RBI Monetary Policy Review June 2013

RBI Monetary Policy Review June 2013 from Karvy Private Wealth

The World this Week June 18 - June 22 2012

The world this week june 18 - june 22 2012

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Increasing EMI and government to the rescue

Another hole in the common mans pocket with an ever increasing rate of interest!! To ensure some comfort to this critical situation the government has stepped into the picture. There was an official letter sent to public sector banks by the ministry, asking them not to increase the EMI rates and levy burden on borrowers which has affected their capacity to their loans.
The ministry even suggested them to increase the tenure instead of increasing the EMI against all kind of loans.
In the time of economic slowdown and high inflation, the banks need to be more cautious while increasing the interest rates. This was said to an MD of a midsized public sector bank by the finance ministry.
The banks increased their rate by almost 300 basis points due to the policy rate rise by the RBI and the Apex bank raised policy rates 11 times in 16 months to resist inflation.
The central bank had questioned the asset quality of banks as the increase in EMI’s on individuals and the borrowers who had taken loans at a floating rate could get affected. They want them to increase the tenure period instead increasing the rate of interest which would give them more time and avoid default.
The public sector banks claim to have an increase in Non Performing Assets in the current financial year. As per the RBI data, personal dues were about 7 Lakh Crore as on 17th June which is about 17.3% more compared to previous year.

RBI First Quarter Review of Monetary Policy

RBI Quarterly Monetary Policy Review - 26th July'2011

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Suggestions from the RBI – Tame Inflation

Seeking cooperation of states in containing price rise, the RBI has said efforts are needed to improve farm productivity, develop rural infrastructure and revamp PDS to address supply side issues and contain inflation.

For instance, help better management of Public Distribution System and improve productivity in agriculture and allied activities.

"There is also need for reform in the Agriculture Produce Marketing Committee Acts among other measures ," RBI governor D Subbarao said while speaking at 24th Conference of the State Financial Secretaries in Mumbai.

The government data released on May 17 showed a minor dip in headline inflation to 8.66 per cent in April, driven by a moderation in food and manufactured items prices.

On market borrowings, Subbarao said,"There was a need to improve efficiency in terms of better planning, robust cash management and adherence to the Fiscal Responsibility Legislation".

Besides improving revenue collection through tax reforms, the states should also focus on expenditure management, he added.

Subbarao also referred to implementation of Malegam Committee report in the context of regulating micro finance institutions.

"The unincorporated MFI's would be regulated by the proposed central legislation uniformly across the states and the incorporated MFI's by the Reserve Bank".

The Malegam panel was set up by the RBI to study the MFI business in the country following a spate of suicides in Andhra Pradesh due to harassment by loan recovery agents.

Making a case for improving the effectiveness of the State Level Bankers Committee, the Governor urged the state governments to play a proactive role in the field of financial literacy and financial inclusion in collaboration with the Reserve Bank of India

Source: http://www.rediff.com/business
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Rupee Depreciation By 20% in 2 years

The Indian Rupee may depreciate by around 20 %during next 2 years on account of dip in confidence about the domestic economy leading to outflow of funds.

According to a report by financial and business research firm Evalueserve, there will be pressure on the Rupee unless steps are taken to fix certain structural issues like high current account deficit and dwindling investments.

"During the next two years the probability of the INR (Indian Rupee) to depreciate is the highest (about 50 per cent) as compared to an appreciation or a status quo scenario," Evalueserve said, adding that the depreciation could be in the range of around 20 per cent.

During the past 12 months, the Indian rupee has traded in a relatively narrow range between 47.33 and 43.99 to the US dollar.
"However, the pressure on its stability seems to become more evident," it said.

Evalueserve said Indian rupee's depreciation could be fuelled by exit of foreign institutional investor (FII) money and lack of investor confidence on account of governance issues, besides high current account deficit (which is the net flow of income out of the country, barring capital movements).

"Even a relatively orderly outflow of $15 billion of FII money over a year could result in the Indian rupee depreciating by 22-30 per cent. This could imply an exchange rate in the range of Rs 55-60 to every US dollar," it said.
The situation could be even worse in case the outflow in faster.

Foreign funds have pulled out nearly Rs 3,400 crore (Rs 34 billion) from the Indian stock market during the first half of May as interest rate pressures continue to mount.

"This risk (outflow) is also heightened by the fact that India's capital markets are very shallow and do not have the capacity to absorb even moderate external shocks," it said.

Evalueserve pointed to structural factors like the high inflation, which has been blamed on supply side challenges, problems of governance as shown by recent scams, and high deficits.

"Inflation is at an all-time high... The monetary policy changes undertaken by the government to control inflation have been ineffective," the report said, attributing inflation to supply side challenges including lack of infrastructure.

While the government has not been able to liberalise sectors like insurance for foreign players, the Goods and Services Tax (GST) had to be postponed due to lack of consensus among political parties.

Regarding deficits, it said: "The government finances are in a bad shape and the combined central and state government deficit has stubbornly stayed around 10 per cent of GDP."

The RBI had earlier this month said it expects India's current account deficit to be around 2.5 per cent of GDP in 2010-11.

Source: http://www.rediff.com/business
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Monetary Policy Update From Karvy Private Wealth!

RBI announced the annual policy for Fy12 on 3.5.2011

Policy actions undertaken are as follows

• Repo Rate increased by 50 bps to 7.25%
• Reverse repo to be now a derived value fixed at 100bps discount to Repo. The new rate is 6.25%
• MSF, a new programme for banks to borrow overnight from RBI, with the rate fixed at 100bps premium to repo rate (8.25%).
• Savings Rate increased by 50 bps from 3.5% to 4%.
• Provisioning requirement for certain non-standard assets increased by 10 percent.

All the measures combined would lead to margin compression for the banking space. Also, higher interest rates might lead to further NPL creation.

The tone of the policy was clearly hawkish. RBI stressed on managing inflationary expectations as its number one priority. It expects the high crude oil and commodity prices to sustain at these levels and even gain going forward. RBI has forecasted the Fy12 growth at 8%. There could be downside risks to that if infrastructure and manufacturing activity slows down further. RBI also expressed concern about the ongoing fiscal consolidation with the budgeted crude oil and fertilizer subsidies being clearly insufficient. This might lead to enhanced government borrowing programme in H2 FY12 putting further upward pressure on bond yields.

Banks have corrected almost 10% in the last one week. While most of the price correction would be over in next few days, the stocks might stay subdued for some time. We are changing our stance on the banking space from overweight to neutral with a bias towards private sector names.

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Auto Fuel Efficiency Norms by Month End

The bone of contention between the two sides is the "Corporate Average Fuel Economy" or CAFE. The main aim of the proposed standards is to gradually bring down "fuel efficiency per gram of carbon dioxide emission to the vehicle weight". This is CAFE.

Sources said BEE has proposed that fuel economy of 128 gms/CO2 per km be achieved by 2015. The industry, however, feels that this is too strict and the limit should be 142 gms/CO2 per km. BEE has told the car manufacturers that this would be too high and the government could at best keep a target of 135 gms/CO2 per km. This is unacceptable to car manufacturers and now they have walked away from the table. The Government is likely to stick to the figure of 135 in the final draft of norms.

After a consultation process spanning over two years ended in a deadlock with car manufacturers, the government has finally decided to frame auto fuel efficiency norms within this month and put them out for public objections and comments in May.

Over the last one year, the government and the car manufacturers have been trying to reach an agreement over a number of aspects like proposed carbon dioxide emission targets, the year of introduction for efficiency norms and five-star rating system.

A technical committee, comprising industry experts and officials of Ministry of Road Transport and Highways (MoRTH) and Bureau of Energy Efficiency (BEE) under the Power Ministry, was formed to formulate a final draft of fuel efficiency standards for passenger cars under Energy Conservation Act.

Last week, the committee's final attempt to address the concerns of car manufacturers failed.

Now, the government would frame the norms and put it out for public comments for 60 days. With the introduction of these standards for motor vehicles, India hopes to bring down emissions by 2% every year.

Source: http://economictimes.indiatimes.com/news
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Banks' credit grows 22%, deposits up 16.77% on an annual basis

Bank loans registered a growth of 21.38 per cent in 2010-11, while deposit growth stood at 15.84 per cent, according to data released by the Reserve Bank of India (RBI).

According to latest data from the Reserve Bank, banks' credit stood at Rs 40.76 lakh crore as on April 8, as against Rs 33.37 lakh crore in the same period a year-ago.

At the same time, deposits grew by 16.77 per cent to Rs 54.75 lakh crore from Rs 46.88 lakh crore during the period under review.

The data shows that the huge discrepancy in the credit: deposit ratio continues to persist in the new fiscal as well.

The Reserve Bank had in December cautioned against the discrepancy and asked banks to initiate steps to bridge the gap.

In the last fiscal, credit offtake from public and private banks grew by over 21.5 per cent while deposits went up by 15.5 per cent.

The RBI had fixed a target of 20 per cent growth in credit and 17 per cent growth in deposit during 2010-11.

Credit off take was higher last fiscal on account of large borrowings by telecom firms to pay for 3G spectrum licences.

The wide gap between credit growth and deposit growth resulted in a sharp rise in the incremental credit-deposit ratio to 102% by end-December 2010, up from 58 %in the corresponding period of previous year.

Liquidity concerns have also ebbed since the beginning of the financial year, as banks become net lenders to the central bank’s liquidity adjustment facility. Liquidity was in deficit mode during the second half of the current financial year, which saw rates heading north.

“Currently, there are no liquidity pressures. Hence, banks may want to withdraw their special rates on deposits. But banks may not reduce rates, as deposits from retail segment are yet to pick up. So they may want to wait and watch before slashing interest rates on deposits,” said an official from a public sector bank.

Source: http://www.mydigitalfc.com/banking
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Cheque payments just got costlier!

Making payments through cheques may become a costlier affair from today, as RBI has allowed banks to levy higher service charges for their clearing, especially of high-value and outstation cheques.

As per a RBI circular coming into effect from April 1, 2011, banks would be free to fix service charges on speed clearing of cheques of value above Rs. 1 lakh.

 At present, RBI does not allow banks to charge more than Rs. 150 per cheque for speed clearing of cheques worth over Rs. 1 lakh, while there are no charges for value up to Rs. 1 lakh.

However, speed clearing of cheques with value up to Rs. 1 lakh would continue to remain exempt of any service charges.

Besides, RBI has also given a free hand to the banks to decide on the service charge on outstation cheques of over Rs 1 lakh, as against a maximum limit of Rs. 150 per cheque allowed currently.

However, RBI has decided to lower the service charge for outstation cheques up to Rs. 5,000 by allowing a levy of Rs. 25 as against Rs. 50 currently.

The outstation cheques between Rs. 5,000 and Rs. 10,000 would continue to attract a fee of Rs. 50, while those between Rs. 10,000 and Rs. 1 lakh would also continue to be levied a charge of Rs. 100.

"Charges fixed should be reasonable and computed on a cost-plus-basis and not as an arbitrary percentage of the value of the instrument. The service charges-structure should not be open ended and should clearly specify the maximum charges that would be levied on customers including charges if any, payable to other banks," RBI has told the banks.

Source: http://www.rediff.com/business

FDI at stake with Green policies? – RBI

Reserve Bank of India has claimed that the environment sensitive policies and procedures are directly affecting the FDI.

The inflows in FDI as per April – Nov ’10 have been by various sectors like mining, construction, business services etc. Individual preferences in sectors have directly affected the inwards to FDI. Certain policies which manifest the episodes in mining have integrated townships, constructions etc. The following also highlights the delay in land acquisition, issues and the availability of quality infrastructure.

All these add up to the share of India in the assumptive FDI flows as per RBI.

The central bank has claimed that the growth of services is skeptical in nature and thus has to be resolved at its earliest. The global recovery has become more robust. The FDI thus has to get more structural in nature.

Source: Indiatimes.

New rules for using ATM’s

Next time you go to a bank ATM, be ready to re-enter your PIN afresh for every transaction you wish to conduct, such as money withdrawal, balance enquiry and checking account details.

In order to check misuse of ATM cards by unauthorized people, RBI has asked banks to allow only one transaction at ATM machines for one entry of PIN (Personal Identification Number which acts like a password for ATM transactions).

The transactions that a bank customer can conduct through the ATMs (automated teller machines), by inserting or swiping the card and entering the PIN, include withdrawal of money, deposits, fund transfer, bill payments, checking account details, etc.

Previously, customers were allowed to conduct multiple transactions through the ATM by punching in their PIN only once in a single session. However, the practice was vulnerable to misuse by unauthorized people, especially in case authorized customers forgot to collect their ATM card after the transactions. There have also been cases when some people tamper with the ATM machines in a way that a customer cannot collect the ATM card after conducting the transaction.

Once the customer moves out of the ATM machine thinking that the withheld card needed to be collected from the bank, the fraudster goes into the ATM and withdraws money as previous session remains active with the PIN already punched in.

Having received several complaints about the vulnerabilities of the existing practice, RBI has asked the banks to make changes in their systems to allow only one transaction for every entry of the PIN.

Although, RBI had asked all banks to follow these guidelines with effect from January 1, 2011, some of the banks are still in the process of updating their systems with the required changes. In the meantime, the banks have started communicating to their customers about the changes in the way ATM transactions are conducted.

As per RBI guidelines, you will need to re-enter your ATM PIN for every additional ATM transaction in a single session, with effect from January 1, 2011. ATMs have become a preferred mode of banking transactions for both customers and banks, due to the convenience and cost-saving factors.

Source : Rediff Business

Indian equity market holds a lot of opportunities!

India provides tremendous opportunities for financial inclusion via penetration and development in the Indian equity market today, a survey conducted by Nielsen Company said.

The top 5 cities in India contribute 84 per cent to trading in 2009-10, a figure up by 6 per cent from 2001-02. Cash trading volumes from Mumbai and Delhi alone account for 65 per cent of cash trading and 60 per cent of mutual funds volume.

The survey polled 1,207 current and potential retail investors from 12 cities across all geographic zones and levels of development, ages and occupation; 60 corporate, including banks and financial institutions, from the 4 metros and 120 SMEs from clusters in 12 cities throughout India.
There is also a great opportunity to impart financial knowledge. Nearly 94 per cent of retail investors have shown a strong willingness to participate in financial training programmers if they were to be offered in their vicinity.

The survey identified an appreciation of mobile phones as an enabler, a positive perception of competition as delivering better services and lowering trading costs and a desire for receiving financial training across the country. A clear majority of 56 per cent of retail investors across the country see mobile phones as the preferred channel that will likely enable them to participate in the equity market.

Source:Economic Times

What is a Trade deficit?

A Trade Deficit occurs when the value of a country’s imports exceed its exports for a specific period of time, usually a year.

The relationship between imports and exports are called the trade balance. When exports exceed imports it is called a trade surplus. Trade deficits can occur in both developing and advanced countries.Basically, it represents an outflow of domestic currency to the foreign markets.

India's trade deficit--difference between imports and exports--in April-August of 2010-11 is USD 56.6 billion. - Indian Express

Indian tech pioneers, making money reach millions!

We all know how ATMs have become an inseparable part of our lives making it a lot easy for us to deal with day to day money requirements.

Here’s a story of these two Tech Pioneers who went out of their way to design a low cost ATM for the rural India. Not too long ago when Lakshminarayan Kannan set out to design a low-cost ATM to help deliver banking to the rural poor.

That was the time when he teamed up with Mr.Vijay Babu of Vortex to turn his inexperience into an advantage to create an ATM that would be suitable for various villages across India. This sentiment as meant for the good took a positive turn later on, soon after which they came up with Gramteller a low cost robust ATM, which today is a great success.

It is these few very people with a vision for our country, who inspire us to keep moving in the journey of life.

Word of the Day: Treasury bill (T-Bill)

Treasury Bill is basically a short-term debt instrument of the Government of India.
This security bears no DEFAULT RISK and has a high degree of LIQUIDITY and low INTEREST RATE RISK in view of its short term. The instrument is negotiable and is issued at a discount from the FACE VALUE.
At MATURITY, the investor receives the face value and hence the increment constitutes the interest earned.

Two types of T-Bills were issued in India, by the Reserve Bank of India (RBI), on behalf of the government:

Ad-hoc T-Bills (or Ad-hocs) of 91 days maturity (which were non-marketable) to the RBI to replenish the Central Government's cash balance.
Ordinary T-Bills "on tap" that are taken up mainly by banks, for short-term investment or to comply with statutory requirements.

SBI raises $1 bn via bonds issue from US markets…

The country's largest public sector lender, State Bank of India, has raised $1 billion (about Rs 4,700 crore) through an issue of bonds to qualified institutional buyers.

State Bank of India, acting through its London Branch, successfully priced an offering of USD one billion of senior unsecured bonds due 2015, the bank said.

"This is a signature deal, despite market turbulence and volatility. In terms of deal size, order book multiple, diversification into new investors in the US, and number and quality of investors, we achieved our objectives with this issuance,"

"We believe the success of this transaction will also allow Indian issuers to more easily access the US markets," SBI Chairman O P Bhatt said.


SBI's debut issuance allows it to broaden its debt investor base and to access large, highly capitalised US institutional investors in the private placement market, the bank official added.

The offering was priced at a coupon rate of 4.50 per cent per annum. In terms of allocations, US-based investors received 55 per cent of the allocation while Asian investors were allocated 28 per cent and the balance 17 per cent across European investors.

In terms of investor type, asset and fund managers subscribed for 63 per cent of the deal, commercial and investment banks subscribed for 9 per cent, private banks subscribed for 15 per cent and insurance/pension funds subscribed for 4 per cent.

Strong interest from the US-based investors underscores SBI's strong credit profile and its position as India's largest bank.

Source: PTI News

Read more at: http://profit.ndtv.com/news/show/sbi-raises-1-bn-via-bonds-issue-from-us-markets-84577?cp

Owning a Mercedes is not just a dream anymore !

MERCEDES-Benz has reclaimed the top slot in the Indian luxury market after losing it to BMW last year by driving in 15 new cars into one of the worlds fastest-growing car markets so far in 2010.And it plans to keep up the tempo for the rest of the year by bringing more vehicles,Wilfried Aulbur,MD and CEO of Mercedes-Benz India,says.The company on Monday announced its entry into pre-owned car business in India.The German carmaker has invested Rs 200 crore to revamp its sales network to stay ahead in the increasingly competitive luxury car segment,which constitutes less than 1% in the overall car market but is growing at a fast clip,he told Chanchal Pal Chauhan in an exclusive interview.Excerpts:

Last year had been perhaps the toughest for Mercedes-Benz India.What helped you regain your leadership in the market this year

Last year,we lacked the product line as competition offered a large portfolio of products.We were without the E Class for half of the year.So we ramped with new launches and introduced 12 new vehicles in the first 12 weeks of 2010.Subsequently,three new cars with different powertrains were rolled out.The bouquet is not limited to it and an array of new products is linedup for the 2010,but I cannot reveal details now.We have invested Rs 200 crore revamp our sales and dealership network throughout the country to give truly global sales and service experience to Indian customers which is at par with any developed markets like the US or Germany.

Tell us about your new pre-owned car business,Proven Exclusivity Program

We have already more than 30,000 Mercedes (cars) on the roads,so there is a huge potential for potential customers who want to trade in their vehicles,and a market with customers looking to buy a Mercedes Benz family,but dont want to enter at the price point of a C-class (starts from Rs 26 lakh).We are looking for an upgrade into the premium car segment within a price point of Rs 15-18 lakh.Each of these pre-owned cars will come with a standard warranty of six months or 15,000 km and will not be more than six years old.Also,all standard financing options for the new cars would be extended to the Proven Exclusivity Program though slightly tweaked.We are initially starting with four dealers currently Delhi,Mumbai,Chennai and Ahmedabad which would be extended to all our outlets by next year.

Whats the market reaction for the super luxury Rs 1-crore plus cars

We launched the AMG range starting from Rs 1 crore two years back and its response prompted us to introduce the Mercedes-Benz S-600-Guard,with a twelve-cylinder engine coming at Rs 6 crore.Already we have eight confirmed bookings of the S-Guard,proving that the India has car enthusiast who have the propensity to spend that kind of money.And going by the high GDP growth,the luxury car market is just going to expand at a much faster rate.

Metros and big cities account for most of your sales.Do you have a strategy in place for smaller cities and towns

The major metros form 70% of our sales but the potential of other smaller cities is growing.We got 125 bookings from Aurangabad that proves the customers are just waiting to be reached out.We have expanded in Surat,Jaipur and Goa,while new dealerships at Indore and Bhuvneshawar are coming up soon.

Source :ET
Photo : www.dragtimes.com

Inflation tops forecast; finmin talks down rate hike

India's headline inflation unexpectedly accelerated in May, heightening expectations the Reserve Bank of India (RBI) would raise rates before its scheduled July review despite concerns over Europe's debt crisis.

The data came along with a sharp upward revision of March's reading and on the heels of April manufacturing output matching its fastest pace in 15 years, indicating strong growth and rising inflationary pressures in Asia's third-largest economy.

Separately, the finance ministry's chief economic adviser, Kaushik Basu, said the strong growth in manufacturing would continue and forecast the economy to grow 8.9 percent in the June quarter, topping the previous quarter's 8.6 percent expansion.

"This (inflation) increases the likelihood of an inter-meeting rate hike from the RBI as inflationary pressures are really showing up," said Sebastien Barbe, Hong Kong-based head of emerging markets research and strategy at Credit Agricole.

"It seems like the markets are also now less worried about the situation in Europe, so the RBI may be less reluctant to tighten before July."

Graphic on inflation.

Bond yields and overnight swaps rose on the data, while stocks trimmed gains. Most analysts had earlier said the RBI would wait until its July 27 review to raise interest rates, seeing its hands stayed by Europe's woes and on liquidity tightness.

That view is now changing.

"RBI will increase the frequency of its baby steps and we expect some tightening measures in June itself and a repetition of those in the July policy," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

"Baby steps" to normalise monetary policy is what the RBI has said is its preferred choice of action, but it has also kept open the option of a rate hike ahead of the July review to combat inflation which it deems "worrisome."

K.C. Chakraborty, a central bank deputy governor, said there was a "fifty-fifty" chance of a hike before the review, while Finance Minister Pranab Mukherjee indicated he did not favour a near-term hike and said price pressures would ease in mid-July.

"There will be inflationary pressures till middle of July but at this point of time I am not thinking of altering interest rates," Mukherjee told reporters in Patna on Monday.

The wholesale price index (WPI) rose an annual 10.16 percent in May, higher than the median forecast for 9.56 percent in a Reuters' poll and April's 9.59 percent.

In a sign the May reading could be an underestimate, March inflation was revised to 11.04 percent from the earlier estimate of 9.90 percent. Recent WPI data have been similarly revised up.

India's economy grew at 7.4 percent in the year to end-March 2010 and is seen expanding at 8.5 percent in the current fiscal year that began on April 1.

REFORMS MORE DIFFICULT

Persistently high inflation, which has been over the central bank's perceived comfort level of 5 percent for seven months running, could turn voters against the ruling Congress party before eight state elections scheduled in 2010 and 2011.

It would also dampen enthusiasm for reforms, such as a keenly awaited freeing up of retail fuel prices, crucial to improving public finances and stop state-run fuel retailers from bleeding.

The government deferred last week taking a decision on freeing fuel prices, worried about political opposition and the impact on prices.

Policymakers have repeatedly said inflation would ease on better prospects for crops from good monsoon rains. But a hike in fuel prices could push it up, an adviser has said.

On Monday, Basu said the impact would be limited.

"The inflation figure you are getting is going to go up," he said. "But if you go six months down the road ... in my opinion you would see a smaller inflation then."

The benchmark 10-year bond yield, which had risen 6 basis points after the WPI data, ticked up another point to go past a five-week high of 7.68 percent.

"The hawkish comments by Basu led to a further sell off in an already nervous market," said Bekxy Kuriakose, head of fixed income at L&T Investment Management.

One-year indexed swap rates rose 6 basis points. The swap rate has risen over 50 basis points from a more-than 5-month low of 4.71 percent in early May on concerns over tight liquidity and expectations of higher policy rates.

Basu and Finance Secretary Ashok Chawla said the high WPI readings were a matter of concern, but inflation would soften in the months to come on cooling food prices.

Chawla forecast WPI to fall to 5-6 percent by December, with Basu adding it would be below 5 percent by end-March 2011.

Source: Reuters.

Financial regulation can't be one size fits all - Gokarn

"This was not a financial crisis around the world," said Gokarn on the sidelines of a meeting of the Institute of International Finance in Vienna. "It was a financial crisis in some countries which spilled over."

"So each system has to evaluate what its core problems are and what it needs to do to end recurrence," he said. "This does not mean that the same solution is going to be appropriate for every system."

"Each system has its strengths and weaknesses and we have to take this into account," he said.

Source: Reuters.