Monetary and Credit Policy: Repo and Reverse Repo Rates Unchanged

The Reserve Bank of India (RBI) has recently released its mid-quarterly review. It has clearly spelt out that monetary policy actions will be in terms of rate cuts going forward, given the moderating growth momentum and higher downside risks to growth.
The RBI kept repo and reverse repo rates unchanged at 8.5 per cent and 7.5 per cent, respectively, to fight rising inflation in Asia's third largest economy. The central bank left Cash Reserve Ratio (CRR–(money that banks must keep with the RBI) unchanged at 4.75 per cent. Recently, the RBI slashed CRR, the portion of deposits banks are required to keep with the central bank, by 0.75 percentage points, a step that was meant to infuse Rs 48,000 crore into the economy.
Earlier on March 9, the central bank cut CRR by a hefty 75 basis points, or three-fourths of one per cent, from 5.5 per cent to 4.75 per cent effective the fortnight beginning March 10.
The markets and the corporate sector were expecting the CRR cut on March 15 when the RBI is scheduled to announce its mid-quarter review. But the central bank said on Friday it feared a liquidity crunch due to the advance tax (to be paid before March 15) outflows; and this would have increased the already tight position of banks due to the usual frontloading of cash balances with the RBI.This CRR cut will inject around Rs. 48,000 crores of primary liquidity into the banking system. Earlier in January, the cut in CRR of half a per cent injected Rs. 31,500 crores into the banking system. The CRR cut was welcomed by banks and the corporate sector.
On January 24, RBI had cut CRR by 0.5 percentage points to 5.5 per cent, releasing Rs 32,000 crore into the system. Since then, the fund crunch has only worsened.
The strain on the system rose to high of Rs 1.02 lakh crore. And going forward it will only increase as by March 15 companies will have to make advance tax payments which will drive out Rs 60,000 crore from the system.
Another Rs 12,000 crore is likely to go out of banks due to the Oil and Natural Gas Corporation (ONGC) auction last week, and a similar amount will be drained out on account of excise duty payment by companies.
Rate of Inflation
Inflation rose to 6.95 per cent in February which is much above the Reserve Bank’s comfort level of 5-6 per cent. RBIs own forecasts of inflation is that it will go down to 7 per cent levels in March 2012 from November 2010 levels of 9.11 per cent. RBI has indicated that non food manufacturing inflation is still a worry as it has gone up from 7.6 per cent in October 2011 to 7.9 per cent in November 2011. However, it has reiterated that despite the rise in non food manufacturing index, headline inflation momentum is slowing down.
The market will now have to work out its own math on inflation. Inflation can surprise on the downside as much as it has surprised on the upside. It is going to be a difficult call on where inflation is headed in 2012, but considering the fact that prices are already at elevated levels with inflation as measured by the Wholesale Price Index (WPI) averaging over 9 per cent for the past two calendar years, inflation has the ability to come off sharply especially if global growth slows down dramatically.
GDP Growth
There are now serious concerns on the slowdown in the Indian economy as the Gross Domestic Product (GDP) growth figures for the September-December 2011 quarter came in a paltry 6.1 per cent, the lowest since the Lehman crisis that shook the global economy in 2009.
The economy has given mixed signals in the past few months with some green shoots being seen on inflation, foreign institutional investor inflows, stock markets, the rupee and policy action picking up.
However, the figures come as a dampener as they are well below estimates. It is clear the lag effect of problems seen last year of low investor confidence resulting in low investment, high inflation and high interest rates and policy inaction are playing out. The surprise is that GDP growth is now at the level seen during the Lehman crisis when the world economy was in a reset mode though the situation has improved since.
GDP growth decelerated to a low of 6.1 per cent in the third quarter of fiscal 2012, raising fresh concerns about the growth slowdown. Industrial sector continues to be the main laggard and grew at an anemic rate of 2.6 per cent due to falling domestic demand and faltering global recovery.
The magnitude of moderation has been a bit of surprise because advance estimates released earlier had pegged financial year 2012-13 growth at 6.9 per cent.
According to FICCI, it would be ironical if GDP growth in 2011-2012 goes below 6.8 per cent, would be lower than in the crisis that was achieved in 2008-09 — the year of the post Lehman crisis.
Foreign Trade
Indian imports continued to outpace exports in February as demand remained weak in major exports markets like the United States and Europe, nudging the government to revise up the full-year trade deficit projections.
A widening trade deficit will likely worsen India's current account deficit and further weaken the rupee. Merchandise exports grew an annual 4.3% to $24.6 billion in February, while imports grew 20.6 percent to $39.8 billion.
The trade deficit widened to $15.2 billion during the month, from $14.8 billion in January.

Economic Survey 2011-12: Inflation Pegged at 6.5 Per Cent, Maintained GDP Growth at 6.9 Per Cent

Finance Minister Pranab Mukherjee presented the Economy Survey 2011-12– a report card of the Indian economic scenario for current fiscal– in the Lok Sabha (lower house of the Parliament) on March 15.
Inflation Rate
The Survey pegged inflation at 6.5-7 percent by end of March and projected a further moderation in the next fiscal. Inflation in the current fiscal has largely been driven by high food prices. It had slipped to a low of 6.6 percent in January, but rebounded to almost 7 percent in February. The survey, however, said that fiscal consolidation was the only way to keep inflation down.
The survey said that monetary measures by the Reserve Bank of India (RBI) and its impact on curbing inflation needed to be studied further to improve efficiency of such actions in the future. Incidentally, the RBI in its mid-quarter review of the monetary policy left key rates unchanged, citing upside risks to inflation.
Growth Rate
The Economic Survey has maintained Gross Domestic Product (GDP) growth at 6.9 per cent. The growth in the financial year 2012-13 growth is expected to come in at 7.6 per cent and the financial year 2013-14 growth is pegged at 8.6 per cent.
Indian along with Indonesia showed strong growth despite a global economic slowdown in the final quarter of 2011, according to the International Monetary Fund (IMF).
IMF in its latest provisional report has said the GDP growth of G20 – a grouping of leading economies of the world – slowed to 0.7 per cent in the October-December quarter, compared with 0.9 per cent in the third quarter.
In the United States, GDP growth increased to 0.7 per cent in the fourth quarter, compared with 0.5 per cent in third quarter.
The IMF stated that in India and Indonesia growth increased strongly, but slowed in China to 2 per cent, compared with 2. 3 per cent in the third quarter.
In Japan, economic growth decreased to (-)0.2 per cent, following the strong rebound (+1. 7 per cent) in third quarter.
The Survey states that GDP fell by (-)0.3 per cent in both the European Union and the euro area in the fourth quarter of 2011, the first fall since the second quarter of 2009.
Fiscal Deficit
The Survey states that the fiscal outcome in 2011-12 is likely to be affected by the macroeconomic setting which indicates sharp slowdown in industry and rising costs affecting profits. In the first nine months of the current fiscal, gross tax revenue has grown by 12.2 per cent as against the budget estimate target of 17.3 per cent, it said.
On the other hand, as against a target of 4.9 per cent for the whole year, growth in total expenditure in the first nine months of 2011-12 was 13.9 per cent, which comprised 15.4 per cent growth in non-Plan expenditure and 10.8 per cent growth in Plan expenditure, the survey added.
Per Capita Income
According to the Survey, the per capita income of India stood at $ 1,527 in 2011. The Survey says that this is perhaps the most visible challenge. Nevertheless, India has a diverse set of factors, domestic as well as external that could drive growth well into the future.
The Survey further says that between 1980 and 2010, India achieved a growth of 6.2 per cent, while the world as a whole registered a growth rate of 3.3 per cent. As a result, India’s share in global GDP more than doubled from 2.5 per cent in 1980 to 5.5 per cent in 2010.
Consequently, India’s rank in per capita GDP showed an improvement from 117 in 1990 to 101 in 2000 and further to 94 in 2009. China, however, improved its rank from 127 to 74 during the same period.
Highlights
* India's economic growth estimated at 6.9 per cent in the current fiscal; growth momentum to pick up in next two fiscals to 7.6 per cent 2012-13 and 8.6 per cent in 2013-14.
* RBI expected to lower policy interest rates, as inflationary pressures expected to ease in coming months; A low interest rate regime to encourage investment activity and push forward economic growth.
* Steps required for deepening of domestic financial markets, especially corporate bond market and attracting longer-term inflows from abroad; Efforts at attracting dedicated infrastructure funds have begun.
* The growth rate of investment in the economy is estimated to have declined significantly; borrowing costs up due to a sharp increase in interest rates.
* High borrowing costs and increase in other costs affecting profitability and internal accruals.
* Slowdown in Indian economy largely due to global factors, as also because of domestic factors like tightening of monetary policy, high inflation and slower investment and industrial activities.
* Inflation high, but showing clear signs of slowdown by the year-end; Whole-sale food inflation down to 1.6 per cent in January 2012 from 20.2 per cent in February 2010.
* India remains one of the fastest growing economies of the world; Country's sovereign credit rating rose by a substantial 2.98 per cent 2007-12
* Farm sector growth pegged at 2.5 percent for 2011-12.
* Services sector to grow at 9.4 percent.
* Services sector share in GDP to go up to 59 percent in the fiscal ending March 31.
* Industrial growth pegged at 4-5 percent, expected to improve as economic recovery resumes.
* Inflation on Wholesale Price Index (WPI) was high but showed clear slow down by the year-end. This is likely to spur investment activities leading to positive impact on growth.
* WPI food inflation dropped from 20.2 percent in February 2010 to 1.6 percent in January 2012.
* Calibrated steps initiated to rein-in inflation on top priority.
* India remains among the fastest growing economies of the world.
* Fiscal consolidation on track - savings and capital formation expected to rise.
* Exports grew by 40.5 percent in the first half of this fiscal and imports grew by 30.4 percent.
* Foreign trade performance to remain a key driver of growth.
* Forex reserves enhanced - covering nearly the entire external debt stock.
* Central spending on social services goes up to 18.5 percent this fiscal from 13.4 percent in 2006-07.

RBI Releases Financial Stability Report

At a time when there is growing uncertainty about the health of many Western banks, the latest version of the Financial Stability Report (FSR) just released by Reserve Bank of India (RBI) is reassuring. Indian banks remain robust though capital adequacy ratios have fallen and Non-Performing Assets (NPAs) have increased.
Capital Adequacy of Banks
Stress tests show banks are reasonably resilient though the capital adequacy of some banks could be adversely affected under severe credit risk stress scenarios. At a more disaggregated level, the picture is less encouraging. In particular, the consequences of, largely, public sector banks' headlong rush into lending for infrastructure projects, often at the behest of the government and the RBI, are now evident.
The report warns the 'growth rate of credit to the power sector has been much higher than the aggregate banking sector's credit growth and could unravel in case of a sharp economic downturn'. The same could also be said about bank lending to other infrastructure sectors such as real estate and airlines.
Low-Interest Rate Regime
A slowdown in domestic growth could raise the risks for the banking system as loans made in the low-interest rate regime of the previous two years turn sticky. More so since, as the report points out, all components of domestic demand, private, government, consumption and investment, have decelerated. On the external front, Indian banks with their limited exposure to overseas markets are relatively safe.
Nonetheless, contagion from the European sovereign bond markets to international banks could trigger further deleveraging and raise the cost of foreign currency loans for Indian banks and corporates. However, to the extent regulatory arrangements worldwide have been strengthened with national regulators recognizing the importance of a coordinated approach, the system is, hopefully, less vulnerable than before.
Real Test
The real test is whether the financial market infrastructure, in particular the payment and settlement systems, will continue to function without major disruption, when the next crisis strikes. As long as the lessons of the 2008 crisis have been learnt, there is reason to second the FSR's vote of confidence.

India’s Economic Growth Rate

India's economic growth has slumped to 7.3 percent in the first half of the current fiscal, substantially below the budgetary estimate. The Gross Domestic Product (GDP) growth declined to 7.7 percent in the first quarter and it slumped further to 6.9 percent in July-September period. The economic growth was likely to be better in the second half of the current financial year. It is hoped that the country will be recovering some of the loss in our growth momentum and may end the year over 7.5 percent." The finance minister said the government was not in a position to boost growth through stimulus as it did during the global financial crisis in 2008-09.
Inflation Rate
Inflation has remained stubbornly high, near double digit, for the last two years despite an aggressive monetary tightening by the Reserve Bank of India (RBI) and claims of a series of fiscal measures by the government. Headline inflation based on the wholesale price index was recorded at 9.73 percent in October. However, food inflation has moderated in the recent week. It was recorded at 8 percent for the week ended Nov 19, according to the latest official figures.
Food inflation dropped to a four-month low of 8 per cent as on November 19, reflecting fall in prices of essential items like onions, potatoes and wheat giving relief to common man, while rates for rice and vegetables increased at a moderate pace.
Decline in food inflation may also give respite to the government which is facing heat from the Opposition on various issues, including the price rise. This is lowest since July 16 when it was 7.16 per cent.
The RBI raised the repo rate by 25 basis points to 8.50 per cent and the reverse repo moved up by a similar percentage to 7.50 per cent in its last policy review in October. Repo is the short-term rate at which the RBI lends to banks, while reverse repo is the rate at which it gets funds from banks.
The central bank has hiked policy rates five times this fiscal. In the last one-and-a-half months alone, it has raised the key rate (repo) by 50 basis points.
Foreign Trade
India's exports grew by just 10.8 per cent to $19.8 billion in October, the lowest in the past two years, mainly due to the declining demand in the US and Europe. The growth rate has been the lowest since October, 2009, when it contracted by 6.6 per cent.
According to the Commerce Ministry data, imports grew at a faster rate of 21.7 per cent to $39.5 billion leaving a trade deficit of $19.6 billion, the highest ever in any month in the last four years, which is also due to expensive crude oils and vegetable oils.
From a peak of 82 per cent in July, export growth has slipped to 44.25 per cent in August, 36.36 per cent in September and 10.8 per cent in October.
In October, oil imports grew by 20.73 per cent to $10 billion, whereas the non-oil imports rose by 22 per cent to $29.4 billion over the year-ago period.
But, for the cumulative April-October period, exports aggregated to $179.7 billion showing a handsome growth of 45.9 per cent, thanks to sterling trend witnessed in the previous months of the current fiscal.

Midyear Review of Monetary Policy 2011-12

The Reserve Bank of India (RBI) on 25 October raised interest rates by 25 basis points and lowered the economic growth forecast to 7.6 per cent for the current fiscal even as it expressed hope that inflation will start coming down from December. RBI Governor Duvvuri Subbarao also deregulated savings bank deposit rates with immediate effect.
The policy is expected "to continue to anchor medium term inflation expectations", while stimulating investment activity to support growth.
Borrowers, who are livid at repeated rate hikes, can heave a sigh of relief as the RBI hinted at a reversal of policy stance by saying the likelihood of a hike in December is "relatively low".
The central bank has kept other key rateand ratio — Bank Rate and Cash Reserve Ratio (CRR) — unchanged at 6 per cent each. It also retained the Statutory Liquidity Ratio (SLR) at 24 per cent.
Earlier in May, RBI had raised the savings deposit rates to 4 per cent from 3.5 per cent.
The RBI has also proposed to notify banning prepayment penalty on floating rate home loans, as recommended by the Banking Ombudsman recently. The policy document further stated that RBI will issue the final guidelines on credit default swaps by November-end.
Economic Growth Rate
Factors like weakening global macroeconomic outlook and high domestic inflation will pull down the economic growth rate further, RBI said while lowering the Gross Domestic Product (GDP) forecast for the current fiscal to 7.6 per cent from its earlier projection of 8 per cent.
The central bank had earlier projected the Indian economy to grow by 8 per cent in 2011-12, lower than 8.5 per cent recorded in 2010-11.
The risks to the policy emanate from worsening global macro scenario, commodity prices and increase in government spending which could crowd out private investment, it said.
An important policy decision RBI announced is the freeing of savings bank deposit rates with immediate effect, the last bastion of the regulated interest rate regime.
The RBI said: "While growth in advanced economies is already weakening, there is a risk of sharp deterioration if a credible solution to the euro area debt problem is not found."
Rate of Inflation
In addition to inflation, the RBI said slowdown in project investments was also impacting growth. The overall inflation has remained above 9 per cent since December 2010. It was 9.72 per cent in September.
Elevated inflationary pressures are expected to ease from December 2011. The projection for Wholesale Price Index (WPI) inflation for March 2012 is kept unchanged at 7 per cent.
Food inflation, which account for 14 per cent in the overall inflation, stood at a six month high of 10.60 per cent
Significantly, despite the fall in inflation during the week, prices of onions went up by19.68 per cent on an annual basis while fruits turned 15.84 per cent dearer. Alongside, milk prices also rose by 10.76 per cent, as did prices of eggs, meat and fish by nearly eight per cent. On a yearly basis, cereals and vegetables were also dearer by 4.77 per cent and 4.31 per cent, respectively.
According to the WPI data, while inflation of overall primary articles stood at 11.13 per cent for the week ended July 9, down from 11.58 per cent in the previous week, inflation of non-food articles was pegged at 15.50 per cent for the week, up from 15.20 per cent.
The RBI also indicated that it might not go in for another rate hike in its midquarterly review in December 16, provided the inflation does not shoot up further. According to the RBI, if the inflation trajectory conforms to projection, further rate hikes may not be warranted. It stated that concerted policy focus is needed to generate adequate supply response in respect of items such as milk, eggs, fish, meat, pulses, oilseeds, fruits and vegetables.

India’s Industrial Production Dips

The Reserve Bank of India (RBI) is in an unenviable position ahead of its monetary policy review meeting scheduled on 16 September. It has to take a call on interest rates -- whether to raise them further in the face of continuing inflationary pressures or pause temporarily based on the latest disappointing factory output data. To its credit, the central bank has been much more realistic in turning the spotlight on the Indian economy's blind-spots than North Block. In its successive policy reviews, the RBI has not simply focused on inflation's stubborn persistence, but even warned of business mood dips impacting investment and consumption growth declining as interest rate-sensitive sectors face increasingly reluctant buyers.
GDP Growth
In fact, while New Delhi has tended to exhibit a misplaced optimism about growth prospects with its eyes shut, the RBI was ahead in scaling down its Gross Domestic Product (GDP) growth forecast for 2011-12 by a full percentage point to below eight per cent.
India’s GDP increased 7.8 per cent in the three months ended March 31 from a year earlier, the weakest pace in five quarters, government data show. Still, the expansion is the quickest after China among major economies, bolstered by higher incomes in the nation of 1.2 billion people. All in all, the portents for the Indian economy are far from encouraging.
Overall IIP
The latest industrial growth figures for July suggest that the slowdown that many experts and most policymakers thought would be temporary and narrow is, indeed, broad-based. The overall Index of Industrial Production (IIP) registered a year-on-year expansion of only 3.3 per cent, the lowest in 21 months. Manufacturing and mining grew by 2.3 per cent and 2.8 per cent respectively, while the 13.1 per cent increase in electricity was mainly a result of the good monsoon, which has helped boost generation from hydel stations. More disturbing has been the 15.2 per cent dip in production of capital goods, a proxy for investment activity. Even if one discounts for the unreliability of data for this sector -- leading to extreme growth volatility -- the fact that investment sentiment has been vitiated by recent political developments and concerns over ambiguous laws and tangled procedures among foreign investors cannot be missed. If industrial growth is slowing, there is the possibility of weakening demand on account of high interest rates further dampening it.
Growth in Mining Output
The growth in mining production was 2.8 per cent in the month, down from 8.7 per cent in the same month last year. Production of intermediate goods fell by 1.1 per cent during the month under review against a growth of 8.5 per cent in July 2010.
Consumer durables grew by 8.6 per cent in July as compared to a growth of 14.8 per cent in the corresponding month of last year. However, electricity production improved witnessing a growth of 13.1 per cent in July this year as against a growth of 3.7 per cent in July 2010.
Non-durable consumer goods (FMCG) production also grew by4.1 per cent in July, compared to a decline of 0.9 per cent in the same month last year.
Rate of Inflation
Persistent increases in its key policy rates over the past 20 months may have somewhat dented non-food 'core' inflation resulting from excessive demand. But the problem is that while demand in the manufacturing segment may have dipped, general inflation has not. Agricultural production has been tardy for quite a long time now. The services sector has been a saving grace but it cannot prop up growth beyond a point.
The international business environment continues to be bad and in fact deteriorating and with the RBI raising lending rates and tightening liquidity so as to check rampant inflation, the negative impact on economic activity and growth was not inconceivable. For once the Finance Ministry may be right when its Chief Economic Adviser Prof Kaushik Basu, says inflation will stay high until December. So the RBI, in a way a victim of its own success, will now have to battle high inflation and the prospect of falling output driven by weakening demand.
For policymakers it would be tempting to pass off the slowdown as partly the outcome of global woes just as earlier they claimed that inflation was also stoked by global commodity prices. But unlike the United States and the European Union, India did recover from 2008 with a smart pick-up in 2009. The current slide actually began in the past six months or so. And that has been the result of very successful monetary and very slothful public policies.

RBI Opens Door to India Inc With Strong Fences

The Reserve Bank of India (RBI) on 29 August paved the way for corporate India to enter banking, but set stiff conditions that straightaway shut the door on real estate companies and brokerage firms. In its much-awaited draft guidelines for new private banks released on Monday, the RBI said private groups or entities with diversified ownership, sound credentials and a "successful track record" of 10 years would be allowed to apply for new banking licenses. The central bank is considering issuing banking licenses for the first time since 2004.
Such groups or entities cannot have more than 10 per cent or more assets or income from real estate and capital market activities.
Nonoperative Holding Company
The new banks can be set up only through a wholly owned, nonoperative holding company, or NOHC, that will control the bank and other financial service companies in the group, the RBI said. The NOHC, which will be registered as a non-banking finance company with the RBI, will include all financial arms of the founding group. The minimum capital required to set up new banks has been fixed at Rs 500 crore.
Banking aspirants such as the Aditya Birla Group, the Mahindra Group and Larsen & Toubro were generally happy with the guidelines -- something reflected in the sharp rise in the shares of some non-banking finance companies expected to seek banking licenses.
While Bajaj Finance ended 15 per cent higher, Reliance Capital, IFCI, SREI Infrastructure, Shriram Transport Finance and Mahindra & Mahindra Financial Services ended 2.5 to 11 per cent higher.
However, some felt some of the clauses gave the incumbents undue advantage. For example, the minimum capital adequacy ratio for existing banks is nine per cent as against 12 per cent prescribed for new banks.
New Draft Norms
Similarly, in existing banks, foreign shareholding is permitted up to 74 per cent. It has been capped at 49 per cent for new banks for the first five years. Another discrepancy is in the listing norms. While existing banks are not mandated to get listed, new banks have to be listed on local bourses within two years of licensing.
New banks would also have to open at least one in four branches in rural areas with a population of no more than 9,999.
While laying down the detailed eligibility criteria, the RBI has made it clear the licenses will be offered selectively after the final guidelines are framed and certain amendments made in the Banking Regulations Act, 1949. The central bank has sought comments on the draft norms from public and other stakeholders by October 31.
According to the draft norms, banking being a highly leveraged business, licenses shall be issued on a very selective basis to those who conform to the requirements, who have an impeccable track record and who are likely to conform to the best international and domestic standards of customer service and efficiency. Therefore, it may not be possible for RBI to issue licenses to all the applicants meeting the eligibility criteria.
The central bank will also seek feedback on applicants from other regulators, enforcement and investigative agencies such as Income Tax, Central Bureau of Investigation and Enforcement Directorate.
The RBI has also stipulated half the directors of the holding company be independent, with a view to keeping in check the influence of promoters.
RBI is directionally very clear it will allow the corporate sector to have a play in banking. The central bank has also made it clear what type of corporate it wants in the sector and only serious and long-term players can be considered.
Paid-Up Capital of Bank
The holding company will have to hold a minimum 40 per cent of the paid-up capital of the bank for an initial period of five years. It will have to reduce its shareholding in the bank to 20 per cent within 10 years and to 15 per cent within 12 years from the date of licensing. The new bank will have to be set up within a year of getting in-principle nod.
Individuals or institutions other than the holding company can own more than 10 per cent of the paid-up capital of the bank, directly or indirectly. Shareholding of five per cent or more by individuals and institutions will also be subject to prior RBI approval.
Despite the restrictions on foreign shareholding and higher capital requirements, the new banks will be competitively placed and will have a level playing field. The technology cost has come down sharply and these new players don't have any legacy issues like existing banks.
The RBI also proposed the business model for new banks include how they aim to achieve financial inclusion. They have to open 25 per cent of their branches in unbanked rural centers. The banks should also operate on the core banking solution platform from the beginning.
Nonbanking Finance Companies
The nonbanking finance companies seeking a banking license can either convert themselves into a bank or set up the bank separately.
For promoters having over 40 per cent income from non-financial business, the RBI has put in some additional guidelines. Banks promoted by these corporate entities will have to seek prior approval for raising paid-up capital beyond Rs 1,000 crore for every block of Rs 500 crore.

FDI Limit in Banking Sector To Be Capped at 49 Percent

Indian companies may have reasons to rejoice, as the Reserve Bank of India (RBI) is likely to allow some of them an entry into the banking space. The entry will, of course, be subject to stiff riders. Real estate companies, however, may not be as lucky as they are among four sectors that will find the banking doors locked.
According to a government official, the RBI is expected to come out with draft guidelines on allowing new private banks, as the Finance Ministry and the central bank have resolved their differences on most of the contentious issues.
Capping New Banks
The official said Foreign Direct Investment (FDI) in new banks may be capped at 49 per cent for now, as the RBI was not in favor of higher FDI. In a discussion paper released in August 2010, the central bank had suggested capping FDI in new banks at 49 per cent in the first 10 years, which could be subsequently raised to 74 per cent. The ministry was open to a higher cap.
The number of new licenses to be issued has not been decided yet and the call will be taken by the RBI.
The guidelines were more or less final, but the regulator would want to give a one-month window to all stakeholders to give their suggestions on the draft, said the official.
On the reasons for keeping real estate companies out, the official said the government did not have a good experience when the sector was allowed in the Special Economic Zone space.
Foreign Investment Limit
The central bank had sent the draft guidelines to the Finance Ministry in January 2011 to seek its approval. The process got delayed as differences cropped up over the grant of licenses to industrial houses, the minimum foreign investment limit and caps on promoter shareholding.
It is learnt that initially the RBI was not in favor of giving licenses to big corporate entities, while the finance ministry was opposed to restricting the FDI limit to 49 per cent. At present, banks are allowed to have an aggregate 74 per cent foreign investment (FDI plus foreign portfolio investments), with a cap of five per cent for a single investor.
The norms will also minimize the downside risks of industrial houses promoting banks and ensure promoters of these new banks meet the "fit and proper" criteria. This would make it difficult for any entity to get a license if any case involving it was pending before any regulator.
The minimum capital requirement for new banks may be kept at Rs 1,000 crore, five times the requirement when new bank licenses were given in 2001. The RBI had stipulated this be increased to Rs 300 crore over three years from the commencement of business. The minimum promoters' contribution may be retained after dilution of stake over a period of five years.
Retention of Current Approach
In its discussion paper, the RBI had suggested retention of the current approach of requiring promoters to bring in a minimum of 40 per cent of capital with a lock-in clause for five years. The threshold for other significant shareholders was proposed to be restricted to a maximum of 10 per cent, with a requirement to seek acknowledgement from the RBI on reaching the five per cent threshold and above. "Promoters, too, would have to dilute to the extent required in a time-bound manner, say, five years after the lock-in period," the discussion paper said.
The grant of new licenses will be linked to financial inclusion as the finance ministry is looking at a nationwide roll-out of Unique Identification (UID) numbers with the help of banks.
Industrial houses such as Larsen & Toubro, Reliance Anil Dhirubhai Ambani Group, Aditya Birla Group and the Shriram group have expressed interest in setting up banks. Currently, the space is dominated by the State Bank of India and private lenders such as ICICI Bank and HDFC Bank.
In the 2010-11 Budget, Finance Minister Pranab Mukherjee had first announced that new banking licenses would be issued to private sector players and non-banking finance companies to extend the geographic coverage of banks and improve access to banking services.

Committee Formed To Bring Black Money Back

Black money and corruption are two such issues that have jolted our public life and the polity badly. The two issues are linked with each other. Traders, politicians, senior bureaucrats, officials and the go between, earn huge sums of money by dubious means through corruption and bribery. To keep that money out of the sight of the Income Tax sleuths, they stash that black money in foreign banks. Such banks are usually located in Germany, Switzerland, Mauritius and other smaller countries and islands, where black money is stashed to avoid paying tax and to save themselves from punishment.

GFI Report
According to a report released recently by a US organization, Global Financial Integrity (GFI), $104 billion worth of black money had been deposited in foreign banks between 2000 and 2008. The report was captioned, 'Illicit Finance Flows from developing countries 2000-2009'. It means that since the situation did not improve after economic reforms, some influential and highly placed person became multimillionaires at a faster pace.
Jullian Assange, founder of WikiLeaks, has disclosed in an interview recently, that there are names of some Indians in the list of those who have stashed their black money in Swiss Banks. He promised to publish the material soon. In an interview to a TV channel on Tuesday last, he appealed to the people in India not to lose heart because he would certainly reveal the names of those who have their accounts in Swiss Banks. He hinted that prior to revealing the names, he might seek the opinion of some expert agencies on it.
He also alleged that the Government of India is not adopting the same kind of aggressive stand as was adopted by Germany to get the names of Indians who have stashed black money there. He added that adopting a harsh stand to get the list of the account holder is all the more necessary for the Government of India because it is India, which is losing tax income more than Germany.

Double Taxation Deals
Earlier Jullian Assange had claimed that the documents regarding the account holders that had been handed over to him by Rudolph Elmer, contained names of individuals from the United States, the United Kingdom, Germany, Australia, and Asia. In short, it had names from almost all regions including traders, politicians, artists and those working in multinational companies and in corporate sector. He did not agree with the contention of the Indian Government that double taxation deals are proving a hindrance in bringing the black money back. Assange maintained that hiding the wealth is not at all related to double taxation and stashing black money in foreign banks is more damaging than corruption.
Meanwhile, on the direction issued by the Supreme Court that the government should form a special team to unearth black money, the government has informed the apex court that it intends to constitute a ten member committee to go into black money, terrorism, and drugs syndicate issues. The proposed committee is to be set up under the Secretary Revenue, which would also have senior officers of the Central Bureau of Investigation, Enforcement Directorate, Intelligence Bureau and the Reserve Bank of India. Solicitor General Gopal Subramaniam said that the committee would start working immediately and the revenue secretary would submit a status report on the progress made by the committee, from time to time, to the Supreme Court.

Legal Action Taken
It may be recalled that the apex court bench comprising Justice B. Sudershan Reddi and Justice S.S. Najar had asked the federal government that in view of the general feeling that nothing worthwhile is being done by the government to bring the black money back, why should a special investigation team be constituted and why should not the names of those having accounts in foreign banks be revealed? Meanwhile, the government has received Rs.70 million from nine culprits who had stashed black money in the LGT Bank of Germany. The amount has been received not only by way of income tax but as fine too. Also, legal action has been initiated against six other culprits.

Indian Economy Poised For Fast Development After Recession

Amid all indications of improvement in the Indian economy, the World Bank has also estimated that the country's economic growth rate, between financial years of 2010-11 and 2011-12, could be from 7.5 to 8-percent. The point to be noted is that the average growth rate of the economy between 1995 and 2005 had been 6.4-percent. From this viewpoint, the World Bank's estimate is also presenting a rosy picture of the country's economy on lines of other estimates and is confirming that India's economy has come out of recession and is well on the way of progress.

Improvement in Economies of High-Income Countries
There are strong possibilities of further development of the Indian economy. It would continue to get stronger with foreign demand. Improvement in the economies of high-income countries would also benefit the country's economy, because this would increase demand from these countries and the flow of foreign investment would increase, which would further strengthen the country's economy. The commendable thing here is that the country would achieve this even when the stimulus packages, given for recovering from the economic recession for the next year i.e. 2010-11 are withdrawn.

Impact of Global Recession
One more noteworthy thing would be that while the Indian economy surges ahead in the years 2010-11 and 2011-12, the pace of global economic growth would be quite slow. Continuous growth of our economy is confirmed by the export figures for December 2009. An increase of 9.3-percent was registered in exports in January. This is the second consecutive month registering growth in export. There had been a fantastic growth of 18.2 percent registered in exports in November 2009.
After falling continuously for 13 months, exports had registered increase for the first time in November 2009. The global recession had been the reason for continuous fall in exports, but with satisfactory growth registered for a second consecutive month, it is proved that our export sector is emerging from recession.

Export Growth
With improvement in industrial activity, there has been increased import of raw material for export trade. This means that exports are growing. There is hope of 10-percent growth in exports in the year 2010-11.
The export sector of the country would become stronger after price rise comes under control, as it would make our goods more competitive in the international market. There is hope that price rise would soon come under control with other measures being taken at the government level, along with increase in the Cash Reserve Ratio (CRR) by the Reserve Bank of India.

India's Growth Rate

The trend of rapid improvement in the Indian economy continues, which becomes clear from the growth rate of industrial production. In October 2009, the growth rate was 10.4 percent and it became 11.7 percent in November 2009.
It is good that the growth rate of the manufacturing sector is 12.7 percent. In durable consumer goods, the growth rate was 37.3 percent, which means that the fear of recession has vanished from consumers' minds, and a sense of self-confidence and security has come back.
The good news is that export too, has started showing growth after a long time. Everyone agrees that in India's journey of growth, global recession would will only prove to be a hiccup, and India would will soon tide over it. But we would will have to learn a few lessons from the recession and have to make a few fresh beginnings.

Biggest Challenge
The biggest challenge before us in the coming days is to become a superpower in the manufacturing sector. At present, the service sector has a big share in India's growth, but we would will have to concentrate on the manufacturing sector for continuous growth.
Obviously, we cannot make industrial progress like China as a democratic society has its own limitations. Though industrial development in a democratic society is a bit slow, it is sturdy. Secondly, people have bigger partnership in that development. Even now, the basis of our industrial development is domestic demand, which means that Indians are benefiting from industrial development.
The development at a more extensive level is necessary so that this demand keeps on growing, and large-scale efforts are necessary for development of the agriculture sector. Along with making agriculture profitable, it is necessary to reduce people's dependence on the same.

Manufacturing Sector
Only the manufacturing sector has the capacity to create jobs on a large-scale. The government's policies and the Reserve Bank of India (RBI) have played an important role so far in coming out of the recession.
At the beginning of the New Year, we are at the point where the process of emerging comes to an end and the process of picking up speed begins. Let us hope that the government's policies would continue to provide impetus to this process in the future also.

Faulty Management Cause of Growth-Inflation Imbalance

In November, the inflation rate rose to 4.78 percent, and it has created several complex problems for the government. In itself, this inflation rate is not dangerous, but the circumstances under which this rate has been recorded rings a danger bell.
For the past some time, the inflation rate was quite low due to recession, but whatever was the rate was due to sudden rise in prices of very essential food items.

Pressure on RBI
The inflation rate in respect of essential food items has reached 20 percent pushing up the overall inflation rate. The problem is that the government does not have any immediate remedy to reduce prices of essential food items. There is growing pressure on the Reserve Bank of India (RBI) to increase interest rates, but there is danger of it adversely affecting the improvement in economy. Second, how effective would the monetary steps be on price rise due to shortage of food items is also being argued continuously.
The manner in which we run our economy is still quite old fashioned. The RBI would certainly take some steps to reduce cash, but the question is when? The government could certainly make some efforts to increase availability of food items, but arresting this price rise can take place only be after the Rabi harvest comes.

Result of Mismanagement
In fact, price rise in essential food items because of shortage that we are suffering from is the result of mismanagement of past several years. While the growth rate has increased due to development in service and industry sectors, the agriculture sector still stands where it was. We don't have any plan for long-term needs.
Food items of our everyday need also keep going through the vicious cycle of less production, more prices and more production, less prices. If a big country like ours would leave its agriculture on the vagaries of the market and the monsoon, crisis will be created.

Affecting Price Hike
There has been less rain this year and prices of pulses have gone up. More pulses would be produced next year and the prices would fall. But when growing pulses would become a less profitable proposition and the rains would be good, farmers would again reduce growing pulses.
The present crisis toward the end of the first decade of the 21st century is warning us that it is necessary to pay attention to agriculture, otherwise people would keep suffering from price hike, and policymakers would continue to work out the complex arithmetic of growth and inflation rate.

Credit and Monetary Policy Still Influenced by Effects of Recession

Nothing new happened on 27 October. The script of the Credit and Monetary Policy announced by Reserve Bank of India (RBI) Governor D. Subbarao was written by the RBI on 26 October itself during the quarterly review of Indian economy. Although it is being said for some time that India has now recovered from the shocks of economic recession, the RBI believes that it is still time to take steps cautiously.

CRR, Repo and Reserve Rates Unchanged
No change was, therefore, made in most of the rates. Neither was any change made in the bank rates, nor in Repo Rate, nor in Reverse Repo Rate, or in the Cash Reserve Ratio (CRR).

Obviously the RBI wants that steps that were taken during recession for relief to industries should continue. They should continue to get credit at lower rates.

Danger of Inflation
One thing became clear from the 26 October report that the RBI perceives the danger of inflation, in spite of the fact that the inflation rate was below zero until a few days ago, and is still quite low. But the RBI feels that it could go up in the coming days.

For that, by increasing the Prime Lending Rate (PLR) by one percent, the bank had already indicated that it does not want any more monetary expansion at the moment.

Common Man's Concern
However, the reason for the common man's concern is not this figure of inflation, but the inflation in food commodity prices, for which the RBI is also watching the Rabi (winter) crop like everybody else. Apart from price rise, the bank sees another danger in real estate business. It feels companies engaged in this trade could get into trouble, and has made provisions for disbursement of loans to housing companies more stringent.

One problem continues, which dashes the hopes of many. The kind of scene witnessed in the stock market after the announcement of monetary policy is the result of such sense of hopelessness of several trades.

While banking companies are troubled by some limitation on their business possibilities, housing companies are unhappy that they would not be able to get loans easily now. And when housing is jolted, it has to impact on steel and cement. If crops are good, everybody would recover from these shocks. And then, the economy would also be prepared for a progressive policy rather than the monetary policy for recession.

Counterfeit Currency

It is rightly said, that the poor of the world, cannot be made richer by redistribution of wealth. But, there are some, who seek a short cut, to riches through crime and use of counterfeit currency. Criminals believe that whatever is worth doing is worth doing for the money. Nevertheless, the truth is that the wealth is the product of industry, ambition, character and untiring effort.
There are problems we as a nation have learnt to live with: money laundering, black money, counterfeit currency, narcotics and terrorism. All of them are inter-linked and their sources are well known. Yet we have not been dealing with them effectively.
We react, or rather over-react, whenever there is a major terror strike or drug/fake currency seizure, and then soon forget it instead of making serious efforts to root out the problem. Frequent seizures of counterfeit currency have ceased to stir the national conscience. Newspapers try to shake the powers-that-be by repeating the Naik Committee’s startling revelation made a few years ago that counterfeit currency amounting to about Rs. 1,69,000 crore was circulating in the country till the year 2000. The figure has not been updated since then.
The menace of finely printed currency has achieved new heights, that quite often, the customers do get fake currencies through ATMs. The worst is that when they approach banks with the complain of receiving a fake note, bank official impound the notes. As per the law of land, the bank should lodge an FIR with police, which would investigate the source of the fake currency. Banks obviously have not been to cope with the problem.
Two men allegedly involved in smuggling of counterfeit currency notes into the country from Nepal were arrested in Sitapur district of Uttar Pradesh. Pramod Singh and Babadeen, both in their mid 20s, have confessed that they collected the consignment of fake currency notes — supplied from Pakistan — in Nepal.
Their main role involved selling of the counterfeit notes to their clients in Uttar Pradesh, Bihar and Madhya Pradesh. Uttar Pradesh is fast becoming a hub for counterfeit currency smuggled purportedly across the porous and largely unguarded border with Nepal.
In August 2008, a Reserve Bank of India (RBI) team unearthed counterfeit currency amounting to over Rs.5 million from the currency chest of State Bank of India’s Domariaganj branch in Siddharthnagar district in eastern Uttar Pradesh. This followed the arrest of the bank’s chief cashier and recovery of a large amount of both genuine and fake currency from his house.
Victim of Economic Terrorism
India has become the victim of another kind of terrorism from its neighbour, Pakistan. It is economic terrorism in printing and circulating counterfeit Indian notes. The Pakistani intelligence agency, Inter-Services Intelligence’s (ISI) role in printing and circulation of fake Indian currency notes has never been a secret. It is estimated that around 1,69,000 crores of fake rupees are in circulation all over India. Both Banks and Government are in a denial mode, because probably they do not know what to do.
On its insistence, Pakistan Government has imported additional currency-standard printing paper from companies located in London to pursue its nefarious designs in India. Of late, Pakistan has been procuring currency-standard printing paper in huge quantities from London-based companies much higher than normal requirement of the country for printing its own currency. It is diverting it, to print fake Indian currency notes. It is believed that Pakistan Government printing press in Quetta (Balochistan) Karachi’s security press, and two other presses in Lahore and Peshawar, are being used to print out counterfeit Indian currency.
The ISI has, been using Pakistan International Airlines (PIA) to transport counterfeit currency to its conduits in Nepal, Bangladesh and Sri Lanka. The modus operandi of the ISI was revealed by two Nepali counterfeit currency traffickers who were arrested by Thailand police sometimes back. During interrogation, the accused disclosed that they were working for a prominent Nepali businessman. The fact that Nepali territory is being used by Pakistanis to smuggle counterfeit currency is well known. The first such expose was made when Pakistani diplomats were caught distributing fake Indian currency notes. One Naushad Alam Khan, arrested in Dhaka with fake Indian currency notes worth Rs 50 lakh admitted his direct link with HuJI (Bangladesh) chief Mufti Abdul Hannan. It was found that both Khan and Hannan had fought for the Taliban in Afghanistan.
Fake Indian currency notes racket is being carried out by using the network of underworld kingpin Dawood Ibrahim, not only in India but also in Sri Lanka, Bangladesh and Nepal in close association with different terror outfits, according to one intelligence report. With Sri Lanka, Nepal and Bangladesh being active partners, with India in probing Fake Indian Currency Notes (FICN) related cases, it is safe to assume that so far as the fake currency in India is concerned, its source is Pakistan.
Investigations into the Mumbai 26/11 attacks have revealed that a large part of the money to fund the terror operation were obtained through fake currency rackets and hawala channels. It is also believed that Pakistan’s ISI raises Rs. 1,800 crore (Rs.18 billion) annually to fund terror operations and that a major chunk of this amount comes in through fake currency rackets.
Approximately Rs 30 lakh of the Rs 50 lakh spent, on the attack on the Indian Institute of Science, Bengaluru, was obtained through the fake currency racket. This is big menace, which should be tackled with no holds barred, even if it means walking with the devil till we have decimated this problem.
HurtingEconomyEconomic terrorism, in the form of fake currency flooding the market, is fast becoming an unavoidable part of our daily lives even as we try hard to weed out any counterfeit notes from our wallets. It is common sight today that people peer hard at every 1,000-rupee or 500-rupee note to check for those tell-tale signs but the menace of fake notes continues unabated. It is present everywhere, right from the piggy bank at our homes to the bank ATMs. According to the RBI estimates, the number of forged notes detected by the banking system was 1,95,811 against 4,422.5 crore notes in circulation. Though the apex bank has been proclaiming that the number of fake notes in India is a mere three to six pieces per million, which is one of the lowest in the world, the fact remains that the counterfeit currency has wider circulation and deeper ramifications on the economy of the nation.
Fake Currency Detecting Machine
There is a machine to detect counterfeit currency. But it is not available in the market. While scientists at the Central Scientific Instruments Organisation (CSIO) not only developed an Automatic Counterfeit Currency Detector (ACCD) and secured international patents, for yet unknown reasons nobody has come forward to manufacture and market it commercially.
There are people interested in buying the device or selling it but not for manufacturing them. However, the CSIO scientists claimed that no such machine is being manufactured in India.
Banks have, however, installed “note sorting machines” that detect the genuineness of a currency note on the basis of the paper’s characteristics and response to ultraviolet light exposure. However, unlike the ACCD, they are not currency or country specific and do not take into account security features.
Banks have also issued locally made ultra violet lamps to their branches where a suspected note is manually placed for detection. Bankers say that an experienced cashier can detect a counterfeit by its “feel and texture” while counting. The RBI tested the device developed by the CSIO in 2008. The results were said to be satisfactory but RBI officials wanted CSIO to make certain modifications. While the earlier machine would stop whenever it detected a counterfeit currency note, RBI wanted scientists to develop a machine that would throw out the counterfeit currency but continue to do the counting.
There are imported machines available in the market though, costing about Rs. 50,000 but they can cater to just one manually fed note at a time. The ACCD,the prototype version of which cost about as much, has six sensors and a counting speed of 600-1000 notes per minute. Earlier, the CSIO had developed a small device to check the genuineness of a single note at a time. It was patented but its transfer of technology to the industry was not pursued and the concepts developed were applied for the ACCD project.
Role of RBI
The RBI has tried to allay growing public fears over fake currency by stating that only four notes out of 10 lakh are fake. While the number may not be too large to trigger a nation-wide panic, it is still a cause for consternation. That the RBI itself is perturbed by the menace of fake currency is evident from the fact that only a few days ago it had issued an appeal to banks warning them of counterfeit currency notes of Rs 1000 denomination in circulation.
India has been trying to fight the sinister design of those who are trying to weaken the nation through “economic terrorism”. Time and again it has been exposed how fake currency is used to not only destabilise the nation but also to fund terror. The CBI’s revelation that the “secret template” used to print currency notes has been compromised proves that the rot runs deep. The Anti-Terrorist Squad recently seized a cache of fake notes in Mumbai. Several other rackets have been busted. The Gujarat ATS has even claimed a breakthrough. But the smuggling of fake currency into the Indian economy continues unabated.
The RBI has taken several steps like double scrutiny of notes put in the ATMs and setting up of Forged Note Vigilance Cells. According to the RBI’s annual report, the detection of counterfeit banknotes has shown a rising trend. However, much more needs to be done. Note sorting machines proposed to be set up in a phased manner at the 70,000 bank branches must be installed with greater urgency. While the move not to file an FIR against ordinary persons found in possession of a maximum of five fake currency notes is appreciable, those involved in rackets must not be shown any leniency.
What should be done?
The RBI needs to first accept the problem. Only then will they be able to solve it. The RBI obviously gets to know when an entire series of currency notes has been faked. It is difficult to understand why they continue with the series despite it being faked. The RBI should immediately withdraw the series once such things happen. That solves the problem to a great extent.
What we have been noticing is that once a customer reports fake currency, the bank immediately destroys the note and there ends the matter. First, the banks ought to file a police complaint. Banks should introduce testing machines at ATMs so that the customer can immediately report the problem.
They should stop torturing the person who reports the crime. All police units of the respective states ought to follow the Bengaluru module where there are separate units for law and order and crime. The crime wing of the police should handle this matter.
It is noticeable that why we cannot manufacture ink and paper to make currency. It is still being imported and this gives criminals an edge. If we manufacture our own ink and paper, then we will be in control of the situation and can enhance our security features. Besides, it is time the government accepted that we face a serious problem. The law must be changed to protect those who complain about the problem. Agencies should get out of denial mode.
Remedial Measures
It is very surprising that despite the best efforts of investigating agencies like the Central Bureau of Investigation (CBI), which is creating a data bank of fake currency, the point from where the fake notes are infused into the economy remains undetected. There are indications that, at some points, the bank officials in remote towns are hands in glove with the counterfeiters, but there has not been much breakthrough in this area. In fact, with the rise in the number of physical notes in circulation, the number of cases of fake notes detection also has gone up. Does it indicate that along with the national mint, the anti-national mint is also working over time? As of now not many remedial measures are in sight but experts do recommend usage of cards and electronic payment to suppress the menace of fake notes but most people are quite wary of using these options for fear of leaving their personal details in the hands of cyber criminals. Now the best option for the apex bank, experts add, is that banks should go for better technology for currency operations, improve security system for storage of cash in banks and install note sorting machines at the bank counters for early detection of counterfeit notes.Laws are not stringent enough. Telgi got away with just seven years’ jail for the Rs 50,000 crore stamp paper scam. After 9/11, the US paid as much attention to internal security as to wiping out sources of terror funding. The destablising role of economic terrorism needs to be better understood and countered in the country.