It needs a well-defined objective and policy instrument.
In his maiden monetary policy announcement, RBI Governor Raghuram Rajan unveiled a mix of easing and tightening measures. He raised the repo rate and lowered the bank rate. In July, the RBI had suddenly raised rates to defend the rupee. Since then, the bank rate, or the MSF rate, has become the operational policy rate, the rate at which commercial banks borrow from the RBI. It is too high for the economy today and needs to be reduced even further.
The decision to cut the MSF rate was obvious. That was the easy part. Rajan also raised the repo rate, which used to be the policy rate before the RBI’s actions to defend the rupee in July. This was supposed to indicate the RBI’s intent to target inflation by lowering inflationary expectations. Bringing such expectations down is a difficult task for any central bank. For the RBI, the problem is even more difficult since it must balance multiple objectives, has numerous instruments and is not independent.
Rajan will have to work hard to build the RBI’s credibility as an inflation targeter. He will need to get rid of its multiple objectives and many instruments. He will have to focus on defining the objective of monetary policy and its instrument clearly, building credibility, being consistent and communicating his policy stance to the public. The success of his term will be measured by how well he is able to anchor inflationary expectations and bring down consumer price inflation. The growth slowdown and high food inflation will make inflation forecasting and targeting difficult. So far, the RBI has not managed to communicate clearly because it has too many instruments and unclear objectives. Read More
Raghuram Rajan has been in his job at the head of the Reserve Bank of India for just a few weeks now and already changes are being made as the 23rd President. He plans to make sweeping changes to the financial system and bring the hierarchical administrative make-up of the sector to its knees by introducing liberal laws that will allow banks to open up branches without gaining prior permission from the Indian central bank. He wants to free up money for the economy to inject it into the private sector.
Today Rajan has raised the repo interest rate (the rate which the central bank lends to commercial banks) from 7.25% to 7.5%, while maintaining the quantity of bank deposits that must be kept in cash (the cash reserve ratio) the same.
Inflation is reaching levels that are causing the Indian economy great strife and currently it stands at 6.1%.
That’s the highest for the past half year.
Putting up the repo rate means that Rajan is worried about the hike in inflation, but he was expected to do nothing of the sort under pressure from the government and industrialists that wanted money and they wanted it now to get the economy growing. Analysts weren’t expecting it either. It’s always good to be where the people that are watching don’t expect you to be.
Rajan and India
Raghuram Rajan is the guy that put the sex back into Sensex, the Indian stock market, apparently. The Indian press are more interested in what he looks like and the fact that he woos the women while what they should be worrying about is what he will be doing to the Indian economy. Read More
The Orbit Grand, a block-size complex designed to have at least 26 floors of elegant apartments, an extensive array of ground-floor stores and abundant parking for the chauffeured cars of residents and shoppers, was supposed to be a diadem of India’s real estate market.
Now it is turning into a symbol of the slumping fortunes of property developers and owners in a once-promising emerging economy. Construction of the Orbit Grand has almost completely stalled at the 10th floor, the tower crane at the site seldom moves and the builder has defaulted on its loan.
“There’s no real work going on right now. There’s just a minimum number of workers coming in to do small things,” said Alam Sheikh, an electrician who is one of just 14 builders left at the site.
The real estate market in cities across India is crumbling as the Indian economy slows. The rupee has dropped nearly 20 percent against the dollar since early May, scaring away foreign investors. Read More
Bank stocks seem to be loving every word of new Reserve Bank of India (RBI) governor Raghuram Rajan. In the past few days, some bank stocks have risen by more than 20%. Why has there been so much of euphoria over Rajan’s maiden statement? Immediately after taking over on Wednesday, he spoke, among other things, about issuing new bank licences by January; exploring the possibility of converting large cooperative banks into commercial banks and putting in place a system of “on tap” licensing; and freeing branch licensing. All well-run banks will be able to expand their branch networks in rural and urban India without the need for RBI’s nod.
While these steps signify reforms in the banking sector, commercial banks will get an immediate benefit from the RBI swap window for deposits from non-resident Indians (NRIs) and overseas borrowing. While the swap windows will ensure foreign fund flow into India and, to that extent, help the country narrow the gap in its current account, banks will also benefit as this will add to their profitability with the cost of liability going down. Analysts are estimating a fund flow of as much as $10 billion.
RBI has opened two swap windows—one for fresh NRI funds of three-year maturity or more, and banks’ overseas borrowing. The cost of swap for the NRI fund is capped at 3.5%. The cost of swapping foreign borrowing for banks is not capped at any rate but it is one percentage point lower than the prevailing swap rate, which is currently at around 7%. Till now, banks were allowed to borrow up to 50% of their core capital. The limit has been doubled. Read More
2. It has been decided to introduce a US Dollar-Rupee swap window for fresh FCNR (B) dollar funds, mobilised for a minimum tenor of three years and over.
3. The salient features of the new swap facility are as under:
(a) The swap facility will be available to the scheduled commercial banks (excluding RRBs) for fresh FCNR(B) deposits mobilized in any permitted currency (as specified in the RBI Master Circular on Interest Rates on FCNR (B) Deposits dated July 1, 2013) for the tenor of minimum three years.However, the swap facility with RBI will be available in US Dollars only. The tenor of the swap will be for three years or more in line with the tenor of the underlying FCNR deposits.
(b) The swap window will be operated on a daily basis on all working days in Mumbai (except Saturdays and holidays). However, a particular bank can avail of the swap facility only once in a week. During any particular week, the maximum amount of dollars that banks would be eligible to swap with RBI would be equal to the fresh FCNR(B) deposits for minimum tenor of three years mobilized in equivalent US Dollar terms during the preceding week(s). Read More
• Postpones first monetary policy statement as Governor to September 20 from September 16
• To set up a panel on how to strengthen monetary policy framework, which will submit report in three months
Rupee and capital inflows
• To allow exporters to re-book cancelled forward currency contracts up to 50pc of the value of cancelled contracts and up to 25pc for importers
•Will push for more trade settlements in rupees, open up financial markets for those who receive rupees to invest back in
• Will offer a special window for swapping foreign currency non-resident (FCNR) deposits with a minimum tenor three of years and more, at a fixed rate of 3.5pc per year
• Will raise overseas borrowing limit of 50pc of unimpaired Tier I capital to 100 per cent for banks
• Borrowings mobilized under this provision can be swapped with RBI at a concessional rate of 100 basis points below the ongoing swap rate prevailing in the market Above schemes will be open till Nov. 30, 2013 Read More
When Goldman Sachs economists wanted to bring their global clients up to speed on the risks in China’s credit boom, they spoke to Charlene Chu, the Fitch Ratings analyst known for her bearish views.
Ms Chu has studied China’s shadow finance sector to come up with one of the highest estimates of the country’s debt pile at more than 200 per cent of gross domestic product. She also warns that the banking sector is far more exposed to many of the shadow loans than most people realise.
The latest official figures show non-performing loans (NPLs) at Chinese banks grew by Rmb13bn ($2bn) in the second quarter to Rmb540bn, increasing for a seventh straight quarter.
More than a decade ago, Beijing set up four state-funded asset management companies (AMCs) to take over the bad debts of the four biggest state-owned banks. After a rocky start, the bad banks have become adept at working out problem loans in only the past couple of years, according to bankers. Read More
The Reserve Bank of India’s recent liquidity tightening measures, which threaten to take a fresh toll on banks’ asset quality, come at a time when commercial banks led by the public sector brigade were beginning to see visible results in their crack down on runaway non-performing loans.
For instance, Bank of Baroda’s “rigorous flow up” of all non-performing accounts and timely response to early warning signals resulted in cash recovery of Rs 625.57 crore in the fiscal ending March 2013, according to chairman and managing director SS Mundra.
The bank also recovered Rs 352 crore from the prudentially written-off accounts, enabling Bank of Baroda to restrict its gross NPAs to 2.4 per cent and net NPAs to 1.28 per cent during 2012-13 — the lowest level in the large-sized PSU bank segment. Read More
Ratings agency CRISIL has lowered its estimate for growth in India’s gross domestic product (GDP) for 2013-14 to 5.5 per cent from its previous estimate of six per cent.
The industry and services sector are expected to grow at a lower rate of 3.5 per cent and 6.9 per cent, respectively. The forecast for agricultural GDP growth is, however, unchanged at 3.5 per cent, CRISIL said.
The agency added the Reserve Bank of India (RBI)’s steps to tighten liquidity would adversely impact car, truck and home sales. It would also reduce volume growth for steel and cement companies, according to CRISIL data.
The steps, which would push lending rates up, might badly hit the debt repayment capacity of companies, which are already facing adverse economic and business climates.
This would raise the incidence of defaults and increase non-performing assets of banks to four per cent by March 2014, up from 3.3 per cent in March this year.
The agency expects refinancing to be a challenge for companies due to tighter cash conditions, which could prompt more rating downgrades than upgrades in the near term.
“The liquidity squeeze has changed our outlook on change in the rating cycle. The companies would face refinancing or rollover challenges due to tight cash conditions,” said Rope Kudva, managing director and chief executive, CRISIL. Read More
1) Easing in Hungary will be deeper than previously expected
2) India steps up interventions even more
3) Expectations for a Chinese “mini-stimulus” are growing, but markets are not responding
1) Easing in Hungary will be deeper than previously expected. In this week’s meeting, the Hungarian central bank delivered the expected 25 bp cut, but it also issued an extraordinary statement with forward guidance suggesting that rate cuts could fall to as low as 3-3.5%. We knew the bank was dovish, but we expected them to retain the hawkish optionality at least until they could be sure that the sell-off in EM was behind us. In addition, the government continues to look for ways to alleviate the burden on households of FX-linked loans, but little concrete news has been announced so far.
2) India steps up interventions even more. The RBI imposed yet more restrictions on commercial banks’ access to cash, thereby hoping to support the rupee. This comes on the back of rate hikes to the marginal standing facility and bank rate, tighter regulation on FX derivatives and restrictions on gold imports. As it stands, we still see space for the correction lower in USD/INR to continue, but we are keenly aware of the risk that policy overshoot can backfire.
The risk is that it ends up weakening the rupee by scaring off foreign bond and equity investors. We would prefer if the government left markets alone for the time being and focused on much needed structural reforms. This would do a lot more good for India and INR than the measures described above. Read More