Re: {LONGTERMINVESTORS} Expectations from RBI - Discussions.
RAJESH DESAI
Pushing the RBI Let the bank regulator do its job Business Standard / New Delhi Jul 20, 2012, 00:57 IST
The word “balancing” seems to be a favourite of Reserve Bank of India Governor D Subbarao. Consider the number of times he has used the expression “balancing” growth with inflation management in his monetary policy speeches. So it wasn’t a surprise when, last week, he sought to once again “balance” his views about the finance ministry’s equations with the central bank. A day after advising the ministry to demonstrate exemplary corporate governance by exercising its ownership rights through bank boards, Dr Subbarao said the RBI and the government were not adversaries, that disagreements were natural, and that he would worry if there was complete agreement. Such nuancing of views may be a compulsion of the high office he holds, but the message underlying them comes through loud and clear: North Block has no business being in the business of micro-managing banks. The latest directive to public-sector banks to refrain from giving collateral-free short-term loans to companies was just the latest in a series of “notes” from North Block to state-owned banks virtually dictating to them what they should and shouldn’t do on various operational issues such as capping of bulk deposits and how to conduct board meetings. That the directive came just days before the government observed the 43rd anniversary of bank nationalisation on Thursday was perhaps sheer coincidence, but it was yet further proof of continued government interference in how public-sector banks did business.
It’s not the finance ministry alone; even the Prime Minister’s Economic Advisory Council Chairman C Rangarajan has been expressing in public his opinions about new bank licensing. At a time when the RBI has released draft papers on the issue of new bank licensing and has sought feedback, Dr Rangarajan has said that the central bank should consider licensing new banks even without amending the Banking Regulation Act. This is in contrast to the RBI’s position that new bank licences could be considered only after changes in the Act, which would enable it to supersede the boards of banks. It would have perhaps been much better if Dr Rangarajan, a former RBI governor himself, had shared his opinion privately with Dr Subbarao, with whom he is known to have a good relationship. As it stands, his statement — regardless of its merits — needlessly adds fuel to the raging fire of questions as to whether the RBI's autonomy is under attack.
There is obviously sense to former RBI Governor Y V Reddy’s observations that the government should let the banking regulator retain a firm hand on the tiller. Dr Reddy should know, as the RBI and the government did not see eye to eye on monetary policy during his tenure. In 2007, global interest rates were softening; but the central bank under Dr Reddy maintained a hawkish stance, citing inflationary risks stemming from high oil prices. The government favoured lower interest rates to help sustain high growth and bring relief to borrowers. The RBI’s view prevailed and it hiked policy rates. But in June of the following year, Dr Reddy was prodded by the finance ministry into raise rates against his wishes. The government’s sympathisers cite the 1934 Act governing the RBI's operations, which gives the government power to direct the central bank in the public interest. There is no quarrel with that historical role, but the problem starts when the government uses that excuse to direct the RBI or banks even on operational matters. The central bank should be seen to be insulated from pressure from New Delhi, in order to ensure the health of India’s evolving financial system.
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CA. Rajesh Desai
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CA. Rajesh Desai
RAJESH DESAI
The Reserve Bank of India (RBI) has come out with its first quarter Monetary Policy review, albeit policy Stance for this meet is in line with our as well as general consensus. Again, RBI has kept the rates unchanged. The following are the policy measures;
Repo Rate
Retained the repo rate under the liquidity adjustment facility (LAF) at 8.0 per cent.
Reverse Repo Rate
The reverse repo rate under the LAF, determined with a spread of 100 basis points below the repo rate, stands at 7.0 per cent.
Marginal Standing Facility (MSF) Rate
The MSF rate, determined with a spread of 100 basis points above the repo rate, stands at 9.0 per cent.
Bank Rate
The Bank Rate stands at 9.0 per cent.
Cash Reserve Ratio
The cash reserve ratio (CRR) of scheduled banks has been retained at 4.75 per cent of their net demand and time liabilities (NDTL).
Statutory Liquidity Ratio
Reduce the statutory liquidity ratio (SLR) of scheduled commercial banks from 24.0 per cent to 23.0 per cent of their NDTL with effect from the fortnight beginning August 11, 2012.
Growth
The growth projection for 2012-13 is revised downwards from 7.3 per cent to 6.5 per cent.
Inflation
Inflation projection for 2012-13 is revised upwards from 6.5% to 7%.
Guidance
The primary focus of monetary policy remains inflation control in order to secure a sustainable growth path over the medium-term. While monetary actions over the past two years may have contributed to the growth slowdown – an unavoidable consequence – several other factors have played a significant role. In the current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth. As the multiple constraints to growth are addressed, the Reserve Bank will stand ready to act appropriately. Meanwhile, managing liquidity within the comfort zone remains an objective and the Reserve Bank will respond to liquidity pressures, including by way of OMOs. In a turbulent global environment, the risks of external shocks are high and the Reserve Bank stands ready to respond to any such shocks swiftly, using all available instruments.
Next MID QUARTER Policy Review scheduled on Sep 17th, 2012 and SECOND QUARTER Policy review scheduled on October 20th, 2012
Meeting consensus expectations the Reserve Bank of India today kept key lending rates unchanged . However, it has cut the statutory liquidity ratio (SLR) to 23% from 24% earlier.
"SLR cut is a step in the right direction," C Rangarajan, chairman PMEAC told CNBC-TV18. He expects SLR cut to be followed by open market operations.
The repo rate remains at 8% while the reverse repo rate is at 7%. Backing RBI’s move, Rangarajan said, the central bank has struck an appropriate balance between the need to contain inflationary pressures and give some incentive for growth.
Below is the edited transcript of Rangarajan’s interview with CNBC-TV18.
Q: Can you just react with your initial thoughts, no repo rate, no CRR cut, but an SLR cut from the Reserve Bank of India?
A: The Reserve Bank has struck an appropriate balance between the need to contain inflationary pressures and also to provide some incentive for growth. The cut in the Statutory Liquidity Ratio (SLR) is in a way promoting injecting more liquidity into the system.
Perhaps the cut in SLR will also be followed or accompanied by open market operations (OMO). This will prevent to some extent the covering out which government borrowing maybe doing. Therefore, SLR cut is a step in the right direction, but on the other hand the cut in the repo rate would have sent a wrong signal at a time when inflation is running very high.
Q: RBI has lowered the growth forecast from 7.3% to 6.5% and upped the inflation forecast from March 2013 to 7% from earlier 6.5%. Do you think that now you will see an overall lowering of forecast even by the Economic Advisory Council (EAC)?
A: We in EAC are also engaged in trying to make a forecast for the current fiscal. But I believe that the growth rate maybe slightly higher than 6.5%, which has been indicated by the Reserve Bank. But the inflation situation may hover around 7% after taking into account some adjustment in the administered prices. Initially there could be some rising and then later on some softening, but the expectation of inflation at around 7% by March 2013 seems to be right.
Q: It does not look like the Reserve Bank is looking at a rate cut anytime soon because of this raised inflation fears. Would you agree with that stance?
A: I think the basic stand that the Central Bank has already been taking for a long time is that over the medium-term low inflation gives continuity to high economic growth and therefore we should work towards lowering of inflation. As things stand, the inflationary situation may not come under control very quickly. The monsoon has not been too good. Therefore, food inflation may show a tendency to rise.
Some of the administrative prices have to be adjusted. Therefore, in the immediate future, inflation cannot come down to the desire extent. At this particular point, it is very difficult for the Reserve Bank to indicate also what could happen to the policy rates. But I think that the cut in the SLR should be regarded as almost like a cut in the CRR because it will inject liquidity into the system.
Q: What about the fiscal side? We are not seeing any kind of pass-through in diesel prices. Do you think that’s also limiting the RBI’s elbowroom on the rate front?
A: I think the RBI has taken the decision based upon its assessment of the behaviour of inflation, its assessment of how economic growth will pan out.
On Tue, Jul 31, 2012 at 11:51 AM, Puransingh Kochar <kochar...@gmail.com> wrote:
The body language of Subba is making the markets a bit nervous as Subba looks upset at the state of finances, Poor chap, he is clueless on what MMS will do.
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CA. Rajesh Desai
Rajesh Desai
Chidu shows RBI who’s boss: but is this what he should do?
The decision of the government to decline an extension to Subir Gokarn as Deputy Governor of the Reserve Bank of India (RBI) does not speak well about our politicians’ tolerance of regulatory autonomy.
The finance minister has been trying to pressure the RBI into cutting rates, but Governor D Subbarao has resisted these attempts so far. Gokarn, as his deputy in charge of monetary policy, has been a key player in this.
That he is not being given an extension – normally, there is no reason to deny anyone a full five-year term, unless the incumbent has done things to deserve a truncation after three years – means that P Chidambaram wants to send a message on who’s boss to the RBI.
No one, of course, will link the RBI’s refusal to cut rates to Gokarn’s marching orders. But the very fact that he was first given a month’s extension, and then, when the monetary policy did not change in December, he was asked to go, enables one to draw one’s own conclusions.
This is probably about Chidambaram hitting back at the RBI since the latter will not toe his line.
To be sure, Chidambaram is not the first finance minister to not take kindly to regulatory independence. His predecessor Pranab Mukherjee, aided by his own advisor, Omita Paul, did precisely that in several cases.
It is now Chidambaram’s turn, it seems, to deny another regulator his due – the deputy governor whom Subbarao favoured. AFP
For example, the previous Sebi chief CB Bhave was packed off after three years even though the ministry was earlier keen to offer him the option of staying on after his initial three-year appointment.
One of his most talented directors on the Sebi board – KM Abraham, who brought the recalcitrant Sahara group to book – was not given an extension. Nor was MS Sahoo.
In 2011, it seemed as if even Subbarao’s extension could be dicey, given the growing distance between his hard money policies and North Block’s desire for “out-of-the-box” solutions, but luckily the crisis in Europe and the US (after the S&P rating downgrade) intervened, and the PMO felt there was no need to rock the boat at the RBI at that time.
This government has been at war with independent regulators and institutions ranging from the CAG to the insurance, markets and banking regulators even though all these regulators were appointed by UPA-1.
The problem is simple: even though the government gets to pick who it wants to head the RBI or Sebi or Irda or CAG, it dislikes the incumbents when they choose to become independent.
In Subbarao’s case, he was finance secretary when Chidambaram was Finance Minister in UPA-1. Chidambaram chose Subbarao over some better candidates possibly because he thought Subbarao would be more in sync with his thinking.
But the office does things to people. Once ensconced in the chair, no one likes to be thought of as someone’s appointee or lapdog. Successive finance ministers have been unable to accept this simple fact.
The need for a stable five-year term for regulators was recognised by the Sixth Pay Commission and the finance ministry at that time was quite keen to go along with the idea.
As an Economic Times story notes, the ministry had even approved a note in July 2009 to change Sebi rules on giving the chairman and directors a full five-year tenure. The changes were even notified. But even while the actual proposal (for giving Bhave an extension) was being studied by the Cabinet’s Appointments Committee – which then included not only the PM, but also Home Minister Chidambaram (now FM) – the finance ministry under Pranab Mukherjee withdrew the note seeking to extend Bhave’s term.
No one knows what transpired.
It is now Chidambaram’s turn, it seems, to deny another regulator his due – the deputy governor whom Subbarao favoured.
It does not set a good precedent.
However, there is another possibility. Maybe the ministry is planning a clean sweep, with Subbarao’s own term set to end in September. The government may want new incumbents at both the RBI Governor and Deputy Governor level.
Whether they will do the government’s bidding always is another matter altogether.
http://www.firstpost.com/economy/chidu-shows-rbi-whos-boss-but-is-this-what-he-should-do-575935.html?utm_source=MC_TOP_WIDGE
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CA. Rajesh Desai
Rajesh Desai
RBI governor Subbarao may not oblige with a rate cut of 50 basis points: Economists
MUMBAI: Forecasting monsoon showers may turn out to be an easier vocation than the interest rate decisions of RBI Governor Duvvuri Subbarao.
Just when economists, bond traders and investors were celebrating the dip in December wholesale price index (WPI) reading - which fell to a three-year low, according to data released on January 14 - as a sign of a 50-basis-points cut, Subbarao threw a wrench during a speech at IIM-Lucknow the next day, saying inflation was still high.About half of the 10 economists polled by ET on Friday lowered their forecast to a 25-bps cut in repo rate, the rate at which RBI lends to banks. They had forecast a 50-bps cut before the speech. A basis point is 0.01 percentage point.
"After the better-than-expected WPI numbers, markets had started to discount a good probability of a 50-bps cut in rates by January that resulted in the yields on 10-year bonds breaching 7.80%," said Ashish Vaidya, executive director (trading) at UBS. "But post the governor's cautionary comments on high inflation, the markets seem to have moved the probability in favour of 25 bps."
Eight of 10 economists are now forecasting a 25-bps reduction in repo rate on January 29 to 7.75%, from 8%. Of the eight, five were expecting a 50-bps cut before the governor's speech. But State Bank of IndiaBSE 0.31 % and Edelweiss Capital are still betting on a 50-bps cut.
Benchmark bond yields, which fell to a low of 7.80% on January 15, the day Subbarao made his speech at Lucknow, climbed to 7.86% on Friday. Bond prices and yields move in opposite directions.
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Although WPI is the preferred price gauge for central bankers, RBI factors in consumer prices too since in an emerging market such as India the basket constitutes more than three-fourths of the total expenses for half the population.
"The Consumer Price Index is a bit of a dampener, but we have all along tracked and followed WPI in making our decisions, which has fallen below market expectations," said Sandeep Bagla, executive vice-president, I-Sec Primary Dealership. "So headline inflation is likely to undershoot RBI's expectations by March. Growth has slowed and pricing power is absent."
Headline inflation as measured by WPI dropped to 7.18% in December, the lowest since December 2009, from 7.24% in November. A closely watched sub-component - core inflation - fell to 4.2%, signalling that manufacturers are losing pricing power. But retail inflation climbed back into double digits, to 10.56%, in December compared with 9.9% in November, as its biggest component - food - became more expensive.
High food prices probably made Subbarao cautious since it was the misreading of food inflation in 2010 that turned into a broad price rise, leading to a wage-price spiral.
"Inflation has come down, (but is) still high," Subbarao was quoted as saying at IIM-Lucknow. "India has limited monetary and fiscal room for growth."
Also, some believe the governor, who raised doubts about the government's ability to restrict the fiscal deficit at the upwardly revised target of 5.3% of the gross domestic product, may wait for the February 28 budget before sharply lowering interest rates.
The government, on its part, appears to be moving on economic reforms to contain expenditure, including raising diesel prices. But that itself could add to inflationary pressure in the short term, though it will be good for the country in the long term. Some others, however, are sceptical given the track record. In 2010, the government declared its intention to free up oil prices, but that hardly translated into reality.
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CA. Rajesh Desai
Rajesh Desai
RBI Diary :
· RBI Governor Subbarao and all deputy governors at the RBI's Central Board meeting. 1430 IST, New Delhi.
· Finance Minister Chidambaram to address RBI board directors at its post-Budget meeting. Governor Subbarao, Deputy Governors Sinha, Khan, Patel and Chakrabarty to be present. 1530 IST, New Delhi.
· Chidambaram, Subbarao, Sinha, Khan, Patel and Chakrabarty at a press meet. 1635 IST, New Delhi.
· Subbarao to address members of Bankers' Club. 1830 IST, New Delhi.
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CA. Rajesh Desai
Rajesh Desai
(Reuters) - The man widely expected to be the next Reserve Bank of India (RBI) governor favours clipping the autocratic power of the role and giving more say to a monetary policy committee.
Raghuram Rajan, who in 2005 predicted the global financial crisis, also believes that inflation of around 5 percent is "reasonable" in a developing economy, rejecting the notion of a "new normal" for India of 7-8 percent.
That's a view shared by the RBI, which has struggled for years to curb inflation and a sign that Rajan would not radically alter the thrust of monetary policy.
Inflation has been stuck above 7 percent for most of the past three years, limiting the central bank's ability to support economic growth as expansion slowed dramatically from more than 9 percent in early 2011 to just 4.5 percent in the December quarter of 2012.
India is an outlier in setting policy, with power vested solely in the governor. Giving more power to a committee would align the RBI more closely with other major central banks.
"I do think that broadening the policy-setting from being in the mind of the governor may, over time, bring a broader set of views and allow for more continuity," Rajan said during an interview in his office in New Delhi, where he is chief economic adviser to Finance Minister P. Chidambaram.
The son of a diplomat father, Rajan, 50, has spent a large part of his life abroad, as chief economist at the International Monetary Fund and a professor at the University of Chicago, making him something of an outsider in the country of his birth.
Not shy about speaking his mind, Rajan confronted conventional wisdom with a paper in 2005 at a U.S. meeting of central bankers, warning that financial sector developments could trigger an economic crisis. The argument was dismissed by many at the time as alarmist.
His current role, which he took up in August, is widely viewed as a stopover on the way to Mumbai, where the central bank is located. RBI Governor Duvvuri Subbarao's term is due to lapse in September.
But he dismissed as "hypothetical" a suggestion he might become the next RBI governor. The search process has yet to begin and perceived front-runners in the past have not always landed the job.
When it comes to making policy decisions, Subbarao in practice does take the views of staff and an advisory committee on board. But he often goes against their advice, minutes of central bank meetings have shown.
Giving more power to a monetary policy committee was one proposal in a set of reforms suggested by a committee headed by Rajan in 2009. Subbarao opposes the idea, RBI insiders have said.
"When my committee proposed it, the idea was to get more continuity into the process, so that things did not necessarily change, when a new governor came in, by so much," Rajan said.
Still, others say India is not ready for a monetary policy committee, including Abheek Barua, chief economist at HDFC Bank, who says the pulls and pressures of a committee could dilute policymaking and erode the RBI's independence.
"I think we should slowly move to a committee type thing, but I don't think this is really the right time to do it. We need someone who can really crack the whip and get things done."
While inflation should be the central bank's main focus, growth and financial stability were also important, Rajan says.
"I think you can articulate again and again that you do stand for low inflation but that has to be seen in the context that you are making sure that you don't completely give up on either of the other two," he said.
His growth outlook of 6.1 to 6.7 percent for the fiscal year starting in April, contained in a report prepared for the government, is rosier than many private forecasts.
If he does move to the RBI, Rajan would be the first among recent RBI governors not to have spent a significant part of his career in Indian bureaucracy, an often-unwieldy apparatus with British-era vestiges that Rajan says can be "archaic". It includes, for example, a requirement that he needs the finance minister's permission to leave the capital.
"(I have to) adjust to this way of living, from academia in the U.S., where I don't tell even my wife where I'm going sometimes," he said, laughing.
(Additional reporting by Suvashree Dey Choudhury in MUMBAI; Editing by Neil Fullick)
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CA. Rajesh Desai
Rajesh Desai
Subbarao went against panel suggestion on rate cut
MUMBAI - Reserve Bank of India Governor Duvvuri Subbarao went against the suggestion of a majority of external members of the central bank's monetary policy committee that recommended no change in repo rate at the annual monetary policy statement 2013/14 on May 3.
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CA. Rajesh Desai
Rajesh Desai
Don't expect RBI to ease rates: CLSA
In an interview with ET NOW, Rajeev Malik, senior economist at CLSA, says he doesn't expect the RBI to ease rates in the next 6 to 12 months. He expects maintains 2014-end forecast at 65/USD. Video
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CA. Rajesh Desai