The Reserve Bank of India (RBI) issued draft guidelines on Tuesday (01 September) for its proposed plan to change how banks calculate their lending rates, which would make them more responsive to monetary policy actions but would likely be opposed by the sector. Banks currently have a good degree of freedom in determining their lending rates, but that has created frustration among Reserve Bank of India officials, who believe the sector is seeking to protect profit margins and is therefore not passing on central bank rate cuts quickly enough. The RBI has cut the country's main repo rate three times by a total of 75 basis points this year, but most banks have lowered their base lending rates by only around 30 basis points. The RBI in April proposed that lenders start determining base rates using the so-called marginal cost of funds. Under this method, banks' lending rates would respond more quickly to money market rates, analysts said. On Tuesday, the RBI unveiled the detailed draft guidelines on how banks should calculate their lending rates, and asked for feedback by September 15. The central bank wants to implement the measures by April of next year. "For monetary transmission to occur, lending rates have to be sensitive to the policy rate," the RBI said in the release. "It was observed that base rates based on marginal cost of funds are more sensitive to changes in the policy rates." But the move is likely to be opposed by banks, which say they need to maintain flexibility in setting lending rates because money market conditions can be volatile. Banks have also maintained they are lowering their lending rates as soon as they can but are constrained because they must weigh how much they are receiving in deposits with interest they owe to customers and companies. "It is difficult to work on a marginal cost model because the term deposits are locked in for a specific time and can't be repriced as frequently as assets," said a state-run banker.(Reuters)
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The Reserve Bank of India (RBI) listed State Bank of India and ICICI Bank as the country's two "systemically important banks", lining them up for tougher supervision to avoid collapses that would rattle the financial system and economy.The designation by the RBI on Monday (31 August) is the rough equivalent of the "too big to fail" applied to lenders in other countries, including the United States.The RBI said State Bank of India would now need to set aside an additional Tier 1 common equity of 0.6 per cent of its risk-weighted assets. ICICI Bank will have to maintain an additional 0.2 per cent.The RBI said it will review its list of systemically important banks every year and announce them in August.(Reuters)
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After repeated chiding by RBI chief Raghuram Rajan on banks not passing rate cut benefits to consumers, HDFC Bank today lowered its base lending rate by 0.35 per cent to 9.35 per cent -- the lowest in the industry.The move may trigger a fresh round of rate cuts by other banks as well."HDFC Bank has decided to lower its base rate, or the minimum rate of lending, to the lowest level in the industry, to 9.35 per cent from the existing 9.70 per cent. The new rates will be effective tomorrow," a source told PTI.Currently, the base rate stands same at 9.7 per cent for the country's three largest lenders -- State Bank of India, ICICI Bank and HDFC Bank.In its last monetary policy review on August 4, the RBI Governor had rued that banks have lowered their rates by only 30 basis points despite the central bank having cut its benchmark rate by as much as 75 basis points since January.Rajan has also linked better monetary policy transmission or banks cutting their lending rates to any future rate reduction by the central bank."The central bank will look for more room to ease policy rate pending fuller transmission of rate cuts by banks as they have cut only 0.30 per cent at the median level as against the RBI's cut of 0.75 per cent," Rajan had said.The RBI has lowered its policy rate by 25 basis points each on three occasions so far this year, the first being on January 15, followed by another cut in March. Banks first lowered their rates in April and then in June after Rajan chided them for holding onto higher rates.(PTI)
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The government plans to change the Reserve Bank of India Act before the end of the fiscal year so it can set up a new committee to direct the country's monetary policy, retiring Finance Secretary Rajiv Mehrishi told Reuters.The committee would be comprised of appointees from the government, the Reserve Bank of India, and independent members appointed by the government, but any changes have to be approved by the parliament, which has blocked other government bills."An attempt will be made to bring in by December. If it cannot be done by December, then of course by February," Mehrishi said in an interview, just before his last day in the job.On Monday, Prime Minister Narendra Modi appointed Mehrishi as the top official of the India's Interior Ministry for two years' period.The central bank and finance ministry have been trying to resolve differences over the panel's composition - chiefly over the balance of representation between government and RBI appointees.The finance ministry last month signalled a willingness to retreat from a blueprint that would have ensured its effective control over a seven-member committee.RBI Governor Raghuram Rajan has said the central bank and government have reached a "broad consensus" on the composition of a rate panel, without disclosing details.Mehrishi said the composition of the panel would reflect the views of Rajan, the government and lawmakers, but details would be disclosed first to the parliament."His views have been noted and would be taken into account in making any decision. But what the decision is does not depend solely on the RBI governor," Mehrishi said.The government also plans to set up an independent public debt management agency (PDMA), mainly under New Delhi's control, in the current fiscal year, which ends next March, he said.He said the finance ministry had agreed in principle with the RBI to allow Indian bonds to be settled through Euroclear, the world's largest securities settlement system, as part of efforts to boost capital inflows and deepen the bond market."It is a FEMA (Foreign Exchange Management Act) requirement so RBI has to consult the government," he said. "So we will respond to RBI. I think this week or latest by next week."RBI officials were not immediately available for comment.Rates Out Of SynchMehrishi said the RBI's high policy rate - now at 7.25 percent - was out of synch as it was encouraging inflows of volatile "hot" money into Indian markets."We have to find some kind of (middle way) via media where we do not incentivise the parking of hot money in India," Mehrishi said.Finance Minister Arun Jaitley has called for lower rates to boost domestic demand and investments. However, under a historic monetary policy overhaul agreed to between the RBI and the government in February, RBI Governor Rajan has a specific mandate to control inflation, meaning price stability takes priority in policy making.Mehrishi said high interest rates were putting pressure on companies to borrow money abroad and making government borrowing more expensive.However, he said the central bank was the best judge to decide policy rates which have to be seen from monetary policy perspective as well as liquidity in the market.(Reuters)
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Despite the Reserve Bank of India (RBI) slashing the statutory liquidity ratio (SLR) — the percentage of deposits that banks have to invest in government securities (G-Secs) – over time to 21.3 per cent from 23 per cent, banks continue to hold around 28 per cent (by way of SLR). In its Annual Report for 2014-15, Mint Road explains the reasons for the excess holding of SLR by banks: “… the buffer providing access to collateralised borrowings from the wholesale funding market and the Reserve Bank. Maintaining excess SLR securities also helped banks to weather the impact of the current slow phase of the economic cycle on their balance sheets and earnings”. Simply, put what it means is that bank held excess by way of SLR – that is, they invested higher amounts in G-Secs — as they could pledge them to raise funds from the money markets; and that at a time of dip in asset quality, such investments stood them in good stead. Data on sectoral deployment of credit, which constitutes about 95 per cent of total bank credit by banks, indicate that deceleration in credit off-take in 2014-15 was more pronounced with respect to the industry and services sectors, which together constituted about 68 per cent of total non-food credit. Credit growth in the services sector was weighed down by its major components: trade and non-banking financial companies (NBFCs) that accounted for nearly 48 per cent of the total credit to the services sector. In the industrial sector, growth slowed down across sectors, particularly for infrastructure, basic metals and food processing. The sectors which witnessed lower incidence of non-performing assets such as personal loans saw higher growth during the year. Infrastructure accounts for nearly one-third of the credit to the industrial sector. Its main components are power and roads, constituting 60 and 18 per cent of the total infrastructure credit respectively. While deceleration in credit to the power sector was modest, the slowdown was sharp with respect to roads in 2014-15. Non-food credit growth decelerated sharply in 2014-15 to 9.3 per cent (year-on-year), with incremental non-food credit declining to Rs 5,50,000 crore from Rs 7,30,000 crore in the previous fiscal. A host of factors weighed down on credit off-take, including lower corporate sales, softening of inflation rate, risk aversion by banks due to rise in non-performing loans, and procedural delays in debt recovery. Some in Inc also shifted to alternative sources for financing. Sale of significantly larger amount of non-performing loans (Rs 31,000 crore) by banks to asset reconstruction companies (ARCs) during 2014- 15 also contributed to a deceleration in bank credit. Mint Road’s Annual Report is ominous. It says that viewed in conjunction with other indicators of investment activity such as stalled projects, capital goods imports, production and capex spending, the decline in the private investment intention appears to have become more pronounced in 2014-15 relative to the preceding year. As per the RBI’s data on new projects which were sanctioned financial assistance by banks and financial institutions (FIs) or funded through external commercial borrowings, foreign currency convertible bonds, domestic capital market issuance, investment intentions for such projects aggregated to Rs 14,590 billion during 2014-15 as against Rs 20,810 crore in the previous year. “A turnaround in the investment demand cycle, therefore, assumes critical importance to steer the economy on to a sustainable high growth trajectory. The recent experience suggests that a strong step up in public investment may be required to dispel the inertia constraining private investment and to crowd it in, given the robust business sentiment”, says RBI in its Annual Report. Key to this effort will be putting stranded investments in stalled projects back to work while ensuring the availability of key inputs such as power, land (especially for roads) and skilled labour. Steadfast implementation of structural reforms like the goods and services tax (GST) is also required to reinvigorate productivity and competitiveness. Well, we know that story well.
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Indicating an imminent rate cut, RBI Governor Raghuram Rajan has said inflation has come down to the comfort zone quicker than expected and he is keeping a watch on data to see how much room is there for further easing of the monetary policy. "We are on a phase of accommodation. We are still in that phase. We are looking at the data to see what more room we have," Rajan said. Stating that RBI monetary policy has been accommodative, Rajan said he has cut interest rates three times already this year and he was "still on an accommodative setting". "You know, like other central banks, we are in a wait-and-watch mode. And as the incoming data are analysed, we are looking to see how much monetary room there is for more accommodation," Rajan told Wall Street Journal in an interview on the sidelines of the Jackson Hole summit in Wyoming. Rajan, who was participating in this elite economic symposium of the Kansas City Federal Reserve, said inflation has come down in India, and replied in affirmative when asked whether it was coming into RBI's comfort zone more quickly than he had expected. In an earlier interview also, to CNBC at the same summit, Rajan had said that he was not finished with rate cuts and RBI continues to remain in accommodative mode. When asked whether the capital flight, and currency depreciation would put him in a position to keep the rates unchanged, Rajan told WSJ: "No, you know, capital is attracted to strong economies. What we have seen in India is that for the most part we have been attracting capital. "Now, emerging markets have suffered a loss of capital, outflows, in the last few months. We have had some, nothing too particularly dramatic. It's been a little out from the equity markets. The debt flows have stayed pretty much in." On what would drive his decision between growth and inflation, Rajan said, "I think the growth feeds in, to the extent that it affects our inflation outlook. And if we feel, for example, that global growth is very weak and commodity prices are going to remain low for a long time that feeds into our inflation outlook also. "Our primary focus is on the inflation outlook. That's helped by a good monsoon. It's helped by lower commodity prices. And, you know, it's hurt by a significant exchange-rate depreciation." To a specific question on whether he was biased towards easing of rates but was yet to take a call, Rajan said, "We are on a phase of accommodation. We are still in that phase. We are looking at the data to see what more room we have.(PTI)
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There is a better than even chance that the Reserve Bank of India (RBI) will cut interest rates at its policy meeting on 29 September thanks to inflation striking a record low, according to a Reuters poll, marking a shift in expectations from earlier.The median from survey of 21 economists showed a 60 per cent chance that the central bank would cut its policy repo rate from 7.25 per cent at the next meeting, whereas a previous poll in July had shown a move was more likely in the final three months of the year.Since then, India has released consumer price data for July that showed retail inflation at a record low of 3.78 per cent, giving the RBI more room to ease policy.Keen to inject more momentum in the economy and encourage investment, the government and business community have urged the central bank to lower interest rates, though RBI Governor Raghuram Rajan has stressed that he wants to see low inflation on a sustained basis."We have fuel disinflation making a comeback all over again. Crude prices are back down," said Vishnu Varathan, senior economist at Mizuho Bank.Varathan noted the price of onions, a staple ingredient in Indian cooking, was beginning to rise, putting upward pressure on food inflation.But, he said the RBI would find it harder to cut interest rates later in the year, if the US Federal Reserve delays raising interest rates, which it is expected to do.The RBI left interest rates unchanged at its last policy review on 4 August, having already cut them by 75 basis points this year as a slump in global commodity prices brought inflation under control. By holding rates steady, Rajan went against the majority on an advisory panel, who had recommended a reduction.India is due to release economic growth data for the April-June quarter on Monday.The median forecast given by 27 economists put year-on-year growth at 7.4 per cent for the quarter, slowing from 7.5 per cent in the January-March period.Whereas the headline figure looks healthy, many economists have treated the data series with caution since the statistics department revised its methodology for measuring gross domestic product earlier this year.Other indicators and on-the-ground evidence suggest the economy is struggling, and there is growing impatience with Prime Minister Narendra Modi's government to implement more policies that can galvanise growth.The government is trying to introduce a nationwide goods and services tax to create a more unified market in a country where levies can differ from state to state.Twelve of the 21 economists polled doubted whether the government could roll out the tax before the next fiscal year begins in April.(Reuters)
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Reserve Bank of India governor, Raghuram Rajan on Thursday (27 August) identified three areas as a “work in progress” – the economy, the fight against inflation and the ability of banks to cut interest rates. The central bank believes India's growth outlook is improving gradually and says the real activity indicators are backing its 7.6 percent gross domestic product (GDP) projection. In June, Mint Road had lowered the growth forecast for the current fiscal to 7.6 percent from 7.8 percent projected in April, citing various risks, including poor monsoon and rising crude oil prices. In the `Governor’s Overview: Annual Report (2014-15) – a first of its kind section -- Rajan noted: “First economic growth is still below levels that the country is capable of. Second, inflation projections for January 2016 (as of early August 2015) are still at the upper limits of RBI’s inflation objective. Third, the willingness of banks to cut base rates -- whereby they forego income on existing borrowers in order to attract more new business -- is muted; not only does weak corporate investment reduce the volume of new profitable loans, some bank capital positions, weakened by NPAs (non-performing assets) , may prevent them from lending freely”. The RBI Annual Report observed that the outlook for growth is improving gradually; business confidence remains robust, and as the initiatives announced in the Union Budget to boost investment in infrastructure roll out, they should crowd in private investment and revive consumer sentiment, especially as inflation ebbs. While the progress of the monsoon has allayed initial fears of moisture shortfall, uncertainty surrounding the progress and distribution of the monsoon remains a risk to the outlook for both growth and inflation. In the first four months of 2015-16, indicators of real activity have broadly tracked the RBI baseline projection of output growth (at basic prices) at 7.6 per cent for the year as a whole, up from 7.2 per cent in 2014-15. Taking into account initial conditions, including the prospects for the monsoon and for international crude prices, the RBI projected in April 2015 a baseline path for inflation in 2015-16 in which it would be pulled down from current levels by base effects till August but is expected to start rising thereafter to below 6.0 per cent by January 2016. “So far, inflation outcomes have closely tracked these projections. The risks to this trajectory are balanced as the weather-related uncertainties are offset by falling crude prices. Inflation developments will warrant close and continuous monitoring as part of the overall disinflation strategy that requires inflation to be brought down to 5 per cent by January 2017”, it said. On banking reforms, the Annual Report was clear that it will press ahead, however, tough it may be. “A regulatory view, fashionable in the past, was that the pace of regulatory reforms had to be limited by the capacity of our banks, especially our public sector banks. The current stress in the banking system suggests that the real economy will not wait for the banking system, and a slow pace of reform could lead to greater, rather than lower risk residing in the banking system. Financial sector reforms need to move on many fronts. It was pointed out that for a country as big and populous as India, reforms cannot be shots in the dark, subjecting the economy to great uncertainty and risk. “Wherever possible, we have to move steadily but firmly, ever expanding the scope of reforms while always limiting the uncertainty they create. The Chinese term this ‘Crossing the river by feeling the stones’. It is an appropriate metaphor to guide our own reforms”.
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