RBI keeps OMO option open to infuse liquidity

“If there is a persistent shortage after this (CRR cut), we are certainly keeping the OMO option open,” RBI deputy governor Subir Gokarn said after delivering a lecture at the Madras School of Economics

Chennai: The Reserve Bank of India (RBI) is keeping the Open Market Operations (OMO) option open to address the pressure on liquidity, reports PTI.

“It is really the first market day after the CRR (Cash Reserve Ratio) cut. So we will have to observe the response over the period of time. But, as we have said, in the past policy interactions that if we need to address liquidity for the OMOs, we are open to that,” RBI deputy governor Subir Gokarn told reporters here.

“If there is a persistent shortage after this (CRR cut), we are certainly keeping the OMO option open,” he said after delivering a lecture at the Madras School of Economics.

On the interest rates especially in the present inflation pattern, he said, “There is no short-term fix...It very tempting to say... lower interest rate to stimulate growth. But if the consequence of that is the spike in inflation in few months down the road, then it has really not accomplished anything...

“We need to look at inflation management not for a month or two, but on a sustained basis, it has to come down and stay down at least below certain thresholds for some period of time for it to start impacting positively on investment behaviour in particular.”

Replying to a query on criticism of RBI’s strategy to tackle pressures on liquidity, Mr Gokarn said, “I think we made judgements that are based on assessment of both growth and inflation. I would say we generally have found some sort of a middle ground between these two extremes. Those are the reasonable decisions to make, given the circumstances and given the information we have.”

He said although food inflation continued to be low, protein products were still costly. “For the moment, it looks likes, even though food inflation overall has gone down...the protein part of it, still remains quite high,” he said.

“There is a strong demand driven pressure on protein prices. Households, are in a sense, because of increasing affluence are shifting their dietary habits, dietary patterns and there is much more demand for products like milk, meat and eggs and so on,” Mr Gokarn said.

On the MGNREGA’s (Mahatma Gandhi National Rural Employment Guarantee Act) impact on the cost of agricultural production, he said, “When we look at the behaviour of rural wages in the last two years, the average increase has been substantially more than might have been projected on the basis of NREGA floor. That may be contributing. But, there are other things that are driving wages up.”

Skill mismatch was one of the major reasons behind the increase in the cost of agricultural production, he said.

“The solution to all of this in a sustainable way is more supplies. Better productivity of these food products, more skilling, that is, more people being trained and equipped to meet market requirements,” Mr Gokarn said.

 

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RBI provides more leeway to banks for rupee vostro accounts

“With a view to give more operational leeway to the AD Category-I banks, it has been decided to dispense with the requirement of prior approval of the RBI for opening and maintaining each rupee vostro accounts in India of non-resident exchange houses,” the RBI said in a circular

Mumbai: The Reserve Bank of India (RBI) on Monday dispensed with the rule under which banks were required to seek its approval for opening and maintaining vostro accounts by non- resident exchange houses for each new client, reports PTI.

Vostro is an account that one party holds for another.

“With a view to give more operational leeway to the AD Category-I banks, it has been decided to dispense with the requirement of prior approval of the RBI for opening and maintaining each rupee vostro accounts in India of non-resident exchange houses in connection with the Rupee Drawing Arrangements (RDAs) that banks enter into with them,” the apex bank said in a circular.

RBI said that approved dealer banks can now take its permission the first time they enter into such an arrangement with non-resident exchange houses from the Gulf countries, Hong Kong, Singapore and Malaysia.

“Subsequently, they may enter into RDAs, subject to the prescribed guidelines and inform the RBI immediately,” RBI said.

The circular said, “Once the total number of RDAs reaches 20, the AD Category-I bank may cause a detailed external audit of their internal system to ensure that it is working satisfactorily.

“Based on the satisfactory report, the board of AD Category-I banks may authorise more such arrangements. A copy of the board note together with board resolution in the matter may be filed with the RBI and new arrangements informed to the RBI.”

In another circular, the apex bank said that it has also dispensed with the old rule under which fresh licences were issued to banks and financial institutions to act as full-fledged money changers on a selective basis based on criteria.

Such criteria included provisions for facilitating an increase in outreach and preference was given to branches based locational advantage like being located in border areas or tourist centres and so on.

“In view of the recent measures adopted to provide more flexibility to the authorised persons in selecting the location for their branches, it has now been decided to remove the criteria relating to increase in outreach and locational advantage while considering the applications for issuance of fresh licenses for Full-Fledged Money Changers (FFMC),” the RBI said.

 

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Govt approves Rs7,900 crore capital infusion in SBI

 The capital infusion will “increase the issued capital by SBI by way of preferential allotment of equity shares to the government to the extent of approximately Rs7,900 crore including premium,” SBI said in a filing with the BSE

Mumbai: State Bank of India (SBI), the country’s largest lender, on Monday said the government has approved capital infusion of Rs7,900 crore in the bank, a development that will help the lender to increase its business activities, reports PTI.

The capital infusion will “increase the issued capital by SBI by way of preferential allotment of equity shares to the government to the extent of approximately Rs7,900 crore including premium,” SBI said in a filing with the BSE.

The government of India conveyed its approval today, it said.

With the capital infusion, the government’s stake would go up to about 65%. At present, the government of India holds 59.4% stake in SBI.

The capital infusion by the government will raise Tier I capital of the bank to about 8%.

As of September 2011, the capital adequacy ratio (CAR) of SBI stood at 11.4%. Of this, Tier-I capital stood at 7.47% at the end of second quarter against the minimum 8% level desired by the government.

It is to be noted that earlier this month, SBI chairman Pratip Chaudhuri had said the government has approved a capital infusion of Rs6,000-Rs8,000 crore in the bank by 31st March.

Last year, SBI had submitted a proposal to the government for raising Rs20,000 crore through a rights issue to fund its growth plans over the next two fiscals.

SBI had raised over Rs16,000 crore through a rights issue in 2008. In the last SBI rights issue, the government contribution was in the form of bonds to the bank instead of cash.

In 2010-11, the government provided capital support to the tune of Rs20,157 crore to public sector banks.

Most of the public sector banks got capital support from the government last fiscal. These banks included Punjab National Bank, Bank of Baroda, Union Bank of India, Oriental Bank of Commerce, UCO Bank and Dena Bank.

It is to be noted that financial services secretary DK Mittal had said the state-run banks would require about Rs3.5 lakh crore by 2021.

A committee headed by finance secretary RS Gujral is working out a strategy for the required capital infusion in public sector banks over a period of next 10 years.

 

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