MUMBAI: Reserve Bank Governor Duvvuri Subbarao faces perhaps his biggest challenge when he sets this fiscal year’s monetary policy on Tuesday. While there are enough reasons for him to keep interest rates where they are, a growing clamour for rate cuts from industry and finance ministry officials may force him to play to the gallery despite abundant evidence of inflationary pressures lurking beneath the surface. A quick-fix approach to monetary policy setting, popular before the credit crisis, is giving way to intense analysis of more factors beyond the economic growth rate. It gets more complex especially when the data thrown by government agencies is volatile and becoming suspect.
As many as 16 of the 20 economists and fund managers polled by ET are forecasting a token 25-basis-point cut in repo rate, with the rest forecasting a pause. Seven are predicting a cut in cash reserve ratio, the portion of deposits that banks need to keep with the RBI. A basis point is 0.01 percentage point. Repo rate is at 8.5% and CRR at 4.75%.
High government borrowings, current account deficit, tight liquidity conditions, slowing deposit growth, strong sales despite high interest rates, easy international monetary conditions, high commodity prices, overseas debt repayments and foreign fund flows are among the several objects clamouring for attention in Subbarao’s kaleidoscope.
Numerous forecasters and corporate lobbyists base their demand on what is believed to be capturing economic activity — the index of industrial production — and price level, which is perceived to be reflected in the Wholesale Price Index.
Neither of them can be trusted anymore.
The governor calls IIP data ‘analytically bewildering’.
Finance Minister Pranab Mukherjee says the data is ‘totally baffling’. The common man finds that prices have risen faster at the marketplace while the statistical office says otherwise.
For the record, both these numbers are falling, supporting the call for a cut in repo, the rate at which the RBI lends to banks. To boost industrial production, cost of funds should be lowered, and the slowing price rise shows that inflation is not a threat to the value of the currency now. IIP in February grew 4.1% from a revised 1.1% in January. Before the revision it was 6.8%. Wholesale prices in March, to be announced on Monday, may rise 6.65%.
But Subbarao, who institutionalised the so-called ‘outreach’ programme at the RBI, visiting villages to feel the economic pulse, will also factor in taxi drivers’ demand for a fare hike and workers seeking a pay rise, factors that could lead to a wage-price inflation, the nightmare of all central bankers.
“The expected drop in March core inflation towards the RBI’s comfort range of 4-4.5% and the persisting weak momentum of the economy will likely allow it to cut repo rate by 25 basis points,” says Taimur Baig, economist at Deutsche Bank. “The RBI will be willing to support growth by cutting repo rate, unless the March inflation surprises sharply to the upside.”
The deteriorating inflation outlook has already led to economists cutting their overall rate cut target this fiscal by half to 75-100 basis points from 150-200 basis points six months ago.
The catch here is that inflation numbers suppress the actual price rise that would have happened had the government not been administering prices of petroleum products, coal and power. With crude oil, which constitutes nearly a third of total imports, at $120 a barrel, the price situation could only worsen if the government decides to pass on higher prices.
Subbarao is convinced that ‘suppressed inflation’ still poses a danger to the economy and the economic slowdown is not as pronounced as it appears to be when one looks at corporate sales growth.
Every dollar increase in crude prices may push up trade deficit by $800 million, worsening current account deficit that is at a level last seen in 1991 when the nation pledged gold and devalued the currency by more than a fifth to balance trade.
HSBC’s India Purchasing Managers Index for the services sector in March at 52.3 and manufacturing PMI at 54.7 showed growth. Order backlog soared to an all-time high of 56.4.
The strength is partly derived from the skewed pricing policy of the government that is bloating fiscal deficit, which jumped to 5.9% of the gross domestic product last fiscal. This year it is forecast to fall to 5.1%, but few believe that it would not be breached like it happened last year.
“The government’s record market borrowing of Rs 5.7 lakh crore will crowd out private sector credit,” says Nagaraj Kulkarni, economist at Standard Chartered. “The lack of decisive government steps to improve investment sentiment and kick-start the investment cycle will also weigh on credit growth.”
Market interest rates are rising with banks raising deposit rates to attract funds as the near-10% inflation for two years drove investors away from bank deposits that grew the slowest in 7 years. Savings rate has declined to 30.5% of Gross domestic product in 2012, from 36.8% before the crisis.
Despite two cuts in CRR and open market purchases of bonds letting in Rs 2 lakh crore into the market, bank borrowings from the RBI are more than double of what the central bank is comfortable with.
“Liquidity imbalance is partly long term, which has been created by intervention in the forex markets and a mismatch in demand and supply of money,” says Abheek Barua, chief economist, HDFC Bank. “Despite temporary improvement in liquidity, it is incompatible with patterns that we have seen in the past. In its policy rhetoric, the RBI’s emphasis will be to make it clear that further monetary easing will be contingent on the inflation situation and how administrative prices are passed through.” But having remained steadfast in his stance of not easing till he won over price rise and rejecting suggestions of his technical advisory committee, there is an outside chance of the governor holding on to a pause instead of cutting.
With sales of BSE Sensex companies forecast to rise 29% in the March quarter and automobiles sales of Mahindra & Mahindra and Tata Motors rising at about 30%, any cut could fuel demand, leading to further price rise that may become uncontrollable.
“A misunderstanding in the markets is that lowering interest rates is the answer to boost Gross domestic product growth,” says Madan Sabnavis, chief economist, Care Ratings. “Cutting key interest rates will only improve investments, but that does not take care of the slowdown in consumption and need for increased government spending.”
GOVERNMENT EXPECTS TO NET RS 1,100 CR FROM SMALL SAVINGS IN FY’13
NEW DELHI: The government is expecting a net inflow of Rs 1,100 crore in the current fiscal from small savings schemes like PPF and MIS which became more attractive after the Centre’s decision to hike interest rates on them. “The government is expecting Rs 1,100 crore inflow in the NSSF ( National Small Savings Fund) in the current fiscal,” a senior Finance Ministry official told PTI. In order to arrest outflow of investments on small savings schemes, the government had decided to increase interest rates on them by up to 0.5 per cent with effect from April 1, 2012. There had a been a sharp decline in the investments into small savings like Public Provident Fund (PPF) and Monthly Income Scheme (MIS) last fiscal and it is estimated that there has been a outflow to the tune of Rs 12,000 crore from the NSSF. (For details log on to : http://economictimes.indiatimes.com/news/economy/finance/government-expects-to-net-rs-1100-cr-from-small-savings-in-fy13/articleshow/12673360.cms)
RBI FOR SETTING UP OF REHABILITATION FUND FOR SICK MSMEs
The Reserve Bank has suggested setting up a rehabilitation fund for reviving sick micro, small and medium enterprises (MSMEs) in the wake of rising number of such units. “…rehabilitation of sick MSMEs could not be taken up due to non-availability of promoters’ contribution in a large number of cases, RBI has recommended to the government to set up a ‘rehabilitation fund’ for sick MSMEs,” RBI Deputy Governor K C Chakrabarty said at a conclave here. According to RBI data, the number of sick units in MSME sector has gone up by 16 per cent to 90,141 units in March 2011 from 77,723 in March 2010. On the MSE (Medium and Small Enterprises) loan policy, he said,”…banks have also been advised to review and put in place MSE loan policy, restructuring or rehabilitation policy and non-discretionary one time settlement scheme for recovery of non-performing loans, duly approved by their board of directors”. (For details log on to : http://economictimes.indiatimes.com/news/economy/finance/rbi-for-setting-up-of-rehabilitation-fund-for-sick-msmes/articleshow/12672970.cms)
RUPEE VOLATILITY MAY KEEP RBI FROM LIFTING FOREX CURBS
MUMBAI: Despite various transactional restrictions still in place, there are fears of volatility returning to the rupee-dollar exchange rate. Traders said there would be high dollar demand from Indian companies for redemption of foreign bonds, payment for oil imports and in case of risk aversion if euro zone crisis intensifies. Hence, expectations that the Reserve Bank of India (RBI) might roll back the temporary blocks were dim. “The market was quiet in the forwards segment, because trading was reduced to being need-based rather than speculative. Trading positions of banks were down due to limits on overnight open positions,” said a dealer from a foreign exchange consulting firm. It would be in the interest of market participants if the restrictions were removed but the rupee may suffer, the dealer added. (For details log on to : http://www.business-standard.com/india/news/rupee-volatility-may-keep-rbilifting-forex-curbs-/471450/)
CENTRAL BANK OF INDIA TO HIRE 3,000 PEOPLE
GUWAHATI: Central Bank of Indiaplans to increase its manpower by 8% this fiscal with specific focus on hiring from northeast India. The state-run lender is targeting 20% growth in 2012-13 while its business in northeast Indiais likely to grow by 40%, chairman and managing director MV Tanksale said. The bank plans to recruit 1,000 probationary officers and 2,000 clerks, he said. The bank, with a business mix of 3.48 lakh crore, has 38,000 people on its rolls. Around 1,500 personnel retire from the bank annually. “We will launch special recruitment drive in the northeast,” said Tanksale. The bank plans to go on an aggressive branch expansion by adding 250 more branches across the country to its present tally of 4,000. It will add 1,300 ATMS to the 1,700 already set up. It has selected 200 pockets for setting up ultra small branches to serve people in the country’s interiors. (For details log on to : http://economictimes.indiatimes.com/news/news-by-industry/jobs/central-bank-of-india-to-hire-3000-people/articleshow/12680423.cms)
CROSS-SELL PRODUCTS, INCREASE FEE-BASED INCOME, LVB CHIEF TELLS STAFF
COIMBATORE: The Chief Executive and Managing Director of Lakshmi Vilas Bank, Mr P. R. Somasundaram, urged the bank’s employees to come to terms with the radical changes taking place in the banking industry. He said this at the 32 {+n} {+d} Conference of the Lakshmi Vilas Bank Employees’ Union in Coimbatore. Urging the LVBians to take banking more seriously, Mr Somasundaram said: “We have come a long way in the last two years, and are ready to assume that life has become more or less normal now. But please understand that banking in the next five years is going to witness a change that we might not have even thought of.” He continued: “Electronic-banking is becoming the order of the day. Despite being the tenth bank in the country to launch Inter-bank Mobile Payment Services (IMPS) in association with the National Payment Corporation of India, we have not been successful in selling them. And it is not just IMPS. (For details log on to : http://www.thehindubusinessline.com/todays-paper/tp-money-banking/article3318372.ece)
INDIA COULD LOSE WORLD BANK SOFT LOANS
NEW DELHI: World Bank has informally told Indiathat 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. Indiastands to lose over $2 billion in low-interest funds for many of its welfare schemes, besides missing out on social initiatives spearheaded by the Washington-based lender over the previous decade. “We expect Indiato move into the middle income category of countries in the next two years. This will mean that the IDA ( International Development Association) funding Indiagot 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. (For details log on to : http://economictimes.indiatimes.com/news/economy/finance/india-could-lose-world-bank-soft-loans-middle-income-tag-to-make-it-ineligible-for-ida-funding/articleshow/12682026.cms)
RBS TO OFFER PHILANTHROPY SERVICES IN INDIA
The Royal Bank of Scotland (RBS) Indiawill soon provide philanthropy services as a part of its wealth management segment in the country. “We have started providing philanthropy services under wealth management in Britainfrom 2005. As Indiais one of our key international markets, we will soon provide this service to our clients under our wealth management portfolio,” RBS executive director for philanthropy services, wealth management division, Maya Prabhu, said here. Rising level of prosperity and family-run businesses here provide a lot of opportunities in this space, she said. According to the bank, the blueprint for providing such services in Indiawill be ready by this June-July. (For details log on to : http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/rbs-to-offer-philanthropy-services-in-india/articleshow/12673256.cms)
WITHOUT BRANCHES, HSBC MAY CALL OFF RBS DEAL
MUMBAI: Hongkong and Shanghai Banking Corporation (HSBC) is not likely to buy the retail and commercial banking businesses of Royal Bank of Scotland (RBS) in India if it does not get the majority of the latter’s branches here, sources familiar with the development have told Business Standard. The deal is stuck because the Reserve Bank of Indiahas declined to transfer the branch licences of RBS to HSBC. It is learnt HSBC will agree to buy the businesses only if it gets 15-18 branches of RBS in India. The number of branches HSBC would get was an important factor in determining the valuation of the deal. Sources said HSBC was likely to pay a premium on the asset value, depending on the asset quality. The asset value of RBS, however, has not been disclosed. (For details log on to : http://www.business-standard.com/india/news/without-branches-hsbc-may-call-off-rbs-deal/471495/)
IRDA FOR GOVT-BACKED HEALTH INSURANCE SCHEME
CHENNAI/HYDERABAD: The Insurance Regulatory and Development Authority (Irda) has strongly come out in support of a government-backed health insurance policy, which is in the works with an aim to provide health cover to a large population. “Why not we have a state-backed health insurance coverage for people when practically all the governments in the world have similar coverage for their citizens,” Irda chairman J Hari Narayan said. He was referring to a meeting of a group of experts in the Planning Commission today on the new health insurance scheme. Stating that it could be on the lines of the existing Rashtriya Swasthya Bima Yojana, he said they had to see the contours of the scheme once it was ready. But there were risks involved with a government-backed health scheme and one such could be that the pricing may go up, he added. Hari Narayan was addressing the launch of Health Forum, a self-regulatory body constituted by Irda to address the issues of the health insurance sector, here on Thursday. (For details log on to: http://www.business-standard.com/india/news/irda-for-govt-backed-health-insurance-scheme/471402/)
DMI FINANCE ACQUIRES 16% STAKE IN ALCHEMIST ARC
NEW DELHI: DMI Finance today announced its foray into the asset reconstruction space by acquiring 16 per cent stake in Alchemist ARC for an undisclosed sum. “Having made considerable progress in building our loan origination pipeline, we felt the need to expand our current product offerings and enter the ARC space as it offers considerable growth opportunities,” DMI Finance co-founder Yuvraj C Singh said in a company release. DMI Finance did not reveal the deal value. Industry sources said the sum involved is around Rs 32 crore, valuing Alchemist ARC at Rs 200 crore. “We are confident that our strategic partnership with Alchemist will play a key role in redefining the ARC segment in the country,” he added. (For details log on to : http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/dmi-finance-acquires-16-stake-in-alchemist-arc/articleshow/12676759.cms)
BASIX GROUP LOOKING TO EXPAND AFRICA FOOTPRINT
HYDERABAD: One of India’s oldest microfinance institutions is heading to Africato try and spread its risks because of the troubles the sector is facing at home. The Basix Group, founded in 1996 and headquartered in Hyderabad, is looking to acquire minority stakes in development credit institutions in 10 African nations, its founder chairman Vijay Mahajan told ET. He declined to name the countries or the financial institutions in which Basix is interested, saying he will have clarity about the details in less than two months. Basix, which has been asked by its lenders to bring in equity of Rs 100 crore before its debt restructuring package is approved, said half the amount has been tied up already from existing investors and wealthy philanthropists. “I am moving heaven and earth to try and make sure that the rest of the money is with us before the June 30 deadline,” said Mahajan, who studied at IIT-Delhi, IIM-Ahmedabad and PrincetonUniversityin the United States. Basix is trying to restructure more than Rs 700 crore in loans after being choked by tighter regulations in October 2010 that led to wave of defaults by borrowers. It has accumulated losses of about Rs 600 crore and over 2 million customers. (For details log on to : http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/basix-group-looking-to-expand-africa-footprint/articleshow/12682456.cms)
FIIs INVEST RS 322 CRORE SO FAR THIS MONTH
NEW DELHI: After pouring record funds into the Indian equity market during the first three months of 2012, overseas investors seemed to be cautious so far this month and invested Rs 322 crore. Foreign Institutional Investors (FIIs) made a net investment of Rs 322 crore in the equity market up to April 13, according to the Securities and Exchange Board of India (Sebi) data. Net inflows stood at around Rs 44,000 crore during the January-March period of 2012. However, in 2011 FIIs mostly stayed away from Indian equities and pulled out over Rs 2,700 crore from the capital market. (For details log on to : http://economictimes.indiatimes.com/news/economy/finance/fiis-invest-rs-322-crore-so-far-this-month/articleshow/12676842.cms)
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