Central board of RBI directors meet in Mumbai

Mumbai: The RBI's central board of directors met here Thursday to review key economic, monetary and financial developments in the country. The meeting was chaired by RBI governor D Subbarao. Deputy Governors K C Chakrabarty and Subir Gokarn were also present at the meeting, the apex bank said in a statement. Besides, the meeting was also attended by Economic Affairs Secretary R Gopalan and Chief Economic Advisor in the Ministry of Finance Kaushik Basu, among others. A day before the board meeting, Subbarao had met officials of the Maharashtra state government and bankers at specially convened meeting of the State level bankers committee (SLBC). Issues, such as crop loans, crop insurance, financial inclusion, cooperative banks and credit-deposit ratio in Maharastra were discussed during that meeting, RBI said.

Zee News

Less profit from RBI may upset finmin Budget math

Mumbai: The Reserve Bank of India (RBI) will transfer R15,009 crore in surplus profit to the government this year, 20% below the previous year’s R18,759 crore.  The lower amount will dampen the finance ministry’s non-tax revenue, in a year when tax receipts are also expected to trail Budget estimates.  For this fiscal, the government has projected an income of R19,129 crore from dividends and surplus from RBI and other public sector banks. The lower realisation from RBI means banks will have to pay higher dividends.  The RBI central board on Thursday approved the transfer of surplus profit for the year ended June 30, 2011 to the Government of India. The central bank’s financial year ends on June 30.  Last fiscal, the finance ministry had projected R27,461 crore from this stream but got only R22,748 crore. The payment is as per the lower projections, but given the lower anticipated revenue from taxes, this puts additional pressure on the fisc. Though details of RBI’s income and expenses in 2010-11 are yet to be published, income is expected to have fallen due to lower returns from overseas assets in which it has invested India’s forex reserves.  The RBI parks foreign exchange reserves in high-rated bonds and deposits. It follows three principles — safety, liquidity and returns while deploying reserves abroad. Analysts point out that returns had been low due to near-zero interest rates in developed economies.  RBI’s income in 2009-10 was R32,884.14 crore, 45.85% below the previous year’s R60,731.98 crore, thanks to low interest income from foreign currency assets. The surplus transferable to the government also in 2009-10 dipped to R18,759 crore from R25,009 crore in 2008-09.  Earnings from foreign currency assets and gold declined 50.58 % in 2009-10 to R25,102.55 crore from R50,796.21 crore in 2008-09.

FE

LS passes SBI subsidiary banks bill, gives more power to Centre

New Delhi: The Lok Sabha Thursday approved a bill that will empower the central government to deal with the issues concerning subsidiary banks of the State Bank of India. The Lower House passed the State Bank of India (Subsidiary Banks) Amendment Bill with voice vote after Minister of State for Finance Namo Narain Meena assured that government does not intend to privatise the state-owned  banks. The Left Parties, however, staged a walk out as the Minister moved the bill for passage. The bill, according to Meena, will confer powers on the central bank to approve authorised capital of the SBI subsidiary banks in consultation with the Reserve Bank. Earlier such powers were exercised by the RBI. The situation changed after the central government took over the equity of the SBI held by the central bank. The central government, following the amendment, will also have powers over to approve other activities of the subsidiary banks like appointment of managing directors, preferential allotment of shares, issuance of bonus among others. Allaying apprehensions of the members that government was paving the way for the privatisation of the state-owned banks, Meena said, "this bill is not about privatisation ... (government) does not intend to privatise PSU banks". The initiatives, he said, will improve the functioning of the subsidiary banks of SBI. On consolidation in the banking sector, Meena said, neither the government nor the RBI has issued any directive in this regard.

Zee News

RBI surplus profit dips 20%, liquidity overhang blamed

The Reserve Bank of India’s transferable surplus dipped by 20 per cent to Rs 15,009 crore for the year ended June. This is the second time in a row that the central bank has reported a drop in the surplus, which is transferred to the government. The central board, at its meeting held on Thursday, approved the transfer of surplus profit to the Centre amounting to Rs 15,009 crore for 2010-11, as against Rs 18,759 crore for the year ended June 30, 2010, RBI said in a release on Thursday. In 2009-10, the surplus had dipped by 25 per cent to Rs 18,759 crore from Rs 25,759 crore in 2008-09. A senior treasury official with a large public sector bank said the low yield on international assets, bonds and deposits, in an environment marked by overhang of liquidity, had partly contributed to a drop in surplus profits. The liquidity was pumped by governments in developed nations to kickstart economic growth, after the global financial system was hit by financial crisis in 2008. As one avenue to park funds, RBI invests foreign currency reserves in bonds issued by other governments. India’s foreign exchange reserves stood at $309 billion at the end of June 24. The volatility in the value of international currencies also has a bearing on earnings of the central bank, said a treasury executive with another public sector bank.

BS

Corporation Bank plans services for senior citizens

Bangalore: Mangalore Headquartered Corporation Bank, a premier public sector bank, is in the process of according special and exclusive services for senior citizens. "Though it is in the conceptual stage as of now, we are confident the bank will roll out certain special services for senior citizens shortly," Narendra Singh, Executive Director of the Bank told.

http://www.siliconindia.com/shownews/Corporation_Bank_plans_services_for_senior_citizens-nid-88382.html 

RBI dashes hopes of pause on rate hikes

“The RBI has said it will continue doing what it is doing... that it will continue raising the policy rates till the time inflation comes down to 7 per cent. It has said inflation data need to be seen. If inflation comes down, it will pause. But, if it remains stubbornly high and close to two digits, it will continue the hike.”.....

Read............ 

Inflation to stay, see 12.9% by Jun 2012: RBI survey

Urban households expect inflationary pressure to sustain through this fiscal and the first quarter of 2012-13 and feel there may not be any softening of food prices, an RBI survey shows. While June, 2012 household inflation is expected to be 12.9%, up from the 12.7% perceived for March 2012, daily-wage workers and housewives expected higher inflation rates to continue. As per the 'Inflation Expectations Survey of Households: June, 2011 (Round 24)' conducted by the apex bank, the rise will be mainly on account of movement in food prices. It also found that 25% of the respondents surveyed believe that the Reserve Bank is taking necessary action to control inflation. While the housewives surveyed said they expect inflation to be 13.1% by June 2012, daily wage workers said it would be 13.4%. On the other hand, financial sector employees and self-employed projected inflation to be 12.1% and 13%, respectively, by year-end. "Unlike in last round of the survey, the percentage of respondents expecting price rise have gone up for all product groups (viz., food, non food, households durables, housing and services)," the survey said. It further added: "However, expectations on general price rise were mainly influenced by movements in food prices". The survey found that households expect inflation to rise further by 170 basis points during the next 12 months from the perceived rate of 11.2% in April-June quarter of the current fiscal. Headline inflation, as measured by Wholesale Price Index (WPI) has been hovering above 9% since December, 2010. It stood at 9.44% in June. After a brief period of moderation, the rate of price rise of food items has also started climbing and food inflation stood at a four-and-half month high of 9.90% for the week ended July. "From September 2010 round of the survey, household inflation expectations are higher than the official inflation rates. In the current round also, the same trend has been observed," the survey said. RBI found that 98.7% of the respondents believe that prices will increase. This shows that more urban households have come to the view that inflation is on the upswing than during the previous survey when 96% respondents had given such a view. The survey was conducted in April-June 2011 and covered 4,000 urban households across 12 cities for the July-September 2011 quarter and the July 2011-June 2012 period. The latest survey is the 24th conducted by RBI to find inflation expectations of Indian households. RBI has been conducting such surveys on a quarterly basis since 2005.

BS

No let-up on inflation control – S.S.Tarapore

The sinking of global markets should not result in a volte face on India's inflation management. To sacrifice inflation control in the pursuit of higher growth rates would be disastrous from a political economy point of view.

The recent Report of the Prime Minister's Economic Advisory Council (PMEAC) is a watershed in that it is forthright in asserting that while India was able to negotiate the global economic crisis quite well, we have been unable to find our way back to the path of rapid asset creation and growth. The policy drift has led to an unintended slowing down of initiatives to restore investment and economic confidence. The Report is emphatic that: “It is certain that the RBI will have to continue to maintain a tight monetary policy for quite some time, given the combination of domestic inflationary situation, the international backdrop and the fairly strong growth that the domestic economy is experiencing”.  The Report recognises that the international situation is not entirely supportive of economic growth. The crisis in Greece, Portugal and Ireland, spreading to Spain and Italy, could have severe repercussions on the global economy. The fiscal deficit in the US of over 10 per cent of GDP and the unprecedented monetary easing have exhausted the capacity to stimulate the economy any further. The large political differences in the industrial countries on how to proceed with fiscal consolidation cast a cloud over any prospects of global recovery.  After the announcement of the RBI's monetary policy on July 26, the Finance Minister, in an unusually categorical statement, warned market participants that there would be a need for further interest rate hikes.  The downgrading of the US rating by Standard and Poor's, from AAA to AA+, resulted in a massacre in global financial markets on Friday August 5, which also spread to emerging economy markets. It is significant that the earlier downgrading of the US by the Chinese rating agency did not impact financial markets. Even without any pronouncements by rating agencies, it was common knowledge that the US had a very serious problem but it took S&P to deliver its verdict to trigger a global sell-off. The recent roiling of global financial markets should not result in a knee-jerk reaction in India to abandon the sagacious advice in the PMEAC's Report.  Unfortunately, advocates in influential policy circles in India are already calling for a reversion to monetary-fiscal easing, as was undertaken in 2008.  It would be a serious error of policy if India were to forget its present over-riding priority of expeditiously crushing inflation as monetary-fiscal easing at this stage would only stoke the inflationary fire, leading to serious social tensions. Thus, there is merit in not aping the policies in the major industrial countries.  Investment guru Marc Faber has asserted that the present global economic crisis could be much worse than in 2008. But before such an eventuality, authorities in the industrial countries would take recourse to printing money and this could result in a War. Nouriel Roubini foresees that Quantitative Easing (QE) 3 could be followed by QE 4 and QE 5. This would, inevitably, generate strong inflationary pressures globally which would inevitably spread to emerging markets. There has been almost instantaneous clamour by Indian industry to soften monetary-fiscal policies. Moreover, some influential policymakers have already voiced empathy with this viewpoint. It is essential that in India basic policies are not excessively swayed by recent developments in the global economy. We have India-specific problems and these must be addressed on a priority basis. The sinking of global markets should not result in a volte face on the present avowed policy of inflation control. The clear policy of crushing inflation should not be reversed because of global developments.  As Dr C. Rangarajan, the economic policy helmsman, has cogently argued, there is an important difference between the level of inflation and the rate of inflation. For instance, if the inflation index rises from 100 to 110 we consider the inflation rate to be 10 per cent. But if the level rises further to 120 we take solace in the fact that the rate of inflation is 9 per cent in the subsequent period.  To the Common Person, the fact is that he groans against an even higher level of prices. Policymakers never talk of a roll-back of the level of prices as this is erroneously considered as a contagion to be totally avoided. We have waited far too long to tackle inflation, which is Public Enemy No.1. Given the vast tracts of poverty, sacrificing inflation control at the altar of higher rates of real growth would be disastrous from a political economy point of view and moreover, would be morally repugnant.  If at all, the monetary-fiscal tightening should be accelerated and not weakened. The crucial issue is whether the Indian authorities would be excessively swayed by global developments to ease monetary-fiscal policies or whether they would be steadfast in their commitment to control inflation in India.

HBL

Banking reach target tough to achieve

PATNA: The banks in the state face a tough task of extending banking facilities to all 9,213 villages, each with a population of over 2,000, by the end of the current fiscal, as only 2,449 such villages had been covered so far. As many as 6,764 such villages remain to be covered.  Deputy CM Sushil Kumar Modi, who reviewed the banks' working at the State Level Bankers' Committee (SLBC) meeting held on Thursday, said the bankers should pull their socks on this front to meet the target. "We want you to cover all these villages within the 11^th  Five Year Plan itself, which ends in March next year," said Modi.  SBI chief general manager (CGM) Jeevandas Narayan, who chaired the SLBC meet, said that the bankers faced great responsibility, as the new RBI plan of extending banking facilities to all the villages having less than 1,000 people would begin to be implemented from the next fiscal (2012-13).  Modi said the bankers had adopted three modes - mobile banking, e-kiosk for online banking by linking with Vasudha Kendra in the blocks concerned, and business correspondent (BC) model in which BC deployed by a bank in a village operates through a handset to conduct banking transactions - to cover these villages. SBI has adopted e-kiosk mode to reach out to its target villages.  The plan envisages a no-frill account with zero balance of at least one person from every family. Modi said that 66 lakh no-frill accounts had been opened in the state till June 30. Of them, 51.62 lakh accounts were active, while the remaining 14.38 lakh accounts were not active, he added.  According to him, the RBI, in view of the trend witnessed in the country, had asked the bankers to allow overdraft withdrawals of Rs 500 to Rs 1,000 so that no-frill accounts did not become dead, and it would also inspire the account holders to make small savings. Otherwise, active no-frill account holders could make overdraft withdrawals in the range of Rs 5,000-Rs 10,000 in a year, Modi said.

TOI

Finance ministry to clear norms for new bank licences next week

NEW DELHI: The finance ministry will clear guidelines for new bank permits by next week, potentially setting the stage for the Reserve Bank to roll out licences after a gap of eight years. Once the finance ministry gives its go-ahead, RBI is expected to make the norms public and invite applications for new private banks, a promise the finance minister had made in the 2011-12 budget.  The central bank had already sent the draft licensing norms to the government in January. Confirming that issuing new licences was high on the government's agenda, financial services secretary DK Mittal said, "We are working on that. After we send our comments, it will be for the RBI to take a final call."  He did not elaborate on what changes the government has suggested. "There is no policy paralysis," he said, referring to the growing perception of a slowdown in decision-making. In his budget speech, Finance Minister Pranab Mukherjee had said that RBI would issue the guidelines for banking licences before the close of this financial year. Regulator RBI then put out a discussion paper, 'Entry of New Banks in the Private Sector', in August 2010 inviting comments from banks, non-banking financial institutions, industrial houses and other institutions. A finance ministry official said the main difference between the government and the RBI continues to be over the proposed 74% foreign direct investment limit in new banks.  RBI has suggested capping FDI in new banks to 49% in the first 10 years, which could be subsequently raised to 74%. FDI up to 74% is allowed in private banks at present. "RBI is apprehensive that if 74% FDI is allowed initially then its initiative to push foreign banks towards the wholly-owned subsidiary model would be defeated," the official said.  The finance ministry, though, is not in favour of a different regime, arguing that it would send a wrong signal to foreign investors. The finance ministry and the RBI are now working to narrow down their differences. "There is a view that, with less than 50% foreign holding, downstream investment of the new banks will not be required to monitored," the official said.  "The compromise could be that instead of 10 years, the new banks could be allowed to lift FDI limit to 74% after seven years." While the two are unanimous on the need for imposing stiff conditions on new players to ensure promotion of financial inclusion, there is some disagreement on how to go about it. In the draft guidelines, the central bank had proposed that new players should have at least a fourth of their branches in rural areas with population of less than 10,000. The ministry, however, wants these branches in tier III and tier IV cities having a population of up to 50,000.  

ET

Finmin seeks CVC nod before approving Sridhar’s name for Sebi director’s post

New Delhi: The finance ministry has sought the Central Vigilance Commission’s (CVC) clearance of S Sridhar, one of the two shortlisted candidates for the two vacant posts of whole-time member on the board of the Securities and Exchange Board of India (Sebi). The move, which follows adverse comments on Sridhar by the VK Shunglu committee that probed irregularities in the Commonwealth Games, could potentially delay the appointment to the market regulator’s board, which is short of two whole-time members since last month. According to two finance ministry officials, Sridhar's name will go to the Cabinet’s Appointments Committee headed by Prime Minister Manmohan Singh only after CVC clearance. The Sebi board is required to have three whole-time directors, in addition to the chairman. There are also part-time directors, including two government nominees and one from RBI. The terms of whole-time directors MS Sahoo and KM Abraham ended in July, leaving Sebi with Prashant Saran as the only such member. Sahoo was in charge of legal affairs, enforcement and market intermediaries supervision and regulation. Abraham handled investigations, integrated surveillance and market regulation. Rajiv Agarwal, an IRS officer posted in Mumbai, is the other candidate shortlisted by a panel headed by Sebi chairman and comprising government representatives. His name has already been sent to the panel for approval. If the CVC does not clear Sridhar’s name, then the process for selecting the third whole-time member has to begin afresh, as the process doesn't leave a waiting list.  Sridhar was the former chairman and managing director of Central Bank of India, CWG’s official banker. The Shunglu panel, as reported by The Indian Express on February 23, accused Sridhar of being “interested” in CWG contracts because one of his relatives was posted in London with the CWG Organising Committee (OC).  Before the Shunglu panel submitted its report, it had written to finance minister Pranab Mukherjee and then Cabinet Secretary KM Chandrasekhar requesting information on the Central Bank of India’s dealings with the OC. When contacted, Sridhar told FE: “The allegations made against the Shunglu committee report are baseless. Some interested party is trying to frame me.” The selection committee interviewed 11 of the nearly 50 candidates who had applied for the two Sebi posts. An official said: “The ministry has already sent Rajiv Agarwal’s name for approval from ACC, which is likely to be cleared shortly.” The prime minister has set up a team of ministers led by defence minister AK Antony to study the Shunglu committee report. The allegations against Sridhar are yet to be proved. The group of ministers has been asked to consider the responses of the Union ministries, the Delhi government and its various agencies to the findings of the high-level committee headed by former Comptroller and Auditor General V K Shunglu.

FE

RBI nudges banks to lend more to weaker sections

In an RBI meeting with bankers and MFIs in July, Deputy Governor K.C. Chakrabarty had questioned bankers on why they were not lending to crisis-ridden microlenders, including those that had not defaulted on loans to banks.....

Read............ 

FICCI calls for interest rate cut

New Delhi : The S&P downgrade of US debt and the possibility of a double-dip recession accompanied with anaemic growth in Europe and Japan has weakened global commodity prices.  This will reduce pressure on domestic prices, said industry chamber FICCI, seeking a rate cut by the Reserve Bank of India. The apex bank's focus should now shift from minimising risk of continued inflation to conserving the growth momentum, it said in a statement.  The RBI may be emboldened by the Fed stance of keeping the interest rates unchanged at exceptionally low levels (0-0.25 per cent) at least through mid-2013.  The slowdown in industrial growth is all pervasive, with both investment demand (capital goods growth at a measly 1 per cent during April-May 2011 vis-à-vis 49.8 per cent in the like period previous year) and consumer demand (consumer durables goods growth at 7.9 per cent during April-May 2011 vis-à-vis 27.7 per cent in the like period previous year) being hit.  To sustain investor interest in the India growth story and give a strong signal to the investor community, the RBI would do well to boldly cut interest rates, said FICCI.

HBL

Many many happy returns of the day................

Mr Crisis

Some months ago, when Duvvuri Subbarao was at odds with the finance ministry on how quickly new bank licences should be given out and the criterion for deciding these, few thought he’d get the extension that most of his predecessors got after completing their three-year term. But with the US and European crises getting murkier—the odds of a US recession are said to be one in four—the government wisely decided that rocking the boat wasn’t a good idea. More so since Subbarao, who was baptised by fire (Lehman collapsed within a short while of his taking over), has done a good job of keeping India relatively insulated from the extreme volatility that followed Lehman. Indeed, despite the sharp increase in inflows and the rupee volatility, Subbarao stayed away from the traditional policy of buying dollars—given how exports still grew, he appears to have been vindicated.

Given the banking sector has come out relatively unscathed even after a period of high growth, Subbarao’s leadership has been good for RBI. Although some, like the latest issue of The Economist, suggest RBI has been somewhat lax in giving out what it calls get-out-of-jail cards and prefers to not recognise bad loans if it thinks doing the right thing would put the banking system’s stability at risk. Introduction of the base rate, similarly, has ensured the transmission of monetary policy is faster; the policy paper on deregulation of savings rate shows RBI was on the right track, though nothing has come of it so far. Many criticise Subbarao for being in sync with the finance ministry after taking what looked like an independent stand—this, however, is a bit of a myth, since the system will collapse if both are at loggerheads. But since the good that men do is oft interred with their bones, if India’s growth collapses, Subbarao will probably be remembered for his sharp 50 bps rate hike at a time when both global and Indian growth is slowing. While there are divergent views on whether this was the right policy, and even on whether RBI should be looking at CPI or WPI to determine policy action, what was inexplicable was the conclusion, as recently as July 26, that India’s growth momentum was still strong—indeed, it didn’t need the S&P downgrade for RBI to figure out the challenges to global growth were serious. What is true, though, is that this endeared him to the inflation-scarred political class.

FE

Vote for stability

In these turbulent times, the Centre’s timely decision to give RBI Governor Dr Subbarao a two-year extension stands apart as a decisive vote for stability at the central bank. This will strengthen the RBI to pursue the right course it has been following in different areas of its responsibility. A change of guard at this juncture would have resulted in slowing the processes of change in areas like fighting inflation, forex reserves management, financial inclusion and outreach, and transparency in policy prescriptions where Dr Subbarao has made perceptible progress. On his part, the governor should take this opportunity to hasten the initiatives he has taken to make RBI a change agent in the country’s economic development. Beyond the mandated responsibilities, one expects RBI to do much more in the areas of financial inclusion, gold and wealth management (as part of its forex reserve management), revival of grass-roots rural financial institutions like co-operatives, and balanced economic development across regions by ensuring an appropriate realignment of the outreach of institutional infrastructure using financial sector reforms as a tool.

M G Warrier, Mumbai (BS)

RBI should not cut rates now - Arjun Parthasarathy

The worst possible confidence booster is a rate cut now. Reserve Bank of India (RBI) should hold on to its stance of managing rising inflation expectations despite a sharp fall in economic sentiments globally. A rate cut at this juncture will be seen as a knee jerk reaction to a crisis that has not happened yet. A rate cut will pull down the Rupee, worsen investor confidence in the RBI, take up bond yields and will not achieve anything. Turkey cut rates unexpectedly last week, and the result is a central bank fighting to contain selling pressure on the currency. The 125bps rate hike over the last three months is indicating RBI’s worries on rising inflation expectations. The fact that global worries started emerging in May 2011 did not deter the RBI from raising interest rates. Equity markets turned weak post April 2011 on worries of Eurozone debt and impending global economic weakness. The three months equity performance up to 25th July 2011 is hardly a sign of positive sentiments over the economy. Equity indices from the Sensex to the Dow returned flat to negative over the three month period from April 25th to July 25th. Hence a sharp fall in equity indices from July 25th to the present where equity indices have fallen between 11% to 19% across markets is no justification for reversing policy stance. It is a different matter altogether that RBI may have erred in the side of caution, but RBI would have been conscious of that fact when raising rates by higher than expected 50bps in their July 26th policy review.  The signal RBI will be sending out by maintaining policy rates at current levels is that the RBI has been right in its assessment of inflation expectations after taking into consideration global economic issues. One or two weeks of market volatility is too early to judge the assessment. The fact that the volatility is caused by high government debt should keep the RBI on its toes, as the Indian government is facing cash flow issues at present and is overdrawn with the RBI by around Rs 30,000 crores to fund its cash requirements. The central bank should be seen as acting on its judgment of inflation and economic growth rather than the state of government finances.  Bond markets have recognized the fact that RBI’s policies coupled with global economic weakness will have a positive effect of bringing down inflation expectations. Ten year benchmark bond yields have dropped by 25bps from July highs on the back of improved sentiments on inflation. A sudden reversal of RBI stance will confuse the markets and bond yields could reverse its downward trend if the market interprets the move differently. A sudden rate cut when the government finances are weak is seen as the central bank trying to support an enhanced borrowing by the government. The market is not ready for higher than budgeted supply of bonds. Global markets can reverse trends quickly on the back of fresh economic data. Hence a sudden reversal in equity and commodity prices will unnerve markets that have positioned itself on the back of policy reversal by the RBI. The RBI is better off waiting and watching for further signs of commodity weakness before changing its policy stance. The RBI governor Dr D Subbarao has rightfully got a two year extension. Dr Subbarao has had to cut rates and then hike them in his three year period. He will not want to enter into that cycle again.

Moneycontrol

Debt management

Former Deputy Governor Rakesh Mohan was always against separating the debt management office from the Reserve Bank of India. Recently, he also offered examples of advanced economies that are bringing the debt management office back under the central bank’s purview. His former boss Y V Reddy, however, thinks the timing is not right. Why? Reddy’s explanation: “Only when the government of India’s debt comes down can this proposal be taken up!”

BS

IDBI Bank’s ‘Magic Card’

IDBI Bank, on Monday, unveiled 'Magic Card', a debit card with in-built credit for salary account holders in a bid to improve its CASA ratio to 24 per cent from 20 per cent as of now during the year. Though, only basic difference between the magic card and a typical credit card is there is no free credit period but at the same time rate of interest will be much lower and linked to bank rate. The credit limit or overdraft limit will be either two or three times of net salary depending on the rating of the organisation.

Deccan Herald

India Banks Seek More Time to Comply With New Rules on Derivatives

MUMBAI-- Banks operating in India have asked the central bank more time to meet the recently tightened rules on derivatives to avoid a squeeze in trading volumes in the currency-derivatives market, two people familiar with the matter said Wednesday. The Reserve Bank of India last week issued a notification, tightening the rules as part of its efforts to prevent mis-selling of complex currency derivatives to local companies. The new rules make it compulsory for banks to ensure that the company executives to whom they sell derivatives are backed by their board of directors to execute such transactions. The rules also prevent banks from selling derivative products they can't independently price, and make it mandatory for foreign banks to price such products in India. The central bank's notification didn't specify any dates to implement the rules, implying that they would take immediate effect. "Companies need time to go to their boards and secure authorization for their finance people to execute derivatives trades, which was one of the new rules," said a person who was part of the discussions with the central bank. "Immediate implementation as implied in the circular could kill the market," said a currency trading head at a foreign bank. Both people spoke on condition of anonymity. The new rules follow disputes between banks and some mid-sized companies, which claimed they had been sold derivatives without being warned of the risks, resulting in heavy losses to them during the economic crisis.

WSJ

Welcome extension

The continuity at the RBI means good news for an economy increasingly under strain, from volatile times as much as policy paralysis. Dr D. Subbarao has got a two-year extension of his term as Governor of the Reserve Bank of India. This continuity spells good news for an economy that has increasingly been feeling the strain of policy paralysis in a beleaguered government that is fighting a new crisis every passing day. The world economy has not yet recovered from the global crisis of 2008. But another set of challenges is already on its way, given the panic across the world following the recent downgrading of US debt by rating agency Standard & Poor's. These are volatile times in which the macro-economy needs to be steered by a safe pair of hands — which it has in Dr Subbarao. Market participants and observers, both here and abroad, will, no doubt, see it as a confidence-building measure for the economy.  Dr Subbarao, when he took over three years ago, stepped into the rather large shoes of Dr Reddy. Many doubted if he would measure up — especially because, by then, Dr Reddy had developed a halo as a saviour of the Indian economy, when the rest of the world was in crisis. Dr Subbarao has since proved his mettle after his baptism by fire during the global crisis of 2008. Over the past three years he had to first unwind a tight monetary policy and infuse phenomenal amounts of liquidity. Equally, as the economy began recovering and inflation pressures began to mount, he has had to wind the tape back and tighten monetary levers during the last year. He also increased the frequency of policy actions to about 45 days so as to impart a measure of gradualism. Through this difficult period, he has been consistently communicating the reasoning behind various decisions and left the markets with a reasonably clear idea of what they could expect. There were occasional hiccups when his inflation-fighting credentials were questioned. And some wondered whether he could stand up to the government on reining in the fisc or on matters of RBI autonomy, especially in view of his earlier stint as Finance Secretary. The record would probably show that he has passed the test, in his own simple style. He has tried to improve the conduct of monetary policy, bring in more transparency and communication, and demystify the office of Governor — all goals he set for himself at the start of his first term. The decision to retain Dr Subbarao at the central bank's helm for another two years is, therefore, very welcome, although one wishes the government would make up its mind on top positions far sooner than it did in this case, to avoid unnecessary suspense in these uncertain times. The remaining part of his tenure will, no doubt, be devoted to improving on his record besides handling the principal challenge of controlling inflation without choking growth.

HBL

Dear money, quantum's the worry

Unless across-the-board reform is speeded up, the supply situation will not allow inflation to come down to a reasonable 4-5 per cent

If money becomes more expensive, will inflation come down? In a predominantly industrial economy, yes, but in an economy where industry accounts for less than a quarter of GDP, not quite. Yet, the Reserve Bank of India (RBI) is persisting with a monetary orthodoxy that has been shown to have severe limitations. According to this orthodoxy, if money becomes more costly, demand for it will fall, pushing down the overall level of demand in the economy. This will then force producers and distributors to reduce prices. Eventually, even if absolute prices don't come down, the rate at which they are increasing will, and everyone lives happily ever after. Nice, but not good enough if you are not willing to also do something about the total quantum of money in the system. To see why, imagine a man who has had six glasses of whiskey in 90 minutes, making it one glass in every 15 minutes. To reduce his intake, the barman raises the price of each drink. If the drinker can still respond, he will reduce the rate at which he is drinking. But what about the alcohol already in his body?  India's problem is not dissimilar to the drinker's. Unless something is done to reduce the amount of money available for consumption, as it were, increasing its price will only have an impact — as the RBI knows well enough — after such a long time that we will never know what actually worked. In short, the time has come to tackle what, in jargon, are called ‘monetary aggregates' by actually impounding the money available with the banks. But given the structure of the economy and the economy-wide deficiencies, even this may not have much effect. The problem lies in the system's inability to improve productivity and efficiency through technology and competition. In other words, reform. Unless due attention is paid to these two aspects, the RBI will achieve the same result as the barman — a comatose customer.  This newspaper has been arguing for several quarters now that monetary policy shot its bolt quite some time ago. So, unless across-the-board reform is speeded up, the supply situation will not allow inflation to come down to the reasonable level of 4-5 per cent. Primarily, these reforms must aim, in the short run when no great investments can be undertaken, to reduce the transactions costs. These are huge in India, amounting cumulatively for each stage of the process, to around 15 per cent. Even a 25 per cent reduction in these costs will yield good results. Many of these reforms will have an adverse revenue implication but these will be made up by the higher production. Most of what needs to be done is known and can be achieved at the administrative level. What is lacking is not the political will, as is often alleged, but merely imagination.

HBL

Coming to grips with inflation

Monetary policy is moving rather too fast on the inflation front, while government action on the supply side continues to be glacial. The RBI did wait for supply-side improvements before reverting to its historical sharp tightening............

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World must collectively tackle financial crisis: Experts

Indian stock market has been witnessing volatility on the talks that the S&P may downgrade other counties after the US. In an exclusive interview with CNBC-TV18’s Shereen Bhan, Bimal Jalan, former Reserve Bank Governor and Rajiv Kumar, secretary general of Federation of Indian Chambers of Commerce and Industry (FICCI) discuss the implications of this downgrade.

Below is the edited transcript of the interview.

Q: The downgrade has finally taken place. We have already been in a very fragile and vulnerable state especially with the concerns on the Eurozone, but does this dramatically alter things?

Jalan: There is lot of uncertainty and it has been there for quite sometime. This entire issue of debt ceiling in the US has also caused uncertainty. So the best thing at the moment is to wait and watch rather than to jump to the conclusion. The situation is very difficult, but fortunately, India has been in a strong position since we have strong reserves and we are not much dependent on exports. So, I would wait and watch and I am sure that the US government will respond positively and will try and prevent any big crash or so called double dip.

Q: You are saying that it is a wait and watch position at this point in time, but does this increase the dilemma as far as central bankers are concerned. They have got more problems now to deal with. We have seen very scathing criticism coming in from China; they are saying that the US hasn’t done its bit. This politics has actually created a problem for the rest of the global economy. What do you expect the central bankers especially people in China and the Reserve Bank to do with US treasuries?

Jalan: In this kind of a position, the best thing to do would be to wait. We should not rush into a panic or do something, which destabilises the market further. Emerging markets are very large holders of treasuries and few days are not going to matter very much.

At the moment, the whole world and even the central banks have to work together to try and prevent the crisis form hitting us rather than acting individually because it’s not something, which was unanticipated.

Q: The question mark is on the sustainability of the growth that we are seeing in the US. If we do see another round of quantitative easing, what will it mean as far as global inflation is concerned? Also what does it really mean for the central bank here in India which is already combating record high inflation?

Jalan: If it’s assumed that there is a global problem, then there has to be a globally co-ordinated response. The whole idea is that panic should be prevented from happening, and if each of us takes our own position, then naturally you have to protect your own self.  We should take a collective action to try and stabilise rather than destabilise. We have gone through these kinds of episodes often where there was Asian crisis and before that we had 1991 crisis. So you have a global response and the situation is not worse than what was for example say a fortnight ago.

Q: So you are saying lets not destabilise things further by pressing the panic button?

Jalan: Yes, and it can be prevented from coming to a situation where each of us act in a certain way which destabilises the situation further. If you see China selling treasuries, then there would be a case for every other country in East Asia selling treasuries. If everybody sells treasuries, then naturally the expectations would be fulfilled that the treasury prices would come down.

Q: China has questioned if the dollar should continue as the Global Reserve Currency. We have also got the UK business secretary Vince Cable saying that this would be the way that the world should move but it’s not going to happen anytime soon. What are your thoughts on that?

Jalan: There is a question mark about the Dollar, Euro and Yen. Yen has been in trouble since last 10-15 years. So, the time has come for the world and the major central banks to get together and work out a mechanism for resolving this problem. You say you don't have dollar, which other currency would you go for?

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RBI steps no substitute for economic reforms

The UPA government showed a measure of decisiveness in extending the tenure of Reserve Bank of India governor D Subbarao for two years from September 4, when he would have completed three years. The decision reflects the government’s anxiety that there should be no uncertainty on this score. He played a major role in steering the economy through the 2008 global meltdown to a reasonably high growth trajectory. This time again the credit rating agency Standard and Poor’s has already cautioned Asia-Pacific countries of a possible downgrade, which will have unimaginable consequences. Seen against this backdrop, it makes sense to have a time-tested person with vast experience in both banking and government sectors at the helm of the RBI. In any case, the government has been trying to manage the inflationary pressures on the economy, which have dented the purchasing power of the common man, by leaving the matter entirely to the bank. Small wonder that it was forced to make changes in bank rates 11 times in as many months. But the point that the interventions by the bank, however welcome they maybe, cannot be a substitute for bold policy decisions has escaped the government’s attention. One reason could be that all its energy is now dissipated on deflecting corruption charges flung at it by the Opposition. Needless to say, time is of the essence in decision-making. If the economic growth rate is not to fall below the projected 8.2 per cent, the government will have to take a whole lot of measures to revive and reinvigorate economic reforms. Privatisation of public sector undertakings – not just the loss-making ones – seems to have been abandoned. Procrastination on land acquisition, environmental clearance, etc, have dampened the enthusiasm of foreign direct investors, while labour, pension and retail business reforms have been put on the backburner. Surely, this is no recipe for growth.

http://expressbuzz.com/opinion/editorials/rbi-steps-no-substitute-for-economic-reforms/302951.html

Tinkering with rules of the game

The granting of a two-year extension to the RBI governor D. Subbarao is a credible move on the part of the Union government

The granting of a two-year extension to the Reserve Bank of India (RBI) governor D. Subbarao is a credible move on the part of the Union government. To that extent, it is a welcome step. That, however, appears to be an exception: The behaviour of ministers and the assorted government officials towards other important institutions has been, to put it mildly, deplorable. The Comptroller and Auditor General (CAG) of India—a constitutional functionary—has been criticized by politicians and ministers alike. The goings on at the Securities and Exchange Board of India, where investigations have been ordered against upright officials—“routine”, of course—are a reason for worry. The reason why any country needs independent institutions is to ensure that citizens—ministers and powerful politicians alike—are subject to the same set of rules as everyone. In India, all governments—there are no exceptions—have tried, at one time or another, to whittle down the independence of institutions. To that extent, all parties are guilty to an extent. But what is happening with the present government is something else. Two distinct processes are at work here. For one, no government in recent memory has had to face a raft of corruption allegations as this one. The CAG’s reports—on spectrum pricing and now the Commonwealth Games—have detailed malfeasance on the part of ministers and officials. These have not only come in handy for the opposition to beat the government with, but have also fed into a crisis of legitimacy. At another plane, the United Progressive Alliance (UPA) government has tried to “claw back” some space that has been ceded to independent regulators over a period of time. This is not the handiwork of some specific minister or party functionary, but is a problem of how this government visualizes its role and relationship with society at large as also its efforts to alter the balance between the market and the state.  When these two trends are seen together, the attack on institutions becomes intelligible. The more it tries to change things, the greater the scope for friction between citizens, government and institutions. The results cannot be happy. A final word is required on the Subbarao extension. There is no exception, so to speak. India, today, is not the India of the 1970s—even if the UPA wants to imagine it that way. It is simply too well integrated into the global economy for it not to be hit if it tries to curb the independence of the central bank. That, and not some abstract respect for rules, explains the exception in Subbarao’s case.

Mint

Wrong treatment

Inflation still looms large for reasons beyond the central bank's control

True to form, the Reserve Bank of India's Monetary Policy Statement for fiscal 2011-12, like its predecessors, documents the economy's trajectory thus far, complete with all its warts and moles. Where it may have erred is in the prescriptive treatment of a fresh dose of tightening up of credit that leaves something to be desired. What makes it all the more unfortunate is that the RBI had in its possession far superior data than was available to the Government at the time of presentation of the Budget or the Economic Survey. The RBI has quite rightly identified that inflation, this time around, is stoked by a boom in global commodity prices. It has talked of a growing “pricing power” of producers that stems from a demand situation that is “strong enough to allow significant pass-through of input price increases.” Equally, the RBI also acknowledges that this is happening despite “visible signs of moderating growth…” — of all the places, in capital goods production and investment spending, for which the central bank immodestly pats itself on the back. To take credit for tightening interest rates to the point that investment spending and the capital goods sector decline is to admit to stifling the engines of capacity creation in core sectors of the economy. This is at a time when the sector is in need of additional funding to shore up capacity and secure higher output in the process. Yet the RBI has raised the repo rate significantly higher, by 50 basis points, whereas so far it had routinely raised it by half that number. The problem doesn't seem to lie in just the core sectors alone. The policy also tells us that its own two surveys, on industrial outlook and on order-books and inventories, in other words, a far broader spectrum of the economy, point to a far more pessimistic view than earlier. Amidst such overwhelming evidence it has chosen to do what it has on the ground that inflation has to be tackled. This is, of course, an old defence for tightening, even though it has little impact on overall inflation. A tighter monetary regime might have released some speculative pressure in the real estate market but overall, inflation still looms large for reasons beyond the central bank's control. The RBI has nevertheless been cautious in its tightening and left the Bank Rate untouched. It has also introduced a new window for banks with the Marginal Standing Facility (MSF) at which banks can borrow overnight funds up to 1 per cent of their Net Demand and Time Liabilities. By creating an additional window, albeit a small one, of liquidity, the RBI must be hoping that banks' ability to lend to critical sectors will not be constrained by any shortage of resources. The treatment the RBI dishes out for the economy's ills — moderating growth and persistent inflation — may prove ineffective. But its diagnosis of slowing investment spending should provide New Delhi food for thought.  

HBL

Vocal Interventionist: Subbarao oversees turbulent times

At the earnest of the Prime Minister, Duvvuri Subbarao - Governor of the Reserve Bank of India - has had his tenure extended by two years, up to September 4, 2013. His original three-year stint as the banking regulator has seen exciting times and a 360-degree turn in his policy management approach. On September 15, just ten days after Subbarao took charge, Lehman Brothers filed for bankruptcy and the sub-prime crisis turned into a global contagion. A financial meltdown followed. Though theories of decoupling were long making rounds, India's economy, its markets and its rupee were not immune, though the financial system was partially insulated. So Subbarao, on his thirty-seventh day at Mint Road, joined global regulators in an interest rate cutting spree, cutting rates frequently in pursuit of liquidity management and insulating the economy from a logjam. What followed was six rounds of cuts in the repo rate by 375 basis points (a hundred basis points make a per cent), four rounds of reverse repo rate cuts summing to 275 basis points and the four cuts in the cash reserve ratio, by 400 basis points total. While reverse repo indicates absorption of liquidity, repo indicates the injection of liquidity. And cash reserve ratio is the percentage of banks' net demand and time liabilities parked in cash with the Reserve Bank. Then Subbarao's priorities were to manage liquidity and combat growth slippage. Loose monetary policy was a catalyst to government's fiscal stimulus packages, meant to bring growth back on track. But then inflation began to inch up. Starting March 2010, inflation rising began to hit unsustainable levels. Subbarao began his 'baby steps' journey to get away from the loose monetary policy of his early days. Suddenly Subbarao's dual focus areas were to manage growth and fight inflation, and there followed eleven rate hikes where the repo rate went up by 375 basis points. Lately, considering the overall growth-inflation scenario, Subbarao is determined to persevere with this anti-inflationary stance. In July, while reviewing the monetary policy for the quarter ended June, Subbarao, unlike many Indian regulators in the past and present, expressed a strong belief that controlling inflation is imperative both for sustaining growth over the medium-term and for increasing the potential growth rate. According to Subbarao, controlling inflation is critical to create a favourable investment climate, on which the economy's potential growth depends. "Fiscal consolidation can contribute to a sustainable growth path by rebalancing demand away from government consumption and towards investment," said Subbarao. "The Reserve Bank's efforts of achieving low and stable inflation could also be supported by concerted policy actions and resource allocations to address domestic supply bottlenecks, particularly in respect of food and infrastructure," he added. That in hindsight was an indication that he knew his job best, and the government had to complement, alongside the Reserve Bank, with appropriate policies to rein in inflation and boost growth. His tenure extension is indicative of the fact that the government, given the state of situation it is in and given the global financial climate, is comfortable to have a "truly" independent regulator guarding the economy. "I am happy that the Government has reposed its confidence in me at this difficult juncture in the world economy," Subbarao commented upon his re-appointment. His extended tenure has extended challenges and uncertainties. In 2008 he faced bank failures. This time round sovereign troubles have swept the developed world.
 

Business Today

Eleventh-hour wisdom

No modern corporation would take a decision on the appointment of its chief executive a few days before the announcement is due and be apologetic about it, saying that further delay was not possible given the exigencies of the situation. That is precisely what the Union government has done in giving Reserve Bank of India Governor Duvvuri Subbarao a two-year extension 22 days before his term expires. Union Finance Minister Pranab Mukherjee claimed that there was no reason why any decision was required to be taken at this point in time since “there was time till September”! True, when Dr Subbarao was appointed RBI governor in September 2008, his appointment was announced five days before the end of the five-year term of Dr Y V Reddy, the then RBI governor. Appointments to senior positions in the Indian government – including the Cabinet, foreign and other senior secretaries, heads of intelliegence agencies and large public sector corporations – are all made at the eleventh hour. This policy of eleventh-hour appointments reveals the kinds of pulls and pressures that operate in such appointments and, in doing so, devalues the final decision, however good. Moreover, the newly appointed person is given very little time to familiarise herself with the job — most of the learning takes place on the job. In recent months senior officials, even in critical ministries, have walked through revolving doors spending barely weeks in a job before retiring. None of this is acceptable modern management practice for a large nation with a professional bureaucracy. In the specific case of Governor Subbarao’s extension, Mr Mukherjee’s bizarre explanation that this was done because of the uncertain global environment only underscores the point that such decisions ought to be taken well in advance. Mr Mukherjee seems to imply that the government has been forced by unexpected global developments to take a decision on the appointment, or the extension of tenure, of a central bank governor at the eleventh hour, rather than a minute before midnight! This is a typical Indian response, which justifies last-minute action on grounds of compulsion and force of circumstance, instead of explaining why action was not taken in advance, which would have averted the need for an eleventh-hour response. Better late than never, the government has done well to extend Dr Subbarao’s tenure because he has offered the central bank mature and reassuring leadership in difficult times. Prime Minister Manmohan Singh has done well to reassure the banking and financial circles and macroeconomic authorities in India and abroad that professionalism will matter more in such appointments. In the coming weeks, Dr Subbarao will have to bite the bullet on several important policy decisions, including the policy on new private sector bank licences. He would now be able to continue to take an independent and professional view, without being pushed around by politicians. To be sure, Dr Subbarao has not pulled any punches. Nor has he shied away from making his views known on a variety of issues such as the distinction between RBI as an institution and other financial sector regulators, and the limits to monetary policy when fiscal policy runs amok. RBI has maintained its focus on fighting inflation and must continue to do so even as it points to the limitations of monetary policy and to the need for a wider policy response.

BS

Welcome extension

The continuity at the RBI means good news for an economy increasingly under strain, from volatile times as much as policy paralysis.

Dr D. Subbarao has got a two-year extension of his term as Governor of the Reserve Bank of India. This continuity spells good news for an economy that has increasingly been feeling the strain of policy paralysis in a beleaguered government that is fighting a new crisis every passing day. The world economy has not yet recovered from the global crisis of 2008. But another set of challenges is already on its way, given the panic across the world following the recent downgrading of US debt by rating agency Standard & Poor's. These are volatile times in which the macro-economy needs to be steered by a safe pair of hands — which it has in Dr Subbarao. Market participants and observers, both here and abroad, will, no doubt, see it as a confidence-building measure for the economy.

Dr Subbarao, when he took over three years ago, stepped into the rather large shoes of Dr Reddy. Many doubted if he would measure up — especially because, by then, Dr Reddy had developed a halo as a saviour of the Indian economy, when the rest of the world was in crisis. Dr Subbarao has since proved his mettle after his baptism by fire during the global crisis of 2008. Over the past three years he had to first unwind a tight monetary policy and infuse phenomenal amounts of liquidity. Equally, as the economy began recovering and inflation pressures began to mount, he has had to wind the tape back and tighten monetary levers during the last year. He also increased the frequency of policy actions to about 45 days so as to impart a measure of gradualism. Through this difficult period, he has been consistently communicating the reasoning behind various decisions and left the markets with a reasonably clear idea of what they could expect. There were occasional hiccups when his inflation-fighting credentials were questioned. And some wondered whether he could stand up to the government on reining in the fisc or on matters of RBI autonomy, especially in view of his earlier stint as Finance Secretary.

The record would probably show that he has passed the test, in his own simple style. He has tried to improve the conduct of monetary policy, bring in more transparency and communication, and demystify the office of Governor — all goals he set for himself at the start of his first term. The decision to retain Dr Subbarao at the central bank's helm for another two years is, therefore, very welcome, although one wishes the government would make up its mind on top positions far sooner than it did in this case, to avoid unnecessary suspense in these uncertain times. The remaining part of his tenure will, no doubt, be devoted to improving on his record besides handling the principal challenge of controlling inflation without choking growth.

HBL

Government's decision to extend the RBI governor's term is welcome

The government's decision to extend the term of the Reserve Bank of India (RBI) governor D Subbarao by two years should bring some cheer to a market sorely in need of some. The last thing the economy (and the country) needs right now is a change of guard at the helm of the central bank.  Given the government's fondness for bureaucrats for the post, any new appointee would have been a greenhorn, unequal to the challenges of steering the economy through troubled times. At a time when three of the four deputy governors are also relatively new, the government can ill-afford to rock the boat.  But it would be unfair to welcome Subbarao's extension (his original three-year tenure ends on September 4) only on the grounds of continuity. Under his leadership, the Bank has shown commendable skill in straddling the twin responsibilities of growth and price stability in a situation where the Bank does not have a free hand. Unlike many central banks, the RBI is not independent.  In such a scenario central bank autonomy is limited and is often determined by the space defined by the government. RBI autonomy, first raised by former RBI governor and present Chairman of the Prime Minister's Economic Advisory Council, C Rangarajan and ably defended by his successors, Bimal Jalan and Y V Reddy, has been dearly won. There are no return favours due to the government.  Unlike elected governments whose timeframe is only till the next elections, the RBI governor must keep his eye on the long-term. His first (perhaps, only) duty is to the country and its people. When in doubt he could take a cue from the story he related some years ago about Dr Reddy's response to a friend who happened to overhear a conversation between the feisty governor and the finance minister of the day.  Intrigued to hear a single 'Yes' in a conversation marked by a series of unending 'No's', the friend wanted to know what the 'yes' was about. To which Dr Reddy's answer was, "Well, the finance minister wanted to know if I could hear him!" As long as the governor reserves his agreement to such harmless questions and on all other matters exercises his own (apolitical) judgment we are in safe hands. All the very best, governor!

ET