The RBI and the Finance Ministry need to work in harmony, former Prime Minister Manmohan Singh said as he stressed on the need to keep the central bank's autonomy intact. The comments from Singh, who has served as RBI Governor as also as Finance Minister in the past, assume significance as they come against the backdrop of reports about differences between RBI and Finance Ministry on multiple issues, including on interest rates and on the proposed shifting of some powers away from the central bank. "I would like the two institutions to work in harmony," Singh said. He had served as RBI Governor from September 16, 1982 to January 14, 1985, and then as Finance Minister from 1991 to 1996, before becoming Prime Minister for two consecutive terms during the 2004-2014 UPA rule. "I've served in RBI. So, I know the importance of RBI. Its autonomy should be kept intact," Singh told reporters on the sidelines of an award function in New Delhi on Saturday. "I've been Finance Minister also. Since I have served as both RBI Governor and as Finance Minister, I would like to see the two institutions work in harmony," he added. "RBI is a great institution ... Finance Minister (Arun Jaitley) has already said that there is no disconnect between the two," Singh said. There have been reports about differences between RBI and Finance Ministry over the structure of a new agency that was to manage public debt, among other issues, including setting of policy rates. In his first full-year Budget in February, Jaitley had proposed to set up Public Debt Management Agency and shift the regulation of government bonds from RBI to market regulator Securities and Exchange Board of India (SEBI). The proposal generated a lot of controversy, with the RBI raising concerns and questioning the timing of the move. However, the government has now deferred the PDMA plan and dropped the proposal from the Finance Bill, 2015, passed by Parliament this week. (PTI)
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World bond and stock markets rose on Friday after a bruising week and sterling jumped to a two-month high after the business-friendly Conservative party won Britain's national elections. Sterling was up 1.4 percent against the dollar and London's FTSE led equity markets with a 1.5 percent surge to help European shares rebound from two-month lows and wipe out what had looked like being a second week of losses. With more than 75 percent of the seats counted in the UK, the Conservatives were set to govern for another five years, quashing the pre-election fears the result could have been too close to form a stable government. "The surprisingly decisive result reduces uncertainty over the next (UK) government," analysts at Morgan Stanley wrote in a note. Confidence was also given a big lift as bond markets recovered after one of the most turbulent weeks in Europe for decades. Most government bond yields dropped back in early trading but the pounding of recent days which has been triggered by signs of a rebound in inflation, still left normally rock-solid German Bunds on course for a big weekly spike in yields. The bond stabilisation helped investors cast off their normal caution ahead of monthly U.S. non-farm payroll jobs data and its implications for when the Federal Reserve raises interest rates. Economist polled by Reuters expect the figures to show a jump of 224,000 new jobs in April after 126,000 in March and a run of generally disappointing U.S. data since then. "The U.S. economy had virtually a zero growth in January-March. If it remains weak after April, a rate hike by the Federal Reserve may be delayed further," said Shuji Shirota, head of macro economics strategy at HSBC Securities in Tokyo. The dollar inched up ahead of the data but it was completely in the shadow of sterling following the election outcome. As well as against the dollar, the UK currency 1.7 percent against the euro and yen to notch its biggest trade-weighted rise since 2010. "Viewed within the context of the UK's large current account deficit, the policy uncertainty removed by today's result will be a relief for some previously nervous foreign investors," said Adam Myers, European head of FX strategy at Credit Agricole. Euro SagsOvernight in Asia, MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.5 percent as it recovered from a one-month low. Tokyo ended up 0.5 percent, but China's mainland stock index was the stand-out as it jumped 2 percent to claw this week's losses back to 4 percent. The gains came despite Chinese exports sharply missing forecasts with surprise 6.4 contraction in April. Bonds were also helped by a dip in oil prices: A steady rise in oil prices since March had been cited as one reason behind the rout in bonds as higher oil prices tend to boost inflation - a major risk for fixed-income investors. Brent crude oil futures hovered at $65.88 per barrel, stepping back from Wednesday's five-month high of $69.63. (Reuters)
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Fresh from his success in securing a mandated inflation target, Reserve Bank of India (RBI) Governor Raghuram Rajan has revived another long dormant reform as he seeks to modernise India's financial architecture: a freely floating currency. Rajan called in April for full convertibility in "a short number of years", having first raised the prospect when he took office in 2013. While it is unlikely to be realised during his current term, he is laying the ground work for it to happen. A policymaker familiar with Rajan's views described convertibility as the governor's "next big ambitious goal". The RBI did not have an immediate comment on the subject. The move is in tune with the nationalist government's ambitions to increase India's weight on the international stage; even if economic fundamentals and political realities mean a freely floating rupees is still years away. "It is the right time to take baby steps to move towards capital account convertibility," said one senior finance ministry official. Last month, the Reserve Bank allowed companies to raise rupee debt abroad for the first time. While the debt will be denominated in rupees no rupees will leave or enter India as the transactions will be settled in dollars. But,this symbolic move towards greater openness will grant Indian companies access to a wider pool of investors, potentially lower borrowing costs and give the rupee more visibility in global markets. India's currency regime is effectively a managed float, meaning there is a currency market, but the RBI intervenes to contain volatility. Investors are also not free to buy assets at will: foreign investors can freely invest in equities, but they cannot buy more than $80 billion of the country's debt - a limit that they are already pressed up against. Some finance ministry officials and policymakers interviewed by Reuters said opening up the rupee was a logical next step after India formally adopted inflation targetting in March, and the government outlined a plan to reduce the fiscal deficit. However, neither of those achievements has been tested yet. A poor monsoon, for example, or a sharp recovery in global oil prices could push inflation higher. And any shift on the currency will be gradual and cautious as India's shallow financial markets and a still unreformed banking system are vulnerable to major external shocks, such as the start of a tightening cycle in the United States. Roller Coaster"We are a long way from achieving full capital account convertibility. First the macro fundamentals like inflation, and the fiscal deficit should be fixed -- otherwise it will be like putting the cart before the horse," A Prasanna, economist at ICICI Securities Primary Dealership, said. Volatile inflation and high government requirements have rendered India's rupee and interest rates vulnerable to sharp swings that the authorities fear would become more destabilising should they loosen their grip on the managed float. For some officials, the answer is a progressive move phased over several years, as envisaged by former RBI deputy governor S.S. Tarapore, author of a landmark 1997 report. Having allowed companies to raise rupee debt abroad, the government could follow China's example by encouraging companies to settle trade transactions in rupees, creating offshore supply. Allowing foreign direct investment in sectors that are currently restricted could also help advance the internationalisation of the Indian economy. "We have already achieved about 30-40 percent of the capital account convertibility. It is not advisable to have a full capital account convertibility in one go," the finance ministry official said. Policymakers and bureaucrats will also need to convince politicians to push through sometimes painful changes. Junior finance minister Jayant Sinha told Reuters late last month that to become a leading economy India needs to think "deeply" about capital account convertibility. He said there was no formal plan, and expected it to be an evolving process. "One thing India has done extremely well over the last few decades of economic policymaking is to take a graduated approach, a calibrated approach," Sinha said, adding that had got the country through the Asian crisis of the late 1990s and the global financial crisis of 2008. But even a gradual approach, policymakers say, will be progress towards the goal of a freely floating currency. "We cannot wait forever for this reform to happen. But without ascertaining the strength of the house do not open the door," said a senior policymaker familiar with the RBI's thinking. (Reuters)
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Prime Minister Narendra Modi sank his finance minister's plans to strip powers from the Reserve Bank of India (RBI) last week, sources told Reuters, evidence of a new-found respect for the bank's governor and a recognition that Modi needs his calming influence on markets. When Modi came to power just under a year ago, the position of central bank boss Raghuram Rajan, an appointee of the outgoing Congress government, looked precarious. Senior members of Modi's Bharatiya Janata Party (BJP) chided Rajan for his tough stance on interest rates, which threatened the Prime Minister's pledge to reboot economic growth, and the governor in turn cautioned the government against putting too much faith in exports through its 'Make in India' policy. But when Finance Minister Arun Jaitley, one of Modi's closest allies, dropped plans on Thursday to remove the bank's authority to regulate the government bond market and manage public debt, a senior government source who was privy to discussions said the decision "came from the very top". A senior BJP figure confirmed that Modi had intervened on Rajan's behalf. The prime minister's office and the finance minister did not respond to requests for comment. Jaitley now intends to consult the RBI and come up with a detailed roadmap on the issue, a process that could take at least a year, officials say. There were signs last month of the changing dynamics in the relationship between 52-year-old Rajan and Modi, 64, when the prime minister publicly praised Rajan for "perfectly" explaining complex economic issues to him in regular one-on-one meetings. His intervention last week was hard evidence. "The Ministry of Finance's reversal on stripping this power from the RBI reflects the significant influence of the central bank governor," said Kilbinder Dosanjh, a director at the Eurasia Group consultancy. That influence owes much to the reputation of Rajan, a former chief economist of the International Monetary Fund (IMF), and the institution he runs. "We need to be careful while handling the RBI, as it is a proven institution in a country which is ridden with imperfect institutions," said Indira Rajaraman, an economist who is also one of the directors of the RBI's central board and had criticised the finance ministry's plan as hasty and inconsistent. India also needs to consider the impact on investors, who also see the RBI in the same favourable light. Foreign investors have already been irked by the Indian tax department's attempts to claw back tax it says is owed on years of previously untaxed gains, which prompted a sell-off in India's share and bond markets. And with poor summer monsoon rains in prospect and higher US interest rates looming, New Delhi was reluctant to spook investors further by clipping the bank's wings, said the government source. "Nobody wants to upset the apple cart," said the government source. (Reuters)
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The Federal Reserve downgraded its view of the U.S. labour market and economy on Wednesday in a policy statement that suggested the central bank may have to wait until at least the third quarter to begin raising interest rates. The Fed's statement put in place a meeting-by-meeting approach on the timing of its first rate hike since June 2006, making such a decision solely dependent on incoming economic data. The data, however, have been getting worse. Just hours before the Fed's statement, the U.S. government reported that first-quarter gross domestic product came in much weaker than expected. The central bank acknowledged that growth had slowed in the winter months, a dimmer assessment of the economy than its view in March. And while it said the poor performance was in part due to transitory factors, it pointed to soft patches across the economy, in a sign it may have to hold off hiking rates until at least September. "The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labour market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term," the Fed said in its statement, following a two-day meeting of its policy-setting committee. U.S. Treasury yields added to earlier gains and short-term interest-rate futures contracts dropped slightly after the Fed statement before paring the losses. Futures traders continue to bet the Fed will wait until December to raise rates, and give an October rate rise just a 46 percent chance, according to CME FedWatch. The Fed's guidance on Wednesday differed little from its last meeting. But unlike its March policy statement, this time the central bank did not effectively rule out hiking rates at its next meeting. That still makes a June move a possibility, though the data would have to sharply improve in the next two months for that to happen. 'A Little Dovish'The economy grew at an anaemic 0.2 percent annual rate in the first quarter, the Commerce Department reported early on Wednesday, well below economists' expectations for 1.0 percent growth and the fourth quarter's 2.2 percent expansion. In its statement, the Fed said the pace of job gains had moderated, a downgrade of its view last month and a reflection of the poor March employment data. It also noted that the underutilisation of labour resources was little changed - it had used the term "improved" in its March statement. "On net it seems to be a little dovish given the weaker-than-expected activity we have seen," said Gennadiy Goldberg of TD Securities. The Fed's view of inflation changed only slightly, as it hinted at the recent stabilization of oil prices and a levelling off of the U.S. dollar by saying "inflation continued to run below" its longer-term objective. At its last meeting the Fed had described inflation as having "declined." "We all know the Fed would love to start normalizing rates, but the simple fact is, the data does not warrant that action right now," said Wayne Kaufman, chief market analyst at Phoenix Financial Services in New York. There were no dissents in the Fed's policy statement on Wednesday. After the release of the statement, the Fed held a conference call with reporters to test a new conference call system that increases its flexibility to explain an interest rate hike in months when one of its quarterly press conferences is not already scheduled. (Reuters)
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The rupee's stability reflects the strength of the Indian economy and the currency should be able to withstand possible international events such as a rate hike by the US Federal Reserve, Indian Finance Minister Arun Jaitley said on Thursday. "By and large the strength of the Indian economy is also reflected in the fact that (the) rupee has remained relatively within the stable range, and we do believe that the rupee will find its real value and real strength in the international currency market," he said at a seminar in Washington. He noted that even when several currencies had faced a serious challenge, the rupee was relatively more stable against the dollar and rose against most other currencies. He said the depth and size of the Indian market meant its ability to withstand such shocks was far stronger. "I wouldn't call it threats or risks if we continue with our own internal ability to carry on with our own reform process," he said. "And as long as we continue that, I think our ability to absorb various international possible scenarios would be reasonably high." Goods And Services TaxThe implementation of the landmark goods and services tax (GST) regime proposed from April 1 next year would increase India's GDP by one to two per cent, Jaitley said. "This (GST) has the potential to push India's GDP by one to two per cent," he said, adding that the landmark constitutional amendment would immediately convert India into a one big uniform market. The new tax regime is scheduled to be rolled out from April 1, 2016 after the necessary constitutional amendment in the next session of the Parliament. In Washington to attend the annual Spring meeting of the International Monetary Fund and the World Bank, Jaitley was speaking at the Peterson Institute for International Economics. In his effort to address the concerns of the US corporate sector related to taxation, Jaitley said his government intends to rationalise the tax regime and make the tax department friendly to the assessor itself. Jaitley said the government is working hard on unaccounted money and assets, undertaking steps which include increasing cashless transaction and bringing the black money back into the system. He assured American corporate sector that there will be no retrospective taxation system in India, but did acknowledge that there are a few issues that his government has inherited from the previous regime and is working to address those. (Agencies)
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Iranian investment banker Ramin Rabii says he shouted in joy when he learned that Tehran and world powers had reached a deal which promises to lift economic sanctions on Iran. Then he called colleagues to discuss the business implications. Rabii, managing director of Turquoise Partners, a Tehran-based investment firm with about $200 million of assets under management, has been grappling for years with the results of the sanctions: unstable growth, high inflation, international banking restrictions and hard currency shortages. The agreement on curbing Iran's nuclear programme, reached on Thursday, will - if confirmed in a final deal by a June 30 deadline - begin to ease those crippling problems for Turquoise and thousands of other Iranian firms. "We've been preparing for this moment for 10 years," Rabii said by telephone, adding that in the months leading up to the deal Turquoise was in touch with hundreds of potential foreign investors about opportunities for them if sanctions were lifted. He said the company now planned to develop its asset management and brokerage businesses, and would hold roadshows for investors in Europe and possibly Dubai.India's Oil ImportsThe breakthrough in the standoff between Iran and the West is likely to help major buyers of Iranian oil like India by lifting curbs on quantity of import and payment restrictions. In 2014-15, US put pressure on India to maintain imports from Iran at 2013-14 level, which led to New Delhi not importing any oil last month. Iran is one of the biggest suppliers of oil to India. The sanctions on Iran have brought a steady decline in oil and natural gas revenue, to $56 billion in the 2013-2014 fiscal year from about $118 billion in the 2011- 2012 fiscal year, according to the International Monetary Fund. India was paying 45 per cent of bills against Iranian oil imports in rupee through a UCO Bank account. For the rest it had to wait for opening of payment channel. The unpaid bills now total $5.9 billion. China, India, South Korea, Japan and Turkey are the largest buyers of crude from Iran, which has the world's fourth-largest oil reserves. Banking SanctionsFrozen out of the international banking system, its foreign trade slashed by the sanctions, Iran looks likely to become the biggest country to rejoin the global economy since post-Communist eastern Europe in the early 1990s. The resulting boom could create tens of billions of dollars worth of business for both local and foreign companies and shift the economic balance in the Gulf, which has so far been heavily weighted towards the rich Gulf Arab oil exporting countries. "Precautionary talks have already started between Iran and some big Western investors" in areas such as oil and autos, said Iranian-born economist Mehrdad Emadi of London's Betamatrix consultancy. "Now there will be accelerating momentum." He predicted annual growth of Iran's $420 billion economy would rise by as much as 2 percentage points to over 5 per cent in the year after a final nuclear deal. It could accelerate further to 7 or 8 per cent in the following 18 months - matching the growth of Asia's "tiger economies" during their boom years. Iran's trade with the European Union, which totalled 7.6 billion euros ($8.3 billion) last year, could balloon 400 per cent by mid-2018, Emadi said. The complex web of financial, shipping, energy and technology sanctions woven by the United States, the European Union and the United Nations is expected to take years to remove, even if a final nuclear agreement is reached and implemented smoothly. As a result Iran's oil exports, cut by the sanctions to about 1.1 million barrels per day from 2.5 million bpd in 2012, may not start rebounding before 2016. American ActsBut the single most damaging sanctions measure, the US Treasury's use of Section 311 of the USA PATRIOT Act to identify Iran as a money laundering area, could be lifted quickly by the Obama administration, analysts believe. This would have a big impact on trade and investment by letting foreign banks deal with Iran without fear of being targeted by US officials. Iran could be re-admitted to the SWIFT global payments system, from which it was expelled in 2012, within three months of a final nuclear deal, Emadi said. Rabii said the boost to Iranian production from easier trade would quickly spur the economy, even if big foreign investment deals took longer to arrange. "Iranian industry is currently operating at about 60 to 70 per cent capacity. Thirty per cent is idle - that's because of the sanctions. Getting this working again is the low-hanging fruit of lifting the sanctions." Benefits Across GulfThe economic benefits would extend across the Gulf, particularly to Dubai, which is a traditional hub for business with Iran and has a large Iranian community. The sanctions slashed Dubai's trade with Iran by more than a third; the emirate could now become a jumping-off point for foreign companies going back into Iran. Airlines and logistics firms around the region also stand to profit. Tarek Sultan, chief executive of Kuwait-listed logistics giant Agility, said Iran was potentially attractive because its isolation had encouraged it to develop indigenous expertise that could allow it to leapfrog other economies. "When the international situation is resolved and restrictions are lifted, we'll be among the first ones in there," Sultan said late last year. Other parts of the Gulf economy may at least temporarily be hurt by the rise of Iran. Gulf Arab stock markets are reforming themselves to attract foreign capital; Saudi Arabia plans to open its bourse to direct foreign investment within months. These markets will now have a major rival for funds in Tehran. Any increase in Iranian oil sales could come at the expense of Saudi Arabia, Opec's biggest producer, which has lifted its output near 10 million bpd. The kingdom already faces a record budget deficit this year because of low oil prices. (Agencies)
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Saying that the thinking by the Reserve Bank of India and government on financial matters were often quite similar, Prime Minister Narendra on Thursday (2 April) asked the Reserve Bank of India to prepare a 20-year road map for financial inclusion and nudged banks to be considerate in giving loans to the poor as also while making recoveries from them, especially farmers. "RBI will be completing 100 years in 2035...it will be appropriate for the central bank to work on the theme of financial inclusion and prepare a road map for achieving it," he said while addressing a function to mark the 80th anniversary of the Reserve Bank of India. The other milestones for achieving financial inclusion could be 150th birth anniversary of Mahatma Gandhi in 2019, 75th year of Independence in 2022, 90th anniversary of RBI in 2025 and 100 years of RBI in 2035, the Prime Minister said. "These are four important dates...we can create a road map for financial inclusion," he said, adding that the financial inclusion should not remain a government programme but should become "an article of faith". Reserve Bank of India Governor Raghuram Rajan said the country's push to finance infrastructure should not override the need for financial stability. Rajan made the comments during a speech on financial inclusion. India is keen to ramp up infrastructure investment to help support economic growth, which will require a big push to fund projects. Finance Minister Arun Jaitley the government would restore the credibility of decision-making, while easing processes and making India's tax structure non-adversarial. The comments, in a speech on financial inclusion in Mumbai, reiterate government promises to make India more business- and investor-friendly. Concerns Over Farmers' SuicidesExpressing concern over farmers' suicides and the plight of the poor people in the country, Prime Minister Modi asked the bankers to be considerate in providing financial assistance to poor. Farmers' plight should, he added, shake up the conscience of the banking sector. "Our farmers commit suicide. The pain of this should not only be restricted to newspapers and TV screens. When farmer dies, does it shake the heart of banking sector? Because of taking loan from money lender, he has to face death," Modi said. The Prime Minister also called upon the bankers to extend credit to resource rich eastern states.(Agencies)
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