BofA-ML sees diesel price hike adding 120 bps to inflation

According to BofA-ML India chief economist Indranil Sen Gupta, inflation should persist around 7% in the March quarter, which will then likely go back up to 7.5-8% in second half of 2013

Mumbai: Bank of America-Merrill Lynch (BofA-ML) has said the recent partial diesel price hike will inflict a 1.20% burden on the already sticky inflation and that the price index will remain elevated throughout the next fiscal, reports PTI.


“The bottomline is that inflation will follow an inverted U in FY14, after last week’s diesel price hikes that will add 120 basis points (bps) to FY14 inflation.”


“Inflation should persist around 7% in the March quarter, which will then likely go back up to 7.5-8% in second half of 2013. But it should abate to 6.5-7% by March 2014,” BofA-ML India chief economist Indranil Sen Gupta said in a note.


However, the American brokerage said it continues to expect the Reserve Bank of India (RBI) to cut policy rates by 25 bps on 29th January. It is likely to be cut by 75 bps by June, then pause in the second half as inflation picks up and cut another 50 bps again in the March 2014 quarter as inflation subsides.


The government allowed oil marketing companies to increase the retail price of the fuel by 50 paise per every month and ended subsidy on bulk and institutional diesel consumers like railways, state road transport corporations and to power plants. The current subsidy on diesel stands at Rs 9.50 to a litre.


Gupta said, “We expect inflation to persist at 7%-7.5% in the March quarter after the diesel price hike. And accordingly we hike our March 2013 inflation forecast to 7.3% from 7.1%.”


On the impact of the staggered diesel price hike, it said the move will add about 120 bps to FY14 inflation if crude remains at $110 per barrel.


However, on the positive side, Gupta said, the price hike will help the government trim its oil subsidy by Rs20,000 crore to Rs67,300 crore (assuming a rupee value of 54 to the dollar).


Stating that the long tightening by the RBI has begun to turn counter-productive, he said “We cannot deny that the RBI tightening is increasingly turning counter-productive in hurting growth rather than denting an inflation that is largely ‘imported’.”


Finance Ministry favours real estate, broking firms to set up banks

Finance Ministry has said that real estate companies and broking firms can be allowed to open new bank, but there should be complete ban on taking exposure in the group companies or entities related to promoters

New Delhi: The Finance Ministry has expressed the view that the Reserve Bank of India (RBI) should allow real estate companies and broking firms to set up banks as adequate safeguards will be there to prevent exposure of promoters to related entities, reports PTI.


In its comments to RBI on the giving out new bank licences, the ministry has said that such entities can be allowed, but there should be complete ban on taking exposure in the group companies or entities related to promoters, sources said.


Even the vendor and large customers of such promoters can't get loan from the new bank, sources said, adding that this move will minimise accumulation of risk.


So, the firewall has been proposed to avoid undue influence of bank CEO to lend to the group companies, they added.


As per the RBI's draft norms for licensing of new banks in the private sector released in 2011, "entities or groups having significant (10% or more) income or assets or both from real estate construction and or broking activities individually or taken together in the last three years will not be eligible".


Explaining rationale for not permitting such entities, the RBI's draft guidelines said, there are certain activities, such as real estate and capital market activities, in particular broking activities which, apart from being inherently riskier, represent a business model and business culture which are quite misaligned with a banking model.


Post-crisis, it said, there are concerted moves even internationally to separate banking from proprietary trading.


"More importantly, in India, past experience with brokers on the boards of banks has not been satisfactory. It will therefore be necessary to ensure that any entity/ group undertaking such activities on a significant scale is not considered for a bank licence," the guidelines added.


The Finance Ministry has also suggested that the non-operative holding company (NOHC) may be substituted by the non-operative financial holding company (NOFHC) to signify that only financial sector entities are part of the NOFHC.


RBI will regulated financial holding company and different entities under the holding company will be regulated as per the business they carry out, sources said.


In its recommendations, the ministry has also proposed to lift the ban on setting up of new financial services entities under the NOFHC for at least three years from the date of commencement.


It has also favoured RBI's proposal of opening 25% of branches in unbanked areas of the country.


"The bank shall open at least 25% of its branches in unbanked rural centres (population up to 9,999 as per 2001 census) to avoid over concentration of their branches in metropolitan areas and cities which are already having adequate banking presence," the draft guidelines had said.



R Balakrishnan

4 years ago

I think the real estate companies have been suggested because of the highest level of ethics they follow in business, much like the stock broking community in India. Kudos to RBI for straight thinking.


4 years ago

This is really innovative and a new idea, I like this concept and the way it is carried out in so light and cool manner. I concur with your conclusions and will eagerly look forward to your future updates I’ve been meaning to read this and just never received a chance. It’s an issue that I’m quite interested in, I just started reading and I’m glad I did. You’re a excellent blogger, one of the greatest that I’ve seen. This blog unquestionably has some details on subject that I just wasn’t aware of. Thanks for bringing this things to light."> small Business Loans

Banking system shows signs of instability on rising NPAs: RBI

NPAs, or bad loans, of the Indian banking sector rose sharply to 1.28% in 2011-12 from 0.97% in the previous year due to high interest rate and slowdown in the global economy

Mumbai: The banking system in the country has recently shown signs of moderate rise in instability due to increase in non-performing assets (NPAs), the Reserve Bank of India (RBI) has said in a working paper, reports PTI.


“The movements in the banking stability indicator... that there are symptoms of a moderate rise in instability of the banking sector in recent periods perhaps due to the rise in the NPA,” it said in a working paper on “Banking Stability - A Precursor to Financial Stability”.


The NPAs, or bad loans, of the Indian banking sector rose sharply to 1.28% in 2011-12 from 0.97% in the previous year, because of high interest rate and slowdown in the global economy.


For public sector banks, it rose to 1.53% in 2011-12 from 1.09% a year ago though private lenders reduced their NPAs to 0.46% from 0.56%.


The paper said there is a need to exert precautionary measures to improve the overall performance of the banking sector and initiate regulatory measures appropriately.


It said policymakers will need to work towards strengthening the banking sector to enable the banks to bear the shocks resulting from an adverse turn in the real sector environment.


Also, it said there is a need to build enough safeguard in the banking sector to avoid the negative feed-back loop between the banking sector and the real sector which could lead to the germination and aggravation of a financial crisis.


Referring to the recent global economic crisis that began in 2008-09, the paper said, “The real act of the financial crisis was enacted in the courtyard of the banking sector where the trigger of financial crisis initially took place.”


However, concerted efforts are being made by various organisations such as the IMF, BIS and the World Bank as well as individual central banks to evolve various leading indicators of the financial stability, including banking sector, in order to make an informed judgement about the evolving risks to the financial system and initiate corrective policy measures.


The paper also observed that banking instability has immediate adverse effect on the financial markets stability as well as real sector output.


“...stability in the banking sector is a necessary condition for maintaining financial stability,” it added.


It further said deterioration in the banking stability indicator has adverse impact on the real sector and similarly deceleration in the real sector performance will adversely affect the banking sector.


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