Run-up to Policy - No Curves on This Policy Street

Most Economists See 25 bps Hike - RBI may also revise upward its year-end inflation target to 7%, finds an ET poll

A sliding rupee, the government’s deteriorating finances and the persistence of a cheap money policy in the West may prompt Reserve Bank of India (RBI) Governor Duvvuri Subbarao to toughen his stance against the call for a pause in raising interest rates on Tuesday, despite a dozen increases since March 2010. The governor will raise the key repo rate — the rate at which the RBI lends to banks — by 25 basis points to 8.5% and probably cut economic growth forecast from the current 8%, when he places the quarterly monetary policy review on Tuesday. Indeed, there are chances of a possible upward revision of year-end inflation forecast of 7% due to little signs of price pressure easing, and missing it last year, an ET poll of 20 economists show. “Whichever way one looks at it — headline, core, food, fuel — inflation is unacceptably high and remains a big concern,” says Brinda Jagirdar, chief economist at the State Bank of India. “Besides, with the rupee weakening, imported inflation is another worry. Higher market borrowing by the centre and a potential fresh quantitative easing in developed economies could add to domestic liquidity, fuelling inflationary pressures,” she adds. Subbarao is torn between a central banker’s commitment to rein in inflation and the demands of the business community to stop raising rates that is affecting profitability. The prolonged low rate of interest rates after the 2008 credit crisis had created such a strong demand momentum that even after the 12 hikes, bank loans are growing at an annualised pace of 20%, above the RBI’s target of 19%.  Inflation — as measured by the Wholesale Price Index (WPI) — was at 9.72% in September, above the 8% mark for the 19th month in a row, defying expectations. This is despite the ‘analytically bewildering’ Index of Industrial Production (IIP) data that came in at 4.1% for August, showing slowing output. Although, car sales growth is slowing, other businesses such as motorcycles and televisions have been witnessing strong growth. “We need to bring inflation down in order to bring interest rates down,” Subbarao said recently in Jaipur. “When inflation is as high as 9.8% it is difficult to bring it down without compromising on growth. So, we are trying to trade off at this time on bringing down inflation, even if that means bringing down growth by a few basis points.’’ But business climate is worsening with companies postponing new projects due to higher cost of funds and unpredictable raw material prices that make business forecasting difficult. L&T cut its full-year orders forecast two third to 5%. Thermax, an electrical equipment manufacturer & Crompton Greaves, its competitor, also said that business is becoming difficult.  “There is zero demand for loans for new projects,” said State Bank of India chairman Pratip Chaudhuri. On the contrary, HDFC Bank, Axis Bank and other lenders are reporting more than a quarter jump in their net profits with retail segment contributing the biggest growth. The macro numbers and micro developments are diverging substantially, creating a paradox for policy makers. More than the inflation, it is the government finances that may be creating bigger trouble for policy makers in Mint Street. “We believe India’s policy mix is worsening with a much tighter than expected monetary policy and looser-than-expected fiscal policy,” says Tushar Poddar, chief India economist at Goldman Sachs. “With market and consensus expectations of a rate hike on October 25, monetary policy is likely to tighten further. Along with this has come a worsening fiscal balances due to higher subsidies on oil and fertilisers but more importantly, a significant slowdown in revenues.”  The treasury has said it will borrow Rs. 52,800 crore more than what it budgeted for in February.

ET  

The quality of inflation - T.C.A. SRINIVASA RAGHAVAN

If what you buy today is better than what you were buying in the past, the cost of that improvement in quality has to get reflected in prices

There has been much debate on, around and about inflation in India because, since early 2008, it has been soldiering on at about 10 per cent per year. The Reserve Bank of India, after having shot its monetary bolt, now says it is because of shortages. The Government says it is because of high prices of energy and other commodities. The Left says it is because of speculation by international investors. The economists say it is because of the high fiscal deficit. And many others say it is because of growth. All these explanations are true but there is one other reason that no one is talking about. It was pointed out to me by the former editor of this paper. He says it is also because of better quality. That is, if what you buy today is better than what you were buying in the past, the cost of that improvement in quality has to get reflected in prices.  Costs are bound to increase when loosely sold items get packaged, when investments are made in supply chains, when manufacturers start building in energy efficiency, and so on.  I posed the question to two people who should know: the chief statistician and the chief economic advisor.Both said that at present there is no way of assigning the cost of improvements in product quality and, therefore, no way of knowing how much of the inflation is being caused by it. But think about it: the reason you don't mind paying more for the “same thing” today could well be because it is better than what that thing was in the past.

The good, the bad and the undeserving

Sometimes, you tend to look back and wonder about this and that. My time has been largely misspent in the company of economists who, I have concluded, are of three types: the good, the bad and the undeserving. The best amongst the good ones speak in murmurs, the bad ones do regressions and the ugly ones preen like a brigade of frogs at a beauty parade. I write this because recently I had to put up with some very self-congratulatory talk. My own view, after having studied the matter in depth, and at close range, is that the worst of the last group are the ones who served as chief economic advisors (CEAs) between 1982 and 2002.During this period there were five and a half, the half being a “chief consultant”. He was the best by far and therefore ousted after 15 months. In the 1980s, one left after two years and another after about a year and half. What did the two longest serving ones achieve? After all, one served through most of the 1980s and the other through most of the 1990s? The first, because of his political astuteness, became finance secretary in December 1989 and, thanks to his nervous cautiousness, watched helplessly as the economy wrecked itself in 1990; the second simply played fourth fiddle to the Manmohan Singh, Montek Ahluwalia and C. Rangarajan trio that oversaw the liberalisation of the economy in the early 1990s. In the last 10 years there have been four CEAs. All have had excellent technical skills but, as their short tenures show, not political skills. As a result, they have not tried to anticipate what the Prime Minister wants to hear and tailor their reports accordingly. They have served their ministry, not the PM. This has stood the country in good stead. The current incumbent's term will end soon. I have just the person in mind for the job.

HBL

Why a rate hike is warranted

...There is widespread belief in the market that RBI will raise its main policy instrument, i.e., repo rate under liquidity adjustment facility, by 25 basis points. The recent pronouncements by the RBI Governor Dr. D. Subbarao and Deputy Governor Dr. Subir Gokarn, appear to point in that direction.....

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Time for RBI to cut rates

....High interest rates are to be blamed the most. An overwhelming majority of the respondents — 67% — felt it is time for the Reserve Bank of India to reverse its hawkish stance and start cutting interest rates......

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Price heat: brace for another rate hike from RBI

....“While the RBI’s policy decision remains a close call, we expect the central bank to deliver another rate hike of 0.25 percentage points — in contrast to most other central banks — as headline and core inflation remain too high,” ....

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Global turmoil impacts rupee

....More than a month, domestic foreign exchange markets were testing low levels the rupee could reach against the dollar. Markets expected the central bank to intervene to check the fall of the rupee. But instead of doing so, it allowed the rupee to decline gradually ensuring no volatility affecting the market......

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'RBI should link saving deposits return to repo'

Reserve Bank of India should deregulate savings deposits and link the return on these deposits to its repo rate as depositors are being ripped of Rs 36,000cr under the present system, says an Indian Institute of Technology report

The repo rate - the rate at which RBI lends overnight funds to banks - is used by the central bank as a benchmark for signaling policy rates. While all other interest rates, including fixed deposits, are decided by banks themselves, the return on SB (savings bank) accounts is fixed by RBI. According to the study, the fixed rate (4%) is low even as cost of servicing customers has shrunk because of technology. At the same time the real returns to the depositors are negative as rate of inflation is more than double the savings deposit rate. The study has been undertaken by Ashish Das from the Department of Mathematics, IIT, Mumbai. In the past a study by Das had prompted the central bank to change the mode of calculating interest on savings deposits from minimum balance during the month to a daily interest calculation. Now Das has pointed out that banks are saving close to Rs 36,000cr in interest payments because account holders are not getting their due. The research shows that on an average there have been about Rs 13 lakh crore parked under SB deposits and about Rs 4.5 lakh crore in current account deposits in the past 12 months. These current account and savings deposits are termed as CASA or 'demand deposits' and are much sought after by banks as they are a source of low-cost funds. According to Das, although depositors have the freedom to withdraw funds at will on an average, 92% of the total amount of SB deposits held by banks always remains with the bank throughout the year. Given the present rates prescribed by RBI on savings deposits, banks pay roughly Rs 48,000 crore a year. Now if banks were to provide depositors a return equivalent to what they pay on one-year deposits, which on an average is around 7%, they would have to pay 84,000 crore on these same deposits. "The prime reason why depositors' money is not receiving more interest is the RBI's choice to give the balance Rs 36,000 crore to the banking sector to retain their profitability and to cross subsidise their expenditures," said the report. According to Das, the floor rate for savings deposits can be around half the repo rate. The system can be made pro-consumer by rounding rates to the higher percentage point.  Bankers agree that there is scope to increase returns on savings deposits. However, all the large banks are against complete deregulation of savings rates as they feel this could trigger a rate war by upstart banks, who have little to lose. Bankers also admit that technology has vastly increased profitability and that money is likely to lie longer in bank account as more depositors use electronic modes for payments.

TOI

Eurozone woes, RBI meet to set mood for markets

Taking positive cues from the US markets, Indian bourses may open with gains but the mood is likely to stay cautious as the RBI meets on Tuesday to take stock of inflation and European leaders moot a solution to the eurozone debt crisis, say analysts.......

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Banks to decide on ending loan pre-payment penalty

Close on the heels of the National Housing Bank (NHB) waiving off prepayment penalty on old home loan borrowers and pressure mounting from the Reserve Bank of India (RBI) on banks to follow suit, the management committee of Indian Banks’ Association (IBA) will be meeting on October 25 to decide on the next course of action............

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Mobile banking for financial inclusion

............What is needed is an innovative business model addressing the key concerns of security of deposits, low transaction costs, convenient operating time, minimum paper work, frequent deposits and easy access to credit and remittances — all tailored according to the income and consumption pattern of the targeted population.

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Value of cheque transactions down 8% in Aug: RBI

The total value of transactions carried out through cheques across the country in August 2011 amounted to Rs 7.43 lakh crore, down by 8.3% over that in the same month last year......

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JKB, RBI conduct awareness programme

SRINAGAR: With a view to inculcate the spirit of entrepreneurship in youth from a cross section of society to check the menace of rampant unemployment in the state, J&K Bank Rural Self Employment Training Institute (RSETI) Baramulla on Saturday organised awareness programme in collaboration with Reserve Bank of India (RBI) at Government Degree College Sopore. The programme witnessed good presence of students especially from the Departments of Commerce, Business Management and Economics. R.K Meena AGM RBI was Chief Guest and Nasreen Malik Principal Degree College presided over the function. Departmental Heads M.D Khandwaw, Ab. Majid Dar, Ab. Rashid and Firdous Ahmad also took part in the deliberations and made the discussion interested. Speaking on the occasion, Meena AGM RBI gave a detailed lecture touching upon various functions RBI including monitory, fiscal and financial policy, currency circulation and control, regulations, bankers to the last resort, financial inclusion, fake currency, ATM, debit/ credit card operations, lotteries, NBFCs, impact of recession, market investment, banks ombudsman, Lead bank scheme, role of RSETIs and setting up of Financial literacy and counseling centers by banks. Speaking on the occasion, Director RSETI Riyaz Ahmad Mir said, “RSETI attempts to turn job seeking youth into job providers after giving them free training under the programme entrepreneurship development for a period depending on the line of activity they choose.” After giving them certificate, he said, the institute hand holds them for a period not less than two years so that they establish their own enterprise without hassles from government departments or financial institutions. Senior Executive Manager J&K Bank Ghulam Rasool Hajam, Lead District Manager Gh. Hassan Wani also spoke on financial inclusion and banking schemes particularly of J&K Bank. Muzaffar Hurra APO from DRDA Baramulla spoke on SGSY, MGNREG and functions of DRDA. Post lecture session, Meena interacted with the students and faculty members of the college and also presented gifts as a matter of good gesture during quiz session amongst the winners. Informative literature was also distributed among the participants. Principal Nasreen Malik concluded the proceedings thanking J&K Bank for organising such an educative programme at the college that tries to ensure that financial literacy also is carried forward by the students’ community to large sections of people across the north zone.

http://statetimes.in/news/index.php/2011/10/23/jkb-rbi-conduct-awareness-programme/

Of teaser loans and prepayment

....The RBI is on the dot, except that the rider that the borrower should be prepared to prepay from his own sources, which means he should not be asking a new bank to pay off the loan, may be a tad hard on him, in addition to the difficult task of proving that the prepayment is from his own sources. The banking ombudsman can certainly work out a compromise formula, especially when a borrower is unable to take on the might of the lender. .....

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'Many in body, one in mind'

... clearly, the macroeconomic canvas is complex. But is this enough to force the Reserve Bank of India’s (RBI) hand? Inflation remains stubbornly high, global commodity prices are high despite a weakening global recovery and there are as yet little signs of downward movement in the inflation trajectory that RBI wants to see....

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Investors wait for RBI rate tweak and Diwali

...For those long on equity, a 50 basis point hike is negative; while a pause by the RBI would have the same effect on those with short positions on equity. .....

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Business confidence of SMEs declines

New Delhi: The business confidence of small and medium enterprises (SMEs) on the economic outlook for the October-December quarter has declined due to high inflation and fears of a further hike in interest rates by the RBI, industry body CII has said. The Business Confidence Index (BCI) of SMEs for the third quarter stood at 54.7, a decline of 2.5 points as compared to the July-September period, CII said. The survey is calculated on the scale of 0-100, moving from unfavourable to favourable situation. "Inflation and high credit cost have certainly affected the Micro, Small and Medium Enterprises' (MSMEs) sentiments regarding credit availability," CII said. The Reserve Bank, in its mid-quarterly credit policy review on September 16, hiked key short-term lending (repo) rate and the short-term borrowing rate by 25 basis points each. The central bank has hiked interest rates by 350 basis points since March, 2010, to curb inflationary pressure. It is scheduled to review interest rates again on October 25. There are expectations of another rate hike in view of spiralling prices. Besides prices of edible items, the general inflation has remained stubbornly over 9 per cent since December 2010. "We live in an age where everything is interlinked and nothing happens in isolation and the tightening policies around the world will affect MSMEs in particular," CII Deputy Director General Gurpal Singh said. The slowdown in economies like Europe and US is also impacting the business of these companies. The chamber, however, said the situation is somewhat ameliorated by RBI's initiative of providing two per cent interest subsidy to exporters who are operating in sectors like handicrafts, handlooms and carpets. Within the confidence index, respondents expected the manufacturing sector (in terms of input cost) to outperform the services sector. The BCI for manufacturing industry stood at 27.7 for the October-December period, compared to 20.1 for the services sector.

FE

AP police arrest Nigerian online fraudsters

Hyderabad  : Cyber criminals from Nigeria continue to dupe gullible Internet users by sending emails with lottery results and other bites. The Andhra Pradesh police have busted yet another Nigerian cyber criminal gang that is duping several Indian nationals of lakhs of rupees. Acting on a complaint by a Guntur resident, a special police team swooped down on a Juhu (Mumbai) hide-out of the Nigerian clique and seized several mobile phones, Internet datacards and 60 SIM cards from four Nigerians. The fraudsters were arrested on Friday evening. The Nigerian gang had sent an email to one K Lakshmi Narayana of Dachepalli (Guntur district), saying that he had won a cash prize of one million British pounds and that their diplomat was coming down to India to personally handover the prize. They collected a small fee of Rs 8.82 lakhs towards processing and ‘RBI clearance’ charges. A few months later, he realised that he was duped and registered a complaint with the Cyber Police Department. The police tracked the phone calls to Mumbai and raided the hideout and arrested the four allegedly involved in the crime. They were being brought to Hyderabad, the police said here on Saturday.

HBL

Economic history repeats thru symptomatic SBI downgrade

...As the appeal against higher interest rates gathers momentum (ahead of the RBI's upcoming monetary policy review), one cannot but note the eerie similarities between the situation in the Indian financial sector now and that of the US in the late 1970s and early 1980s. .....

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Ellaquai Dehati Bank holds Kissan mela in Ganderbal

Srinagar, Oct 21: Ellaquai Dehati Bank organized a loan Mela at Batwina in Ganderbal. District Development Commissioner Ganderbal Showket Ahmed Mir was Chief Guest and D P Sharma Deputy General Manager Reserve Bank Of India was the Guest of honor.The people of Batawina and from adjacent villages participated in the programme. Loans to the tune of Rs 71 lacs under Kissan credit Card scheme were disbursed on spot among the 100 beneficiaries. Speaking on the occasion A K Razdan Chairman of the Bank said that today’s programme of holding the loan Mela was a step forward towards the bank’s policy in reaching out to the rural masses with financial services. He said that it is our endeavor to provide all credit facilities to farmers so that they can grow economically well. Solar Home Lights were also delivered among the people of area. 

Greater Kashmir

RBI needs to get the facts right

The Reserve Bank of India meets on October 25 to decide on the future course of monetary policy. Expectations are that it will raise rates by another 25 basis points. If the influential chief economic advisor to the Prime Minister, Dr C Rangarajan, is to be believed, RBI should keep hiking rates until doomsday, or when inflation is reduced to the “comfort” level, whichever comes first. India’s inflation hawks have seized upon the just reported 10% year-on-year rise in food inflation as sufficient reason for RBI to continue on its hiking path. (In contrast, China just printed a 13.7% rise in food inflation and, to the best of my knowledge, no one, hawk or otherwise, Chinese or IMF, has suggested that China raise rates further.) When was the last time that India had persistently high inflation and its back was broken? In the mid-1990s. In March 1994, when Dr Rangarajan was the governor of RBI, WPI inflation moved to double digits. In response, RBI increased the cash reserve ratio by 1 percentage point to 15%, and in the space of the next nine months, RBI doubled call money rates to 12%-plus. The inflation response? Single-digit WPI inflation was reached in June 1995 and, by January 1996, inflation was down to only 5%. For the next 11 years, the average rate of WPI inflation remained at 5%! This sharp slowdown in inflation, some believe, was due to the Volcker-like response of India’s RBI. And this Indian experience is now being cited, quoted, and invoked, to justify the remarkably aggressive past rate hikes of RBI—and recommendations for continuation of the same. We should learn from history; if we do not, what else are we going to learn from? But there is a burden on learning, especially when it means that policy recommendations can affect the course of an economy, and millions of jobs are dependent on the “right” RBI policy. Inflation, and lack of growth, also hurts the poor the most. It is nobody’s case that high inflation should be allowed to persist; and it is everybody’s case (or should be) that the instruments used to reduce inflation be appropriate, i.e. the policy should be effective in achieving its goals. So, was a policy that would embarrass most hawks successful in reducing India’s inflation—or was this policy fortuitously correlated with a decline in international inflation? Between 1993 and 1997, median WPI inflation in developing countries fell by 2.8 percentage points, from 7% to 4.2%. The fall in Indian WPI inflation—2.1 percentage points from 7.7% in 1993 to 4.6% in 1997. In 1991, the start of the short high-inflation episode, Indian WPI inflation was 13.7%; emerging markets’ WPI inflation in the same year, a near identical 12.1%. There is no evidence—zero—to link the decline in India’s inflation rate post 1996 to Indian monetary policy, while there is a lot to link the decline in India’s GDP growth rate to this very same policy. GDP growth in India, after averaging above 7% for three consecutive years, 1994 to 1996, collapsed to an average of 5.1% rate over the next six years, 1997 to 2002. We all know about the great Indian miracle growth from 2003 onwards. What some of us may not know, and a few of us do not want to realise, is that the take-off in Indian growth took place because of a large 450 basis point decline in nominal and real interest rates during 1999 to 2003; and the take-down in growth took place because of a large increase in RBI’s monetary tightness in the mid-1990s. History suggests that it is time for RBI to be independent and break the umbilical cord with the 1990s and UPA 1 and 2’s monetarism. While it is contemplating this momentous decision, it should also take time out to study the accompanying chart. This chart documents the evolution of two inflation indices—administered food inflation and CPI inflation. The former is the inflation in procurement prices for agricultural crops. These prices are set by the government and are the prices at which the government purchases crops from the farmers. These purchase prices are food inflation! A non-recognition of this simple fact has left several inflation hawks (including RBI?) to conclude that an increase in repo rates will help reduce food inflation. Even if RBI were to increase such rates to 9% or 15% or 30%, it will have a zero effect on half the consumption basket that is food. For sure, the economy will collapse with such rate hikes—as it did mid-1990s onwards and possibly led to the crashing decline of the Congress in the 1996 national election. The graph illustrates the various turning points in Indian inflation for the last 30 years. Note the close correspondence—and especially note the economically criminal vote-getting policy of the Congress after it came to power in May 2004. Starting in 2006, procurement prices literally exploded to an 18% increase in 2008 alone. Between 2006 and 2009, the relative price of food increased by a historic 33%. The normal pattern is for the relative price to move in a plus/minus 5% range. It is this procurement price increase that has led to high and sticky inflation in India. And it is this inflation that the quixotic RBI wants to reduce by raising repo rates. Never in history has a more inappropriate instrument been used. And sometime, RBI, PMO, and the Congress party will have to answer for this uncomfortable reality. If procurement price inflation declines, overall inflation should approach the historic and tolerable 5% level. If the Congress party were to reduce the increase in procurement prices (and it appears it is doing that), food inflation will come down and so will overall inflation—and India might finally be able to progress along its potential growth path of 8-9% GDP growth.

FE

RBI vs inflation: Experts debate value of monetary policy

Nevertheless, inflation for the past 19 months has remained above 9% in the last 10 months.  So is the monetary policy losing all effectiveness? Does it still have a role to play at all in inflation? And what really is the trigger of this sustained inflation over the past two-three years?......

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Thoda adjust kar lo

......the floodgates have been opened and Hinglish may soon become our official language. Here's what the Reserve Bank of India Governor's monetary policy announcement would look like then.....

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'Frequent RBI intervention affecting FDI flows'

The Gujarat Chief Minister, Mr Narendra Modi, took the Centre and the RBI to task for its inability to control inflation.  “I am sorry to note that the Reserve Bank of India has raised interest rates 12 times since March 2010, which has had little or no effect in controlling inflation”, he said in his speech at the National Development Council meet here on Saturday. He said frequent monetary policy intervention was adversely affecting investor confidence. “FDI flows have also been affected,” he said. Mr Modi also flayed the Centre for making attempts to “tinker” with the federal structure, particularly in the implementation of development schemes. Asking the Centre to observe “federal dharma”, he said extreme vigilance and caution had to be exercised to ensure that all the constitutional authorities were allowed to carry out their mandated functions. On corruption, Mr Modi said there was a “credibility crisis” in the country and the confidence of people in governance had been shaken to the core.

HBL

Watch out for October 25! RBI may hike savings rate

All eyes are set to be on the Reserve Bank of India (RBI) next week, as it unveils its monetary policy. While the dreaded rate hike is on the cards, sources informed that the central bank might also tinker with the savings rate in its policy on October 25, reports CNBC-TV18's Latha Venkatesh.  In the previous occasion, RBI used the savings rate increase as part of its monetary policy efforts to tame inflation. With the hints thrown by various sources, it appears that RBI might hike the savings rate on October 25. Increasing savings rate is a good way of ensuring that the monetary policy is transmitted. On September 16 when the repo rate was hiked, banks didn’t transfer it. But, if savings rate is increased, it increases the cost of banks considerably. Therefore, transmitting that will become necessary for the banks, in which the RBI is ensured that the policy rate hikes control inflation and curb consumption.

Moneycontrol

RBI Governor Meets Pranab Ahead of Oct 25 Monetary Policy Review

RBI Governor D Subbarao met Finance Minister Pranab Mukherjee on Friday,barely a few days before the October 25 monetary policy review. Subbarao downplayed the meeting, saying it was a routine practice for the RBI governor to discuss the state of economy with the finance minister before a monetary review.

TOI

Too many cooks: Do we need four RBI governors or one?Are too many economists spoiling the broth?

That the UPA is fighting a losing war with inflation is now apparent – with WPI inflation remaining close to double-digits, and food inflation crossing double-digits on Thursday in a year of good monsoons. An important reason for this may be an oversupply of economists with the UPA – who have ended up confusing the markets with their cacophony of forecasts and prescriptions. This confusion is contributing to a climate of rising inflationary expectations.

Four economists – the Reserve Bank’s Duvvuri Subbarao, the Planning Commission’s Montek Singh Ahluwalia, the finance ministry’s Chief Economic Advisor (CEA) Kaushik Basu, and the PM’s Economic Advisory Council Chairman, C Rangarajan – have been holding forth on inflation as far as one can remember over the last two years. And they have all gone wrong consistently. They have been speaking in such a variety of voices and tones that the only sensible thing one can conclude is that they are not sure what to do. A government which has four top-class economists at the helm, and which is presided over by yet another PM-cum-economist, seems clueless about what to do about inflation. A glance at Friday’s newspaper headlines is instructive. Four days ahead of the next RBI monetary policy review, these are the statements coming from our eminent economists:

C Rangarajan: “We can see seasonal decline in November and December. It (inflation) is expected to come down to 7 percent by March-end,” reports Business Line  Business Standard has Rangarajan castigating the RBI for taking baby steps in the past. “RBI took baby steps to contain inflation… aggressive policy earlier would have been a preferred policy alternative,” he said.

Montek Singh: BusinessLine paraphrases the Planning Commission Deputy Chairman’s statement thus: “The inflation rate is not likely to soften before November. In fact, it may start softening by December-end and may go below 8 percent only by March 2012.”

Kaushik Basu: In a recent interview to NDTV Profit, the chief economic advisor said he would put an outer limit of 9 percent for inflation in December. Three months ago, in July, he was telling us that he expected “inflation to come down to a little over 6 per cent by March 2012,” reported The Financial Express. He went further and said the government should try to target an inflation rate of 4 percent. In September, Basu wanted Subbarao to think “out of the box”, and consider a reduction in interest rates. “I believe that is something (reduction of interest rate) which ought to be considered.”

D Subbarao: In his September policy review, the RBI governor said: “Food inflation is at near-double-digit levels, despite normal monsoons, underlining the fact that it is being driven by structural demand-supply imbalances and cannot be dismissed as a temporary phenomenon. The inflation momentum, reflected in the de-seasonalised sequential monthly data, persists. As monetary policy operates with a lag, the cumulative impact of policy actions should now be increasingly felt in further moderation in demand and reversal of the inflation trajectory towards the later part of 2011-12.”

Pranab Mukherjee: The finance minister expects inflation to come down to 7 percent by year-end. His explanation for why it is still high? “The higher inflation is mainly due to the impact of global financial meltdown and certain domestic factors.” To sum up, we have one prediction of 6 percent by March-end, one of 7 percent and another of 8 percent – and an RBI governor preferring discretion on his exact rate expectations. And what is the chief cook, the economist-PM, saying about it all? Earlier this week he schmoozed with the other cooks – Subbarao, Montek and Rangarajan – to see if they could figure out where inflation was headed and what they could do about it. The Economic Times quoted him as saying this: “The purpose of that meeting was to explore ways and means of how we can bring about a moderation in the rate of inflation,” Manmohan Singh said.

Two conclusions can be drawn from this cacophony.

One, that the flurry of predictions and prognosis is adding to the confusion on where inflation will be. Of the four economists in action, only one of them is the RBI governor. But all the others have equal qualifications for the job, and what they say neutralises what the RBI chief is saying. While the PM and Rangarajan have been former RBI governors, the other two economists had (or still have) hopes of becoming one (Kaushik Basu and Montek Singh). In essence, the market is hearing four RBI governors (or potential governors) talking – not one – even without considering the PM and the finance minister. This is what is spooking inflationary expectations. As Kaushik Basu himself argues in a recent paper: “It is widely believed…that when a well-informed responsible government or quasi-government agency makes an inflation forecast that, in itself, can cause the course of inflation in the future to change. This is because, at least in the short run, the actual inflation rate depends, in part, on what people expect the inflation rate to be. Inflation can get worsened by the very fact of higher inflationary expectations and likewise prices can be stabilised, to a certain extent, by virtue of leading people to expect that prices will be stable.” Maybe this is why government economists have been trying to talk down inflation saying the WPI will fall to such-and-such level by such-and-such date. But talking down inflation is a double-edged sword: it works only if some of the predictions are borne out by reality. But this has demonstrably not been the case. In December last year (2010), Basu was predicting 6.5 percent inflation by March 2011. “I am hoping that we will end the year around 6.5 percent. It is a bit worse than what we had earlier expected but not too bad,” Basu had said. Actually, Mr Basu, since then it has only gotten worse and worse. So talking inflationary expectations down cannot work when you get your forecasts dead wrong. Maybe, it’s time to let Mr Subbarao be the sold voice on inflation? Two, there is still a strong possibility that all of them may continue to be wrong, given the sheer amount of potential inflation still left in the economy. Oil prices may have to be raised to reduce under-recoveries of Rs 1,20,000 crore for the marketing companies. Power tariffs have to be raised as distribution companies are reeling in losses. Coal prices have to be raised due to high payouts to workers and shortages. The government may have to borrow more given the number of companies coming for capital or bailouts (banks, Air India, etc). Then there is the shortfall in revenues and disinvestment proceeds. In short, the economy’s inflationary potential is still understated. When governments borrow excessively, rates rise, and inflation results. Maybe the economists should concentrate on reducing the voodoo element in UPA economics and let Subbarao deal with the nuancing of the anti-inflation message.

Firstpost

In a first, banking Lokpal speaks up

Maximum complaints against SBI and its subsidiaries

Jaipur : The Reserve Bank of India's own Lokpal, or the Banking Ombudsman, broke its silence here on Friday to reveal the number of complaints it received during the year from customers against individual banks. Though introduced back in 1995 by the RBI, it was only this year that the Banking Ombudsmen, 15 of them all over the country, were given permission by the authorities to reveal the details to the media. “We are going public for the first time after a recent decision by the RBI authorities to be more transparent on the activities of the Office of the Banking Ombudsman [OBO], which is primarily meant to help the small customers,” said Banking Ombudsman for Rajasthan N. P. Topno interacting with journalists here. “The scheme is meant to be an inexpensive and expeditious form of grievance redressal relating to deficiencies of customer services rendered by the banks on selected 23 grounds or aspects,” he said. The figures for the year 2010-11, disclosed by Mr. Topno and his team, Deputy General Manager and Secretary K. Sundari; and Assistant General Manager S. N. Senapathi, reveal the largest number of complaints received was from the customers of the State Bank of India and its subsidiary banks.  Out of a total of 3,512 complaints from all over Rajasthan, 46 per cent or 1,618 pertained to SBI and its subsidiaries, with State Bank of Bikaner and Jaipur (SBBJ) which had 879 complaints against it, leading. Other nationalised banks in Rajasthan together accounted for 29 per cent or 1,021 complaints. Private banks together elicited 594 or a 17 per cent of the total complaints. There were 101 complaints against foreign banks and 71 against Regional Rural Banks. None of the cooperative banks in Rajasthan is qualified to be listed in the purview of Banking Ombudsman. Mr. Topno was quick to add that the reason for SBI subsidiaries accounting for a big share of the complaints could be due to their larger presence in the State. The SBBJ alone has over 700 branches in Rajasthan, while SBI has 370 branches. “If one takes per branch complaints, it comes to 1.16 in the case of SBBJ, which is lower than most of the banks,” Mr. Topno pointed out. For SBBJ at national level, the average of complaints is 1.53 per branch. SBI has an average of 1.94 complaints per branch. The national average of complaint per bank branch stood at 1.7 in the current year. The nationalised banks did not do too badly as Punjab National Bank with 353 branches had 314 complaint against it, while Bank of Baroda with 392 branches had 254 complaints — both less than one complaint per branch on an average.  The position was similar in the case of UCO Bank (162 branches) with 114 complaints and Bank of India (72 branches) with 32 complaints. Among the private banks, ICICI with 378 branches all over Rajasthan accounted for 324 complaints, while HDFC with 67 branches had 149 complaints against it. The Ombudsman received 58 complaints against Axis Bank which has 65 branches in the State. Standard and Chartered Bank with one branch evoked 38 complaints. “In all, Rajasthan had five per cent of the total complaints received at national level. The number of complaints also saw a decline in the State this year from 4,560,” Mr. Topno said.  The Ombudsman disposed of 3,549 complaints, of which 1,908 (53.70 per cent) were settled in favour of the customers. A majority (24 per cent) of the complaints pertained loans and advances while 15 per cent were related to credit cards. Another 13 per cent concerned pension-related aspects. 

HBL

SLBC's special meet to review Govt sponsored schemes

Govt in spot over anant selection

... Anant was selected to the past by a search-cum-selection committee headed by Planning Commission Deputy Chairman Montek Singh Ahluwalia for a five-year term. Besides Ahluwalia, Deputy Governor of RBI Subir Gokarn and S P Mukherjee of the Central Statistical Association were the members of the search-cum-selection committee.....

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Finance Ministry considering district-wise rollout of ATMs

With an aim to make ATM operations more viable for banks, the Finance Ministry is considering distribution of ATM roll-out district-wise on the lines of the ‘one district one bank' model. A shared infrastructure, it feels, would reduce the cost of setting up the ATM infrastructure and ensure better distribution also. In fact, banks are open to ATM infrastructure-sharing model where the licence to set up ATMs could now be distributed district-wise to banks or service-providers, and the ATM infrastructure sharing could be fee-based.  “We feel it's better to distribute district-wise, and some bankers have also mooted the idea of white-label ATMs,” Ms Shubhalakshmi Panse, Executive Director, Vijaya Bank, told Business Line. White-label ATMs are those which are not bank-owned but outsourced completely to service-providers. However, the Reserve Bank of India is against setting up of white-label ATMs in India.“Currently, we are discussing the modalities of ATM-sharing and hope to finalise soon,” said Mr A. S. Bhattacharya, Chairman and Managing Director, Bank of Maharashtra. He pointed out the Government is yet to decide on this issue. According to some bankers, the Government has the following options — allow banks to purchase ATM machines and outsource all other facilities; outsource the ATM services completely; or own the entire ATM operations.  “The idea is to reduce cost and avoid duplication of efforts,” pointed out Mr Bhattacharya. By doing this, he added that the Finance Ministry hopes to reach out to underserved rural areas better.  One bank could bid for a district and others could just plug into that bank's ATM, said Ms Panse.  On the other hand, she added that some bankers have also suggested setting up of an ATM Corporation of India, which would be entrusted with the responsibility of setting up of ATMs in the country, on the lines of the National Payment Corporation of India.

HBL

Shopkeepers shortchanged

CHENNAI: The Diwali rush has begun and coins of Re 1 and Rs 2 denomination as well as notes of smaller denomination are becoming difficult to get.  While shopkeepers in the city said they were forced to buy coins and notes from unauthorised agents at a premium, RBI sources denied there was any shortage and said private agents were hoarding the coins to be sold just before Diwali. The commission on notes and coins ranged from 1.5% to 13%. Coins, especially, are hard to get and cost 15% more, say private agents. They say a bundle of 100 crisp Rs 10 notes costs Rs 100 while a bundle of Rs 20 notes costs Rs 300. And a bag of 2,500 coins, regardless of the denomination , comes for Rs 375. Traders in T Nagar and Koyambedu, where the problem is said to be severe, claimed they had to depend on agents as banks refused to provide adequate low denomination currency.  "This is the only time small-time agents like us can make some money. There is a demand for coins and we are doing our best to supply traders coins and notes,'' said G Manickam , who deals in coins and currency.

G P Borah, General Manager, Issue Department, Reserve Bank of India, told TOI that coins worth Rs 3.7 crore had been pumped into the city during the last one week to meet the demand and that there was no shortage.  "We are sending periodical coin remittances to the banks for distribution to the public besides issuing coins in small numbers to retail customers at our bank through the Coin Vending Machines. Due to heavy demand for coins for the ensuing festival season, we are also issuing coins to banks over our counters on production of certain documents such as trade licence, service/sales tax challan copy, PAN card, etc. We also have a tie-up with a few banks to distribute coins once a month in major market areas like Aminjikarai, Koyambedu, Purasawalkam, Egmore, Selaiyur, T Nagar, Washermenpet and George Town in co-ordination with respective traders' /merchants' associations," he said.

TOI

Don't blame economic woes on global issues

... Even more importantly, economic mandarins in the Prime Minister's Office, the Ministry of Finance, the Planning Commission and the Reserve Bank of India have rather reluctantly conceded what was already rather well known: namely, that they have not the foggiest idea how to control runaway food inflation.......

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Small savings schemes lag due to poor rates

With bank deposit rates touching the 10%-mark, investors are gradually losing appetite for small savings schemes, such as Public Provident Fund and Post Office National Savings Certificate. Despite tax incentives, the growth in small savings deposits has lagged due to their unattractive interest rates and the expansion of bank branches across the country. During April to August 2011, small savings collections dipped and there was an outflow of around R400 crore. This has affected the government’s borrowing programme and the Centre now plans to bridge the gap by borrowing R53,000 crore. In fact, following the recommendations of the Reddy Committee, there was a brief period— from FY 2001 to FY 2003— when small savings rates were aligned with market rates. However, since then, the rates have not seen any change. An RBI expert committee under the chairmanship of Shyamala Gopinath, former deputy governor of the Central bank, has suggested that their rates be linked to the market rates. In a recent report on household savings, Rohini Malkani, Citigroup’s chief economist for India, says that to shore up higher amounts under small savings, structural changes are required. “To this end, implementing recommendations proposed by the Committee on National Small Savings Fund, such as rationalising the multiplicity of the schemes and benchmarking yields to the secondary market yields on Central government securities of comparable  maturities, are the steps in the right direction,” she says. Small savings schemes are operated through a network of around 1,50,000 post offices, 8,000 bank branches and 5,00,000 agents.  Among the various postal savings schemes, the monthly income scheme and Kisan Vikas Patra account for over 50% of the total outstanding savings.  Traditionally, after bank deposits, small savings are the second largest contributor to household financial savings. The outstanding collections under small savings have grown from R1.9 lakh crore in FY 2000 to R5.8 lakh crore in FY 2010.  The Citigroup’s analysts say while small savings play an important role in garnering resources, they play a relatively smaller role in financing the Centre’s deficit.  Experts, however, say to make small savings attractive to retail investors, the Centre must increase the interest rate now to make the returns inflation-adjusted. 

FE

RATE HIKE WILL BE A MISTAKE

.....Frustrated by the lack of support from fiscal policy and belatedly recognizing that persistent inflationary pressures are as much a demand pull as a structural food inflation story, the Reserve Bank of India (RBI) has delivered a steady diet of interest rate increases this year to bring inflation under control.....

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Better than pause, a small rate hike

...Historically speaking, changes have not always been made in multiples of 25 basis points. RBI had lowered the repo rate from 7.5 per cent to 7.1 per cent on March 7, 2003, and again in the same month on March 19, 2003, the repo rate was reduced by 10 bps to 7 per cent. This time, it should be a move in the opposite direction......

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A solution to black money

...The Reserve Bank could stop issuing high value notes but permit State governments (or district banks) to do so on condition they are legally valid only within the region that issues them, and for three months only......

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Kerala govt concern over declining CD ratio of Dhanalaxmi Bank

The Kerala government today expressed concern over the declining credit-deposit ratio of private Dhanalaxmi Bank and said it will approach the Finance Ministry and RBI to "sustain" the lender''s operations while keeping company headquarters in the state itself. "The Kerala government will approach the Finance Ministry and RBI to take steps to sustain the state-based bank and also to keep its headquarters in the state," Rural Development Minister K C Joseph told the State Assembly in response to a question from former Finance Minister T M Thomas Issac. Joseph said the bank''s credit-deposit ratio and profit have declined in recent years. Though Kerala has no control over the bank''s functioning, it will approach the Centre and RBI to sustain the bank in the state, he said. Issac has alleged that a major chunk of the bank''s shares has now gone into the hands of some big corporates.

MSN News

Problems of prosperity corner a central bank

It’s difficult to envy the Reserve Bank of India. The central bank has wielded its sharp interest-rate tool a dozen times in the last 19 months, and a blunt one (raising the cash reserve ratio) three months before the hiking spree started in March 2010 — all classical monetary moves — to moderate, if not feeble, effect. To boot, it does not have an effective weapon against rising purchasing power and consumption. For that matter, neither does a crisis-embroiled government. Ergo, food inflation keeps rising — it bounded up to 10.60% for the week ended October 8 year on year from 9.32% in the week before as vegetables, fruits, milk and protein-based items turned costlier. “Seasonal and structural factors are contributing to the hike in food inflation. Government policies are only boosting rural income, not productivity,” points out A Prasanna, chief economist, ICICI Securities Primary Dealership. He was referring to stuff like NREGA, which guarantees 100 days of work to those in hinterland. So, effective or not, the market expects the RBI to hike the repo rate — the rate at which banks borrow from it— by 25 basis points next Tuesday, but the thirteenth such effort may end up as another tokenism. “That’s because food inflation is driven by factors beyond the control of the RBI. Nobody borrows money to eat food, so it cannot be controlled by the apex bank,” said Madan Sabnavis, chief economist, CARE Ratings. But, at the same time, the cost of producing food has been rising as interest rates harden. There is clearly monumental failure to address the supply-side constraints, say experts. Says Anubhuti Sahay, economist, Standard Chartered Bank: “The government needs to invest more in agriculture, irrigation and other infrastructure. Rural demand is picking up because of government’s social security schemes.” Food policy analyst Devinder Sharma said there is no mechanism to check transactions between wholesalers and retailers. “The price of agricultural commodities doubles or rises even more there. Unfortunately, the government is not taking any step to reduce this,” says Sharma. O P Bhatt, former chairman of the State Bank of India, has a different take on the situation. Demand for food is greater in India compared with other countries, he says, because there are millions of poor who have one or one-and-a-half square meals a day and others who consume more. “We have 100-200 million who are very poor. The demand for food is coming from all these sections of population, contributing to food inflation,” he says. So it’s a sign of economic prosperity and the benign economic theory holds true, where conditions prevailing in the economy tend to exert a beneficial or favourable influence, he says.

DNA

State Bank of India may not follow RBI in raising rates

MUMBAI: State Bank of India (SBI), the country's largest bank, may refrain from raising rates in the near future even if the banking regulator, the Reserve Bank of India, hikes policy rates.  This was indicated by SBI's managing director Hemant Contractor in response to a media query on whether SBI would raise interest rates if RBI were to hikes policy rates. "Till now we have passed on, but we have to look at asset quality and things like that... Also, with credit growth slowing, the ability of banks to pass on the hike is a little limited," he said. SBI has pegged its base rate at 10%, which is among the lowest among banks.  In fact, most banks have not raised rates after RBI raised rates on September 16, 2011. Bank officials fear that the increased lending rates will hurt borrowers who may find it difficult to repay their monthly installments and, in turn, default on loans. Secondly, they feel the demand for loans has come down due to already alleviated rate of interest. MUMBAI: State Bank of India (SBI), the country's largest bank, may refrain from raising rates in the near future even if the banking regulator, the Reserve Bank of India, hikes policy rates. This was indicated by SBI's managing director Hemant Contractor in response to a media query on whether SBI would raise interest rates if RBI were to hikes policy rates. "Till now we have passed on, but we have to look at asset quality and things like that... Also, with credit growth slowing, the ability of banks to pass on the hike is a little limited," he said. SBI has pegged its base rate at 10%, which is among the lowest among banks. In fact, most banks have not raised rates after RBI raised rates on September 16, 2011. Bank officials fear that the increased lending rates will hurt borrowers who may find it difficult to repay their monthly installments and, in turn, default on loans. Secondly, they feel the demand for loans has come down due to already alleviated rate of interest. Another rate hike will further dampen loan growth. Recently, SBI chairman Pratip Chaudhuri had said that demand for loan has come down. "For banking industry, loan growth is 4.5% from year to date (from April to early October) and for SBI it is 5%. RBI is slated to announce its half-yearly policy on October 25 and many economists and money market dealers feel that the central bank will raise policy rates by at least 25 basis points to control inflation. Headline inflation has touched 9.72%, much above RBI's comfort level of 6-7%.  Meanwhile, SBI's Contractor said that the bank will take a call on raising funds through medium-term notes (MTN) in November. "If MTN happens, it will be upwards of $500 million," he said soon after announcing a launch of foreign travel reloaded prepaid card in Saudi Riyal currency.

ET

Trident Microfin is under a Corporate Debt Restructuring plan: How can Kotak Bank slap a legal notice on the microfinance institution?

.....All said and done, it seems very unusual that action has been taken against Trident, an MFI that has committed to the CDR mechanism and is in the process of having its debt restructured. With Kotak Bank saying that it is unable to share information because the matter is sub-judice, a lot of the questions remain unanswered. Hopefully, the RBI and the concerned administrators of the CDR system will get into the relevant issues identified above as soon as possible and bring an end to this very peculiar situation. .......

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RBI's last window of opportunity – S.S.Tarapore



If we want quick and sharp abatement of inflation, there is no alternative to strong monetary policy measures. And the RBI should take early action before the window shuts



All eyes will be on the RBI Governor, Dr D. Subbarao's monetary policy announcement of October 25. Formulation of the Reserve Bank of India's monetary policy, even in normal times, is an unenviable task, but the ensuing policy comes against the backdrop of an unusually difficult scenario, both global and national. In India, fiscal policy provides no support to monetary policy. On the contrary, the increase in borrowings by Rs 53,000 crore in the second half of 2011-12 will add to the problem of monetary management.  While the RBI needs to signal a continuing tight monetary policy, to enable the borrowing programme to go through, it will have to be liberal in its open market operations and/or provide for a larger accommodation at the repo window. This will inevitably result in upward pressure on the government's cost of borrowing as also in the crowding out of commercial sector credit. And the upshot will be that the overall policy will not be conducive to an anti-inflationary stance. The external scenario is of little comfort to the authorities. Sluggish conditions in the global market will inevitably affect exports while imports would rise, thanks to the distinctly over-valued exchange rate. The balance of payments current account deficit (CAD) will push towards the 3 per cent of GDP level which would cause concern to the authorities. Real GDP growth in 2011-12 could end up close to 7.5 per cent, and while this is a good performance in the context of the global slowdown, the lobbying for a halt to monetary tightening is gathering strength.

Don't change stance

Industry is screaming blue murder, and now economists have joined the chorus crying for a halt to the further tightening of interest rates. It could be argued that credit expansion in the first half of 2011-12, at Rs 1,51,072 crore (3.8 per cent), is clearly lower than the expansion of Rs 1,80,040 crore (5.6 per cent) in the corresponding period of the previous year.  The inflation scenario, which is the primary concern of the RBI, is raging at 9.8 per cent, on a year-on-year basis, which is clearly not acceptable and well above the tolerable level of 5 per cent. It would appear that monetary policy is the only wing of economic policy fighting inflation — the other wings of overall economic policy are merely following an open-mouth policy of talking down inflation without taking any effective measures. In the recent period there have been some pertinent studies by RBI economists. According to the Working Paper by Mr Deepak Mohanty and others on Inflation Threshold in India: An Empirical Investigation, an increase in the Wholesale Price Index (WPI) inflation beyond 5.5 per cent has a negative impact on growth. A premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. The Paper argues that the inflation objective, or target level for inflation, should be lower than the inflation threshold as there are lags in the monetary policy transmission process. Another Working Paper titled Why Persistently High Inflation Impedes Growth concludes that the central bank's objective of containing the inflation perception to 4-4.5 per cent is consistent with the need for balancing growth maximisation, threshold inflation of about 6 per cent and maximising low inflation. These two studies are outstanding seminal contributions on monetary analysis and economists in banks and elsewhere who readily pronounce on monetary policy would do well to imbibe the contents of these Papers.

Strong action

It is sometimes argued that as the RBI did not undertake aggressive policy action earlier, it should now not undertake strong policy action. It has, time and again, been explained that it is important to take strong policy action well before the upper turning point of the cycle. In fact, if this is followed, the upper turning point can be delayed and the economy can creep along the ceiling of growth for a longer period. Now that monetary policy was not used aggressively during the upturn of the cycle, should RBI put a pause to the series of interest rate increases? Such a move would be disastrous as inflation can get totally out of hand. The longer the RBI delays strong policy action the more inflation gets entrenched in the system.  The RBI need be no apologist for its monetary tightening. It would be best if, on October 25, the RBI raises the repo rate from 8.25 per cent to 8.75 per cent and also raises the cash reserve ratio from 6.0 per cent to 6.50 per cent. While these measures may appear harsh, if what we want is a quick and sharp abatement of inflation, there is no alternative to strong monetary policy action. The window of opportunity for strong monetary policy action is very narrow and the RBI should take early action before the window shuts. While there is some advantage in advanced guidance on the course of monetary policy, excessive guidance can severely curtail the effectiveness of monetary policy.

HBL 

RBI must fight inflation despite slowdown: Rangarajan



Inflation remains way above what is considered as the comfort level, said C. Rangarajan



New Delhi: India’s economy will grow at a lower-than-expected pace of 8% during the fiscal year, but a slew of rate rises are not solely to blame, and the Reserve Bank of India (RBI) should keep up its inflation fight, a top adviser to the prime minister said. Inflation remains way above what is considered as the comfort level,” said C. Rangarajan, the chairman of the prime minister’s economic advisory council said on Thursday. “In that situation it becomes absolutely essential for the central bank to act.”  At a time when peers around the world are easing monetary policy to head off a downturn in the global economy, the RBI is widely expected to raise rates again at its 25 October policy meeting. “The primary responsibility of the country’s central bank is to tame inflation,” Rangarajan said at a news conference in New Delhi. In a further sign the rate increases have failed to rein in inflation, the latest weekly data showed the food price index was up 10.60% through 8 October versus a year ago, compared with a 9.32% reading in the prior week. Sluggish industrial output growth, high rates and fallout from the euro zone crisis have all taken their toll on Asia’s third-largest economy, with its main policymakers revising down their growth forecasts for the fiscal year. Businesses have seen a steady rise in their cost of funding following a dozen rate increases by the RBI even as emerging economies such as Brazil and Indonesia have eased policy. “Slow growth in industrial production should not be entirely put at the door of rising interest rates,” he said, adding that economic growth was also hurt by bottlenecks on the supplyside, citing coal shortages and problems in the mining sector. Economists expect India’s slowing growth and inflationary pressures to stretch well into next year, a Reuters poll showed, and consensus predicts inflation at 8.8% in the year ending March 2012, much higher than their previous forecast in July.  Rangarajan, the adviser to Prime Minister Manmohan Singh echoed finance minister Pranab Mukherjee’s comments on Wednesday that most observers expect India’s economy to grow by less than 8% in the fiscal year.  The Union budget had projected economic growth of around 9% for this fiscal year that ends in March 2012. Both officials appeared resigned to another rate hike, despite grumblings from industry leaders that high borrowing costs were damaging investment. Rangarajan said India needs to use both fiscal and monetary methods to tame inflation and to maintain high growth. He predicted headline inflation would ease to 7% by March, when the current fiscal year ends. The council provides economic forecasts twice every year. It had revised downward its initial forecast of around 9% growth to 8.2% in July. Rangarajan said it will be difficult for India to meet the budgeted fiscal deficit target of 4.6% of GDP this year, without controlling subsidies. However, he said he did not expect the deficit to breach 5%. He said India needed to raise controlled prices for diesel to cut oil firms’ revenue losses on retail sales, adding such a move could happen when inflation starts moderating. India freed petrol prices in June 2010, but still subsidizes diesel, which accounts for about 70% of all petroleum products used in the country. Private economists see the fiscal deficit widening to up to 5.6% of gross domestic product in the current fiscal year, against government’s target of 4.6% as the gap between tax receipts and spending widens. India’s industrial output growth has dwindled to low single digits, while car sales are expected to rise just 2-4% this fiscal year, an industry body had forecast, sharply lower than 30% growth last year.  Headline inflation has been above 9% for 10 straight months, driven up by snags affecting food distribution, weakness in the rupee and high oil prices.

Mint