Current slowdown factored in monetary policy: Gokarn

“Things are happening as per our projections which will then result in some moderation in growth as well,” RBI deputy governor Subir Gokarn said, adding that the RBI has also revised downward its overall credit growth projection to 18% from the earlier 19%

Mumbai: Reserve Bank of India (RBI) deputy governor Subir Gokarn yesterday said the present slowdown in credit offtake is a part of the demand adjustment process visualised by the central bank in its tight monetary policy stance, reports PTI.

“This (low credit pick up) is, in fact, an anticipated outcome... that’s a part of the demand adjustment process that we visualised,” Mr Gokarn told reporters on the sidelines of a Ficci-IBA event here.

“Things are happening as per our projections which will then result in some moderation in growth as well,” he said, adding that the RBI has also revised downward its overall credit growth projection to 18% from the earlier 19%.

The RBI has hiked its key rates a record 11 times since March 2010 to batten down sticky inflation, which stood at 9.22% for July.

The rate hikes can have an adverse impact on demand, which along with sliding global commodity prices can be one of the key measures to drive to the inflation numbers.

Off late, a slew of banks had said they are witnessing slower-than-normal credit pick-up and blamed the successive tightening by the central bank. Many banks have also downwardly revised their credit growth targets midway as a result of this phenomenon.

On the forthcoming festive season and the resultant pressure on liquidity, he said, “We have already said we aim to keep liquidity in a certain range. And if it is significantly disrupted from that range, we will obviously consider measures. But festival seasons are predicable and temporary, will not require any response.”

Stating that domestic inflation will be guided by the global commodity prices and domestic consumption, Mr Gokarn said he expects commodity prices to remain flat at the levels where they are now and hopes that this will lead to inflation going down from November because of the base effect.

“Clearly by November-December, we will start to get the base effect if commodity prices remain flat, so inflation will come down mathematically. Our projection was that by November-December, the number will start to turn down, that projection remains intact,” he said.

Though global growth may be slower than what was expected, India need not worry as the driving factors of our growth is domestic consumption and public expenditure continue to be at play, he said.

But the moot question is whether what is happening globally can impact commodity prices significantly or not and if it does it will help us bring down our inflation, he said.

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Allowing corporates in banking may pose self-dealing risks: RBI

“...if a corporate has an interest in a bank as a promoter or a shareholder, but has no position on the board, then there is no prohibition on the bank lending to the corporate. This opens up opportunities for self-dealing,” Reserve Bank of India (RBI) governor D Subbarao said in Mumbai

Mumbai: Amid the debate over whether business houses should be allowed to set up banks or not, Reserve Bank of India (RBI) governor D Subbarao on Tuesday said that entry of corporates into the banking space could open up opportunities for ‘self-dealing’ and use of bank money for own needs, reports PTI.

“...if a corporate has an interest in a bank as a promoter or a shareholder, but has no position on the board, then there is no prohibition on the bank lending to the corporate. This opens up opportunities for self-dealing,” he said at Ficci-IBA summit here.

His statement assumes significance as RBI is expected to soon come out with a draft for giving banking licences to more corporate entities.

Pointing out that there are persuasive arguments both for and against the proposal of allowing business houses in banking, he said, “By far the biggest apprehension is about self-dealing—that corporates will use the bank as a private pool of readily available funds.”

He said that the strongest point in favour of permitting business houses in banking “is that corporates can bring in the capital as also business experience and managerial competence”.

There are, of course, both statutory and regulatory checks against self-dealing. For example, the Banking Regulation Act prohibits banks from lending to directors on the board and to entities in which they are interested, he said.

Regulations also prohibit lending to relatives of directors without the prior approval or knowledge of the board, he said.

He noted that as much as these prescriptions are extensive, there are still gaps.

“Another apprehension that was raised during the public debate on the discussion paper was that it is not easy for supervisors to prevent or detect self-dealing because banks can hide related party lending behind complex company structures or through lending to suppliers of the promoters and their group companies,” he said.

“As we contemplate allowing corporates to promote banks, there is need for changes in statutes and regulations to address these concerns,” he said.

Following announcement by the finance minister in his Budget speech last year to allow business houses to enter into banking sector, many have corporates have evinced interest to enter the sector. These include Reliance Capital, LIC Housing Finance, Aditya Birla Group, etc.

On the remuneration issue of CEOs of the banks, Mr Subbarao said, “Taking into account the feedback received on the draft guidelines, the result of the impact studies and the final prescriptions issued in the matter by the Basel Committee in May 2011, the Reserve Bank is in the process of finalizing the guidelines relating to compensation.”

The guidelines are scheduled to be implemented from the financial year 2012-13, and banks have already been advised to start preparatory work in this regard, he said.

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High commodity prices main reason for inflation: Govt

“The surge in headline inflation, despite an overall moderation is food inflation was on account of an unanticipated increase in oil and commodity prices and demand pressures reflected in significant increase in inflation in non-food manufactured products,” minister of state for finance Nano Narain Meena said

New Delhi: The government on Tuesday said high commodity prices and demand pressure in manufactured items have led to inflationary pressure, but added that the rate of price rise is likely to moderate to 6%-7% by the end of this fiscal, reports PTI.

“The surge in headline inflation, despite an overall moderation is food inflation, was the combination of two factors—an unanticipated increase in oil and commodity prices... and demand pressures reflected in significant increase in inflation in non-food manufactured products,” minister of state for finance Nano Narain Meena said in a written reply to the Rajya Sabha.

Headline inflation, measured by the Wholesale Price Index (WPI), has been above 9% since December 2010. Food inflation remained in double-digit for most of 2010 before falling below the 10% mark in March this year.

Inflation of manufactured items, which have a share of over 65% in the WPI basket, has been above 7% since March this year.

Mr Meena said the government and the Reserve Bank of India (RBI) has taken a number of steps to control inflationary pressure.

The RBI has hiked interest rates 11 times since March 2010 and “related measures to moderate demand to levels consistent with the capacity of the economy to maintain its growth without provoking price rise.”

“In the absence of tightening, inflation perhaps would have been higher on account of demand pressures,” he said.

Regarding steps by the government, he mentioned reduction of import duty to zero on rice, wheat, pulses, edible oils and onion, ban on export of edible oils and pulses, suspension of futures trading in rice, urad and tur and extension of stock limit orders in case of pulses and rice.

Mr Meena also said that the government has reduced import duty on skimmed milk powder, petrol and diesel and custom duty on crude oil.

In reply to another question, he said that headline inflation is expected to fall to 6%-7% by March 2012.

“Overall WPI headline inflation is expected to fall to ... 6% to 7%,” the minister said.

He said the expected slowdown in economic growth will also act to ease inflationary pressure in the second half of the fiscal.

“Growth is expected to decelerate... to around 8% in 2011-12, which should contribute to some easing of demand-side inflationary pressure, particularly in the second half as the full impact of monetary tightening is realised,” Mr Meena said.

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