The Indian Panorama

Tag: Raghuram Rajan

  • Greece crisis hits India – may trigger outflows : Finance Secretary Rajiv Mehrishi

    Greece crisis hits India – may trigger outflows : Finance Secretary Rajiv Mehrishi

    With Greece witnessing a full-blown economic crisis, India’s software and engineering exports may take a hit and the country may also face larger capital outflows due to a weaker euro, industry and government officials warned today.

    Worried that the Greek crisis may trigger capital outflows, Finance Secretary Rajiv Mehrishi today said the government is in touch with the Reserve Bank which will take necessary steps to deal with the issue.

    “Obviously we are in touch with the RBI but they will do what they have to do,” he told reporters here as uncertainty over Greece pulled down the BSE index, Sensex, by over 500 points in early trade though it recovered in the afternoon today, June 29.

    The situation in Greece has no direct impact on India, he said but added that there may be some indirect effect via Europe on capital inflows and outflows here.

    The Greece situation battered the stock markets globally today, June 29, including in India, as foreign investors looked to re-allocate their portfolios in the wake of weakness in euro against various other currencies, while the companies with direct exposure to Eurozone markets were hit hardest.

    This is contrast to RBI governor’s Raghuram Rajan comments last week that India may be able to withstand the impact. Commerce Secretary Rajeev Kher said exports from India would be impacted negatively if the European Union is hit from the Greece crisis, although he ruled out any major direct impact of the prevailing Greek situation.

     

  • GOVERNMENT TO SET UP DEBT AGENCY

    GOVERNMENT TO SET UP DEBT AGENCY

    NEW DELHI (TIP): The government is going ahead with its plans of setting up a Public Debt Management Agency (PDMA) and will start a dialogue with the Reserve Bank of India (RBI) after the budget session of Parliament.

    Sources said the government plans to proceed with the setting up of PDMA in a “phased manner” to ensure that the transition is smooth and there is no disruption.

    Last week, finance minister Arun Jaitley sought to comfort the RBI, which had protested against government’s plans to take away some of its powers. The PDMA had emerged as key sticking point in the relationship between the RBI and the Finance Ministry.

    Sources said the government had examined several options for a smooth transition of the borrowing programme from the RBI to the new agency but had to drop the idea as several complications were pointed out. One of the suggestions that had emerged was to use the manpower of the RBI, which handles borrowings, to do the job on behalf of the new agency. The move to have a separate agency to handle public debt has been in the works for more than a decade but progress has been limited.

    “It was pointed out that there would be several complications. We will start the negotiations with the RBI for setting up of the PDMA in a phased manner,” said an official, who did not wish to be identified.

    Initiating the debate on the Finance Bill, Jaitley had announced his intent to drop amendments to the RBI Act, which would have taken away the central bank’s role in regulating government borrowings by setting up a new Public Debt Management Office. The plan to transfer some of RBI’s powers to the Securities and Exchange Board of India had also been dropped.

    The moves followed a protest by RBI governor Raghuram Rajan, which resulted in Jaitley stating that the government would ready a roadmap to set up a debt management agency.

    “Since RBI has been handling public debt management, the government in consultation with the RBI will prepare a detailed roadmap, separating the debt management function and the market infrastructure from the RBI and having a unified financial market,” Jaitley said. The FM had proposed setting up of the PDMA in his 2015-16 budget speech.

    “One vital factor in promoting investment in India, including in the infrastructure sector, is the deepening of the Indian Bond market, which we have to bring at the same level as our world class equity market,” FM had said.

  • RBI GOVERNOR GETS DEATH THREAT FROM IS

    MUMBAI (TIP): Reserve Bank of India (RBI) Governor Raghuram Rajan recently received a death threat from a purported Islamic State (IS) email account that is being accessed from across the globe.

    The governor received the threat on his official email address last month from isis583847@gmail.com—an account which the police said had been opened from Australia, Canada, Italy, Germany, US, Nigeria, Poland, Belgium, Hong Kong and Ukraine in a span of a few days.

    While security measures at the RBI has been beefed up, Mumbai Police Commissioner Rakesh Maria has asked the Cyber Crime Investigation Cell to conduct thorough investigations.

    The RBI refused to comment on the issue, but inside sources confirmed that Rajan was currently in the US along with Union Finance Minister Arun Jaitley to attend the World Bank group meeting in Washington. Without elaborating on the details of the e-mail, police sources said the IS warned Rajan that he would be eliminated as a contract had been received to execute him.

  • INDIA’S WAR ON INFLATION STILL NOT WON, SAYS RAGHURAM RAJAN

    INDIA’S WAR ON INFLATION STILL NOT WON, SAYS RAGHURAM RAJAN

    MUMBAI (tip): The Reserve Bank of India (RBI) still has a way to go in fighting inflation and it is important that the central bank has the credibility to bring down inflation if it picks up, Governor Raghuram Rajan said in an interview with a domestic newspaper.

     

    “People say we have won the war on inflation. I am not so confident. What we need to aim for is that if there are supply shocks in future, they don’t increase inflationary expectations. We should be able to see through those shocks. That is when I would say we have won,” Rajan said in an interview.

     

    Rajan’s words of caution come a few days after the RBI held interest rates steady in its latest policy review after a surprise inter-meeting rate cut last month.

     

    Rajan also stressed on the need for the country to accelerate growth, saying India should not settle for “anything less than double-digit growth” in the medium term.

     

    He also said India was importing “disinflationary conditions” from the rest of the world, helping contain domestic inflation, but said countries needed to be mindful of “an exchange rate that is too strong, which is not competitive.” 

  • RBI CUTS RATES; HOME, CONSUMER LOANS TO COST LESS

    MUMBAI (TIP): Reserve Bank of India governor Raghuram Rajan cut key interest rates — for the first time in almost two years — by 25 basis points about a fortnight ahead of the monetary policy review on February 3. Home and consumer loan rates are set to fall, as is the cost of capital for doing business.

    The RBI had been under growing pressure from industry and reportedly the government to lower rates in the hope that it would stimulate growth. There had been speculation in the media that the finance ministry was unhappy with Rajan for being too focused on keeping inflation in check, and ignoring the need to get the economy back on track.

    Raghuram Rajan RBI

    Banks have responded to the mid-term move by bringing down lending and deposit rates and are forecasting more rate cuts in coming months.

    Government-owned United Bank of India and Union Bank of India were the first off the block, nipping the base rate by 25 basis points to 10%. The base rate is the benchmark rate set by every bank to which the pricing of all its floating rate loans is linked.

    Other large lenders are expected to follow suit. State Bank of India chairman Arundhati Bhattacharya said that a cut in rates was on the bank’s horizon and there was some preparedness to do so but the timing would be decided by the asset-liability committee. HDFC vice chairman and CEO Keki Mistry said lenders were expected to pass on benefits of lower interest rates to customers by February.

    Finance minister Arun Jaitley, who had been making a case for lower interest rates, said the move would provide a fillip to the economy directly by increasing the private sector’s ability and willingness to spend. “It should also help indirectly by improving the balance sheet of the corporate sector and banks, facilitating an increase in the demand and supply of credit,” said a statement from the FM. While the lower inflation numbers and drop in international crude prices have worked in favour of a rate cut, what appears to have emboldened RBI to go in for a mid-term move is the sharp fall in inflation expectation in RBI’s household survey.

    The RBI decision came as a surprise although Rajan had indicated in the last policy review in December that he would be open to reducing rates early- 2015 even “outside the policy review cycle if the current inflation momentum and changes in inflation expectations continued”. Extending his wishes to the people on Thursday on the occasion of Makar Sankranti, Pongal and Uttarayana, Rajan said,
    “Inflation outcomes have fallen significantly below the 8% targeted by January 2015. On current policy settings, inflation is likely to be below 6% by January 2016. These developments have provided headroom for a shift in the monetary policy stance”. According to data released by the government, retail price increase as measured by the consumer price index was 5.2% in December — much below RBI’s best case scenario as forecast in its monetary policy.

    Market dealers said another trigger for the RBI decision might have been the release of the US Fed’s ‘Beige Book’ Wednesday night showing some slowdown in growth in oil-producing areas in the country, an effect of the recent crash in crude oil prices. It also revealed little pressure on wages or prices to rise. All these indicated that rates in the US may not rise as quickly as expected now.

  • ‘CONTACTLESS’ CARDS SOON TO EASE PAYMENTS

    ‘CONTACTLESS’ CARDS SOON TO EASE PAYMENTS

    MUMBAI (TIP): NFC or ‘contactless’ payment cards, which can complete a payment transaction in one-tenth of the time traditionally taken to conduct electronic transactions, will soon be available in India. ICICI Bank has finalised launch of contactless debit and credit cards next month. NFC (Near Field Communication) cards allow payments can be made by merely waving the card in front of a scanner instead of requiring them to be swiped or dipped into a card reader.

    Rajiv Sabharwal, ED, ICICI Bank said “We expect this to be one of the biggest game changers in the payment industry. The key advantage is that, this card can ensure the transaction gets completed in one tenth the time taken by an existing credit card. Also since the card need not leave the customer’s hand, the level of security is higher.” Present regulations require that all cards need to be authenticated by punching a pin to complete the transation and as of now ICICI Bank’s NFC cards will need to be authenticated with PIN. However, RBI has said that it will review this requirement for small transactions.

    RBI governor Raghuram Rajan had said that the central bank was exploring the possibility of allowing small-value transactions on a simpler basis, provided the provider takes full responsibility of misuse beyond a certain point. ICICI Bank will introduce this cards in a Mumbai, Bangalore and Hyderabad. It has already tied up with 200 merchants in these cities and in Gurgaon. The shops include retail and restaurant chains. The bank will issue both debit and credit cards and will tie up with both Visa and MasterCard for their products payWave and s Paypass respectively.

    “In Australia, where NFC was recently introduced, in a matter of months half the market converted to NFC cards because of the convenience. There is a strong pull for this kind of a product from the merchant side as they can service many more customers in the same time. Given our distribution capabilities we expect to make a big difference,” said Sabharwal. In markets where NFC is being used signature or pin validation is waived for low-value transactions making it the fastest form of payment. “Today many believe that cards are to used only for high value payments and they use cash for low value transactions. With NFC even small value payments can be made by card and these transactions can be brought into the formal channel,” said Sabharwal.

  • FINANCE MINISTER SIGNALS LOWER RATE, CHEAPER FUNDS

    FINANCE MINISTER SIGNALS LOWER RATE, CHEAPER FUNDS

    NEW DELHI: Finance minister Arun Jaitley on November 5 told industry captains that he expects the cost of capital to come down, a statement which CEOs read as a signal to a rate cut in the coming months. The issue of high cost of capital, mounting bad debt in public sector banks and infrastructure gap came up for discussion during Jaitley’s closed-door meeting with a group of Indian and foreign CEOs, including Bharti Group’s Sunil Mittal, Religare’s Malvinder Singh and Etihad Airways president and CEO James Hogan.

    Source present in the meeting told TOI that some of the foreign CEOs raised concerns over the steep rise in nonperforming assets of banks, and the minister responded by saying that the government is taking steps to address the concern. On October 24, Jaitley had made a case for an interest rate cut by the Reserve Bank of India in an interview to TOI. “Currently, interest rates are a disincentive. Now that inflation seems to be stabilizing somewhat, the time seems to have come to moderate the interest rates,” the minister had said. Despite inflation moderating to a five-year low, the RBI has so far resisted the temptation.

    But, given the surplus cash in the system, the cost of funds for companies raising loans has come down in recent days. Corporate chiefs see a rate cut by the central bank as the best way to step up investment in the economy. “It may be time for the RBI to think of a rate cut,” Mahindra group chairman Anand Mahindra said. Pointing out that inflation is moderating, he added, “The need of the hour has changed and it is time to start looking at supporting growth.” Mahindra sought relief for automakers in the form of lower excise duty. Uday Kotak, vice-chairman and MD of Kotak Mahindra Bank, also pitched for a rate cut.

    “The RBI should be considering a rate cut between December and February. The macroeconomic conditions have improved significantly now.” Kotak said with the Modi government kick-starting the economic reforms process, the economy has started to pick pace. However, he added that one should not expect an immediate recovery. “It has to be seen as a marathon, rather than a sprint.” Kotak added that the Indian economy should see an average growth of 6.5% over five years. Sunil Mittal, chairman of Bharti Enterprises, also hoped that a rate cut happens soon. “Once the finance minister asks for it, he speaks for the nation.”

    The telecom czar said that the new government has moved ahead with “some big reforms” which have led to a movement in the Indian economy. “But just give it some time for a pick-up.” Rahul Bajaj, chairman of Bajaj Auto, said further steps are required to give a big thrust to the economy. “They cannot happen all of a sudden.” He said interest rates should be lowered, though the final call remains with RBI governor Raghuram Rajan.

  • RBI TO ISSUE GUIDELINES FOR SMALL FINANCE BANKS SOON

    RBI TO ISSUE GUIDELINES FOR SMALL FINANCE BANKS SOON

    HYDERABAD: The RBI would issue guidelines for small finance banks in a few weeks as it pushed for financial inclusion backed by technolog (TIP)y. “In the next few weeks, we will put out guidelines inviting applications for what we call small finance banks.

    These are banks that will cater to smaller customers across the country. The detailed guidelines will also be put out,” RBI governor Raghuram Rajan said on Wednesday. He was speaking at the 10th IDRBT Banking Technology Excellence Awards here. Referring to payment banks, he said they should tie-up with regular commercial banks to offer different services.

    “My hope is that by licensing payment banks, we would also further cause of bank payments, bank alliances.” Highlighting that technology has an important role to play in financial inclusion, he said certain ‘Ps’, including Products, Price and Protection summaries the aspects which need to be pondered over by bankers. In this context, he said Products that are shaped to the needs of individuals, without taxing their understanding are needed.

    The RBI has put out a consumer code which puts the onus on banks to determine what is suitable for individuals, Rajan said. “Of course, that’s a harder task than just selling the product to the individual. We have to find out what the individual understands, what the needs are, etc.” Technology may help in understanding customer profiles better and to inform the customer better, the Governor said.

  • ‘Time to Deliver Begins Now’ : Raghuram Rajan

    ‘Time to Deliver Begins Now’ : Raghuram Rajan

    ‘Time to Deliver Begins Now’: Raghuram Rajan, Governor of the Reserve Bank of India

    NEW YORK CITY (TIP): The Consulate General of India, New York, in collaboration with the India-America Chamber of Commerce, held an informative discussion with the Governor of the Reserve Bank of India, Raghuram Rajan on Wednesday, October 8, 2014, at the Consulate’s Ballroom. In attendance were several prominent and influential Indian-American businessmen, engaged in finance and investment banking.

    “Over the years, India has outgrown its institutions,” Mr. Rajan said. “Such institutions only worked well when we had the practice of resource allocation, which was a source of revenue. This was a time when coal could be extracted from the ground with your bare hands”. Our economy can no longer work with this model, he said, and just as there were drastic democratic changes that reacted to the economic slump in the past decade, institutions also have reacted. Mr. Rajan emphasized on the need to convert talk about change into delivering and implementing reforms.

    Mr. Rajan made three crucial recommendations to creating a more investment-friendly market in India: (1) stalled projects needed to get back on track, and that clearance granted at the capital should be effective on the ground; (2) the complex labor laws needed to be improved to benefit both employers and workers; and (3) promotion of self-certification to eliminate the stressful and cumbersome process of inspections.

    Furthermore, outlining the major areas that require change and immediate implementation, Mr. Rajan said now was a good time to invest in the Indian economy. Developing infrastructure, improving the quality of human capital, optimum regulation for good business, and extensive financial sector reform should be the next steps for improvement and development of the Indian economy. He encouraged the audience to get involved in the “nitty gritty of the implementation process” and that it was not difficult, especially given the Indian government has the political will to reform. before

    Raghuram Rajan1

    Raghuram Rajan2

    The Reserve Bank of India Governor took questions after he had spoken for thirty minutes.

    Earlier, Consul General of India in New York, Ambassador Dnyaneshwar M Mulay, and President of India-America Chamber of Commerce Rajiv Khanna, gave brief introduction about the Governor.

  • Rajan hints at higher G-sec limit for foreign investors

    Rajan hints at higher G-sec limit for foreign investors

    MUMBAI (TIP): The Reserve Bank of India governor Raghuram Rajan has hinted at increasing the ceiling for foreign investment in government debt. The governor, however, ruled out India being part of JP Morgan bond indices as the ceiling on foreign investment in debt will continue but the central bank is in talks with European bond trading platform Euroclear to encourage foreigners to invest here.

    Rajan said that the RBI will re-examine foreign investment limit in government debt. Rajan said that he expects the allocation available for foreign investors in government bonds to increase as short-term debt matures, but added the central bank will over time “re-examine the limit and see what we can do”.

    Commenting on the pros and cons of being included in JP Morgan’s bond index, Rajan said, “Inclusion in global indices has some advantages. We become part of portfolio invested by foreign investors. But we know there are issues increasing the vulnerability when things turn the other way. It also requires some changes on our side in terms of regulation and policy,” said Rajan. The main roadblock to India being included in the JP Morgan indices is the limit for foreign investors. Global indices require all the debt in the market to be open to international investors.

  • RBI’S “007” RAJAN FACES PRO-GROWTH BOSS IN MODI

    RBI’S “007” RAJAN FACES PRO-GROWTH BOSS IN MODI

    MUMBAI (TIP): Hailed as a troubleshooting “James Bond” of central bankers amid India’s currency crisis last year, Raghuram Rajan was given a licence to kill inflation with higher interest rates and drive a programme of monetary policy reforms. Now, the governor of the Reserve Bank of India (RBI) may need all the suave charm of the fictional British spy to sell that same hard-nosed agenda to a powerful new prime minister who is determined to revive economic growth and create jobs. Rajan, who calls high inflation a “dangerous disease”, won plaudits after he took office in September for arresting a rupee freefall and helping restore investor confidence that had all but evaporated under a lame-duck government led by the Congress party.

    This month’s decisive election win by the pro-growth Bharatiya Janata Party (BJP) shifts the power dynamics. Now, investors and voters are looking to Prime Minister Narendra Modi to stir India’s economy from its prolonged torpor, putting Rajan and Modi on a collision course if inflation stays high. In his first months on the job, Rajan overcame push-back from within the central bank as well as the finance ministry to shift the benchmark inflation measure from wholesale to consumer prices.

    The consumer price index (CPI) is the global standard, but in India the higher level of CPI meant Rajan was likely to keep rates tighter for longer. High interest rates make credit more expensive and create a difficult environment to re-ignite growth. But if, as many expect under Modi, the investment climate improves and government expenses are managed better, Rajan might get some relief on the inflation front. Investors expect Modi to bring down inflation by cutting subsidies, improving food distribution and promoting investment in infrastructure.

    “The Modi-Rajan equation reminds us of that between Volcker and Reagan, where it was a combination of the central banker’s inflation-fighting cred and the latter’s charismatic image,” said Philippe Jauer, chief investment officer at fund manager Amundi Singapore. Paul Volcker was head of the U.S. Federal Reserve when Ronald Reagan was president in the 1980s. For now, the RBI is expected to leave interest rates on hold at its policy review on Tuesday, but investors will be scouring Rajan’s accompanying statement for clues to whether the new government’s strong electoral mandate has changed his rate outlook. Investors expect the next policy move will be a rate cut, but perhaps not before early next year

    TIES AT THE TOP
    A professor at the University of Chicago and former chief economist at the International Monetary Fund, Rajan was brought back to India in 2012 to be chief adviser to then-finance minister P. Chidambaram of the Congress party, which meant the two already had a working relationship when Rajan took over at the RBI. After stunning the markets with a series of bold measures on his first day, he was dubbed variously by the Indian media as “The Guv” and “a rock star banker”.

    The “Name’s Rajan, game’s Bond,” the Economic Times daily gushed on its front page, with a photo-edited picture of Rajan in an action pose and brandishing James Bond’s trademark Beretta pistol, albeit one made of rupee notes. Rajan, 51, has proven to be a pragmatic – if not swashbuckling – operator at the RBI, pushing to streamline a staid institution, deepen markets, and reform policymaking to control the country’s grinding inflation. Rajan and the new finance minister, Arun Jaitley, 62, a prominent corporate lawyer, held a meeting in New Delhi on Tuesday, but have not previously worked together.

    Jaitley is not seen to be as hawkish as Rajan on inflation – a dynamic that is typical between central bankers and governments around the world and often leads to tension. One senior finance ministry official who worked with Rajan and was part of the team that made a presentation this week to Jaitley said Rajan’s initiative to set an inflation target based on CPI could create conflict if, as many expect, CPI rises in coming months. “Rajan is … making things difficult for the government by publicly speaking about RBI’s stance on the CPI inflation.

    He would not find it easy to backtrack even if he wants to adjust with the new government,” the official said. The shift would give the central bank a clear price-stability mandate and make fighting inflation its chief objective. Previously, the RBI was charged with promoting growth and financial stability as well as controlling inflation.

    FAR FROM DONE
    Getting the new government’s support for inflation targeting is far from a done deal. Rajan has done what he can to set an informal target by establishing a “glide path” to get CPI inflation down to an annual 6 percent by January 2016 and 4 percent, plus or minus 2 percentage points, a year later. CPI inflation was at 8.59 percent in April year-on-year after running near or above 10 percent for almost two years through the end of 2013. “Inflation targeting will require trying to convince the government, and I think it won’t necessarily be a bed of roses.

    But I think it is a right step,” said Rajeev Malik, senior economist at CLSA in Singapore. Inflation targeting and setting up a monetary policy committee – as Rajan proposes – both require legislative changes. Agreeing on the make-up of a committee, including whether the government would appoint members and who they might be, could prove contentious. Rajan recently softened his tone, noting that inflation targets are for the medium term and are flexible, and that the proposal does not aim to turn the RBI into “inflation nutters”.

    However, he was uncharacteristically blunt on the subject of RBI independence in other recent remarks. “I am happy to talk to the government, I am happy to listen to the government, but ultimately the interest rate that is set is set by me,” he said at an event in St. Gallen, Switzerland. “The government can fire me, but the government does not set monetary policy.” On Tuesday, after his first meeting with Jaitley as finance minister, he said fighting inflation would continue to be a priority, although the RBI will also aim to strike a balance between spurring economic growth and containing prices. “RBI has always maintained the balance between growth and inflation,” he told reporters.

  • Growth is still very weak: Rajan

    Growth is still very weak: Rajan

    NEW DELHI (TIP):
    Reserve Bank of India (RBI) Governor Raghuram Rajan, on Thursday, said growth was still very weak. Nevertheless, it was stabilising on the back of a good harvest, strengthening exports, and some early signs of resumption of large stalled projects, he added. “I have no doubt that the fiscal deficit for 2013-14 will be close to, or below, the Finance Minister’s red line,” said Dr. Rajan while delivering the D. R. Gadgil Memorial Lecture on ‘Inclusive growth and the role technology can play in it’, here.

    However, the RBI Governor said, “We have to work to ensure macroeconomic stability, which means strengthening growth, especially through investment, maintaining a moderate current account deficit, achieving a fiscal deficit consistent with the government’s fiscal roadmap, and reducing inflation.” Going forward, he felt that, “we need to continue on the path of fiscal consolidation constantly improving the sustainability and quality of fiscal adjustment. It is important that we spend money on needed public investment, even while reducing misdirected subsidies and entitlements.”

    Dr. Rajan said that good fiscal control would help the central bank in its fight against inflation. “So will moderation in agricultural support price inflation, which will ensure that these prices only provide a baseline level of support when the farmer is in difficulty, without displacing market prices.” Accurate market prices, together with good dissemination of data on sowing patterns, could do a far better job than support prices in directing agricultural production to where it was most valuable and needed, he added. “Somewhat paradoxically, raising energy prices to market levels will also lead to lower inflation over the medium term, the horizon over which the RBI is trying to contain inflation”, Dr. Rajan observed.

  • THE INDIA STORY

    THE INDIA STORY

    Eye-watering onion prices set inflation rate soaring; the rupee also slid to new low before stabilizing. Reversing its bad run, the sensex at the end of the year surged to new highs buoyed by the BJP’s performance in recent state polls. Meanwhile, the appointment of Raghuram Rajan as RBI governor led to high expectations; he, however, has warned he does not have a magic wand to curb inflationary pressure. stabilize the rupee and at the same time spark a revival in economic growth.

  • GOVT GETS SOME TIME TO ACT ON SUPPLIES

    GOVT GETS SOME TIME TO ACT ON SUPPLIES

    NEW DELHI: RBI governor Raghuram Rajan has taken a bold gamble betting on a possible softening of food inflation to help him avert a rate hike for now and support slowing growth. Fresh arrival of crops may ease the pressure on food inflation and already there are signs of a downward trend in vegetable prices. But the government will have to continue efforts to improve supplies and any complacency on this issue will witness price pressures strengthening again. This is tougher than it sounds. The likelihood of populist measures in the run-up to the national polls may again strengthen price pressures.

    The impact of the US Federal Reserve winding down its stimulus is also a crucial factor which would impact the price situation despite the government asserting that the country is better prepared now to face the situation. With the 2014 general elections, the government – which is battling voter anger over high prices – may have to demonstrate that it is taking steps to tame inflation. The ball once again is in its court. The move to defer an interest rate hike for now provides the government enough space to act decisively on improving supplies and dealing effectively with the fiscal situation. The governor, who had raised interest rates twice since taking over in September, has not led his guard down on price pressures, highlighting the dangers that still exist and has said these may prompt the central bank to act if they tend to gather momentum in the weeks ahead.

    “He (Raghuram Rajan) is expressing confidence that price inflation will come under control and let’s hope that he is right. If he is right, then definitely in retrospect it will be proved to be a very good decision,” Planning Commission deputy chairman Montek Singh Ahluwalia said. But some economists say that the RBI may have to act sooner than later. “While we do not disagree that food inflation is likely to ease going forward, on the back of a gradual normalization of supply, we are not convinced that headline inflation will drop very much as overall food inflation may not decline notably,” said Leif Esekesen, chief economist for India and Asean at HSBC. “Moreover, there still is a need to potentially raise diesel prices to contain the fiscal deficit, and inflation expectations are not on the verge of turning in the near term either.” Economists say that inflation risks still remain tilted to the upside.

  • RBI to launch CPI-Iinked savings certificate by month-end

    RBI to launch CPI-Iinked savings certificate by month-end

    MUMBAI (TIP): To offer a hedging option to investors who are getting a negative real rate of return due to high inflation, RBI governor Raghuram Rajan said the apex bank will launch the consumer price inflation (CPI)- indexed savings certificate product by this month end. The rate of interest for the product’s inaugural run will be 1.5 per cent above the annual average of the CPl. “We are coming out with inflation indexed certificates (IISC) tied to the CPI this month. That will give savers the opportunity to invest in assets that produce real returns,” Rajan told analysts after presenting his mid-quarter policy review. “The real return is being fixed at 1.5 per cent for this first roll out of liSC,” Rajan said.

    CPI index rose to the nine-month high at 11.24 per cent for November on the back of an increase in food items. Rajan had earlier announced the product in his first interaction with reporters on the day of taking charge as the head of the central bank and announced that it will be launched by November. The certificates will be second in a series of products after the Inflation Indexed Bonds (liB) which have been launched to counter the effects of price rise for investors. liB is linked to the whole price index-based inflation. Rajan reiterated that offering real rate of returns is very much on the mind of the central bank. It can be noted that the negative rate of return is one of the main issues why investors are moving towards physical assets like realty and gold, which have driven away investors from financial instruments to physical assets like the high current account deficit and a worry about a potential asset bubble forming up.

  • LOANS DEARER AS SBI, HDFC BANK HIKE RATES

    LOANS DEARER AS SBI, HDFC BANK HIKE RATES

    MUMBAI (TIP):
    Home and auto loans are set to get more expensive with State Bank of India and HDFC Bank raising their benchmark rates by 20 basis points on Wednesday. Both the banks raised their base rate to 10% from 9.8%. Following the increase, home loans from SBI will attract 10.3% interest for borrowings up to Rs 30 lakh and 10.5% for loans above Rs 30 lakh. Typically, a 20 basis point hike results in the monthly EMI on a Rs 30 lakh loan going up by Rs 368. SBI’s auto loans are also benchmarked to their base rate and will now attract 10.75% interest. SBI shares fell Rs 63 to Rs 1,810 following the announcement. The country’s largest home finance company, HDFC, offers home loans at 10.4% for amounts up to Rs 30 lakh and 10.65% for loans above that. However, as part of a festive offer, HDFC is giving loans at 10.25% for borrowings up to Rs 30 lakh and 10.5% for loans above the sum until November 15.

    HDFC vice chairman and CEO Keki Mistry said the company did not have any immediate plan to raise its lending rates. Other private lenders like Axis Bank and ICICI Bank also said they were not immediately revising their base rate. Though there will be an increase in outgo for new borrowers of SBI, for existing borrowers there will be no increase in the EMI as the tenure of the loan will be extended. Bankers say for borrowers with longterm loans, the overall impact will be offset by drop in lending rates as interest rates tend to move in cycles, rising and falling every two years. Meanwhile, the bond markets appear to be preparing for another hike in the repo rate before the year end. On Wednesday, the yield on the 10-year government bond rose to 8.82% from 8.74% earlier.

    The increase in lending rates come on the back of a 25 basis point increase in repo rate by Reserve Bank of India in its monetary policy review on October 29. RBI governor Raghuram Rajan had indicated that inflation, as measured by the wholesale price index, is expected to remain higher than current levels through most of the remaining part of the year, warranting an appropriate policy response. “With inflation risks still tilted to the upside, the RBI has to keep its inflation guards up and stand ready, if needed, to raise rates further to bring inflation under control,” Lief Eskesen, HSBC’s chief economist for India and ASEAN, said following the policy announcement.

  • RBI NOT GOING TO BECOME ‘NUTTERS’ ON INFLATION: RAJAN

    RBI NOT GOING TO BECOME ‘NUTTERS’ ON INFLATION: RAJAN

    MUMBAI (TIP): Reserve Bank of India Governor Raghuram Rajan, dubbed an inflation hawk by his critics ruled out a blind fight against inflation, saying a single-minded focus on price rises, regardless of its consequences on growth, is not the remit of any “reasonable central bank.’’ “I don’t want to say in any way that the RBI is going to become nutters on inflation,” said Dr. Rajan in his customary post-policy media interaction here. Ruling out inflation targeting in the strict sense of the word, Dr. Rajan said the domestic context did not allow him to single-mindedly focus on inflation as growth was also a concern. “For any reasonable central bank, while looking at achieving reasonable level of inflation, it also has to take into account the growth situation, because growth itself will create some dis-inflationary forces and, therefore, it means you can achieve the inflation target less of an interest rate hike,” he said. Since assuming office on September 4, Dr. Rajan has hiked the key repo rate by 25 basis points each on September 20 and on October 29, taking the short-term lending rates to 7.75 per cent. While saying that the RBI would provide liquidity in the system for productive purposes, the Governor said “the more durable strategy for mitigating mismatches between the supply of, and demand for, funds is for banks to step up efforts to mobilise deposits.”

    RBI Governor said that unwinding of exceptional measures introduced in the wake of volatility in the foreign exchange markets — like increase of MSF by 300 basis points on July 15 over and above the repo rate — “the process of re-aligning the interest rate corridor to normal monetary policy operations is now complete.” Dr. Rajan had assured that the difference between the repo rate and MSF would be brought down to 100 basis points, in his maiden policy announcement in September after taking over as RBI Governor, while bringing down the MSF from the increased level of 10.25 per cent to 9.50 per cent. He said that the central bank considered Wholesale Price Index (WPI) inflation and the Consumer Price Index (CPI) inflation while taking a decision on inflationary pressures and expectations. “The RBI looks at both WPI and CPI..…..We cannot neglect CPI…..WPI misses some aspect of inflation… CPI is something that common man experiences.” WPI inflation is expected to remain higher than current levels through most of the remaining part of the year, warranting an appropriate policy response. “Retail inflation measures by the CPI, has also risen sharply across food and non-food constituents, including services, keeping inflation expectations high. Notwithstanding the expected edging down of food inflation, retail inflation is likely to remain around or even above 9 per cent in the months ahead, absent policy action.” On growth, Dr. Rajan said that there was big uncertainty. “The industrial activity has weakened with a contraction in consumer durables and tepid growth in capital goods reflecting the ongoing downturn in both consumption and investment demand”. However he said that strengthening export growth and signs of revival in some services along with expected pick-up in agriculture could support an increase in growth in the secondhalf of 2013-14 relative to the first half. “We will get fairly strong agricultural growth…. this will improve the rural sentiment and demand.”

  • PROGRESS BLOW TO GUJARAT

    PROGRESS BLOW TO GUJARAT

    Human indicators put state that brags about growth behind Tripura and Sikkim

    NEW DELHI (TIP): A new development index has identified Gujarat as a less developed state, while ranking Odisha and Bihar along with eight others as “least developed” and Goa and Kerala among the seven “relatively developed” states. A panel headed by Raghuram Rajan, now the RBI governor, which submitted its report to finance minister P Chidambaram, also recommended a fresh approach to devolution of funds to states and moved away from the special category classification to devise three categories – least developed, less developed and relatively developed. According to the index, there are 10 least developed states, 11 less developed and seven relatively developed states in the country. The slotting of Gujarat, which has attracted attention due to its development model, in the “less developed” category is likely to escalate the already bitter political debate on the ‘Gujarat model of development’.

    The other states in this category are Manipur, West Bengal, Nagaland, Andhra Pradesh, Jammu and Kashmir, Mizoram, Tripura, Karnataka, Sikkim and Himachal Pradesh. The least developed states include, apart from Odisha and Bihar, Madhya Pradesh, Chhattisgarh, Jharkhand, Arunachal Pradesh, Assam, Meghalaya, Uttar Pradesh and Rajasthan. The relatively developed states according to the index are Haryana, Uttarakhand, Maharashtra, Punjab, Tamil Nadu, Kerala and Goa. The panel has developed a multidimensional index of backwardness based on monthly per capita consumption expenditure, education, health, household amenities, poverty rate, female literacy, percent of SC-ST population, urbanisation rate, financial inclusion and connectivity.

    The panel said less developed states rank higher on the index and would get larger allocations based on the need criteria. “The committee has proposed a general method for allocating funds from the Centre to the states based on both a state’s development needs as well as its development performance,” Chidambaram told reporters. “The committee has recommended that each state may get a fixed basic allocation of 0.3% of overall funds, to which will be added its share stemming from need and performance to get its overall share,” Chidambaram said. The panel was set up after persistent demand from Bihar CM Nitish Kumar who insisted a the special category status to help access more funds for its development. This sparked off a demand from several other states such Odisha for the special category state status. While the new index will ensure more funds for Bihar from the central kitty, it has stopped short of conferring the “special category” tag on the state, Shaibal Gupta, seen as Nitish’s nominee on the panel to submit a 10-page dissent note.

    However on Thursday, Nitish concealed his disappointment, if any, to celebrate the recommendation as a triumph even as BJP taunted him for failing to have his way despite cozying up to Congress. “It is a very decent report. For example under this index Odisha is at the bottom of the list and then Bihar. Therefore it recognizes that Odisha, Bihar, Madhya Pradesh are among the most backward states of India. That is I think the demand,” Chidambaram said. “The demand of these states is please recognize the fact that for a variety of reasons we are the most backward states. I think this index captures the degree of backwardness and acknowledges that Bihar is among the most backward states of India. Special category is the present categorisation. Now they are moving away from that,” finance minister said while detailing the recommendations of the panel.

    “This is not an answer to all the demands of the states. This is meant only to be a way forward on how to devolve funds to the more backwards states and areas of India. He said the index better captures the stage of development in a state, how backward it is or how relatively less backward it is and is a good measure for planning and devolution of funds. “Because some states are small very limited resources it is necessary to have a threshold below which the devolution of funds does not fall. So the committee has recommended that each one of the states will get a basic allocation of 0.3%,” Chidambaram said. The finance minister said that the report will be examined by various stakeholders before being implemented. “It will not be in the current year. It has to go through the examination process and will be implemented in an appropriate time in the next financial year.

    To which funds this should be applied a decision will be taken,” Chidambaram said. The report said that the National Development Council had accorded the status of special category state to eleven out of 28 states. They were based on a number of characteristics such as hilly and difficult terrain, low population density and or sizeable share of tribal population, strategic location along the borders with neighbouring countries, economic and infrastructural backwardness and non-viable nature of state finances. State under this category have a low resource base and are not in a position to mobilise resources for their developmental needs even though the per capita income of some of these states is relatively high, the report said.