Bank licences: Sebi scans listed applicants, firms

As the Reserve Bank of India (RBI) gears up to issue new bank licences, capital markets regulator Sebi has also a job at hand that is of scrutinising all applicants coming under its jurisdiction directly or through group entities. Sebi's scrutiny follows detailed queries shot off by RBI to various regulators in India and abroad as part of its due-diligence of entities seeking to enter banking arena. According to a senior official, Sebi is looking into the capital market track-record of all the group entities of 26 banking aspirants, some of whom are either listed entities or have presence in Sebi-regulated businesses like mutual funds, brokerage and investment banks. The area of prime focus for the Securities and Exchange Board of India (Sebi) is action taken by or underway for violations to various market regulations, he added. The scrutiny is expected to be over this month itself. RBI is granting new bank licences for the first time in about a decade and preliminary screening process is underway for 26 entities that have submitted their applications. As part of this process, RBI has also asked the applicants to provide further details about their promoters, equity structure, financial inclusion programme, proposed banking model, among others, sources said. In addition to Sebi, RBI is also seeking details from other regulators such as insurance watchdog IRDA and pension regulator PFRDA, about the businesses of the applicant entities under their respective jurisdictions. With regard to some applicants, RBI has sought to know details about source of funds and compliance to the structural norms proposed for new banking players. Besides, RBI is seeking additional details from the concerned foreign regulators about those applicants whose group entities have operations, significant business dealings with foreign companies or overseas listings. Sources said this due diligence process involves information exchange with domestic and foreign regulatory authorities for all group entities of the applicants.

RBI permits foreign banks' subsidiary to acquire pvt banks

Mumbai: In a bid to regulate and avoid 2008- type crisis, RBI on Wednesday said foreign banks with complex structures and which do not provide adequate disclosure would have to operate in India only through wholly-owned subsidiaries (WOS).

However, it permitted WOS of overseas banks to acquire private sector banks.

The framework for setting up of WOS by foreign banks in India, released by the Reserve Bank Wednesday night, also allowed foreign banks' subsidiaries to list on local stock exchanges. The initial minimum paid-up equity capital or net worth for a WOS would be Rs 500 crore.

"Banks with complex structures, banks which do not provide adequate disclosure in their home jurisdiction, banks which are not widely held, banks from jurisdictions having legislation giving a preferential claim to depositors of home country in a winding up proceedings, etc, would be mandated entry into India only in the WOS mode," it said.

Foreign banks operating in India before August 2010 have the option to continue their operations in branch model.

The RBI further said foreign bank subsidiary will not be allowed to hold more than 74 percent, the sectoral cap for overall foreign investment, in private banks they may acquire.

"As a locally incorporated bank, the WOSs will be given near national treatment which will enable them to open branches anywhere in the country at par with Indian banks," the RBI guidelines said.

There were 43 foreign banks in India with a network of 333 branches as of March 2013. At present, foreign banks have presence in India only through branches.

The guidelines come against the backdrop of the 2008 global financial crisis, which the RBI said has shown that growing complexity and inter-connectedness of financial institutions have compromised the ability of home and host authorities to cope with the failure of big banks.

"The lessons learn during the crisis lean in favour of domestic incorporation of foreign banks," it said.

Spelling out reasons for subsidiarisation, it said this will create separete legal entities having their own capital base and local board of directors, which will help in better regulatory control.

Also, it would ensure that there is a clear delineation between the assets and liabilities of the domestic bank and those of its foreign parent and clearly provides for ring fenced capital and assets within the host country, RBI said.

Standard Chartered, the largest foreign bank by branch presence in India, has its depository shares trading on the domestic bourses, although it hasn't adopted a subsidiary route here.

Only multinational banks Standard Chartered, HSBC and Citi have more than 30 branches in the country. Although the Royal Bank of Scotland has 31 branches, it is winding down local retail operations.

The RBI's framework, aimed at safe guarding the Indian banking system, comes in the backdrop of collapse of several banks in advanced countries during 2008 global financial crisis.

"The issue of permitting WOS to enter into merger and acquisition transactions with any private sector bank in India subject to the overall investment limit of 74 percent would be considered after a review is made with regard to the extent of penetration of foreign investment in Indian banks and functioning of foreign banks (branch mode and WOS)," it said.

To provide safeguards against the possibility of the Indian banking system being dominated by foreign banks, it said, the framework has certain measures to contain their expansion if the share of foreign banks exceeds a critical size.

RBI will put a stop on further entry of new WOSs of foreign banks or capital infusion, when the capital and reserves of all foreign banks in India exceed 20 percent of the capital and reserves of the entire banking system.

Raghuram Rajan meets Chidambaram; discusses economic situation

Rajan discusses economic situation with Chidambaram

Ahead of the RBI's central board meet, the central bank chief Raghuram Rajan on Thursday met Finance Minister P Chidambaram and is understood to have discussed economic issues. "Our meeting was part of regular interaction that takes place between RBI and Finance Ministry," Rajan said after his hour long meeting with the Minister and Economic Affairs Secretary Arvind Mayaram. The Central Board of Reserve Bank will meet in Raipur on Friday to discuss key economic and financial developments. The RBI board meets at least once every quarter. The meeting would be chaired by Rajan. The four deputy governors are the official directors on the board, while Mayaram and Financial Services Secretary Rajiv Takru are the government nominees. There are also 11 non-official directors on RBI board. The meeting assumes significance in the wake of economic growth falling to a four year low of 4.4 per cent and current account deficit (CAD) at an elevated level of 4.9 per cent in the April-June quarter. While the government has been emphasising on measures for incentivising growth, the RBI in its policy review last month had hiked interest rates by 0.25 per cent. The RBI is scheduled to announce its second quarter policy review on October 29. Although Prime Minister Manmohan Singh and other government functionaries are expecting the growth to improve in the second half of this fiscal, Asian Development Bank in its recent report lowered India's growth projection for 2013-14 to 4.7 per cent. The economic growth rate slipped to a decade's low level of 5 per cent in 2012-13.

CAD widens to 4.9 per cent of GDP in Q1 on high gold, oil imports PTI

High imports of gold and oil pushed current account deficit (CAD) to 4.9 per cent of gross domestic product (GDP) to $21.8 billion in the April-June quarter of the current financial year.

CAD is the difference between inflow and outflow of foreign exchange.

The deficit had declined to 3.6 per cent in the January-March quarter after touching a record high of 6.5 per cent in the October-December quarter. It was 4.4 per cent (or $16.9 billion) in Q1 2012-13.

"The trade deficit, coupled with a slow recovery in net invisibles (income and services), led to widening of CAD to $21.8 billion in Q1 of 2013-14 from $16.9 billion in Q1 of 2012-13," the Reserve Bank of India (RBI) said in its Balance of Payments statement.

Gold imports increased by $7.3 billion in the first quarter of the current financial year. The imports stood at about 335 tonnes in the April-June quarter.

"Excluding the increase in gold imports of $7.3 billion in Q1 of 2013-14 over the corresponding quarter of the preceding year, CAD would work out to $14.5 billion, which translates into 3.2 per cent of GDP," the central bank said.

RBI said there was a small draw down on country's foreign exchange reserves to finance the CAD.

"On BoP basis, there was a slight draw down in foreign exchange reserves of $0.3 billion in Q1 of 2013-14 as against an accretion of $0.5 billion in Q1 of 2012-13," it said.

During the quarter, while exports declined by 1.5 per cent, imports recorded an increase of 4.7 per cent. The trade deficit widened further to $50.5 billion in Q1 of 2013-14, from $43.8 billion a year ago, RBI said.

The government plans to bring down CAD to 3.7 per cent, or $70 billion, in 2013-14 from 4.8 per cent, or $88.2 billion, in 2012-13.

RBI governor Raghuram Rajan receives Deutsche Bank Prize, 2013

Reserve Bank of India governor Raghuram G Rajan has been awarded the Fifth Deutsche Bank Prize for Financial Economics 2013, in recognition of his ground-breaking research work which influenced financial and macro-economic policies around the world.

The academic prize is sponsored by the Deutsche Bank Donation Fund and carries an endowment of euro 50,000. The Centre for Financial Studies (CFS) awards the prize bi-annually in partnership with Goethe University Frankfurt.

Presenting the prize to Rajan, Deutsche Bank co-chairman Juergen Fitschen yesterday said that it would have been hard to find a more deserving winner for this year's award.

Rajan's career "is not only marked by path-breaking, empirically-based research, but he never shied away from the real world of complex policy issues and special interests. He never shied away from speaking inconvenient truths," Fitschen said.

He noted that Rajan had in 2005 warned about the dangers of building up "unsustainable imbalances in the financial system," three years ahead of global financial crisis.

"Prof. Rajan's work revealed that the relationship between the financial sector and the rest of the economy is so complex that it is not good enough to simply look at the size of the financial sector in relation to the gross domestic product (GDP), as is done so often at present," Fitschen said.

He had also "warned us about the dangers of using or rather misusing" financial regulations and financial systems for purposes other than their original objectives, for example, for safeguarding stability or fostering growth, the Deutsche Bank co-CEO said.

The housing bubble in the United States, which triggered the financial crisis in 2008, had highlighted the danger of using the financial system to make up for the failures in social policies.

Jury chairman and director of the Centre for Financial Studies Michael Heliassos said the organisers are quite pleased to welcome Rajan in his new capacity as the RBI governor.

Rajan was picked up for the prize from more than 260 nominations from top universities, central banks and research centres in 37 countries. More than half of the nominations came from the US.

RBI governor says forex reserves comfortable

 
Even as the country’s foreign exchange reserves are at a 39-month low, Reserve Bank of India (RBI) Governor Raghuram Rajan says they are at a “comfortable level”.

According to RBI data released last Friday, the country’s foreign exchange reserves were at $275.3 billion as on September 13, which went up by about half a billion over the previous week.

The central bank has been cautious in using its forex to stem the depreciation of the rupee, which has weakened by 14.4 per cent against the dollar this financial year. Under Rajan, who took charge on September 4, the currency has been able to halt its fall, which has appreciated 5.5 per cent this month.

In July, the central bank had beefed up its foreign exchange market intervention as it sold close to $6 billion to stem the rupee fall. Rajan has also announced several steps, like swap facility for banks for foreign currency non-resident bank, or FCNR (B), deposits and banks’ overseas borrowing limit. Both these windows, which are available till November 30, are expected to swell the forex kitty by $10 billion.

According to a Bank of America Merrill Lynch report, India’s import cover has halved to seven months — last seen in 1998 — in the past five years, which is well below the eight to 10 months needed for rupee stability.

Rajan, who was speaking at a seminar in Frankfurt, reiterated the policy stance of the central bank was “neutral” at this point in time, though he said high and persistent retail price inflation was a concern. “At this point, we are neutral, we will see how things develop,” he said when asked about the central bank’s policy stance.

The RBI chief added inflation was not just due to higher food prices. “Unfortunately, there is still some inflation when you strip out the effects of food and energy. Therefore, it is not just food, it’s other factors also, which are driving inflation,” Rajan told reporters on the sidelines of the conference.

During the mid-quarter policy review, Rajan had hiked the repo rate by 25 basis points (bps) to 7.5 per cent, while reducing the marginal standing facility rate by 75 bps to 9.5 per cent.

“The intent here is that when the repo rate becomes the effective policy rate, it should be consistent with inflationary conditions in the economy. On net, these measures will reduce the cost of bank financing substantially while allowing us to take an appropriately precautionary stance on inflation,” Rajan said while announcing the policy last Friday.

He added there was a need to bring real interest rates down as low as possible. According to him, there is a need for new innovative ways to bring down real interest rates. Rajan believes emerging market economies must resort to fiscal tightening when money is flowing in.

The US Federal Reserve has recently decided against reducing its massive monetary stimulus, known as the third round of quantitative easing. According to Rajan, an exit from quantitative easing will be more abrupt than entry. He said there was a need to rethink dangers of over-stimulation. Besides, there is a need to rethink dangers of cross-border capital flows. Going forward, the external consequences are large, he added.

FCNR golden goose: Great returns on borrowed capital

Foreign banks are scrambling to raise dollar deposits from non-resident Indians — even tempting them with loans — to open their foreign currency non-resident (bank), or FCNR (B), deposit accounts in India.

The move comes after the Reserve Bank of India (RBI), as part of its efforts to stem the rupee’s depreciation, opened a special window for swapping FCNR (B) dollar funds of three years or more at a concessional rate and offered various other incentives, including cheap dollar-rupee swap rates.

Observers say this has offered Indians residing abroad an opportunity to increase their income manifold using borrowed capital.

The process, as bankers and market participants explains, begins with a foreign bank requesting a non-resident to open a FCNR (B) deposit account with its India unit. The bank immediately offers the customer a loan against this deposit. The customer uses the loan to create another FCNR (B) deposit account, against which he is again given a loan. The process is repeated eight to 10 times. The customer benefits as he earns more interest on FCNR (B) deposits than he pays on loans against those.

Some of the Indian banks with foreign branches have also approached their non-resident customers to raise FCNR (B) deposits, but observers say these lenders are not as aggressive as their foreign rivals.

Industry analysts say, using this mechanism, non-resident Indians (NRIs) can make a net return that is significantly higher than the interest rates offered on deposits in developed markets like the US. The returns would easily lure NRIs. According to some estimates, by putting up just 10 per cent of the deposits, the client effectively makes between 18 and 21 per cent on the dollars.
On September 4, 2013, in an almost desperate move to arrest the slide the rupee, RBI had announced a window for swapping FCNR (B) dollar funds, mobilised for a period of at least three years, at a fixed rate of 3.5 per cent a year for the duration of the deposit. The scheme, the central bank had said, would remain operational until November 30, 2013.

In other words, the banking regulator is now permitting lenders to convert three-year FCNR (B) dollar deposits into rupees at 3.5 per cent, even though the swap cost, considering the recent rupee-dollar forward rates, is estimated to be more than six per cent. This has encouraged banks to mobilise FCNR (B) dollar deposits, as they can reduce their cost of fund by at least 250 basis points using this window.

“It is a win-win situation for all. The interest rates offered to non-residents on three-year FCNR (B) deposits in India are significantly more than the current dollar swap rate of 80 basis points a year for a comparable tenure. Banks will benefit, as they will have access to low-cost funds. And, ultimately, this will increase dollar flows into India,” Param Sarma, director and chief executive of NSP Treasury Risk Management Services, says.

Market participants expect banks to bring in over $10 billion through this route which will probably avoid the need for an immediate sovereign bond issue by the government.

“The swap window was necessitated by a sharp depreciation in the rupee and need to bridge the current account gap. There was a need for one large chunk of dollar inflow, which probably led to the introduction of this scheme. However, it is a subsidy, assuming the rupee-dollar swap cost is currently over six per cent. This subsidy will have to be borne by the country,” says Mecklai Financial Deputy CEO Partha Bhattacharyya.

Some industry analysts believe the subsidy burden on Indian taxpayers because of this move might be as high as Rs 2,000 crore a year, assuming banks bring in $10 billion of FCNR (B) deposits.

“We discontinued FCNR (A) deposits since we did not want to bear the entire currency risk, and these deposits also violated IMF (International Monetary Fund) conditions. But by allowing swap at a concessional rate of 3.5 per cent for FCNR (B), we are going back to the FCNR (A) regime, at least partly. I believe, we should be explicit in saying what would be the estimated cost of this subsidy, since the deposits might run up to five years,” Ranade adds.
The process, however, has raised concerns of systemic risk.

“The 2008-09 crisis was triggered by over-leveraging. We are again seeing foreign banks encouraging leveraging. There are reports that lenders are offering NRIs upfront loans against FCNR (B) deposits and repeating the process. Such leveraged money can leave as abruptly as it comes in, thereby increasing systemic risk,” Ajit Ranade, chief economist of Aditya Birla Group, says.

RBI assures Street on liquidity management

The Reserve Bank of India (RBI) on Wednesday assured the market it was closely monitoring liquidity conditions. It added it would take appropriate action, including open market operations, to ensure adequate liquidity was available to support the flow of credit to productive sectors of the economy.

Experts said the statement would result in government bond yields falling further on Thursday.

Beginning with the mid-quarter review of monetary policy on Friday, RBI began a calibrated unwinding of the exceptional measures announced since July to restore normalcy to financial flows. Currently, RBI is injecting about Rs 1.5 lakh crore into the system on a daily basis, through the liquidity adjustment facility, the export credit refinance facility and the marginal standing facility.

However, despite this, liquidity conditions have been tightening, as shown by the hardening of yields in the government securities market, owing to uncertainty on the government’s borrowing programme for the second half of 2013-14 and the prospective effects of banks’ half-yearly account closure. The seasonal pick-up in credit demand, the festive-season-related demand for currency and the sluggish deposit growth have also contributed to the tight liquidity.

On Wednesday, the yield on the 10-year 7.16 per cent benchmark government bond closed at 8.79 per cent, compared with its previous close of 8.84 per cent. Experts said the RBI’s assurance was necessary, as two government bond auctions were scheduled for this week.

On Monday, a government bond auction for a notified Rs 15,000 crore devolved partially on primary dealers to the tune of Rs 4,030 crore. On Friday, RBI would auction government bonds for a notified Rs 14,000 crore.

Risk of a sovereign downgrade increases after SBI downgrade by Moody's

The risk of a sovereign downgrade risk has only become exacerbated after international rating agency Moody’s downgraded State Bank of India’s senior debt and local currency deposit to ‘Baa3’, and now has a negative outlook. The market is viewing this as a proxy for the sovereign rating. The State Bank of India and group entities account for 25 per cent of the country’s banking system. Currency strategists say that despite the recent euphoria after the Fed’s “no taper” decision, India is far from the comfort zone.

The stress is not only in the banking system, India Ratings and Research in a report has said that the default rate of corporate finance issuers in the country has risen to 4.5 per cent in FY13 from 3.5 per cent and 0.3 per cent in the previous two years. What this implies is that the RBI’s move to ease liquidity conditions will have little bearing on the current financial condition of borrowers and their ability to repay loans. Scotia Bank’s currency strategist Sacha Tihanyi says that this should remind the market of the risk to the sovereign of a credit rating downgrade, as Standard & Poor’s currently has the country’s BBB– investment grade rating on a negative outlook (other major agencies have it on stable).

Will the Fed start its famed taper in September?

64% of 800 investors polled think it will start this week but weak US data suggest it might not be aggressive.
Two big events this week - the Federal Open Market Committee (FOMC) meeting on Wednesday and RBI's policy review on Friday - will determine which way equity markets head.
Since June, the Federal Reserve has been looking to taper its $85 billion a month bond buying programme. The FOMC's meeting is crucial for emerging markets like India because over the last few years, financial markets have been fuelled by easy liquidity.

Since 2009, $100 billion has flowed into Indian equities. Not surprising, then, that the talk of a possible taper from this month has sent risk assets and commodities into a tailspin.
So, are the taper related fears unfounded or are they real? To begin with, markets have already priced in some tapering from this month. However, if the Fed tapers its bond buying by $10 billion, the impact on financial markets would be negligible.
But if it is higher than $10 billion, markets may roil. According to a Barclays survey, conducted among 800 global investors, 64 per cent of respondents believe tapering will start this week and almost all of them expect it to occur before the end of the year.

Investors now perceive the removal of Fed stimulus will start earlier, the survey says. Forty five per cent expect the Fed to finish their open-ended QE3 programme in second quarter of 2014, while most respondents in our June survey thought it would happen in the fourth quarter of 2014 or later.

Interestingly, most investors believe equities have become less attractive but have shown a slight increase in their preference for emerging markets and commodities from June.

Barclays says: "The perception of key risks has also shifted. Last quarter, a reduction in Fed policy stimulus was seen as the key risk for markets by nearly 40 per cent of survey participants; today, the number is just 26 per cent."
Several economists in the US believe concerns regarding a taper could be premature, as growth data continues to be weak and the Fed does not want "risk off" trades just yet.
Talks of a taper have pushed up interest rates in the US by over 100 basis points and any further increase would impact growth. For starters, it is believed growth has slowed in the third quarter (ended September) from the 2.5 per cent seen in the second quarter. Economic growth bottomed out in the fourth quarter of 2012 when it touched 0.1 per cent. While there is no doubt that growth is picking up, questions remain on how sustainable this would be without the stimulus.

Since the Fed met at the end of July, there have been 21 growth-related data releases. Of the 21 releases, 12 have been below consensus.

New home sales in the US in the month of July have fallen by 13.4 per cent. Bank of America Merrill Lynch says it's a close call but it is still in the December camp when it comes to the Fed's possible tapering.

'RBI unlikely to reverse liquidity tightening steps on Sep 20'

 
Mumbai: Reserve Bank's new Governor Raghuram Rajan may wait for signs of a sustained stability in the rupee and is unlikely to reverse the liquidity tightening steps at Friday's mid-quarter review, Standard Chartered Bank said Tuesday.

"While the rupee's 7.6 percent appreciation (against dollar) from September 3-16 is encouraging, the RBI might prefer to wait longer for confirmation of sustained currency stability - a key determinant of such a reversal," it said in a report here.

"A complete reversal of liquidity tightening measures on September 20 looks unlikely to us," it added.

In order to arrest rupee's fall, Rajan's predecessor D Subbarao in July had announced liquidity tightening measures, including a cap on banks' overnight borrowings which increased the short-term rates in the system.

The RBI reduced the banks' liquidity adjustment facility (LAF) borrowing limit from 1 percent of the total deposits to 0.5 percent and also asked banks to maintain higher average CRR (cash reserve ratio) of 99 percent of the requirement on daily basis.

The StanChart report, however, said the RBI might recalibrate some of its liquidity-tightening measures in the mid-quarter monetary policy review on September 20 to reassure the market that the steps announced are temporary.

According to the report, RBI Governor could reduce the daily minimum CRR balance from 99 percent, or marginally increase the LAF borrowing limit from 0.5 percent of net demand and time liabilities (NDTLs).

"These changes are unlikely to reduce the call rate substantially below the MSF rate which is at 10.25 percent, but we believe they would offer some comfort to the markets, with the hope of further easing later," it said.

StanChart expects the RBI Governor to stay hawkish on inflation front as August CPI inflation remained elevated, and moreover, WPI inflation accelerated to 6.1 percent. "The headline number is likely to keep the RBI cautious."
The report said the RBI may adopt a wait-and-see stance on September 20 given that the government is yet to announce measures to contain the fiscal deficit at 4.8 percent of GDP.

In the first four months of FY'14, the fiscal deficit reached a level equivalent to 60 percent of the budgeted target. StanChart expects the US Fed to taper its quantitative easing by USD 10 billion per month and maintain a relatively dovish policy tone.

"If the RBI only fine tunes the existing liquidity framework and reiterates its intent to gradually exit the tight liquidity regime, then we expect a limited market response," the report said.

"The markets will then watch closely for signals from the new Governor on the timeline and possible preconditions for a roll-back of liquidity-tightening measures," it said.

The report said given the uncertainty over the RBI's potential monetary policy responses, it remains neutral on government securities duration.

Rate cuts may be delayed with RBI focus on rupee: Barclays

New Delhi: With the Reserve Bank's policy focus geared towards supporting the rupee, the central bank may delay easing rates to between December and April 2014, a Barclays report says.

According to the global brokerage firm, the RBI is likely to remain focused on supporting the rupee, which has depreciated by more than 13 percent since May and crossed the psychological level of 62 against the dollar last week.

"As such, while the focus is on the INR, we think monetary policy calibration will eventually be biased towards further easing, rather than tightening. However, we think further policy easing will likely be delayed," Barclays said in a research note.

The financial services major believes key policy rates would be eased by as much as 75 basis points in this fiscal but it would be a "delayed" affair.

"We still expect 75 bp of repo rate cuts, but now we expect them to take place between December 2013 and April 2014, rather than our initial expectation of September -December 2013," Barclays said.

The industry has been demanding a cut in key policy rate to boost economic activities. Industrial output contracted for the second consecutive month in June.

Moreover, inflation rose for the second consecutive month and shot up to 5.79 percent in July, driven largely by double-digit rise in prices of food articles, including vegetables and onions.

The RBI, in its First Quarter Review of Monetary Policy on July 30, left all key interest rates unchanged.

The repo rate, at which the RBI lends to the system, was kept at 7.25 percent and the cash reserve ratio, the amount of deposits banks park with it, was unchanged at 4 percent.

The RBI is scheduled to hold its next mid?quarter review of policy on September 18.

RBI governor Raghuram Rajan’s report to be lynchpin of financial sector reforms

NEW DELHI: Next up on India's reforms agenda is the financial sector. After retail, aviation and fuel prices, the government is getting ready to roll out the long-overdue, next generation of measures aimed at freeing up the country's financial sector and a framework for this could be in place as early as next month.

The plan to kick off the process, stalled for many years, was discussed in the run-up to the appointment of Raghuram Rajan as Reserve Bank of India governor and has the highest political sanction. The reforms blueprint will lean heavily on the two high-profile reports already available with the government, one of them authored by Rajan himself.

"We will have a framework ready soon and will take it to the Financial Stability and Development Council (FSDC) for deliberation before the measures are rolled out," a senior finance ministry official told ET. 

Financial sector reforms took a back seat after the global meltdown in the belief that India's conservatism had saved it from the worst effects, which which wasn't the right lesson to draw from the experience, Rajan had said in his 2008 report on financial sector reforms, 'A Hundred Small Steps'.

The policy paralysis that gripped the government in the first three years of the UPA-2 administration (2009-12) also contributed to the lack of progress on changes in the sector even as the government swore on the need to improve financial inclusion.

P Chidambaram's return as the finance minister in August last year was followed by a series of measures to break the policy logjam — fuel price reforms, the opening up of multi-brand retail, the establishment of the Cabinet Committee on Investment. It's now the turn of the financial sector. "The idea is to pick out 10-12 recommendations that could be taken up," the official added.

Drawing up the blueprint for change shouldn't be too onerous as two committees have conducted an exhaustive study of what needs to be done.

The High-Powered Expert Committee (HPEC) on making Mumbai an international financial centre called in 2007 for "deregulating, liberalising and globalising, all parts of the Indian financial system at a much faster rate".

Rajan's 2008 report cited above spoke of the "need to deregulate certain areas of the financial sector" and "focus on creating necessary institutions, and closing important gaps in regulation".

The Reserve Bank has sought suggestions on the banking structure in India in response to a discussion paper released last month. That could yield more ideas for the reforms exercise.

The Rajan committee had suggested more small private banks, disinvestment in small, underperforming state-run banks, the freeing of branch licensing rules, and the greater participation of foreigners in Indian financial markets.

Rajan, reputed as one of the few who warned about trouble ahead of the 2008 financial crisis, has already set the ball rolling in a way with a flurry of announcements on the day he took over as the RBI governor — September 4. He also said that new bank licences could be issued in January. India had first raised the prospect of new banks in 2010. Financial sector reforms are badly needed, experts said.

"This is good news... financial sector reforms in India are long overdue," said Jahangir Aziz, senior Asia economist and India chief economist at JPMorgan Chase. The "past five years we did not touch anything for the fear of doing something unintended".

Aziz also cited the widespread belief in India that the country was ring-fenced in 2008 by the restrictions and controls it had in place and said there had been no empirical study of the cost that taxpayers had to bear.

India's interest rates shot up to among the highest in emerging market economies after the crisis, besides which RBI's foreign exchange losses have been substantial, he said. Even when it comes to financial inclusion, competition is needed to ensure that it happens, he said.

Rupee climbs 138 paise, Sensex gains over 450 points as Rajan sparks reform hopes Sensex Blue chip shares, especially banks, jumped with NSE bank index surging as much as 9.4 per cent.

MUMBAI: The rupee on Thursday strengthened by hefty 138 paise to trade at 65.69 against the dollar at the Interbank Foreign Exchange market after fresh measures by the RBI to stem the currency's slide.

The rupee had settled at 67.07 against the dollar on Wednesday, up by 56 paise over the previous day's close.

Traders said dollar selling by exporters and banks and fresh measures announced by new RBI governor Raghuram Rajan to curb the rupee's slide helped domestic currency recover.

The dollar's weakness against other currencies overseas also supported the rupee's sentiment, they said.

Meanwhile, stock markets were up by over 2 per cent in early trade.

The BSE benchmark index soared by 488 points to 19,055.74, while National Stock Exchange's Nifty rose by 153 points to 5,601.90 in opening trade.

Banking, realty, capital goods and consumer durables stocks were leading gainers.

The new RBI governor on Wednesday announced measures, such as liberalisation of the financial market by enhancing the limits for exporters to re-book cancelled forward exchange contracts and opening a special concessional window for swapping foreign currency non-resident (FCNR) deposits and dollar funds, to support the rupee.

In the Asian region, Hong Kong's Hang Seng index rose by 0.95 per cent, while Japan's Nikkei was up by 0.61 per cent in early trade.

The US Dow Jones Industrial Average ended 0.65 per cent higher on Wednesday.

Raghuram Rajan unveils big initial package, promises more Mumbai: New RBI Governor Raghuram Rajan Wednesday came out with a slew of measures, including more trade settlement in rupees to rescue the battered financial markets and hinted at a shift in focus from inflation control, doggedly pursued by his predecessor, to boosting growth. Shortly after he took over as the 23rd Governor of the central bank, Rajan, 50, addressed the media with a prepared statement in which he laid out a detailed road map for his innings in the short term, which he called a "big initial package." He also rescheduled by a few days the date for his much-anticipated first monetary policy statement to September 20. The new Governor set up a number of committees for revising and strengthening monetary policy framework, financial stability, financial inclusion, NPAs and an outside panel of experts headed by former Governor Bimal Jalan to screen applications for new bank licenses. Rajan said the new bank licences will be issued around January next year. Apparently reflecting a shift in the approach from his predecessor D Subbarao, who had serious differences with the government of late, Rajan said the primary role of the bank is monetary stability to sustain confidence in the value of the rupee. "Ultimately, this means low and stable expectations of inflation, whether that inflation stems from domestic sources or from changes in the value of the currency, from supply constraints or demand pressures. "...But we have two other important mandates; inclusive growth and development, as well as financial stability," he said. Asked about Subbarao's focus on targeting inflation, Rajan said he would reserve his comments till September 20. Rajan said the bunch of reforms has been unveiled today to enhance growth. "I think there are so many low-hanging fruits in the economy that if we only pluck them we can accelerate growth substantially." The former IMF chief economist and economic advisor to the Finance Ministry said there were some positive developments in the economy which will help to boost growth. The measures disclosed to support the rupee include liberalisation of the financial market by enhancing the limits for exporters to re-book cancelled forward exchange contracts and opening a special concessional window for swapping foreign currency non-resident (FCNR) deposits and dollar funds. "My sense is that we certainly don't need false optimism. But I think there is good reason to believe that in the medium run, the future of the country is strong," he said. Asked about Standard and Poor's downgrade threat, he said the international rating agency "nearly reiterated what has been its long standing claim about there being one-third possibility of a rating downgrade...It is not something new. So I won't read too much into the statement." The measures announced by Rajan include enhancing the re-booking limit on cancelled forward exchange contracts for exporters to 50 percent, extending a similar facility to importers and introducing cash settlement in 10-year interest rate future contracts to develop the money and G-sec markets. Rajan indicated the RBI will take steps to reduce the Statutory Liquidity Ratio (SLR) and introduce greater regulatory and supervisory control over the domestic operations of foreign banks. He promised to give freedom to banks to open branches without prior RBI permission. The new RBI chief also said he will steadily liberalise the markets and lift restrictions on investment and position-taking, together with SEBI, and will examine introduction of interest rate futures on overnight interest rates. While the RBI has enhanced the re-booking limit on cancelled forward currency contracts to 50 percent for exporters, importers will be allowed a 25 percent limit. The central bank will push for more trade settlements in rupees and open up the financial markets for those who receive rupees to invest it back in. Rajan said the RBI will raise the overseas borrowing limit of 50 percent of unimpaired Tier I capital to 100 percent for banks and will introduce cash-settled 10-year interest rate future contracts. The central bank will also examine introduction of interest rate futures on overnight interest rates; steadily but surely liberalise markets, restrictions on investments and position-taking; and issue inflation-indexed savings certificates tied to CPI to retail investors by end November. He stressed on the need to reduce the requirement for banks to invest in government securities in a calibrated way and will push foreign banks to set up wholly owned subsidiaries. Rajan proposes to collect credit data, examine large common exposures among banks and encourage banks to clean up their balance sheets. Referring to the announcements, he said, "This is a part of my short-term time-table for the Reserve Bank. It involves considerable change, and change is risky. But as India develops, not changing is even riskier. We have to keep what is good about our system, of which there is a tremendous amount, even while acting differently where warranted." He also announced a committee headed by RBI Deputy Governor Urjit Patel to strengthen monetary policy framework. The panel will submit its report in three months. Rajan said that a committee under former Governor Bimal Jalan would screen bank license applicants after an initial compilation of applications by the RBI staff. He said new bank licences will be announced "within, or soon after, the term of Deputy Governor Anand Sinha, who has been shepherding the process. His term expires in January 2014." Financial sector expert Nachiket Mor will head a panel to suggest steps to promote financial inclusion. Another committee, to be headed by Deputy Governor K C Chakrabarty, will take a close look at rising NPAs and suggest steps to improve the recovery of bad debts. "While the resumption of stalled projects and stronger growth will alleviate some of the banking system difficulties, we will encourage banks to clean up their balance sheets and commit to a capital-raising program where necessary. The bad loan problem is not alarming yet, but it will only fester and grow if left unaddressed," Rajan said. Stressing that India is a fundamentally sound economy with a bright future, the new RBI chief said, "Our task today is to build a bridge to the future, over the stormy waves produced by global financial markets. I have every confidence we will succeed in doing that."

Mumbai: New RBI Governor Raghuram Rajan Wednesday came out with a slew of measures, including more trade settlement in rupees to rescue the battered financial markets and hinted at a shift in focus from inflation control, doggedly pursued by his predecessor, to boosting growth.

Shortly after he took over as the 23rd Governor of the central bank, Rajan, 50, addressed the media with a prepared statement in which he laid out a detailed road map for his innings in the short term, which he called a "big initial package."

He also rescheduled by a few days the date for his much-anticipated first monetary policy statement to September 20.

The new Governor set up a number of committees for revising and strengthening monetary policy framework, financial stability, financial inclusion, NPAs and an outside panel of experts headed by former Governor Bimal Jalan to screen applications for new bank licenses.

Rajan said the new bank licences will be issued around January next year.

Apparently reflecting a shift in the approach from his predecessor D Subbarao, who had serious differences with the government of late, Rajan said the primary role of the bank is monetary stability to sustain confidence in the value of the rupee.

"Ultimately, this means low and stable expectations of inflation, whether that inflation stems from domestic sources or from changes in the value of the currency, from supply constraints or demand pressures.

"...But we have two other important mandates; inclusive growth and development, as well as financial stability," he said.

Asked about Subbarao's focus on targeting inflation, Rajan said he would reserve his comments till September 20.

Rajan said the bunch of reforms has been unveiled today to enhance growth.

"I think there are so many low-hanging fruits in the economy that if we only pluck them we can accelerate growth substantially."

The former IMF chief economist and economic advisor to the Finance Ministry said there were some positive developments in the economy which will help to boost growth.

The measures disclosed to support the rupee include liberalisation of the financial market by enhancing the limits for exporters to re-book cancelled forward exchange contracts and opening a special concessional window for swapping foreign currency non-resident (FCNR) deposits and dollar funds.

"My sense is that we certainly don't need false optimism. But I think there is good reason to believe that in the medium run, the future of the country is strong," he said.

Asked about Standard and Poor's downgrade threat, he said the international rating agency "nearly reiterated what has been its long standing claim about there being one-third possibility of a rating downgrade...It is not something new. So I won't read too much into the statement."

The measures announced by Rajan include enhancing the re-booking limit on cancelled forward exchange contracts for exporters to 50 percent, extending a similar facility to importers and introducing cash settlement in 10-year interest rate future contracts to develop the money and G-sec markets.

Rajan indicated the RBI will take steps to reduce the Statutory Liquidity Ratio (SLR) and introduce greater regulatory and supervisory control over the domestic operations of foreign banks. He promised to give freedom to banks to open branches without prior RBI permission.

The new RBI chief also said he will steadily liberalise the markets and lift restrictions on investment and position-taking, together with SEBI, and will examine introduction of interest rate futures on overnight interest rates.

While the RBI has enhanced the re-booking limit on cancelled forward currency contracts to 50 percent for exporters, importers will be allowed a 25 percent limit.

The central bank will push for more trade settlements in rupees and open up the financial markets for those who receive rupees to invest it back in.

Rajan said the RBI will raise the overseas borrowing limit of 50 percent of unimpaired Tier I capital to 100 percent for banks and will introduce cash-settled 10-year interest rate future contracts.

The central bank will also examine introduction of interest rate futures on overnight interest rates; steadily but surely liberalise markets, restrictions on investments and position-taking; and issue inflation-indexed savings certificates tied to CPI to retail investors by end November.

He stressed on the need to reduce the requirement for banks to invest in government securities in a calibrated way and will push foreign banks to set up wholly owned subsidiaries.

Rajan proposes to collect credit data, examine large common exposures among banks and encourage banks to clean up their balance sheets.

Referring to the announcements, he said, "This is a part of my short-term time-table for the Reserve Bank. It involves considerable change, and change is risky. But as India develops, not changing is even riskier. We have to keep what is good about our system, of which there is a tremendous amount, even while acting differently where warranted."

He also announced a committee headed by RBI Deputy Governor Urjit Patel to strengthen monetary policy framework. The panel will submit its report in three months.

Rajan said that a committee under former Governor Bimal Jalan would screen bank license applicants after an initial compilation of applications by the RBI staff.

He said new bank licences will be announced "within, or soon after, the term of Deputy Governor Anand Sinha, who has been shepherding the process. His term expires in January 2014."

Financial sector expert Nachiket Mor will head a panel to suggest steps to promote financial inclusion. Another committee, to be headed by Deputy Governor K C Chakrabarty, will take a close look at rising NPAs and suggest steps to improve the recovery of bad debts.

"While the resumption of stalled projects and stronger growth will alleviate some of the banking system difficulties, we will encourage banks to clean up their balance sheets and commit to a capital-raising program where necessary. The bad loan problem is not alarming yet, but it will only fester and grow if left unaddressed," Rajan said.

Stressing that India is a fundamentally sound economy with a bright future, the new RBI chief said, "Our task today is to build a bridge to the future, over the stormy waves produced by global financial markets. I have every confidence we will succeed in doing that."

Raghuram Rajan to take over as RBI Governor on Thursday

Get Rs.1.45Crore Pension - Compare to save upto 55%, Free Online Quotes frm 30 Insurer
Policybazaar.com/HDFC_LIC_SBI_Life

Mumbai, Sept 3:  

Raghuram Rajan will take over as the RBI Governor on Thursday. He takes over at a time when the country is battling a rapid fall in the rupee, high inflation, low growth and burgeoning current account deficit.

A former chief economist with the International Monetary Fund and economic advisor to the Finance Ministry, 50-year-old Rajan will take over a difficult assignment from Duvvuri Subbarao on his completing five years in Mint Road.

Rajan has already said that he has no magic wand to face the challenge before the country but would deal with them one at a time.

The Government, which was at the receiving end of Subbarao’s unrelenting focus on inflation control at the cost of low interest rates, would hope that the new incumbent would reverse some of those policies.

“We have enough ideas. It is not just the currency, it is financial inclusion, it is growth. I think there is a lot to do. There are challenges in the economy... These things are not going to be overcome overnight. There is no magic wand.

But there are undoubtedly solutions to many of the problems that the RBI can tackle and the job is to go ahead and do it.

“We will do it one step at a time. Make sure that it progresses every day,” he told reporters yesterday on his last day of office at the Finance Ministry.

Rajan, who was appointed as the Chief Economic Advisor in the Finance Ministry in August last year, brings to the RBI a vast experience gained at the IMF and during the brief stint in the government.

Known for his frank views, Rajan, who will be the 23rd Governor of the Reserve Bank of India (RBI), was acclaimed for predicting the 2008 global financial crisis. In 2005, he had delivered a lecture critical of the financial sector, arguing that a financial disaster might be looming.

HSBC cuts FY14 growth forecast to 4%

HSBC on Monday lowered India's GDP forecast for the current financial year to 4 per cent from 5.5 per cent earlier saying economic uncertainty is likely to weigh on the growth forecast in the coming months. According to the global financial services major, growth is likely to slow in the near term due to tighter financial conditions and higher macroeconomic uncertainty.
"In light of this, we revise down our GDP growth forecasts to 4.0 per cent (5.5 per cent) for FY2014 and to 5.5 per cent (from 6.6 per cent) for FY2015," HSBC said in a research note on Monday.
According to official figures, the country's economic growth in the April-June quarter slid to 4.4 per cent, the lowest in past several years, pulled down by drop in mining and manufacturing output.
This prompted the industry to demand co-ordinated action by the government and the RBI to boost the economy.
HSBC, however, believes the slowdown has further to go, saying leading indicators suggest the country's growth momentum could ease further during the July-September quarter in both manufacturing and services sector.
Moreover, factors like RBI's currency stabilisation measures and heightened macroeconomic uncertainty is making consumers and businesses more cautious about spending, HSBC said.
The pressure on growth momentum is likely to pose greater challenges for policy makers as they try to stabilise the falling currency, which had touched an all time low of 68.80 to dollar on August 28 and is currently hovering around the 66/USD mark in a highly volatile trade.
"In terms of the quarterly profile, we expect growth to slow in the July-September quarter of 2013 and dip below 4 per cent," HSBC said adding that growth will show "faint" signs of recovery during the final quarter of the fiscal year as macroeconomic uncertainties recede somewhat and confidence reluctantly recovers.
Moreover, CCI expedited and other investment projects are likely to slowly kick in around that time, the report said.
According to HSBC, "the outlook for India is still tainted with downside risks given the lingering macroeconomic uncertainties and the possibility that politics could get in the way of meaningful progress on structural reform".