Don't anticipate intervention as liquidity is comfortable: RBI

The Reserve Bank feels that liquidity in the system is comfortable and therefore it does not anticipate any intervention in the form of an open market operations (OMO) in the near future. "We don't anticipate that kind of a situation (shortage of liquidity) to emerge and will keep a watch on it," RBI Deputy Governor Subir Gokarn told reporters at the customary post-policy meeting. He said the current strain on liquidity is a seasonal phenomenon. "The current situation is simply a seasonal effect. We do expect (that) during the Diwali period, there is high demand for money... So, banks have to rely on repo to meet the CRR requirements. This money will come back to the system sooner." Gokarn added that the week preceding Diwali week, there was a daily transaction of around Rs 40,000 to Rs 50,000 crore, which is in a comfortable range of the central bank. As per the monetary authority, liquidity in the banking system should be maintained at 1 per cent above or below the deposit base. "Obviously, that is the signal we have sent out with the 1 per cent. If that persistently stays above that number, that provides us some basis to act," he said, adding but RBI will not intervene only to check rising yield in G-Sec. "OMOs will not be conducted to keep yields down. It will only be initiated, if at all, for liquidity management. Though it has a bearing on the yield, it can't be used primarily for yield," he added. 

IBN Live

Subbarao Goal to End Rate Rises May Hinge on Policy

Indian central bank Governor Duvvuri Subbarao’s plan to end a record cycle of interest-rate increases may hinge on the government’s ability to rein in its “expansionary” budget.....

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RBI’s monetary policy aimed at taming inflation: Subbarao

The Governor of Reserve Bank of India, D. Subbarao on Tuesday assured that RBI’s monetary policy will remain aimed at taming inflation and also be sensitive to growth. While addressing a press conference in Mumbai on Tuesday after the announcement of the second quarter review of RBI’s monetary policy, the RBI governor said, as an assurance to investors that if inflation trajectory conforms to projections, further rate hike may not be warranted. He said that RBI’s policy will be independent of Government borrowing but variable fiscal deficit during inflation will be taken into consideration while calibrating monetary policy. He also said that since the rupee exchange rate is dependent entirely on external factors it will not be used as an instrument for managing inflation. While speaking about the savings bank interest rate deregulation, which is effective from on Tuesday, the RBI Governor said that banks have been given discretion to devise their own policies and plans on their products and rate subject to conditions. He added that the RBI will be willing to intervene if the banks feel the need for regulatory interference. He suggested that banks should have friendlier policies for savings bank account holders from lower economic households. The RBI Governor said that the deregulation will be beneficial for the economy as it will also support financial inclusions.

http://newsonair.nic.in/news.asp?cat=National&id=NN1481

RBI raises repo rate by 25 bps, says may not need further hikes

The Reserve Bank of India raised interest rates on Tuesday for the 13th time since early 2010 but said it was likely to hold off on further increases as it expects high inflation to ease beginning in December. The RBI raised its policy lending rate, the repo rate, by 25 basis points to 8.5 percent, in line with expectations in a Reuters poll last week. It also revised down its growth forecast for the fiscal year ending in March to 7.6 percent from 8 percent with a downside bias earlier, while sticking with its forecast that headline wholesale price index inflation will ease to 7 percent at the end of the fiscal year. The likelihood of a rate move at its December review is "relatively low," the RBI said in a statement. "Beyond that, if the inflation trajectory conforms to projections, further rate hikes may not be warranted," it said. The RBI under Governor Duvvuri Subbarao has been one of the most aggressive central banks anywhere and has continued to take its fight to inflation even as its global counterparts have refocused monetary policy towards promoting growth. Despite continued policy tightening, inflation in India remains sticky, with the headline wholesale price index up 9.72 percent annually through September, its 10th straight month above 9 percent and highest among the BRIC grouping of economies that includes Brazil, Russia and China. Meanwhile, India's economy grew at 7.7 percent in the June quarter, its weakest in six quarters, while industrial output growth was below 5 percent in July and August. In last week's Reuters poll, 17 economists had expected the central bank to raise rates on Tuesday but 13 had expected it to pause, with most respondents expecting rates to remain unchanged after Tuesday for the remainder of the fiscal year through March.

Has RBI thrown the baby out with the bathwater?

We are happy that the Reserve Bank of India (RBI) has indicated a pause after today’s 25-basis point policy rate hike, assuming inflation remains in check. In any war against inflation, some sacrifice has to be made in terms of immediate growth to ensure future growth. At the same time, monetary policy must be forward-looking. We share RBI forecast that inflation would moderate to 7 per cent levels by March, 2012. In our view, the current 7.5 per cent growth rate is an achievement in itself, relative to the global context. The policy rates are very high in terms of transparency, as RBI has made its forward-looking stance very clear. Giving a hint that probably this is the last rise, would help borrowers to take more informed decisions. The deregulation of the savings deposit rates is indeed a big step in interest liberalisation. This would lend flexibility to banks to introduce different products in the interest of the retail customers. Introduction of instruments like new two-year and five-year cash settled interest rate futures, credit default swaps and changes in short sales of gilts would lend depth to our markets. We expect, lending rates to come off by 100 basis points in the coming April-September slack season, once RBI begins to cut policy rates and the 10-year government bond yield to calm down to mid-cycle eight-8.5per cent levels by March. The government's disinvestment programme would be key in guiding further action by the RBI.

Sajjid Chinoy - India Economist JP Morgan (BS)

Competition on rates could hit banks with large savings a/c base

The Reserve Bank of India (RBI) decision to deregulate savings bank deposit rates could shave off nearly 13% from the profits of India’s banks if they offer even 1 percentage point more on deposits to their customers..........

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Fixed deposit rate hike, a remote possibility

The interest rate on fixed deposits in banks may not go up with the RBI increasing the repo rate by 25 basis points. Banks generally revise interest rates on deposits and advances whenever the central bank increases the repo rate. However, this time bankers say that the deposit rates have already peaked leaving little scope for any upward revision. At present, the interest on term deposits between 46 and 60 days is in the range of 5 per cent to 8.50 per cent. It is between 8 per cent and 10.50 per cent for varying periods from six months to five years, and bankers say that this range is the maximum in view of the increasing costs of deposits. There are other factors that make hiking deposit rates a remote possibility. The credit growth during the first two quarters was sluggish which means a rather humbled growth in net interest income and net interest margins. The apex bank also observed that planned corporate fixed investment in new projects declined significantly since the second half of 2010-11 and has stayed low in the first quarter of 2011-12. Consequently, the pipeline of investment is likely to shrink, putting growth in 2012-13 at risk. This would make credit offtake a tough proposition for banks. Further, to push up retail advances, banks are also offering some concessions and incentives which will add up to the cost of funds.  Any increase in deposit rates in these circumstances might lead to an additional burden adversely impacting the profitability. Most of the banks had revised deposits rates during August-September and claim that today's hike in repo and reverse repo rates has already been factored. So, while you may have to pay a little more interest on loans, the earnings from your term deposits are unlikely to go up immediately.

HBL

We will not cut rates even if inflation drops to 7% - Economy and Politics - livemint.com : D Subbarao

...But certainly, you cannot go away with the impression that March 2012 will be a marker when interest rates will start coming down. Certainly not. That will be a wrong inference. Because we have said in the policy document that the long-term inflation should come down even below that. So 7% is not the threshold.......

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Pain and promise of RBI hike

The RBI has done it again. However, it took the sting out of the latest hike in interest rate by virtually committing itself to no such hike in the immediate future. So, the pain of the 13th straight 25- basis point increase in the repo rate since early 2010 was smothered by the improbability of another such hike in December. The relief from further hikes was enough to send the markets into a celebratory spiral. The Sensex ended the day with a gain of 362 points. The downward trend in the indices was happily broken on the eve of the Mahurat trading on the auspicious occasion of the Deepawali on Wednesday. Market men had been starved of good news. A simple announcement by the RBI that it might be, at last, through with its recent cycle of benchmark interest rates hikes did the trick. Regardless of the merit or demerit of the latest interest rate hike, RBI Governor Duvvuri Subbarao ought to be congratulated for his resolve to persist with his bitter prescription to tame inflation. Even if the inflationary fires are proving hard to be tamed, Subbarao cannot be faulted for wanting to douse them with the only tool available to him. Economic pundits agree that there are limits to what the central bank can do to contain inflation. Using monetary policy as the lone anti- inflationary tool has met only a partial success. The repo rate following the latest hike of .25 percent has now reached 8.5 percent but the back of the inflationary monster is far from broken. At the end of the September quarter, the Wholesale Price Index was ruling 9.72 percent higher than the same period last year. However, at the retail level, where it matters most, the price- rise was nearly double that figure. Indeed, food inflation was higher than what the aggregated WPI or the CPI would suggest. Thus, the RBI cannot be faulted for persisting with its homeopathic doses of interest rate hikes, even though some critics argue that its objective would have been better served had it administered the bitter pill of a full 100- basis point hike in a single- shot when the inflationary fires were at their peak. As we noted, the pain of the latest increase was very nearly killed by the promise of no more hikes, but Finance Minister Pranab Mukherjee did well to express concerns about the impact on growth. Projections of growth in the current fiscal have been scaled down. Even RBI on Tuesday revised it from the earlier eight percent to 7.6 percent. Increasingly, the official figures for growth in 2011- 12 are getting closer to the independent assessment which puts it at about seven percent. Simply put, the nine percent growth talk has virtually vanished even from the official quarters. Sector after key sector of the economy is under stress. Whether it is the automobile or iron and steel, cement or construction, the economy is in the grip of a creeping slowdown. Credit off- take is slow. Banks are once again suffering the pain of rising non- performing assets. Power sector is in the grip of a veritable debt crisis, with the Government proposing to write off at least fifty percent of their outstanding loans. There is little the RBI interventions in the policy rates can do here to remedy the worsening economic scenario. Fiscal measures are required. Unfortunately, the Government continues to be the worst culprit, spending far beyond its means. There is no way the budgetary deficit targets can be met in this fiscal. Growing demands on the Government from the Sonia Gandhi- led National Advisory Council to distribute largesse, without any consideration of the fiscal situation, is bound to make Mukherjee's task much more difficult. Besides, his expectation to raise Rs. 40,000 crores from disinvestment has been belied. So far, only Rs. 1,000 crores has been collected thru disinvestment. Given the bleak management of the economy, especially due to the current policy paralysis in the Government, it is doubtful if the RBI hikes in interest rate alone can contain the inflationary fires. The ‘aam aadmi’ is actually on ‘Ram Bharose’. 

FPJ

The final destination

The Reserve Bank of India took savings interest rates in the banking sector to its final destination by announcing deregulation with immediate effect. We can only compliment the merits of deregulation that facilitates efficiency in allocation of resources and strengthens the transmission mechanism of monetary policy by allowing the entire term structure of interest rates to move in tandem with the policy rate. As the Indian economy witnesses a rapid structural transformation, on the back of an increase in formal employment and a greater degree of financial intermediation, saving accounts penetration (a basic indicator of financial inclusion/ penetration of banking services) is set to witness a secular rise. The increase in savings interest rates & the eventual deregulation of the same is a transformational positive step towards enhancing the rights of the small retail customer, who are typically not savvy enough to maximise the returns on small savings through FDs/investments and will greatly benefit through this alignment towards market based savings rates. The initial phase of deregulation may see some competition amongst banks manifesting in higher rates. However, as the system evolves we could see the savings rate stabilise and converge. This phenomenon is akin to what was witnessed in Insurance, Airlines, Telecom and Pharmaceuticals sectors as they aligned to free market orientation. Banks in a deregulated environment will have a greater scope for product innovations around the savings account and a better opportunity to cross-sell. 

Rana Kapoor, Founder, MD & CEO, YesBank (BS)

One-trick pony

Ordinary Indians would be justified in asking why the RBI hiked the repo rate for the 13th time, when 12 earlier increases haven't calmed inflation.

The Reserve Bank of India (RBI) has done the only thing it knows to do when faced with intractable inflation: Raise the price of money in the hope that it will help dampen overall demand. This, in an economy where the output of goods and services are lagging behind demand, causing their prices to rise uncomfortably. All very textbook and straight bat, though ordinary Indians can be excused for wondering that if the increases in RBI's repo or lending rate haven't worked 12 times in the past, why should they the 13th time. A better solution to inflation, perhaps then, would be to augment supply. But in this case, if higher interest rates reduce investment demand – which the RBI admits is what its previous rate hikes have actually ended up doing – how would output increase? Only the central bank can explain this mystery. Rather than doing so, it has promised – just as an insistent child doing something naughty would – that this is the last and there will be no more rate increases hereafter. Or like the God who, having created conditions for a recession, chose to rest on the seventh day and press the pause button. But if raising interest rates is the only trick a pony knows, there is no telling how much money would cost in India, even as elsewhere in the world its price nears zero. The RBI, further, has also de-regulated savings bank interest rates. This could mean banks offering higher rates on these deposits, which will then force them to raise lending rates as well. At the end of it, when the dust settles, it is growth that will come down (the central bank has, indeed, revised its own earlier GDP growth estimate for 2011-12 from eight to 7.6 per cent). Meanwhile, the Government, with its eye on the coming Assembly polls in Uttar Pradesh, has raised its minimum support price for the new wheat crop by 14.7 per cent and rapeseed-mustard by over 35 per cent – at a time when food inflation has again crossed double-digits. What is won at the races would, thus, be lost at the roundabouts. It is nobody's case that monetary policy should not be used to control inflation or the central bank just be a silent bystander. But it beats comprehension that — when its own Deputy Governors have been maintaining that the inflation problem is structural, emanating from persistently high fiscal deficits, and also due to high global energy and commodity prices — the RBI should rely on the same stock delivery each time: Hike in the repo rate. There are times when non-action is sensible action. This was one of them. But the RBI, possibly a result of systemic inertia, felt compelled to do something. And it has done the wrong thing. 

HBL

A struggling balancing act

In raising policy rates on Tuesday, the Reserve Bank of India (RBI) can still claim to be the last bank standing as almost all other central banks have either paused or cut rates over the past month. And in doing so, RBI showed remarkable strength standing up to intense public pressure to pause. But for all purposes, it also signalled this would be the last rate hike at least till March 2012. These contradictory actions underscore the inherent struggle between public pressure to pause and the lack of any real evidence to support the action. The uneasy balancing act was most apparent in Tuesday’s almost tortured policy statement. Since last January (following the inexplicable pause in December 2010), RBI had repeatedly stressed that curbing inflation dominated all its other objectives. To justify Tuesday’s rate hike, it fell back on the old argument of moving in “baby steps”, i.e. a sudden shift in stance would unhinge inflationary expectations. The promise of a pause was justified by falling back on another old argument that inflation would come down in the next six months. That inflation will come down in January-March next year rests to a very large extent on the impact of base effects arising from a sharp rise in inflation in the first quarter of this year. But these base effects are fleeting at best; May onwards, even the most modest projections of sequential inflation points to headline inflation rising again. Isn’t monetary policy supposed to be forward looking with lagged effects on the economy that can stretch anywhere between six and 18 months? Does a signal to pause actually anchor inflationary expectations or make it come unhinged even more? Ah well! To make the promised pause consistent with growth, RBI cut its growth forecast for this year to 7.6%. Activity has been slowing undeniably and a bit more realism from policymakers is always a good thing. In downshifting its growth forecast, RBI cited the slowdown in investment, driven by slower clearance and execution of projects, high inflation and rising interests as the major factors. What it did not mention is that corporate investment has been languishing since 2008. What appeared to be a cyclical malaise then is now threatening to become a structural malady. Macroeconomic uncertainty both about the near term—when inflation will peak and growth trough—and about the medium term—whether India will go back to the 9% growth trajectory—is the reason why despite tight capacity, corporate India hasn’t been investing. The government clearly has the dominant role to play in calming fears that India’s medium-term growth prospects are tarnishing. But ending the current inflation cycle quickly and decisively falls in the central bank’s purview. Pinning one’s hope on fleeting base effects doesn’t fill one with confidence that this inflation cycle is over. All that said, RBI needs to be congratulated unequivocally for finally deregulating the interest rate on savings accounts. In doing so, it dismantled one of the last remaining vestiges of our paternalistic attitude to protect the “less-sophisticated” investors such as pensioners and the poor. There may have been many reasons for doing so, but presuming them to be naïve was both untrue and disrespectful.

Jahangir Aziz, Senior Asia economist, JPMorgan Chase (Mint)

Two policy poles

On a day when the RBI raised policy rates by 25 basis points, the Union govt raised the minimum support price of wheat for the 2012-13 procurement season by Rs. 165

The contradiction could not be more glaring. On a day when the Reserve Bank of India (RBI) raised policy rates by 25 basis points, the Union government raised the minimum support price of wheat for the 2012-13 procurement season by Rs. 165. Constant increases in the minimum support price for farmers are one big factor in fuelling prices of wheat and rice. This will add to food inflation, which is close to double digits. Law minister Salman Khurshid said the raise has been made after thoughtful consideration. “We hope that this will be a good news to all our farmer friends at the time of Diwali.” Such decisions are irrational when RBI has highlighted food inflation as a key reason for the structural nature of inflation. Instead of giving away festival gifts —and taking them back at a later date as inflation —the government should display some seriousness in tackling this problem.

Mint

Monetary policy review: Battle to get back is still on, says RBI governor D Subbarao

... The battle with inflation, and the battle to get back up is still there and I'm sure that battle will be on with us for some more time.....

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Fitch on RBI's focus on inflation

The Reserve Bank of India's (RBI) decision to raise interest rates underlines its commitment to tackle inflation even as the economy slows, which is one factor supporting the Stable Outlook on the country's BBB- rating.....

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Consumers set to earn more on savings accounts as RBI de-regulates interest rates

NEW DELHI: Consumers are set to earn more on their savings accounts with the Reserve Bank of India (RBI) on Tuesday de-regulating interest rates, the last administered bank rate in the economy. The move will push up cost of funds, sending bank shares sharply lower.  "It is felt that the time is appropriate to move forward and complete the process of deregulation of rupee interest rates," said Governor Duvvuri Subbarao during the second quarter review of the apex bank's monetary policy for this fiscal. Currently, the savings rate stands at 4 percent, which was last raised in May after remaining unchanged for 8 years. For deposits up to Rs 1 lakh and irrespective of the amount in the account within this limit, a bank will have to offer a uniform interest rate. For savings bank deposits over Rs 1 lakh, a bank may provide differential rates of interest, if it chooses to do so. "However, there should not be any discrimination from customer to customer on interest rates for similar amounts of deposits," said the RBI Governor. The market gave a thumbs down to the proposal with shares of major lenders State Bank of India, HDFC Bank, Axis Bank, Bank of Baroda, Allahabad Bank falling as much as 2-6 percent. The key banking sector index was down 2.66 percent in recent trade. "It will definitely increase cost of funds for banks towards maintaining current account savings account deposit growth," Moses Harding, head of global markets group, IndusInd Bank said. IDBI Bank executive director R.K.Bansal said that he expects the savings rate to rise to 6 percent.  Bansal estimates that banks with lower share of savings rate deposits will take a 10-20 basis points hit on margins, while banks with larger share of savings account deposits will see a 40-50 basis points fall. Already banks' cost of funds have gone up after the RBI mandated that banks calculate interest paid on savings deposits on a daily basis while the savings bank rate was last raised by 50 basis points. Savings deposits are a source of low-cost funds for banks, which form 22 percent of banks' total deposit base and 13 percent of savings of the household sector. This makes it a politically sensitive interest rate as savings deposits are held largely by households, particularly in rural areas where financial literacy is not widespread.  New age private banks are likely to aggressively move now to mop up low cost deposits, which traditionally has been the prerogative of the larger banks. 

ET

RBI warns banks against floating rate manipulation, prepayment fee

MUMBAI: The Reserve Bank of India (RBI) has warned banks against taking customers for a ride by manipulating interest rates on floating rate loans. The regulator also wants them to voluntarily waive the prepayment penalty on home loans.  At the Annual Conference of Banking Ombudsmen, banks and RBI mutually agreed to ban prepayment fees on floating rate home loans as one of the 10-point action plan to improve customer services. Subsequently, banks made a representation to RBI against it. "Banks had agreed...now they have a problem. We are giving them some time but we are very clear that this 10-point action plan has to be implemented," Dr.K.C.Chakrabarty, Deputy Governor of RBI told media persons on Tuesday.  RBI governor D Subbarao also sounded the same note. "We will pursue with banks to do this (banning prepayments penalties) as soon as possible but should the system require time to adjust to this, we will be prepared to give them some time," he added. Meanwhile, in the mid-year policy review, RBI has expressed its discomfort about old floating rate customers getting a raw deal while new customers are being offered a better rate, though both have received the same rating.  There are instances where the spread charged to a customer has been revised upward frequently during the tenure of the floating rate loan, it said in a statement.  "These have also resulted in a situation where existing customers are at a disadvantage, compared to new customers with the same credit rating, leading to customers complaining about discrimination," it said. This is particularly the case in home loans where banks kept offering attractive rates to new customers while old customers paid a higher rate. In order to bring uniformity in differential rates, RBI said on Tuesday that it is setting up a working group which will look into the "principles governing proper, transparent and non-discriminatory pricing of credit."

ET

Govt approves Rs. 3,000 crore capital infusion in Nabard

This would raise the paid up capital of the apex agriculture and rural development bank to Rs. 5,000 crore

New Delhi: The government on Tuesday approved Rs. 3,000-crore capital infusion over a period of two years in National Bank for Agriculture and Rural Development (Nabard) to help the lender mobilise higher resources from the market. The Union cabinet approved the proposal for augmenting the capital base of Nabard by infusing Rs. 3,000 crore, as the government equity in two instalments of Rs. 1,000 crore in 2011-12 and Rs. 2,000 crore during 2012-13, information and broadcasting minister Ambika Soni said here. This would raise the paid up capital of the apex agriculture and rural development bank to Rs. 5,000 crore, she said after the Cabinet meeting. As per RBI’s guidelines, the outstanding total resources mobilised at any point of time by a Financial Institution​ should not exceed 10 times its Net Owned Funds (NOF). It becomes important to raise NOF such that Nabard’s ability to mobilised resources from the market can be enhanced, she said. The infusion of the additional share capital by the Government of India will increase the NOF and thus the borrowing capacity of Nabard to enable it to extend its various activities, she said. At present, the authorised capital of Nabard is Rs. 5,000 crore, of which, the paid up capital is Rs. 2,000 crore. The Government of India holds 99 per cent share capital of Nabard. It is to be noted that the Reserve Bank of India (RBI) divested its 71.5% stake in Nabard to the government last year.

Mint

IIM prof loses Rs 18 lakh to SMS fraud



Creating financial awareness:

(from right) Mr M. Palaniswamy, Banking Ombudsman, RBI; Mr U.V. Kulkarni, DGM, RBI, Bangalore, and Mr J.S. Ravishankar, AGM, at a press conference in the city on Monday



Bangalore : A professor at the Indian Institute of Management, Bangalore, lost Rs 18 lakh to an SMS fraud which lured him with $5 billion from a multinational company. The Reserve Bank of India's Banking Ombudsman for Karnataka, Mr M. Palaniswamy, said that such cases were on the rise, and awareness of such fraud and phishing activities on the Internet space have to be spread.  He added that the RBI has now mandated people like him and his team to visit taluks and villages every month to spread awareness on the banking ombudsman scheme. “Not many people, even in the urban areas, are aware of this scheme,” he pointed out. According to him, 3,694 complaints were received by his team in 2010-11 (the RBI follows a July to June calendar). Of these, the highest number of complaints was on failure on commitments made by banks to customers at 1,232, while complaints on ATM, debit and credit cards were at 768, followed by deposit-related complaints at 268 and 176 pension-related complaints.  On the other hand, State Bank of India and its associate banks were the banks which were complained against most at 1,521, “mainly because they have largest volume in terms of branch network”, Mr Palaniswamy pointed out. However, 2009-10 saw more complaints at 4,343 complaints, and 2008-09 saw 3,524 complaints. 

HBL

BoM organises bankers' panel meet on Rajbhasha

The Bank of Maharashtra organised the 27th meeting of Maharashtra State Level Banker's Committee ( Official Language) as well as an executive seminar in Hindi at its central office at Pune. The banks which were awarded the prizes were: Union Bank of India the first, Dena Bank the second, Central Bank of India the third while Bank of Baroda won the consolation prize among the commercial bank category under the trophy scheme. Nabard won the first prize under the financial institution ( FI) category. On the occasion, the winner banks/ financial institutions were felicitated under the Rajbhasha Trophy scheme. Present on the occasion were R H Kullkarni, GM ( IT, Alternate Business Channels & Official Language), Dr M. L. Gupta, Dy Director ( Implementation), Dr Rajendra Verma and Seema Deshpande, Asstt Directors of Hindi Teaching Scheme & Vivek Maindergi, Asstt GM, RBI. 

India's Coin Shortage Blamed on Mint Capacity

.... The RBI annual report indicates more than 6 billion coins are issued annually. The newspaper reports, “The fall in supply is being attributed to reasons like lack of capacity coupled with the aging machinery.”.....

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'RBI rate hike not to impact inflation in short-term'

"On inflation, it (rate hike by RBI) will not have much impact in the short-term. Rate hikes are aimed a brining down inflationary pressures in the long-term," Planning Commission Principal Adviser Pronab Sen said when asked about impact of possible hike in key rates by RBI on Tuesday.........

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Rate hikes: Has RBI become the govt’s convenient scapegoat?

....Financial market participants have watched, initially with sympathy and then dismay, as the Reserve Bank of India raised rates 12 times in 18 months, causing growth to slump while inducing no discernible impact on inflationary pressures......

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High inflation dictates that ‘ some sacrifice’ of growth inevitable: RBI

Why a rate hike is warranted

....In this backdrop, the central bank's commitment to price stability is critical for anchoring inflationary expectations, and a repo rate hike by 25 bps will be the signature of RBI's commitment to low and stable inflation.....

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Credit policy: Is another 25 bps hike coming?

So will the RBI Governor Subbarao's Diwali gift this year be another round of rate hike? Well, CNBC-TV18 poll shows 80% of the street expects a 25 bps hike in repo rates and 60% believe the RBI to revise its FY12 inflation target to below 8%...........

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Why India’s monetary policy is a failure

Inflation affects the purchasing power of people adversely. Especially food price inflation affects the poor and the low income groups harder than the higher income groups. In India, the annual food price index rose by 10.6%, during the week ending October 8 compared to last year. Pushed by food prices the headline inflation has reached an alarming 9.72%. The latest hike in index is nearly double the rate that the Reserve Bank of India expects — annually 5% or 6%. The inflationary pressure is not due to supply bottleneck in food grain. In fact, food grain production in India has reached a record 241 million tonnes in the agricultural year 2010-11, compared to 218 MT in 2009-10. Food inflation has been a worldwide phenomenon since late 2008. The phenomenon is attributed to large scale diversion of crop land to biofuel production, loose money policy, fiscal imprudence and rise in fuel prices. Fuel price has indeed contributed to food price hike in India. But the other reasons do not apply to the Indian economy. Deficit financing is on a leash. So is monetary policy. In order to tame the rising food price index, the RBI is trying to control money supply in the economy by raising repo rates, at which it lends to other banks, and reverse repo rates, at which it borrows from other banks. Already the RBI has hiked the repo rate by 3.25 percentage points in 12 installments since March 2010. This has jacked up the interest rate in commercial banks. High bank rate discourages investment and encourages savings, thereby reducing aggregate demand. However, the increase in the interest rate has done little to contain food inflation. On the contrary, costlier loan has hampered the growth rates of Gross Domestic Product and industrial output in the current fiscal’s first quarter. According to the RBI, while industrial growth rate decelerated, agricultural growth rate accelerated in this period. Yet the food price index soared upward. This clearly is a failure of the country’s monetary policy or monetarism itself, endorsed by the International Monetary Fund. Prof C Rangarajan rightly commented that increasing interest rates will reduce demand only in the housing and car markets. He does not envisage easing food inflation before the middle of 2012.  Rangarajan’s point is bolstered by the fact that the RBI’s tight money policy hardly has any impact on food price inflation. The failure of the monetary instrument in controlling inflation of basic food articles follows from exposing Indian agriculture to free market forces in many ways. Unlike the industrial sector, the agricultural sector functions outside the organised money market. Farmers undertake production not for cash alone, but also for subsistence. Irrespective of monetary policy, agricultural production must take place. Thus, farmers have to use costly fertilizer, pesticides, and irrigation to derive maximum yield. The gradual reduction of state subsidy in fertilizer, pesticides and electricity for pump irrigation has escalated production cost. Deregulation of the petroleum sector, and allowing the oil PSUs to operate in a free market has imposed an additional price burden on farmers, as oil price keeps rising. Oil price hike, at double digit rates, results in higher transportation cost for agricultural commodities as also higher production cost for farmers using diesel pump sets for irrigation. At the level of marketing and distribution of agricultural products, speculative commodity trading becomes active in influencing market prices. Futures trading and hedging in agricultural commodities can add to inflationary pressure. Prices of futures trading influence the spot market prices in commodity. A high price quoted in the futures market means a high spot price. In 2008, owing to high prices of potato, rubber and soy oil, the government had to ban commodity trading in these items, though with little effect. As the government, at the behest of international financial institutions, is encouraging more of market economy and less of state role, the agricultural sector suffers due to the market’s vagaries. Traders and hoarders call the shots. The public distribution system is slack. Under such circumstances, the state’s distributional intervention was necessary but it stood aloof. So much so that when wheat was rotting, the Supreme Court suggested that the excess wheat be distributed to the poor free of cost. The prime minister refused. Had the wheat been distributed free, the price of wheat in the market would have crashed. Just to prop up commodity trading and corporate retailers, the government fought the suggestion. That is why only indirect measures like monetary policy is resorted to combat inflation.

DNA

RBI signals stance shift, warns of growth risks

Talks of sub-8% growth, weak investment climate on the eve of policy review

The Reserve Bank of India (RBI) on Monday reiterated that inflation remained “sticky”, but shifted focus to the rising “downside risks” to growth and a weakening investment climate. Economists interpreted the shift in stance as the central bank’s subtle hint that the monetary policy review on Tuesday may signal a gradual end to the long rate hike season started in March 2010. The consensus among economists is that whatever the RBI does tomorrow, it is expected to leave rates on hold for the remainder of the fiscal year. In its macroeconomic and monetary development report released ahead of the second quarter review of the monetary policy, the RBI said, “The monetary policy trajectory will need to be guided by the emerging growth-inflation dynamics even as transmission for the actions is still unfolding.”

CENTRAL BANK’S MACRO VIEW Growth may fall below 8 per cent in 2011-12. Industrial activity has slowed down, services growth may weaken further High inflation is likely to persist over next couple of months Investment demand is softening. Pipeline of investment is likely to shrink, putting growth in 2012-13 at risk Widening current account deficit would pose risks if global trade and capital flows shrink Rupee depreciation and fall in domestic share markets are in line with most other emerging markets

The market still widely expects the central bank to increase the key policy rates by 25 basis points tomorrow before hitting the pause button. The repo rate, which is currently 8.25 per cent, was hiked 350 basis points in the past 20 months though the effective tightening was nearly 500 basis points. “This is the first time the RBI has explicitly stressed that monetary policy actions will be guided by growth-inflation dynamics, as opposed to an exclusive focus on fighting inflation. The RBI has emphasised that the transmission of the past actions are still to unfold. All these suggest that the rate cycle is close to peaking. We expect the central bank to hike the policy rate by 25 bps tomorrow and then signal a pause of sorts, unless inflation spikes again,” said Sajjid Chinoy, India economist, JPMorgan. In its review, the RBI said the growth in 2011-12 would be less than its earlier projection of eight per cent, on account of various global factors. The survey lowered the FY’12 GDP view to 7.6 per cent against 7.9 per cent earlier, mainly because of growth risks posed by global headwinds and a high inflationary scenario. The central bank cautioned the global growth prospects may have an adverse impact on the Indian economy. In addition, due to softening investment demand, the investment pipeline may shrink, putting 2012-13 growth at risk. “By stressing the slowing investment demand, global uncertainties and lagged effect of the monetary policy, the RBI is probably preparing the market for a change in stance. Inflation is not any more the only concern; growth-related issues are also now going to figure prominently in monetary policy formulation,” said Samiran Chakraborty, regional head of research, Standard Chartered Bank. The central bank said investment demand was softening due to a tighter monetary policy, impediments to completing big projects, weakening business confidence and a slowing global economy. It said planned investment in new projects had fallen “significantly” since the second half of the fiscal year ended in March, and remained low in the April-June quarter, when project finance data from 33 banks showed a 44 per cent drop-off in loan approvals from a year earlier. "Consequently, the pipeline of investment is likely to shrink, putting growth in 2012-13 at risk," the report said. The 2012-13 fiscal year starts in April 2012. The RBI also said high inflation is likely to persist over the next couple of months before moderating as falling global commodity prices so far have been offset by rupee depreciation. "Global commodity prices, especially those of metals, have softened significantly. However, even after some correction, the current Brent crude oil price is still over 25 per cent higher than its average for 2010-11," the RBI said, adding that moderation of inflation was expected in the latter part of the financial year. Headline inflation measured by the Wholesale Price Index, hovering around the double-digit mark for nearly 20 months now, is projected by the RBI at seven per cent by the end of March. "Going forward, there are significant downside risks to growth during 2011-12. GDP data for Q1 2011-12 and various lead indicators are indicative of further moderation in growth. The buoyant export growth observed up to August 2011 may not hold out on account of the sluggish growth in the advanced economies and further deepening of global uncertainties," the RBI said. With the increasing linkage of domestic industrial growth with the global industrial cycle, further moderation was likely ahead, given the weak global PMIs, the central bank said. Capacity constraints seemed to be easing in some manufacturing segments, especially cement, fertilizers and steel, the RBI said, adding construction activity had slowed and leading indicators suggested services growth may weaken slightly. Private consumption was starting to soften in parts but remained robust overall as evident from the corporate sales performance, the RBI said. Sales growth continued to be healthy, but profits were under pressure, it said.

BS

RBI is addicted to ineffective policy

SINGAPORE  - Pride seems to have gotten in the way of sound policy-making in India, where a headstrong RBI refuses to concede defeat in its quest to bring down equally stubborn inflation.

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RBI faces a conflict of choice

......“The challenge at this juncture is to contain inflationary pressures,’’ the central bank said adding that the task of bringing down inflation to an acceptable level on a sustainable basis remains significant.....

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A K Bhattacharya: A temporary truce

Inflation and slower growth have encouraged North Block and Mint Road to sink their differences - for now

Crisis, it is said, often helps warring parties smoke the peace pipe. There may be some debate over whether the Indian economy is already in the middle of a crisis or is merely experiencing early signs of it. But there is already some evidence that the turf battle between the government and regulators has given way to some sort of conciliation. Consider the following. Finance Minister Pranab Mukherjee declined to utter a word on his meeting with the Reserve Bank of India (RBI) governor last week. His explanation : the finance minister should not be making any statement on his consultation with the governor a few days before the scheduled review of the monetary policy. The RBI Governor, too, displayed similar discretion when journalists asked him about his meeting with the finance minister. In a different way, such understanding between the monetary policy authority and the fiscal policy authority was completely missing until even a few months ago. Of course, there was no act of indiscretion either by the finance minister or the RBI governor but statements made by senior officials in the finance ministry on what the central bank ought to be doing on interest rates would often cause avoidable ripples. On its part, the central bank would also let its discomfort over rising government borrowing be made public through its reports. Healthy tension between the central bank and the finance ministry is not an unhealthy development, as long as the top leadership in the two institutions knew how to use that tension to work out the right policy options for the economy. Whether the leadership made optimal use of that tension, however, was a moot point then. The problem had its root in the role the central bank should play as a regulator. Should it be seen as any other regulator in the financial sector? Or should it enjoy a special position because it was also the monetary policy authority, in addition to being the regulator for banks? The finance ministry under Pranab Mukherjee had mooted the idea of setting up a financial stability and development council to oversee the co-ordination among financial sector regulators and taking an overall view on what needed to be done to strengthen financial systems. The central bank, for good reasons, saw in that move an attempt by North Block to undermine its special status among all financial sector regulators. While the finance minister made a Budget announcement on the formation of the Council, the central bank also made known its reservations about the proposed structure in which the RBI governor was equated with other financial sector regulators. After several rounds of tense consultation, a compromise formula was used to defuse the tension. From what it appeared, the central bank was not entirely satisfied, but it at least was assured of special status during consultations at the Council. The finance ministry’s relations with the central bank were strained for another reason. When the capital market watchdog, Securities and Exchange Board of India, quarrelled with the Insurance Regulatory and Development Authority over who should regulate unit-linked insurance plans, the finance ministry had to intervene to resolve the dispute. As a way out, the finance ministry mooted setting up a new body to co-ordinate among the various financial sector regulators including the central bank. Once again, the move upset RBI as it was clearly being equated with all other financial sector regulators. Indeed, about six months ago, turf battle among regulators in the financial sector was a big issue. Finance ministry bureaucrats, too, would be worried over what needed to be done to resolve it. Today, the situation has changed. Nobody – either in the finance ministry or the central bank – is concerned about regulatory jurisdiction. Bureaucrats have one explanation: when the house is on fire, you don’t worry about which part of it is yours. The more important thing is to save the house from being devastated by the fire, a senior government official explains. So, if you do notice the absence of tension between North Block and Mint Road, it is not because the problems have disappeared or the two have found a solution. The economic crisis – rising prices and falling growth rates – has taken a toll of both the central bank and the finance ministry. For the time being, all attention is focused on the challenges. But make no mistake, the truce is temporary, because the real issues that gave rise to the troubles six months ago have not yet been fully resolved.

BS

Is India moving towards stagflation?

Translated into plain English, the new economic review released by the Reserve Bank of India on Monday roughly translates as: the economy is caught between the devil and the deep blue sea. “Inflation continues to be sticky while growth risks have increased,” is how this difficult truth is described in the central bank review, which has been released one day before Governor D. Subbarao lets us know whether or not he will increase interest rates one more time. The professional forecasters who are polled by the RBI have revised their growth forecasts for FY12 downwards while raising their forecast for inflation. The question needs to be asked: is India headed for a mild version of stagflation, with lower growth and higher inflation? The RBI says that growth is now below trend, capacity utilization pressures are easing and the output gap has widened. These developments should ideally take pressure off the price level. However, it seems that actual inflation may take time to ease off thanks to heightened inflationary expectations. India could settle down by the middle of this decade with a lower growth rate and a higher inflation rate. It is time the policy establishment takes the threat of incipient stagflation seriously. The government continues to run a revenue deficit even as investment activity falters. A profligate government will need to borrow more from the money market to meet its growing obligations, thus pushing up interest rates to make investments in new projects even less attractive. The Indian central bank has flagged off a big concern: will long-term growth be damaged if the investment drought continues? The Manmohan Singh government has put the long-term India story at risk. Is it too late to expect any corrective action?

Mint

India’s Central Bank Says Rupee’s Weakness ‘New Source’ of Price Pressure

India’s central bank said the rupee’s weakness has emerged as a “new source” of price pressure and that the challenge to tame inflation “remains significant,” signaling the need for higher interest rates................
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Setting the stage for RBI

In previous policy reviews, the Reserve Bank of India made it clear that inflation is enemy No.1 and it was ready to sacrifice growth in the world’s 10th major economy to fight persistently high inflation

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Play safe in uncertain times, cautions RBI

NEW DELHI: You may have been planning a Diwali binge but RBI on Monday advised caution and suggested that everyone - from the government to the private sector - play safe amid the uncertain global environment. "Recovery is unlikely to peter out even in the case of advanced economies. Nevertheless, in a financial world, several outcomes are possible as perceptions of economic agents can shift fast impacting their economic behaviour. It would, therefore, be necessary for all stakeholders -- private or government -- to quickly build upon the liquidity buffers and hedge against financial risks," it said in a report on the eve of the monetary policy review.  While providing indications of a further increase in interest rates, the central bank said its task had become more complex with persistent inflation and increased risks to growth. "While persistent high inflation is impacting growth, investment is slowing. This will have an adverse impact on potential growth," the report said.

TOI

RBI warns of growth risk ahead of rate decision

The Reserve Bank of India (RBI) said inflation remains "sticky" even though risks to growth have risen, while weakening investment imperils growth for the next fiscal year, complicating its policymaking task a day before it is expected to raise interest rates.......

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SBI launches ‘Bank on Wheels’ in Nagaland

Dimapur :  State Bank of India has launched an ambitious programme called “Bank on Wheels” in Nagaland with the objective of provide banking services to unbanked blocks allotted to it in the state of Nagaland. The programme under ‘Financial Inclusion’ project as laid down by Government of India and Reserve Bank of India was launched in six blocks - Noksen (Tuensang district), Tenning (Peren district), Tamlu (Longleng district), Kikruma (Phek district) and Pungro and Sitimi (Kiphire district) blocks, on October 18 last. Briefing mediapersons at SBI Regional office, Dimapur, SBI officials AK Das (AGM), David Kire (chief manager Lead Bank) and TAP Paul (manager RMME), said that out of 196 villages in Nagaland with population over 2000, SBI covers 145 villages. Out of the total 17 unbanked blocks in Nagaland, SBI has taken up the task of opening branches or business correspondents/business facilitators (BCs/BFs) in six blocks including villages in far-flung areas along the Indo-Myanmar border. AK Das said that the task is expected to be completed by March 31, 2012. The AGM said ‘Bank on Wheels’ consisting of mobile banking van will tour and visit villages in the unbanked blocks and open ‘no frills accounts’ for the villagers. ‘No frills accounts’ are savings bank accounts where customers can open bank accounts with zero balance or by depositing Rs. 50 only.  The banks officials also said that besides SBI branches, mobile vans will be provided to NGO partners tied up under a MoU to roll out customer services points (CSPs) in unbanked villages all over the state. Das said that SBI being the lead bank in Nagaland has two-pronged strategy-one led by its branches directly and the other led by a NGO engaged as business partner. “The bank will spread financial literacy along with the programme. It is a programme of the people and of the people. Bank at your door step will become a reality and a dream come true for the rural people,” he added.

The Morung Express

Banks officials, insurance companies & Nabard to prepare inclusion plan for each district

Credit cards are set to become an integral part of a new countrywide financial inclusion drive that will pitch gram panchayats as the basic planning unit for delivery of financial services. The Reserve Bank of India has already issued guidelines on Electronic Benefit Transfer and its convergence with the financial inclusion plan......

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Non-bank funding beats bank credit

Non-bank sources have occupied the space vacated by banks in meeting the needs of the Indian economy, according to the macro-economic and monetary development review by the Reserve Bank of India. The share of non-bank sources in the total flow of financial resources increased from 46 per cent in April-September in 2010 to 54 per cent in the same period in 2011. Both domestic and foreign sources showed significant increases in fund extended by them.Among domestic sources, net issue of commercial paper (CP), non-deposit taking NBFCs (non-banking finance companies), and housing finance companies increased. The resource flow from external sources rose on account of higher mobilisation in the shape of foreign direct investment and external commercial borrowing. Foreign banks saw a sharp rise in credit growth, while public sector banks continued to witness a deceleration, in continuation of the first-quarter trend. As public sector banks continued to be the largest lenders, the overall credit growth decelerated, said the report. Credit growth, which had witnessed a sharp deceleration in the first quarter, continued the trend in the initial period of the second quarter, partly reflecting high base of last year. Despite this deceleration, credit growth remained above the indicative trajectory of 18 per cent set out by RBI in the July 2011 review. This was mainly because of high nominal GDP growth. The credit deceleration was diffused over a wide range of sectors, including chemical and chemical products, engineering, power, telecommunications and consumer durables. This slowdown may have been prompted by the deceleration in investment demand that could have impacted term loans. Further, the top rated companies resorted to relatively cheaper sources of borrowings including ECBs and commercial paper. Real lending interest rates have remained positive, but low and supportive of growth in the recent period. Despite monetary tightening, real interest rates have fallen due to high inflation.

FC

PSU banks including SBI, UBI and others need urgent capital infusion, says RBI

The banking regulator has said that public sector banks will urgently need capital infusion due to rising bad loans in their books. This was stated by the Reserve Bank of India (RBI) in its pre-policy macroeconomic and monetary document released a day before the half-yearly policy is announced.......

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Dodgy numbers, creaking system

From data on exports to agriculture, India’s policymakers are ill-served by an outdated statistical framework. The observed trend has been that the RBI data, which captures actual inflows of foreign exchange resulting from exports, has been somewhat higher than the figures provided by DGCI&S. This trend has been reversed in the export figures provided by the two agencies. The short point, therefore, is that there is a case for relooking at export figures provided by DGCI&S...

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Government to standardise bank accounting

NEW DELHI: Concerned over the unusual steep fall in SBI's profit for the March quarter after a change of guard at the helm, the finance ministry has said it is in the process of putting in place a mechanism to ensure continuity in accounting practices in banks. The finance ministry is addressing the issue and is planning to lay certain guidelines, Department of Financial Services Secretary D K Mittal said, adding that "the change of top management should not lead to rewriting of books and there has to be some continuity". "There is a need to have more scrutiny by somebody," he said, adding that the change in guard should not lead to a significant change in the bank's balance sheet. After Pratip Chaudhuri succeeded O P Bhatt at the country's largest lender, State Bank of India (SBI), its profit plunged 99% for the quarter ended March 31, 2011. Its profit was just 20.88 crore, against 1,866.60 crore for January-March quarter of 2010.  "If accounts are prepared wrongly then auditor is held responsible apart from officers. There has to be some accountability. It's not that you rewrite the accounts and you are scot free...same Chartered Accountant is re-appointed and officers rewrite," he added. Earlier the Reserve Bank Deputy Governor K C Chakrabarty had also said that there was a need for banks to improve the standards of financial reporting. "See our banks, I see when the chairman retires the profits go down," Chakrabarty had said.  There is a need to improve both the standard of reporting as well as that of examination of account books, Chakrabarty had said. 

ET

Finmin tells PSBs to get more efficient

As the finance ministry prepares to pump Rs 10,000 to Rs 20,000 crore to strengthen the country's public sector banks (PSBs) it also wants them to revamp their working style and achieve higher levels of efficiency in return. Secretary financial services DK Mittal told Mail Today that most of the executive level officers in public sector banks are currently posted in the regional headquarters or the main central headquarters. He said there is an urgent need to revise this policy so that these officers are sent out to work at the branches of the public sector banks where they have to directly deal with customers and ensure that more deposits come in and disbursement of loans is carried out more efficiently. This would change the staffing profile of the public sector banks and help them to compete better with private banks, such as HDFC and ICICI Bank where senior executives man the branches and interact personally with customers. Mittal said that while the finance ministry would be transfusing more money into public sector banks it would also be monitoring the performance of these banks more closely. Various parameters, such as the rate of increase in the current and savings accounts (CASA) of banks, would be looked into for judging the efficiency of the banks. CASA accounts are cheap ways of raising funds for banks since the interest that has to be paid on them is low. Therefore, higher the proportion of these accounts in the total money with the bank the more efficient it is considered to be. Mittal said the productivity per employee of a bank would also be taken into consideration in gauging its performance. He disclosed that the finance ministry would also keep a closer watch on the Reserve Bank of India's (RBI) rating of public sector banks in evaluating the government-led lenders. The RBI has a rating based on six parameters covered by the acronym CAMELS - capital, assets quality, management, earnings, liquidity and systems and controls. This is normally carried out every year. The CAMELS rating of a bank is highly confidential and is not disclosed either by the bank or the regulator. According to sources, the RBI had in fact lowered the CAMELS rating of State Bank of India (SBI) for not setting aside sufficient capital for its bad loans, which had led to the public sector bank inflating its profits. The SBI's image had taken a battering when its profit suddenly plummeted during the last quarter of the financial year ended March 31, 2011 as more funds had to be kept aside for NPAs, which the outgoing chairman OP Bhatt had refused to do. The new chairman Pratip Chaudhri has to now face the music. According to sources, if the finance ministry had kept a close tab on the RBI ratings of the SBI this embarrassment could have been averted. Mittal said the finance ministry expected to inject Rs 10,000 to Rs 20,000 crore during the current financial year in all public sector banks including State Bank of India (SBI), Bank of India (BoI), Syndicate Bank and Bank of Baroda ( BoB) to enable them to raise their Tier-I capital to eight per cent in accordance with the new banking norms. The exact amount that each bank would get from the government would depend on their net profit a apart from equity. While the SBI management had been keen to go in for a Rs 20,000- crore rights issue to raise fresh funds, the finance ministry has shot down the proposal due to a lack of funds and is looking at its books more closely.

Business Today

Monetary policy review: RBI Governor D Subbarao likely to raise repo rate

... 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%.....

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It is time for another RBI policy statement

...This time, the clamour has been more voluble than at any time in the recent past. Apart from economic slowdown, which is now felt across several sectors and the macroeconomy, the RBI, should take note of the worsening global economic situation and signal a pause. Many central banks, those of the U.K., South Korea, the Philippines and Malaysia have recently signalled their intention to wait and watch. However, it is highly unlikely that the RBI will follow suit. A 25-basis point hike in the repo rates seems to be the most likely policy option.....

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Everyone wants a rate hike breather from RBI

WHEN you give a gun to a soldier and then send him into battle to fight an identified enemy, he’s bound to shoot. So those who blame the Reserve Bank of India (RBI) for shooting by increasing interest rates in its declared battle against inflation are of course being unfair. Monetary policy is the only credible weapon in the central bank’s armoury and it is bound to deploy it. A central bank can squeeze out liquidity from the market in a variety of ways and raising interest rates is certainly one of them. The RBI must expect medals for soldiering on, even though it has not yet fully vanquished the enemy, and must wonder why so many are throwing darts at it. It is in recognition of this fact that this newspaper has backed the RBI’s rate hike moves for most of the last few months. However, at the time of its last policy statement we expressed for the first time in more than a year our doubts as to whether further rate hikes were worth the pain. At that time, as has since been revealed by the RBI itself, the central bank’s external policy advisory group had in fact advocated a pause. RBI Governor Duvvuri Subbarao chose to ignore that advice on the grounds that he was not convinced that he had broken the back of inflationary expectations and was duty-bound to deploy firepower. Since then professional economic opinion, with the almost singular exception of his monetarist predecessor, C Rangarajan, currently chairman of the Prime Minister’s Economic Advisory Council, has increasingly joined the naysayers on interest rate hike.  While many analysts think that the RBI governor is not going to let go, and a great majority of economists want to see inflationary expectations further blunted and price levels lower, the vote in favour of apause in the rate hike cycle is gaining popularity. Apart from business and trade, bankers and other policy makers feel the government must act on other fronts, especially fiscal. An important factor that is making the “pause” argument stronger is the current environment of global uncertainty and fears of recession. While “business” may be “better than the mood”, the fact that the mood is so downbeat is beginning to worry many players.  A pause in rate increases, with adequate warning that the hike cycle may be resumed without warning and that the RBI will remain hawkeyed and keep its finger on the trigger, may help improve the mood. This may be a risky strategy, but given the global environment it is a risk worth taking. Long-distance runners know that a pause for a breather is not likely to come in the way of their winning the race. Finally, if the RBI liberates itself from this six-week cycle of making policy statements, it may feel less obliged to act every six weeks. This being the Deepavali week, the central bank can light up the markets with a pause. 

BS

RBI's expected rate rise may prove one too many

The Reserve Bank of India (RBI) is likely to raise interest rates again on Tuesday, but that doesn't necessarily mean it should. This would be the 13th rate rise since March 2010 for the Reserve Bank of India. It defies the growing case for standing pat as local and global conditions worsen, adding to the prospect it may be forced soon to reverse direction.....

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