RBI Policy- No surprises on the rate front, stiffer norms for banks

In a complex economic environment, we look up to the erudite to give us direction, perspective and knowhow of the situation we find so difficult to comprehend; difficult because of conflicting information flow and sometimes on account of too much of information. The monetary policy review which was announced on 27th October was much awaited by markets for the same reasons.

The tone of the policy statement has shifted to hawkish from a soft stance adopted during the recession. The focus has clearly been on supporting economic growth, ensuring price stability by anchoring inflation and strengthening the banking sector that was responsible for the financial crisis which then blew up into a full-fledged economic crisis.

Globally the economic scenario is improving and India too is seeing recovery as is indicated from the IIP numbers and improvement in the business confidence index is what the RBI maintains. But the RBI has just stopped short of announcing a rate hike because export growth is still in the negative territory and it does not want to hamper economic growth which has gradually begun to take off. A premature exit would hamper all the good work done over the past several months but at the same time a delayed exit would lead to spiralling inflation. So RBI has decided to exit in a calibrated manner.

The special liquidity support measures have been withdrawn. They include the limit for export credit refinance facility and the non standard refinance facilities.

To contain inflation, the liquidity lever is being tightened. Capital flows into the country have increased significantly over the last 9 months (increase in rates would have increased the flows on account of interest rate differential) and the average daily amount absorbed by the Reserve Bank under the LAF window was to the tune of Rs.1,20,000 crore indicating that there is ample liquidity in the system. The RBI has thus increased the SLR to 25 percent from the 24 percent level. That will reduce some amount of liquidity in the hands of the banks. This should have a minimal impact on banks because currently the SLR they are maintaining is in excess of the threshold limit set and currently there is ample amount of liquidity in the system.

Caution and prudence in policy making always follow a financial crisis. To the credit of RBI, the Indian banking system has remained almost unscathed in the current crisis purely because of caution exercised by the RBI which most of us were critical of at that time. But in hindsight, it has proved to be the best thing that could have happened to the banking sector.

The RBI continues to work towards its goal of further strengthening the banking sector by undertaking a slew of measures.
Provisioning requirement for standard loans to the commercial real estate sector has been increased to 1 percent from 0.4 percent. This is done because loans to this sector was growing at a fast pace and the RBI wanted to tackle asset inflation. The short term impact would be seen on the bottom line of banks. The cost of funds to the developers will increase which in turn would result higher cost to buyers.
Increase in the provisioning coverage ratio to 70 percent by September 2010 will affect banks profitability as they will have to set aside funds to meet this new stipulation.
Lock in period and minimum retention has been introduced for securitisation exposures so as to ensure that proper due-diligence is done by originators.

The ground has already been set for monetary tightening with the current policy document stating unequivocally that there is a shift from managing the crisis to managing the recovery. As growth comes back on track with some amount of certainty, the RBI will act swiftly and tighten interest rates. I do not expect this to happen till early next year. In the interim, expect RBI to continue to introduce measures to strengthen the banking system in line with global counterparts.

2010 Commonwealth games- Crowning glory or sorry story!

In 2003, when India won the rights to host the 2010 Commonwealth games over Canada, we Indians were a happy and proud lot. So much so, that it made headlines and people were talking about how this would be the platform on which we could launch a bid for the 2020 Olympics. India got a lot of publicity in the international media too for being only the second nation in Asia to have an opportunity to host a multi-sport event.

It was an excellent opportunity for us to showcase our culture, our ability to host large events and it would also have been a reason for us to resurrect our ailing or should I say non-existent sports infrastructure. With our reputation and image at stake, it would only be fair to assume that no stone would be left unturned as far as preparation goes. Alas - this was not to be. We have made news albeit for all the wrong reasons. Preparations are behind schedules for 14 of the 19 sports venues. The Commonwealth Federation maintains that, if India is not able to buck up, this sporting event would have to be cancelled. What a disgrace this would turn out to be for us Indians! Given the amount of time we had at hand – 7 years no less, it is extremely disappointing that a country of a billion plus population is struggling to host an international event of this stature.

And what has been our response to this so far - Instead of taking this time to introspect and initiate corrective action, the reaction has been typically confrontational with mudslinging and name calling. The latest being, Mr. Suresh Kalmadi, the head of the organising committee, accusing the game’s CEO, Mike Hooper, of being useless and demanding his repatriation. Is precious time not being wasted doing blame storming?

So is this the end of the road –or is there still a small ray of hope, maybe not – but I’m an incurable optimist. If one goes back in time, and I mean way back, there does seem to be an uncanny parallel / precedent – the 1982 inaugural Asian Games. With only a year to go and preparations nowhere close to where there should have been, there was chaos. But after the reins were handed over to a young and vibrant Rajiv Gandhi, he along with a bunch of ‘technocrats’ turned it around and made it one of the most memorable events in our sporting annals.

We still have a chance to emerge with our heads held high - A chance to protect our pride from getting bashed. The moot question is will history repeat itself! The countdown has begun. Wake up India and Chak de !!!

Are interest rates headed northwards?

Are interest rates headed northwards?

At a time when most economies are still unsure of the strength of the economic recovery, Reserve Bank of Australia (RBA), has taken the lead and has hiked cash rate by 25bps to 3.25% for the first time in 19 months. It is the first among the G-20 nations to take this stance- A clear indication of the fact that RBA believes that an accommodative monetary policy is no longer required.
This came amidst warnings from the IMF that risks to the global economy continues to be on the downside. Most economists are of the view that this rate hike has come in a tad too soon.
In its policy review yesterday, European Central Bank and Bank of England have left interest rates unchanged maintaining that they have been cautious and prudent.

In India, RBI has already indicated that we have seen an end of rate cutting regime. But the moot question remains – Is this the time for interest rates to move northwards? Here the governor is caught in a Catch 22 situation. The stance taken should not hamper the fragile economic recovery witnessed and at the same time should not fuel inflationary pressures.
We have seen economic conditions better with the industrial production and export numbers improving. But inflation will remain a concern with deficit monsoons and CPI hovering around the 10% mark.
Speculation is rife that RBI will maintain status quo for the time being at the quarterly policy review slated for October 27.