internet penetration in India growing rapidly (a 2009 World Bank report puts the number of Internet users in India at 61.3 million, up from 51.75 million the previous year), it’s of little wonder that a McKinsey report has found that 7% of all banking consumers use Internet banking, up from only 1% in 2007. Coupled with Internet, other modes of banking, like mobile banking, are growing rapidly. The report found that 6% of the banking population used mobile banking services. The sheer savings incurred by the banks through the use of these alternate modes of transactions, as opposed to branch transactions (down 15% since 2007), coupled with the increasing range of services like balance enquiry, stop payment instruction of cheques, transactions enquiry and location of the nearest ATM/branch offered on the phone, suggests that this number is sure to grow in the future. Consider this: officials at the Union Bank of India estimate that transactions through alternative channels account for 53% of total transactions (up from 35% in 2010 and targeted to reach 60% by March 2012), and are at only around 10% of the cost of branch transactions. No wonder, then, that even RBI is urging more banks to launch mobile banking. Presumably, lower costs for the banks result in lower fees for the customers, and the limited availability of bank branches in India (only 79,735 branches across India in 2009, according to RBI) makes using mobile phones and the Internet a much more attractive option. With 812 million mobile subscribers and banks now allowing customers to make transactions using their phones (as semi-closed wallets, allowing customers to exchange physical cash for virtual money stored on the phone, thus enabling electronic payments, like a debit card), mobile banking in India is fast becoming the banking tool of choice. Keeping all these developments in mind, the McKinsey report astutely surveyed the participants on why they wouldn’t use Internet banking, and the results should be illuminating for the banks. Overall, 55% thought that Internet banking was not secure enough, up from 47% in 2007. More relevant for the banks is that 76% of those in the ‘affluent’ group considered Internet banking not secure enough, a whopping 18% rise over 2007. This suggests that even though there haven’t been cases of Internet banking fraud, the various other cases of hacking and phishing have shaken people’s confidence in the security of the Internet. An image change might be a good idea in this regard.

On rupee symbol's first birthday, rupee-denominated deals made easier

MUMBAI: A year after the rupee got its Devanagari identity, the RBI has taken the first step to popularise it in international trade. The Reserve Bank on Thursday made it simpler for overseas buyers and sellers of goods and services to cut rupee-denominated deals while trading with Indian businessmen. It has permitted overseas traders to hedge their currency risks with local and offshore banks for trades invoiced in rupee. While invoicing in rupee was allowed a few years ago, foreign traders have not been accepting such export or import orders in the absence of a mechanism to cover risks arising out fluctuations in the currency. For Indian traders, however, invoicing in rupee eliminates exchange risks built into all cross-border transactions. Whenever rupee surged against dollar, exporters raised demand for rupee invoicing. But it never took off as most foreign buyers and sellers, often with more bargaining power, feared possible losses in a volatile currency market. "This is a significant move and will reinforce interest in invoicing in rupee terms by overseas buyers and sellers, given a liquid onshore market. To get this off, block governmental contracts like defence and energy should be invoiced in rupee for overseas sellers as the Chinese did," said Hemant Mishr, head of global markets, South Asia, Standard Chartered Bank. Since rupee is not a fully convertible currency, foreign investors like hedge funds, large Indian companies as well as diamond houses participate in the non-deliverable forward (NDF) market, which is not recognised by RBI. "RBI's move will boost rupee-denominated trade and reduce number of transactions in the NDF market. A slice of NDF volumes may be diverted to the well-regulated onshore market," said NS Venkatesh, treasurer, IDBI Bank . In NDF trades, any gain or loss from bets on the movement of the rupee is settled in dollar or any other international currency because the Indian currency - as the term NDF suggests - cannot be 'delivered' abroad. These hedging transactions can be entered with either a bank in India or an offshore bank with a correspondence arrangement with a bank. In the past, local banks have come up with ideas that could simplify trade transactions and minimise currency losses. For instance, earlier this year, a few banks in India had sounded out the RBI on the possibility of a new currency arrangement between India and its largest trading partner, China. They suggested a simple and inexpensive mechanism that would bypass the dollar and allow trade payments in local currencies. Since the rupee and Chinese yuan are largely non-convertible currencies, export and import transactions between the two countries have dollar legs. The rupees that an Indian buyer pays his bank for Chinese imports are converted into dollars, which, in turn, is converted into yuan with the help of other banks for paying the Chinese seller. It's a transaction that can take 2-3 days due to differences in time zones, and involves certain operational costs that can be pruned, if payments can be directly settled in the yuan and rupee.

RBI to issue new coins of 50 paise to Rs 10 denomination

The Reserve Bank today said it will soon put into circulation new coins in five denominations, ranging from fifty paise to Rs 10. "The RBI will shortly put in circulation... Coins of the fifty paise, one rupee, two rupees, five rupees and ten rupees denominations," the apex bank said in a statement. The fifty paise, Re 1 and Rs 2 coins would be of ferritic stainless steel containing iron and chromium, while the Rs 5 coins would be made of nickel brass with a varying composition of copper, zinc and nickel. The Rs 10 coins would be made of copper and nickel. Fifty paise is the lowest valid denomination in the country now after twenty-five paise coins were withdrawn from circulation from June 30. All the new coins would be circular in shape, with a shape and outside diameter between 19 to 27 millimetres, the statement said. The coins would shall bear the Lion Capitol of the Ashoka Pillar and the word 'India' in English on one side and their denominational value on the obverse side.

Financial Chronicle

ONE MORE RATE INCREASE LIKELY

The backdrop to the Reserve Bank of India (RBI) monetary policy meeting next week is not very different from what it has been in the recent past. Inflation is clearly at an unacceptable level and growth is moderating, but not collapsing. So, it is quite likely that the policy response from RBI will be a 25 basis points rate increase to reiterate its anti-inflationary stance. However, there is considerable uncertainty over the policy trajectory going forward and hence the policy statement will be scrutinized closely for RBI’s assessment of the current economic situation and any forward looking cues. Before we make forecasts about the policy trajectory, it is important to have a quick look through the rear-view mirror. We believe that the annual policy announced in May brought a change to RBI’s way of looking at monetary policy setting. It was explicitly acknowledged that in the near term, we might have to sacrifice some growth to tackle inflation. In line with that, a so-called calibrated soft landing policy was adopted to avoid the possibility of sustained high inflation hampering long-term growth potential. The general expectation is that the policy rates will be tightened till either inflation starts coming off or growth becomes too “soft”. Inflation in FY12 (fiscal 2012) has been in line with RBI’s projection even after the recent fuel price revisions. The headline WPI (Wholesale Price Index-based inflation) has been quite flat in the 9.4-9.75% range for the last seven months and we think that the 9-10% range on inflation is likely to continue till at least October. Even on RBI’s preferred measure of non-food manufacturing inflation, there is no flare-up in the last three months. What will further comfort RBI is that the seasonally adjusted month-over-month inflation readings (which better indicates the momentum in prices) have been declining over the same period. Overall, we think that inflation is likely to remain a cause for concern, but the absence of negative surprises should soothe some nerves and keep inflation expectations under check. Inflation uncertainties now stem from three sources— renewed pressure from global commodity prices (particularly oil, oilseeds, edible oil, sugar and metals), a truant monsoon and larger-than-expected pass-through of higher fuel prices on to other commodities. Monetary policy is likely to have limited success in controlling inflation arising out of any of these events. However, in case of these price shocks, inflation could be more protracted, making it difficult for RBI to lower its guard. The outlook on growth is more uncertain. The industrial production data is trending downwards, specifically in the intermediate and capital goods sectors. However, one is not sure whether robust conclusions can be drawn from this data, which has been volatile and subject to significant revision. Other proxy indicators such as credit growth and non-oil import growth have also moderated, but still hover around healthy levels. On the other hand, business confidence is at a low and new projects in the pipeline are sparse on the back of rising rates, policy inaction and global uncertainties. RBI in any case has this difficult problem of deciding how much of a near-term growth sacrifice is acceptable. Lack of consensus in growth indicators compounds that problem. Also, further policy action should take into account the lagged effect of the cumulative rate increases and should not choke the supply side completely. Our baseline view is of one more rate increase after the July policy because inflation sustaining above 9% will still keep the real policy rates negative and force RBI to maintain the bias towards inflation management. Disorderly global developments and a declining trend in core inflation might force the central bank to rethink a rate increase post July, which remains a risk to our view.

Samiran Chakraborty is Asia economist, Standard Chartered Bank. These are his personal views (MINT)

Banks see another RBI rate hike on Tuesday

Leading lenders Standard Chartered and HDFC Bank on Friday said they expect the Reserve Bank to hike its short-term lending rate by 25 basis points in the forthcoming monetary policy, a view echoed in an RBS survey of money market participants. "We see a 25 bps increase in the repo rate at the 26 July policy as inevitable...inflation management will remain the priority, but policy statement is likely to be less hawkish," StanChart said in a note. Similarly, a majority 71 per cent of the 151 respondents in a Royal Bank of Scotland (RBS) survey opined that they expect the monetary authority to go in for yet another spike in its key rates by 25 bps, while 5 per cent said it could be 50 bps, and 24 per cent see the RBI leaving the rates unchanged. "The RBI rate action will continue to be driven somewhat mechanically by the inflation data that remain way above its comfort zone. Thus a 25 bps hike in the policy rate seems almost certain," HDFC Bank chief economist Abheek Barua in his report said. The RBI has hiked its key rates 10 times or 275 bps since March 2010 to tame the uncomfortable inflation number, which stood at 9.44 per cent for June, and has clearly articulated that it is ready to sacrifice growth in the short term. However, recent signs like the food inflation cooling down and industrial production data being consistently low has led to a view that RBI may pause the tightening for now.

Business Today

L&T awaits RBI norms to decide on banking foray

L&T Finance Holdings Ltd, the L&T Group’s financial services holding company, is currently waiting for the Reserve Bank of India (RBI) to announce the guidelines for new bank licenses to decide on foraying into the banking sector, said a top official. Sumeet Maheshwari, chief executive officer, L&T Infrastructure Finance Ltd, told reporters in Hyderabad on Friday that L&T is keen on foraying into banking business as it enables the transaction business revenue among others. “As a country, we are growing and the banking needs will also grow. As the rural incomes better, the banking needs are going to gallop,” he said, adding that “Me too players will not survive. The new private sector banks will have to offer something unique if they have to succeed.” Saying that L&T is growth hungry, he said the company will also look at other opportunities such as acquisitions of existing banking firms. The company already has two bank investments – 5 per cent each in Federal Bank and City Union Bank, which provide synergy to L&T’s customers in terms of transaction services. “‘But there could be other opportunities in the market and we will look at them. We will look at both Greenfield and Brownfield opportunities,” he said. Further, he said, “If the regulations facilitate easier entry, there will be a lot of players. If it reduces the cost of entry into that business, the cost of setting up, it is worthwhile getting into the business.” The costs, he said, includes not just money but also time for setting up of branches for years to stabilize the business and management energy, which needs to be weighed vis-à-vis the benefits the business offers. “Banking comes with a lot of other requirements and you need to weigh them. There is no free lunch,” he said. He said the existing branches of the L&T Finance were only suitable to do the existing business and not suited to address the needs of retail customers in the banking operations. The bank branches will have to be in the visible areas and proper locations to make them convenient for the retail customers. He said RBI has requirements such as SLR and CRR for banks that may fetch lesser returns as both SLR and CRR add up to the costs, influencing the lending and borrowing rates. “As an L&T entity if I am able to borrow at very close to those costs, then is it worthwhile for me to get into banking business? The SLR and CRR ratios may increase or decrease. We need to study the regulations as and when they are announced,” he said. Maheshwari said L&T is yet to decide on whether one of its existing financial services entities should enter the banking business or a separate entity needs to be floated for the banking foray. “It all depends on what the RBI guidelines say,” he said. Further, Maheshwari said L&T will sell its equity holdings in two private sector banks Federal Bank and City Union Bank if the banking regulator requires them to exit from the banking investments. “Otherwise, it is a profitable portfolio investment for us like any other investments.”

Financial Chronicle

Assets and appreciation

Then it was not just the leading commercial bank but also the banker to the government, a role it gave up with the setting up of the Reserve Bank of India in 1935. The bank again played a part in the nation’s history when it became the forward scout of bank nationalisation....

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It's party time, as interest rate inches to 10%

Depositors are laughing all the way to banks and literally so, as interest rates offered by banks on term deposits have almost touched 10 per cent. There are many public sector banks (PSU banks) now offering 9.75 per cent interest and their private peers have already raised rates beyond 10 per cent.....

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Friday, July 22, 2011

Inside RBI's mind : Rajeev Malik

The central bank should raise key policy rates again but avoid becoming a prisoner of its own making

Central banking is an important but thankless job, especially when it has to navigate, as in India’s case, through unnecessary challenges created by a government that appears to have become a question mark. Poor Reserve Bank of India (RBI) continues to be at the receiving end of criticism – unjustified at times – for the high and still rising Wholesale Price Index (WPI)-based inflation and, depending on who you talk to, for either raising interest rates too much or not raising them enough. The interpretation of how the domestic and global economic landscape has changed since the RBI’s last review in mid-June holds the key to the central bank’s action at the quarterly review of monetary policy on July 26. The forthcoming meeting is the first since the government mustered some political courage to increase fuel prices. The move also indicated some effort to check the fiscal’s undermining of monetary tightening. Central banks’ guidance in their policy statements should be viewed as a tapestry of their evolving thinking as the economic cycle evolves. In its last policy statement, the RBI maintained a hawkish stance, felt inflation was uncomfortably high and that it remained its key focus. While it acknowledged some moderation in growth, the slowdown was not interpreted to be either broad-based or undesirable. Also, the softening in commodity prices in the run-up to that policy was not deemed significant enough to downgrade it as a risk factor. Finally, the RBI correctly flagged up the concern that global developments could pose a risk to India’s growth, but these were not meaningful enough to take its eyes off the multi-headed inflation devil. How have economic conditions changed since the last policy review? Domestically, industrial production and the Purchasing Managers’ Index survey indicate further moderation in the growth momentum, as desired by policy. Unfortunately, India’s industrial production data continue to show too much volatility and sizeable revisions, and probably exaggerate the pace of moderation. Indeed, RBI Governor D Subbarao aptly labelled these revisions as “analytically bewildering”. However, direct and indirect tax collection in April-June hints at a better tone of aggregate demand than what industrial production indicates. Still, just as the post-crisis recovery was uneven, the ongoing deceleration, too, is uneven. More importantly, WPI inflation remains uncomfortably high and actually accelerated in June. It will increase further in July as the more complete impact of the recent hike in fuel prices is captured. WPI inflation increased to 9.4 per cent year-on-year (YoY) in June from 9.1 per cent in May. At 7.2 per cent YoY in June, WPI core (non-food manufacturing goods) inflation was similar to 7.3 per cent in May. It should not be overlooked that the data for May and June are preliminary and will be revised upward to show headline inflation hitting 10 per cent. Equally worrying is the pattern of revisions in the preliminary WPI. April inflation figures were revised significantly higher to 9.7 per cent from 8.7 per cent. The magnitude of revisions so far in 2011 has averaged around an outsized 1 percentage point, which should raise qualitative issues with the new WPI data as well. Overall, inflation should remain the the RBI’s key focus, and it cannot just shy away from increasing rates when inflation remains near-double digit, has actually risen and revisions to the inflation data remain worryingly high. Globally, the recovery in the US is losing momentum and the European sovereign issues are becoming more serious by the day. Brent crude oil is slightly higher than where it was at the time of the last RBI review, and the local pass-through remains incomplete. Also, “suppressed inflation” remains a concern since, among other overdue adjustments, electricity tariffs will also need to be raised. Overall, the global backdrop warrants close tracking but cannot be an immediate reason for the RBI to not increase rates, especially given expectations of further acceleration in inflation. Admittedly, significant global financial dislocation could prompt the RBI to hold fire but that outcome is conditional on events outside the RBI’s control. Until then, the apex bank should remain focussed on what it can do. It is striking that core WPI inflation has been moving higher in the past several months, despite the deceleration in industrial production growth since early last year. This should call into question the sensitivity of input price inflation to growth. The RBI remains in a dysfunctional marriage with WPI inflation for setting its interest rate policy. Indeed, the signs of moderating growth are not new, but local financial markets appear less perturbed by rising headline and core inflation than they were a few weeks ago. The key difference is the air pocket that global commodities have hit, not deceleration in growth as the local idiot box keeps blaring. Actually, the latest increase in core WPI inflation – on the RBI’s own guidance – should indicate further strengthening in demand pressures. However, this is an interpretation I do not fully subscribe to and the RBI will probably soon be haunted by it. While domestic demand conditions affect the magnitude of pass-through by businesses, by relying on WPI, the RBI is focusing on input prices. Instead, monetary policy should focus on final prices of consumer goods. It is far from certain that incremental deceleration in growth will positively affect WPI inflation if global commodity (especially crude oil) prices remain elevated or rise further. A crucial aspect of the upcoming policy will be the RBI’s guidance. It is still early to take a final call on the unfolding monsoon season. However, risks from global factors could be two sided. A crisis in Europe could cause commodity prices to correct, thereby offering scope of a breather for the RBI. At the other extreme, adoption of more monetary easing in the US could cause commodity prices to move higher, thereby warranting further tightening by the RBI. The global risks mentioned above warrant mutually exclusive responses from the RBI. Besides, there is uncertainty about the timing and outcome. The central bank should adopt a wait-and-see approach after hitting eight per cent on the repo rate as soon as possible. The bottom line is that a rate hike is a must next week since there is hardly anything to cheer about on inflation to either pause or signal a pause just yet.

The author is senior economist at CLSA, Singapore / The views expressed are personal / BS

BR Shenoy's forgotten voice of dissent

After returning to India Professor Shenoy taught at Wadia College (Pune), Gujarat College (Ahmedabad) and University of Ceylon. He was associated with various Government Bodies of Ceylon (now Sri Lanka) including the Commission on Currency and Department of Commerce. In 1942 he was appointed Principal, L. D. Arts College, Ahmedabad and then joined the Reserve Bank of India in 1945. During his RBI days he was the Far Eastern Representative of the IMF (1948) and an Alternate Executive Director of IMF as well as of the World Bank (1951-53).

Misuse of RBI lending window - K.Kanagasabapathy

The recommendations of the Deepak Mohanty Working Group released in March 2011, were an important landmark. On that basis, RBI inter alia decided to manage liquidity to ensure that it remained broadly in balance, with neither a large surplus diluting monetary transmission nor a large deficit choking off fund flows....

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RBI Guv Meets Pranab Ahead of Credit Policy Review

Amid fears that there would be another round of interest rate hikes to tame inflation, RBI Governor D Subbarao met Finance Minister Pranab Mukherjee here today, ahead of the central bank's monetary policy review on Tuesday. "I have come to review the macro-economic situation with Finance Minister before the policy review, slated for July 26," Subbarao said after meeting Mukherjee. The meeting was also attended by other senior officials of the Finance Ministry. The Reserve Bank is scheduled to announce the first quarterly review of credit policy for 2011-12 on July 26. It is is widely believed that the central bank will increase short term lending (repo) and borrowing (reverse repo) rates by another 25 basis points. RBI has increased these key rates 10 times since March 2010 to tame the rising prices. They have gone up by 250 basis points (2.5 per cent) since then, making loans costlier for both industry as well as consumers. The headline inflation for June at 9.44 per cent is much above the comfort zone of 5-6 per cent. The central bank faces a challenging task of managing the inflationary pressure at a time when the industrial growth has started showing signs of slowing down. Besides, the resulting moderation of overall economic growth, GDP, is a major concern before RBI. The government has already lowered India's GDP projection for 2011-12 to 8.6 per cent from the earlier estimate of about 9 per cent on account of slowdown in industry output. The factory output growth rate, as measured by the Index of Industrial Production (IIP), dipped to 9-month low of 5.6 per cent in May due to a poor showing by the manufacturing and mining sectors and lower offtake of capital goods.

The Outlook

CARRY ON HIKING THE POLICY RATE

Pause in response to building downside risks to global and domestic growth? Or press on with its long-established campaign of lifting policy rates to combat inflation? That, in a nutshell, is the policy choice facing the Reserve Bank of India (RBI) at its latest policy review meeting next week....

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Cabinet clears merger of SBICI with SBI

The government today approved merger of State Bank of India Commercial and International Bank Ltd (SBICI) with its parent bank SBI . SBICI, with two branches, is a wholly owned subsidiary of State Bank of India (SBI) and functions as a private sector bank offering an array of financial products and services. "It's performance over the period of its existence has not been consistent. It has not paid any dividend since its inception...In the overall analysis, continuation of SBICI in its present form would not create a substantial organisation with a separate niche," Information and Broadcasting, Ambika Soni told reporters after a Cabinet meeting here. So also as an independent bank, SBICI has had to maintain a full-fledged, elaborate administrative setup to conform to regulatory requirements, she said, adding, the cost of maintaining such a structure is disproportionate to the level of operations of the SBICI. The proposed merger will help in maintaining the administrative structure of SBICI as both its branches in Mumbai will be easily absorbed in the operations of the parent entity, she said. While no present beneficiary of its parent SBI would be affected, the number of clients of SBICI will have access to the bigger network of SBI, she said. SBICI was set up in 1994 after taking over the Indian operations of the erstwhile Bank of Credit & Commerce International Ltd (BCCI), which went into liquidation in 1991. It's net worth stood at Rs 128.74 crore on the capital base of Rs 100 crore. It had total business (deposits and advances) of less than Rs 700 crore, with a return on asset of 0.49 per cent. As per RBI guidelines, the minister said, for ownership in private sector bank, the bank's capital had to be raised to Rs 300 crore. The existing business model of SBICI and the returns generated by it over the years do not justify capital infusion, she said. As of March 2011, SBICI earned a net profit of Rs 4.21 crore. The board of SBI had cleared amalgamation of SBICI with itself in 2008. SBICI's capital adequacy ratio (CAR) stood at 28.16 per cent at the end of March 2011.

SC panel to preserve Kerala temple's assets

New Delhi: The Supreme Court on Thursday appointed a five-member committee to supervise the unearthing and preservation of assets of the Sree Padmanabhaswamy Temple. The committee will be headed by Director General of National Museum and will consist of representatives of the Archaeological Survey of India (ASI) and Reserve Bank of India (RBI).

The court also asked the media not to speculate on the worth of assets of the temple before its valuation has been completed.

Marthanda Varma, the eldest member of the Travancore royal family, has said that all the treasure that has been unearthed at the Sree Padmanabhaswamy temple belongs to the presiding deity.

A seven member committee formed by the apex court has completed the stock taking of five of the six vaults of the temple. The chambers had been kept shut for the last 130 years but were finally opened on June 27, 2011 following a Supreme Court order.

IBN Live

Thursday, July 21, 2011

Stubborn inflation signals administrative paralysis: Jalan

More than 20 years have gone by since India began its tryst with economic reforms. The nation is at a crossroad today with most crucial reforms stalled, slowdown in economy and stubborn inflation becoming a daily nightmare for administrators and the common man. One may attribute this mess to policy paralysis from the government’s end. In an interview with CNBC-TV18, former Governor Reserve Bank of India (RBI) Bimal Jalan said that it’s administrative inaction and not lack of policy reforms. “It is a kind of systemic failure wherein we have 100 programs for poor, but we still rank highest is poverty line, “he added.

Below is the verbatim transcript of his interview with Shereen Bhan.

Q: How worried are you? How hard is this going to impact us? Are we going to be pushed back several years on account of what we are seeing happen today?

A: As of now, one should consider the growth rate, etc. I don’t assign too much importance to 8.4%, or, 7.9% or 8.2%. These draw headlines and so on but it’s the creative energies of people generating this growth, and, I hope this will continue. However, the more important thing is in terms of public governance, say, delivery of services to the poor-we have 100 programs- and yet we rank the highest in the poverty level.

Q: What to your mind makes us most vulnerable today? And, I am not talking about the global economic environment which is increasingly volatile. I am talking about our domestic environment.

A: What makes us most vulnerable is the fact the government, per se, the government as a whole is not collective entity. The amount of voices that you hear from different centers of power is amazing. You should be asking this question systemically, this anti-defection law for example, that you can have 20 people holding the balance and if they belong to a large party they can’t defect. If they belong to a small party 3 fellows can defect and set up their own party.

Q: As the former RBI Governor what worries you the most today about where India is?

A: What worries me most about where India is, is not the growth rate, it is not the fact whether we have reforms or we don’t have reforms. What worries most about what is going on is one, governance, the administrative decisions and that we take them so late and of cousre inflation. Inflation is another issue. Why are we not able to tackle it? We are not able to tackle it because we earlier use to go back 8 months

Q: Are we going to have to learn with 6% or 7% inflation?

A: I you are going to live with 6% or 7% inflation that will be alright, then you will be living with 6% or 7% but here we don’t know where we are going. So what is happening is that the inflationary expectations have become heightened, sorry to use this sort of a language. What has happened is, that if anybody who has liquidity he would buy more.

Q: Who has failed the most in our battle against inflation?

A: I don’t want to point a finger, but what is want to say is it’s a collective effort. It’s a collective effort and collectively we have failed. You go back six months ago or eight months ago and you would recall in your programs how many times people said it would come down on its own. The great personalities, everybody said it will come down, come down in December, come down in September that is last December, last September. Now they are saying we must do something, but what is to be done nobody is quite clear.

Q: Is it India’s number one problem?

A: In economic sphere, yes.

Q: It is India’s number one problem?

A: Yes because we have been talking about it for 12 months or 18 months and if nothing happens then that means credibility of the system and the authority of the system collapses.