RBI holds rates, lowers growth forecast, raises inflation estimate 10-05

RBI’s six-member monetary policy committee keeps interest rates unchanged at 6% because it anticipates upside risks to retail inflation.

The Reserve Bank of India (RBI) on Wednesday left interest rates unchanged, citing upside risks to inflation. The central bank lowered its economic growth forecast for the current year and raised its inflation estimate.

RBI’s six-member monetary policy committee (MPC) kept the repurchase or repo rate—the rate at which the central bank infuses liquidity in the banking system by lending to banks—unchanged at 6%. It maintained its neutral policy stance, suggesting that rate cuts in the short term could not be taken for granted.

The decision to hold rates was not unanimous. Ravindra Dholakia, one of the three external members of the MPC, suggested lowering the repo rate by at least 25 basis points (bps). One basis point is one-hundredth of a percentage point.

But the rate-setting committee listed several upside risks to inflation such as farm loan waivers, states’ implementation of pay commission allowances and price revisions following implementation of the goods and services tax (GST). It raised its inflation target to 4.2-4.6% for the second half of this fiscal year from 4-4.5%.

RBI governor Urjit Patel said rate action will depend on coming data and on the inflation trajectory over the next six to seven months.

“The tone of the policy was neutral with adequate highlight on upside inflation risks. We maintain our expectation that MPC will remain on hold as it continues to watch out for evolving growth-inflation dynamics,” said Madhavi Arora, economist at Kotak Mahindra Bank Ltd.

Since the last policy meeting in August, when RBI cut the repo rate by 25 bps), consumer price index-based (CPI-based) inflation accelerated by nearly 2 percentage points to 3.36% in that same month, data released in September showed. The central bank has a medium-term target of 4% for CPI inflation
“The possibility of fiscal slippages may add to this momentum in the future,” the committee said. Fiscal slippages refer to the government likely overshooting its deficit targets.

The cental bank’s warning comes at a time when there are calls for a fiscal stimulus to boost growth. Economic growth decelerated to 5.7% in the quarter ended June, the slowest pace in three years, as it felt the lingering impact of the November invalidation of high-value banknotes. Production cuts and destocking ahead of the 1 July implementation of GST also contributed to the slowdown.

The central bank lowered its fiscal 2018 projection for growth in gross value added (GVA), a measure of economic output, to 6.7% from 7.3%, citing adverse shocks, especially to the manufacturing sector, from the implementation of GST.

“This may further delay the revival of investment activity, which is already hampered by stressed balance sheets of banks and corporates,” said the MPC statement.

Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, said that if second-quarter GDP growth declines and inflation does not quicken sharply, there will be room for rate cuts towards the end of the fiscal year.

RBI’s revised growth projections envisage an acceleration in GVA growth to 7.1% and 7.7% in the December and March quarters respectively. RBI governor Patel also pointed to a “possibility that the cyclical upturn will happen in the next two quarters”.

The MPC also said recapitalizing public sector banks adequately will ensure that credit flows to productive sectors are not impeded and growth impulses are not restrained.

Separately, RBI reduced the statutory liquidity ratio (SLR) by 50 bps to 19.50%, effective from 4 October. SLR is the minimum proportion of deposits that banks have to invest in government securities.

This move is a part of a transition to the so-called liquidity coverage ratio (LCR), which is part of the Basel III capital framework, of 100% by January 2019. LCR is the proportion of liquid assets required to be held by financial institutions.

On Wednesday, bond yields closed higher as the market saw a lower possibility of rate cut in the near term. The yield on the benchmark 10-year government bond rose by 5 bps to close at 6.703%. Share indices also ended higher, with the Sensex gaining 0.55% to close at 31,671.71. The rupee rose 0.8%, its biggest gain in seven months, on heavy dollar sales following the policy announcement. It closed at 65.01 against the dollar.

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99% of banned notes returned after demonetisation: RBI annual report 09-10

The Reserve Bank of India (RBI) on Wednesday said it estimated that people had returned almost 99 per cent of the scrapped Rs 1,000 and Rs 500 notes after demonetisation, effectively putting a question mark over the government gaining handsomely by the unreturned money turning into a special dividend by the central bank.

In its annual report, the RBI also said the face value of fake high-value notes was minuscule at Rs 41 crore.

The central bank said people had returned Rs 15.28 lakh crore of the Rs 15.44 lakh crore banned currency, or 98.96 per cent of the scrapped Rs 500 and Rs 1,000 notes, to the banking system.

“Subject to future corrections based on the verification process when completed, the estimated value of Specified Bank Notes received as on June 30, 2017, is Rs 15.28 lakh crore,” the annual report said. 

The old notes came to the RBI either directly or from bank branches and post offices through the currency chest mechanism.

Some of these notes were still lying in currency chests, the RBI said, adding it could only estimate the value of the notes and could not provide an accurate figure.

The RBI data showed the unreturned Rs 1,000 notes in March 2017 amounted to Rs 8,900 crore. The segregation of old and new Rs 500 notes were not that clear. The RBI incurred a cost of Rs 7,965 crore in printing notes in 2016-17, against Rs 3,421 crore incurred in the previous year. The central bank also increased its provisions by over Rs 13,000 crore in order to boost its contingency reserves, a practice it was adopting after three financial years.

The net effect was that the dividend paid to the government was halved to Rs 30,659 crore in the July-June financial year 2016-17. Prime Minister Narendra Modi had on November 8, 2016, announced demonetisation in a televised address, rendering 86 per cent of the currency in circulation invalid. The nation subsequently queued up at bank branches and automated teller machines as the central bank struggled to supply new notes. About Rs 15.3 lakh crore of notes are in circulation in June, against the pre-demonetisation level of Rs 17.9 lakh crore. Economists said the government may have overestimated the extent of black money in the system, but increased tax collection should be counted as a long-term gain.

“Data analytics of deposits have thrown up unusual patterns. Previously we did not know who held black money. Now we do, and this is a clear gain,” said the chief economist with a private bank. The number of suspicious transaction reports by banking system increased by 345 per cent, which could possibly lead to an increase in future tax revenues. Coupled with the goods and services tax, this will help in improving tax realisation,” said Soumya Kanti Ghosh, group chief economist, State Bank of India.

The total number of suspicious transactions detected in 2016-17 was 473,003, up from 106,273 in 2015-16 across banks, other financial institutions and intermediaries . In banks alone, the number of suspicious transactions detected was 361,214, against 61,361 a year ago.

This is the first time since 1952-53 that reserve money for the whole year contracted, by 13 per cent. The RBI incurred a loss in seigniorage, the profit made by the central bank on account of currency issuance.A committee headed by the RBI board member Y H Malegam had suggested the central bank did not need to build additional reserves for three years starting 2012-13.

This being the fourth financial year, the RBI increased its provisions to Rs 13,190 crore and allocated them in various reserves. “In value terms, the share of Rs 500 and above banknotes, which had together accounted for 86.4 per cent of the total value of banknotes in circulation at end-March 2016, stood at 73.4 per cent at end-March 2017. The share of newly introduced Rs 2,000 banknotes in the total value of banknotes in circulation was 50.2 per cent at end-March 2017,” the RBI said. 

In volume terms, Rs 10 and Rs 100 banknotes constituted 62 per cent of the total banknotes in circulation at end-March 2017, against 53.0 per cent at end-March 2016.

The RBI said  processing and destruction of old Rs 500 and Rs 1,000 notes kept in various currency chests and regional offices of the RBI “pose a challenge.”

“In this regard, the agenda for 2017-18 includes the procurement of Currency Verification and Processing System/Shredding and Briquetting Systems.”  The RBI’s agenda also include introduction of new series banknotes in other denominations; procurement of security features; and “introduction of varnished banknotes.”

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Raghuram Rajan breaks silence, says RBI had warned Modi govt against demonetisation 09-03

Raghuram Rajan makes the disclosure in his latest book -- I do what I do – which is a compilation of speeches he delivered on a wide range of issues as the RBI governor.

Former RBI governor Raghuram Rajan has revealed that he did not favour demonetisation as he felt the short term economic costs associated with such a disruptive decision would outweigh any longer term benefits from it.

Rajan makes the disclosure in his latest book – I do what I do – which is a compilation of speeches he delivered on wide range of issues as the RBI governor. Although he maintains the book is not a tell-all, the short introductions and postscripts accompanying the pieces offer fascinating insights into his uneasy relationship and differences with the present government.

“At no point during my term was the RBI asked to make a decision on demonetisation,” Rajan has said, putting to rest speculation that preparations for scrapping high-value banknotes got underway many months before Prime Minister Narendra Modi made the surprise announcement on November 8.

This is the first time the former RBI governor has spoken on demonetisation since demitting office on September 3 last year. Rajan, who now teaches economics at University of Chicago, said he chose not to speak on India for a year because he didn’t want to “intrude on his successor’s initial engagement with the public”.

“I was asked by the government in February 2016 for my view on demonetisation, which I gave orally. Although there might be long-term benefits, I felt the likely short-term economic costs would outweigh them,” Rajan wrote.

“I made these views known in no uncertain terms.”

He didn’t elaborate on the short-term costs or the possible long-term benefits, but as the RBI governor he “felt there were alternatives to achieve the main goals.”

Latest government data showed the November 8 decision to scrap Rs 1,000 and Rs 500 notes, sucking out 86% of cash circulating in the system, has had a lingering impact on the economy.
The growth of GDP slowed sharply from 7% in October-December quarter to 6.1% in January-March and 5.7% in April-June, primarily because of the cash squeeze that weakened consumer spending and discouraged businesses from making new investments.

The government, however, maintains that the economic slowdown has not been entirely because of demonetisation. In an interview to Times of India, published Sunday, Rajan described the deceleration in GDP as “the costs of demonetisation upfront.” 

“Let us not mince words about it – GDP suffered. The estimates I have seen range from 1 to 2 percentage points, and that’s a lot of money – over Rs 2 lakh crore and may be approaching Rs 2.5 lakh crore,” he said in the interview.

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“I think the people who mooted this must have thought some of it would be compensated if money didn’t come back into the system,” he said referring to illegal wealth held in cash.

The government’s expectation was that at least Rs 3 lakh crore worth black money held in cash won’t return, significantly reducing the liability of the central bank and boosting its profits, which could be used for new investments and developmental work.

But RBI data, available now, shows 99% of the high-value notes have returned to the banking system, meaning hoarders of black money found a way to legitimise most of their dodgy cash.
“The fact that 99% has been deposited certainly does suggest that aim (of curbing black money) has not been met,” Rajan said in the interview.

Despite his reservations, Rajan wrote in his book, the RBI was asked to prepare a note, which it did and handed to the government.

The RBI note, he said, “outlined potential costs and benefits of demonetisation, as well as alternatives that could achieve similar aims. If the government, on weighing the pros and cons, still decided to go ahead with demonetisation, the note outlined the preparation that would be needed, and the time that preparation would take.”

“The RBI flagged what would happen if preparation was inadequate,” he wrote.

The government subsequently set up a committee to consider the issue. The central bank was represented on the committee by its deputy governor in charge of currency, Rajan wrote, possibly implying he did not attend these meetings.

The current leadership of the central bank could not be reached for comments on Rajan’s account. Phone calls to the RBI spokesperson went unanswered.

Rajan did not detail the contents of the note RBI had submitted to the government. Modi’s radical move was slammed by the opposition as ill-conceived and poorly executed. It took banks much longer than the government had expected to tide over the cash crisis. Frequent changes in cash withdrawal rules added to chaos and inconvenience that lasted far longer than the 50 days the PM had sought to restore normalcy.

Still, Modi won popular support for his move, winning a landslide victory in crucial elections in Uttar Pradesh. Most people, especially the poor, backed his decision as a frontal attack on black money.

Please also view the video of Dr. Raghuram Rajan's interview with Rajdeep Sardesai. HERE





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Is Demonetisation Illegal? 02-27

Probably the tail end article on Demonetisation in my collection..

Everyone has a right to say and speak his/her mind. And 'every say' needs to be heard.  Agreements. Disagreements not with standing....

Image credit : Shyam's Imagination Library

Upadate: The Lok Sabha on February 8, 2017, passed the Specified Bank Notes (Cessation of
Liabilities) Bill, 2017. Under the new law, holding, transfer and receiving of old 500 and 1000 currency notes is a criminal offence. The bill has thus ended the liability of the RBI and the government on the demonetised currency notes.

At eight O'clock on November 8, 2016 evening, India was wide awake. Reason: In his televised special address, Prime Minister Narendra Modi had unveiled an economic tsunami where 86 per cent of the currency in Rs 500 and Rs 1,000 denominations ceased to be legal tender.

Since that day, the Reserve Bank of India and the Centre have taken many steps to lessen the problems of the common man faced due to demonetisation. At the same time, the Supreme Court has been flooded with public interest litigations (PILs) challenging the constitutional validity of the move. But the million-dollar question is: Is demonetisation legal?

While the matter has been referred to the five-judge constitutional bench, Propguide studies the legal aspects of the order which has hit the country’s booming economy.

Violates the constitutional right to property under Article 300A: The only right ever to be erased from the list of fundamental rights was the Right to Property. It was demoted to a mere constitutional right. So, is cash-rationing a valid restriction on the constitutional right to property? Yes, because cash and bank accounts are property.

In Jayantilal vs RBI, in the context of the 1978 demonetisation, the top court had held that demonetisation is not merely a regulation of property, as the government is presently arguing, but constitutes compulsory acquisition of a "public debt' owed to the bearer of the notes declared illegal. Article 300A states that the state may deprive an individual of property only through 'law', and not by executive notification as the government has done.

Excessive delegation: Section 26(2) of the Reserve Bank of India Act, 1934, says that on the recommendation of the central bank, the central government may pass a notification in the Gazette of India that any series of bank notes cease to be legal tender. Fixing the date from which the demonetisation would come into force is the foundation of section 26(2) and constitutes an "essential law-making function" which cannot be fixed by the central government on behalf of the central bank

Abridgement of fundamental rights: The currency ban had caused a lot of hardships to the common man as many of them could not carry out their business and trade (19(1)(g) and violated the Right of Life (Article 21) of those 100-odd people who died while standing in the long bank queues. While the government is within its right to curtail fundamental rights in the larger public good, it needs to prove that the curbs were 'reasonable'.

Act of Parliament needed: The precedent is that on the last two occasions of demonetisation (1956 and 1978), the law was effected through an ordinance. But, this time the law was effected through a government notification. The rationale is that to have a rule which would have a draconian effect on the lives of people, a notification can't suffice.

Article 19(6) has no significance: The Centre would want to hide behind Article 19(6) of the Constitution but it has no relevance here. Article 19(6) says that nothing in Article 19(1)(g) shall affect the operation of any existing law in so far as it prevents the state from making any law imposing, in the interest of the general public, reasonable restrictions on the exercise of the rights conferred by the sub-clause. But the exception of Article 19(6) is not available to the central government as the notification is beyond "police powers".

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