'Incredible' India? Hardly, say business leaders

..... India now faces the worst-case scenario that was touted earlier this year - stubbornly high inflation, slowing growth, a mounting fiscal deficit, a rupee that risks freefall -- and both policymakers and the Reserve Bank of India (RBI) have few levers to fix it......

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Pranab hails RBI move to press 'pause' button

The Finance Minister, Mr Pranab Mukherjee, has welcomed the RBI move to change its policy stance from monetary tightening to a pause and keeping its policy rates unchanged at the latest mid-quarter monetary policy review. This could help regain growth momentum with improved macro-economic parameters in remaining period of current fiscal, Mr Mukherjee told reporters outside Parliament soon after the RBI's mid quarter policy announcement. The central bank had in succession raised policy rates 13 times since March 2010 to tame overall inflation. The Finance Minister also welcomed the RBI Governor, Dr D. Subbarao's resolve to check speculative intervention in foreign exchange market which among other factors has contributed to the sharp slide in rupee against the dollar. Mr Mukherjee also expressed confidence that overall inflation would moderate in the coming weeks. He also pointed out that there has been an appreciable decline in food inflation in November. The Finance Minister, however, expressed concern that inflation in manufacturing goods remain firm at 7.7 per cent. "There is need to improve business sentiment and regain growth momentum," he said.

HBL

A tricky balance

The Reserve Bank of India's decision to retain the policy interest rates and the CRR (cash reserve ratio) at their existing levels is entirely in line with market expectations. But the decision could not have been easy. There were strong reasons that would have justified a rate hike, or for that matter even a cut in the rate. High up in the first category is the stubbornly high inflation, which has remained above 9 per cent for 12 months in a row. Despite food inflation moderating sharply, November's inflation rate of 9.11 per cent, marginally down from the October figure, is a cause for worry. Quite ominously, the non-food manufactured product inflation, which the RBI regards as the ‘core inflation', rose to 7.9 per cent (from 7.6 per cent in October), reflecting higher input costs. The sharp upward revision of inflation figures for September to 10 per cent is another worrying development; it raises fears of similar revisions for subsequent months. On the other side, the clamour for a rate cut has centred on the fact that a rapidly slowing economy, especially in the industrial sector, requires a boost. Under the circumstances, the RBI's decision to maintain the status quo is sober and well considered. It ensures continuity in seeking to strike a balance between the often conflicting goals of reining in inflation and encouraging growth. In its second-quarter policy statement (October 25), the central bank hinted at a pause in future interest rate hikes, while giving itself room to address short-term growth issues and concerns. While both inflation and inflation expectations are currently above the comfort level for the RBI, the pressures are likely to abate in the coming months, notwithstanding high crude prices and the sharp depreciation of the rupee. The year-end target of 7 per cent for inflation is retained. However, downside risks to growth have clearly increased owing to a combination of domestic factors and a deteriorating global economy. As matters stand, a growth rate of 7.6 per cent for the current year, projected by the RBI in October, will be difficult to achieve. The central bank is not hedging its bets when it says that “from this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth.” However, as the sharp downslide in rupee shows, monetary policy must be prepared to deal with unforeseen contingencies, many of which are likely to occur due to factors outside its domain.

HBL

Status quo from RBI

.....We need to have the policymakers sort out growth and inflation issues to avoid these contradictions. Neither of them is the prerogative or responsibility of just the government or RBI. Evidently, both have to speak to each other to make things work, which is important at the end of the day.

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The turn of the wheel

In the mid quarter monetary policy review announced on Friday, the RBI has actually used the words " reverse the cycle" but left this for future action, a significant change that comes at a particularly difficult time in the Indian economy...................

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Monetary policy: pause and effect - Madan Sabnavis

........... The RBI appears to have undertaken a stocktaking exercise this time by not invoking any action ostensibly, to closely monitor developments before taking any measures on the monetary and forex front. One can surmise that its view could change in January if it is convinced that liquidity and exchange problems are more permanent. Also, the growth-and-inflation trade-off will be tested in terms of the “good harvest argument” impacting consumer spending, and hence index of industrial production, or IIP, growth and food inflation.

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‘No change', a welcome change

.....The mid-quarter policy statement has addressed the concerns on the interest rate side, by clearly indicating a likely reversal in the cycle with monetary policy actions being directed towards addressing growth related issues going forward,'' .................

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Lock kiya jaye............

With interest rates likely to head southwards, lock in your investment at prevailing high interest rates in fixed income products such as bank FDs and debt MFs.............

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Hard-pressed to fill coffers with dollars

.......RBI move props up rupee, but dip in foreign currency reserves a big worry.......................

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RBI detects counterfeit notes

New Delhi, Dec 16 : RBI has detected more than two lakh pieces of counterfeit notes in the current financial year even as it has strengthened the mechanism to detect fake currency by banks, Parliament was informed today. RBI has reported that the "data on source-wise detection of counterfeit notes during the period April 2010 to September 2011 is 264,282 pieces," Minister of State for Finance Namo Narain Meena said in a written reply in the Lok Sabha. The maximum number of note pieces (152,930) have been detected in the Rs 500 category. One special FICN co-ordination group has been formed in Ministry of Home Affairs to share the intelligence/information amongst the different security agencies of the state/centre to counter the menace of circulation of fake currency within the country with CBI being the nodal agency, Meena said. "The security features in the high value currency notes are being constantly upgraded by RBI. RBI has also strengthened the mechanism for detection of counterfeit notes by the banks," he said.

IBN Live

What RBI must not do today – S.S.Tarapore

With inflation where it is, it would be best for the RBI not to attempt a direct or indirect relaxation of monetary policy. The central bank should not drive down yields on government paper

December 15, 2011: Market participants will be waiting with bated breath, hoping that the Reserve Bank of India (RBI) will shower goodies for all. We can trust the RBI to set out a well-crafted Policy Statement today as part of its Mid-Quarter Monetary Policy Review.The Indian economy continues to grow at a healthy rate of growth but there is gloom that we are no longer enjoying a 9 per cent real rate of growth. In India, policymakers, opinion makers, India Inc. and the public at large refuse to accept that there are cycles in economic growth and that it is not possible for an economy to grow at higher and higher rates of growth. Once an economy overheats, a slowdown is inevitable. The RBI and the government need to seek the advice of Gita Gopinath, the young Harvard Professor, who has specialised in economic cycles in the Emerging Market Economics (EMEs). We need to recognise that the global economy faces a number of serious threats which could result in a hair-curling slowdown. Given our proclivity for policies which serve narrow sectoral interests, we believe that the laws of economics do not apply to us in India, simply because we are different. We debunk the relationship between over-heating and generalised inflation. Of course, we can always blame the slowdown to the global contagion. The fact that inflation in India is well above that in major industrial countries is just not our fault! If the rupee is depreciating, it is all because of problems faced by the major currencies. The RBI has a major task of reconciling policy contradictions. It is now generally accepted that the growth rate in 2011-12 would reflect a sharp slowdown. While the official line still is that the growth rate will be 7.5 per cent in 2011-12, the top policy honcho, Dr Kaushik Basu, has conceded that the rate could be 7.25 per cent. With the shocking industrial production numbers, there are many analysts who are already talking of an even lower growth of 6.5 per cent. What is not fully appreciated is that, even at a growth rate of 6.5 per cent, we would continue to be one of the fastest growing economies in the world. The overall inflation rate continues to be in the 9 per cent plus range. It is unconscionable that the RBI is being blamed for the inflation just because it has been fighting it with a series of repo rate increases. Some analysts would see a glimmer of hope in food inflation falling to 6.6 per cent and hope that the base effect would bring down the year-on-year overall inflation rate to 7 per cent by March 2012 so that we can claim victory over inflation. It hardly needs to be stressed that the battle against inflation is far from over. If, at all, monetary policy is to be blamed, it is because the RBI has not raised the repo rate more sharply, and also not raised the cash reserve ratio (CRR) to tighten liquidity. But, then, this is nobody's criticism of the RBI.  As stressed in these columns, the window of opportunity for monetary policy action is very narrow and it is now clear that the authorities have missed the opportunity to slay the inflation monster. The fisc is hopelessly out of alignment with the objectives set out. The slowdown in the industrial sector is no surprise. The exchange rate is under pressure precisely because when the capital inflows were large, the rupee was allowed to appreciate as the RBI did not intervene. Now that the rupee is under pressure, it is not prudent to intervene to slowdown the depreciation. The balance of payments current account deficit (CAD) is reportedly over 3 per cent of GDP — the highest among the Asian EMEs. Taking all factors into account, it would be best that the RBI does not attempt either direct or indirect relaxation of monetary policy. Now, what is it that RBI should not do in its policy announcement today? First, with inflation where it is, there should be no question of reducing the repo rate. Secondly, the RBI should not respond to the cries of the seductive sirens pleading for reduction of the CRR. Thirdly, the RBI should not aid and abet the government's unreasonable demand that it should be able to borrow more at lower interest rates. More particularly, the RBI should not drive down yields on government paper by undertaking large open market operation purchase of securities.The present monetary policy measures are far too mild and allow arbitrage opportunities to banks to borrow from the RBI and profitably on-lend these funds.To sum up, the RBI would serve the larger interests of overall stability and growth by a standstill policy. A monetary policy relaxation would earn encomiums for the RBI but would be detrimental to long-term growth with price stability.

HBL

Let God Save the Rupee!

When the tried and tested economic principles fail, perhaps prayer is the best hedge against a crisis

Having lost faith in the Reserve Bank’s ability to stem the rupee’s free fall, thousands of devotees have sought divine intervention to save the currency. This week, devotees gathered at the Chilkur Balaji temple in Hyderabad on two days to recite the “Runa Vimochana Narasimha Stotram”, a chant invoking the half-man, half-lion God Narasimha to ease the onslaught of the dollar and help with the recovery of money from defaulters. The prayers were led by the temple’s head priests M V Soundararajan and C S Gopalakrishna who came up with the remedy when they were approached by a couple that was worried that the strengthening dollar would make it difficult for them to repay the $40,000 loan they had taken for their son’s education in the US. “I haven’t studied economics, but I know that the rupee’s depreciation is mainly due to market sentiment. So, if one sentiment can drag the rupee lower, I’m sure another sentiment can make it rise,” said M V Rangarajan, another priest at the temple. The prayer is an extract from the Narasimha Puranam and many demigods are known to have chanted the verse for relief from debt. Lord Venkateshwara, who is believed to have been indebted to the Hindu god of wealth, Kuber, is said to have invoked his family deity Narasimha to help clear his debts. Lord Venkateswara, whose temple is at Tirupati, is said to have borrowed money from Kuber for his marriage, and the legend goes that he is still paying the interest on the loan amount. When asked why the prayer sessions were being organised, the priests said that a temple must pray for the well-being of the people and that the current crisis will affect the common man. The Chilkur temple, about 25 km from Hyderabad, lacks the architectural splendor of most South-Indian temples. The road that leads to the temple is muddy and winding. In fact, the temple’s obscure locale could belie its popularity, but the temple bears an exceptional testimony to the number of students who have cleared their visa interviews after paying their respects to the presiding deity. The temple gets almost one lakh visitors every week, with the rush peaking on Fridays and Saturdays. Its presiding deity, Lord Venkateshwara, or Balaji, is one of the most worshipped incarnations of Hindu God Vishnu. The deity’s popularity has risen considerably in the last decade, earning him the nickname ‘Visa Venkateshwara’. Most of the temple visitors are students who come to pray for visas to travel or move to the West. Similar prayer sessions were held worldwide during the global financial crisis in 2008. Orthodox Jews in 11 major seminaries across Israel prayed for a fast resolution to the financial crisis. The Church of England, too, published a prayer that aimed to help people caught up in the difficult financial situation.

ET

Nabard pegs TN credit outlay at Rs 77,803 cr

The National Bank for Agriculture and Rural Development (Nabard) has pegged Rs 77,803.49 crore as the potential bank credit for 2012-13 in Tamil Nadu. This will be an 18 per cent growth over the ground level credit target of Rs 66,161 crore in 2011-12. The credit potential comprises crop loan at Rs 31,574.14 crore, agricultural term loan of Rs 17,010.05 crore, non-farm sector at Rs 14,032.35 crore and other priority sector at Rs 15,186.94 crore, said Lalitha Venkatesan, chief general manager, Nabard.Of the total credit, short-term will be 40.6 per cent, she added. “The real challenge for agriculture is to enhance capital from both public and private sectors in research, infrastructure, including market, cold storage, warehouse and others.” The other major challenge is labour shortage, for which mechanisation is the solution, she said.

Reserve Bank of India Regional Director N.S.Vishwanathan added, banks' performance in the state was much better compared with other parts of the country. For instance, the CD ratio of the banks in Tamil Nadu was 117 per cent compared with the national average 72-73 per cent. “However, we (Banks) need to scale up and improve supply-side infrastructure,” he said. On financial inclusion in Tamil Nadu, he said the target was to cover 4,500 villages, with a population of 2,000, by March 2012. "In the State Level Bankers' meet, we had decided to achieve it before December 2011. As of September, 75 per cent of the banks have achieved it,” said Vishwanathan on the sidelines of the State Credit Seminar, organised by Nabard.

Sharad Sharma, chief general manager, State Bank of India, said SBI had been allocated 900 villages, as part of financial inclusion programme in the state, and the target was to be achieved by March 2012. “But we have achieved in November 2011 itself -- half of the villages are covered by bank's branches and rest through the business correspondence model,” said Sharma.

BS

Rural Min seeks to convert MFIs to local area banks

The rural ministry has suggested conversion of micro finance institutions (MFIs) into local area banks. It proposes to create a separate category below local area banks for MFIs. Accordingly, the ministry has sought amendment in the banking regulation act. Local area banks cater to credit needs of rural people with a suite of products. If the proposal is passed, MFIs can provide variety of products. “This will probably enable MFIs to do the business of deposit taking along with lending. Once they are converted into rural area bank, their credit limit may also be enhanced. Currently, they are not allowed to lend more than Rs 50,000 to a single borrower. The government probably wants MFIs to pursue a bank’s business model and to own more responsibility of what they do,” an analyst from a rating agency told Moneycontrol.com on condition of anonymity. As per the Reserve Bank of India’s (RBI) stipulation, the minimum paid up capital to set up such a bank should be Rs 5 crore, with at least Rs 2 crore being contributed by the promoters. The area of operation shall be a maximum of three districts. MFI industry in India has been facing a tough time since October, 2010 when the state government of Andhra Pradesh passed a legislation effectively shutting down private sector institutions in the wake of rising number of suicide cases. Andhra is the so-called epicenter of MFI activities in India. Later, a sub-committee of the central board of directors of RBI under the chairmanship of Y H Malegam was formed to study issues and concerns in the MFI sector in January, 2011. Based on the committee’s recommendations, the RBI earlier this month, came out with a set of new norms for MFIs.

Some key norms include:

• Capping of net interest margin of individual MFIs to 12% (NIM is the difference between interest earned and expended.)
• Interest on individual loans will not exceed 26% per year (earlier it was in the range of 35-40%)

• Not more than two NBFC-MFIs should lend to the same borrower.
• Total indebtedness should cross Rs 50,000 a borrower

Recently, RBI Deputy Governor, H. R. Khan was also quoted saying that MFIs would be allowed to draw external commercial borrowings of up to $10 million. However, they need to have proper hedging strategy. 

Moneycontrol

Flicking the birdie

......when my dad got a transfer to Chennai, he requested for Hyderabad so that it would be easy for me. He works with RBI and they were kind enough to consider his request. ............

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SEBI forms intl advisory board, first meet next month

....... The decision to set up an IAB was taken by the Sebi board in its meeting on July 28, pursuant to which Sebi began the process of setting up this board. For the probable names, Sebi had sought suggestions from its Whole Time Members, as also from the two former RBI Governors YV Reddy and Bimal Jalan, besides Raghuram Rajan, Professor of Finance, University of Chicago, and Kaushik Basu, Chief Economic Adviser, Ministry of Finance..........

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No re-booking of cancelled forward contracts: RBI

.......The apex bank has now made it clear that forward contracts once cancelled cannot be rebooked....................

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RBI plans special purpose vehicle to help power distribution utilities with losses

The Reserve Bank of India can help wipe out losses of power distribution utilities amounting to 82,000 crore by setting up a special purpose vehicle that can purchase the liabilities, a high-level official panel appointed by the prime minister has recommended.............

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State going through 'overdraft crisis'

...... Ironically, when Reserve Bank of India (RBI) Governor D Subbarao was meeting the chief minister, the new dispensation was going through a maiden overdraft crisis. So while the RBI governor was warning the government against ways and means advances (WMAs), the state's liquidity crunch made it survive on overdrafts from the RBI which can be availed for a maximum 14 days and is usually the last resort.........

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PNB appointed lead bank for Pathankot and Fazilka

MUMBAI: The Reserve Bank assigned to state sector lender Punjab National Bank the responsibility of being the lead bank in newly created districts of Pathankot and Fazilka in Punjab. "It has been decided to assign the lead bank responsibility of the two new districts viz Pathankot and Fazilka to Punjab National Bank," the Reserve Bank of India said in a statement. The two new districts were created by the Punjab government in July this year. While Pathankot was carved out of the Gurdaspur district, Fazilka has been carved out from the Ferozepur district.  "The lead bank responsibility of existing Gurdaspur district and Ferozepur district will continue to be with Punjab National Bank and Oriental Bank of Commerce, respectively," the RBI added.

ET

How unaccountable are central banks?

They have made errors, too. Allow independent auditing of central bank decisions

............... how do we improve transparency and accountability in central-bank decision-making and regulatory policing? Central bankers would be more accountable if there were adverse consequences for their senior management, at least in terms of reputational damage, for non-performance. In India, there should be statute-based performance audits of the RBI on a periodic ex-post basis. Independent auditors should have full access to all decision memos, and their reports should be submitted to the government and tabled in Parliament for discussion.

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Case for cutting rates

Tough Guv Unlikely to Cut Rates

Subbarao’s Multiple Challenges Falling growth Plummeting Rupee Falling, but still high inflation Receding capital inflows Manufacturing Prices Still Rising
Any general’s nightmare is battle on multiple fronts. When RBI Governor Duvvuri Subbarao presents the midquarter review of monetary policy on Friday, he not only has to convince the market that he is close to winning the two-year battle on inflation, but is also prepared to fight the sinking rupee, dwindling investments, soaring government borrowings and ensure that flagging economic growth does not collapse completely. And, all this without leaving the inflation front open again. The burden is falling on the central bank to provide relief for every ailment as businesses and investors have almost given up on the government to act after the debacle over foreign investment in multibrand retail and policy inertia. The tools that Subbarao has to do with are few — a cut in policy rate, reduction in cash reserve ratio, and throwing a portion of the $300-billion, but deceptive, forex reserves at the market. The regulator spelt out a series of qualitative measures to arrest the rupee slide on Thursday. But no one is expecting an interest rate cut, thanks to inflation that has remained at an average of 9.5% for nearly two years and Subbarao's breaking away from consensus and his advisors on holding rates. There is a half-hearted hope that CRR, the portion of deposits that banks keep with the RBI, could be cut, with the Indian central bank taking a cue from others, including China, that have eased this reserve requirement. As he broke away from consensus in the past in fighting against inflation, will he do so to revive growth too? “It is an unfortunate situation where the monetary policy is doing double duty,” said Samiran Chakraborty, head of research, India, at Standard Chartered. “The fiscal policy is neither supportive of fiscal management nor is it doing anything to bolster growth, and policy movements have been more accentuated on both the sides, in raising as well as cutting rates, because of a weak fiscal policy.” Some are calling for a cut in CRR since the government, despite the RBI’s autonomy, may be prodding it to partially ease the pressure on the system because of its failures. “A CRR cut is desirable for two reasons, one it improves sentiment and the other it is not antithetical to it's monetary stance as the private sector is not borrowing and this money will support the government's enhanced borrowing programme,” said Madan Sabnavis, chief economist, Care Ratings. The repo rate, the rate at which the central bank lends to banks, is at 8.5% after 13 increases and the cash reserve ratio is at 6%. But rate increases and a slump in investment due to policy paralysis have led to industrial output shrinking 5.1% in October. Inflation as measured by the wholesale price index is at 9.1%, though food inflation has eased to a fouryear low of 4.35%. But manufacturing prices, which the RBI looks at for its cues, are still rising. “It would be strange for the RBI to ease liquidity conditions or monetary policy when core inflation is running at 1.2% on a monthly basis, and the rupee is sinking like a stone,” said Jahangir Aziz, Asia economist, JPMorgan Chase. “In such a situation, central banks typically tighten, not loosen monetary policy, to squeeze out forex short-selling. Lowering the funding cost of short INR position will just add to the already extreme pressures on the currency. The RBI is unlikely to administer experimental medicine on Friday and, therefore, it just pauses and eases liquidity with tactical open market operations.” The rupee, the worst-performing currency in the region, opened at a lifetime low of 54.20 on Thursday before closing at 53.64 as overseas flows dry up while consumption of imported items remain strong. There have been calls to the RBI to defend the currency and it has done so since Dec 2, by selling dollars and buying rupees.

ET 

RBI’s new norms to hit currency speculators hard

..... “RBI’s attempt is to stabilize the rupee and reduce speculation. There would be no impact on the genuine trades from importers and exporters. This move will reduce speculation because in volatile times it is seen that traders cancel forward contracts depending on their position. But bank volumes will be hit and that will impact fee income,”...........

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Will RBI governor D Subbarao cut interest rates?

........ The only notable thing that might happen is that the RBI could signal a change from its hawkish stance to a more dovish one, which should cheer investors.But, in all likelihood, no rate cuts...........

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RBI steps in to arrest rupee depreciation

.........The Reserve Bank of India (RBI) on Thursday abandoned its hands-off approach to the rupee, which on Thursday ended off an all-time low hit earlier in the day.......

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RBI seen easing tone, not rates, as economy falters

The best that investors can hope for from the Reserve Bank of India (RBI) on Friday are measures to improve market liquidity and an acknowledgement that economic conditions are worsening. The RBI is not expected to draw a line in the sand to defend the rupee, which hit a record low on Thursday, and rate cuts are out of the question as inflation remains above 9 percent. Dovish talk at its mid-quarter policy review would fuel expectations that the central bank accelerates moves to begin easing monetary policy after raising interest rates 13 times since March 2010, most recently in October. However, the tumbling rupee, which hit a record low on Thursday at 54.30 before central bank intervention pulled it back, puts upward pressure on import prices and complicates inflation management task, traders said. The rupee is down more than 18 percent from its July peak. "Quite clearly, weaker rupee is creating its own damage on the inflation front and on growth, (which) keeps the central bank that much further away from easing rates," said Shubhada Rao, economist at Yes Bank in Mumbai.Hopes that a worsening growth outlook might push forward the central bank's move to begin easing monetary policy have run up against the uncertainty caused by the plunge in the rupee, which has caught policymakers off-guard. The inflation picture, meanwhile, is mixed. Food inflation fell to a nearly four-year low of 4.35 percent in the year to December 3, data on Thursday showed. However, manufacturing inflation rose in November from the previous month, helping keep wholesale price index inflation above 9 percent for the 12the straight month. Mahindra & Mahindra Ltd, India's largest maker of utility vehicles, unveiled a price rise on Thursday. The fall in the rupee has exacerbated poor investor sentiment, with Indian stocks down nearly 23 percent this year, and the market will be looking to RBI Governor Duvvuri Subbarao for reassurance, even if his options are limited given the need to fund a widening current account deficit. The RBI steps in to smooth volatility but is otherwise officially agnostic about the rupee's level versus the dollar. "They will not, obviously, target a rupee level, but how do they manage the concerns emanating from a weaker rupee? That will be the question," Rao said. The central bank may also lay out more measures to ease tight market liquidity through open market operations (OMOs). In the past three weeks the RBI has injected more than 240 billion rupees into the banking system through bond buybacks. "I think he might announce the quantum of OMOs that the RBI might do until February or March," said Harish Aggarwal, a dealer with First Rand Bank in Mumbai. The RBI has kept banking system cash tight to help fight inflation and has said it is comfortable with a deficit of about 600 billion rupees. With a deficit now at about 1 trillion rupees, Aggarwal said he expects a further 300 billion-500 billion rupees in bond buybacks by March. These are troubled times for Asia's third-largest economy. Data showed on Monday that India's industrial output slumped more than 5 percent in October from a year earlier, far worse than expected and the first drop in more than two years, with capital goods output down 25.5 percent. Overall economic growth slowed to 6.9 percent in the September quarter, its weakest in two years, and some economists expect India to struggle to reach 7 percent growth in the fiscal year that ends in March 2012. The government had been targeting 9 percent earlier this year. India's central bank has been criticised for acting too late in taking the fight to inflation despite the series of rate increases since early 2010. In October, the RBI indicated its tightening may be coming to an end even though inflation remains well above its comfort zone "The central bank's burden right now remains to establish its credibility with respect to fighting inflation," said Taimur Baig, economist at Deutsche Bank in Singapore, who like most analysts expects the RBI to keep interest rates and the cash reserve ratio steady on Friday. The central bank has lifted the policy repo rate to a three-year high of 8.5 percent from 4.75 percent. That has helped to brake economic activity, as has the global downturn and poor local sentiment driven by policy gridlock in a government weakened by corruption scandals. While inflation prevents the RBI from becoming more accommodative to stimulate growth, lower-than-targeted tax receipts and a worsening fiscal outlook curtail the government's room to maneuver to prop up growth."Options for fiscal steps as well as monetary measures are increasingly limited," Finance Minister Pranab Mukherjee said on Thursday.

Reuters

Policy Review | Central bank’s focus may shift to growth

......... Much weaker growth will prompt RBI to ease monetary policy, our expectation of the sequence of easing remains first injecting liquidity through open market operations (which RBI has been doing), then cut the reserve requirement ratio of banks in January, followed by repo rate cuts in March 2012,”.....

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Growth must take centre stage now, says finance ministry

Recent slide in inflation no consolation amid exceptional shrinkage in industrial growth

Growth seems set to return as the key mantra tomorrow when the government will come out with its mid-quarter review of the Reserve Bank of India’s monetary policy, sources said on Thursday, sensing the “underlying thinking” in the finance ministry. A senior official with the ministry said growth would “now take the centre-stage” with a cool-down in prices. “Even so, inflation still remains a matter of concern,” he told Business Standard. Only yesterday had RBI governor D Subbarao met Finance Minister Pranab Mukherjee. The central bank’s head was reportedly briefed about the ministry’s view on the matter. Another official said on Thursday that the administrative circles did now expect a major change in the RBI’s stance immediately. That apart, the RBI governor “may make” a move in the direction tomorrow, he claimed. The review announcement comes close on the heels of news breaking that the October industrial growth registered a negative 5.1 per cent growth — the lowest figure in more than two years. This has raised serious concerns across the board, triggering fears of a re-run of the gloomy economic scenario after December 2008, when a global financial crisis led to contraction in industrial production for seven months in a row. Further, economic growth fell to nine-quarter low of 6.9 per cent in the second quarter of this fiscal. With 7.7 per cent growth in the first quarter, this has delivered 7.3 per cent growth in the first half. The finance ministry hoped the second half would witness a slight recovery compared to first, so that overall growth this fiscal would be 7.5 per cent. However, in the current scenario, experts feel the growth will be below seven per cent in 2011-12. The overall inflation fell to a one-year low of 9.1 per cent in November from 9.73 per cent in October. But, inflation has been over nine per cent for a year now.Food inflation, on the other hand, has been coming down quite fast. It stood at just 4.35 per cent for the week ended December 3. Chief economic adviser Kaushik Basu pegged food inflation to fall below 3 per cent in a month’s time. Analysts say RBI’s move of raising policy rates for 13 times since March 2010 has not pulled overall inflation to below 9 per cent. Food inflation has fallen because of supply issues and base effect. As such, RBI should not increase any rate further, as it is not killing inflation but growth.

BS

Inflation would ease further: R Gopalan, Economic Affairs Secretary

........ The government today expressed hope that price situation would ease further and said moderation in food inflation will give some space to RBI to address the worrying level of economic growth.............

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Make it a two-way bet

As a regulator of the forex market, the RBI must be seen to be in control

The rupee has been falling for months, losing 17.3 per cent of its value vis-a-vis the dollar since September. Many observers have come to believe that there is little reason to suppose that the rupee will recover before as late as March next year. The Reserve Bank of India (RBI), meanwhile, insists its mandate is merely to minimise volatility in the foreign exchange market, and not to defend the value of the rupee. While sensible in theory, in practice this is clearly beginning to show some flaws. A serious question needs to be raised: does this continuing precipitous decline reflect a sense taking hold in global markets that the rupee, the worst-performing currency in Asia this year, is a safe one-way bet? The rupee market is still thin, and not invulnerable to speculative action. In the presence of one-way bets, speculation can create a vicious cycle, making a falling rupee a self-fulfilling prophecy. The reason the RBI was given the mandate to manage volatility was that while the decision was taken, for the best of reasons, to allow the rupee to float, it was nevertheless known that a key purpose of regulation is to manage the impact that speculation can have on the real economy. That producers are now feeling the pinch is obvious; while net exporters, like information technology firms, are happy, an extensive array of companies with foreign-currency borrowing are being hit, as are those globalised companies that import a good deal of their inputs. No regulator should act merely to insulate market participants from the negative consequences of a business decision. But the purpose of regulation, in this case, is to ensure that markets function properly — and for financial markets, that they do not dash off uncontrolled by a concern for fundamentals. Yet, in its attitude to the rupee fall, the RBI has chosen to appear weak, a cardinal sin for a regulator. The belief is becoming universal that it could not affect or arrest a slide of significant proportions, even if it wished to; this further empowers speculators. Statements like that from the chairman of the Prime Minister’s Economic Advisory Council, C Rangarajan, indicating that the RBI is helpless, add to the damage. The point of a well-functioning financial market is that participants should never be faced with a one-way bet. There is little chance, then, of prices – in this case, the rupee exchange rate – finding their true value. The RBI stayed out of the foreign exchange market for nine months, leading participants to believe that it was incapable of intervening. Yet unless it does so occasionally, people will not be properly wary of taking positions, and insufficiently thoughtful about the positions they take. Like inflation targeting, regulating a floating currency is all about managing expectations. The RBI cannot manage expectations if it appears helpless. The game is psychological; it must be prepared to play the game well. And to play the game well, it has to show that it’s willing to play the cards it has.

BS

RBI may not hike rates as growth slows

...."The RBI should reduce interest rates to gradually reverse the impact of the 13 interest rate hikes it has undertaken over the last two years,"........

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Policy pundits clueless on inflation

.At a recent seminar on September 21, on inflation, Kaushik Basu, Chief Economic Adviser in the Department of Economic Affairs (DEA), apparently agreed with the comment of Govinda Rao, (Director of NIPFP and a member of the Prime Minister's Economic Advisory Council) that “the country's economic managers have not been able to fully grasp the processes underlying the persistence of high inflation.” Such a conclusion by the two senior policy makers is deeply disturbing. ..........

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Basix, Swaws seek RBI approval for debt recast by banks

..... Both Basix and Swaws want a special dispensation from the Reserve Bank of India (RBI) that can enable the banks to restructure loans without categorizing them as substandard assets, according to two persons familiar with the development..................

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The Great India Microfinance Credit Bureau: Questions that beg an answer…

.......... I would also like the DFIs like SIDBI, commercial banks, regulators like RBI and multi-laterals like IFC to come out and vouch safe the integrity and quality of the data being supplied to the credit bureau by Indian MFIs—in terms of data integrity, internal consistency and physical compatibility with client existence and records. Without question, they must make themselves accountable and responsible for the quality and integrity of such data, given the implications for financial inclusion and inclusive growth. ..............

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R.I.P one dollar coins

Thank you sirs, we can't afford you. Henceforth, the U.S. Mint will not produce one dollar coins bearing the images of former Presidents who have passed into the pages of history. A one dollar coin not produced is a dollar saved for the Obama Administration, which finds itself in a tough economic situation. In the face of poor demand, 1.4 billion surplus one dollar coins are stacked in the vaults of the Federal Reserve. Also, 1.6 million one dollar coins are scheduled to be minted over the next five years. The move to suspend production of one dollar coins is expected to save at least $50 million in production and storage cost. That is a huge saving in a downturn environment. For a recession-hit America, every one dollar coin is a pain on the economy, it appears.

HBL

Debit, credit card uses hit a new high

...Indians shopped for Rs 8,997 crore worth of goods and services using their credit card in October this year, compared with Rs 6,760 crore spent in October last year, an increase of 33 per cent, at a time when the number of outstanding credit cards fell to 1.76 crore in October 2011, against 1.82 crore cards in October last year, according to data available with the Reserve Bank of India (RBI). ...........

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'Banks not that transparent on loan pricing'

Chakrabarty Says Customers Must Approach Banking Ombudsman Over Rate Anomalies

NEW DELHI: RBI Deputy Governor K C Chakrabarty is known to speak his mind. In a freewheeling chat with TOI recently, he spoke on a host of issues ranging from transparency in interest rates to charges levied by banks and corporate governance issues. Excerpts:
Moody's has expressed concerns over the health of Indian banks. Do you agree with it?
We may or may not agree with them. Overall, the economy has slowed down and you cannot say that banks will not be affected adversely. We feel that banks will be able to overcome (the stress) and banks also say so. But banks will have to work hard, they must take corrective measures and they must be cautious so that they are able to withstand the pressure. The more you diversify, spread your risks, go for inclusion, you will be better off.
What should banks do?
One of the first things that they need to do is, improve the quality of management; they must improve the quality of asset management, they must control expenses, avoid unnecessary risk taking and they must see to it that they do not have unduly high exposure to sectors those are under stress. They should improve corporate governance. In terms of sectors, there is concern on power, aviation... Power and aviation are concerns. But these are all necessary vital sectors. We need more flights, more airports because the country needs them. We should collectively find out how we should deal with them. It does not mean that banks should not finance them. Banks being the provider of finance need to influence a company's decision in improving its performance. Power companies need to build efficiency - both generation and distribution costs need to come down and even transmission loss should be reduced. Banks can say that they will not provide fresh funds till power companies build in efficiencies. Wherever required, tariffs should go up. But we can't let the power sector close down.
There are comparisons between now and 2008 and there are demands for a special dispensation for loan restructuring...
This is a very controversial thing. The issue is whether we are out of 2008 crisis or if it is the same crisis? The second thing is, in 2008, the crisis started from banking sector and spread to the real sector. This time, it is a sovereign crisis that is spilling over to banks. We have to contain this spillover. If it spills over to the real sector we all will suffer. Unfortunately, central banks and governments are not in a position to provide the same kind of relief that was possible in 2008, hence need for more collective efforts.
In the past you had discussed the issue of pricing of loans and transmission of interest rate by banks...
What we are saying is, increase interest rates if the cost of funds go up. If one is saying that cost of funds has increased by one percentage point and one has increased base rates by two percentage points but average yield on advances has increased by only one percentage point. That means benefit in cost has been not passed on in an equitable manner. One may say that cost of operation has gone up, that is, inefficiency has gone up, we need to avoid that. Pricing has to be transparent and non-discriminatory. If petrol price goes up, everyone pays a higher price. This is what we want.
Do banks have the ability to do that? They say that they don't have data.
Banks cannot say this as the very meaning of having licence to do banking business is the ability to assess and price the risk. Anyhow, we are appointing a committee to examine the issue in totality.
There are also concerns about usurious charges and they have a huge interest margin. What are your comments?
I find some banks have prime lending rate of 21% and base rate is 12%. That is a huge gap. What kind of risk we are taking when we are lending to someone at 21%? If the risk is too high, don't lend to them. It does not make sense for the good borrowers to pay for that and in the process they also suffer. The second is the economy, which will suffer.
But didn't banks jack up PLRs to get customers to move to base rate, which was expected to usher in transparency?
If that was the case, everyone should have moved to base rate by now. We have no evidence on whether banks are doing it in a scientific manner. The committee will look at all these aspects and if there is a need, we will tighten the guidelines. What we are saying is that in the matter of pricing, banks are not that transparent, especially for small customers, and definitely they are not non-discriminatory.
Old customers have to pay higher rates than a new customer who walks into a branch now. Is that fair?
First, we have to conclusively prove that this is happening. If it is the case and if a customer complains, Banking Ombudsman will uphold the customer complaint and ask banks to rectify.
After a meeting with ombudsman, you had asked banks to come up with a fixed rate product. While there are products I will have to pay 15% for a fixed rate home loan, which does not make sense. What are you doing about this?
I have seen one bank offering a home loan at 11% fixed rate. We don't want to micro manage banks on pricing but in the interest of customers and in the interest of banks, there must be a fixed rate product because banks are better manager of risk than individuals. If the banks want to hedge their risk, they can go for interest rate swap, for which market exists.
Are you happy that banks are again offering loans where the rate is fixed for two years?
We have absolutely no problem with them. But if the objective is to deprive the existing customer the benefit of lower rates then we have objection. That is why we must give the customer a choice to exit free of cost.
Some banks levy very high penalty. For instance, if you go below the Rs 10,000 minimum balance to Rs 9,990, then they charge Rs 600-700. Is this fair?
All banks are not doing this. I am unable to understand the justification for Rs 10,000. Further, how can one charge him Rs 500 penalty if the balance goes to Rs 9,900? Banks must examine the charges and explain the reasonableness of these charges. But then a customer has to come to the Banking Ombudsman.
TOI

HOUSE CALL



RBI governor D Subbarao at Parliament House in New Delhi on Wednesday two days before the Policy meet



Regulations are essential for financial inclusion

With Reserve Bank of India stepping in to regulate NBFC-MFIs and a Microfinance Regulation Bill pending for enactment, industry experts discussed the role of regulators in achieving financial inclusion at the Microfinance India Summit in New Delhi today. Kate Mckee, Senior Advisor of the CGAP said that regulations clarify ambiguities and play a role in product diversification. “I do think it is very important to set a certain floor on the behaviour of markets and is important in building consumers confidence”, she said. Hassan representing the Central Bank of Bangladesh, pointed out the dichotomy in policy and regulation. “In Bangladesh, in addition to financial stability, we’ve included the role of promoting financial inclusion by strengthening payment system especially the mobile banking system. Similar to the RBI, we have certain targets of agricultural lending. And we do have targets to the SME sector as well. And several of these targets are done by commercial banks through MFIs.” Vijay Mahajan, Founder and Chairman of BASIX group, thinks that the RBI regulation is a very good step forward but it should not be the final point. He commented that, “It is the first time in the industry that a regulator has put down in writing that 26% interest rate is fine. The last time was 12%. To go from 12% to 26% is a huge leap.” P. N. Vasudevan, Managing Director of Equitas Microfinance India also remarked that the RBI regulations are much better than the AP government act. Therefore, it is more welcomed.

Microfinance Focus

Activist invokes RTI to find out truth behind a bank fraud pardoned by National Consumer Forum

RTI activist Sharad Phadke who successfully pursued a case of his failed ATM transaction which was not credited to his account for 65 days, has now taken up cudgels against bank frauds against small time loan takers. A report…............

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Loans disbursement by banks picks up

.......Currently, the year-on-year non-food credit growth is at 17.72 per cent. The banking system could face a liquidity crunch over the next fortnight due to outflows on account of advance tax payments by India Inc even as demand for credit is gathering pace. Given this scenario, if the RBI does not reduce the amount of cash that banks are required to park with it (cash reserve ratio), then banks could find themselves in a bind, said a banker........

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Banks must support land development to conserve arable lands: Nabard

..........banks have the responsibility to support land development to conserve arable lands which are being unutilised every year. But this has largely been ignored by the banks though the Reserve Bank of India classifies funding for purchase of agriculture land as priority sector lending...........

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Chart view: Why the RBI can’t use forex reserves to rescue the rupee

...... The fall in the rupee — it hit a new record of 53.74 against the dollar today — makes repaying those debts an even heavier burden. It also makes the Reserve Bank of India less inclined to spend the country’s forex reserves to prop up the rupee...........

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Furnish Accounting Details: RBI to ARCs

Worried about the accounting practices followed by asset reconstruction companies, the Reserve Bank of India (RBI) has asked them to furnish complete details on accounting policies, in a bid to take a closer look at the systems. The move comes as an aftermath of loopholes detected in accounting policies of the country’s largest ARC, Asset Reconstruction Co of India (Arcil). In a letter to all ARCs, the banking regulator has said: “Please inform us about practice or system followed in your company and furnish complete details of accounting policy relating to income recognition on all items such as management fee, yield on security receipts, booking of upside, interest on funded expenses, expenses incurred on behalf of trust for valuation and due diligence extra.” Earlier, the RBI had found gaps in accounting policy of Arcil and the company had to restate its profits from . 51 crore to . 3 crore for fiscal year 2010-11.  “The regulator may want all ARCs to follow standard and sound accounting practice. The collection of information could be a prelude to it,” said an official from an ARC, who did not want to be named.  The RBI’s inspection report on Arcil observed that “Arcil’s accounting practice of recognising income on accrual basis and its reversal only if the same is not realised for more than two years was not in conformity with RBI rules which require reversal of income that is due for more than 180 days.” A big part of Arcil’s income was on accrual basis. Sources from the ARC industry said even as the RBI has asked ARCs to reverse income after six months, a few ARCs continue to accrue income for three years while there are some ARCs who book income only after receiving income.  While restating profits, Arcil had said it has done so “for making an additional provision of . 71.05 crore against accrued yield on investment in senior class security receipts not realised till date.”  In a parallel development, the finance ministry has formed a committee to look into the different aspects of ARCs’ operations and measures that can be taken to stimulate the sector in the backdrop of few banks resorting to selling their bad loans portfolio to them.

ET

With our bucks to the wall

.........The government has allowed oil companies a facility to source their dollar requirements from the Reserve Bank of India (RBI). This is band-aid, it doesn't cover the hit the oil marketing companies are taking on account of the rupee's fall..............

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Soft RBI stance is okay as India is liquid now: Expert

........ People are expecting 9% or thereabouts, a good improvement compared to last month. That sets tongues wagging whether the Indian Central Bank would follow suit of other emerging markets in either CRR cut or rate cuts. The RBI would be thinking twice before doing that because of the ugly rupee number. But today, even if the RBI adopts a soft stance, that would be okay for the market because in terms of liquidity, the Indian markets are one of the most liquid markets...............

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RBI likely to prefer open mkt operations over CRR cut

Despite headline inflation falling to its lowest level in 12 months, owing to a contraction in factory output, economists said the central bank would not resort to a cut in the cash reserve ratio (CRR) when it meets to review the policy on Friday, but would opt for open market operations (OMOs) to tide over the liquidity crunch. Wholesale price index-based annual inflation rose 9.11 per cent in November, compared with 9.72 per cent in October, primarily due to the statistical impact of a higher base. Noticeably, the headline inflation for September was revised to 10 per cent from the provisional 9.72 per cent. The revision to double digits was seen after a gap of 14 months. Abheek Barua, chief economist, HDFC Bank, said, “Given today’s inflation release, it is unlikely that the Reserve Bank of India (RBI) would opt for a CRR cut when it meets this Friday for its mid-quarter review. Instead, it would focus on using tactical measures such as OMO buybacks to ease the recent drag on liquidity.” Today, banks borrowed about Rs 80,000 crore from RBI’s repo window. This is above the central bank’s comfort zone of +/- 1 per cent of net demand and time liabilities. According to RBI estimates, headline inflation would cool to seven per cent by March. Economists said RBI may not be in a hurry to change its stance from an anti-inflationary one to a pro-growth one, though inflation’s current trajectory is expected to sustain. “Despite the moderation in November, inflation, especially core inflation, continues to remain significantly above RBI’s comfort level. With core inflation also coming under pressure because of rupee depreciation, we believe the anti-inflationary stance of the central bank would remain intact,” YES Bank said in a research note. “We believe OMOs would be the preferred route for RBI to alleviate the liquidity stress in the economy, rather than a cut in CRR, since CRR is essentially a monetary policy tool, not a liquidity tool.” A pro-growth stance is expected to be adopted only next month, when the central bank would meet for the third quarter policy review on January 24. “With growth slowing much more than expected and the likelihood that headline inflation could cool to seven per cent by March, the central bank is, however, likely to build in a dovish rhetoric in its monetary stance, leaving the door open for a possible CRR cut in January and a repo rate cut in the first quarter of FY13,” Barua said. Economists said RBI’s decision to adopt a pro-growth approach would be complicated, as inflation and wage expectations remained high. RBI may not adopt measures to support growth until headline inflation is close to its tolerance zone. Inflation has stayed around the double-digit mark for the last 21 months, despite a series of rate rises by RBI. The central bank has raised the key policy rate by 375 basis points since March 2010. RBI is widely expected to leave the key policy rate unchanged in Friday’s policy review. Taimur Baig and Kaushik Das, economists at Deutsche Bank, said, “In our view, significant monetary-easing measures would require another 200 basis points of disinflation, along with evidence of both a decline and stabilisation of inflation and inflation expectations. We believe unless growth and financial markets begin to deteriorate in a disorderly manner, RBI is still three to four months away from taking major easing measures”.

BS

Inflation versus rupee

.....In other words, if RBI wants to keep inflation under control, it has to start devising ways to at least slow down the fall in the rupee.........

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Urban households expect inflation to be 12.9% by Sept: RBI survey

.............The survey was conducted in July-September 2011 and covered 4,000 urban households across 12 cities for the October-December 2011 quarter and the July 2011-June 2012 period. The RBI and the government have forecast headline inflation to moderate to around 7% by March 2012.

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Rupee's tumble

....The RBI apparently thought it prudent to keep a close watch and tweak policy here and there to ease fund inflows, reserving its firepower for use should the situation deteriorate. With the macroeconomic numbers unlikely to improve in the next few months — if anything, they might worsen — the rupee appears to be really up against it...........

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Rs free fall continues, worst not over yet

.. In a poll conducted by Business Standard, a majority of respondents said the rupee would fall further at least till March, taking cues from global economic conditions and strong demand for dollar in the country............

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RBI must stay focused on how to rein in rising prices: Rangarajan

New Delhi: Even as economists say high interest rates are choking the growth momentum in the country, Prime Minister’s Economic Advisory Council chairman C Rangarajan on Wednesday said the central bank should continue to focus on controlling rising prices. “According to latest (inflation) numbers, it is still above 9%. Therefore, concerns regarding inflation cannot be taken away from the monetary authorities,” he said on the sidelines of Delhi Economics Conclave. The inflation data released on Wednesday showed that the rate has declined marginally to 9.11% in November from 9.73% in the previous month. Both the government and RBI have pegged the year-end inflation at around 7%. RBI, which has raised interest rates 13 times since March 2010, to rein in inflation, is scheduled to review the monetary policy on Friday, December 16. In the last review, it had indicated that it may take a pause in rate hike in December if inflation situation improves. Industry has maintained that RBI’s tight monetary policy regime is hurting investments and industrial production. Asked if the central bank should intervene to arrest the slide of rupee against the US dollar, Rangarajan said India can do little to check the movement in the rupee, which is driven by external factors He added, “the stated policy of RBI is to prevent volatility in foreign exchange market. I think RBI will act but it is really a call of RBI and it will depend on what is happening on market.’’ He said behaviour of the rupee, which touched an all-time low of 53.75 vis-a-vis the US dollar on Wednesday, is a reflection of current account deficit and extent of capital flows. “If there is a temporary mismatch, this will lead to pressure on capital flows, but if capital flows pick up, then what we are now seeing, can also get reversed,” he added.

FE

Immediate RBI rate cut unlikely: SBI chief

With inflation at uncomfortable levels, the Reserve Bank of India (RBI) is unlikely to opt for a rate cut in Friday’s mid-quarter monetary policy review, growth slippage notwithstanding, State Bank of India (SBI) Chairman, Pratip Chaudhuri, said today. “I do not think so (that RBI would cut rates) because food inflation has to come down significantly and steadily...at that rate (9.11 per cent WPI inflation), I don’t think RBI would take a view that inflation and inflationary expectations have been controlled,” he said at a conference on economic policies for emerging economies here. Most market participants expect RBI to hold its repo rate, the interest rate at which it lends to banks under the liquidity adjustment facility, on Friday.Chaudhuri doesn’t expect the central bank to cut the cash reserve ratio either, as the move would be seen as contradictory to its anti-inflationary stance. Many market participants expect RBI to cut the cash reserve ratio to ease the liquidity situation in the banking sector, especially due to the payment of the third tranche of advance tax by companies.

BS

There is no stopping bad news on the economic front

There is no stopping bad news on the economic front. For, if the currency woes were not enough, the wholesale price index (WPI)-based inflation came in at a very high 9.11% in November compared with street expectations. Sure, the number has fallen from 9.73% in October due to a substantial decline in food inflation to 8.54% from 11% in October but the figure remains very high. And the rupee’s 20% depreciation in this year will likely push up prices of goods that have a substantial import content, particularly fuel products that are not administratively adjusted, wrote Taimur Baig and Kaushik Das, economists with Deutsche Bank, in a note. So all eyes are now on what RBI Governor Duvvuri Subbarao will do this Friday when he announces the mid-quarter review of monetary policy. Will he be forced once again to hike policy rates or will he stand pat? “The RBI will estimate if the current inflation will sustain before making that decision,” said Rajrishi Singhal, chief economist at Dhanlaxmi Bank. Analysts believe the central bank’s aim to bring down inflation to 7% by March still looks reasonable considering the drop in prices of foodstuff and primary articles — and the fact that the statistical high base effect of last December comes into play. “Today’s inflation print makes the RBI’s case even stronger to maintain status quo on rates,” Anubhuti Sahay, economist at Standard Chartered, told Bloomberg. “Weakening growth will find space in the policy statement, but they are unlikely to completely remove inflation from their radar.”

DNA

Giving trouble currency

........It is true RBI Deputy Governor Subir Gokarn’s statement about RBI’s reserves not being sufficient to seriously defend the rupee was probably ill-advised, but that’s in the past. Indeed, the sharp fall in the rupee adds to inflationary pressures—........

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Inflation eases marginally, all eyes on RBI now

..... The latest figures may complicate matters for the Reserve Bank of India (RBI), which was expected to shift its bias towards growth from inflation in its Friday policy review as the pace of economic growth eased........

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Time to start cutting interest rates

.RBI’s system liquidity band at plus/minus 1% of banks’ funds has been breached in the past month or so. The situation is likely to worsen over this week, even if transiently, with advance tax payments by corporates, before they flow back into the system through expenditures. How best to mitigate this, though, is another story.......

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India inflation tops 9%, adds to cbank headache

Indian inflation held stubbornly above 9 percent in November, maintaining pressure on the central bank to keep interest rates steady this week, although signs of a rapidly weakening economy mean it is likely to adopt a more dovish tone. The wholesale price index (WPI), the main inflation gauge, rose 9.11 percent from a year earlier, slowing from a 9.73 percent rise in October and above the 9.04 percent increase forecast in a Reuters poll. The pull-back from October’s pace was largely due to a sharp drop in food inflation, with price pressures in manufacturing and fuel rising as a tumbling rupee pushes up import costs. “The rapid depreciation of the rupee is going to throw out of the window all the calculations on inflation, given the contribution of imported inflation to manufactured product price inflation,” said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai. The rupee is down 18.4 percent from its year-high in July and hit a fresh record low on Wednesday, undermining the central bank’s forecast for inflation to drop to 7 percent by March and making its job of shifting to a looser policy of cutting interest rates all the more tricky.  “Even though the RBI will definitely pause on rates (on Friday), the exact timing from which it would have started easing interest rates has once again turned uncertain due to the tumbling currency,” Nitsure said. Reuters.

http://www.dailytimes.com.pk/default.asp?page=2011%5C12%5C15%5Cstory_15-12-2011_pg5_28

Rupee depreciation: Are we on the same page?

That is what the Reserve Bank of India (RBI) Governor D Subbarao would like everyone to be on while discussing the sharp rupee depreciation against the US greenback. The Indian rupee has been mauled nearly 20 per cent in the last one year. And the downslide is unstoppable. The rupee closed at $52.22 on Tuesday, the second week of December 2011. Why the dramatic slide? Subbarao isn't the only one in the hot seat. ...........

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Only rapid supply increase can tame food inflation: Gokarn

Though transitory episodes of food inflation do not warrant a monetary policy response, there are strong justifications for acting in the face of more persistent ones, if the objective is to keep overall inflation in check, according to Dr Subir Gokarn, Deputy Governor, Reserve Bank of India. Quickly increasing the productivity of proteins and fruits and vegetables is the highest priority, both from the perspective of development and standards of living and from the viewpoint of monetary policy, he said at the Kale Memorial Lecture at the Gokhale Institute of Politics and Economics. “When prices are rising because demand is growing strongly while supply stagnates or fails to keep up, there is no alternative to curbing food inflation than raising supply rapidly. The current pressure on the prices of proteins and fruits and vegetables is clearly the outcome of this combination of circumstances. “However, raising productivity quickly is itself a serious challenge, given the pressures emanating from both labour costs and, over longer horizon, what appears to be a structural reduction in the absolute amount of rainfall,” explained Dr Gokarn. The RBI, in its second quarter review of its monetary policy in October, said that the inflation outlook will, among others, depend on the supply response in respect of those commodities where there are structural imbalances, particularly protein items. Therefore, concerted policy focus to generate adequate supply response in respect of items such as milk, eggs, fish, meat, pulses, oilseeds, fruits and vegetables will play a major role in shaping the behaviour of food inflation in the near term. According to Dr Gokarn, the transition from a cereal-dominated diet to a more balanced one with a greater appetite for proteins and fruits and vegetables is something that all countries have seen, and India is no exception. “It (the transition) is in full swing today and the absence of a strong supply response means that many aspiring consumers will actually be denied the opportunity to make that transition,” the deputy governor said. The Deputy Governor observed that persistent supply pressures on the economy, whether they are from food, energy, labour or any other critical input, are clearly not very good for maintaining the balance between fast growth and low inflation. “A permanent supply shock leads to lower growth and higher inflation, which could further fuel inflationary pressures through expectations. In this situation, central banks have to choose between the risk of inflation spiralling through expectations and the burden of slowing growth even further by anti-inflation policy measures,” he said. Dr Gokarn felt that an effective strategy for supply enhancement must be compatible with both the nature of the commodities and the state of the economy. “I have no doubt that such a strategy can be devised from existing knowledge and the right kinds of resources being brought together. Co-ordination will be the key,” he added.  

HBL