RBI panel suggests move towards single policy rate regime

Reactivation of Bank Rate, 150 bps LAF corridor among recommendations.

In a move that will reduce uncertainty in liquidity and short-term interest rates, a Reserve Bank of India committee has suggested a single policy rate regime, on the lines of the US Fed Rate or the Bank Rate of the Bank of England.

The committee on the operating procedure of monetary policy headed by Deepak Mohanty, an executive director of RBI, said in its report the repo rate should be the single policy rate to unambiguously signal the stance of monetary policy to achieve the macroeconomic objectives of growth with price stability.

KEY TIPS

Fix LAF corridor at 150 basis points  Conduct second LAF regularly  Reactivate Bank Rate  Auction surplus cash balances of the government  Include oil bonds in collateral pool for reverse repo Publish government cash balance daily  Raise daily CRR requirement to 80 per cent

“The repo rate will operate within a corridor set by the Bank Rate and the reverse repo rate. As the repo rate changes, the Bank Rate and the reverse repo rate should change automatically,” the report said.

At present, the repo rate acts as the policy rate when liquidity is in deficit mode while reverse repo becomes the operating rate when there liquidity is surplus. The group feels such a scenario is not a convention followed globally and two rates may create confusion among market players regarding the stance of the policy when liquidity alternates between surplus and deficit mode in quick succession.

It was suggested the optimal width of the policy corridor, that is the gap between the Bank Rate and reverse repo rate, should be fixed at 150 basis points and should not be changed in normal circumstances. The panel felt the corridor should be asymmetric with the spread between the policy repo rate and reverse repo rate, twice as much as the spread between the repo rate and the Bank Rate. “With a corridor of 150 basis points, the Bank Rate should be fixed at repo rate plus 50 basis points and the reverse repo rate at repo rate minus 100 basis points,” it said.

The main objective in the determination of the width of the corridor is to stabilise the overnight money market interest rate while facilitating the development of the money market so that the reliance of banks on RBI facilities comes down over time.

The report recommends the modified LAF should operate in deficit liquidity mode and the liquidity level should be contained around (+)/(-) one per cent of net demand and time liabilities (NDTL) of banks for optimal monetary transmission.

The report also urges reactivation of the bank rate, which has been dormant as RBI is using key policy rates to signal the direction of interest rates. The Mohanty panel says the Bank Rate would be the rate at which RBI would provide liquidity under a new collateralised Exceptional Standing Facility (ESF) up to one per cent of NDTL of banks to be carved out of the required statutory liquidity ratio (SLR) portfolio. The collateral pool for reverse repo operation under the LAF may be extended to include oil bonds.

The committee also recommended an increase in the minimum level of the cash reserve ratio requirement by banks from 70 per cent to 80 per cent on a daily basis.

Source: Business Standard

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Foreign, private banks pay higher advance tax

Mumbai: Leading multinational banking majors have paid more advance tax in Q4 FY 11 indicating a good financial performance against a mixed bag from Indian banks, especially public sector banks.

Citibank and Deutsche Bank have both paid a significantly higher advance tax in Q4 FY 11 at Rs. 400-crore and Rs. 170-crore, respectively, an Income Tax source said.

They had paid Rs. Rs 150-crore and Rs. 60-crore, respectively, in Q4 FY 10.

While Standard Chartered Bank's tax payment remained unchanged at Rs. 200-crore, another foreign banking powerhouse, HSBC, has paid more advance tax at Rs. 449-crore in Q4 FY 11 as against Rs. 190-crore in the year-ago period, the source said.

Amongst Indian public sector banks, Union Bank and Central Bank have paid less advance tax at Rs. 70-crore and Rs. 110-crore, respectively, in Q4 FY 11. Last fiscal, in the same period, they had paid Rs. 175-crore and Rs. 252-crore, respectively.

IDBI Bank too has paid less this time, a meagre Rs. 2.6-crore as against Rs. 25-crore in Q4 last fiscal, the sources said.

Bank of Baroda (BoB), a state-run entity, has however, paid more at Rs. 400-crore this time as against Rs. 300-crore in Q4 last fiscal.

Private banks such as HDFC Bank and ICICI Bank seem to have fared well this fiscal as their outflows are higher.

HDFC Bank has paid Rs. 540-crore as advance tax this time as against Rs. 300-crore in the year-ago period while ICICI Bank shelled out Rs. 475-crore as against Rs. 350-crore in Q4 last fiscal, the source said.

Home-loans lender, HDFC, has paid more in Q4 FY 11 at Rs. 340-crore as against Rs. 280-crore in the same period last fiscal.

Public sector life insurance behemoth, LIC, paid Rs. 931-crore this time as against Rs. 864-crore in the year-ago period, the source said.

Source: Financial Express

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RBI submits draft guidelines on new banking licences to FinMin

New Delhi: Finance Ministry has received draft guidelines on the new banking licence from the Reserve Bank, which is expected to make it public by the end of this month.

The Finance Ministry has got draft guidelines on new banking license, official sources said.

The guidelines are at a draft stage and no firm view on the paid-up capital and other issues has been taken, sources said.

The Reserve Bank of India (RBI) is likely to issue guidelines for new banking licences by the end of the current fiscal.

"RBI is planning to issue the guidelines for banking licences before the close of this financial year," Finance Minister Pranab Mukherjee had said in the Budget speech last month.

After the Finance Minister's announcement in 2010-11 Budget, the Reserve Bank had brought out a discussion paper in August 2010 on dispensing banking licences to business houses and non-banking finance companies, besides regulations for the same to foster greater competition.

The RBI also sought to know "whether industrial and business houses could be allowed to promote banks."

Further, it sought stakeholders' views on whether NBFCs should be allowed to convert into or promote banks.

The apex bank has received comments on its discussion paper from all the stakeholders.

Various entities like Reliance Capital, IndiaBulls, Religare, IL&FS, IFCI and Aditya Birla Financial Services are reported to be mulling entering the banking space.

At present, India has 27 public sector banks, seven new private sector banks, 15 old private sector banks, 31 foreign banks, 86 regional rural banks, 4 local area banks, 1,721 urban cooperative banks, 31 state cooperative banks and 371 district central cooperative banks.

Source: Financial Express

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Ambani loans spur biggest bond yield drop since 2009

Yields on the convertible bonds of Anil Ambani’s Reliance Communications are falling by the most in two years after the company obtained loans from Chinese banks, giving it a bigger cash cushion to meet debt payments.

The yield on Reliance Communications’ note due March 2012 that investors can exchange for shares slid 4.04 percentage points to 9.10% last week, the most since April 2009, Cantor Fitzgerald prices show. Yields on India’s convertible bonds jumped to as high as 35%, more than six times those on similar Chinese securities.

Reliance Communications, which increased net debt almost five-fold in three years to R32,400 crore ($7.2 billion) at the end of 2010, said on March 9 that it will save money by borrowing R8,700 crore from a group led by China Development Bank to refinance the purchase of third-generation airwaves and buy equipment. India’s second-biggest phone company fell 33% this year, helping turn the BSE Sensitive Index into Asia’ worst performer.

“The pressure is relieved,” said Manish Dangi, who manages the equivalent of $14 billion as head of fixed income at Birla Sun Life Asset Management in Mumbai. The company had an “asset-liability mismatch” and “people were wondering how it would be handled,” Dangi said. Ambani, whose wealth slumped by 79% since 2008, faces rising debt costs after the RBI raised interest rates seven times in the past year to curb inflation.

Reliance Communications will save R500 crore a year in interest costs with the 10-year loans from the Chinese banks, the company said in a statement to the BSE on March 9. The new financing and reports the same day that American Tower is one of four bidders vying for its tower assets pushed the company’s shares up by the most in more than two months. Gaurav Wahi, a spokesman for Reliance Communications, didn’t answer two calls and an email seeking comments.

Improved finances at Reliance Communications may revive investor confidence in convertible bond market as about $375 million of the company’s notes mature in May.

“This will definitely improve” the firm’s “balance sheet and debt position of the group,” said KK Mital of Globe Capital Market in Delhi.

“News of loan from China Development Bank eased out worries in investors who have an exposure to Reliance Communications’ 2011 bonds,” said Raj Kothari, a London-based trader of convertible bonds with Sun Global Investments.

The net worth of Ambani, 51, shrank to $8.8 billion this year, making him India’s eighth-wealthiest person, according to Forbes.

Reliance Communications has R2,690 crore of syndicated loans and bonds due in 2011, according to Bloomberg data, equivalent to 58% of its profit in the most recent fiscal year ended March 31, 2010. A further R5,430 crore mature in 2012.

Source: Financial Express

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Don't cancel partial withdrawal from EPF

New Delhi: The Labour Ministry today favoured the provision allowing subscribers partial withdrawal of money from Employees Provident Fund(EPF) to continue and also said there is no move to impose a lock-in period.

The Labour Ministry stand on partial withdrawal came in response to a suggestion by the Finance Ministry that liberal advances and withdrawal from EPF account should be shunned to help achieve old-age income security for employees.

"Ministry of Labour and Employment has replied to the Ministry of Finance mentioning the need for continuation of the provision for partial withdrawal from provident fund account of the subscribers," Labour and Employment Minister Mallikarjun Kharge said in the Lok Sabha.

The Finance Ministry is of the view that by not adhering to "one instrument, one policy objective" most employees retired with as less as Rs. 35,000 in their account.

In a written reply, he also said there was no move to impose a lock-in period for EPF withdrawal.

However, he said as per a notification issued January 15 this year, interest will not be paid on inoperative account from April 1.

He said the total number of inoperative accounts was estimated to be around three crore, with an amount of Rs. 8,318 crore lying in such accounts as of March 31, 2010.

Source: Financial Express

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