Cos Seek RBI Help to Cut Dollar Loan Costs

Banks and cos want RBI to allow all companies to access simple derivatives to reduce their financing costs

Banks and corporates are hopeful that the Reserve Bank of India will change rules to allow many infrastructure and unlisted companies to lower the cost of their dollar loans. 
Large private sector and MNC lenders recently met senior central bank officials to discuss the possibility of allowing all companies access to certain simple derivatives to reduce financing cost. At present not all companies are allowed to carry out these transactions, better known as cost reduction derivative strategies. While many companies are going for foreign exchange loans, thanks to the abundance of dollar liquidity in international money markets, the cost of such borrowings becomes prohibitive if they have to fully hedge the currency risk. But the cost can be lowered if they enter into a 'call spread' derivative contract that partly hedges the underlying loan. 
"Various banks have met RBI to put across their point. We feel the regulator will soon take a call because checks and balances are now in place," said the treasury head of a foreign bank. Banks are not asking for reintroduction of complex and exotic products which are barred by RBI regulations. However, allowing simpler and safer structures to a wider universe of companies over and above the plain vanilla options will enable many corporate borrowers to prune cost and take advantage of the global dollar liquidity. 
At present, most companies are going for straight-forward option deals that give them an opportunity to buy dollars at the end of three to four years when the foreign currency loan has to be repaid. But the premium they pay on such options largely offsets the cost advantage of a cheaper external commercial borrowing. But, if a borrower strikes a deal where he simultaneously buys and sells call options, then the premium received from selling the option lowers the loan financing cost. In other words, the net premium a company pays in such 'call spreads' is lower than that paid for a plain vanilla option. Here's how such twolegged transactions work: A company buying a call option has the right (but not the obligation) to buy dollars at a specific dollar-rupee exchange; and, when it sells a call option, it has the obligation to sell dollars at another prefixed rate. The company doing the deal takes a view that dollar will not appreciate beyond the point at which it sells the call option. 
These deals are restricted to listed companies and their associate entities or firms with a minimum net worth of . 200 crore. "But there are many companies in infrastructure and other segments where the parent is unlisted and the special purpose vehicles formed for the projects are not adequately capitalised. 
In these deals, the company surrenders some of the upside. But it's far better than keeping a dollar loan unhedged which is a risky proposition or going for a full hedge which can be very expensive," said another banker. 
According to a senior official of a local private sector bank, lenders have also sought some relaxations in the documentation procedure that have been made compulsory for derivative transactions. "Getting a board resolution that authorises a person dealing in derivatives can be time-consuming when one is dealing with public sector companies, many of which have a big appetite for forex loan," said the person. In a call spread deal, companies have to provide for possible mark to market losses on derivatives because the loans are not fully hedged. "But most borrowers are fine with this as long as the financing cost comes down," said a senior dealer. 
sugata.ghosh@timesgroup.com 

RBI Wants a Producers’ Prices Index to Gauge Inflation Better

Says an index to measure the selling price of goods & services will be a more effective policy tool  India's central bank has said that policymakers should develop a producers' prices index, or PPI, which measures the selling price of goods and services to make a better assessment of inflation and, in turn, help monetary policy management. The governor of the Reserve bank of India, Duvvuri Subbarao, while highlighting the flaws in the current wholesale price index, or WPI, which is a more popular measure and interprets inflation, made out a strong case for looking at new measures such as the PPI. "In its present structure, the WPI does not capture the price movement of services... it is a hybrid of consumer and producer price quotes," said Subbarao at a function to mark the sixth National Statistics Day at the RBI headquarters in Mumbai. For instance, the current WPI captures the price of important commodities such as milk from the retail markets, reflecting the price which the final purchaser pays and not the producers' prices or sellers' prices.  While the consumer price index, or CPI, measures price changes from the buyers' perspective or at the retail level, PPI measures price changes from the perspective of the seller. Sellers' and purchasers' prices differ due to government subsidies, sales and excise taxes and distribution costs. For these reasons, it is, therefore, desirable that the country should move towards developing a PPI which measures the average change over time in the sale prices of domestic goods and services.  The Reserve Bank monitors both CPI and WPI to assess inflation, while taking a decision on whether to raise or cut interest rates. However, there are several data gaps in them. "One of the problems we have to contend with in assessing inflation trends is the divergence between WPI and the CPI, which is due to the differences in coverage and weights," said Subbarao. For instance, food has a weight of only 24% in WPI compared to weights in the range of 37-70% in CPI. Metals and a few other bulk commodities, have a weight of 8% in WPI, but are not directly included in the CPI. Besides, services, whose prices have been on the rise, have weights in the range of 12-25% in the CPI, but are not reflected in the WPI. "The difference in weights and coverage and the divergence in price movements not only create a wedge between the different inflation measures but also sometimes move them in opposite directions." he said. Another problem is the measurement and interpretation of core inflation. Core inflation is usually estimated by excluding food and energy prices from the basket of goods and services that represents a household's typical spending. The rationale for exclusion is that the prices of food and energy tend to fluctuate sharply and such volatility from the supply side, if passed on into the general price index, makes it difficult to interpret the overall trend. The surmise is that core inflation, being less volatile, gives a better sense of future price trends.  "Even in advanced economies where food and fuel constitute a relatively small proportion of the consumption basket, the focus on core inflation for policy formulation is being challenged." Subbarao said.     The WPI does      not capture the price movement of services... it is a hybrid of consumer and producer price quotes  DUVVURI SUBBARAO  Governor RBI

Economy gasps as growth sputters to 9-yr low of 5.3% 6.5% GDP Rate In 2011-12 Way Below Govt’s Estimates

New Delhi: India's economic growth has come down to a nine-year low of 5.3% in the January-March quarter of this year, showing up in bolder relief than ever before the signs of the severe stress in the economy, and prompting calls for urgent action to reverse the trend. 

    Data released by the Central Statistics Office (CSO) on Thursday showed growth in 2011-12 stood at 6.5%, much lower than the 8.4% posted in the previous year. It was below the government's previous estimate of 

6.9% and way off the mark of estimates handed out periodically by top government policymakers. 

    The Indian economy, once the star among emerging market economies, has steadily slowed since the January-March quarter of 2010-11, and on Thursday after digesting the January-March growth figure of 5.3%, some economists cut their growth estimates for 2012-13. 

    The manufacturing sector growth fell 0.3% in the March quarter compared to an expansion of 7.3% in the corresponding period the previous year. Agriculture posted a growth of 1.7%, sharply lower than the 7.5% growth in the March quarter of 2010-11 For the full year, the manufacturing sector grew 2.5% in 2011-12 compared with 7.6% in 2010-11. 

SLUGGISH ELEPHANT March quarter GDP growth at 5.3%, against 9.2% in Q4 of 2010-11 

Manufacturing scrapes the bottom with 0.3% decline, agriculture grows just 1.7%, services slow down to 7.9% from 10.6% 

Overall 2011-12 growth at 6.5%, lower than estimates of 6.9% Economists are scaling down growth projection 

for 2012-13 

Industry in gloom. Says govt should pull out all stops to stem the slide 

Growth in core sectors slows to 2.2% in April 

    Growth in the eight core industries slowed in April, pointing to a rut. Coal, crude oil, natural gas, refinery products, fertilizers, steel, cement and electricity grew 2.2% in April, lower than the 4.2% posted in the same month last year. P 19 

Govt in denial? FM hints that the worst is over 

    The finance ministry seemed to be in denial on Thursday, with officials saying India was still growing faster than many Eurozone countries. Pranab Mukherjee too suggested the worst was over, saying the factors for sluggishness had "bottomed out". P 19 Experts urge govt to step up reforms

New Delhi:The slide in the economic growth has led to calls for quick action on the part of the government. The sluggishness in the services sector, which accounts for nearly 60% of GDP, emerged as a worry for policymakers already burdened by the slowing economy and stubborn inflation. Data showed the services sector growth slowed to 7.9% in the March quarter compared with a10.6% expansion in the sameyear-ago period. The domestic demand-driven economy has been hit hard by high inflation, interest rates, rising global commodity prices, lack of economic reforms and delay in implementation of projects. This, in turn, has hit business confidence, forcing domestic players to explore investment options overseas. 

    Policymakers have consistently blamed the global economic environment and the lack of cooperation from the opposition in approving key economic legislations as reasons for the slowdown. The March quarter data came on a day when the opposition had called for a shutdown to protest the sharp increase in petrol prices. Analysts say the disappointing growth numbers could spoil the mood further and heighten the anxiety. 

    Finance Minister Pranab Mukherjee termed the March quarter data as disappointing but said the figures should be seen in the light of overall global developments. He attributed the slowdown to tight monetary policy and the weak global sentiment affected growth in domestic private investment. 

    But economists pointed to two key risks which included uncertainty about the monsoons and the European debt crisis and said the need of the hour was to step up reforms and ease supply bottlenecks.

COME AGAIN? 

There are several reasons that growth is almost universally predicted to be sustained at a high rate of 8-9% per annum and more, over the next few decades... —PRANAB MUKHERJEE ON AUG 6, 2011

RBI may take big bang steps to tame rupee Currency Hits New Low Of 55.47 Against $

Mumbai: The foreign exchange market is bracing itself for sledgehammer measures by the Reserve Bank of India given the sharp depreciation in the rupee in the last few sessions. The rupee further weakened against the dollar to close at 55.40 after hitting 55.47 intra-day on Tuesday following a downgrade of Japan by rating agency Fitch. 

    The rupee, which opened stronger against the dollar, soon started weakening steadily to close at the day's low. Dealers said that none of the central bank's measures to steady the rupee have had an impact. RBI has exhausted close to $20 billion of its reserves in supporting the rupee. It has allowed corporates to pay more on external borrowings, freed interest rates on non-resident deposits, and cracked down on banks going long on the dollar. 

    The most recent measure by RBI was curbs on trade in currency derivatives. Yet the rupee continues to weaken largely on the back of a world-wide dollar rally. 

    The most drastic measures could be limits on dollar purchases which could reduce pressure from importers. It was also widely expected that the central bank would open a separate window to sell dollars directly to oil companies thereby eliminating a large chunk of demand. 

    Besides increased demand for dollars from exporters who are leaving no position "unhedged", the local unit is coming under pressure because of sales by foreign institutional investors who turned net sellers in April 2012. 

    Forex dealers are waiting for the outcome of the Greek election on June 17 which will provide a pointer to whether Greece would continue to remain in the Eurozone. The main concern of the markets is of a disorderly exit—one where there is complete confusion over financial contracts with investors being forced to write off billions. According to Nick Firoozye, Senior Interest Rates Strategist, Nomura, the Greek exit from the euro would be not at all orderly. "Approximately 20% of the world's reserves are in euro, and a larger notional amount of euro swaps are traded that that of than dollar. That is a significant underpinning of the global financial market. An exit would almost automatically be disorderly: you would need to determine the governing law of individual contracts and obligations; whether redenomination is allowed or whether default is inevitable on some, as well as the obligations of central banks and governments. These issues are not at all straightforward —we can try and be as prepared as possible but it is not going to be easy in any way." 

GREXIT DILEMMA

Siddhartha Sanyal | Chief India economist, Barclays 

On Greek exit: The rupee is set to stay under pressure in a risk-off scenario and even a Greek exit from the euro will not improve it in the near term. The hopes of the rupee being favoured with oil prices coming off have not materialized and the only way out at the moment for the rupee seems to be further policy intervention 

On rupee: The exchange rate will be 56 by next month and 54 in three months

Dharmakirti Joshi | Chief economist, Crisil 

On Greek exit: Nervousness in Europe increases volatility in the forex market. We do not know how the situation will unfold in Greece... but the general result would be risk-aversion. The bad news is that our trade deficit is very high and most of our imports are price-inelastic. The good news is that the forex reserves and financial institutions are strong and, with 

    depreciation, Indian 

    assets become 

    attractive 

On rupee: The rupee could firm up to 49 in 8-10 months if there are measures to bring stability to the currency

Shubhada M Rao | President & chief economist, 

Yes Bank 

On Greek exit: The lingering Eurozone concerns may see another bout of intensification (of pressure on the rupee) around mid-June... If Greece fails to come to a consensus, the risk-off environment will prevail. The piecemeal measures and direct intervention by RBI have not been able to arrest the rupee's slide... Perhaps, an incisive and bigbang approach is needed now 

On rupee: The fair value of the rupee should be in the 52-53 range

RBI cuts key rate by 50 bps, but banks reluctant to pass on benefit immediately

Consumer is King of this Policy

Subbarao Stuns with Giant Repo Rate Cut

Even though it may take a while for home & auto loans to get cheaper, removal of prepayment charges & transparency in deposit rates cheer consumers 

 Reserve Bank of India Governor Duvvuri Subbarao fired the bazooka from his arsenal to revive flagging economic growthwith a 50-basis-pointcut in interest rates, but said he will not hesitate to raise rates again if price pressures revive. 

The unexpectedly steep reduction — the markets had expected a 25-basis-point cut — coming in the wake of a growing clamour from governmentofficials andbusinessmen to cut rates, even though demand pressures persist, raised questions whether the governor is risking his credibility. 

Subbarao, a former finance secretary, had for much of the past year ignored markets and advice from an internal panel to reduce rates, resulting in howls of pain from business but burnishing the central bank's inflation-fighting credentials. The governor, in an interview to ET, described the decision as a "professional judgement" guided entirely by the numbers on growth and inflation. "Idon'tthink you should read us by what people are expecting us to do, or should read us by whether we deliberately wanttosurprisethe market. That's a professional judgement. We have taken into account both growth and inflation dynamics." 

Tuesday's reduction in lending rates, the first in three years, was widely welcomed by businessmen and hailed by the finance minister. "The growthwhichhasweakened in past months should now improve… The monetary policy announcement should help in investment revival and contribute to strengthening of business sentiments," Finance Minister Pranab Mukherjee said in Delhi. 

In interviews after the presentation of the Union budget, finance ministry officials had been increasingly strident in their callsfor a change in monetary policy. 

Earlier Tuesday morning, addressing a meeting of the Confederation of Indian Industry, Mukherjee said they could expect some "good news" as the RBI was likely to soften its monetary policy in about "half an hour", though he did not disclose details. This was around 10:38 am. The minister's words were somewhat unusual as news of the rate cut was embargoed till the official announcement at11 am. 

The RBI also boosted liquidity measures by doubling banks' borrowing limit under the so-called Marginal Standing Facility to 2% of their demand and time deposits. This could smoothen money market movements and help the government's borrowing programme. 

The rate cut is aimed at boosting investments, but many expressed doubts on whether corporates and individuals will benefit immediately asbanks are reluctanttocommit to lower borrowing costs any time soon. "Both deposit and lending rates will come down, though it may take a while," said Aditya Puri, CEO at HDFC Bank. "If governmentspending comes in,leading to an increased money supply and consequent velocity into the banking system, we do expect that deposits will grow." Cash Reserve Ratio Left Unchanged 

When that happens, yes, there will be enough money. Bankers will be brave. In the interim, it may lead to blood pressure rather than bravery," Puri added. 

The central bank also sought to help the consumer by abolishing prepayment charges on home loans after banks failed to do so despite persuasion, and bringing in more transparency in interest rates on deposits. 

Subbarao cut repo rate — the rate at which it lends to banks — by 50 basis points, double of what the market expected, to 8%. Reverse repo — the rate it pays banks when they deposit surplus funds — fell to 7% and the penal rate of interest on borrowings by banks under MSF dropped by the same amount to 9%. The RBI kept some power dry by leaving the cash reserve ratio untouched at 4.75%. 

"Expectations are that pricing power of corporates is quite limited so they may not be able to pass on the increase in input prices as they were able to do for much of the past one-and-a half years," Subbarao said. "Therefore, supply shocks or adjustment in administered prices may not transmit to generalised inflation. But if our calculations go wrong, our policy prescriptions will have to be different.'' The finance minister vowed to step up the fight against inflation. "Food and primary inflation have shown signs of hardening. This is a cause for some concern. We intent to continuously monitor the situation and take the required steps to manage short-term supply constraint for those food items that contribute to inflation. We will do everything possible to maintain price stability." 

The benchmark Sensex rose 1.2% to 17,358. The yield on the 8.79% bonds due November 2021 fell 12 basis points to 8.34%, the lowest since March 14. The rupee climbed 0.4% to 51.48 to the US dollar, 

"It has merged a couple of 'baby steps' into today's move and will possibly stay on hold for a while," said Siddhartha Sanyal, economist at Barclays. "We believe the central bank will examine the scope for further monetary easing on a case-by-case basis in the coming months, with a bias towards not cutting repo rate further in the next one to two policy meetings." 

Gross domestic product may expand 7.3% this fiscal compared with the baseline projection of 7% last year, Subbarao said. Inflation will probably be at 6.5% by March 2013. He forecast bank deposits to grow 16% and commercial credit 17%. 

But the government's fiscal position, borrowings of a record Rs 4.8 lakh crore, and suppressed inflation in the form of lower petroleum product and coal prices could throw a wrench in the works. "Large borrowings have the potential to crowd out credit to the private sector," said Subbarao. "Crowding out of the more productive private credit demand will become more critical if there is fiscal slippage." 

But the liquidity-boosting measures may possibly take care of the market conditions despite huge borrowings by the government. 

"The surprise was the increase in MSF to 2%, which clearly is an effort to cap borrowing costs within the corridor of 8-9% and not let temporary factors due to frictional liquidity lead to unintended tightness in inter-bank markets," said B Prasanna, managing director and CEO at ICICI Securities Primary Dealership Ltd. 

The generous rate cut and liquidity-boosting measures may push up prices again, even as high interest rates have failed to completely tame prices so far. 

The central bank has been missing the inflationary forecast for many years. Its desired level of 4-4.5% and long-term target of 3% in line with international standards may remain a dream. 

"The RBI was clearly itchier to cut policy rates more than expected, but the 50-basis-point cut may have been a bit too premature and aggressive," said Leif Eskesen, regional economist at HSBC. "If that turns out to be the case, it could hurt the RBI's credibility while doing little to raise growth on a sustained basis."

FM upbeat on growth, RBI sounds caution

New Delhi: Finance minister Pranab Mukherjee on Tuesday said the monetary policy announcement should help revive investment and strengthen business sentiment. He also promised that in coming weeks, additional steps would be taken to reinforce the focus on growth. 

    But the Reserve Bank of India (RBI) has flagged some key concerns that could hurt growth and inflation in the months ahead. "Domestically, the state of the economy is a matter of growing concern. Though inflation has moderated in recent months, it remains sticky and above the tolerance level, even as growth has slowed," RBI governor Subbarao said. 

    "Significantly, these trends are occurring in a situation in which concerns over the fiscal deficit, the current account deficit and deteriorating asset quality loom large." 

    The governor said several upside risks to the budgeted fiscal deficit of 5.1% of gross domestic product remain even though the Budget envisages a reduction in the deficit in 2012-13. Economists have also expressed doubts about the government's ability to stick to the fiscal deficit target set in the Budget for the current fiscal and have slammed the lack of any credible plan to restore the health of public finances. 

    "Going by the recent burden-sharing arrangements with the oil marketing companies (OMCs), the Budget estimate of compensation for under-recoveries at the present level of crude prices is likely to fall significantly short of the required amount. Any slippage in the fiscal deficit will have implications for inflation," the governor said. The central bank has identified the uncertainty of global commodity prices as another key risk. RBI urged the government to raise prices of petroleum products. 

    But, Mukherjee vowed there would be no slippage on the fiscal deficit front. "Let me assure you that the budgetary exercise has been done with due diligence and I would do my best to restrict the government expenditure to the budgeted figures," he told the AGM of CII.

I'd do my best to restrict govt expenditure to budgeted figures 

Pranab Mukherjee 

FINANCE MINISTER

Home loans to get cheaper as RBI cuts key rate after 3 years

GIVING A SHOT IN THE ARM

Slashes Repo Rate By 50bps To Fuel Growth No Penalty For Pre-Payment Zero-Balance Savings A/C

Mumbai: Home and auto loans are expected to become cheaper with the Reserve Bank of India cutting interest rates on Tuesday for the first time in three years by a more-than-expected half a percentage point. The move is aimed at boosting the sagging economy. 

    RBI in its annual policy reduced by 50 bps its repo rate-—the rate at which it lends overnight funds to banks and also announced a slew of consumer-friendly measures such as zero balance savings accounts for all and abolition of pre-payment charges for home loans. The availability of cheaper funds is expected to spur individuals to spend more and business to increase investment. It was expectedly cheered by bankers and industrialists across the board. 

Will curb govt expense: Pranab 

    Finance minister Pranab Mukherjee said the monetary policy announcement should help revive investment and strengthen business sentiment and promised that additional steps would be taken to reinforce the focus on growth. Though RBI flagged some concerns that could hurt growth and fiscal deficit, Mukherjee vowed there would be no slippage on fiscal deficit. "I will do my best to restrict the government expenditure to the budgeted figures," he said. P 21 

MAJOR POLICY MEASURES 

    50 basis points cut in repo rate signals shift of RBI's focus to growth 

    Liquidity support by allowing banks to borrow more from RBI 

    Economy expected to grow 7.3%, inflation 6.5%, deposits 16% and loans by 17% in 2012-13 THE BAD NEWS 

RBI wants govt to hike fuel prices 

Warns that future rate cuts not guaranteed 

Deposit rates could come down 

Inflationary pressures to continue 

THE GOOD NEWS 

Loans to individuals and businesses to become cheaper 

No foreclosure or prepayment charges on home loans 

Zero-balance savings accounts with minimum facilities to all bank customers 

Unique customer ID may pave way for savings a/c portability 

Banks not to provide undue returns for bulk depositors 

Fixed rate bank home loans may become a reality BOOSTER SHOT Is RBI rate cut a one-off affair? 

Mumbai: Giving the RBI's monetary policy a thumbs up, the BSE sensex closed 206 points higher at 17,357 points. It was buoyed largely by the magnitude of the cuts since it was only expecting a 25 bps reduction. Bonds rallied, with the yield on 10-year benchmark bonds falling to 8.34% from 8.44% on Monday. In the forex market the rupee rallied against the dollar to 51.49, up from Monday's close of 51.68. 

    While banks are unequivocal about lending rates falling, all of them may not pull down their rates immediately. "With the reduction in interest rates, EMIs will definitely fall. That is the good news. But how fast the transmission takes place…we will have to watch depending on our cost of funds. But clearly, the trend is downward," said Chanda Kochhar, MD & CEO of ICICI Bank, the country's largest private bank. The country's largest bank SBI is meanwhile looking at a 'comprehensive' reduction in lending rates. "On car loans and all other loans wherever the spreads over the base rate (benchmark rate for loans) are high, we will look at bringing down rates. I am not sure about the base rate but it is our asset liability committee that will take a call" said Pratip Chaudhuri, chairman, SBI. 

    The policy, designed to give growth a much needed push, predicted that the economy would grow at 7.3% even as it continued to remain concerned about inflation saying it would remain high at 6.5% in 2012-13. RBI governor D Subbarao denied that the government had any influence on the move. However, he said that the government needs to do its bit to 

spur growth. "Monetary easing is necessary but not sufficient condition for growth. The government should adjust oil and other subsidies and address supply side constraints," Subbarao said. 

    Besides addressing rates and setting forecasts for 2012-13, the policy also includes a number of announcements aimed at giving bank customers a better deal. New regulatory initiatives include specialized training to bankers to help them detect fake notes.

India could Lose World Bank Soft Loans Middle-income tag to make it ineligible for IDA funding

World Bank has informally told India that its rapidly-growing economy may soon make it ineligible for soft loans, prompting the government to lobby for concessional lending for a few more years. 

India stands to lose over $2 billion in lowinterest funds for many of its welfare schemes, besides missing out on social initiatives spearheaded by the Washingtonbased lender over the previous decade. 

"We expect India to move into the middleincome category of countries in the next two years. This will mean that the IDA ( International Development Association) funding India got last year was the last cycle of such funding for the country," said a senior World Bank official. 

The bank lends to developing countries under two arms — IDA and International Bank of Reconstruction and Development (IBRD). IDA funds are highly concessional or interest-free loans and grants aimed at improving living conditions of the poorest. India is Currently a Blend Country 

IBRD funds infrastructure projects in middle-income and creditworthy lowincome countries at interest rates higher than those provided by IDA but lower than those offered by other commercial lending agencies. 

India is currently classified as a "blend" country — defined as one in transition from lower middle-income to middle-income — and is creditworthy for lending from both IDA and IBRD. In 2010, India's per capita national income stood at $1,330, which is higher than the operational eligibility cut-off of $1,175 per capita income. 

The finance ministry, which is lobbying with the bank, has argued that though per capita income has risen, India has the highest number of poor and should, therefore, continue to get IDA support, an official said. According to official estimates, India has more than 350 million people below the poverty line. Last July, the World Bank board approved $1 billion for the National Rural Livelihood Mission (NRLM) — an ambitious livelihood guarantee scheme launched in 2011 under the rural development ministry. The bank is helping 13 poorest Indian states in building institutional systems before the scheme is scaled up at a national level in the next three-five years. "We tried hard to get the funding for NRLM as we knew that getting IDA funding will not be possible after this. There is a huge demand for concessional lending from poorer countries, particularly in Africa," the official said.

RBI mulls use of cheques for loans against gold

WHAT'S UP

Expecting excessive heating up of the gold loan business in the country, the Reserve Bank of India (RBI) recently came out with regulations, limiting gold financing companies to give only up to 60% of the value of gold kept as collateral as loan. It also stopped the practice of acceptance of public deposits by subsidiaries of some gold loan companies through surrogate branding. Now the buzz is that the central bank is working to limit the amount of cash that gold loan companies can give its customers. The most likely change in rules could be that beyond a certain limit, say Rs 50,000 per loan, the advances should be through cheques. The move is aimed at limiting the use of hard cash in this flourishing business. And RBI's move would surely help in establishing some trail about the use of funds from gold loan, even if not the source of money used to buy the gold that is being kept as collateral. 

With Bold Moves, Subbarao Gets Reddy for Criticism

In his Predecessor's Steps: RBI guv has earned more critics than admirers in the past few months

When career bureaucrat Duvvuri Subbarao took the wheel at Mint Street in September 2008 at a time the financial world was crumbling, the popular belief was New Delhi would get a firm handle on monetary policy. The Lehman Brothers collapse and the 'synchronised' handling of the crisis between the government and central bank strengthened the belief. Three years later and the next crisis possibly round the corner, the story is different. Subbarao has earned more critics in recent months for supposedly killing growth, but a few admirers too for his conviction. Events are unfolding to create a landscape similar to the one that confronted his predecessor Yaga Venugopal Reddy — heaps of criticism for supposedly stifling growth and innovation. 
"It was unnecessary given the sharp deterioration in the global environment and a significant slowdown in domestic activity," said Tushar Poddar of Goldman Sachs after the governor raised policy rates 25 basis points last Friday amid slowing economic growth. A basis point is 0.01 percentage point. 
Industry was not far behind. 
"At a time economic policy should focus on the creation of jobs, it is unfortunate that the economy is being forced into a sluggish growth phase," said B Muthuraman, president, Confederation of Indian Industry. 
Subbarao, who parroted the policy stance of global central bankers during much of his first term, is deviating significantly. Policymakers in developed nations are keeping rates near zero and Federal Reserve Chairman Ben Bernanke has promised to keep it low till the middle of 2013. Most Asian central bankers have left rates untouched this month and Turkey and Brazil have cut interest rates. Subbarao is the odd man out by promising to keep raising rates till prices cool. Many admire his independence. "Subbarao is a pragmatic and astute central banker who has taken independent decisions based on his well-researched conviction," says Madan Sabnavis, chief economist at rating company Care. Warrior Caught in Padmavyuha
"He has recognised inflation as being the single most important malaise afflicting the economy and pursued the goal of increasing rates, notwithstanding the pressures being exercised from different quarters, displaying a lot of character." 
Industry has been seeking a halt to raising interest rates, which started with 'baby steps' in 2010 with the governor's public admission of confusion with reference to his position being similar to a warrior caught in 'padmavyuha', a battle formation that is easier to get in, but difficult to get out. 
The noise was loud enough to force him to declare last November that he would be putting the brakes on rate increases as manufacturing data showed weakness despite climbing prices. Industry and markets cheered, but it was short-lived. 
He abandoned the baby steps for a shock treatment by raising rates 50 basis points in July, double of what the market forecast. "What the RBI will have to consider is that interest rate tightening has not had the desired impact on inflation that we were hoping for. It is having an impact on growth," Kaushik Basu, chief economic advisor to the finance minister, said before the rate hike decision last week. 
The wildly-fluctuating Index of Industrial Production was presented as an argument for a pause. But Subbarao began to dig the surface. The economist in him found that data from the government was unreliable. A new series that was peddled by the government statistics department to be more reliable has been described by the governor as 'analytically bewildering'. 
ASSERTING RBI'S AUTONOMY 
It is not just his monetary policy actions by which Subbarao has asserted the central bank's autonomy. He has spoken out in public on some controversial issues such as the government's inability to rein in fiscal deficit, criticising banks that sold derivatives to unsuspecting customers and steadfastly resisting demands for investing foreign exchange reserves to build infrastructure. 
He has spoken out on other matters as well. "The establishment of a statutory joint committee is itself problematic and raises issues about its potential misuse in ways that impair the autonomy of the regulators," Subbarao wrote to Mukherjee expressing his reservations about setting up a council headed by the finance minister to reconcile differences between regulators. But on this, the government ultimately had its way. Monetary authorities, in an unwritten rule, do not comment often about government finances. But in the last few months when criticism mounted on the RBI for raising rates, Subbarao said the government was not helping much to contain prices. In effect, saying that those in glass houses shouldn't throw stones at others. "Beyond the short term, the threat to the independence of central banks emanates from factors apart from public anger... as countries contemplate exit from these expansionary policies, the familiar tensions between monetary and fiscal policies are showing up again," he had said. "Many believe that these tensions are temporary, and will melt away once recovery takes root... that may not well be the case." 
INCREASING TRANSPARENCY 
Transparency is probably a word that does not exist in a central bank's dictionary. The RBI is probably as opaque as most central banks, but Subbarao has taken 'baby steps'. One example is the decision to make public the minutes of the technical advisory committee meeting. It probably may not be as significant as it is in the West due to non-voting nature of the members, but it has helped in at least one way — to show Subbarao does not hesitate to differ. Twice he has gone against the majority view of the advisory committee. The steps towards greater transparency are not surprising given his agenda all along has been "to improve communication" and "de-mystify the office of the governor". 
"Since this governor has taken charge, the language in the policy statements has acquired much greater clarity as has the guidance for future policy actions," says Jahangir Aziz, Asia economist, JPMorgan Chase. 
Ever since taking charge of monetary policy, he knew part of his job was to hold a mirror to the government. "The central bank has performed the role of being an effective counterpoint to the government, which often has to concentrate on short-term objectives," he had said. "The Reserve Bank has been able to take a medium-term view and what is prudent and optimal comes out of this synthesis. We should continue to do that."

Govt Waves the Stop Sign as RBI Readies to Flag Another Rate Hike

High rates harming growth, says Kaushik Basu

    The central bank's monetary tightening has harmed growth instead of taming inflation, the country's chief economic advisor has said, sending an unequivocal signal three days before a crucial RBI rate-setting meeting that the government wants no more hikes. 

This rare display of the government's discomfort with the monetary strategy being followed by the central bank signals a public breaking of ranks between the two navigators of the economy on how best to steer it from here. 
As the RBI prepares for its mid-quarter monetary policy review on Friday, in which it is widely expected to raise rates by another 25 basis points, Kaushik Basu acknowledged the task before the central bank was not an easy one. "However, what RBI will have to consider is that interest rate tightening has not had the desired impact on inflation that we were hoping for. It is having an impact on growth," he told ET NOW in an interview. 
His intervention marks a hardening in tone from the finance ministry, which has so far gone along with the RBI even though it may not have agreed with the central bank's stance. Finance Minister Pranab Mukherjee had earlier this month expressed hope that the RBI would desist from raising rates further, saying "the existing monetary policy of reining in inflation may not have to be extended". The RBI has already raised key rates 11 times and by a cumulative 325 basis points since March last year. These have not managed to completely tame inflation, which remains too high for the central bank's comfort. July inflation was at 9.22% and estimates for headline inflation remain as high as 9.7% for August. The government will release inflation numbers for August on Wednesday. 
But the rate tightening is helping put the brakes on economic activity. Industrial production growth has eased, falling to 3.3% in July from 6.6% in June. Industry has been complaining as its cost of credit has been rising, and so are banks, which fear rising rates will lead to an increase in bad loans. GDP growth forecasts for the year to March 2012, first estimated at around 9%, have been scaled down by most economists to around 8%. 
Despite all this, most expect the RBI to continue to increase interest rates until it is convinced that inflation has been tamed. But Basu said it was time to change tack, suggesting that higher interest rates carried with them the danger of attracting capital flows of money borrowed at cheap rates overseas, which could also fuel inflation. Time to Bend Conventional Rules 
"Conventional monetary tools may not curb inflation. Interest rates have not had the desired impact," he said, adding that there was a case for the RBI to consider an "unconventional move". "Once you move away from that instrument, there are other instruments, which are fiscal policy and other monetary moves which can handle inflation." 
Basu, an economics professor who has taught at several US universities before returning to New Delhi to take up his present job, said the monetary authorities' failure to curb inflation despite raising rates pointed to the changing structure of the global economy. "The RBI should indeed take a serious look at the situation worldwide and the experimental moves undertaken by Turkey and Brazil," he said, referring to the decision of the two countries to cut interest rates in the face of high inflation. "In the Turkish case, they took the view that with the carry trade and other problems, they will have to lower interest rates. As a result, Turkey's inflation, which was above 10% in April last year, is now down to 6.2% in July this year. Thus, contrary to expectation, the lowering of interest rates has not made inflation worse," Basu said. In Brazil too, the central bank late last month cut its benchmark rate by half-a-percentage point to 12%, reversing course after a year of rate hikes. 
As for India, Basu said he expected inflation to hover around 10% until the year-end and decline from December. "Thereafter, non-food inflation will fall off faster than food inflation. Food inflation will prove to be difficult for us from January. Food inflation will be a bigger concern during February-March," he said. 
Basu also said he expected GDP growth for the current fiscal year to be 8-8.1%, with exports and FDI flows mitigating "below par" performance in manufacturing and industry.

Traders Face Higher Costs on RBI Move

Proposal to raise risk weights for NBFCs will drive away retail players, say brokers

Dalal Street traders, who rely on funding from non-banking finance companies (NBFCs) to trade in stocks and invest in public offers, may need to be prepared for higher borrowing costs. 

The Reserve Bank of India (RBI) committee's proposal to increase risk weights for NBFCs with capital market exposure to 150% is expected to push up brokers' cost of funds, resulting in these firms charging more for money given to traders. 
Brokers expect the move will lead to a fall in market volumes and bemoan the fact that the rules are being changed 
at a time when trading opportunities have been on the wane due to an uncertain global environment. 
"The participation of retail traders has already shrunk in recent months. Higher costs will drive away even the rest as making money in these market conditions are difficult," said Rajesh Baheti, managing director of the Mumbai-based Crosseas Capital. 
The sharp decline in retail participation in recent months has been because of a dip in activity in mid- and small-cap shares. Retail traders usually borrow from brokers and trade in these stock segments, which usually rally sharply only in bull markets. 
But brokers argue the impact will not be much as NBFCs are lending less to retail stock traders nowadays; instead they are focusing more on promoters, willing to pledge their stock holdings for their business or personal needs. 
"Broadly, lending to capital market-related activity will shrink because of higher provisioning, but within this segment the focus will be on lending to promoters because of the collateral they provide," said a senior official with a Mumbaibased broking firm, which owns an NBFC. 
The loans to promoters against shares typically have tenure of one to three years and carry a margin requirement of two to three times. NBFCs charge premium rates for this short-term finance and have the right to sell pledged shares if promoters default. 
"The demand among retail traders for loans to trade is elastic, while that is not the case with promoters. This will allow broker NBFCs to pass on the higher funding cost to promoters," Baheti said. 
As on June 30, 768 companies have pledged shares with the total value at $ 33.4 billion compared to $37 billion on March 30, according to Morgan Stanley. The pledged value of these shares is about 2.2% of India's market capitalisation, the lowest level since March 2009.
nishanth.vasudevan @timesgroup.com 

Growth Slows, but Not Enough to Comfort RBI

   India's economy expanded at its slowest pace in 18 months, but the slide was slower than forecast and largely confined to ratesensitive sectors, reinforcing economists' views that the Reserve Bank of India (RBI) may raise interest rates again to combat inflation. Gross domestic product (GDP) rose 7.7% in the three months to June compared with 8.8% in the year-ago quarter, according to data released on Tuesday. The biggest surprise in the pack was the jump in investments — a robust 7.9% from a near-collapse of 0.4% in the previous quarter. Services output also expanded by a handsome 10%. The growth of eight infrastructure industries offered further proof of investments firming up. The index rose to a 15-month high of 7.8% in July from a year ago. 

The government, however, remained cautious in its optimism. While Finance Minister Pranab Mukherjee termed the GDP number "disappointing", his Chief Economic Advisor Kaushik Basu advised against reading too much in the positive entries of the data. "You should not set your hopes too high for the immediate next quarter," he said, adding, "But I do expect growth in third and fourth quarters to show quite a substantial pick-up." 
The spate of interest rate hikes by the RBI over the past few months ate into consumption growth, which fell to 6.3% from 8% in the previous quarter and 9.5% in the year-ago quarter. A near-normal monsoon towards the end of August, however, boosted the prospects of the agricultural sector, which grew 3.9% as against 2.4% in the year-ago quarter. Construction Takes Biggest Hit 
The first-quarter growth of last year was revised downwards from 9.3% to 8.8% after it was updated with the new IIP series. The data for rest of last fiscal will be revised later, which makes sequential month-on-month comparison difficult. 
Fiscal deficit has surged more than two-fold to Rs 2.2 lakh crore during the first four months of the current fiscal, on account of low revenue realisation and higher expenditure.The headline growth is broadly in line with expectations, but the services sector has done much better than the consensus estimate. An ET poll of 14 economists had put the first-quarter median growth estimate of GDP at 7.65%. 
Only the interest rate-sensitive industrial sector has taken a knock in the first quarter with growth falling to 5.1% from 9.1% in the year-ago period. Construction took the biggest hit as hardening interest rates dampened demand and slowed down project execution. The sector grew just 1.2% as against a 7.7% growth in the year ago. "Construction numbers are extremely low," said India's chief statistician, TCA Anant. "Because it is a leading indicator of new development, this slowdown in construction is a worrying trend." Mining growth also lost traction because of policy-related delays in project execution. The sector grew 1.8% compared with 7.4% in the previous year. 
But analysts remained confident of the growth momentum. "Clearly, the numbers display resilience in economic growth," Yes Bank economists Shubhada Rao, Vivek Kumar and Yuvika Oberoi said in a note. "The fact that GDP has come only a tad lower than the previous quarter validates the RBI's comfort of growth remaining broadly resilient." 
"The 8.2% growth rate could be achieved," said C Rangarajan, chairman of the Prime Minister's Economic Advisory Council. The latest GDP data has reinforced the view that the central bank will raise interest rates in its September 16 review to dampen inflation. 
"We expect another 25 basis point hike in the September monetary policy review," said Sajjid Chinoy, India economist with JPMorgan. Only Goldman Sachs felt the Reserve Bank was done with rate hikes for this year.

RBI WILL HAVE THE LAST WORD Bank Window Opens for Cos with Stoppers

India Inc excited as draft norms will not be too difficult to meet for cos with strong credentials

    After years of intense lobbying, business houses wanting to set up banks are spotting a ray of hope. The Reserve Bank of India is slowly opening the doors for corporates to enter the highly-regulated industry, but with caution, conditions and caveats. 
In draft guidelines issued on Monday, the banking regulator laid down the broad rules of the game: finance companies can be converted into banks, and promoter groups with "sound credentials and integrity" and a 10-year record of successfully running their businesses can set up banks. 
Such banks should have a minimum paid-up capital of . 500 crore, run 25% of their branches in rural unbanked regions, list within two years, and be owned by a separate holding company that cannot borrow money to float the bank. Total foreign holding in the bank cannot cross 49% while the operating company must lower its stake to 20% by 10 years. 
Corporates may find it easy to meet most conditions, but the RBI has spelt out it will be "very selective" and have the last word. "…it may not be possible to issue licences to all the applicants meeting the eligibility criteria…," said the draft note. A key pre-condition is changes in the Banking Regulation Act to empower the RBI to supersede bank boards and block purchase of 5% or more shares if the investor is not "fit and proper". 
India Inc, nonetheless, is excited. Reiterating the Aditya Birla Group's "strong intent to enter banking", Chairman Kumar Mangalam Birla said it was a "forward step" while Bajaj Finserve MD Sanjiv Bajaj said the guidelines were "practical" and "Bajaj Auto and Bajaj Finserve are eligible". A senior Tata Group official said it was a "positive" move. 
Banking on New Rules 
The Hurdles 
No new licence till laws change to give RBI more power Negative feedback from other regulators can dash chances Comments from CBI, ED & other govt agencies can backfire 
The Race 
Tatas, Aditya Birla group, Bajaj, L&T, LIC Housing, M&M, Shriram group, Reliance, ADAG, PFC, IFCI, Religare, Srei may be interested Edelweiss with active broking biz may lose out; IDFC & IndiaBulls said they are not interested in banking 
THE RULES 
Paid-up cap of Rs 500 crore, listing within 2 years No foreign entity/NRI can hold over 5% shares Biz groups will have to float a holding co to own bank & other financial services like insurance, broking etc Some Time before RBI Issues Licence 
Even though the financial services business has been a pitfall for several corporate houses in the last two decades, most have harboured hopes of promoting banks. "It's a high-risk business and you have to be paranoid to run it," said Uday Kotak, whose group had received a banking licence in the last round (2003-04). But like others, he too was enthused on Monday: "I hope this bodes well for the government as it plans to move on the reform path." 
The RBI, which has had to deal with shady promoters holding benami shares, brokers taking over treasury of small private and co-operative banks, and flamboyant promoters cutting funny deals with diamond merchants to borrow money for the bank, is understandably paranoid. Under the current norms, promoters will have to declare their source of funds and no single entity or group, other than the operating company, shall have direct or indirect shareholding in excess of 10%. "The draft guidelines reflect the RBI's learnings from bank failures. For instance, restricting exposures to suppliers and customers of industrial houses where it is a promoter is really seen as a form of connected lending and self-dealing," said H Jayesh, founder partner at law firm JurisCorp. 
While corporates will now pressurise the government to amend the BR Act, it will be some time before the RBI issues the first licence. According to Ashvin Parekh, partner, Ernst & Young, "It may be 2-3 years before we see a new bank becoming operational. Diversified ownership and exercise of regulatory control are essential conditions...There have been instances in the past where promoter shareholding was not pared according to plans." 
Some aspirants like Religare were confident they would be able to fulfil the RBI's criteria. "Religare Enterprises Limited (REL) is already regulated by the RBI. Besides, they have also separated ownership and management, and today majority of Religare Enterprises' board members are independent of the promoter group and the promoters themselves do not participate at the REL board level," said a Religare spokesperson. 
Anil Ambani's Reliance Capital said it was looking forward to the release of the final guidelines while N Sivaraman, president, L&T Finance Holdings, said "two years is too short a period for a new bank to get listed". Considering the time a new bank would require to create a base and brand to raise money, a fiveyear period would have been better, he said. Among the eligibility conditions outlined by it, the RBI will collect feedback from other regulators as well as agencies like CBI and Enforcement Directorate while deciding on an application. Conditions like these have created a widely shared perception that the central bank may not be in a hurry to grant licences till some of the ongoing investigations are over. "While the RBI will have a lot of discretion, it has framed the guidelines with an open mind…there may not be any hidden lever," said Saurabh Tripathi, partner & director at The Boston Consulting Group.

Tightening to Stay till Prices Cool: RBI Central bank set to raise key rates by 25 bps today

The Reserve Bank of India, or RBI, has said the broad thrust of monetary policy will have to be on tightening despite risks of slower growth, in what is being perceived in the financial markets as an indicator that the central bank is set to raise interest rates again on Tuesday. In its latest report on macro and monetary developments of the economy, the RBI said monetary policy would have to preserve its tight monetary stance till there is credible evidence of inflation trending close to a level within the central bank's comfort zone of 4-4.5%. Taming inflation is an unfinished task considering that price pressures still persist, it said. 

The report, unveiled on the eve of the policy review on Tuesday, is a pointer to another increase in the key repo rate, or the rate at which the RBI lends to banks against government securities. All 15 market participants polled by ET over the weekend were unanimous the central bank would raise repo rate by 25 basis points (1 bps is 0.01%). It has raised rates 10 times since March 2010 to cool inflation, but its job is far from over with headline inflation still over 9%. The RBI has projected inflation to come down to 6% by the end of this fiscal. 
The macro report said if the monsoon turns sub-normal, upside risks to the projected moderation in inflation during the second half would go up. Not only is the headline inflation still hovering around 9%, but non-food manufacturing inflation also remains significantly high at above 7%, according to the RBI's assessment. It also cautioned against a potential impact of the Eurozone crisis on the domestic economy. "Challenges from the policy perspective have become even more stringent with increased risks to growth, though inflation is likely to remain high in near term. Risk factors have emerged that could adversely impact aggregate demand," the report said.

Accounting Jugglery by Banks Draws RBI Flak

CHANGE OF GUARD SHOULDN'T IMPACT EARNINGS

Violent swings in banks' earnings whenever there is a change of guard, known as the new broom syndrome, is not reflective of best practices, said a central banker in a veiled caution to local lenders to end accounting jugglery to dress up performance. "Financial reporting should not be as per the minds of bank chairmen," said KC Chakrabarty, deputy governor at the Reserve Bank of India. "When bank chairmen change, profits tend to fall. Things should not turn topsy-turvy if bank chairmen change."

The regulator's comment comes less than a month after the nation's biggest lender, State Bank of India, shocked investors with a 99% plunge in net profit for the fourth quarter of fiscal 2011 as it boosted provisions for various loans, including standard ones. This, some believed, could have been avoided if chairman Pratip Chaudhuri's predecessor, OP Bhatt, had followed some standard practices, instead of getting into a dispute with the central bank over provisions. "We could see it coming," Chaudhuri told ET in a recent interview. "There was deliberation at the end of the third quarter that a provision should be made. Our auditors were insistent that this provision be made, but the bank management persuaded them to believe that possibly it should be feasible to get a favourable dispensation from the RBI. It does not depend on the quality of the asset, but the view that the RBI takes." That was not the first time it happened at a state-run bank. When AK Khandelwal took charge as Bank of Baroda chairman from PS Shenoy well over three years ago, profits tumbled. Similarly, Bank of India reported a fall in earnings after Alok Misra succeeded TS Narayanasamy as chairman of the Mumbai-based bank. This has happened at SBI too in the past. When Janki Ballabh succeeded GG Vaidya in November 2000, net profit declined 45% in the immediate quarter and began improving thereafter. Bhatt, who presided over SBI for five years until March, followed the same script. The quarter after he took charge in June 2006 witnessed a 35% plunge in profits.Salaries of PSU Bank Chiefs Way Below Those of Pvt Peers Unlike private banks where overall earnings of CEOs hinge a great deal on stock price movements, thanks to generous stock options, salary packages of PSU bank chiefs are linked to that of top civil servants and also to earnings and revenue growth advances of their banks. But even after accounting for incentives, their salaries are way below that of senior executives in private banks. "It has become a trend for a new chairman to provide excess provision so that improved numbers can be shown during his time," said Cherian Verghese, former chairman of Union Bank of India. Continuity and reputation of the organisation should be the priority. Chairmen should place themselves on a higher pedestal and look beyond their tenure and care for the reputation of the institution on an ongoing basis," he said. The new broom syndrome leads to losses to investors as most of the times, there's not even a warning about these kinds of shocks.

KC CHAKRABARTY Deputy Governor, RBI