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Fri, 20th January 2017

Anirudh Sethi Report

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Archives of “central banks” Tag

“Humiliated” by post-note ban events, RBI staff write to Urjit Patel

Feeling “humiliated” by events since demonetisation, RBI employees today wrote to Governor Urjit Patel protesting against operational “mismanagement” in the exercise and Government impinging its autonomy by appointing an official for currency coordination.

In a letter, they said autonomy and image of RBI has been “dented beyond repair” due to mismanagement and termed appointment of a senior Finance Ministry official as a “blatant encroachment” of its exclusive turf of currency management.

“An image of efficiency and independence that RBI assiduously built up over decades by the strenuous efforts of its staff and judicious policy making has gone into smithereens in no time. We feel extremely pained,” the United Forum of Reserve Bank Officers and Employees said in the letter addressed to Patel.

Commenting on “mismanagement” since November 8, when note ban was announced, and the criticism from different quarters, the letter said, “It’s (RBI’s) autonomy and image have been dented beyond repair.”

At least two of the four signatories — Samir Ghosh of All India Reserve Bank Employees Association and Suryakant Mahadik of All India Reserve Bank Workers Federation — confirmed the letter. The other signatories are C M Paulsil of All India Reserve Bank Officers Association and R N Vatsa of RBI Officers Association.

The forum represents over 18,000 employees of the RBI across the ranks, Ghosh said.

ATM withdrawal limit hiked to Rs 4,500/day by RBI

In a decision that will bring big cheer to the common man, the RBI (Reserve Bank Of India) has hiked the daily ATM withdrawal limit to Rs 4,500 per card. This would come as a huge relief to people who stand in queues for a long time and still manage to get only Rs 2,500.

In its latest notification, the RBI said, “The daily limit of withdrawal from ATMs has been increased (within the overall weekly limits specified) with effect from January 01, 2017, from the existing Rs 2500/- to Rs 4500/- per day per card. There is no change in weekly withdrawal limits.Such disbursals should predominantly be in the denomination of Rs 500.”

The current withdrawal limit per bank account per week has not been revised, a fact that is likely to disappoint people.

The Narendra Modi government’s move to demonetise old Rs 500 and Rs 1000 notes has largely been supported by the common man, though most agree that the implementation could have been better planned and executed. Long queues at banks and ATMs were a common sight in the first few days since the historic decision was announced by PM Modi on November 8. The situation has admittedly improved since then, but with increase in the daily limits, the government and banking system must work to ensure that ATMs have enough cash. But even as the central bank has eased the ATM withdrawal limit, the government is leaving no stone unturned to promote cashless transactions.

BOJ taking ‘a step forward,’ says Kuroda

The Bank of Japan revised its economic outlook for the first time in 19 months during the two-day policy meeting that ended Tuesday. But that is apparently the only step the central bank is taking at this time.

“The headwinds seen in the first half of this year have ceased,” BOJ Gov. Haruhiko Kuroda told reporters following the meeting. Markets were riled by heightened concerns directed at emerging economies at the beginning of 2016, only to be shocked in June by Britain’s referendum to exit the European Union. The BOJ was forced to loosen its policy in July, raising its target for exchange-traded fund purchases.

 During the second half of 2016, the economic landscape has slowly brightened, beginning with U.S. readings. The Japanese economy has followed suit with increased exports and production. Consumption also recovered from a slump caused by a soft stock market and inclement weather at the beginning of the year.

“Japan’s economy has continued its moderate recovery trend,” the BOJ said in a statement published after the meeting. The central bank had previously qualified that view by highlighting sluggish exports and production.

Emerging Markets : An Update

EM ended the weak on a soft note, as the hawkish Fed decision continued to have reverberations for global markets.  Worst performers in EM last week were CLP (-3.3%), ZAR (-2%), and KRW (-1.5%).  With little fundamental news expected this week, markets may take a more consolidative tone, especially with the holidays approaching.  However, we continue to believe that the global backdrop for EM remains negative.
 
Several EM central banks meet, including Turkey, Hungary, Czech Republic, the Philippines, Taiwan, and Thailand.  None are expected to move except Turkey, which is likely to hike rates for the second straight month in response to the weak lira.  We were surprised by Colombia’s rate cut last Friday, and expect the peso to open weaker this week as a result.  
 
Poland reports November industrial and construction output, real retail sales, and unemployment Monday.  Consensus forecasts are 1.7% y/y, -18.9% y/y, 5.3% y/y, and 5.5%, respectively.  Central bank minutes will be released Thursday.  Recently, central bank Governor Glapinski said that the next move is likely to be hike but unlikely until 2018.  CPI was flat y/y in November, the first non-negative reading since June 2014.  Low base effects should see the y/y move sharply higher in 2017, and should move the timing of the first rate hike forward into 2017.
Taiwan reports November export orders Tuesday, which are expected to rise 6.0% y/y vs. 0.3% in October.  The central bank meets Thursday and is expected to keep rates steady at 1.375%.  The last move was a 12.5 bp cut back in June, and then left rates steady at its next quarterly meeting in September.  November IP will be reported Friday, and is expected to rise 5.2% y/y vs. 3.7% in October.

World braces as US monetary policy turns

Wednesday’s U.S. rate hike has caused ripples through global markets, as investors began to contemplate the impact of American monetary tightening and beefed-up fiscal spending under a President Donald Trump.  

Turning point

 Many traders at a stock brokerage here described comments by Federal Reserve Chair Janet Yellen Wednesday as more hawkish than expected.

A 25-basis-point increase in the federal funds rate was announced at 2 p.m., following a two-day meeting of the Federal Open Market Committee. The first hike in a year, which lifted the benchmark rate to a range of 0.5% and 0.75%, was largely expected. But Yellen also revealed that the Fed was now looking at raising the rate three times in 2017, instead of the two hikes that had been indicated before.

Yellen also cautioned against guessing President-elect Donald Trump’s intentions regarding fiscal spending. “We’re operating under a cloud of uncertainty at the moment and we have time to wait and see what changes occur and factor those into our decision-making as we gain greater clarity.”

Fed watchers took this as an indication that the pace of rate hikes could hasten to more than the three estimated for 2017 as Trump’s policies are implemented.

What the FOMC Says may be More Important than What it Does

Provided that the Federal Reserve delivers the widely tipped and expected 25 bp hike in the Fed funds target range, the key to investors’ reaction will be a function of the FOMC statement and forecasts.  The FOMC meeting is the last big event of the year for investors.  The Bank of England, the Swiss National Bank, and Norway’s Norges Bank hold policy meetings, none are likely to alter policy. Several emerging market central banks meet this week, and Mexico is the only one that will likely move.  Many expect a 25 bp hike, but there is some risk of a 50 bp move.  The Bank of Japan meets the following week, and it too is unlikely to take fresh measures.   
A failure of the Federal Reserve to raise interest rates would be a significant shock and spur a dollar sell-off, a Treasury rally, and probably an equity market sell-off.  The likelihood of this scenario is so low that it is not worth much time discussing.  Similarly, 50 bp move also is highly unlikely.  It would go against everything the Fed has been saying about gradual moves.  It would be an admission of getting behind the curve, and there is no evidence that this is their assessment. 
Since the FOMC last met, the US dollar has strengthened, interest rates have risen sharply, and the unemployment rate has fallen further.  Investors will learn what the central bank makes of these developments.  Officials that have spoken since the election have generally agreed that it is premature to make any judgments of changes in fiscal policy or economic policy more broadly.   And for good reasons.  It is far from clear the policies of the new Administration.   
There seems to be a broad sense that probably near midyear there will some tax cuts and spending increases, alongside a tougher, perhaps more mercantilist trade policy.  The details are vague, and how this sits with fiscal conservative wing of the Republican Party is not clear.    While the intentions and signals of the President-elect have spurred a sizable reaction in the capital markets, more concrete details are needed to begin contemplating the impact on monetary policy.  

Cash Is No Longer King: The Phasing Out Of Physical Money Has Begun

As physical currency around the world is increasingly phased out, the era where “cash is king” seems to be coming to an end.Countries like India and South Korea have chosen to limit access to physical money by law, and others are beginning to test digital blockchains for their central banks.

The war on cash isn’t going to be waged overnight, and showdowns will continue in any country where citizens turn to alternatives like precious metals or decentralized cryptocurrencies. Although this transition may feel like a natural progression into the digital age, the real motivation to go cashless is downright sinister.

The unprecedented collusion between governments and central banks that occurred in 2008 led to bailouts, zero percent interest rates and quantitative easing on a scale never before seen in history. Those decisions, which were made under duress and in closed-door meetings, set the stage for this inevitable demise of paper money.

Sacrificing the stability of national currencies has been used as a way prop up failing private institutions around the globe. By kicking the can down the road yet another time, bureaucrats and bankers sealed the fate of the financial system as we know it.

A currency war has been declared, ensuring that the U.S. dollar, Euro, Yen and many other state currencies are linked in a suicide pact. Printing money and endlessly expanding debt are policies that will erode the underlying value of every dollar in people’s wallets, as well as digital funds in their bank accounts. This new war operates in the shadows of the public’s ignorance, slowly undermining social and economic stability through inflation and other consequences of central control. As the Federal Reserve leads the rest of the world’s central banks down the rabbit hole, the vortex it’s creating will affect everyone in the globalized economy.

New Currency Is Not 100% ‘Made In India’, RBI Is Sourcing ‘Raw Materials’ From Other Countries

The ‘Make In India’ drive has been considerably promising and futuristic in the past couple of months. Modi too had been a notable zealot about inducing this process in almost every system. 

On the website, the campaign defines itself as a “Major national initiative, designed to facilitate investment, foster innovation, enhance skill development and build better best-in-class manufacturing infrastructure.” 

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However, the drive is not all that successful when it comes to the management of latest currency hoopla. 

As reported by India Today, around 16 million tons of paper is being imported from the UK. 

RBI is sourcing the specialised security thread used in new notes from centres across Italy, Ukraine and the UK.

Thus, the note that we have now is not completely made in India. Due to the high demand of currency in the market and poor capacity of its production material, the RBI is working on a 50:50 ratio of sourcing paper from UK and Hoshangabad(MP). 

The intaglio ink, which is used to print the notes is supplied from Madhya Pradesh, Sikkim and Rajasthan, however, it’s now being produced abroad, and then being sourced through local centres. 

India : Credit and deposit ratios in banks falls to 6-year low at 72.7 per cent

The credit-deposit ratio (CDR) of the banking system, or the proportion of deposits deployed as loans, dropped 155 basis points to 72.7%, the lowest in six years, in the fortnight ended November 11, data released by the Reserve Bank of India (RBI) showed.

The non-food credit growth during the fortnight hit an at least four-year low of 8.25% on a year-on-year basis, while food credit fell 14.3%.

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The last time the CDR had seen a sharper drop was during the fortnight ended April 29, when it fell by 1.65% from the fortnight ago to 75.93%.

The sharp fall in the ratio was primarily because of a jump in the denominator, or a sharp increase in deposits with the banking system, which negated a fall in the credit outgo. During the fortnight under review, total deposits with banks rose by Rs 1.3 lakh crore, or 1.3%, whereas bank credit declined 0.8% to Rs 73.53 lakh crore.

The cash in hand with banks rose nearly 275% from the end of the previous fortnight to Rs 2.47 lakh crore, the highest in at least seven years.

The money parked by banks with the RBI through reverse repo operations under the central bank’s liquidity adjustment facility hit a record high of Rs 4.3 lakh crore as on November 22.

Bank of Japan plays trump card early to shock markets straight

The Bank of Japan last week offered to buy bonds at a fixed yield to curb rising interest rates, playing what was seen as an ultimate trump card far earlier than many expected.

The BOJ announced its first-ever fixed-rate purchase operation on the morning of Nov. 17 to counter mounting fears of an upswing in interest rates. Yields on 10-year Japanese government bonds had climbed steadily since the U.S. presidential election, rising as high as 0.035% the day ahead of the move. The fixed-rated option was introduced only two months ago as part of a monetary policy overhaul in late September that set a target of around zero for long-term yields.

 A call went out for two- and five-year JGBs to address the rapid surge in short- and medium-term bond yields, according to the BOJ’s Financial Markets Department. There were no takers: The offered yields were higher than going market rates, meaning the offered prices were lower, sending wise traders elsewhere. But the conditions of the operation sent a strong signal as to how high the central bank will let rates go before stepping in. Yields slid across all maturities after the move was announced.
 Since then, “interest rates’ upward climb has been weakened somewhat,” Takako Masai, a member of the bank’s policy board, told reporters after a speech Monday. “I get the sense that the purpose of fixed-rate operations has been well conveyed to markets.”