Rupee depreciation expected: Rangarajan

The depreciation in the value of rupee was expected to an extend and could be temporary, said Prime Minister’s Economic Advisory Council Chairman C Rangarajan. He added the entities, which have a foreign exchange commitment must always hedge themselves from against the trends in the value of rupee. Speaking to reporters on the sidelines of the Annual Day celebrations of the Madras School of Economics, where he serves as chairman, Rangarajan said, “There is some panic regarding the direction in which the advanced economies will move and all of this is contributing to a situation in which the currencies are taking some beating.” The rupee has fallen at a time when currencies in many other emerging economies also took a beating. This is a reflection of what is happening not in India, but in the rest of the world, he said. But it must also be noted the rupee had stayed very strong for quite a number of years and therefore some decline in its value was also expected, he said. We would have to wait and see for some more time before coming to a conclusion where the rupee would settle, he added. Any entity, which has a foreign exchange commitment must always hedge itself and I do hope most of them would have hedged themselves against the trends in rupee value, he said. Commenting on the possible global economic slowdown, Rangarajan said the United States is taking efforts towards reviving the economy and the European debt crisis might also be resolved in some way. He said things might be more clear in a month’s time. Allaying possibilities for recession, he said the negative growth might not happen while the growth rate of developed economies would be slowed down and if it continued to remain so, would have some impact on India both in terms of trade flows and capital flows.

BS

Don’t defend the rupee, RBI

... If RBI were to successfully defend the rupee, many more firms would find dollar borrowing more attractive. Indeed, firms and households, anyone who can have access to low-cost foreign borrowing, would borrow in dollars (even if they did not need the money themselves) and lend in rupees, keeping the margin as profit. Since few would expect the central bank to be able to defend its currency in the long term, this is likely to be short-term borrowing. The consequence of a successful defence by RBI is thus likely to be an increase in short-term dollar-denominated foreign debt. This would make the Indian economy even more vulnerable to a currency crisis.

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RBI wary of selling dollars on market volatility, deficit

The Reserve Bank of India has not intervened in a big way in the currency markets, unlike most of its emerging Asian peers, because it can ill-afford to expend a limited and fragile holding of foreign exchange reserves, RBI sources say......

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Interest rate vs buyer interest

Let us have a critical analysis of this interest rate tool vested with the RBI as a part of various monetary control measures and the effect of such action on the economy at the macro level, as it is the man in the street who faces the music ultimately.............

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Subbarao kept PC in loop



Several consultations with then FM on 2G, former Finance Secretary told PAC



The UPA Government and the Congress may be defending Home Minister P Chidambaram against charges of complicity in the 2G scam, but former Finance Secretary D Subbarao’s deposition before the Public Accounts Committee (PAC) on February 3, 2011, clearly shows that he had “fairly and regularly” appraised the then Finance Minister about former Telecom Minister A Raja’s move to allot spectrum at seven-year-old price without auction. Details available with The Pioneer show that on being grilled by the MPs on his communication and meeting with Chidambaram during the scam period, Subbarao told the PAC: “There were several consultations with the Finance Minister (Chidambaram) at several stages. So, I cannot recall exactly whether this particular letter (November 29, 2007 from DoT) was discussed on a stand-alone basis or together with other developments in the telecom sector, but I do recall that in that period (October 2007 onwards), I was discussing with the Finance Minister, fairly regularly on telecom sector issues.” Meanwhile, Finance Minister Pranab Mukherjee is expected to meet Prime Minister Manmohan Singh on Sunday to thrash out the issues related to Ministry note on Chidambaram’s role in 2G spectrum allocation. In order to accommodate his unscheduled meeting with the PM, Mukherjee’s departure from Washington has been advanced by a few hours. Now he is expected to leave Washington early Sunday morning instead of afternoon.  Subbarao was responding to the volley of questions from several members of the PAC, on how his directive of November 22, 2007 — to stay the allotment of spectrum and GSM licences to Reliance Communication and Tata Teleservices at 2001 price — was not adhered to. The directive had also sought to find new market-based price for spectrum, and suggested auction. But on November 29, 2007, DoT wrote to Subbarao that they were going by the 2003 Cabinet approval for the spectrum allotment policy. After the DoT reply, the Finance Ministry kept quiet. To the questions, whether he had consulted Chidambaram, the former Finance Secretary, who is currently the Reserve Bank Governor, reiterated: “On this letter of November 29 from the Telecom Secretary, I cannot specifically say that I had taken this particular letter to the FM, but I certainly was discussing with him on a regular basis.” The recent note by the Finance Ministry to the PMO, and minutes of Raja and Chidambaram’s meeting, clearly show how Subbarao was overruled by Chidambaram to favour Raja’s controversial 2G spectrum allotment. These documents also substantiate Subbarao’s deposition before the PAC that Chidambaram was in the loop. When Subbarao was pressed by MPs, to provide evidence about his communication and meeting with Chidambaram, he told the members and PAC Chairman Murli Manohar Joshi, “Sir, there may not be a paper trail, but there was certainly discussion going on. Sir, as you know — you have been a Minister yourself in the Government — not everything is on paper or reduced to writing. Maybe there were some file endorsements, but I cannot recall them because the note file is not here.” To a question, whether he brought the violations and difference of opinion to the notice of the Cabinet Secretary or Chidambaram, Subbarao deposed, “I do not recall having said specifically that we should go back to the Cabinet. That I cannot really say without seeing the file. But I should have briefed the Finance Minister about the ongoing discussions.” Indicating pressure from Chidambaram and Raja, why no auction of spectrum took place, even after he specifically suggested auction, Subbarao said: “…We (Government) were always arguing on the basis of level playing field rather than on the basis of any growth dimensions that might have subsidised. And if they (Ministers) have chosen so, then as a civil servant, I could not contest that.” 

The Pioneer

Six Sigma can give customers value for money

...By adopting global best practices like Six Sigma, financial institutions can reduce their operating costs and bring in the much-needed customer satisfaction to grow their business.

Read more..........

RBI allows banks, NBFCs to set up infra debt funds

...The Reserve Bank of India (RBI) will allow banks and non banking financial companies (NBFCs) to set up Infrastructure Debt Funds (IDFs) to accelerate and broaden the funding sources for the country’s huge infrastructure spend plans.....

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RBI takes ‘outreach programme’ to south Kashmir village

Srinagar, Sep 22: As part of its financial inclusion and awareness drive, the Reserve Bank of India (RBI), Jammu office today organized an outreach programme at village Tailwani, Islamabad (Anantnag). The programme was presided over by K K Saraf, Regional Director, RBI, Jammu and among others attended by DDC, Islamabad (Anantnag), Kifayat Hussain Rizvi, Banking Ombudsman, New Delhi and J&K M Rajeshwar Rao and others. Saraf said during the Platinum Jubilee Year (2009-10) of establishment of RBI, it was decided to reach out to the remotest villages of the country for extending banking services so that the common man is linked to the banks without actually visiting a bank branch through Information and Communication Technology (ICT) initiatives. Saraf said that Tailwani village was one of the villages chosen by RBI for outreach activities in J&K for 100 per cent Financial Inclusion during 2010-11 by using ICT for issuance of smart cards through the Business Correspondent (BC) model.  The main aim was to achieve the objective of financial inclusion and providing doorstep banking services to the rural poor, small and marginal farmers, people of small means, women, etc.  He also explained to the gathering that the biometric smart cards have inbuilt security features and are therefore very safe for conducting transactions. The card holders would also get receipt for each transaction. 

Greater Kashmir

RBI asks banks to implement safety measures for card usage

MUMBAI: In order to minimise fraud cases and ensure security of transactions, the Reserve Bank of India (RBI) on Thursday asked banks to implement various safety measures related to credit card and debit card usage over a period of next two years.  The central bank directed banks to strengthen the existing payment infrastructure and future proofing system along with adoption of fraud risk management practices within a period of next 12-24 months, RBI said in a notification.  "The increased usage of credit/debit cards at various delivery channels also witnessed the increase of frauds taking place due to the cards being lost/stolen, data being compromised and cards skimmed/counterfeited. There is, therefore, an imperative need to secure such card based transactions...," it said. It also emphasised on the need to migrate to Euro pay MasterCard Visa (EMV) chip and PIN based cards from the present magnetic strip cards as the later is vulnerable to skimming and cloning.  "The need for a complete migration to EMV chip and PIN based cards could be considered based on the progress of 'Aadhar' (Unique Identification Card) in about 18 months," it noted.  As per the circular, the central bank has directed banks to implement improved fraud risk management practices by September 30, 2012. The banks have also been directed to strengthen merchant sourcing and monitoring process by September 30, 2012. The central bank also given a timeframe till September 30, 2013, to banks for securing the technology infrastructure.  To strengthen infrastructure for accepting these cards, RBI has said that commercial readiness of acquiring infrastructure to support PIN at POS (points of sale) should be ready by June 30, 2013.  Similarly, the enablement of all POS terminals to accept debit card transactions with PIN should be completed by June 30, 2013.  The apex bank also directed banks to be ready from technical perspective to issue EVM cards by June 30, 2013.

ET

Banks’ grievance redressal not satisfactory, says Chakrabarty

Mumbai: Reserve Bank of India (RBI) Deputy Governor K.C.Chakrabarty has said that the efficacy of the mechanism for redressing customer grievance in Indian banks is far from satisfactory, despite having undertaken a number of initiatives for ensuring fair treatment to customers. “It is necessary to further develop a credible and effective functional system of attending to customer complaints by strengthening banks’ internal structures to attend not only to the basic customer needs, but (also) the special needs of disadvantaged groups, such as pensioners and small borrowers, including farmers,'' he said at the Annual Conference of the International Network of Financial Services Ombudsman Schemes — INFO 2011 at Vancouver, Canada on Tuesday. Moreover the challenge of financial education, in a multi-lingual and multi-ethnic country like India, poses many operational difficulties, given the low levels of financial literacy and a population of 30% which is uneducated, he added. “We are trying to tide over this situation by adopting multi-disciplinary and multi-channel strategies. Taking into account these considerations, a committee was constituted by the RBI,'' he said. The committee was to look into the banking services rendered to retail and small customers and pensioners, structure and efficacy of the existing grievance redress mechanism, the functioning of Banking Ombudsman Scheme, possibility of leveraging technology for better customer service in the light of increasing use of Internet and IT for bank products and services, etc. and to recommend steps for improvements. Chakrabarty further said the lessons that the global financial crisis have been expensive and painful. “Let us not blindly believe in the ability of the markets and competition to take care of all segments of the population,” he said. “There are sections of financial consumers who always have the highest sense of protection and there are the vulnerable sections of the society who feel left out. We have to move to an order where the market forces, competition, effective regulation and a vibrant Ombudsman scheme all co-exist and handle matters concerning financial consumers’ protection in a harmonised way,” said Chakrabarty. 

FE

RBI asks banks to beef up security for e-transactions

The Reserve Bank of India (RBI) has asked banks to strengthen their payment infrastructure for safety in automated teller machines (ATM) and point of sale terminals. It has set a two-year timeline for banks to upgrade the systems beginning with implementation of fraud risk management services by September 30, 2012. In accordance with the suggestions by the working group appointed by the regulator in March this year, RBI has also asked for better sourcing and monitoring process at the merchant level by the same time frame. The regulator has directed banks to migrate to EMV chip cards and PIN-based cards by June 30, 2013. The central bank has also said that Aadhaar-based biometric identification instead of the personal identification number (PIN) should be used for all card transactions which include transactions in ATM and point of sale transactions. “The need for a complete migration to EMV Chip and PIN-based cards could be considered based on the progress of Aadhaar in about 18 months,” RBI said. It is, however, clarified that banks are free to migrate to EMV Chip and PIN-based technology, depending on their commercial judgment and decision taken by their respective boards, the regulator added.

BS

RBI warns banks on poor customers

In the name of financial inclusion, banks should not blindly follow a policy of customer acquisition, providing new access to new customers. Instead, they must address the issues faced by poor customers properly, for it might otherwise lead to a long term mistrust and loss of confidence in the banking system. According to Reserve Bank of India (RBI) Deputy Governor K C Chakrabarty, financial inclusion is an important tool for economic development, but it might also impact the poor adversely by increasing their indebtedness and wiping out their savings and assets. “While financial inclusion is a necessary pre-condition for financial stability and inclusive economic development, the negativities that may affect a poor, ill-informed, new customer can be enormous — from high level of indebtedness due to excessively high prices and predatory lending, to complete loss of savings and assets created out of loans and those collaterally charged to the banks,” Chakrabarty said during his address at INFO, 2011, at Vancouver. He added if problems faced by the poor ill-informed customers are not addressed in a proper manner, it might lead to a long term in formal financial institutions and loss of confidence in the banking system. It is, therefore, imperative that all consumers should benefit from the same level of security and protection, whatever be the institution they operate with, he said. Hence, for banks, these initiatives should not be treated as costs, but need to be reckoned as investments necessary for business stability, he added. “Unchecked market forces and lax policies, combined with relaxed regulatory oversight, can result in customers being exploited while efforts to open financial markets to serve the bottom of the pyramid are made through financial inclusion measures,” he added.

BS

Axis Bank launches ‘MyDesign Card'

Axis Bank on Wednesday announced the launch of “MyDesign Card”, India's first debit card which allows the customer to incorporate a personal image of his or her choice. Speaking at the launch function, Jairam Sridharan, head (consumer lending & payments), said the popularity of debit cards, especially for purchases, was growing rapidly in the country. “By empowering our customers to design their debit cards, “MyDesign” aims to promote closer customer engagement with the bank,” Mr. Sridharan said. He said the facility can be availed by logging online to the bank's portal or apply for the card through any branch of the bank. In “MyDesign', the customer can incorporate images of themselves and their loved ones, and recapture moments from their fondest memories on their debit cards. The module also provides customers with an option to choose an image from a wide gallery which includes sports, zodiac signs, Indian & international tourist spots, wildlife and pets, landscapes, music, automobiles and many other images, he said.

BS

How independent is the RBI?

The Reserve Bank of India (RBI) last week raised interest rates for the 12th time in 18 months and signalled it is not yet done with rate tightening as it struggles to control inflation that has run up a 13-month high. Hours after the announcement, Kaushik Basu, the finance minister's chief economic advisor, said he had expressed reservations about a rate increase, suggesting there is pressure against further tightening from the government. Meanwhile, India's headline inflation, at nearly 10 percent in August, remains way above the RBI's comfort zone, and even Basu admitted that the country was facing a difficult inflationary situation.

So, the question is: How independent is the RBI?

WHAT DOES THE LAW SAY?

The RBI is not constitutionally independent, as the 1934 act governing its operation gives the government power to direct it. The government appoints the central bank governor and four deputies. "The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest," the act says. Technically, the government is also permitted by the act to supersede the central bank if it believes the RBI has failed to carry out its obligations.

HOW DOES IT WORK IN REALITY?

Over the last quarter century as India's economy was liberalised, the RBI has been more independent. However, there continues to be much consultation between the bank and the finance ministry, and the government has been known to exert its will, against the wishes of the central bank chief. There is no legal act mandating autonomy of the RBI, but there is a growing convention that the RBI is allowed autonomy to do what it wants, analysts say. Consultations between the central bank and the finance ministry are not unusual in India.

IS "CONSULT" JUST A POLITE WORD FOR "GOVERNMENT ORDER"?

Not necessarily. The RBI and government have clashed over monetary policy in the past, notably during the tenure of the previous governor, Y.V. Reddy, and then-Finance Minister Palaniappan Chidambaram. In 2007, global interest rates were softening but the central bank under Reddy maintained a hawkish stance, citing inflationary risks stemming from high oil prices. The government favoured lower interest rates to help sustain high growth and bring relief to borrowers. The RBI's view prevailed and it hiked policy rates. In June of the following year, however, Reddy was prodded by the finance ministry to raise rates against his wishes, he revealed in an interview after he left office. More recently, government officials alarmed over slowing economic growth were advocating a pause in the central bank's 18 month long monetary tightening cycle. However, the RBI persisted with a larger-than-expected rate hike in July, followed by another increase at its September policy review and said it was too soon to ease back from its anti-inflationary bias. But the finance ministry and the RBI generally try and find common ground on issues concerning monetary policy.

SO WHAT GOVERNS THE RBI'S INDEPENDENCE?

Personalities to a very large extent. Reddy, for example, was seen as fiercely independent. Mild mannered Subbarao is seen more open to consultations with the finance ministry, although he has demonstrated independence with criticism of the government's inability to rein in fiscal deficit.  He also aired his reservations over setting up a council headed by the finance minister to reconcile differences between regulators.

WHAT OTHER INFLUENCE CAN THE GOVERNMENT HAVE?

Appointments. The government appointed Subbarao, who was the top bureaucrat in the finance ministry, as central bank governor, bypassing Reddy's deputy Rakesh Mohan, who had been seen as a strong candidate. This was a rare instance where the top bureaucrat in the finance ministry was appointed to the top job at the Indian central bank immediately after serving out his stint as finance secretary. The government can also issue directives on non-monetary policy matters such as foreign investment rules in the banks.

WHO SHOULD INVESTORS BE WATCHING FOR POLICY CLUES?

Both the government and the central bank. Top officials, including Finance Minister Pranab Mukherjee and his chief economic adviser Kaushik Basu, and Planning Commission Deputy Chairman Montek Singh Ahluwalia speak frequently on matters of monetary policy, and their views are considered influential in policy decisions. But it is the governor who has the final say. He decides the timing, means, and degree of policy moves. Subbarao opted for a 50 basis points rate hike in July when the majority of the technical advisory panel members favoured a pause in monetary tightening or at the most a 25 basis points rise in rates. Last week, he went ahead with the rate hike cycle even after Mukherjee's adviser Basu had suggested a pause.

Moneycontrol

RBI is everyone's punching bag – S.S.Tarapore

It is wrong to blame the RBI for the slowdown and high inflation. At best, it can be criticised for not having come down hard on inflation. Besides, monetary policy has been proactive when the other arms of policy have not delivered. The Reserve Bank of India (RBI) released its mid-quarter monetary policy Review on September 16, 2011. Predictably, the RBI raised the repo rate from 8.0 per cent to 8.25 per cent, the reverse repo rate from 7.0 per cent to 7.25 per cent and the marginal standing facility from 9.0 per cent to 9.25 per cent. These baby steps should not have caused any furore. But the uproar was on account of global problems, and a fall in output together with persistently high inflation in India.

INFLATION THREAT

The global situation has gone from bad to worse and the US, Europe and Japan are hurtling into an abyss. The Emerging Market Economies (EMEs), having been accommodated on the High Table of the Big Boys, will be expected to give a helping hand to the industrial countries. In India, real growth is showing signs of some slowdown from the heady 9 per cent levels and the cherished aspirations of a 10 per cent growth rate are dashed. It is conceded in official circles that India would find it difficult to attain a 9 per cent annual rate of growth during the 12th Plan. Despite the efforts of the RBI, the inflation rate is close to the psychologically dreaded level of 10 per cent. It bears mentioning that the official price indices, the world over, generally understate the actual rate of inflation. Even if the rate of inflation comes down, the level of inflation would be higher and thereby put a cruel burden on the weaker sections of society. Given the international and domestic developments, it is imperative that India quickly crushes inflation. Increases in policy rates by 0.25 per cent should surely not be considered as harsh measures. Even the cumulative increase since March 2010 of a little over 3 percentage points should not be considered as drastic, given that after the global financial meltdown Indian interest rates were very low. The repo rate of 8.25 per cent is still a negative real rate and, therefore, the monetary tightening can hardly be called harsh. It is reported that India Inc. is angry with the RBI. Further, critics of RBI argue that if a series of interest rate increases have not been able to bring down inflation, any further interest rate increases would be counter-productive.

NEEDLESS CRITICISM

The other arms of economic policy have just not delivered and the only wing of policy that has been proactive is monetary policy; it is grossly unfair to blame RBI for the slowdown of the economy along with continued high inflation. The criticism of the RBI, if at all, should be that it has not operated fast enough and sternly enough—but that is nobody's case. The window of opportunity is very narrow and baby steps taken over a prolonged period create more tensions than sharper policy steps. The late Dr I. G. Patel, when he was the Governor, would often stress that one-shot measures create less policy tensions than a series of small steps. The government has an overbearing role in the formulation of monetary policy. Hence, it is not fair or appropriate for the government to distance itself from the latest monetary policy. Sound bytes emanating from the government seemed to imply that monetary policy was the last hope for dealing with inflation, which incidentally is generalised and much as government policymakers wish to deny it, generalised inflation is a monetary phenomenon. There is an unwritten code of conduct that the government does not criticise the RBI in the open as it is a party to the decisions. The Chief Economic Adviser, the renowned Dr Kaushik Basu, in an unprecedented outburst on the eve of the policy, is reported to have said that monetary tightening had harmed growth instead of taming inflation, which was a public message to RBI to desist from raising interest rates as higher interest rates would attract more foreign capital and thereby fuel inflation.  The ground realities are that, on the contrary, there have been capital outflows. Again, the Finance Minister expressed the hope that the existing policy to control inflation would not be extended. As Ms Kalpana Kochhar, Chief Economist, Asia Region of the World Bank, rightly pointed out, the reference to Turkey as a model to follow was not appropriate as Turkey had received massive capital inflows; in contrast, in the case of India there have been capital outflows. Policymakers of today should read the Parliamentary records of the early part of 1982, when the then Finance Minister, Mr, Pranab Mukherjee, in a Calling Attention Motion on the RBI Monetary Policy provided a magnificent defence of the RBI. This should be a mandatory read for all policymakers. The formulation of the September 16, 2011, monetary policy of the RBI must have been a period of great anxiety for the top management of the RBI. Kudos to the RBI for holding on to its faith.  Dr Manmohan Singh, as Governor, in the early 1980s, would say that the Governor of RBI was performing loneliest job in the country. As the French philosopher Voltaire said, it is dangerous to be right when the government is wrong.

HBL

RBI's Gokarn:Indian Domestic Demand Buffer To Global Turbulence

NEW YORK (Dow Jones)--Huge domestic demand within India provides a buffer to global economic turbulence, said the deputy governor of the country's central bank. "The advantage of the Indian economy is that it has a high level of domestic demand," said Subir Gokarn, deputy governor of the Reserve Bank of India, speaking in New York.  While this is positive in the longer term, in the short term, it creates volatility, he noted. As seen in the previous credit crisis, this volatility creates a liquidity crunch. "Sharp exits of capital pose the risk of liquidity constraints," Gokarn said, noting the country's monetary policies have tried to maintain liquidity. Speaking about the rupee declining, he said there is "no target to defend it at any particular level, no line in the sand." Any intervention is for "smoothening, not targeting," he said. A major challenge for the country is inflation, he said, in an environment where food prices are rising and oil prices are not declining despite slower growth in the global economy. India needs to increase its food productivity, he said, in an attempt to ease the situation.  It is also essential to rebalance demand such that there is a balance between consumption and investment.  

WSJ

Priority sector lending norms for NBFCs in public interest: Thorat

Mumbai: Usha Thorat, chairperson of the Reserve Bank of India’s (RBI) panel on finance companies, has said that the Reserve Bank of India (RBI) is not being unfair to non-banking financial companies (NBFC) when it comes to priority sector lending norms, according to a release by Indian Merchant's Chamber (IMC). Responding to the industry players, she said consumers’ protection is a strong regulatory objective and the proposed recommendations of a working group report on NBFC have come from two main premises namely, funding risk and concentration. “The risk is associated in wholesale funding to select sectors and a similar risk exists in concentration on a particular industry. Though, concentration on a specific sector develops expertise of NBFCs in that sector, but downturn in any of such sectors, could pose greater risk,” she said. R Sridhar, MD, Shriram Transport Finance Company, however, argued: “The cost of borrowing has gone up by about 50%in last few years. Our cost to consumers has also gone up. If due attention is not paid to NBFCs, the small borrowers would be forced to go back to the moneylenders.”

FE

RBI tightens return filing format for NBFCs

The Reserve Bank of India (RBI) today tightened the return filing format for non-banking financial companies (NBFCs) under which they would have to make disclosures about their deposit and lending activities to the central bank more frequently. As per the new regulation, deposit taking NBFCs would have to submit reports on deposits and prudential norms to the RBI on quarterly basis, as against annual and half-yearly basis respectively earlier. Similarly, the apex bank asked non-deposit taking NBFCs to file statements on capital funds, risk weighted assets, risk asset ratio, among others on quarterly basis. The regulations relating to reporting about liquid asset, exposure to capital markets, among others have been retained. The deposit taking NBFCs will have to file quarterly returns on liquid assets to the RBI. Also, NBFCs with a total assets of Rs 100 crore and above will file monthly returns on exposure to capital market, the notification said. Non-deposit taking NBFCs would continue to file monthly returns on important financial parameters. The RBI said the returns, under the new norms, concerning deposits, prudential norms for deposit taking NBFCs and statement of capital funds, risk weighted assets, risk asset ratio for non-deposit taking NBFCs should be submitted for the July-September quarter. All these filings will have to be done by NBFCs to the central bank in the revised formats notified by the apex bank, the RBI said.

BS

Arcil revises profit after RBI questions accounting policy

India's largest stressed assets buyout firm, Arcil - promoted by the country's top lenders - has slashed its earnings and restated its profits for FY11 besides shelving a proposal to pay dividend to its shareholders, after the Reserve Bank of India raised questions relating to the company's accounting practices....

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A dangerous remedy

......Should RBI take a “pause”? We think not. Even after relentless raising of policy rates, real interest rates—however measured—are barely positive. Clearly, there is still scope for further tightening. If the fear is that high rates will hit the country hard.....

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RBI to intervene, if required: Pranab Mukherjee

...“The RBI Governor has made it quite clear that as and when the situation warrants, the RBI will intervene. Right now, there is no such situation,” Mr. Mukherjee said....

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RBI suspected to have sold dollars at around Rs 49.15: traders

The Reserve Bank of India (RBI) was suspected to be selling dollars in the forex market on Thursday at around Rs 49.15 to arrest steep losses in the local unit after global risk aversion prompted investors to move into safer assets like debt. The RBI was likely to have started selling dollars from 49.15 per dollar, helping drive the partially convertible rupee back below the 49 mark, 11 dealers said. At 3:10 pm, the rupee was at 48.98/99 per dollar, after hitting 49.18, its weakest since 2 September, 2009, when it was down 1.7 percent on the day.

Firstpost

RBI has managed exchange rate well

The Indian rupee has depreciated by more than eight per cent so far this month, after remaining stable for a fairly long period. Naturally, there has been a growing pressure on the Reserve Bank of India (RBI) to aggressively intervene in the forex market to stem the rupee's decline, since imported inflation rises and risks associated with exchange rate volatility are growing. Despite the rupee falling to its lowest level against the dollar in more than two years on Thursday, RBI has stayed on the sidelines, stating it would intervene aggressively only when it saw excessive volatility. Many experts feel this stance of RBI's would aggravate the uncertainty in equity markets and scare foreign investors away. However, as a central monetary authority, RBI has to focus on the effectiveness of forex interventions. We cannot forget such interventions do involve important costs. Among others, these costs are the risks of financial losses on the operations, the cost in terms of resources devoted to the conduct of these operations, and the cost in terms of credibility, if the intervention fails to deliver the desired effect. The considerations of the costs versus gains of intervention might have prevented RBI from intervening aggressively, though there has been some intervention in the market, as reported by some of the newswires. While the current attack on the rupee is primarily sentiment-driven, on account of the growing turbulence in Europe, the rupee has developed a strong depreciation bias, due to India's widening current account deficit and growing dependence on short-term flows. These factors may not allow our currency to recover substantially (and sustainably), even after RBI intervenes aggressively. Also, according to RBI's report on forex reserves in August, India's external liabilities are more than its external assets. So, RBI would like to use forex reserves more prudently. Besides, a depreciation bias would help exports and employment generation, which is the need of the hour. We also need to understand central banks the world over prefer selective, rather than complete, public disclosure of their interventions to make such moves more effective.

Rupa Rege Nitsure, Chief Economist, Bank of Baroda (BS)

It’s premature to say RBI will change its stance

.... You would ideally not expect them to suddenly change the stance and they are continuing with that because inflationary expectations have still not been addressed and that is RBI’s main concern. So it’s premature to say that they will change the stance. I would still put a probability of a 25 basis points hike in October.....

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RBI finds itself isolated in war on inflation

...Until now, the government and the RBI have largely been on the same page when it comes to monetary policy, with near double-digit inflation not only an economic worry but also a political headache. But over the past few weeks, criticism and advice for the RBI chief have been more blunt than usual......

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Dharwad achieves 66% under agri-lending Rapid Action Plan

Hubli : The Reserve Bank of India (RBI) has suggested to banks in Dharwad district to have a Financial Literacy and Credit Counselling Centres (FLCC) at each Blocks. Mr R. Ramachandran, Manager, RBI- Bangalore, while reviewing the performance of banks in the district under Financial Inclusion Plan (FIP), as Lead Bank (Vijaya Bank) is opening Financial Inclusion Resource Centre and also Financial Literacy and Credit Counselling Centre jointly sponsored by Syndicate and Vijaya Bank under the banner of Jnana Jyoti Financial Literacy and Credit Counselling Centre at Dharwar on September 30. The District Level Review Committee (DLRC) meeting chaired by Mr S.V. Dindalkoppa, Project Director, Zilla Panchayat-Dharwar, was held at Karnataka Chamber of Commerce premises. Advising the bank that by just designating business correspondents (BCs) does not serve the purpose of FIP, “There should be full-fledged implementation of FIP by operation of biometric cards,” Mr Ramachandran said. He advised the bankers to speed up the process to cover the remaining 51 unbanked villages of above 2,000 population by the end of this year. Mr Y.N. Mahadevayya, Nabard Assistant General Manager, while reviewing the progress made in the district under Rapid Action Plan of Banks, observed that the coverage is only 66 per cent, remaining 43,000 farmers are to credit linked according to the district statistics by September 30.  While reviewing the district credit plan (as on June 2011), he observed that the total priority disbursal during the quarter is Rs 264.38 crore against a target of Rs 369.72 crore thereby achieving 72 per cent.  Under agriculture Rs 116.46 crore, Small scale Industries (SSIs) Rs 12.45 crore and other priority sector the achievement stood at Rs 135.47 crore.  He advised the bankers to step up advances under agriculture and SSI.  Mr B.A. Tata, Regional Manager, Vijaya Bank, Regional Office-Hubli, speaking on the occasion said the bankers should make special efforts to cover all eligible non-loanee farmers under rapid action plan by end of this month and also advised the bankers to complete Financial Inclusion Plan (FIP) in unbanked service area villages of population above 2,000. As of now coverage is only 26 out of 77 villages.

HBL

Inflation | Decoding the dynamics – Deepak Mohanty



Higher subsidy translates into higher fiscal deficit, which has inflationary implications



While inflation is expected to moderate towards the later part of the year, reflecting monetary tightening and likely softening of global commodity prices, fiscal policy needs to be supportive in containing aggregate demand. In addition, there is an urgent need to address the issue of structural supply constraints, particularly in agriculture, so that these do not become binding constraints in the long run, hampering the task of inflation management.

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Monetary Policy | Key factors shaping trajectory – Dr.Subir Gokarn

The core objectives of monetary policy in the future will remain what they have been in the past. The primary objective of monetary policy is a low and stable inflation. In achieving this, the economy has to be allowed to maintain growth at the highest possible rate consistent with a low and stable inflation.....

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Financial Inclusion | A road India needs to travel – Dr. K.C.Chakrabarty

........financial inclusion is the road that India needs to travel toward becoming a global player. Financial access will attract global market players to our country and that will result in increasing employment and business opportunities. Inclusive growth will act as a source of empowerment and allow people to participate more effectively in the economic and social process....

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ECB window for finance firms not advisable: Thorat

Usha Thorat, chairperson of the Reserve Bank of India’s (RBI) panel on finance companies, on Wednesday said she did not favour allowing financial companies to raise funds through external commercial borrowing( ECBs), since lending by external agencies is actually carried out keeping the government’s comfort level in mind. As a matter of policy, RBI has never favoured entities regulated by it to intermediate between domestic and overseas markets, Thorat said, while addressing a conference on non-banking financial companies (NBFCs). Financial stability eventually emerged as a sovereign risk. Overseas lenders would be more comfortable in giving funds to financial sector player, she said. This facility was allowed for a short term after the global financial crisis. Infrastructure finance companies are also permitted to use the ECB window to raise resources, she said. She added access to finance would only be in the domestic market through non-convertible debentures, certificates of deposit and bank credit. Dependence on deposits from the public by permitted NBFCs must be done away with, she said. On whether demand would continue, considering the current liberal norms of treating accounts as NPAs, she said RBI’s 90-day norm experience with urban cooperative banks showed recoveries from such accounts were better. If action was not initiated early (in case of outstanding repayments), the chances of recovery diminished early. According to current RBI norms, NBFCs can treat an account as an NPA only if the payment is outstanding for 180 days.

BS

May his soul rest in peace.....

I deeply regret to report the passing away on 19th September 2011 in New York of Shri Anand Chandavarkar. He unarguably was the foremost exponent of the Indian economic scene and an acknowledged authority on John Maynard Keynes. He is noted for his grace in style, felicity of expression and profundity in knowledge. His credentials are impeccable. He is a graduate from the University of Bombay and the London School of Economics, where he was a student of Karl Popper, Michael Oakshott, two political philosophers of world repute. Greater distinction is that he was the disciple of three Nobel Laureates in Economics, Friedrich Hayek, James Meade and Ronald Coase. One cannot have more distinguished teachers. The teachers could not have a more distinguished disciple.  Professionally he served in RBI, IMF,OECD and World Bank; Economic Adviser, Bank of Libya; Consultant to the Organization for Economic Cooperation and Development (Paris), the World Bank, and the Presidential Commission on Finance and Banking, Sri Lanka.  He was the author of "Keynes and India" "Central Banking in Developing Countries . His latest book was "The Unexplored Keynes and other essays". He has published widely in leading academic and professional journals, including The Economic Journal, The Oxford Economic Papers, The Quarterly Journal of Economics and the Economic and Political Weekly.  He made a significant contribution to The Cambridge Economic History of India.  He was aninvited speaker at the Tenth Keynes Seminar at the University of Kent,Canterbury, England (1991) and the One Hundredth Annual Meeting of the AmericanPhilosophical Association, (Eastern Division), Washington D.C., 2003. He is a rare economist, a profound scholar who writes with transparency and eloquence, and he has many interesting things to say. His writings on Keynes are particularly fascinating and attracted a huge readership. His deep knowledge of history of economics and economic analysis reflect the long and useful life he led as a teacher and researcher in academic and international organizations. Shining through his writing is his compassion and humanity. Anand Chandavarkar displays his customary ability to "excite the judgement briefly rather than to inform it tediously". He is India's foremost and finest scholar of Keynes. His book, “Keynes and India” remains aclassic. He had worked in the Department of Research and Statistics of RBI for a number of years and some of us were privileged to have worked under him. My wife and I had the privilege of visiting him in Washington and this "Gentle Colossus" came down to the ground floor to see us off.Scholarship combined with utmost courtesy one comes across rarely. We mourn the loss of a great scholar, a perfect gentleman and a raconteur par excellence. He was 88 years old at the time of his death.  

As reported by P.P.Ramachandran (via e-mail)

What timing!

RBI rate hike with a fuel price hike thrown in! Who is managing this inexplicable timing? The latest tightening of rates by RBI, with another one perhaps soon after, can only help in unsettling market sentiments and make the economic outlook darker, which is the greatest foe of the common consumer. Though the latest fuel hike will brighten up the balance sheets of oil companies, but will also heavily impact food prices.

R Narayanan, Ghaziabad (FE)

IT DRIVES INNOVATION IN THE BANKING SECTOR

As India moves towards financial inclusion in the banking sector, technology will play a key role in achieving this goal
In a country of 1200 million Indians, which has only 400 million bank users, there is an urgent need to ensure financial inclusion and greater transparency, and banking technology will play a crucial role in driving this change. On Thursday, September 8, 2011, key players of the banking industry converged at the ITC Grand Central in Mumbai to discuss the issues involved in this transformation, at the fifth edition of The Economic Times Banking Technology Conclave ’11. The conclave, ‘Indian Banking 2015: Towards Technology Enabled Transformation’ had speakers discussing a wide range of issues impacting the sector – the importance of technology investments, partnerships with the Information Technology sector, customer-centricity for higher profitability and the emerging frontiers for cooperative banks, among other things. “Information technology in banking is fast evolving,” said a KPMG White Paper, released on the occasion. “From enabling banking services to driving transformation in the industry, Information Technology holds a promise to change the face of banking in the next few years. New entrants are looking to leverage their existing strengths in the Indian banking arena. The opportunity available to these entrants through leveraging their understanding of technologies and markets they operate in promises innovative business models with a focus on delivering customer value.” The need to provide personalised, speedy and cost-effective services is pushing banks to further reorient and innovate the business model of banking and enabling technology, the paper adds. Mr M.V. Nair, Conference Chairman & Chairman and Managing Director, Union Bank of India, highlighted four emerging trends in banking technology. Mr Nair referred to an integrated multi-channel delivery system; financial inclusion; customer relationship management and IT governance. He also spoke of the importance of green IT initiatives for business competitiveness and cost efficiency, pointing out that modern IT systems were complex and sophisticated, but they were also “energy guzzlers”.  “According to statistics, every watt required for computer power creates the need for another watt for cooling,” Mr Nair said. “It becomes one of the integral parts of Green IT to develop a strategy for implementation of less paper offices to paperless offices. Initiatives like the solar-powered ATMs with which we are experimenting at Union Bank of India may go a long way towards green technology in banking”. The challenges involved in reaching out to last-mile customers formed an integral part of the discussions. Sunny Banerjea, Partner and Head, Management Consulting, KPMG India, pointed out that thanks to mobile phones and other devices, today’s consumer had far more computing power in his hand than it had taken to “get man to the moon in the 1960s”. However, as most bankers would agree, customers could not be looked at as a homogenous group, and strategies for rural and urban customers would necessarily have to be different.  Shikha Sharma, Managing Director and CEO, Axis Bank Ltd, pointed out that while the market was a large one, there were differences in the way the older generation, and the younger one, perceived their banking needs. She also raised issues of changing mindsets and workforce training for the new era of computerisation. There is no doubt that the complex world of Indian banking has already seen tremendous change. With many transactions taking place through the Internet, mobile banking and Automated Teller Machines, customers no longer need to wait in long queues during working hours to get their passbooks updated, or to withdraw money. Even cooperative banks, which have largely operated through traditional models, have begun to see the need for technology-enabled transactions; The Greater Bombay Co-operative Bank Ltd. for instance, has seen value in opening innovative E-lobby Banking branches, and streamlining their systems by achieving ISO 9001:2008 certification. “In just 150 sq ft space, we have seven machines which allow you, among other things, to deposit cash, pay electricity bills and get your passbook printed,” said Narendrakumar A Baldota, Chairman of the Bank. “Banking is available 24x7 and customers come in even at 1.00 a.m. or 2.00 a.m. And the cost is hardly Rs 12 lakh for these seven machines”. In June 2010, Reserve Bank of India had asked all banks to present a three-year financial inclusion plan by incorporating the government's goal of making banking facilities available in all villages with 2000 population by March 31, 2012. The Government is also planning to leverage the Unique Identification Authority of India (UIDAI) project to further achieve financial inclusion, a fact that most bankers at the conclave agreed would make a huge difference.  For emerging markets to move ahead in the global arena, however, there are primarily four issues that need attention. In achieving these goals, banking technology will certainly make a vital difference, simplifying the banking process, offering speed and convenience to the customer in an increasingly competitive era, and also playing a holistic role in financial inclusion. As speakers at the Conclave agreed, while there are many challenges to be met, the process is certainly gaining momentum.

ET 

Maha planning awareness campaign against online frauds

Considering the increasing number of cases of online fraud, Maharashtra government has decided to take steps to create public awareness. The city police's Economic Offences Wing today filed an affidavit before the Bombay High Court, stating that it had hired advertising agency Lowe Lintas to create awareness advertisements. Reserve Bank of India (RBI) too has been requested to issue advertisements, asking people not to fall prey to alluring but shady online schemes, it said. The division bench of Justices D D Sinha and V K Tahilramani was hearing two public interest litigations filed by investors who were allegedly duped by schemes of Speak Asia and Symbiosis Trade Link. On the allegation by the petitioners that police initially refused to look into the complaints, public prosecutor Pandurang Pol told the court that inquiry had been initiated. The EOW has also sought special courts for economic offences for speedy trials. The court was informed that in the Symbiosis matter, the first complaint was lodged in February 2010, but action had not yet been initiated. "What have the police done so far? People want perpetrators to be brought to book. Such cases should be taken to logical conclusion," Justice Sinha said. Speak Asia, a Singapore-based online survey company, is alleged to have cheated people by promising huge returns for taking part and investing in its surveys. Symbiosis Trade Link runs similar scheme from Pune. 

IBN Live

Growth & Inflation aren’t Related

The growth-inflation trade-off proposition is a policy rip-off. There is no theory that quite establishes such a relationship. At best, evidence is empirical and cross-country. Cross-country empirical evidence has to be taken with several pinches of salt, since there are countries with 0% inflation and those with 3000%. No country with 0% inflation has had respectable growth, neither has one with 3000%. Inflation is caused by excess of demand over supply. Growth should lead to increase in supply, unless there is something wrong with nature of growth, or unless we are talking about time-lags. Indian inflation has agro, manufactured goods and commodities. Take the first, agro-cum-food inflation. We have known since late 1980s that productivity growth is tapering. We added more of a fiscal squeeze in early 1990s, adversely affecting extension services and public investments. Then we threw in public expenditure of the consumption variety. MGNREGS templates don’t allow for creation of productive assets. We added hikes in procurement prices, increased input costs because of MGNREGS (wages), power, diesel and fertilizers. With all the economic expertise floating around within government, we couldn’t see the food inflation coming. We couldn’t see shifts in consumption patterns — milk products, egg, fruit and vegetables, fish, meat. Trends have been around since 1987-88. So for food, I don’t understand what this growth-inflation trade-off is supposed to mean. We ensured demand increased, but not supply. There’s a reckless public expenditure problem, best addressed through fiscal policy. Monetary policy has nothing to do with it. Manufactured good isn’t terribly different. Investments and capacity-creation go through cycles. It should not be very difficult to foresee this, nor should it have been difficult to anticipate that interest rate hikes and general policy uncertainty would hurt. Effectively, the economy was chugging along at 9% (Let us not blame global financial crisis for everything. Volatility in exchange rates and capita flows and an uncertain export environment apart, those effects soon passed.) There are people within government who have now picked up RBI as a whipping boy, arguing tightening monetary policy is counter-productive. True, but in terms of diagnosis, nothing has changed between 2008 and 2011. Why didn’t they realise it then? At that time, they wanted monetary policy tightening. Time and again, they have stuck their necks out on forecasts of inflation, to be proved repeatedly wrong. Thus, barring nitty-gritty details about which inflation index to use, inflation has remained where it was. But growth has dropped to 7.5%, perhaps lower still. By trying to do something about inflation, we have reduced growth. No trade-off, but that’s the growth-inflation paradox. We should forget about knee-jerk and short-term reactions to inflation, beyond containing liquidity through fiscal restraint. We should loosen monetary policy. Tolerable levels of inflation should be 10%, not 5%. But once we have done the sensible things, growth will revive to 9% and inflation will drop to something like 7%. That degree of inflation will remain and should be fine, as long as we have real income growth. This isn’t a country of double-digit inflation, normally.

- BIBEK DEBROY, Economist & Research Professor, Centre for Policy Research  (ET)

New norms for national payment systems

Mumbai: In revised criteria for national payment systems, the Reserve Bank of India (RBI) on Wednesday said all licensed banks will need a minimum CRAR of 9%, net NPAs below 5% and minimum net worth of R25 crore in the centralised payment systems. With a view to strengthening the risk management framework, as also to facilitate wider access to payment systems, the Reserve Bank of India had constituted a working group to review of the existing access criteria guidelines. With these eligibility the banks can Real Time Gross Settlement (RTGS) System, National Electronic Fund Transfer (NEFT) system and National Electronic Clearing Service (NECS). According to the notification, RBI mandates two sets of access criteria- one for centralised payment systems and the other for decentralised payment systems. While for decentralised payment systems such as clearing houses at MICR centres and Electronic Clearing Service (ECS) including the Regional Electronic Clearing Service (RECS), the access criteria will need a minimum CRAR of 9% and net NPAs below 5%. The revised access criteria will come into effect from October 1, 2011. However, the present relaxation granted to state cooperative banks and the district central cooperative banks and post office saving banks in membership to clearing house at MICR centres will continue. Unlicensed banks can continue to participate in the decentralised payment systems as sub-members.

FE 

Govt managers 'yet to grasp' inflation reasons

As inflation remains high despite the Reserve Bank of India (RBI) hiking the interest rate several times, experts believe that the Union government’s managers do not have a complete understanding of the reasons behind the continued price rise. Also, there is no consensus on whether the RBI should pause its persistent monetary tightening stance......

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After banks, housing finance cos to do away with prepayment penalty

... NHB Chairman RV Verma told FE, "We are trying to ensure that customers from HFIs and banks should be treated alike, and the prepayment penalty, just like in the case of banks, should be waived by the HFIs as well. The RBI is in the process of issuing guidelines. We are also planning to issue (similar) guidelines to ensure that everyone gets a fair deal.”.....

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Reserve Bank is unlikely to raise rates in next policy meet

The Reserve Bank of India is unlikely to raise rates further but inflation will remain at elevated levels for another six months, said Chetan Ahya, managing director of Morgan Stanley.......

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India can’t afford to grow below 8%: Chidambaram

Kolkata: At a time when there are apprehensions of further rate hikes by the RBI and the growth figures are on a downward curve, home minister P Chidambaram on Wednesday said that India cannot afford to grow below 8%.  His statement comes days after Union finance minister Pranab Mukherjee said that there are signs that growth is being affected by monetary tightening. Chidambaram said, “ without growth we cannot build capacities. The ball is growth and we have to keep our eyes on the ball. We cannot afford to grow at anything less than 8%.” Earlier in July, industrial growth in the country fell to a 21-month low of 3.3% against 9.9% in the same month the previous year. 

FE

26 co-operative banks go belly up in 2010-11

As many as 26 co-operative banks failed in 2010-11 which resulted in credit insurance companies paying over Rs 268 crore to depositors. Twenty-six co-operative banks, which include 10 from Maharashtra, six from Gujarat and five from Karnataka, have failed to repay deposits to customers during the last fiscal. In 2009-10, 29 cooperative banks across the country had closed operations. Under the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of the the Reserve Bank of India (RBI), insurance norms, a maximum of Rs 1 lakh is paid to a depositor in case the bank goes insolvent. The RBI's credit insurance arm has paid over Rs 268 crore to depositors of 26 co-operative banks which went bankrupt in 2010-11. The DICGC paid the maximum amount of Rs 45.43 crore to Ahmedabad Peoples Cooperative Bank of Gujarat. Other Gujarat-based lender Shri Sinnar Vyapari Sahakari Bank got Rs 40.66 crore, Surendranagar Peoples Cooperative Bank (Rs 30.74 crore) and Surat Mahila Sahakari Bank (Rs 26.44 crore). Besides, the credit insurance company paid Rs 16.92 crore to depositors of Rahuri Peoples Cooperative Bank of Maharashtra and also Rs 15.24 crore to the account holders of Katkol Cooperative Bank of Karnataka, according to RBI. At the same time, one each from Uttar Pradesh, Assam and Andhra Pradesh also closed operations. 

BS

The urban banking model cannot work in rural areas

Dollar shortage may choke India Inc.'s overseas borrowing

...In fact, the dollar shortage, which has been there since July, is one of the reasons for the reversal in the rupee's fortunes,....

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RBI needs to intervene in forex market, says StanChart

The Reserve Bank of India (RBI) needs to more actively intervene in the country’s foreign exchange market to stem the rupee’s fall as imported inflation rises and exchange rate volatility risks increase, said Standard Chartered Bank in a research note on Wednesday. The increasing chatter about intervention comes as the partially covertible rupee touched a two-year low of 48.24 to a dollar on Tuesday and remains the worst performer amongst the 10 major Asian currencies. It has already weakened by over 7 percent so far this year. The central bank, in its mid-quarter policy review last Friday, said that the rupee’s depreciation may have adverse implications for inflation. Foreign exchange dealers have suspected the RBI’s presence in the foreign exchange market in recent sessions, but it hasn’t been significant to turn the rupee’s fortunes. The Reserve Bank of India’s stated position is that it intervenes only to stem excessive volatility. But in recent years, it has largely let the rupee free unlike its Asian peers. A bulletin released by the RBI on Sept. 13 showed it had not bought or sold dollars in the foreign exchange market for eight successive months including July. But, the RBI’s hands-off policy may have made the unit more vulnerable during periods of risk aversion, the report said. Standard Chartered however said that the central bank is yet to signal that forex-related risks have risen significantly. This may be partly due to the central bank’s higher tolerance and partly due to the liquidity implications of higher intervention, the note said. Higher intervention will lead to a squeeze in rupee liquidity from the system, lowering system cash to “undesirable levels,” it said. “Hence, intervention is likely to stay sporadic and low, aimed at addressing volatility rather than imported inflation risks,” the report said.

Firstpost

‘Rising Imported Inflation Calls for RBI Intervention’

Increasing the risk of inflation due to surging prices of imported goods, on account of weakness in the rupee, and risks of volatility in foreign exchange rate make a case for RBI intervention, says a Standard Chartered report.  “We take the view that rising imported inflation and forex volatility risks support the case for greater intervention. However, RBI is yet to signal that foreign exchange-related risks have increased substantially,” the report says.  The central bank had briefly intervened in the foreign exchange market last week to cap the rupee below 48 per dollar, after the domestic unit fell by over 9.5% since July. This intervention came almost after a year, with the last intervention from the regulator in October just before the Coal India IPO, when the rupee escalated to levels above 43 per dollar.  “Price action shows, downside pressure remains strong, and one-off intervention may not be enough in an environment of growing contagion risks,” adds the report. The report states that though RBI maintains it will intervene when the volatility in the rupee could disrupt the real economy, the central bank’s tolerance threshold for USD-INR pair has increased substantially, which has left the rupee vulnerable. The reasons cited for this aversion to greater intervention is the liquidity implications. “Banking-system liquidity is currently close to the lower limit of RBI’s comfort zone and is unlikely to improve near-term. In such a scenario, significant RBI intervention to stem rupee depreciation may strain liquidity to undesirable levels,” the Standard Chartered report says. With foreign exchange reserves of $316 billion, the central bank has sufficient capacity to intervene to support the market during periods of dollar demand-supply mismatch, say analysts.

ET

Will Reserve Bank intervene in foreign exchange market?

The RBI's involvement in the foreign exchange market has declined significantly over the last couple of years, though its stated foreign exchange policy has remained largely unchanged.....

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