BANKERS DONT SEE MUCH IMPACT

The cost of funds will depend on the cost of deposits. There is a scramble for deposits, which is putting an upward pressure on FD rates. This will lead to an increase in the pricing of loans

TIMES BUSINESS
* THE TIMES OF INDIA, KOLKATA | SATURDAY, SEPTEMBER 21, 2013

My impression is the overall cost of funds for most banks has come down. While the cost of short-term funds will drop, long-term yields may rise. We will wait for a few days before reviewing our rates

Repo rate increase does not impact banks that rely on retail deposits. Other measures will bring down the cost of borrowing in the money markets. A clear picture will emerge after the quarter ends

The 75 bps reduction in the marginal standing facility is a welcome step. Given the amounts being borrowed from RBI, this reduction should offset any increase from the 25 bps repo increase

Moves that improve liquidity can help the industry and lower interest rates. The effect for the industry is more about rates and we have not seen transmission of repo rate cuts in the past

Hopefully, in conjunction with higher exports and forex ows, the sentiment should stabilise, and open the doors for a more growth supportive monetary policy

PRATIP CHAUDHURI | CHAIRMAN, SBI

KEKI MISTRY | VICE-CHAIRMAN & MD, HDFC

S S MUNDRA | CHAIRMAN, BANK OF BARODA

PRAMIT JHAVERI | CEO, CITI INDIA

NAINA LAL KIDWAI | COUNTRY HEAD, HSBC

SUNIL KAUSHAL | REGIONAL CEO, INDIA & SOUTH ASIA, STANDARD CHARTERED

On Sept 4, when he took charge at RBI, Raghuram Rajan said, Some of the actions I take will not be popular. The governorship of the central bank is not meant to win one votes or Facebook likes. But I hope to do the right thing, no matter what the criticism On Friday, he took the surprising, and unpopular, decision to hike the key policy rate, sending the rupee and the sensex skidding

Rajan resists govt pressure on rates

Like His Predecessor Subbarao, Inflation Remains Governors Key Worry
Surojit Gupta
TNN

DECODING RAJANOMICS

aghuram Rajan has made it clear that while rupee fears have ebbed, inflation worries continue to override central banks growth concerns

New Delhi: A large chunk of RBIs monetary policy statement on Friday sounded familiar. For now, RBI governor Raghruram Rajan has decided to keep inflation as the centrepiece of his policy the theme his predecessor had adopted despite difference in points of view with the finance ministry over interest rates. Rajan used his maiden policy review to caution about the inflationary pressures present in the economy. While a large section of the financial market and economists had expected Rajan to hold rates, the former IMF chief economist demon-

strated that he is ready to undertake unpopular steps to place the economy on a firm footing. His predecessor Duvvuri Subbarao had articulated the problem of stubborn inflation in several of his policy statements. He had also resisted strong pressure from North Block to reduce rates, highlighting price pressure threats. On Friday, Rajan might have disappointed his former colleagues in North Block by raising the repo rate. Finance minister P Chidambaram has been canvassing for enlarging the central banks mandate. The mandate of price stability must be seen as part of the larger mandate and the

MARKET WATCH
INDICES BULLION
SENSEX: 20,264 M 383 GOLD/10 GM: 30,260 NIFTY: 6,012 M 103 SILVER/1 KG: 51,595

TOP GAINERS
TV18: 22 L 2 SHRIRAM CI: 1,081 L 79

EXCHANGE
$: 62.28 84.33 : 99.85 SG$: 49.92

larger mandate is growth and employment, he had said in Rajya Sabha last month. But Rajan flagged the pressing problem of inflation, stating that the wholesale price inflation would be higher than the initial projection. However, the current assessment is that in the absence of an appropriate policy response, WPI inflation will be higher

than initially projected over the rest of the year, the RBI policy statement said. Inflation has remained a stubborn problem for the government and RBI. Food prices have spiralled and onion prices have become unaffordable for a large section of society. Latest data shows food prices rose 18% year-onyear, while retail inflation has hovered around double digits for the past one year. An occasional dip in the inflation numbers have often prompted policymakers to predict that the price pressure would ease as supplies rise. But that has not happened. Even now policymakers are expecting that a bumper harvest on the back of a

robust monsoon will help ease food price pressures. But Rajan is willing to wait for that evidence to emerge without taking any risks. Although better prospects of a robust kharif harvest will lead to some moderation in CPI inflation, there is no room for complacency, the policy statement said. And, he made his intention clear on inflation. You always have to balance the state of the economy with your fight against inflation. What I would like to see is that we achieve, certainly, the RBIs target of trying to bring WPI inflation below 5%. We want to fight against inflation and well bring inflation down.

MEASURE | The RBI has raised repo rate also known as the policy rate by 25 basis points (or 0.25% percentage points). IMPACT | Repo is a facility under which a bank borrows
from the RBI by pledging government securities. Since the RBI is the lender of last resort, the loans it provides are only to meet day-to-day liquidity mismatches; therefore, the impact of a repo hike on cost of borrowing is marginal. However, the reverse repo rate the rate at which banks park their surplus funds with the RBI is also linked to the repo rate. Since banks have the option to either lend to or borrow from the RBI if rates rise or fall too POLICY RATES (%) sharply, the 11 repo and re10 verse repo rates 9 act as a corridor Repo 8 for short-term Rev repo rates. RBIs 7 25-bp increase 6 in the repo rate 5 has moved this 4 June 16, 11 corridor up from Sep 20, 13 6.25-7.25% to 6.5-7.5%. The hike is aimed at curbing inflation and retaining the purchasing power of the rupee. Although its also meant to support the rupee, it could reduce consumer demand and stifle growth. As a result, the sensex closed 383 points lower at 20,264. Since the exchange rate is also impacted by capital flows, fears of FIIs staying away led to the rupee closing 50 paise lower at 62.28 to a dollar compared to Thursdays 61.78.

MEASURE | The RBI cuts the marginal standing facility (MSF) rate by 75 basis points from 10.25% to 9.5%. IMPACT | In addition to lending to banks under the repo facility, the RBI has an emergency window for lending to those banks which do not have surplus government securities or have exhausted their borrowing limits. As part of its measures to tighten liquidity and protect the rupee, the RBI had capped the amount that banks could borrow under repo at 0.5% of their deposits. Once this limit was exhausted, they were forced to borrow under the MSF. In recent weeks, banks largely used the MSF window to borrow funds, as a result of which the cost of short-term funds shot up to 10.25%, the MSF rate. With the 75-bp reduction in the MSF rate, the cost of overnight borrowing has come down to 9.5%.
should be maintained on a daily basis, the RBI had indirectly compelled banks to over-provide, thus creating a liquidity shortage. The move to reduce the daily CRR requirement to 95% from 99% will provide banks relief on liquidity.

7.5

7.5

6.5

6.5

RBI chiefs rate googly stumps Dalal Street

TIMES NEWS NETWORK

We need bullet-proof balance sheet

TIMES NEWS NETWORK

BI governor Raghuram Rajan has proved that he is not a cheerleader for the markets. In an interaction with the media, he spoke about how there is no room for complacency .

power, the kharief crop and the sentiment in rural areas will be an important factor.

On the external situation

I think on the external front the noises on Syria are quite comforting. The worry was that if there was action on Syria it could push up the price of oil considerably even if for a temporary period. It would have been painful for our economy . So I am glad that negotiation has taken over from threat of action. I would see the growth that is picking up in Europe and in Japan as very positive. It is helping us improve our exports and helping us shrink our current account deficit at a faster pace than people thought initially .

MEASURE | The RBI relaxes daily CRR requirement from 99% to 95%. IMPACT | Banks are required to maintain a portion of their deposits in the form of cash reserve ratio (CRR) with the RBI.

On interest rates
The MSF cut we have done affects a significant quantum of funds that are borrowed from markets and with the 75basis points cut there is a significant reduction in cost of funding. Set against that the 25-basis point increase in the repo rate is marginal. We have actually lowered the net cost of borrowing.

Mumbai: A rate-hike googly from RBI governor Raghuram Rajan spooked Dalal Street on Friday with the sensex closing 383 points down at 20,264 with banking and realty stocks leading the slide. Soon after the RBI decision was made public, the index fell nearly 600 points to an intra-day low at 20,051 but recovered in late trades as foreign funds continued their buying. The days slide, however, left investors poorer by Rs 75,000 crore with BSEs market capitalization now at Rs 64.7 lakh crore. The shocker from RBIraising repo rate (the rate of interest at which banks borrow money from the central bank) from 7.25% per annum to 7.50%came against market expectations that Rajan would keep rates unchanged. The unexpected hike aggravated the slide in the market because on Thursday , the sensex had rallied nearly 700 points after the US Federal Reserve decided to continue with its quantitative easing programme, popularly called QE3. Yesterdays euphoria in the stock market has gone, said Gautam Trivedi, MD & head of equities-India, Religare Capital Markets. For the RBI, the focus clearly is on now to combat inflation. The days recovery from its early lows was on the back of FII buying, institutional dealers said. BSE data showed that FII net inflow for the session was Rs 946 crore, although domestic funds were net sellers at Rs 790 crore. In two sessions, FIIs have net bought stocks worth nearly Rs 4,500 crore, which, in addition to the stock market has helped the rupee too, they said. The days losses were led by banking and real estate stocks, mainly because of fears that the RBI decision could lead to higher rates in the economy which is not favourable to a lenders business.

On growth v/s inflation

What I would like to see is that we achieve the RBI target of trying to bring WPI inflation below 5%. But the pace at which that is done is to some extent going to be calibrated to economic conditions. We want to fight against inflation, but it is not a take-noprisoners stance. We have to look at what we believe inflation to be in the longer horizon six to 12 months ahead. We have to look through temporary changes in inflation which will be corrected through crops coming in and so on. I do not think one particular inflation reading will affect our stance. From a growth perspective there are other more important factors that are going to come into the economy over time, including project completion, power generation, the availability of

Traditionally, the CRR is calculated on the average fortnightly balance and banks have had the flexibility to go down on a particular day as long as they made up for it during the course of the fortnight. But by insisting that 99% of CRR requirement

WHATS IN STORE
ACTION PLAN WHAT IT MEANS
Move for calibrated withdrawal of liquidity Cost of funds will come down for banks and bond tightening measures markets will revive The gap between repo and MSF rates will be The move hints at further hikes in repo rate reduced to 100 basis points CPI inflation-indexed retail bonds will have This will provide investors an alternative to gold the option of lump sum or indexed payments as a hedge against inflation Possible relaxation in norms for FII investment in Move to include India in global bond indices government bonds Banks have been asked to revise rates The rates may rise in coming quarters in line with the cost of funds The RBI will calibrate inflation target The central bank may cut rates if the growth according to the state of economy slows despite inflation continuing to be high No fresh measures to tackle tapering of QE3 Existing measures enough to fund the current by US Federal Reserve in future account deficit

On capping overseas investments

It was a precautionary measure to prevent huge outflows. The moment you say capital controls you are putting us into a trap. We liberalised when we had money pouring in as we did not want to create problems here. We contracted when there was money pouring out. The next time money starts pouring in we will be happy to liberalize again.

On tapering
We have prepared for the ta-

pering, those measures will play out. Till Thursday , we had received $466 million through the FCNR(B) and $917 million through the swap facility to a total of nearly $1.4 billion. I dont think we need to contemplate a whole new set of measures now that the tapering has been postponed. Let us remember that the postponement of tapering is only that, a postponement. We must use this time to create a bullet-proof national balance sheet and growth agenda, which creates confidence in citizens and investors alike.
&

On current account deficit

We can finance this years current account deficit without a substantial drawdown from reserves. If all goes well, there will be an accretion to reserves. If that accretion to reserves looks like it is overwhelming us, we will take appropriate decision at that time.

LIKE THAT ONLY

JUG SURAIYA

AJIT NINAN

Re falls 50p to 62.28 on RBI move

Mumbai: The rupee fell 50 paise to close at 62.28 against the dollar on Friday , in line with a sharp decline in local stocks, after a surprise hike in the repo rate by the Reserve Bank of India. Governor Raghuram Rajan also partially eased liquidity-tightening measures that were introduced in July to curb volatility in the currency market. Fresh dollar demand from importers and some banks put pressure on the rupee, while heavy equity investments by foreign institutions restricted the fall to some extent. AGENCIES

Guvs hawkish inflation stance comes as complete surprise

Continued from P 1 he sensex fell by over 600 points within minutes of the policy being announced on fears that a growth-starved economy might turn unattractive for foreigners. Fearing adrying-up of dollar inflows, the rupee closed 50 paise lower at 62.28. However, with FIIs resuming purchases later in the day , the sensex recovered to close 383 points lower at 20,264. For those with home and auto loans, the RBIs decision is likely to be bad news because EMIs (equated monthly instalments) are expected to rise. Although Rajan said that, taken together, RBIs measures were cost-neutral for banks, Pratip Chaudhuri, chairman of State Bank of India, the countrys largest bank, said the bank would need to hike deposit and lending rates substantially . A number of other bankers, too, indicated it was only a matter of time before interest rates were raised. The classic dilemma that central bankers around the world face is between promoting economic growth and controlling inflationand Rajans action on Friday indicated that for him inflation is top-of-agenda, although he denied he

was trading off one for the other. His predecessor, D Subbaraowho like Rajan moved from the finance ministry (he was finance secretary , Rajan chief economic adviser) to Mumbai to become RBI governorwas the target of repeated barbs from his erstwhile bosses and colleagues at North Block for thwarting growth by his conservatism and his reluctance to ease up on interest rates and liquidity . Rajan has done a Subbarao, in a manner of speaking, and theres speculation within the financial community as to how P Chidambaram will react. Rajans hawkish stance against inflation came as a complete surprise to the bond market as well. The yield on the benchmark 10-year bond jumped 39 basis points to 8.58%. The new governor said his measures were not a reaction to recent headline inflation numbersWPI is at a six-month high of 6.10%but were targeting long-term prices; he made it clear that there was no room for complacency . What we have to look at is what we believe inflation to be in the longer horizonsix to twelve months ahead. We have to look through temporary changes in inflation which will be corrected through crops coming in and so on, he said.

Govt may review 5/20 rule to let more desi carriers fly abroad
Saurabh Sinha
TNN

Tata SIA Airlines

New Delhi: The Tata Group has applied to register its JV with Singapore Airlines as Tata SIA Airlines Ltd with the Registrar of Companies through submission of form 1A, taking the first step towards incorporation of a new company. Once this is done, the entity will have to give other documents like Article of Association, composition of companys board of directors, share capital and business areas. TNN

New Delhi: Indias cashstrapped aviation sector is celebrating an early Diwali this year with the arrival of deep pocket players like Singapore Airlines, Etihad and AirAsia on the scene. This sudden euphoria may see the government reviewing the current rule that an Indian airline must complete five years and have a fleet of at least 20 aircraft to start international flights. So far, low-cost carrier GoAir has applied for relaxation of the norm as it is over five years old but does not have 20 aircraft in its fleet. While we were favorably inclined to lower the 20-aircraft rule and retain the five-year bit, no final view has been taken so far. If the upcoming airlines also seek a review of the policy , we may have a comprehensive relook, said

sources. AirAsia chief Tony Fernandes, who has tied up with Tata Sons, to launch a budget airline that could take wings this year itself, has already lambasted the existing policy . These are bizarre rules ... that you cant fly abroad before five years and 20 aircraft (fleet) ... That rule

makes no sense. It is a negative for the Indian airlines. I, as a one-plane airline in Malaysia, can fly to India. India is the only country which has such a rule, he had said in Delhi in July . While Indian carriers say this rule must continue as they complied with them before beginning international flights, the airport managements here favour a change. A senior Delhi airport official said: Tata-Singapore Airlines JV will be based in Delhi, which is an ideal place for a hub between the East and the West, thanks to its geographical position. If India gets a few strong airlines and Air India succeeds in its growth plans, Delhi and some other metros will become true global hubs. Industry sources expect Tata-Singapore Airlines to launch flights to east coast of North America, using Delhi as ahub.

Tata-SIA venture irks AirAsia JV partners

Saurabh Sinha
TNN

Tough draft norms for exec pay disclosure

New Delhi: In a stringent set of executive pay disclosure norms, the government on Friday proposed to make it mandatory for listed companies to give their rationale behind salaries and hikes given to top management personnel in comparison with business performance. The companies have already been asked to provide a ratio of the top management remuneration and the median employee salary on a yearly basis under the new Companies Act. Releasing detailed draft rules for the provision related to the appointment and remuneration of managerial personnel, the corporate affairs ministry proposed various measures like mandatory disclosure of parameters for any variable component of remuneration availed by the directors. The stringent norms come amid instances of companies, even without adequate profits, doling out exorbitant salaries to their top executives. Companies are also required to explain the relationship between average increase in remuneration and company performance. Further, the comparison of the remuneration of the key managerial personnel against the performance of the company should be disclosed. According to the new rules, the ratio of remuneration of each director to the median compensation of the employees of the company for the financial year needs to be disclosed. Besides, listed firms are required to disclose the percentage increase in remuneration of each director and CEO as well as the percentage rise in the median compensation of employees in the fiscal. AGENCIES

New Delhi: On a day when Union aviation minister Ajit Singh cleared the AirAsia India proposal to launch a lowcost carrier (LCC) in India, cracks appeared in the relationship between its joint venture partners AirAsia, Arun Bhatia and the Tatas. And its the Tata Sons tie-up with Singapore Airlines to launch a fullservice carrier which has reportedly irked Arun Bhatia of Telestra Tradeplace, who is among the three partners in the airline venture. Bhatia, who has a 21% stake in AirAsia India, has told ET Now that it was unethical on the part of the Tatas not to keep the partners informed about their proposed full-service venture with Singapore Airlines (SIA). The ET Now re-

port said that Bhatia was willing to buy out Tata Sons 30% stake in AirAsia India, if offered. The Malaysian LCC has a 49% stake in the budget airline that is expected to be launched by the year-end. Bhatia did not respond to TOIs calls on the matter. The Air Asia file will now be sent to DGCA for licence is-

UNETHICAL?
suance, a mere formality . I have approved their case today , Ajit Singh told TOI on Friday night, a day after the Tatas and SIA announced their deal. Bhatia is expected to raise the Tata-SIA deal at AirAsia Indias board meet on September 28. The Tatas have inked two JVs for airlines one with Singapore Airlines for a full-

service venture and another with AirAsia and Telestra Tradeplace for a budget airline in India. Bhatia was reported by ET Now as saying that this will end up hurting business interests of one of the two airlines. AirAsia chief Tony Fernandes, a compulsive tweeter, has maintained silence on the Tatas latest announcement. Industry sources say the Malaysian LCC may not have taken the Tatas fullservice deal favorably . Fernandes was aiming for a year-end commencement of services with its base in Chennai. The airline had readied human resource and infrastructure to start operations before November. The airline has recruited its top management staff, flight attendants and has also set up a small office at the Chennai airport.