God and the central banker

Can central bankers play god to the markets? India’s central bank chief Duvvuri Subbarao does not believe so. In doing so, the Reserve Bank of India governor, a physics student, has taken refuge in quantum mechanics. Subbarao takes the example of Einstein, who could not reconcile to the probabilistic nature of quantum mechanics all through his life. Einstein famously said – “God does not play dice”. Less known perhaps is the retort of his friend and mentor Niels Bohr who said – “Albert, stop telling God what he can or cannot do”. Subbarao draws this parallel in arguing that a central bank cannot tell markets what to do. “We have to take market signals as given,” Subbarao said in New York at a recent IMF meeting.

In fact, he went on to say that central bank decisions get more validity if the market endorses them. Central bankers have always enjoyed an elevated status in the financial world, possibly because of the wide-ranging powers they have enjoyed. True, the sheen has come off at times. Liaquat Ahamed referred to this in Lords of Finance when he wrote about central bankers ruling the financial world in the late 1920s — Benjamin Strong Jr of the New York Federal Reserve, Montagu Norman of the Bank of England, Émile Moreau of the Banque de France, and Hjalmar Schacht of the Reichsbank. The Wall Street crash of 1929 and the depression that ensued crippled an entire generation and set the stage for the second World War. The orthodoxy of the central bankers of the day in trying to adhere to the gold standard was a prime cause. The media, of course, has played a big role in creating this mythical creature called the central banker. In 1999, Time magazine ran a cover story titled ‘The Committee To Save The World’ featuring then Federal Reserve Chairman Alan Greenspan along with Robert Rubin and Larry Summers (then secretary and deputy secretary of Treasury) for their role in averting a global meltdown after Asia’s tiger economies faced a debt repayment crisis. This stereotype was particularly so of Alan Greenspan, under whom interest rates were ultra low and the market was flooded with dollars. To many, Greenspan, whose career at the Federal Reserve spanned nearly two decades, was god. All that came crashing down when the financial crisis broke in 2008 and the very same low interest rates were blamed for the subprime mess and housing bubble in the United States. Subsequently, it’s been mostly downhill for central bankers. The Economist, in a piece in Oct 2010, accused Bank of England Governor Mervyn King of playing god when in a speech he savaged the performance of Britain’s banks before the crisis and criticised the new Basel 3 proposals as too soft. Tongue in cheek, the Economist said trying to reinvent finance was a lot more fun than shifting interest rates by 25 basis points once in a while. But to be fair, most central bankers haven’t claimed a god status. It was something that was mostly thrust on them. But the one who takes the cake is Goldman Sachs boss Lloyd Blankfein who famously said that banks serve a social purpose and are doing “god’s work”. This was after reckless investment banks, in search of supernormal profits, plunged the advanced economies into recession. It was the central bankers who had to rush in with trillions of dollars to ward off armageddon. 

http://blogs.reuters.com/india/2011/10/04/god-and-the-central-banker/

Restore loan servicing facility to customer, bank told

Thiruvananthapuram : Is it within the legitimate rights of a bank to seek to move a standard asset in the form of a vehicle loan to a non-banking finance company (NBFC) located at a place away from the customer and without taking him on board? No, according to the ruling given by the Office of the Banking Ombudsman (BO) attached to the Regional Office of Reserve Bank, Thiruvananthapuram. In a case reported by the BO for Kerala, the Union Territory of Lakshadweep and Mahe, the complainant had taken a loan for a light commercial vehicle from a bank branch near to his house. Despite the account being a standard asset, the bank had gone ahead to sell it to an NBFC which had an office 100 km away from the transferee bank branch and the residence of the complainant. On taking up the matter, the bank submitted to the office of the BO that his loan was part of a loan portfolio assigned to a registered NBFC. The NBFC had also taken over the servicing responsibilities of the loan. The bank said the assignment was in terms of the terms and conditions accepted by the complainant at the time of sanction of the loan. But the office of BO found that as per the terms and conditions, it was stated inter alia that the borrower would continue to discharge in full all his obligations under the loan terms and other transaction documents to the bank only. It observed that the borrower cannot be put to inconvenience by requiring him to approach an NBFC for the monthly repayments.  The bank was advised that the complainant's request to the bank to continue the servicing of his vehicle loan at the original branch was legitimate and the bank had to consider it favourably. The bank eventually complied with the BO's instruction in the matter.

(Disclaimer: RBI does not vouch the propriety or legality of orders passed by the Banking Ombudsman. The object of releasing the details of cases is merely for the purpose of dissemination of information on the working of the BO Scheme.)

HBL 

States told to make electronic payments

Only 5% of the 600,000 villages, towns and cities in India have a bank branch, and only 40% of the country’s population has access to a bank account, according to the Reserve Bank of India (RBI). As part of its financial inclusion (providing banking and other financial services to the unbanked) road map, RBI has asked banks to cover 73,000 villages with population of at least 2,000 by the end of this fiscal. The ensuing action by banks has resulted in several million new accounts being opened, but many of these see no action. The finance ministry’s plan could address that issue, too.......

Read.. 

HC directs Centre, RBI to act tough against online fraud firms

CHANDIGARH: Tightening noose around the companies involved in online frauds, the Punjab and Haryana high court on Tuesday directed the Centre as well as the Reserve Bank of India (RBI) to act tough against the companies involved in online fraud, including seizing their bank accounts. The HC directed the Centre to proceed with any action in order to stop the fraudulent practices, which are being perpetrated by various companies based in India and abroad. It added; " Authorities may take steps, including the seizing of bank accounts, which have been opened by those companies in various banks in order to siphoning of funds of gullible public." While issuing the directions, division bench of the HC, comprising acting Chief Justice M M Kumar and Justice R N Raina also issued notice to the Centre as well as the UT administration and state governments of Punjab and Haryana for November 8 to file response on the issue. The case would come up for further hearing on November 8. The matter had reached before the HC through public interest litigation (PIL) filed by a Zirakpur resident Nardeep Saini and 29 other petitioners from Punjab, Haryana and UT. The petitioners had alleged that three companies had fleeced a large number of innocent persons to the tune of Rs 1,500cr. It was also contended that a large number of Indians were lured in the online investment scheme with assured results of doubling the amount within 10 months.

TOI 

Bankers want a break from monetary tightening measures

Top bankers on Tuesday dropped ample hints to the Reserve Bank of India that it's time it took a breather from its monetary tightening cycle............

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Banks take up exchange rate volatility with RBI

The volatility in exchange rate and increased liability for companies are issues that bankers took up with the Reserve Bank of India (RBI) in pre-policy meet ahead of the second quarter review of the monetary policy on October 25. For companies that have taken large foreign currency loans, rupee depreciation was resulting in foreign currency liabilities going up sharply which could lead to stress in repayments. “When the domestic interest rates were rising, firms were arranging credit from overseas with interest rate differential of at least 300 basis points. This helped them keep the credit cost under check but with rupee depreciating by 12 per cent since June 2011, foreign currency liabilities have gone up further,” said a banker. The capital expenditure has come to a complete standstill and fresh investments into projects are also strangulated as high interest rates are eating into the profitability of companies, bankers told the central bank. Bankers have asked RBI to pause for a prolonged period by not raising interest rates.  IBA chief executive officer R Ramakrishnan told reporters after attending the meeting that the capex has come to a complete naught. "The credit growth that is happening only for the pipeline of proposals sanctioned. So the bankers have asked for a pause in interest rates for a prolonged period of time so that credit can pick up.” Bankers also appraised the RBI about how the extra government borrowing of Rs 52,800 crore will impact the treasury income of banks as most banks have extra government bond holding — SLR (statutory liquidity rat­io) holdings. The additional borrowing, which came as a surprise to the government securities market, has hardened bond yields by 10 to 15 basis points. “It will also result in a bit of crowding out as banks and companies will find it difficult to raise money from the debt market,” said a senior banker. Head of the Indian Banks Association MD Mallya said, “Credit growth is a big concern for banks. The rise in NPAs is also another problem. Exposure to select sectors like power was discussed at length.” The year-to-date credit growth is about 2.4 per cent while for the corresponding period last year it was 3.1 per cent. Though the year on year credit growth is a 20 per cent, it is more due to a poor base effect. After the pre-policy meet, RBI also had a special meeting on resource mobilisation. CEOs of all large state-owned banks such as SBI, Bank of Baroda, Canara Bank, Punjab National Bank and private banks such as ICICI Bank and HDFC Bank were among who attended the meeting chaired by RBI governor D Subbarao. Three Deputy Governors Subir Gokarn, K.C.Chakrabarty and H.R.Khan were present in the meeting.

FC 

CEOs of foreign banks told to oversee audit reviews

Tightening regulatory norms, the Reserve Bank asked chief executive officers of all the foreign banks to oversee their audit reviews. The notification comes against the backdrop of Rs 460 crore fraud of at a branch of foreign lender Citibank. " The reviews ( placed before the Audit Committee) may be put up to the local management committee or chief executive officer (foreign bank)," RBI said in a notification addressed to chief executives of all foreign banks operating in India. The notification also said that for all foreign banks operating in India, the CEOs would be responsible for effective oversight of regulatory and statutory compliance as also the audit process and the compliance thereof in respect of all operations in India.

FPJ

Oversee audit reviews: RBI to foreign banks

Tightening regulatory norms, the Reserve Bank of India (RBI) today asked chief executive officers of all the foreign banks to oversee their audit reviews. "The reviews [placed before the Audit Committee] may be put up to the local management committee or chief executive officer [foreign bank]," the RBI said in a notification addressed to chief executives of all foreign banks operating in India. The notification also said that for all foreign banks operating in India, the CEOs would be responsible for effective oversight of regulatory and statutory compliance as also the audit process and the compliance thereof in respect of all operations in India. The RBI said the banks should identify areas or aspects which, as per their assessment, require to be brought up for review. These areas may be incorporated in a policy and approved by the board or local management committee, it added. The notification comes against the backdrop of Rs 460 crore fraud of at a branch of foreign lender Citibank. As many as 34 foreign banks, including global leaders such as HSBC and Deutsche Bank, are operating in the country.

BS

RBI removes restriction on FIIs buying MSI stock

MUMBAI: The Reserve Bank has removed the restriction on FIIs purchasing the shares of Maruti Suzuki India, following the compliance of their prescribed investment limit in the company. "RBI has...notified that the aggregate share holdings in MSI by FIIs under the Portfolio Investment Scheme (PIS) have gone below the prescribed trigger limit. Hence, this company has been removed from the caution list for FII investment and the restrictions placed on the purchase of shares of this company are withdrawn with immediate effect," the apex bank said in a statement.  It, however, did not provide details as to when the prescribed limit was crossed and by how much.  Maruti Suzuki is the country's largest carmaker. RBI monitors the ceilings on FII/NRI/PIO investments in Indian companies on a daily basis. For effective monitoring of foreign investment ceiling limits, RBI has fixed cut-off points that are two percentage points lower than the actual ceiling. The ceiling for overall investment for FIIs is 24 per cent of the paid up capital of the Indian company and 10 per cent for NRIs/PIOs. FIIs held 18.71 per cent stake in MSI as per the June quarter shareholding pattern.  In another statement, RBI notified that FIIs can now purchase equity shares and convertible debentures of Mahindra & Mahindra Financial Services Ltd through primary market and stock exchanges under the Portfolio Investment Scheme.

ET

Moody's downgrade not a downgrade per se: SBI Chairman

According to chairman Pratip Chaudhuri, the downgrade is not a downgrade per se. "It is a downgrade of a small segment of the bank's debt," he clarified adding, "SBI's overall rating is still a notch above the sovereign."

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‘Harness new technology to change face of higher education’

Y.S.P.Thorat

In order to change the current state of higher education in the country, new technology must be harnessed and teaching methods of liberal education must be implemented. This was suggested by eminent speakers at a symposium on ‘The current state of higher education and institution building in India’, hosted by the Foundation for Liberal And Management Education (FLAME) on its Lavale campus in Pune on October 1. The seminar was addressed by Kiran Datar, advisor, National Knowledge Commission; Jayant Narlikar, founder-director and professor emeritus, Inter-University Centre for Astronomy and Astrophysics (IUCAA) and YSP Thorat, former chairman, NABARD & former Executive Director, Reserve Bank of India (RBI). Stressing on the need to integrate new technology with the advent of beneficial technologies, renowned astrophysicist Narlikar said, “There is a problem in today’s education system and it needs a solution, which is technology. Internet can help in expanding a classroom-like situation. In astronomy, for example, Internet star-gazing is a very common phenomenon that is gaining momentum in the recent years.” He further spoke on reservations and said that reservations should be there at entry level and should be limited thereafter. Sharing her views, Datar said, “The arts curriculum at the University of Delhi has not been changed in the past 50 years. Education at university level needs restructuring. The process of re-structuring an educational institute is extensive. It is spoken about extensively, but is never attempted.” She said that new technology must be harnessed to revolutionise higher education in the country. Speaking about the philosophy of education and the role of educators in shaping a student, Thorat asked whether students are encouraged to make their own choices and take responsibility for their choices or are they taught survival lessons only. He also asked the students whether they knew the meaning of life and how would they prioritise the elements of life. The seminar was organised to honour Parag Shah, the founder of FLAME, who recently retired from his post as chairman of the institute. The conference ended with a question and answer session, wherein the speakers tackled questions from students and faculty.

DNA

Expensive Note - The falling rupee is no cause for cheer



Nervous Laughter

The RBI guv and the FM



Managing one of the world’s fastest growing economies just got 6.8 per cent tougher. That’s the quantum of the unexpected fall in the rupee vis-a-vis the dollar in September alone; it’s now flirting with the psychological mark of Rs 50 to a dollar. If the Eurozone crisis and the dismal economic data from the US weren’t bad enough, the weak rupee has just added another dimension of extreme uncertainty to the basket of problems which Indian companies and policymakers are grappling with. Given the volatility in exchange rates, it’s unclear which way the rupee will move. K. Gurumurthy, currency analyst with Calcutta-based Kshitij Consultancy, expects the rupee to reach levels of Rs 50.5 by the end of the year. “In the immediate range, for the next couple of weeks, we will be looking at Rs 48 on the downside and Rs 49.5 on the upside,” says Gurumurthy. In another estimate, FIEO president Ramu S. Deora feels the rupee may go up to Rs 45-46 levels by next month. Truth is, nobody really knows for sure; many see the rupee being yet another victim of global turmoil, which is upsetting other applecarts. Look, for instance, at the falling commodities prices. Even gold, which has recorded the highest jump in prices in one year, is witnessing a slide as there is increased movement towards the “safe haven”, the dollar.

What is complicating matters is the RBI’s reluctance to intervene to prop up the rupee. In a TV interview in New York last week, RBI deputy governor Subir Gokarn clarified, “If we do intervene at all, it would be with a very narrow perspective...of what might be a very volatile market situation, but nothing beyond that.” Whether RBI intervention would boost the rupee is itself in doubt. Consider South Korea, which has seen a sharp fall in its currency value despite the intervention of its central bank.

In India’s case, there is also the potential stress on foreign exchange reserves given that $130 billion or 42 per cent of the country’s external debt commitments have to be met in the short term. “The RBI strategy to intervene only to check any sharp fall is not unrealistic as we are facing a situation where there are more forex obligations to be met,” underlines HDFC Bank chief economist Abheek Barua. Of course, the RBI knows that, for India, a weak dollar means a further ballooning of the import and subsidy bill, fuelling inflation, which it is watching like a hawk. For now, though, softening of global commodity prices (particularly crude oil) is a relief. Prospects seem brighter for IT and the IT services sector (booming exports become more lucrative with a depreciating rupee). Having burnt their fingers post the October 2008 crisis, FIEO president Deora points out that currently most exporters book 50-70 per cent forward hedging. “I am doing 50 per cent forward booking for my company, so I am able to hedge my risks. We don’t lose so much or earn so much during sharp volatility in rupee-dollar,” avers Deora. In any case, the weakness in demand in the US and Europe could negate this advantage in future. Of course, firms having import components in manufacturing—like gems and jewellery sector—are not so fortunate (particularly those who haven’t hedged risks). Another major concern is for Indian companies who borrow overseas. “Indian companies will have to work with an increase in the cost of borrowing,” points out Barua. For now, there’s an uneasy wait—only a positive signal, globally, will prop up the rupee.

The Outlook 

Reserve Bank of India Governor D Subbarao to hold pre-policy meet today

MUMBAI: Reserve Bank of India Governor D Subbarao will hold a customary pre-policy meeting with the chiefs of some of the large commercial banks on Tuesday. During the meeting, the governor will try to gauge bankers' view on liquidity conditions, credit demand and expectations of bankers from the central bank. The RBI is scheduled to announce its half yearly policy on October 25. Besides the bank chiefs, RBI's four deputy governors will also attend the meeting.

ET

Bankers to seek a pause in rate hikes

Mumbai: Bankers will ask for a pause in rate hikes when they meet Reserve Bank of India (RBI) Governor D Subbarao on Tuesday as a part of the pre-policy consultative process. The RBI has increased its key policy rates — repo and reverse repo — 12 times over the past one-and-a-half years to cool down inflation .. The bankers will also discuss issues like credit growth, non-performing assets and the liquidity situation prevailing in the industry. KR Kamath, CMD, Punjab National Bank, said that the meeting would be followed by an interaction with RBI deputy governor Subir Gokarn. Gokarn is likely to interact with the bankers on resource the mobilisation programme. Other bankers expected to attend the meet include P Chaudhury,chairman, State Bank of India; S Raman,CMD, Canara Bank’ Aditya Puri, MD, HDFC Bank’ and MV Nair, CMD, Union Bank of India. Justifying their demand for pause, the chief of a state-owned bank said that commodity prices have started coming down. “Equity market has also started falling. There is more uncertainty in the system. Keeping this in view, the RBI may refrain from further hikes.”

FE

Government aks PSU banks to open more branches in North East

KOLKATA: The government has issued a directive to public sector banks to open branches in every un-banked block in the North East by September next year. The seven sister states - Arunachal Pradesh, Assam, Meghalaya, Manipur, Mizoram, Nagaland and Tripura - are home to 70 unbanked blocks and 55 underbanked districts as banks have generally shied away from this economically backward terrain mired by insurgency. The progress under Reserve Bank of India's (RBI) viability gap funding scheme for opening branches in this region has also been slow.  Development of the North East assumes great importance to the UPA-2 government as the region is a prominent gateway for the country's border trade with Bangladesh and Myanmar. In step with this, the RBI has decided to open offices in all seven northeastern states. It recently opened one in Agartala, Tripura. The government, has written to the chairpersons of public sector banks to prepare individual plans for improving bank penetration in the North East. Two senior banking executives confirmed having received such a letter from the ministry of finance.  Banks had earlier decided to open 26 branches in brickand mortar form and a total of 400 banking outlets in this region. The government feels there should be at least one branch for every village with a population of 5,000. Severe communication bottlenecks in the remote areas of the North East have stifled economic and banking development here over the years.  To surmount these hurdles, the Usha Thorat Committee had advocated IT adoption levels and usage of intermediaries like business correspondents and business facilitators to serve people in these areas. In the last few years, however, banks have grasped the business potential of the region as branches here significantly help improve current and savings bank account ratios. Various banks have opened around 400 branches in the seven states in the last six years. But the government, concerned about the dismal level of bank penetration, wants to do more and reach out to every unbanked block in the next year.

ET

Is RBI out of sync with crop loan insurance?

 

CHENNAI: Is insurance cover for crop loans mandatory? Depends on whom you are talking to. While the Deputy Governor of Reserve Bank of India, K C Chakrabarty, claims that the National Agriculture Insurance Scheme (NAIS) is “not compulsory for all loanee farmers” and that “no person could be forced to take up insurance cover,” the operational modalities of NAIS, put up on the Department of Agriculture and Cooperation website, provides a completely different picture. Saying that “one must read the guidelines of the schemes properly,” Chakrabarty argues: “Just like a person cannot be forced to take up life insurance, a farmer cannot be forced to take up insurance cover.” He was answering a question on the poor penetration of NAIS even among notified crops in Tamil Nadu, at a press conference on Sunday at a sensitisation meet of bankers and farmers here. However, in a document titled ‘National Agriculture Insurance Scheme (NAIS) - Scheme and Modalities’ available on the website of the department, under the head ‘Farmers to be Covered’, it is clearly stated that “all farmers growing notified crops and availing Seasonal Agriculture Operations loan from Financial Institutions, i.e. Loanee Farmers” should be covered under the scheme “on a compulsory basis”. Senior agriculture officials point out that hundreds of government circulars since the scheme took effect in 1999-2000 have reiterated the modalities of NAIS and they have always worked according to it.

IBN Live 

RBI can't monitor all bank branches: Chakrabarty

Chennai: The Reserve Bank of India “cannot be monitoring each and every bank branch” in the country to check if such banks were taking jewels as pledges from farmers. If the branches demand security for loan amount that is less than `1 lakh, aggrieved customers could lodge a complaint with the banking ombudsman and get their grievances sorted, said K.C. Chakrabarty, Deputy Governor of RBI. Addressing reporters after a sensitising meet of bankers and farmers on mobile phone-enabled Kisan Credit Cards, Chakrabarty said that “he had not received any complaints” regarding crop loan scenario in the State. One of the reasons for the high number of jewel loans could be that the “farmers felt their jewels were safer at banks than at home and provided them as pledges,” he said. Prakash Bakshi, Chairman of NABARD, said that farmers sometimes pledged jewels and availed of loans as documentary evidences were necessary for proper crop loans. Adoption of new technology, such as the mobile-enabled Kisan Credit Cards, was one of the ways to help farmers avail of loans without cumbersome processes, he said. 

Expressbuzz

Empowering farmers with mobile-enabled kisan card system

It has been launched on pilot basis to benefit farmers in Villupuram district

A mobile-enabled kisan card system to help the agricultural community engage in cashless transactions, especially with their input providers, was launched here on Sunday to benefit farmers in Villupuram district of Tamil Nadu by Pallavan Grama Bank. K.C. Chakrabarty, Deputy Governor, Reserve Bank of India, who launched the pilot project, said there was nothing new about mobile banking. “But this is for the first time that a structured launch involving the farming community have been done.” This would not only bring down the transaction cost but also the time involved. And it would be a 24X7 facility. This would be user-friendly, paperless and enable doorstep-banking transactions by farmers using their mobile handsets towards purchase of farm inputs. He said this could be extended all over the country any time.  “The only issue is whether the farmers are accustomed to mobile banking. Besides not all the Regional Rural Banks (RRBs) are computerised. We are trying to popularise mobile banking on a large scale.” Dr. Chakrabarty expressed hope that in the next five years if every farmer and every worker were to have a bank account, this mobile banking system would automatically become popular. Earlier he addressed a sensitisation meet for farmers and bankers in this regard.

Chairman of the National Bank for Agriculture and Rural Development (NABARD) Prakash Bakshi said mobile banking using kisan credit card was conceived because it was found that most of the agriculturists used to draw their loans as a lump sum. This involved substantial outgo of interest even when the loan was not fully utilised and, at times, resulted in multiple visits to the bank. The entire benefit of the subsidised loan that had been granted to them was lost.  “Now, farmers can place the order over phone and transfer the purchase price through their mobile handset in no time. They can do multiple transactions as well.” The project, with Rs.44.66 lakh grant assistance from NABARD. Those who took part in the function included T.M. Bhasin, chairman and managing director, Indian Bank, which has extended the technical support for the project, and G. Rangarajan, chairman, Pallavan Grama Bank.

HBL

State-run banks may be allowed to revamp wages

Govt accepts most of the recommendations on HR policies; officers may get variable pay, perks on performance

State-run banks, which lag behind private sector and foreign rivals when it comes to staff compensation and human resource (HR) policies, may soon get the freedom to raise their standards with the government set to speed up the revamp of personnel management at lenders controlled by it. The government has accepted most of the recommendations made by a panel headed by former Bank of Baroda chief A.K. Khandelwal on HR policies at public-sector banks (PSBs) last year, according to two persons familiar with the development. They asked not to be named as the information is yet to be made public. “Once implemented, this will pave way to significant changes in the way employees are treated,” said one of the persons. State-run banks will be allowed to decide their own wage structure based on individual efficiency and the lender’s overall performance, besides officers getting variable pay and performance-based perks. The government set up an advisory group under Khandelwal to prepare a 10-year road map for individual state-run banks, according to the person. This committee, which has been asked to complete the process in a year, will also look at the technology and business process reengineering reforms required for different banks. India has 27 public sector banks, which together account for more than 70% of the country’s banking sector. These banks together employ around 700,000 people. Out of this, more than 100,000 lakh—including 7,736 executives, over 50,000 officers and around 48,000 clerical staff—are scheduled to retire over the next five years. “Over the next three years, there are going to be a lot of retirements in the upper management of PSBs, especially at the level of assistant manger and above,” said Vaibhav Agarwal, vice president, research, at Angel Broking Ltd. “Nearly 50-60% of the people are expected to retire. Due to the difference in pay scales, getting people from competitors in private and foreign banks will be highly expensive for these banks, hence revamping the current system is critical.” Besides Khandelwal, the advisory group consists of HR expert T.V. Rao and former Indian Banks Association (IBA) chief executive H.N. Sinor, said the person cited above. Traditionally, employees in state-run banks are paid less than counterparts in private and foreign banks. The pay scale is currently decided through negotiations between the IBA and unions once in five years. Employees also face delayed promotions and lack of recognition for individual performance, putting state-run banks at a disadvantage in attracting and retaining talent, bankers said. “The introduction of variable pay can definitely help to improve the performance,” said M. Narendra, chairman and managing director of Indian Overseas Bank. “Reforms are essential also to attract and retain executives for certain specialized jobs.” There can be “some autonomy” for state-run banks in manpower management, he said. Late last year, Reserve Bank of India (RBI) governor D. Subbarao said there was “good reason” to revisit the current salary structure in view of the attrition at state-run banks. “The executive compensation in the public sector, as is well known, is lower than that in the private sector,” Subbarao had said. The move comes as new private sector banks are likely to be set up in the next one year. RBI has issued draft norms for this and is currently in the process of accepting feedback. The Khandelwal panel, which submitted its report in the middle of 2010, had recommended that stock options be given to the best-performing 15% of staff apart from better remuneration for the chairman and managing director. Other recommendations include the induction of HR specialists, the appointment of an executive director for HR, 50% direct recruitment of officers against 25% now and compulsory three-year rural service for new recruits. Senior officers should be subject to appraisals on the basis of feedback from colleagues, subordinates and customers, the committee said.  It also proposed Maharatna status for State Bank of India (SBI), and Navaratna and Miniratna tags for the other state-owned banks. State-run companies are accorded the status depending on their size and are allowed a greater degree of financial autonomy than those without the ratna tag. Some time last year, the government had appointed another committee under joint secretary financial services, Alok Nigam, to study the Khandelwal panel report.
Mint

State UCBs' advances grow faster than deposits in FY11

Urban cooperative banks in Gujarat lent money to 563,000 people. Advances by the urban cooperative banks (UCBs) in Gujarat have outperformed deposits during the financial year ended March 31, 2011. The advances grew by over 11 per cent over previous year, while deposits rose by close to 4.5 per cent on year-on-year basis. As per the figures provided by the Gujarat Urban Cooperative Banks Federation (GUCBF), the advances given by the state UCBs stood at Rs 12,056 crore, up 11.7 per cent from Rs 10,645 crore registered in March 2010, while deposits rose by about 4.5 per cent from Rs 20,443 crore in March 2010 to Rs 21,404 crore in March, 2011. At a recently held annual general meeting of GUCBF, Jyotindra Mehta, the chairman of the federation informed that UCBs in Gujarat advanced money to about 563,000 people during the financial year 2010-11. Speaking about the future growth of urban cooperative banking system in India, Mehta said, "We are proud that Reserve Bank of India (RBI), under its Malegam panel, has opened the doors for new cooperative banks in India." The federation has decided to celebrate the year, 2011-12 as the International Cooperation Year, in line with the United Nation's decision to celebrate the year to recognise the importance of the small cooperative banks and credit unions. "Some time back when the global economy was struggling through a slowdown and many large banks and financial institutions collapsed. At that time credit unions and cooperative banks in Europe and the US stood firm against all odds. It is a pride for us that UN has decided to celebrate the year of 2011-12 as the year of International Cooperation Year," added Mehta at the 36th AGM held in Ahmedabad recently. Currently, the state has 249 UCBs operational, while experts anticipate about 40-50 new UCBs to get operational after the newly issued norms recommended by the Malegam Committee in due course of time. The committee, which was appointed by the RBI on licensing of new UCBs under the chairmanship of Y H Malegam recommended that, 'the existing well managed cooperative credit societies, which would meet financial criteria like profits, capital adequacy and NPAs' proportion should be given priority for granting licenses as UCBs mainly in the unbanked or inadequately banked districts of the country.”

BS

Bank falls prey to Nigerian's fraud

...the Office of the Banking Ombudsman for Kerala, the Union Territory of Lakshadweep and Mahe, has now reported a case of a bank letting its guard down to allow a fraudster from Nigeria to play havoc with a customer account.....

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Forex hedging

Regarding the article “Policy on ECBs needs to change” (Business Line, September 27), an important issue is the impact of exchange rate movements on foreign currency borrowing. The recent decline in the rupee has increased the outgo on unhedged foreign currency borrowings. It would also be correct to ensure that the corporates have a dynamic risk management in place and do not leave it to the banks to advise them. Further, proper hedging techniques would need to be invoked by the corporates. The RBI should also insist on some form of disclosure of their compliance by corporates, as to their hedging / risk management techniques. However, if the foreign exchange borrowing is adequately hedged, the cost differential with the local currency borrowing will not be advantageous. The RBI would need to take a call on exposing the corporates, and consequently the country, to the Damocles sword of exchange rate fluctuations.

Srinivas (HBL)

Boston Consulting Group's take on Indian banks

...In an atypical communication to all public sector banks, the Finance Ministry last month circulated a Boston Consulting Group (BCG) report on Being Five Star in Productivity: Roadmap to Excellence in Indian Banking. .....

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Unique identity crisis

...RBI’s reluctance to fully accept the Aadhaar numbers for the KYC norms is surprising, given that more than a dozen leading banks in the country are partnering with UIDAI to deliver Aadhaar numbers to the citizens, and also when the Aadhaar numbers have been accepted by the insurance companies and Sebi for meeting KYC norms.....

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Pilot study on mobile-enabled Kisan credit card launched

Technology to the poor

Dr K.C. Chakrabarty, Deputy Governor, RBI, with Mr T.M. Bhasin, CMD, Indian Bank, and Mr Prakash Bakshi (right), Chairman, Nabard, at a press conference in Chennai on Sunday

Chennai : Pallavan Grama Bank, Regional Rural Bank (RRB) sponsored by Indian Bank, has launched a pilot project on mobile-enabled Kisan Credit Card aimed at the farming community. This pilot project is funded by Nabard (National Bank for Agriculture and Rural Development). This project with a Rs 44.66 lakh grant assistance from Nabard taken up in Villupuram district, Tamil Nadu, aims at facilitating a paperless, doorstep banking transactions by farmers, who can use their mobile phones for various services such as purchase of farm inputs, cash withdrawal and deposit, said Mr T.M. Bhasin, Chairman and Managing Director of Indian Bank. He added that so far 400 cards have been given out to farmers, and in the next two to three months the bank hopes to issue a total of 2,000 cards. According to Mr Prakash Bakshi, Chairman, Nabard, the objective is to provide paperless and at the same time reliable, secure and any-time banking facilities to farmers. “This will save a lot of time and labour for banks and farmers too,” he said.  The bank organised today a ‘sensitisation workshop' for bankers and farmers on the use of the card. Delivering his special address to the audience here, Dr K.C. Chakrabarty, Deputy Governor, Reserve Bank of India, said cashless transactions would lead to increased efficiency (among bankers). The key focus of this project is to reduce transaction costs as it was observed that farmers spend a lot of money and time on every transaction made at a bank.  “Taking this (mobile banking) as an opportunity, we are asking farmers to utilise this service. Every farmer must use the technology and come under the banking fold for doing transaction so that costs go down and there is efficiency in banking system too,” he said. Responding to a question on when the national rollout of the project would take place, he said, “We reasonably feel, in the next five years, we will be able to link every farmer with a bank account.”  Mr G. Rangarajan, Chairman of Pallavan Grama Bank, introduced the Service Provider of the project, PayMate India, and explained the project concept.

HBL

JK Bank, RBI organize financial literacy workshop

Pulwama, Oct 2: J&K Bank in collaboration with the Reserve Bank of India organized a financial literacy workshop yesterday at Government Boys Secondary School, Parigam, Pulwama.  The workshop was conducted under the Aegis of Financial Literacy and Credit Counselling Centre, Lead Bank Pulwama with active support from J&K Bank Branch, Wanpora, the bank in a statement said.Scores of students from three schools apart from village elders participated in the programme. The lead District Managers of Pulwama and Shopian, AGM Reserve Bank of India, Branch Head, JKB Wanpora and Director RSETI, Pulwama were present in the workshop along with other officials. The Workshop was specially focused on students who were made aware about general banking, benefits of having saving bank accounts and various credit facilities available through banks. Lead District Manager, G R Kumar spoke at length about banking facilities and credit products the bank offers. G. N. Khan, Branch Head Wanpora said the J&K Bank is the Bank of the people of J&K and its employees are servants of the public. He implored the youth to strive for making at least their village self-sufficient and assured full cooperation of his branch in this endeavor. M Saleem Wani, LDM Shopian asked the students to open no frill accounts with their nearest banks and cultivate saving habits early in life. Assistant General Manager, RBI, R K Meena held an interactive session with the students and made them aware about banking and the functions of RBI.  He educated the participants about fake notes, fictitious emails, ATM frauds and unscrupulous NBFCs. He held a financial literacy quiz programme at the end of his session which was participated by the students. Prizes were given to twenty successful participants in the said quiz. The principal of the Institution thanked the J&K Bank, RBI and JKB Wanpora for conducting the programme in her school and requested for continuing such programs in future as well.

The Greater Kashmir

Retirement expo 2011 to be held from Mumbai on Oct 7

Mumbai, Oct 2 (PTI) A retirement expo will be held in the city from October 7 and will be inaugurated by Maharashtra's Home Minister R.R.Patil. The three-day Retirement Expo 2011 will conclude on October 9 with Subir Gokarn, Deputy Governor, Reserve Bank of India and Sachin Ahir, Maharashtra Minister of Social Justice and Empowerment, presiding over the celebrations related to World Elders Day.

RBI has already emphasised the importance of retirement years by inducting its retiring employees into Dignity Foundation productive ageing schemes, a press statement said. Senior citizens will also experience first hand the joy of their ultimate unretirement status in this three day exhibition where they will be able to see the range of newly introduced products and services customised for them, and be literally wooed for the first time in India by Banks, insurance companies, pharma, fitness centres, spas, senior citizens housing societies, assisted living device manufacturers, health professionals and multi-professional gurus of active living, the release said. Over 25,000 senior citizens had trooped in to see what is in store for them at similar expo's that was held earlier in Chennai, Bengaluru and Pune, and were impressed over the opportunities showcased to them. Population ageing is one of the most important global trends of the 21st century. Senior citizens have started receiving attention from the business, and policy makers too. The 21st century is christened the century of elderly persons, while the 22nd will be called the century of the "ageing of the aged". Ageing of society is unprecedented in the history of the world. In all the developed countries people 60 plus has already crossed the seven per cent mark set by the United Nations to be considered ageing nations. India has crossed this percentage and is an aging nation. During 2006-2050, while the overall population rises by 40 per cent, those over 60 years will increase by 270 per cent and the 80 plus will increase by 500 per cent, the release said.

IBN Live

RBI mulls more interactive Internet presence

The Reserve Bank is planning to make its Web interface more interactive with a presence on social networking sites like Twitter, blogs and other online discussion forums. The RBI is conducting a Web survey where it is asking the visitors to its website whether they would like features like discussion forum, blog, live chat, Twitter (for information dissemination) and opinion polls on the site. A number of organisations globally, including regulatory organisations and the government departments, have been increasingly using features like Twitter and other online platforms that help in fast dissemination of information and collating the views of the public. Even the US President Barack Obama and his official residence and workplace, the White House, have a presence on Twitter and various other online platforms such as blogs. In India also, some ministries and a many corporates have established a presence on Twitter, while a number of public figures are active members of this micro-blogging site. The RBI is also seeking to know from the survey that whether the users want interactive charts for various interest rates, currency conversion tools and online calculating tools for EMIs and FD returns. The central bank has also sought views on having certain collaboration tools on its website, such as blogs, forums, bulletin boards, and wikis (which allows the internet users to provide their own information on the website). The survey, which began last month, has also sought views on the existing sections of the RBI website and whether any improvements were required there.

DH

World Bank, IMF returnees viz., Bimal Jalan, Vijay Kelkar, YV Reddy, etc., secure key government posts

"Both my stints at World Bank and IMF helped me understand Indian economy from a global perspective," former RBI Governor Reddy said. Reddy first worked as assistant and adviser to Indian ED in World Bank, 30 years ago, and then had another stint as IMF ED between 2002 and 2005....

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Retired Bangalore professor shows true Gandhigiri, collects his paraphernalia

It’s that time of the year again when Mahatma Gandhi’s photo adorns the dais; political leaders garland his statues and speak about the teachings of the Father of the Nation but hardly follow them. But this 85-year-old retired professor of Botany remembers Gandhiji every day. For 40 years, Prof Venkatesh S Yelvigi has collected Gandhiji’s paraphernalia, which is like a world record in itself. “As a college student, I witnessed the freedom movement. It was awe-inspiring to look at the leaders turn the country around. After retirement, I needed something to keep me occupied. That’s when I thought of this collection,” said Yelvigi. With a collection of stamps from 130 countries and coins bearing Bapu’s image, Yelvigi’s passion for Gandhiji and his work is immense. “I also have a collection of postal cancellations. The seals on them are a collection too,” he said. Showing two Rs10 notes, which appeared identical, he said: “The first note bears Bapu’s name as MK Gandhi, but the second one has Mahatma Gandhi printed on it. When I saw it, years ago, I wrote to the RBI Governor and requested him to change the name to Mahatma Gandhi. It was done.” Yelavigi has Rs 2, Rs 5 and Rs10 notes with dates of importance pertaining to the life of Gandhiji. “Every note bears a number series. From his date of birth October 2, 1869, to his death, I have the entire series. In 2000, I went to Philadelphia, where I was given an opportunity to exhibit my work. All I said was I have brought Gandhi, and they let me participate,” he said. His collection is so versatile that one would only dream of such meticulous work. Showing a piece of cloth-like currency, he explained, “While the freedom struggle was on, a portion of our salary was given to us as Hundi notes. These notes could be exchanged for Khadi clothes at Khadi Bhandars. I know these are rare, that’s why, I have kept them. Every month, I dust and air them. I want to keep them tidy as a mark of respect to Bapu,” he said.  His collection of postal cancellations tell another story. “Some years ago, I had sent my collection to the World Philately Exhibition in Andaman & Nicobar. As an honour to the Mahatma, I made a special series of postal cancellations, which show him from his home to school to his Dandi March and his death,” he said. “None can be him. No one,” he added.

DNA

Govt to infuse Rs 2 lakh cr into banks by 2020

The government plans a whopping Rs 2 lakh crore capital infusion into the state-owned banks spread over 10 years, to help them meet fund requirement and comply with the Basel-III capital adequacy norms. "[Capital infusion is] estimated at Rs 2 lakh crore by 2020 in public sector banks," D K Mittal, Secretary Department of Financial Services told PTI. The government, sources said, will be looking at various instruments to pump more capital into the state-owned banks. "One of the instruments being looked into is non-voting shares," an official said, adding the efforts would help the banks to meet Basel III requirements. Non-voting shareholders get better returns than normal shareholders on their investment but have no voting rights. Implementation of the Basel III norms is scheduled to commence from January 1, 2013, and has to be completed by January 1, 2019. The official further said the Government would like to keep a buffer in its shareholding of banks at around 58% as it would provide it "enough legroom" to maintain a controlling stake even it does not participate in the capital raising exercise by any bank. The government is required to keep a minimum of 51% equity in public sector banks. Basel III is the new international regulatory framework designed to correct the deficiencies in regulation that led to the global financial crisis of 2008. It seeks higher capital adequacy ratio to meet any financial exigency. The RBI is examining the Basel III regulations and would issue guidelines to the extent applicable for banks operating in India in due course of time. There are 26 public sector banks, including SBI and its subsidiaries.

BS

Federal Bank's financial inclusion initiatives achieves another milestone

The financial inclusion initiatives of Federal Bank have achieved positive results in the State, with the implementation of the Information Communication Technology/Business Correspondent model in 12 villages allotted to the bank one year before the schedule. The bank was allotted 12 villages with a population over 2,000 in Kerala to provide banking channel by March, 2012, and the bank achieved this fete by March 17, 2011, itself. The bank has implemented ICT model in Puthuppally village in Alappuzha in a record time of 14 days which was allotted in August 2011.

Micro ATMs

The bank has christened its ICT model Financial Inclusion product as FedJyothi, a smart-card based solution, in which customer transactions are facilitated using Hand Held Terminals or Micro ATMs by business correspondent agents. FedJyothi cards issued to each customer stores information on the latest balance, last few transactions and customer biometric and demographic information. Apart from the allotted villages, FedJyothi implementation is in full swing in other 48 underbanked villages self allotted by the bank in the State. As on date, the bank has engaged 120 business correspondents/facilitators and issued more than 5,000 FedJyothi Smart Cards and it is targeting 50,000 smart card customers by March 2012, senior officials of the bank, said. Federal Bank became the first private sector bank in the State to open a financial Inclusion ‘Grama Jeevan' branch with ATM facility in the unbanked villages for achieving financial inclusion. The bank's ‘Grama Jeevan' branch at Thuruthy Vengoor West in Ernakulam district is the first of this kind which was appreciated by the RBI Governor, Dr D. Subbarao, during his visit to Vengoor West village. Grama Jeevan branches are full fledged bank branches that offer all kinds of banking facilities to the marginalised customers. Federal Bank reaches out to weaker sections of the society by providing various products like no-frill accounts, educational loans, DRI loans, agricultural loans and loans to Self-Help Groups/Kudumbasree, through its brick and mortar branches.

FLCC centres

Federal Bank is the first bank in the State to set up Financial Literacy and Credit Counselling (FLCC) centres and only bank having four FLCCs in the State. Through these Federal Ashwas FLCC centres across the State, customers are educated on responsible borrowing, proactive and early savings, and alsdo offers debt counselling to individuals . The bank has been conducting various financial literacy classes for higher secondary students to educate them on banking and various financial services; so far 15,000 students have benefitted from this programme, the officials said.

HBL

Ajai Kumar appointed as CMD of Corp Bank

Corporation Bank has appointed Ajai Kumar as the new Chairman & Managing Director of the bank. Kumar was earlier the Executive Director of UCO Bank since 2009. A Law Graduate and a Post Graduate in Physics from University of Allahabad, he is a certified associate of Indian Institute of Bankers ( CAIIB) and has a distinguished career in banking industry since 1973 when he joined Bank of Baroda as a Direct Officer. Basically an operations man, his career at Bank of Baroda was spent in the field, where he could gauge the market pulse and take pro- active, result- oriented measures to garner market share. A man with a penchant for independent thinking, he has played a pivotal role in strengthening and consolidating the retail business of Bank of Baroda. His hands- on and practice- driven experience facilitated balanced decision making with insight into all aspects. At Bank of Baroda, Kumar was responsible for 100% automation of the branches and migration to the Core Banking Solution. His paper " Knowledge Management - A Perspective for Public Sector Banks" was widely appreciated at the BECON 2003. He was also a Member of the Board of Directors at Indo Zambia Bank Ltd., and later National Payment Corporation of India.

FPJ

RBI to implement risk mitigation mechanism soon

The Reserve Bank of India (RBI) said it will implement risk mitigation mechanisms from November 1 as part of plans to protect banks from adverse movements in markets. This comes as a follow up to its September 30 deadline to banks for meeting stricter capital market exposure norms that were imposed after the Sensex crossed the 20,000-mark in December 2007. Under the new arrangement, which will be reviewed after a year, only those banks would be permitted to issue irrevocable payment commitments (IPCs) whose agreement with clients allow them right over securities to be received as payout in any settlement. “The maximum risk to the custodian banks issuing IPCs would be reckoned at 50 per cent on the assumption of downward price movement of the equities bought by FIIs/mutual funds on the two successive days from the trade date of 20 per cent each with an additional margin of 10 per cent for further downward movement,” RBI said in a notification. IPCs are like non-fund based credit facility for purchase of shares. “...it has been decided to put in place adequate risk mitigation mechanism to protect the banks from the adverse movements in the equity prices and the possibility of default by domestic mutual funds/FIIs, while ensuring that there is no undue disruption in the functioning of the capital market in the country,” it added. In December 2007, RBI had widened the definition of stock market exposure to include banks and all banks who exceeded the exposure limits after applying the wider definition, were required to bring down their exposure within six months from June 2008. However, that deadline was subsequently extended many times. The apex bank had justified imposing the new guidelines citing that mutual funds should normally meet their repurchase/redemption commitments from their own resources and resort to borrowing only to meet temporary liquidity needs and any bank lending should be only to meet temporary liquidity needs. Capital market exposure include investments in convertible bonds, debentures, and all exposure to venture capital funds. The current norms for investments by banks stipulate that no banks will have overall capital market exposure exceeding 40 per cent of the lender’s networth as on March 31 of the previous financial year. RBI latest notification added that the potential risk on the day after the trade date would be considered as 50 per cent and treated as capital market exposure in case the margin payment is not made.

DH

RBI's new guidelines will hurt us: MFI sector

Hyderabad : The cash-starved microfinance sector will be severely hit by if the new draft guidelines issued by the Reserve Bank of India on securitisation of loan portfolios are implemented, according to the microfinance industry. Last week, the RBI released a revised draft of the securitisation guidelines.  In the case of microfinance loans, the minimum holding period of the loan before securitisation will be six months from the due date of the first installment. Securitisation is the process of converting existing assets, or future cash flows, into marketable securities.  The microfinance industry has been in the practice of assigning repayments from borrowers to investors in securities. Currently, RBI allows securitisation of loans held by the NBFCS after three months from the first installment. A typical MFI loan spreads across one year, with a monthly or weekly repayment cycle. The MFIN board that is meeting on October 10 will discuss the impact of the new guidelines and will give representation to the RBI to reconsider its decision, said Vijay (rpt) Vijay Mahajan, the President of the Microfinance Institutions Network (MFIN), a self-regulating body of MFIs. "From the point of view of risk management, it definitely is ok. However, the RBI has to balance between some additional liquidity facilities for MFIs at this stage. As long as the quality of the asset is good, three months or six months does not make that much of difference," Mahajan said. "We will be requesting the RBI, for the transitional period, till the banking sector lending to MFIs is restored to normalcy -- at least one to two years -- they should consider three months' tenure for a year-long loan and six months for a longer tenure," sad Padmaja Reddy, the promoter of Spandana Sphoorty Financial. In this regard, Reddy pointed out that the microfinance sector has been feeling the heat from banks and other financial institutions after the Andhra Pradesh government introduced a Microfinance Act regulating the sector last year. Andhra Pradesh accounted for almost 30 per cent of the microfinance lending in the country before the new Microfinance Act was implemented in the state.

FE

MFI’s want RBI to reconsider securitisation guidelines

...“We will be requesting the RBI, for the transitional period, till the banking sector lending to MFIs is restored to normalcy — at least one to two years — they should consider three months’ tenure for a year-long loan and six months for a longer tenure,”....

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Monetary policy not the answer to inflation

.........The RBI has raised the repo rate repeatedly since the onset of the current inflation. If there is an episode giving us reason to believe that monetary policy is powerless in the face of a supply-driven inflation “it is this, it is this, it is this”. We need to get real about economics. Public institutions responsible for policy are expected to remain beyond cognitive capture.

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Monetary Policy: Drama and Realities - THROUGH THE PRISM DR. N. A. MUJUMDAR

The monetary policy measures, announced by Dr. Subbarao, Governor, Reserve Bank of India (RBI) on 16th September had an element of drama. First, Dr. Kaushik Basu, Chief Economic Advisor, had openly expressed his view that there should be a " pause" in the process of monetary tightening. His opposition to hike in interest rates was based on the recent experience of Turkey. Despite high inflation Turkey began lowering interest rates from the middle of last year. What happened was interesting. Turkey's growth rate rose comparable to China's growth rate. Inflation far from rising eclined from 10 per cent in April 2010 to around 5 per cent. The counter argument is that Turkey lowered interest rates not so much with the objective of controlling inflation as to counter massive capital inflows. Dr. Basu also cited the empirical experience of South Korea during the period 1956 to the 1970s when high growth co- existed with high inflation. Dr. Basu needs to be reminded that such random examples of empirical experiences have hardly any relevance for contemporary policy making India. As the World Bank's Growth Report has emphasized. " There is no generic formula for growth.”

Each country has specific characteristics and historical experiences that must be reflected in its growth strategy". This is equally relevant for controlling inflation. Inflation in India has some distinct characteristics, as we will presently explain. The point is that such open disagreement of the Ministry of Finance was an embarrassment for RBI. The second dimension of the dramatic element was the reaction of the private corporate sector, which has all along been pampered by Governments and RBI. In the September policy measures, all that happened was a hike in the policy repo rate that is the rate of which RBI lends to banks by 25 basis points from 8 per cent to 8.25 per cent. The corporate sector's argument is that this is the 12th rate hike in the last 18 months and such aggressive monetary tightening will hurt the growth of the economy. Dr. Subbarao is dubbed as " a man killing India's growth". An objective analysis would show that all this is exaggerated and there is little substance in it. For instance, even a 12 times hike in interest rate translates in only a 3 per cent increase stubbornly high inflation even a much higher increase is called for. If we look at the experience of the 1980s, we realize that such increases were implemented without much fuss.

What is wrong is perhaps the so- called " baby steps". It would have been more appropriate to have achieved this objective by bigger steps. The appetite of the corporate sector for cheaper loans is insatiable. Even if this 3 per cent increase in the repo rate translates itself into say 1 per cent increase in bank's lending rate it would not hurt corporate sector. Because interest cost forms only 5 per cent of total costs in any industry. All the sound and fury made by the corporate sector has thus no concrete basis. The critical line in Dr. Subbarao's statement is " Meanwhile, inflation remains high, generalized and much above the comfort zone of the Reserve Bank". Inflation as measured by head- line year- onyear Wholesale Price Index ( WPI) rose from 9.2 per cent in July to 9.8 per cent in August 2011. Food inflation which hurts the middle class and the poor most is at near- double digit levels. What is more, this sort of inflation persists despite comfortable stokes of rice and wheat, and normal monsoons. Advance estimates for the 2011- 12 Kharif season indicate a record production of rice, oilseeds, and cotton. Perhaps, this inflation is being " driven by structural demand- supply imbalances and cannot be dismissed as a temporary phenomenon". Dr. I. G. Patel, former Governor RBI, used to repeatedly emphasise that our blessed country is not exempt from basic monetary laws. Money supply ( M3) growth at 18.7 per cent in August 2011 was higher than the projected growth of 15.5 per cent for the year. Similarly nonfood credit growth at 20.1 per cent in August 2011 was above the indicative projection of 18 per cent for the year. The marginal increase of 25 basis points in the repo rate announced by Dr. Subbarao is the minimum he could have done. All the sound and fury generated by the measure does not signify much. The hike in the repo rate is symbolic and not substantive. Banks are unlikely to transmit the rise to borrowers. Perhaps some marginal rise in home loans or loans to real estate is possible. The corporate sector will not suffer. The question of killing growth Risks to India's robust growth may arise from other sources.

Dr. Subbarao points out " Although India's exports have performed extremely well in the recent period, this trend is unlikely to be sustained in the face of weakening global demand". The faltering US recovery and the Euro crisis endangered by the debt problems of Greece and other countries would affect India's exports. Fortunately, India has already diversified its exports and areas other than the U. S. and Europe today account for a substantial proportion of India's total exports. This should save us from a serious dent in our exports. RBI is no doubt fighting a brave battle against the stubborn inflation. But this action needs to be reinforced by measures in the real sectors. First, we must seek to bring down the open market prices of rice and wheat. Fortunately, we have enough stocks of rice and wheat with the Food Corporation of India ( FCI). But unfortunately we are treating FCI as a glorified go- down keeper. We should activate FCI to intervene in the market by unloading its stocks with a view to bringing down open market prices of rice and wheat. FCI should become a market maker. Similarly, recent experience has shown that prices of other food items like vegetables and fruits have contributed significantly to rise in the prices of essential commodities. Here the problem is that the profits of intermediaries are very high, with the share of the farmer in the consumer rupee continuing to remain low. Streamlining the marketing arrangements of such commodities should receive immediate attention. We seem to be waiting for Wall Marts to solve the problem of linking the farmer to the consumer, eliminating unnecessary intermediaries. But we have our own model of milk marketing in the Anand dairy. If we are able to replicate such marketing models in respect of other essential commodities, we could not only succeed in controlling food inflation but also improve levels of farm incomes. We should learn to contend with these more mundane realities.

FPJ

Manna for monetary policy

By using currency depreciation as a substitute for an interest rate hike, RBI has made the inflation-growth trade-off much steeper

There has been a rather muted reaction from the Reserve Bank of India (RBI) to the recent bout of rupee depreciation. Considering that this is the sharpest and steepest “adjustment” in the exchange rate—11% in two months—since the fabled “hop, skip and jump” in June 1991, it deserves greater attention and analysis. Prima facie, the sharp depreciation is a market adjustment warranted by the fact that the nominal exchange rate hadn’t depreciated enough in line with the inflation differential. This made the rupee overvalued in real effective exchange rate (REER) terms. From April 2009 to July 2011, the six currency REER has increased from 96 to 119, which is about a 25% appreciation. Even on a wider basket of 36 currencies, which includes countries with higher inflation rates, REER has increased from 91 to 104, about 15%. From an analytical perspective, the 11% depreciation in the rupee brings to fore the link between exchange rates and interest rates in the Indian macroeconomic dynamics. This aspect had gone on the back burner because of the rock-like stability of the exchange rate in the last six months or so despite an adverse environment. Also, with a mountain of foreign exchange reserves there is no need for any alarmist reaction. However, given global fragility and the economy’s domestic vulnerability, the interplay of these interest rate changes and exchange rate movements will go a long way in determining developments in the nominal and real sides of the economy—inflation and real output—the two key variables that RBI is struggling to manage. Two obvious implications of the rupee depreciation will be foreign institutional investment (FII) outflows and a knock on impact on inflation. The process of containing FII outflows will involve tighter credit conditions and an interest rate spike. As far as inflation is concerned, there is bound to be a knock-on impact of the weaker rupee especially if oil prices do not fall. With rupee-denominated oil inflation leading the Wholesale Price Index (WPI), it is axiomatic that a weaker rupee will boost rupee oil inflation, which in turn will push up the WPI. Not only is imported inflation contributing almost one-third of the overall rate of inflation, incrementally the relationship is much stronger. For instance, in May 2008 when the rupee depreciated 5%, the WPI rose by 4% over the next three months. Given the fact that RBI is fighting a losing battle against inflation, which it believes is commodity price-driven due to a spurt in global commodity prices, why did it allow the rupee to slide so sharply thereby jeopardizing its own anti-inflation strategy? This is a bit curious.

The last time around when the rupee came under pressure, RBI sold more than $40 billion to prevent the rupee from depreciating. In fact, in less than four months, RBI pushed $37 billion into the system to prevent the rupee from depreciating. It hasn’t done so at this point of time as it has disruptive implications for liquidity management. By intervening and drawing down its reserves, it withdraws an equal amount of rupees out of the system causing an increase in the cash deficit. It would then require aggressive open market operations to restore the liquidity balance. More importantly, the role of exchange rate goes much beyond the pass-through into domestic prices. In the present phase of the economy, exchange rate variability—in itself and vis-a-vis interest rate variability—needs to be understood for its contractionary implications. Theoretically, the received wisdom is that exchange rates and interest rates exhibit a negative correlation as depreciations are expansionary. However, India’s import basket is not easily substitutable and has a robust demand, while its exports are easily substitutable and have less robust demand. As such, in an economy with a higher and inelastic import demand and a lower and elastic export demand, the overall effect of currency depreciation tends to be contractionary, even as it may have a positive effect on the current account deficit. The effect of the recent rupee depreciation is bound to be contractionary especially if global commodity prices do not reduce proportionately. With a bourgeoning current account deficit, rupee weakening has become a part of the process by which credit is squeezed further. A drain in external funds almost always produces a credit squeeze and interest rate spike.  The interesting point is that RBI appears to have found the depreciation coming at a convenient time and hence has watched the rupee’s slide with interest and little else. It could well be using the slide as a substitute for another interest rate hike. If this indeed is so, the million dollar question on everyone’s mind about further monetary tightening may just have been answered. The only downside to this strategy is that the inflation-growth trade-off becomes much steeper.

Mint