Money & Banking
RBI likely to go in for more interest rate cuts, says Nomura

Due to continued weakness in domestic demand and moderate core inflation Nomura expects a 25 basis points cut at the next RBI policy meeting on 18 June 2012

Brokerage and research firm Nomura has said that there will be an additional 50 basis points cut in repo rate in 2012 (25 basis points cut previously) due to continued weakness in domestic demand and moderate core inflation, with a 25 basis points cut at the next RBI policy meeting on 18 June 2012. The cash reserve ratio (CRR) is not expected to be cut on 18 June, as liquidity is closer to the RBI’s comfort zone and open market operations can be used to address the liquidity mismatch, predicts Nomura.

The interest rate cuts are only a quick fix to growth. Without concomitant fiscal tightening, loose monetary policy will likely fan inflation and lead to greater macroeconomic instability down the road.

The research firm is changing its policy rate call. It expects 50 basis points of additional repo rate cuts in 2012 (terminal repo rate of 7.50%), compared with its earlier forecast of 25 basis points, due to a continued weakness in domestic demand and rising downside risks to the global growth outlook. The reasons for the expected  25 basis points repo rate cut on 18 June 2012 include: (a) weaker-than-expected real GDP growth of 5.3% y-o-y in Q1 2012, belying Nomura’s and the RBI’s view that growth had bottomed in Q4 2012; (b) despite rising headline WPI inflation, core WPI (non-food manufactured) inflation has continued to moderate, which suggests that pricing power has declined (A further moderation in core inflation in May, data due on 14 June 2012, is expected); and (c) Brent oil prices have fallen to around US $100/barrel, more than offsetting the drag from the rupee depreciation.

Nomura has assigned a 20% probability to a 50 basis point rate cut at the RBI’s June 2012 meeting. While sluggish growth, low core inflation and weak policy rate transmission argue for a more aggressive 50 basis points rate cut, The brokerage expects a 25 basis point rate cut due to elevated headline inflation (primarily due to persistently high food inflation).

The CRR at 4.75% is close to the all-time low of 4.50% and needs to be kept ready as an emergency buffer to inject liquidity if conditions worsen, says Nomura. Upside risks in headline inflation are expected in the coming months. However, continued moderation in core inflation will likely prompt the RBI to accord a higher priority to growth. As such, following the expected 25 basis points repo rate cut at the June 2012 meeting, Nomura anticipates another 25 basis points cut in the second half of the year.

The current slowdown in growth is largely a payback from continued fiscal excesses and reflects slow government decision-making over the past year. Real effective exchange rate depreciation has already started to ease monetary conditions. As such, the current Indian stagflationary environment needs tight fiscal policy to create a more stable macro backdrop.

Nomura reasons that there are two issues with cutting interest rates: First, in the current tight liquidity environment, the transmission of policy rate cuts may be delayed and sub-optimal. Second, and more importantly, when inflationary expectations are in double-digits and potential growth is at risk of falling below 7%, it will not take much for inflationary pressure to rear its head. Without concomitant fiscal tightening, loose monetary policy will likely fan inflation and lead to greater macroeconomic instability down the road.

Thus, Nomura predicts a gloomy picture ahead for the banks and bond market—not to speak of instability in the equities and forex market—in India, in the absence of firm measures from the government.


Planning Commission spends Rs35 lakh for renovating two toilets!

The Planning Commission spent Rs35 lakh just to renovate two toilets that would be used by only 60 smart card holders. Is it the new austerity of the affluent?

While the Planning Commission continues to debate over its poverty line estimation, it is not stopping it from spending over Rs35 lakh for renovating two toilets with door access control system for its office at Yojana Bhawan, as revealed under a Right to Information (RTI) application. Critics point at the cost is equivalent to buying a flat. The Central Public Works Department (CPWD) has provided 60 smart cards for accessing these toilets to users including senior advisors, advisors, directors, personal secretaries, etc.  

In a reply to the RTI filed of Delhi-based activist, Subhash Agrawal, the Planning Commission replied that, "Cost of installation of Door Access Control System is Rs5,19,426 for two toilets. Cost of renovation of two toilets where door access control system is installed is Rs30,00,305."

In an internal note by the Commission, which was furnished in the RTI reply, it was revealed that toilets situated at 1st, 2nd and 5th floor at the Yojana Bhawan on RBI side were renovated by CPWD with approval from the competent authority after it was noticed that the newly-built toilets were sabotaged. "Things like disturbing/breaking of sanitary appliances are taking place frequently. It may not be out of place to mention that very high dignitaries visit Yojana Bhawan in connection with official work. In addition to this, non-official members of committees visit Yojana Bhawan for attending meetings, etc. Disturbing of sanitary fittings or non-functional sanitary fittings portray a very untidy picture of Planning Commission to the visiting dignitaries."

Another document also given in the RTI reply noted that, "With the approval of JS (admn), CPWD(E) was requested to submit estimates for SITC for door access control system and CCTV cameras. However, the executive engineer CPWD(E) has forwarded estimates for installation of door access control system in two toilets (one each on first and second floor) RBI side, Yojana Bhawan."

The RTI application also said, "It was  also  decided  to  renovate  the  said  toilets  in  line  with  the  toilets, functional  at  IGI (Indira Gandhi International)  airport,  New  Delhi.  These two toilets were to be renovated as a pilot project and after execution of the work; decision on renovation of other toilets was to be taken."

Last month, the column "The austerity of the affluent"  by P Sainath published in The Hindu, based on the RTI replies criticised the Planning Commission deputy chairman Montek Singh Ahluwalia whose foreign travel, between May and October 2011, incurred an expense of Rs2.02 lakh per day to the exchequer.
Mr Ahluwalia refuted the allegation saying that "Foreign travel is expensive but necessary for the discharge of official duties" .


Improving US market conditions and the housing boom

The US housing boom in 2004 lured many to go in for second homes but unable to pay the mortgages, some were forced to return to rented apartments. The 43rd part of a series describing the unknown triumphs and travails of doing international business

As we moved into 2004, one important activity that was noticeable was the great publicity and advertisement programs relating to leasing and sale of newly built houses in and around Washington DC. In fact, this phenomenon was noticed everywhere, and the building construction activity was in full swing. Beautiful communities were coming up, offering townhouses, of various sizes, and at competitive prices. But these prices were relatively high, and the prices of old houses were going up at a fast rate.
As the prices began to go up, all of us were flooded with mail and offers from finance companies and banks for extending credit. Phone calls would be received from marketers who would talk about your increased valuation of your own house, and how they would be able to arrange for immediate credit, which would enable you to replace your old cars; how you may take your much needed vacation and enjoy the sun in the Caribbean; take a long cruise; or fly down to Paris, have car at the Charles De Gaulle airport and drive around the whole of Europe, which you always wanted to do; or take a trip down to the Orient, gamble in Macao or walk up the great Wall of China! The enticing list things and activities that you could do with the extra cash was overwhelming!
A townhouse, bought for $160,000 was presently valued at $250,000 and the market price of the house was growing by the day; the marketer was willing to get a cash credit arranged immediately for $50,000 and one could do any of the above; and slowly pay back along with the house mortgage. It was easy to buy houses and the interest rates attractive.  If on your budget, you decided go in for a house valued $200,000 your agent/broker would highly recommend that you buy a more spacious single independent family home for $300,000 or more, particularly when he/she finds out that both the husband and wife are employed. “It is far cheaper to buy now than continue to pay rent; we can work out a deal that would practically bring the mortgage payments at par with your rent?” The sales pitch was very high, and newly built houses had all the amenities one would hope for.
We declined to fall into a death trap of taking any loans; we felt the market was saturated with reckless credit and even more callous methods for spending this ‘unearned’ cash. Many of my colleagues were keen to buy bigger houses than they really needed, because, they ‘feared’ that they may lose the opportunity. In fact, many bought a “second home” because they had a little cash in the bank to play with and always felt that they could rent the house, as long as the rent covered or was equal to the mortgage costs. What they failed to realise was as to what would happen if the tenant simply disappeared after delaying the rent payment?  This happened to many. My own colleague, who went against my advice, and bought a huge single family home, not only lost it, but had to take a huge debt and return back to a rented apartment in a matter of less than two years!
The credit squeeze had began to affect everyone, including our regular visitors to the hotel; our guests began to demand ‘compensation’ for delays in picking up at the airport, which was a complimentary service, fixed at certain intervals, taking into account the distance and time covered for the travel. Slowly, we became victims of circumstances where customers would misuse our friendly hospitality at the restaurants by being in cahoots with servers! Three guests would enjoy the meal; get charged for two, and give a rewarding ‘tip’ to the server!  Likewise, there were hanky-panky practiced in the paid garage facilities; when these were noticed, the associates received marching orders mercilessly. Every hotel had different incidents that they faced, and, when the top brass met for the monthly get-togethers, notes were exchanged!
The staff facilities included free laundry for our uniforms; so, if one was working five days a week, it would be normal to have these and a couple of pants for cleaning in the laundry, but certainly not any other garment, and that too from other family members! When such things began to be noticed by the receiving associate, not only the front office manager received the data but also the human resources director (though the FOM), and the associate got charged for the services utilized and warned future sterner action in case of repeat performance!
We continued to receive a greater number of government ‘servants’ staying with us at the fixed rates meant for this purpose. This was only when they were on ‘duty’ and paid for in our recorded cards meant for this purpose. If they had to extend their stay and convert it into a personal visit, though, for the sake of long standing relations, they may be able to get the government rates, but they would automatically pay for it by cash or by their personal credit cards. The guests were very clear on this and admirably followed the rules and regulations to the book.
As the housing boom continued, there was a lurking fear in the minds of many that as the reckless credit ballooned up, it was bound to burst sooner than later. Many owners of second ‘homes’ really found they were suddenly saddled with collectable rents, as the tenant had run away, and still they had to pay for water, gas and electricity bills! The market stalled for a while, but home prices in good locality remained high.
An unusual incident came to light, when one guest, Ms Maria called and asked for me by name.  When I answered her call, she mentioned that she gave her credit card for payment to the only girl in the counter, and when she reached home at Baltimore, she could not find it! She had searched everywhere, and felt positive that she didn’t take the card back! “Can you search at your end immediately, before I report it to the card company and have it cancelled?” After assuring her, I began the search, all over the place, including the front desk, Computer terminals for guest’s use, the restaurant she had used for breakfast, her room and also the ladies rest room!  There was no sign. The last thing she must have done was the check out at the garage, where she must have used the room key which was activated to permit her entry and exit in the garage. The garage attendant was on duty, and she confirmed that there was some problem in the morning as most guests had difficulty in using their room keys to exit. I called in Nelson, from the engineering department and had to open the key box at the exit gate, where the guests are requested to drop the keys, so that we may recycle them. Ms Maria had apparently exited the garage, and, mistakenly dropped her credit card in the key collection box! I called her back and arranged for sending it back to her by courier, which she got a day later!  I had quiet forgotten about the whole incident until she had sent a letter of appreciation to the management!

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts. From being the advisor to exporters, he took over the mantle of a trader, travelled far and wide, and switched over to setting up garment factories and then worked in the US. He can be contacted at [email protected].)


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