PSU bank CEOs seek elbow room

...The finance ministry, which is now looking into the issue, however, could soon relax the overseas travel norms, a senior government official who did not wish to be identified told Hindustan Times. The government and the Indian Banks Association (IBA) have also held discussions on the issue.....

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Federal Bank to beef up SME, agri lending

At a time when corporate credit growth appears to be slowing, banks like Kerala-based Federal Bank are discovering immense lending opportunities in SME and agriculture sector, especially in providing credit to large-scale farmers...............

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MFIN-NACER study unearths agents’ role in microfinance, but does not find these middlemen in Chennai

....As the Ministry of Finance and the RBI (Reserve Bank of India) are trying to solve the Indian microfinance regulatory puzzle, there is further evidence on the use of agents in Indian microfinance. The question to be asked then is whether and how the proposed Microfinance Bill will prevent use of such middlemen in the future. .............

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Why RBI should, and likely will, raise rates

It’s that time again. Inflation continues to remain dangerously close to double digits. Wage growth remains buoyant. Input prices increased across the board in September, and inflationary expectations remain elevated. Yet, public pressure on the Reserve Bank of India (RBI) to pause gets stronger and stronger! Proponents of a pause would look at last week’s data and conclude the momentum of growth and inflation are slowing. They would add central banks around the world have moved to a pausing, even an easing, mode. And, this should be reason enough for RBI to call it a day.  Given the pressure on RBI from the industry and the market, this is undoubtedly a close call. But, while a pause cannot be ruled out, we expect RBI to continue on a path of monetary tightening and raise policy rates by 25 basis points at the next review. And, they would be perfectly justified in doing so. Here’s why.

First of course, the economy is slowing. But that’s not the relevant question. The question is whether or not it is slowing enough to dent pricing power across the board. There is no evidence to suggest we have reached that point yet. Yes, the momentum of core inflation slowed in September. But one swallow does not a summer make. Several times last year, the momentum of core slowed one month, only to re-accelerate sharply the next. What was ominous, and largely missed, in the September inflation print is input prices rose across the board and are likely to pressure core inflation in time to come. Until the momentum of core slows on a sustained basis, it would be premature to conclude the economy has slowed enough. Second, much is made of the global uncertainty. Yet, recent data flow has surprised consistently on the upside, with Euro area industrial production, for example, stronger than expected for a second month. As a result, commodity and crude prices are at their highest levels in a month. Third, there are increasing fears that fiscal policy would not be as tight as once thought. The looser the fiscal conditions are, the higher the commodity prices are, the tighter the monetary conditions would have to be. And, here’s the irony: The sharp currency depreciation over the last two months has meant that despite the rising policy rates, overall monetary conditions have actually loosened over the last month! The weaker rupee has increased the domestic cost of tradables and thereby, undercut some of the impact of previous rate increases. The implication is policy rates need to do more of the heavy lifting.  For all these reasons, we expect (and hope) the central bank would ignore the rising chorus and continue raising rates. To pause now would be to undo much of what was courageously done in the recent past. 

BS

MPs want auction of bank licences

A senior banker said, banking licences cannot be auctioned as unlike telecom, banks play a different role and deal with public money

Mumbai: Reserve Bank of India (RBI) Governor D Subbarao on Monday met the Parliamentary standing committee on finance to discuss the issuance of new banking licences to companies, a person familiar with the development said. According to the person, the members of Parliament suggested auctions of new banking licences to the aspirants, citing the controversies in the allocation of second generation airwaves or 2G. Mint could not immediately reach any member of the standing committee. A senior banker said, banking licences cannot be auctioned as unlike telecom, banks play a different role and deal with public money. In August, RBI had released its draft licensing norms for a new set of private banks and said firms that have 10% or more exposure to real estate and brokerage businesses in terms of income or assets, will not eligible to set up a bank. Also, a corporation or an NBFC will need a ”diversified ownership, sound credentials and integrity”, and a 10-year track record, the RBI said. Releasing the draft, the RBI had said it will give licence on a ”very selective basis” and ”it may not be possible for RBI to issue licences to all the applicants meeting the eligibility criteria”.

Mint

New products to revive interest rate futures

The joint technical committee, comprising officials from Sebi and the Reserve Bank of India (RBI), are deliberating on the specifications of the instrument and a decision is expected in the next two-three months. More important, the new contracts will be allowed to be settled in cash, which has been a long-standing demand of industry participants.....

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India's economy 'is slowing sharply': Moody's

India's slowing economic growth is a "cause for worry", research group Moody's Analytics said Monday, highlighting the failure of aggressive interest rate hikes to curb near double-digit inflation.............

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Slowdown fear grips industry as RBI policy meeting looms

Mumbai: A growing uneasiness is palpable among Indian companies, individual borrowers and even commercial lenders as the central bank may increase its policy rates, the 13th such hike since March 2010, to rein in a persistently high inflation in the world’s second-fastest growing major economy........

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Ind Min against notification of some clauses of FDI policy

New Delhi: Taking note of the objections raised by the SMEs, the industry ministry has asked its finance counterpart to refrain RBI from notifying certain clauses of the FDI policy relating to financial instruments. In a letter to Department of Economic Affairs Secretary R Gopalan, the DIPP has said that RBI need not notify "the provisions" related with definition of instruments that would qualify to be foreign direct investment (FDI) or external commercial borrowing (ECB). The Department of Industrial Policy and Promotion (DIPP) is an arm of industry ministry which deals with FDI related issues. The clause, on which objections were raised by the SME sector, was inserted in the recently issued consolidated circular on FDI policy on September 30. According to the clause "only equity shares, fully, convertible and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares, with no in-built options of any type, would qualify as eligible instruments for FDI. "Equity instruments issued/transferred to non-residents having in-built options or supported by options sold by third parties would lose their equity character and such instruments would have to comply with the extant ECB guidelines." The DIPP, the letter said, had received number of objections from the SME sector on the clause relating to FDI and ECB classification. The issue, it added, would have to be "revisited urgently. "In the circumstances, it is requested that RBI may kindly be advised not to notify the provision for the present and maintain status quo until we arrive at a suitable formulation after consultation," the letter said. 

Zee News

BALANCING GROWTH AND INFLATION

The perception in the market before the 25 October monetary policy of the Reserve Bank of India (RBI) is that we are very close to the peak of the rate hiking cycle, although the possibility of another rate hike next week cannot be ruled out. Apart from the rate decision, we will also be looking for any subtle or explicit change in the guiding principles of monetary policy because the economic cycle is changing. There are always multiple considerations that go into framing monetary policy, but in our view, belief in three hypotheses has prompted RBI to adopt a more hawkish policy stance in FY12. First, low and stable inflation encourages investment and promotes growth over the medium term. In this context, a recent RBI working paper estimates that inflation can retard GDP (gross domestic product) growth if it stays above the 4-5.5% threshold. So the target of monetary policy should be to keep inflation below this threshold and high inflation cannot be tolerated in search of higher growth. Needless to say, inflation has been much above that threshold for a sustained period of time. Second, near-term growth might have to be sacrificed to keep inflation under check. This hypothesis connects well with the idea of engineering a calibrated soft landing where the economy might have to grow at below the potential growth rate for a while to moderate demand side pressures. Third, monetary policy is effective in not only bringing down demand-side price pressures but also tackling persistent supply-side shocks which dehinge inflationary expectations.  At this juncture, we probably need to delve a little deeper into some of these hypotheses. For example, while evaluating the second hypothesis there is considerable uncertainty over whether the potential growth rate of the economy has already been adversely affected by lack of supply-augmenting reforms. Most analysts peg the potential growth around 8% but there is a downside risk to that estimate. Also, it is not clear how far below the potential growth rate, RBI will let growth fall. It is quite likely that in the October policy, RBI will be more explicit in acknowledging that growth moderation has occurred but it will probably be difficult for it to give even a subtle hint of whether the extent of slowdown has crossed its tolerance limit. However, there are two important considerations in deciding the timing of a pause in RBI’s quest for an engineered soft landing.  Monetary policy works with a long and uncertain lag, especially in developing countries such as India. So, RBI is likely to pause much before inflation actually falls close to its comfort level. Unfortunately, in late 2010 when RBI paused, inflation flared up again prompting its current worries about a “pre-mature” exit from its anti-inflationary stance. The second factor is the ability of monetary policy to perfectly fine tune the moderation in growth. Once growth starts slowing, a set of chain reactions can trigger a much sharper decline in growth than anticipated, especially when the investment climate is buffeted by global uncertainties. Inflation management does require sacrificing near term growth but allowing growth to drop beyond a threshold could come with its own set of problems.  Persistent inflation is also posing the difficult question of whether interest rate hikes are having the desired impact. It is tough to say what would have happened to inflation if rates had not been raised aggressively. Still, stubborn inflation can change people’s perception about effectiveness of monetary policy and complicate matters. I think RBI will hike rates by another 25 bps (basis points, or 0.25 percentage point) in the 25 October policy because of uncomfortably high inflation and uncertainty over whether hidden price pressures can derail the early signs of inflation finally coming under control. A signal that the balance of risks is getting spread more evenly between inflation and growth is likely to precede a pause in the rate action. For that, growth data needs to worsen further or RBI needs to recalibrate its guiding principles.

Mint

SFIO to have powers to prosecute companies

The bill seeks to define 'fraud', and also outlines the punishment to go with each category of fraud. It also makes out a case for setting up a National Company Law Tribunal with its appellate body. The provisions have been brought in tandem with laws of Sebi, RBI and other regulators.......

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House panel questions RBI's bid to allow corporate, non-banking finance bodies to set up banks

NEW DELHI: Members of Parliament's standing committee on finance have questioned the Reserve Bank of India's move to allow industrial houses and non-banking finance entities to set up banks, wanting to know the rationale behind the decision and when precisely the policy was framed. RBI governor D Subbarao was quizzed by finance standing committee members on Monday over his assertion that the new policy flowed from finance minister Pranab Mukherjee's 2010-11 budget speech, who had promised greater access to banking in terms of both geographical spread and services.  The MPs contested the argument that Mukherjee's speech - that had dwelt on increasing banking access with India having successfully negotiated the 2008-09 global slowdown - provides the framework for the RBI proposing to allow industrial and business houses to set up banks. They said Mukherjee's remarks did not indicate the proposed policy.

TOI

View from the IMF - ANOOP SINGH

The global economy has entered a dangerous new phase. Growth in the West has slowed while downside risks to the global economic outlook have increased further. Financial market volatility has surged as private demand in the US failed to pick up sufficiently and sovereign debt and banking sector problems in Europe proved more tenacious than expected. International efforts are being made, including by the Group of Twenty (G20), to coordinate policies so as to avoid a major global disruption like the one we experienced in 2008-09. How is Asia faring amid this turbulence? In our recently released Asia-Pacific Regional Economic Outlook,  we find that while growth in Asia has also moderated, domestic demand remains resilient. As a result, Asia is poised to grow at about 6¼% during 2011, increasing to 6¾% in 2012 under the baseline scenario. The latter reflects a lowering of only ¼ of a percentage point since our April forecast, compared to ¾ percentage points for our advanced economy growth projections during the same period. However, there are large downside risks to this benign outlook. The advanced economies are at the core of an effective resolution of current global stresses, and a lot depends on them to prevent the risk scenarios from materialising. But emerging market and developing economies’ ability to maintain their stability and growth is also key to an effective global response. The moderation in growth notwithstanding, our Outlook shows that inflation remains generally elevated in the region, with average headline inflation increasing to 5½% (year-over-year) in July 2011, from 4½% in January. This requires a balancing act on the part of Asian policymakers, as they need to guard against risks to growth, but also limit the adverse impact of prolonged easy financial conditions on inflation and balance sheet vulnerabilities. Where does India lie in this balance of risks? India’s inflation remains stubbornly high, registering at 9.7% in September (WPI, year-onyear), while growth is slowing from 8.5% in 2010-11 to 7.6% this year by our current estimation. This confluence has led to understandable public debates about the efficacy of the RBI’s actions. We are clearly of the view that the RBI’s monetary tightening has been necessary and is bearing fruit on the inflation front, and is not the dominant factor in the growth slowdown — that is already showing the early effects of the global slowdown. Thus, although some further monetary tightening is likely necessary under our baseline scenario to quell the entrenched inflationary momentum, the RBI certainly has the room to act quickly if major risks materialise. Indeed, as in 2008-09, the RBI’s ability and readiness to supply liquidity will play a critical role if a major external financial shock materialises. Fiscal policy has an important role to play in the balancing act as the authorities have emphasised. Restraining expenditure to the level of Budget FY2012 would help recreate the fiscal space to counter external shocks. It will also assist the RBI in combating inflation by moderating domestic demand pressures. Finally, a shift in government spending from consumption towards infrastructure, health and education, would help increase the economy’s capacity to grow strongly over time, while also making the growth process more inclusive as we argue in the REO. The government also has a role to play outside of fiscal policy. There is a sense that a reinvigorated pursuit of the outstanding structural reform agenda — such as the introduction of the goods and services tax, further liberalisation of the FDI regime, passage of long-pending financial sector legislation, and measures to improve the business environment — would attract investment currently being held back. This reinvigoration would help bring growth back to potential in the short run while relieving supply bottlenecks that could, otherwise, continue to stoke inflation.  India has felt the repercussions of the current global uncertainties in its currency and equity markets. This is a natural outcome of India’s increasing integration with the global economy and reflects the sharp increase in global risk aversion in recent weeks and months. Nevertheless, India’s vulnerability to external shocks is relatively low at present. This is due, in substantial part, to the fact that banks are well regulated and have strong balance sheets, exports are surprisingly buoyant, and external debts are limited. And India has demonstrated its resilience by navigating the global financial crisis in 2008-09 relatively unscathed. Nevertheless, a high level of vigilance is needed in the coming months, and calls for continued efforts to create policy buffers.

(The author is director of the Asia and Pacific department of the International Monetary Fund) ET

Focus on reforms

Apropos of the column “Let’s kill GDP, inflation will fall” (FE, October 15), for months now inflation has been looming as the greater threat on this government than slowing growth. RBI interventions on checking money supply as a tool to rein in inflation have elevated the borrowing costs. A combination of relentless global economic stasis coupled with adamant inflation at home have elevated input costs. Fiscal considerations are not allowing fuel prices to be toned down either. This does not augur well for industrial growth. The added worry is that a weak industrial sector performance is now being followed by weak services sector performance. The one brighter spot is that the agriculture sector has improved in FY2011. But tardiness in agri-market reforms will not allow the gains of this sector being transmitted to the consumer. And food inflation has remained the Achilles’ heel for close to two years now. So, we should now focus on effective governance and push for reforms, which have been put on the back burner. The route to rate interventions will not take us out of the current crisis as would energetic pursuit of reforms.

R Narayanan, Ghaziabad (FE)

Banks start lending to microfinance institutions

The Kerala Association of Microfinance Institutions (KAMFI) has said that the microfinance crisis cropped up due to some unfortunate happenings in Andhra Pradesh seemed to come to an end, as banks have started lending to microfinance institutions (MFIs).  After the embargo in lending by commercial banks to microfinance sector, the RBI had issued guidelines on microfinance lending inter- alia directing banks to resume lending to microfinance sector and treat them as priority sector advances, Mr K. Paul Thomas, Chairman, KAMFI, said in a statement.

HBL

Return to indebtedness

This July marked the completion of two decades after India experienced the balance of payments crisis of 1991. With substantial reserves, the external situation today appears and is different. But there are similarities as well........

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Public holidays

This refers to the news item ‘Three public holidays in India against 15 in Pakistan’ (October 16). The Indians may have only three national public holidays but they leave us behind when it comes to the various religious and cultural holidays.  For example, the website of the Reserve Bank of India (www.rbi.org.in) informs us that its regional office at Nagpur will observe 26 bank holidays during 2011 of which six holidays fall in the single month of April. Incidentally the bank remains closed on Eid-i-Milad, the two Eids and Ashura.

Dr Faiz Ahmad, Islamabad

http://www.thenews.com.pk/TodaysPrintDetail.aspx?ID=72979&Cat=11 

Cooperative Banking in India

This report covers the cooperative banking sector in India comprehensively, presenting a full view of the types of cooperative banks, their governing structures, the financial parameters, the technology adoption and the products and services offered. Additionally it also covers NABARD and its subsidiaries and defines the role it plays in the development of the cooperative banking sector as well as the Indian economy. Cooperative banks form the backbone of the rural economy. Especially in an agriculture dominated rural sector (Like the one we find in India), cooperative banks play a pivotal role in bolstering the common individual and financing his business and personal needs. The sector is strongly regulated in India by sub apex organizations like NABARD, closely monitored by RBI’s hawkish policies. Of late RBI has acknowledged the enormous role of cooperative banks in extending microfinance amongst the rural population.  The regulations surrounding cooperative banks in India are likely to be relaxed in the next few years to enable the banks to come up with newer products and services for the upliftment of the rural sector. Currently, barring a few, majority of the banks are operating in the low-profit, low-diversity quadrant of banking business.

www.marketreportportal.com

UID project hits job plan roadblock

....Nilekani had recently told reporters that Aadhaar number will be linked for MGNREGA bank accounts for electronic transfer of wages. It was the next step UIDAI was looking at after the Reserve Bank of India (RBI) declared Aadhaar as enough for one to open a bank account. ......

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Meltdown fears are back

Address by Shri V.K.Sharma, Executive Director at the Second Pan-Asian Regulatory Summit, organised recently by Thomson Reuters in Singapore

Systemic risks in the global markets can be best identified and measured by looking at some select key parameters which, between them, indicate the extent of asset bubbles and the corresponding under-pricing of risks. In other words, it is not so much high volatility, which is the ‘effect', that should be a cause for concern as persistent and excessively low volatility, which is the ‘cause', and was the hallmark of the pre-crisis period.  

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One rupee sets off one's imagination !

One often hears of poor supply of coins and the Reserve Bank of India releasing more coins and in new formats. The 1-rupee coin released recently with the rupee symbol looks like the 50-paise coin. This has led to the bazaar talk that the 50-paise coins may soon go the way of 25-paise coins. The RBI site still claims: “Coins in India are presently being issued in denominations of 10 paise, 20 paise, 25 paise, 50 paise, one rupee, two rupees and five rupees.” It also says: “Coins up to 50 paise are called ‘small coins.” So we can take pride that we have done away with small change and deal only in rupees. Sign of growth! 

HBL

'Allow systemically important NBFCs to float perpetual bonds'

Industry chamber Ficci today suggested that systematically important non-banking finance companies (NBFCs) should be allowed to raise funds through perpetual bonds. "Both deposit-taking systematically important and non-deposit taking systematically important NBFCs should be allowed to raise perpetual bonds," Ficci said in a statement. Currently, only non-deposit taking systematically important NBFCs are permitted to augment their capital in this way. Ficci has also suggested that the recommendation of the Usha Thorat committee fixing the period of default prior to classification of loans as non-performing assets (NPA) should be introduced in phased manner. The working group on 'Issues and Concerns in the NBFC Sector' headed by the former Deputy Governor had suggested a 90-day period of payment default for recognition of NPAs by NBFCs, in line with banks. At present, the period of default prior to classification of loans as NPAs in the case of NBFCs is higher, at 180 or 360 days, compared to 90 days for banks. A 90-day period for recognising the NPAs of NBFCs, in line with banks, would impose an avoidable provisioning burden on the NBFCs and could result in NBFCs deciding to opt for early foreclosures, depriving their borrowers of an income generating asset, it said. It is to be noted that the Thorat panel, in its report to the RBI in August, suggested tighter norms for NBFCs with the aim of strengthening the regulatory and supervisory framework for such lenders. Considering the experience of NBFCs in terms of foreclosure losses, the extant NPA norms should be followed, Ficci suggested. If at all this 90-day provisioning stipulation is to be introduced, it needs to be carried out in a phased manner, given that its impact on the industry will be very high, it added. The committee had also made a recommendation for income tax deduction of NPA provisions. The proposal to enhance NPA provisioning may be made effective only when income tax deductions for such provisions are allowed, Ficci said. In addition, it said loans in the form of NCDs should not be treated as capital market exposure.

BS

No information about illegal gold sale: RBI, Finance Ministry

NEW DELHI: Two key economic regulators of the country - Finance Ministry and Reserve Bank of India - do not have any information about the the consumption of unaccounted gold in the country. The RBI and the Finance Ministry have given a sworn affidavit before the Central Information Commission that they do not have any information about the illegal gold sale in the country. The affidavits were issued on the direction by the Information Commissioner Deepak Sandhu who asked them to file a sworn affidavit that they do not have any information about the consumption of unaccounted gold in the country. The direction of the transparency panel comes on an RTI application by activist S C Agrawal who sought to know sale and consumption of unaccounted gold in the country and related issues. The application filed before the Department of Revenue was transferred to a number of authorities within the Finance Ministry with each of them claiming that they do not have any information on the issue. No reply was furnished to the applicant. When the matter came before the CIC, Information Commissioner Deepak Sandhu directed the Finance Ministry, nodal ministry in such affairs, to file a sworn affidavit that no information was held by it.

ET

Inflated problem

Inflation has been a persistent problem for the Indian economy for nearly six years and worryingly for policy makers, Wholesale Price Index (WPI) inflation has been above nine percent for close to a year. Experts say that the price of commodities like food has risen steadily despite a string of good monsoons and record harvests. Sajjid Chinoy, India Economist at JP Morgan says the substantial price rises being experienced by rural India are a combination of a number of factors: supply bottlenecks, rising incomes, greater demand, and changing consumption habits. Critically, Professor Mahendra Dev, Director of the Indira Gandhi Institute of Development and Research points out that the cost of some food items in rural areas may be two or three times higher than official figures. WPI inflation dipped to 9.72 percent in September, down slightly from 9.78 percent in August. However, it still remains fiercely high and analysts in India widely anticipate that the Reserve Bank of India will, for the 13th consecutive time, lift interest rates later this month. The Reserve Bank of India says that it is mindful of a slow down in economic growth and the impact that the rising cost of borrowing is having on businesses and consumers alike. However India's Central Bank has also warned that it is not likely lower interest rates until inflation is brought under control. The timing of India's economic woes is not great. The country is struggling to keep growth and domestic consumption on track at a time when the world's major developed markets, and some of the country's biggest trading partners, are bracing for yet another slowdown.

BBC News

Let’s kill GDP, inflation will fall

......There has been much talk by the experts that India was behind the curve in tightening. By behind the curve is meant that RBI was too slow in raising rates. But the curve is not a one-way street. You can be (and RBI is) behind the curve by raising rates too much.............

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Consolidation likely ahead of Diwali

The stock market is likely to remain firm ahead of Diwali, as the financial performance of Indian Inc has so far not disappointed street expectations. However, the Reserve Bank of India's policy move could spoil the party at Dalal Street. With headline inflation showing no signs of any correction, market participants expect another rate hike of 25 basis points. The RBI is meeting on October 25 to decide on key interest rates.  Corporates are mounting pressure on central bank to pause on current rate tightening, as they are already struggling to raise funds to meet capital expenditure. However, the RBI Governor, Dr D. Subbarao, has reemphasised that inflation must ease before the central bank can reduce interest rates, signalling a tight monetary stance for now. Sustained buying by foreign institutional investors helped Indian markets recover sharply last week. Markets even ignored the weak industrial growth for August on hopes that the global atmosphere would continue to be conducive, as Euro-zone is indicating some actions will be taken to contain the region's economic woes.  The slowdown in industrial production is not an India phenomenon alone. The HSBC Emerging Markets Index declined to 51.9 in the third quarter of 2011 which, according to it, ‘is the slowest in nine quarters.' Of the big-four emerging markets, Brazil and India recorded the fastest rates of decline in new export orders. “Consequently, employment growth as measured across manufacturing and services eased to the slowest for nine quarters, reflecting a weaker rate of job creation in services and a stagnation of manufacturing employment. India recorded a decrease in headcounts for the first time since Q1 2009,” said HSBC report.

HBL

Financial markets that are efficiently regulated

The Reserve Bank of India (RBI), until the constitution of sector regulators like Sebi, Irda, etc, undertook the responsibility of developing various segments of the financial market. Setting up of institutions like the Industrial Development Bank of India,  Unit Trust of India (UTI), National Housing Bank (NHB) and National Bank for Agriculture and Rural Development  and so on, establishes historical track of the role played by the RBI in the development of the financial markets......

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Negotiating the next curve

If the RBI persists with rate hikes despite the onset of slowdown — just as it did not raise interest rates earlier when required — it may miss the bus yet again.

Monetary policy is all about getting the timing right. In 2008, when the wholesale inflation rate suddenly jumped from 4.5 per cent in January to cross double-digits in June, the Reserve Bank of India (RBI) was quick to respond. By August, the central bank had raised its repo rate as well as the cash reserve ratio (CRR) of banks to nine per cent. It wasted little time either when inflation took a plunge from December, following the global economic crisis, to hit negative territory in June 2009. Well before that, the repo rate was brought down to 4.75 per cent and the CRR to five per cent. But subsequently, even as industrial growth recovered towards the year-end alongside unleashing of inflationary pressures, the RBI was slow to react. By the time it did — from around March 2010 – inflationary expectations had already built up. The very fact that 200 out of the 350 basis points increase in the repo rate since then has come after January this year shows how ‘behind the curve' the RBI — and those in the Government prompting it from behind the scenes – have been. The hope that inflation would somehow wither away was simply misplaced. The danger today is of a different hope — of growth still being sustained at an accepted level even as the belated monetary policy actions are beginning to dent it. On October 25, RBI will hold its next policy review. With the annual wholesale inflation rate at 9.72 per cent for September — the 10th successive month it has been over nine per cent and the 21st at eight per cent-plus — it could consider yet another 25 basis point rate hike. But doing so would be counter-productive. The current inflation has been largely food and fuel driven with spill-over effects on wages — against which monetary tightening has proved ineffective, especially post-NREGA. While investment has slowed down, it has, however, more to do with general policy paralysis and waning business confidence than interest rates. High interest rates has mainly impacted the real estate and auto sectors; even that is probably now starting to harm steel or cement consumption more than reining in overall inflation. Demand compression, to fight an inflation fundamentally rooted in supply-side bottlenecks, may only exacerbate a slowdown that is already visible to many.  Against this background — more so, with July and August posting dismal industrial growth and September excise collections falling year-on-year for the first time in 17 months — the RBI would be best advised to press the pause button on further rate increases. Having not raised interest rates when it was required and now insisting on no stoppage until inflation falls to six per cent — the so-called ‘threshold' beyond which growth apparently gets hurt — would only be an invitation to recession. Hopefully, RBI will not miss the miss the bus again.

HBL

Economic policy: Shooting in the dark

... As the central bank wrestles with the dilemma of whether to continue, pause or stop in its tracks, it needs to know, and with far more certainty than at present, how far its policies have slowed down the level of economic activity, how far they have impacted inflation and so on. In short, it must be able to get its finger on the pulse of the economy and also ameasure of the pulse rate.....

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Revive economy

As commented in your editorial “Restoring confidence” (Business Line, October 14), the growth rate is disappointing. It is high time the government concentrated its energies on early resolution of the Telangana issue, which is causing untold misery to the people of all regions in AP.  Also, the Congress should expedite early passing of the Lokpal Bill in Parliament — not for the purpose of pleasing Anna Hazare and his team — in the interests of all stakeholders of the country. Both the Government at the Centre and States, at the political level, and the RBI from the monetary viewpoint, should strive hard to put the economy on an even keel to arrest further decline in growth rates of the economy.

K. N. V. S. Subrahmanyam (HBL)

Coordinated measures needed to control price rise

....While the RBI is planning to announce its second-half monetary views and measures on October 25, it would be interesting to know that fiscal measures still continue to influence the monetary policy of the central bank and only a coordinated approach by the government and the RBI could bring down inflation.....

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Financial inclusion bogged by too much concern with regulatory prudence, rather than bold experimentation: FICCI report

....Banks have been advised by the RBI to submit their financial inclusion plans for reaching 72,825 financially excluded villages by 2012 and to integrate these with their normal business plans. While much has been achieved, as is the norm in any regulatory regime, what has been done by the banks has been the minimum necessary to gain approval (or at any rate regulatory forbearance). Thus significant areas of the rural hinterland of the major states are now reasonably served with banking services. ........

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Finance Ministry for white-level ATMs to boost banking access in country

NEW DELHI: In a bid to increase the penetration of banking services, the Finance Ministry has favoured setting up of white-level ATMs in the country. White-level ATMs are not owned by banks but by private ATM service providers. Customers from any bank can deposit or withdraw money from such ATMs. "Such ATMs will help take banking services to remote places," official sources said. Besides, it will help sponsored banks to set-up ATMs without incurring capital expenses for owning money dispensing machine, sources said. The Finance Ministry has given its view to the Reserve Bank in this regard, sources said, adding that the lead bank or sponsored bank of a district would be given the responsibility of filling cash and meeting other operational requirement. Thus, the bank will be saved from making investment for setting up ATMs, and even other expenses like technical infrastructure and security would be borne by non-bank entities. Currently, white label ATMs are not permitted by the RBI. State-owned IDBI Bank is considering to create a separate venture with private ATM service providers for running white-label ATMs, so called because they are not owned by any bank. At present, brown label ATMs are allowed in the country. In such cases, the hardware as well as lease is under the ownership of the service provider, while connectivity and cash handling and management is the responsibility of the sponsor bank. The ATM is named under the brand of the sponsor bank but the ATM machine is not owned by the bank. At present, banks allow customers of other banks five free-of-charge cash withdrawals at their ATMs every month but end up paying around Rs 3,000 crore a year to settle inter-bank transaction costs. At present, the installed base of ATMs is India is 75,000 as of June 2011. 

ET

ATMs spew fakes, banks deny bail

What will you do when you get a fake note from an ATM?

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Banking Reforms: Foreign v/ s Desi Consultants - DR. N. A. MUJUMDAR

The recent directive by the Finance Ministry to public sector banks ( PSBS) to implement the Report prepared by the Boston Consulting Group ( BCG) on improving banking operations has raised the basic question of who should be preferred: foreign or desi experts? The Report exhorts banks " to strive for excellence on five dimensions" branch sales and service, new channels, lean operations, organisation design and bad debt management". The Report also calls for a need to change the compensation structure

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Banks offer freebies to lure credit card customers

....According to a data released by the Reserve Bank of India (RBI), transactions using credit card during the April-August period of this financial year stood at Rs 37,678.25 crore against Rs 29,024.75 crore in the same period of 2010-11.....

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Rosaiah hails KVB's efforts in taking banking services to the masses

....The capital adequacy ratio stood at 14.83 per cent, well above the Reserve Bank of India's stipulated ratio of 9 per cent and the net non-performing assets at 0.21 per cent was one of the lowest in the country, he said. The bank has been earning profits since inception and declared dividend uninterruptedly, declaring even 120 per cent in the last three years. The bank has earned laurels from many quarters and is recognised as the best old private sector bank.....

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High food price, a crisis on our plate

...The high food prices are the result of structural factors with shortages getting aggravated as demand continues to outstrip supply. So, even as the RBI continues to focus on demand management, what will ultimately help control inflation is sustained increase in agricultural supplies. ........

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Greece's fiscal mess, all thanks to Goldman Sachs: YV Reddy

Nobel laureate Joseph Stiglitz once said that if America had a central banker like YV Reddy it wouldn’t have been in such a mess. High praise has been showered on this former RBI Governor for the manner in which he regulated banks, raised rates and reserve requirements, imposed provisions and risk weights to shield the economy and the banking system from over heated asset markets. The tough task was to do it against wide spread opposition…….

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Bank asked to pay compensation for bond lost in transit

CHENNAI: For Dr Felix Ryan and his wife Jaya, pledging their RBI bond for a bank loan turned out to be more trouble than they expected. Even after repaying the loan amount with interest, the couple have not got the bond back from the bank. Concluding that this amounted to deficiency in service, the State Consumer Disputes Redressal Commission (SCDRC) has ordered that they be given compensation of Rs 35,000 and the bond document be returned to them. A bench of Justice M Thanikachalam, president, SCDRC, judicial member J Jayaram and member Vasugi Ramanan passed orders in the matter. According to his complaint, Dr Felix Ryan had pledged an RBI tax-free relief bond for Rs 1 lakh with HBL Global Private Limited, the marketing division of HDFC Bank Limited, and obtained a loan of Rs 80,000. Though he repaid the entire loan amount with interest on June 4, 2005 and requested the bank authorities to return the bond which was pledged, there was no response from them. Since he had repaid the loan, the bank had no right to hold back the pledged bond, he said. After a legal notice to the bank failed to yield results, the couple filed a complaint before the district consumer forum. In March, 2009, the forum ordered the bank to return the bond along with interest in addition to a compensation of Rs 30,000 and a penalty of Rs 5,000. The bank approached the state forum in an appeal against this order. For their part, representatives of the bank said they had returned the bond through a private courier service on December 23, 2005. They resisted the case saying the complaint was not maintainable as the courier service was not made a party in the case.

However, the bench observed that it was not the responsibility of the complainants to implead the courier service. Since it was the contention of the bank that they had sent the documents through the service, it was for them to proceed against the company, which they failed to do. Except for a number mentioned in the written version, no documents were filed to indicate that Ryan had received the delivery.

TOI

Former Economic Adviser passed away............

Dr.D.K.Bhatia, who retired as Adviser passed away on October 13, 2011.  He was 77.  On his last day he had gone to B K C in connection with a journal he was editing and sustained a massive heart attack. He is survived by his wife and three children. He had a wide circle of friends both in and outside RBI. Shockingly enough for me, Bhatia rang me up on 12th and we had decided to meet on Monday, the 17^th..................

May his soul rest in peace.

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

                                               

adds:-   

A PhD in Economics from the Pennsylvania State University (USA) Dr. D.K. Bhatia had worked in various academic/teaching capacities in the US before returning to India. In India he served in various senior positions in the Reserve Bank of India (RBI) from which institution he retired as Economic Adviser. He also served as International Monetary Fund’s Advisor to Bank Indonesia (Central Bank), Jakarta during 1981-83. In his long career span he has supervised and handled several projects and surveys related to the Rural-Economic Issues in India. He had been a supervising member of the Annual Follow-up Rural Credit Surveys and All-India Rural Credit Survey, 1961-62 conducted by RBI during the years from (1958 to 1965) designed to understand and investigate the dynamics of rural credit flow in general, and especially in the regions of Gujarat (Bharuch, 1958), Kanpur (1959), Bihar Munger (1960), Western Uttar Pradesh (1961-1963). Dr. Bhatia was also involved in the conduct of an Irrigation System Study in the wake of then pressing food grains crisis; this survey focused on tube well irrigation in Deoria (UP) in 1959-60. Dr. Bhatia had a range of training experiences. He was deputed as a Member of Directing staff at XVI SEANZA (South East Asia, New Zealand and Australia) Central Banking course held in Dhaka (Bangladesh) from October-December, 1986. He served as a Group Leader in International Banking Summer School in September 1989 organised jointly by International Banking Council, and Indian Institute of Bankers. He served as a Convenor for the Sub-Group on Private Sector (Household) Saving for the 8th Five Year Plan, under the Chairmanship of Dr. C. Rangarajan who was then the Deputy Governor and later became Governor, Reserve Bank of India. In this experience in the Capital Market he served as RBI nominee on the Governing Board of the Bombay Stock Exchange (1989-1994). 

 

Border vigil intensified for fake bank notes

Jaipur: The Border Security Force has beefed up security along the international border in Rajasthan after receiving reports from intelligence agencies that there were likely to be large-scale attempts to smuggle counterfeit currency into the country through Rajasthan, Punjab and Jammu and Kashmir. The governor of the Reserve Bank of India (RBI), D. Subbarao, chairing a meeting of the bank's deputy governors and newly constituted board, noted that the problem of counterfeit currency had shown a marked increase. The central bank, the Finance Ministry and the Home Ministry were in the process of drawing up a comprehensive plan to stop the racket, he said. "The Indian laws will have to be amended to punish such persons who are involved in circulating counterfeit currency. The present law has many loopholes and it is difficult to prove that a person was involved in circulating counterfeit currency. The role of police and the law will have to be redefined to curb the circulation of the counterfeit notes." The RBI became vigilant after the National Investigation Agency alerted that fake currency notes were being printed at a government-owned printing press across the border.

http://gulfnews.com/news/world/india/border-vigil-intensified-for-fake-bank-notes-1.891876

PM meets top advisors to discuss current economic situation

Amid concerns over high inflation and dipping growth, Prime Minister Manmohan Singh today held informal confabulations with top economic advisors and officials to discuss the present economic situation. The meeting was attended by Reserve Bank Governor D Subbarao, Planning Commission Deputy Chairman Montek Singh Ahluwalia and PMEAC Chairman C Rangarajan, besides some senior officials. While there was no official word on what transpired at the meeting, sources said they informally deliberated on the current Indian and global economic scenarios. The informal meeting comes days ahead of the second quarter monetary policy review of the Reserve Bank of India (RBI) on October 25. The central bank has already raised interest rates 12 times in the last 18 months to tame rising prices. There are indications that RBI may continue with its current hard monetary stance in view of both headline and food inflation remaining close to the double-digit mark, much above the comfort level for the central bank.  "The meeting (with PM) is on the current economic situation. We will have a discussion on growth and inflation, and consider the policy options in this regard," Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan had said yesterday. Headline inflation stood at at 9.72% in September as food products, fuel and manufactured goods grew costlier, a development that is likely to prompt RBI to continue with its policy of monetary tightening.  Indian economy grew by 7.7% in the first quarter, the slowest growth in 18 months, against 8.8% in the same period of the previous fiscal. Industrial output also remained subdued for the second consecutive month in August, registering a growth of just 4.1%.

Moneycontrol

G20 Meeting

Financial Inclusion and Banks – Issues and Perspectives

Address by Dr. K.C. Chakrabarty, Deputy Governor, Reserve Bank of India at the FICCI – UNDP Seminar on “Financial Inclusion: Partnership between Banks, MFIs and Communities” at New Delhi on October 14 2011

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Inflation at 9.72%; rate hike on cards

With headline inflation perilously close to double digits, few expect the RBI to take a pause from its tightening cycle on October 25......

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Inflation expectations and RBI’s response

The central bank would have to signal that it is dedicated to a low and stable inflation environment in the economy. That would imply surprising the market with higher than expected rate hikes and build its credibility as an inflation hawk. RBI should follow through on its action, even if the economy faces short-term pain and slowdown on account of rising unemployment or falling output

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FIIs have not been running for the exit

...foreign institutional investors have not pulled out big money from the Indian market in this period is also corroborated by another set of data on international investments put out by the RBI....

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BofA Merill Lynch says RBI likely to halt rate hike - Business Today

..."There is growing consensus that sluggishness will persist longer than expected earlier. Concerns over the sovereign debt problem in the Euro area have added further uncertainty to the prospects of recovery," the RBI said in a statement.....

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Interest rates must be in line with inflation: Chakrabarty

New Delhi : Declining to be drawn into the issue of another interest rate hike, the RBI Deputy Governor, Dr K.C. Chakrabarty, said that rates have to be in line with inflation. “The exact inflation figure does not matter; what is important is that inflation is still high. Given this situation, the RBI has no other instrument to rein it in other than rate hikes,” he said speaking on the sidelines of a seminar organised by FICCI on Friday. Advocating a possible solution to the high inflation situation, Dr Chakrabarty said: “If inflation goes up, interest rates also go up everywhere in the world. If we want inflation to go down, we have to use technology to bring down the cost of products and services. It has happened in the case of mobile delivery charges where costs have not gone up over so many years.” “The supply side issue has to be addressed to produce more with lower cost and that would bring down the production costs and hence inflation,” he added. RBI's next monetary policy review is expected on October 25. A recent data released showed headline inflation remained close to double digits at 9.72 per cent in September.

HBL

‘Supervision of MFIs cannot be outsourced'

New Delhi : The Reserve Bank of India has no plans to outsource its existing regulatory and supervisory framework for microfinance institutions (MFIs). This was stated by the RBI Deputy Governor, Dr K.C. Chakrabarty, at a FICCI seminar on “Financial Inclusion: Partnership between Banks, MFIs and Communities” held on Friday. “We cannot outsource the supervision for effective monitoring of MFIs in India as we want to keep that area under the RBI's jurisdiction. However, we are not opposed to decentralising their monitoring but it has to be done through opening of RBI's own branches in remote locations where MFIs are operating,” he added. The proposed MFI Bill envisages a greater role for RBI in regulating the MFI sector. It is meant to enable the orderly growth of microfinance institutions, provide universal access to such finance by the poor and disadvantaged classes, and regulate the sector.

HBL

Canara Bank - Change in Directorate

Canara Bank has informed BSE that in exercise of the powers conferred by of Clause (c) of sub-section 3 of section 9 of the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970/1980 read with sub-clause (1) of clause 3 of The Nationalised Banks (Management & Miscellaneous Provisions) Scheme, 1970/1980, the Central Government, hereby nominated Smt. Meena Hemachandra, CGM-in-charge, Reserve Bank of India, Foreign Exchange Department, Central Office, Mumbai as Director under RBI Nominee Category, on the Board of Directors of Canara Bank in place of Shri G. Padmanabhan with immediate effect and until further orders, vide Notification dated October 13, 2011 of Department of Financial Services, Ministry of Finance, Government of India.

Moneycontrol

RBI conducts TAFCUB meeting

Jammu, Oct 13: The 7th meeting of the State Level Task Force on Urban Cooperative Banks (TAFCUB) was held at RBI Srinagar under the Chairmanship of K K Saraf, Regional Director for J&K. The meeting was attended by Co-Chairman M Abbas, IAS, Registrar, Co-operative Societies, J&K, Subhash Gupta, Chief Executive, National Federation of Co-operative Urban Banks, New Delhi and CEOs of Urban Co-operative Banks also attended the meeting. The meeting reviewed the performance of the Urban Co-operative Banks in the Urban Beanking Sector in the State of Jammu and Kashmir along with latest policy developments were the major issues discussed in the meeting. Recommendations of Y H Malegam Expert Committee on licensing of new Urban Cooperative Banks were also discussed.

Greater Kashmir

RBI unveils rating symbols

The Reserve Bank has announced uniform and standard rating symbols to be used for indicating financial health of a bank.  The change in rating symbols and definitions, however, does not effect, in any manner, the rating methodology followed by the credit rating agencies (CRAs) for rating such instruments and will have no bearing on the existing ratings assigned by the CRAs under the Basel-II framework, the Reserve Bank of India said. Under the revised standardised system, there is no change in the long term rating symbols except that they will henceforth display the rating agency’s name as a prefix, it said. “In case of short term ratings, a rating scale denoted by ‘A’ on a scale of ‘1’ to ‘4’ (i.e. A1, A2, A3 and A4) and ‘D’ has been prescribed,” it said. Four domestic CRAs namely CARE, CRISIL, FITCH India and ICRA have been accredited for the purpose of risk weighting the banks’ claims for capital adequacy purposes.

DH

RBI's tight monetary policy to continue: Dy Guv

A day after RBI Governor D Subbarao dashed hopes of a pause on hiking rates, his deputy K C Chakrabarty hinted at continuation of the tight monetary policy, despite the country showing a decline in economic growth parameters.All the same, Chakrabarty said monetary policy had its own limitations when it came to arresting high inflation in the long run, saying price pressures could only be brought down by addressing supply-side issues and reducing manufacturing cost. “If inflation remains high, interest rates will also be high,” he told reporters on Friday on the sidelines of a seminar organised by the Federation of Indian Chambers of Commerce and Industry in association with United Nations Development Programme, India.When asked if the Reserve Bank would further hike the policy rates, he said that the deputy governor said he could not answer the question based on just one figure (monthly inflation for September). The decisions in the policy review are taken after due research and analysis of many factors, he added. “There is something called minimum medicine that needs to be given,” he said when questioned on the series of policy rate hikes. Yesterday, the RBI governor had indicated that it might not soon give up on its tight monetary stance. “Had we not raised the rates, how much would have been the inflation,” asked Subbarao. “Despite so much tightening, inflation runs as high as 9.8 per cent as of August,” he said in Jaipur. RBI has raised policy rates 12 times since March last year, but inflation still remains over 9 per cent for months. The bank is now slated to come out with its monetary review on October 25. Chakrabarty, earlier addressing the participants from the banking sector and micro finance institutions, asserted that RBI has removed all the roadblocks in effectively carrying out financial inclusion. “The poor are more bankable than the rich. The only expectation that I have from you people is that I do not exploit the poor people,” he added. Chakrabarty also criticised banks and the MFIs for “poor financial inclusion”. MFIs are “themselves responsible” for their current state. “You cannot claim that you are doing financial inclusion by charging 80 per cent interest rates,” he said. Responding to a query on proof of address having become a hurdle for the poor to open a bank account, he said just a simple self-declaration was sufficient for the poor to open a basic account.

BS

Mumbai on alert

Mumbai: Mumbai has been put on alert after a huge cache of explosives was recovered from Ambala Railway Station yesterday. Other parts of Maharashtra including Pune, Nashik, and Nagpur are also on high alert. Security has been beefed up outside vital installations and sensitive points including the Chhatrapati Shivaji International Airport, BARC, Mantralaya and an RBI building.  The Mumbai police have also been asked to carry out surprise checks at hotels, motels and the lodges in the city. An alert has been sounded in the neighbouring state of Goa. On Wednesday, a large quantity of RDX was recovered from a car parked outside the Ambala railway station. According to reports 5 kg of RDX, 3 timers and 5 detonators were retrieved in the search operations.

Daily Bhaskar

What’s the rate beyond which inflation hurts growth?

RBI Working Papers:

Why Persistent High Inflation Impedes Growth? An Empirical Assessment of Threshold Level of Inflation for India by Sitikanta Pattanaik and G.V. Nadhanael. Inflation Threshold in India: An Empirical Investigation by Deepak Mohanty, A.B. Chakraborty, Abhiman Das and Joice John

The chief domestic concern for the economy is currently the high level of interest rates and inflation. Elevated interest rates have slowed down the economy and are impeding investment. Will the Reserve Bank of India (RBI) continue to raise its policy rates? How much growth is it willing to sacrifice to tame inflation? These questions are considered in two recent working papers from the RBI. Both these papers show that, above a certain level, inflation starts to hurt growth and there’s no trade-off between inflation and growth—the only objective, at these high levels, would then be to reduce inflation, without bothering about growth. That’s exactly what the RBI has done. The paper by Sitikantha Pattanaik and G.V. Nadhanael of the Department of Economic and Policy Research at the RBI gives a number of reasons why high inflation hurts growth. The authors say that inflation has an adverse impact on private investment, because price signals become distorted, leading to misallocation of resources. Higher inflation could make domestic firms less competitive relative to imports and could hurt exports. Input costs, including wages could go up and would hurt profits, thus restraining entrepreneurs from investing. Inflation could lead to lower demand, affecting growth. The researchers explain that the Philips curve, which shows the relationship between the inflation and unemployment rates, will start to bend backwards above a certain point, which means that higher inflation would lead to more unemployment. The authors quote deputy governor Subir Gokarn, “Below the threshold, workers and producers do not raise their wage and price demands very often because the impact of inflation is not too visible. By contrast, they respond very quickly above the threshold because they are worried that high inflation will rapidly erode their living standards or profitability. In short, when inflation is high, the behaviour of workers and producers increases the likelihood that it will increase further.” The authors cite three trends in India that show inflation is well above the threshold: first, inflationary expectations, seen from RBI surveys, are above the headline inflation rates; second, the pace of increase in wages has also been much more than inflation and third, corporate finance data suggest that growth in staff costs in recent quarters have been higher than the rate of growth in earnings. So what is the threshold level of inflation in India? The researchers use three methods to arrive at this cut-off point, which they put at a wholesale price inflation rate of 6%. A rate of WPI (Wholesale Price Index) inflation above 6%, therefore, hurts growth in India. The second paper also empirically estimates the threshold level of inflation for India. Its conclusion: “For WPI-inflation up to 5.5%, there is positive impact on growth, which is statistically significant. The relationship reverses when WPI-inflation is beyond 5.5% and inflation effect on growth turns negative.” The Reserve Bank has indicated that it expects the WPI inflation rate to be 7% by the end of March 2012. But that is much higher than the threshold rates worked out by both these papers. Does it mean then, contrary to market expectations, the central bank will continue to have a tight monetary policy beyond March 2012?

Mint