Breach of fiscal deficit target will have implications: RBI

 

RBI deputy governor HR Khan said while shrinking value of money on account of high price rise called for a tight monetary policy, there is also a need to maintain a balance between controlling inflation and boosting growth

Mumbai: The fiscal deficit target of 4.6% of the gross domestic product (GDP) in 2011-12 could be missed and this will have serious implications on inflation, reports PTI quoting the Reserve Bank of India (RBI).

“In 2011-12, developments so far indicate that the fiscal deficit target of 4.6% of GDP could be breached which will have implications for domestic inflation.

“The moderation in private demand resulting from anti-inflationary monetary policy stance of the RBI will be partly offset by the expansion in public sector demand in terms of the size of the fiscal deficit,” RBI deputy governor HR Khan said.

Speaking at the 10th National Management Seminar in Bhubaneswar recently, Mr Khan said while shrinking value of money on account of high price rise called for a tight monetary policy, there is also a need to maintain a balance between controlling inflation and boosting growth.

The government has already admitted that adhering to the 4.6% fiscal deficit target would be a challenge on account of lower than expected revenue mop-up and the global financial crisis.

“Shrinking value of money because of persistent high inflation explains the importance of anti-inflationary monetary policy,” the RBI deputy governor said.

Mr Khan said for a country like India with a large percentage of population still living below the poverty line, inflation works as a regressive tax.

“Economic welfare of the population at large could be enhanced primarily through higher growth, that too in a low and stable inflation environment. That suggests why balancing growth and inflation becomes so important to monetary policy,” he said.

Mr Khan said inflation within the threshold level would not mean erosion in purchasing power since higher growth would also raise the income levels, resulting in increased net purchasing power.

“Unless the benefits of growth get equitably distributed, this net increase in purchasing power may not happen to all.

At the aggregate level, some inflation that coexists with high growth could be welfare maximising.

“At high inflation, particularly above threshold level, growth may, however, moderate, and both high inflation and low growth could erode welfare,” he said.

According to Mr Khan, while the global commodity price index has gone up by more than 85% between February 2009 and October 2011, Indian’s Wholesale Price Index (WPI) during that period has risen by about 27.6%.

“That certainly has led to shrinking value of money. Some of the supply side pressures on the value of money however require better capacity to augment the supply situation.

“Moreover, wages in rural areas and staff remunerations in the corporate sector have grown at rates higher than the inflation experienced in the recent past. The erosion in purchasing power, therefore, is much less than what may appear only from the inflation numbers,” he said.

Mr Khan said recent evidence of growth moderation could be expected to dampen demand side pressures on inflation. He said that in the absence of major supply side risks from global commodity markets, inflation should moderate to about 7% by March 2012.

The RBI raised key policy rates 13 times between March 2010 and November 2011 to curb inflation, before putting a pause to its monetary tightening stance at the mid-quarterly policy review last month.

Inflation has been near double-digit since December 2010.

However, food inflation entered negative zone in late last month and experts say that this will help pull down headline inflation to around 7% by the financial year-end.

India Inc has blamed the high interest rates, which have led to an increase in the cost of fresh borrowings, for hindering fresh investments and leading to industrial slowdown.

Economic growth during the second quarter (July- September) of the current fiscal slipped to 6.9%, lowest in over two years. Industrial production entered negative zone and contracted by 5.1% in October.

Regarding high food prices, which prevailed for most of 2010 and 2011, Mr Khan said a number of factors were responsible for it.

This included demand-supply mismatch, increase in rural wages which led to growth in demand, increase in minimum support prices of some crops, high international prices and problems with the supply chain.

“High inflation is a risk to financial savings, since it can reduce the value of savings accumulated over the years.

Making financial instruments available in the system that could provide an effective hedge against inflation assumes importance in this context,” he said.

Mr Khan added that the RBI, in consultation with the government, is exploring the possibility of issuing inflation indexed bonds (IIBs).

 

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RBI guidelines on Basel III more conservative: Moody’s

 

“We interpret RBI’s draft guidelines as more conservative than the Bank for International Settlements norms and view them as credit positive for the banking sector,” Moody’s Weekly Credit Outlook said

New Delhi: Rating agency Moody’s on Monday said the Reserve Bank of India’s (RBI) draft guidelines for adoption of Basel III norms, which seek to raise the minimum equity capital of banks, are more ‘conservative’ than those proposed globally, reports PTI.

“We interpret these draft guidelines as more conservative than the Bank for International Settlements (BIS) norms and view them as credit positive for the banking sector,” Moody’s Weekly Credit Outlook said.

In order to strengthen risk management mechanism, RBI issued draft guideline last month.

RBI has recommended a more stringent minimum common equity Tier-I capital of 5.5% against BIS’ 4.5%, it said.

Besides, it said, the central bank has proposed an earlier deadline for the implementation of a 2.5% capital conservation buffer to March 2017, as compared to BIS’ deadline of January 2019.

The draft guidelines reflect the RBI’s policy of ensuring Indian banks have extra stress-absorption capacity if the operating environment worsens, it said.

The proposed guidelines also prompt banks that have used hybrid securities and other innovative debt capital instruments to raise their core equity capital.

In line with BIS norms, it said, the proposed guidelines also focus on quality of capital, with increased emphasis on the loss-absorption capacity of capital rather than its role in supporting business growth.

Under the proposed guidelines, hybrids and other forms of innovative debt capital instruments that banks currently classify as Tier-I capital will no longer qualify as it, owing to their limited loss absorption capacity, it said.

In addition, it said, the proposed guidelines end the practice of making a distinction between upper Tier-II debt capital instruments and subordinated debt in favour of one set of criteria from a capital regime perspective.

Last month, RBI unveiled draft guideline for adoption of Basel III norms and set implementation period of minimum capital requirements to begin from 1 January 2013.

However, it said, the capital conservation buffer requirement is proposed to be implemented between 31 March 2014 and 31 March 2017.

It also said that the instruments which no longer qualify as regulatory capital instruments will be phased out during the period beginning from 1 January 2013 to 31 March 2022.

 

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Telcos oppose giving 3G pact copy to DoT on fear of leakage of info

During the proceedings on Monday telecom operators opposed the oral assurance given by DoT officials that confidentiality of their agreement would be maintained and said “it would be highly unfair to them”

New Delhi: In a fresh tussle, the Department of Telecom (DoT) has requested the Telecom Dispute Settlement and Appellate Tribunal (TDSAT) to give it copies of agreements on third generation (3G) roaming among private operators, a move opposed by them fearing leakage of commercial information to rivals, reports PTI.

The operators suspect that their roaming agreements, which consist of commercial negotiations would be leaked from the DoT and would reach rivals.

The information is getting leaked like a sea. It would be highly unfair for operators. “The moment it is leaked, it would reach our rival operators,” said the counsel appearing for telecom firms.

Senior advocate CS Vaidyanathan appearing for one of the telecom operators asked the tribunal to direct DoT to file an application and they would file a proper reply on this issue.

TDSAT said it would decide on this issue on 17th January only after considering the DoT’s plea questioning its jurisdiction to decide on 3G roaming issue.

Meanwhile, TDSAT adjourned Monday’s scheduled hearing to 17th January on the plea of DoT challenging its jurisdiction to decide the 3G roaming issue after the government wanted to file rejoinder over the reply submitted by operators.

In their reply, operators Airtel, Vodafone, Idea, Aircel and Tata Tele had termed DoT’s move as “desperate attempt to avoid adjudication” on the 3G dispute.

During the proceedings on Monday operators also opposed the oral assurance given by DoT officials that confidentiality of their agreement would be maintained and said “it would be highly unfair to them”.

“If they want a copy, let them file a proper application and then we would file our objection,” said Mr Vaidyanathan.

However, DoT’s counsel said that as per their license conditions, operators are supposed to handover their roaming agreement and they have already handed it to sectoral regulator TRAI.

“What is the difficulty in giving it to us (DoT). We are a licensor and not a third party in this. They (operators) have already given it to the TRAI,” said DoT’s counsel Maneesha Dhir, adding that it was only for the purpose of preparing a consolidated reply for the main petition.

She assured the confidentiality would be maintained and sensitive information would not be given under the RTI Act.

Earlier on 3rd January, operators had submitted their agreement to the TDSAT in sealed covers and the tribunal had permitted the government to inspect the agreement through their counsels.

However, DoT submitted that agreements were “voluminous and technical” and requested TDSAT for proper copies of the agreement.

Passing an order on 24th December, the tribunal had directed the DoT not to take any coercive action against the telecom operators.

A day prior to that the government had asked five telecom operators to stop their inter-circle roaming on 3G bandwidth within 24 hours and it was challenged by Airtel, Vodafone, Idea, Aircel and Tata Tele before TDSAT.

 

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