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Important for Indian govt to heed RBI's message on financial stability, says IMF Chief Economist

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The Indian government must heed the RBI's message on financial stability, IMF's Chief Economist Maurice Obstfeld has said, amidst reports of friction between the central bank and the finance ministry over several issues, including how much capital the apex bank needs.

Addressing a group of journalists here on Sunday, he also said the International Monetary Fund does not want politicians "manipulating" central banks for political ends.

"There is debate over whether it's better for financial stability to be the remit of the central bank or an independent regulator...the UK in 1997, split them, then put them back together again," he said, responding to a specific question on the recent developments in India regarding the RBI and the Government.

"I'm not going to take a position on that...But I think...the central bank does have to be intimately concerned with financial stability to some degree and with the payment system," he added.

"We need to think about what is the best institutional framework in which financial policy can be set with regard to long term stability of the economy, not just to performance over political horizon," Obstfeld said.

"Well, I think they (the RBI and the Indian government) have reached an agreement on how to proceed. I think their (RBI) message that financial stability is important is correct. And it is important for the government to heed that," he added.

In November, the Reserve Bank of India (RBI) board held a marathon meeting amid a rift between the central bank and the government over several issues, including how much capital the RBI needs, lending norms for small and medium enterprises (SMEs) and rules for weak banks.

The Reserve Bank of India (RBI) has massive Rs 9.59 lakh crore reserves and the government, if reports are to be believed, wants the central bank to part with a third of that fund -- an issue which along with easing of norms for weak banks and raising liquidity has brought the two at loggerheads in recently.

Responding to a series of questions on the attempt in certain countries like the US, India, Argentina and Turkey to curb independence of central banks, Obstfeld said central banks' role as a financial regulator is critical. Central banks have "much greater power than you thought". They are fundamentally involved in financial stability policy, in fiscal policy, he said.

Obstfeld said if one looks at the record, the decisions taken by central banks worldwide did stabilise the economy by avoiding much worse losses in output and employment.

However, at the same time, he said, their moves also raised questions of transparency and accountability.

"So, it's not a shock that people raise these questions and it does create a challenge for central banks to be more transparent and to communicate more effectively with a broader public about what they are about and what they are doing," Obstfeld said.

If the central bank cannot communicate more effectively about what it is doing, then there is a possibility of political manipulation where politicians attack the central bank and undermine it, he said.

"Clearly, we don't want politicians manipulating the central bank for political ends," Obstfeld added.

After serving as IMF's Chief Economist for more than three years, 66-year-old Obstfeld is set to retire this month-end and will return to the University of California, Berkley. Gita Gopinath, Indian American economist from the Harvard University, would replace him from the first week of January.

New floating rate for loans: More transparency, but your EMIs will change often too

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From April 2019, interest rates on retail loans, including those given to micro and small enterprises, will have to be linked to external benchmarks and not the marginal cost of funds-based lending rate (MCLR).

For borrowers, the new framework is aimed at making loan pricing more transparent. But it may also mean more volatility in their EMIs (equated monthly installments).

For banks, the change from MCLR to external rates could put some pressure on their margins and may impact efficient management of their assets and liabilities.

RBI announcement

To bring about more transparency in interest rate calculation, the Reserve Bank of India (RBI) has directed banks to change the manner in which they fix lending rates.

So far, banks were using their own cost of funds, which are internal to the banks, to determine the lending rate charged to different categories of borrowers.

Banks will have to now link to any one of these external benchmarks:


  • RBI’s repo rate

  • The yield on the government's 91-day treasury bill

  • The yield on the government's 182-day treasury bill

  • Any other benchmark market interest rate produced by FBIL (Financial Benchmarks India)

Treasury or T-bills are debt instruments issued for one year or less. Their yields fluctuate when they are traded, based on demand and supply.

Final guidelines on the new rates will be released by December end.

Let us now see how this impacts banks and their customers

At a time when banks are already struggling with their asset portfolios, this move may hamper their ability to handle liabilities further.

“This brings in more transparency for customers and banks need to see what is the best external benchmark they can link the loan rates to...We will now have to build margins in the spreads applied to the interest rates,” said PK Gupta, Managing Director - Retail & Digital Banking, State Bank of India (SBI).

To arrive at a final interest rate to offer, banks will add a spread or a margin to whichever benchmark rate they choose for that particular category of borrowers. Once fixed, banks cannot change the spreads for the entire tenure, unless the credit score of the borrower changes.

However, Gupta said this will mostly impact new loans and therefore, will not immediately banks' performance.

"Ultimately, linking to cost of funds will go away and we have to see how much impact it would have on the personal or housing loans," he said.

Transparency and transmission

Earlier, borrowers were offered interest rates linked to benchmark prime lending rates (BPLR) and banks' base rates, and since April 2016, they were offered rates linked to MCLR, which is based on the internal cost of funds of the respective banks.

The external benchmark rates will be more aligned to market rates and therefore, could result in more transmission of RBI's policy rate actions.

Karthik Srinivasan, Group Head- Financial Sector Ratings ICRA said this is expected to improve the transparency in loan pricing by banks as the existing benchmarks, especially the base rate, have not led to a full transmission of the benefits of a decline in cost of funds for banks.

"Furthermore, the profitability of banks may see a higher volatility, unless they are able to raise floating rate deposits linked to external benchmarks," he said.

Frequent EMI changes, less awareness

Although the external benchmark rates are more transparent, they can be volatile, which means customers' EMIs may change more frequently.

“It will also depend on how strong a bank’s treasury book is to decide on the rates. Also, while the rates may look attractive to begin with, but banks may add T-bill rates plus 1.5/2 percent spread (margin) which may not serve purpose," said Sukanya Kumar, Founder of RetailLending.com, a home loan advisory firm.

"So, I don’t think rates will change immediately for the customers. But maybe overtime if customers understand the T-bill rates and the linking of rates and banks take responsibility of awareness, it may help going forward," she said.

Also, most individuals rarely spend time to understand how their home loans work.

"Not all customers shifted from BPLR to MCLR system quickly which was better than the previous arrangements due to want of understanding of the home loan products," Kumar said.

As banks await the final guidelines, consumers may well want to learn more about how they can avail the benefits of more transparent interest rates.


Can sharetipsinfo help me to become successful in the market?

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Repo rate unlikely to change in remainder of FY19

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The Monetary Policy Committee (MPC) had voted 5:1 to maintain the repo rate at 6.50 percent in the October 2018 policy review, after having hiked rates twice in the previous two policy reviews. However, it had changed the stance of monetary policy from neutral to calibrated tightening, which had suggested a continuing likelihood of future rate hikes.

This expectation has been belied by subsequent data. With sub-4 percent CPI inflation for three consecutive months, a sharp correction in crude oil prices and the strengthening of the rupee, the repo rate appears unlikely to be changed in the upcoming policy review.

Although the CPI inflation in Q3 FY19 is likely to lag the MPC's estimate, a rate cut is ruled out given the change in stance to calibrated tightening and the high core-CPI inflation print for October 2018.

Following the year-on-year (YoY) disinflation in retail food prices in October, the outlook for food inflation remains somewhat mixed. Market prices of various crops are trending well below the revised minimum support prices, easing concerns about the inflationary impact of the latter while casting doubt on the sustainability of rural demand going ahead.

Following the late withdrawal of the monsoon rains, the sharp deficit in post-monsoon rainfall has led to a decline in reservoir storage levels and a delay in rabi sowing, which may create price pressures over the next few quarters.

Additionally, inflation risks related to fiscal factors, such as the staggered pay revision by some state governments and expenditure announcements by the central and various state governments, cannot be ruled out.

Geopolitical developments and supply-demand balances would continue to influence crude oil prices, and consequently, the sentiment toward the rupee and the domestic inflation outlook. We do not expect a sharp rebound in crude oil prices or a re-testing of the all-time low by the rupee in the second half of FY19, which should ease inflationary concerns.

On balance, the CPI inflation in FY19 is likely to average 4.2 percent, only mildly higher than the MPC's medium-term target of 4 percent. Therefore, the likelihood of a rate hike in the February 2019 policy review appears subdued, in ICRA’s view.

The expectation of status quo on the policy rate, the announcement of a pipeline of OMO purchases by the central bank in December 2018, and the correction in crude oil prices would keep a check on G-sec yields in the immediate term, despite continuing concerns of a potential fiscal slippage relative to the budgeted target for the central government in FY19.

Editor's Take | Decoding the fuss over new GDP data

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The NITI Aayog and the Central Statistics Office (CSO) on November 28 released the 'back-series' of India's gross domestic product (GDP) data from 2005-06, using a new methodology, that shaved off the previous growth estimates by a few percentage points in several years.

The new data showed that the Indian economy did not grow at a scorching pace during the erstwhile UPA government's years as was earlier made out to be.

It has triggered a raging debate over the formula with the Congress accusing the government of manipulating data.

Watch Sakshi Batra in conversation with Gaurav Choudhury, Deputy Executive Editor, Moneycontrol as he decodes the new GDP data that kicked up a political row over the timing of its release.

There will be huge change in healthcare sector if more people donate organs: Ashiwini Kumar Choubey

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Union minister Ashiwini Kumar Choubey said on Tuesday if more individuals decide to donate their organs it will bring a huge change in the country's healthcare sector and many lives can be saved.

The Union minister of State for Health and Family Welfare was addressing the gathering at 9th Indian Organ Donation Day celebrations by the National Organ and Tissue Transplant Organisation (NOTTO) under the aegis of the Health Ministry.

"There are lakhs of people who wait at top hospitals for life-saving transplants amid acute shortage of donors. There is a need to spread awareness about organ donation and bridge certain gaps. Even if a section of individuals decide to donate his or her organs, it will bring a huge change," Choubey said.

The programme was also attended by Union Minister of State Anupriya Patel.

Govt extends duty benefit for export of non-basmati rice

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The government has extended duty benefits to non-basmati rice exporters under a scheme to boost the shipment of the agri commodity. The duty benefit is provided under the commerce ministry's Merchandise Exports from India Scheme (MEIS).

"Non-basmati rice items have been made eligible for MEIS benefits at the rate of 5 per cent for exports made with effect from November 26 and up to March 25, 2019," the Directorate General of Foreign Trade (DGFT) has said in a public notice.

DGFT, under the commerce ministry deals with export and import related policies.

Under MEIS, government provides duty credit scrip or certificate depending on product and country.

Those scrips can be transferred or used for payment of a number of duties including the basic customs duty.

India is one of the largest exporters of non-basmati rice and in 2017-18, the country exported 8.63 million tonnes of the rice, which was more than double the quantity of basmati rice exports of 4.05 million tonnes.

Non-basmati rice exports during April-February 2018 stood at USD 3.26 billion as against USD 2.53 billion in 2016-17.

Rice is the country's main kharif crop. As per the first advance estimates of foodgrains production for kharif (summer-sown) season for 2018-19 crop year, rice output is estimated at record 99.24 million tonnes as against 97.5 million tonnes of production in last year's kharif season.

The sowing operation of kharif crops begins with onset of monsoon and harvesting starts from mid-September. Paddy, maize and soyabean are major kharif crops.

WTO's discussion agenda must include old, new issues: Suresh Prabhu

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Commerce and Industry Minister Suresh Prabhu on Monday said that discussion agenda of the World Trade Organization (WTO) must include both old as well as new issues to maintain the relevance of the global trade body. He said that there were challenges before the global trade and their impact would have implications on the world economy.

"Today, we must agree that without WTO, we will have a problem because we need global trade...We must make sure that WTO remains intact. WTO has to change and change for the better," he said here at a programme organised by law firm Lakshmikumaran and Sridharan and an industry chamber.

Prabhu said that based on his discussions with other member countries, an agenda was being prepared which will be forward-looking, agreeable to all nations and include substantive issues.

"We cannot forget the issues that have been put on the table with an agreement of all the countries and those issues also need to be taken into account... So, we cannot forget the so-called old issues. At the same time, we cannot just forget inclusion of new issues. So, we must find out a proper substantive agenda which will be encompassing all these important elements," he added.

While developing countries, including India, want issues related to agricultural subsidies to be resolved, developed nations, such as the US, are keen to push forward new matters related to e-commerce and investments.

WTO's relevance is now under question as some countries are taking unilateral measures, which are impacting global trade.

Two agencies to be appointed for template on FTA negotiations in future: Suresh Prabhu

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Commerce and Industry Minister Suresh Prabhu on Friday said that two independent agencies would be appointed for preparing a template to negotiate free trade agreements (FTAs) in future. He said that the country would now have a completely new approach towards negotiating these agreements.

"We are appointing two independent agencies, who will talk to all the stakeholders...it is a first major change. This will be a new template which will emerge for all future negotiations and we are working on it," he said here at a function.

The announcement assumes significance as concerns have been raised by industry, exporters and trade experts on FTAs being implemented by India.

They say that these pacts have significantly benefited India's trading partners but not Indian industry. Several sectors, including steel, have demanded that they be removed from the purview of such agreements as these lead to dumping and significant jump in imports.

Under an FTA, two trading partners significantly reduce or eliminate import duties on majority of the goods traded between them. Besides, both countries liberalise norms to promote services trade and attract investments.

India has, so far, implemented such agreements with ASEAN and countries including Japan, South Korea, Singapore and Malaysia. Several such pacts are also under negotiations with Australia, New Zealand, European Union, Israel, and proposed 16-member Regional Economic Cooperation Partnership (RCEP).

Serious concerns have been raised on RCEP negotiations with China as one of the member nations. Several ministries, including steel and food processing, have said that the pact would result in flooding of goods from China.

The trade gap with China has increased to USD 63.12 billion in 2017-18, against USD 51.11 billion in the previous financial year. India has trade deficit with 10 RCEP member countries including with South Korea and Australia.

Prabhu said,"while we need FTAs, we make FTAs in a way that it will benefit India to begin with and also other countries. We cannot grow at the expense of India losing and, therefore, we are working on this strategy."

This would also help in promoting the country's outbound shipments, he added.

Talking about trade with the South Asia Association of Regional Cooperation (SAARC), the minister said despite the closeness of the member countries, "our export in SAARC region itself is sub-optimal".

Huge potential exists to boost exports in this region, he said, adding India is trying to work with the neighbouring countries to increase trade.

Birla Copper sees Indian copper demand doubling by 2026

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India's refined copper consumption is set to more than double over the next eight years amid rising demand from the power, auto and consumer sectors, the chief executive of one of the country's top copper smelters said on Thursday.

The nation's consumption of the metal is expected to rise to 1.433 million tonnes by 2026 from 650,000 tonnes in 2018, Birla Copper CEO JC Laddha told delegates at the Asia Copper Conference in Shanghai.

However, he added that this projection did not include the boost copper may receive from a boom in copper-intensive electric vehicles.

"If you add that, I think by 2026 the total consumption would be 2.5 million tonnes," Laddha said. Birla Copper is a unit of Hindalco Industries.

"India's demand for overall copper has risen rapidly over the years and is expected to rise further as a result of various projects like 'Make in India' (and) infrastructure investment," Laddha said.

The government's 'Make in India' initiative is a campaign to boost foreign direct investment into the country.

The nation's refined copper production is set to hit 843,000 tonnes this year, Laddha said, outstripping demand, which is expected to reach 642,000 tonnes.

But following the forced shutdown of Vedanta Ltd's 400,000 tonne per year copper smelter in May, production will shrink to 450,000 tonnes in 2019, versus demand of 700,000 tonnes, he said.

The smelter was closed after the Tamil Nadu state government cut power supply to the unit following violent protests over alleged pollution that resulted in the death of 13 people in police firing.

Vedanta has denied that the plant, India's second biggest copper smelter located in the port city of Thoothukudi, pollutes the area.

Imports from ASEAN countries, Japan and the Middle East are increasing, benefiting from the disruption to supply in India, Laddha said, putting the share of imports at 41 percent currently, versus 28 percent before.

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