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RBI flags 12 macro challenges and opportunities including IDFC and Bandhan

Mumbai, 3 April-2014(IANS/PTI/UNI): The Reserve Bank of India (RBI), in its first bi-monthly monetary policy statement, has kept the repo rate unchanged at 8 per cent and the cash reserve ratio at 4 per cent. RBI Governor Raghuram Rajan had hiked the repo rate by 75 basis points since taking charge in September last year.

RBI flags 12 macro challenges and opportunities including IDFC and Bandhan

RBI flags 12 macro challenges and opportunities including IDFC and Bandhan
Infographic credit: PTI

According to Raghuram Rajan, if inflation moves along the intended glide path, real GDP growth is projected to pick up from a little below 5 per cent in 2013-14 to a range of 5 to 6 per cent in 2014-15, although with downside risks to the central estimate of 5.5 per cent.
Take a look at the major macro challenges and opportunities flagged by the RBI:
Recovery on track in 2014. Tightening financial conditions and the divergence in inflation pose risks.
* The global interest rate cycle has just begun to turn. A large part of the withdrawal of monetary accommodation by advanced economies remains to play out. Consequently, capital flows to emerging markets could remain volatile and may translate into liquidity shocks.
Also check graphs on RBI Monetary Policy Review, Current Account Deficit, GDP growth, Sensex, and more
The economy is set on a disinflationary path, but more efforts may be needed to secure recovery.
* Much more efforts in terms of removing structural impediments, building business confidence and creating fiscal space to support investments will be needed to secure growth.
RBI credit policy
Ability to meet increased food demand in the context of the National Food Security Act, in the face of tightening farm labour markets and rising input costs remains a challenge.
* Unseasonal rains accompanied by hailstorm, and frost early March has adversely affected rabi crops like wheat, mustard seeds, onions and jowar. The possible effects of El Nino on the monsoon also add an additional element of uncertainty for future harvests.
This sluggishness, in part, reflects contraction in natural gas and crude oil output and slow growth in infrastructure industries, save for electricity.
* This stagnation in growth over two years reflects subdued investment and consumption demand.
Efforts to address bottlenecks have yielded modest revival so far, but may need more time before clearances result in investment cycle turnaround.
* 15-20 per cent of these projects, mostly in roads, power and petroleum, have reported additional delays.
Corporate investment intentions improved in Q3
* 179 new large projects worth Rs 79,100 crore received financial assistance during the quarter.
While fiscal targets were met in FY14 (RE), the quality of fiscal adjustment needs improvement.
* One-off increases in non-tax revenues such as spectrum auctions are unlikely to sustain and the subsidy often tends to overshoot budgetary provision leading to further curtailment. Appropriate price adjustments and better targeting necessary. There is also a need to cost out growing entitlements.
Food price corrections moderate inflationary pressures. FY15 average WPI forecast at 5.8 percent.
* Inflation may moderate in the context of relatively stable crude oil and range-bound global commodity prices next year. CPI will hinge on policy actions, extent of the negative output gap and movements of food prices.
CAD improves, driven mainly by declining imports. CAD pegged at 2.4 per cent in FY 15.
* For a sustainable CAD policy efforts should focus on sector-specific issues affecting export performance. The savings-investment imbalance should be reduced by lowering inflation expectations. This would help channelise private savings in financial assets rather than gold.
Surge in capital flows helped build reserves; rupee moved in a narrow range since end-November 2013
* The unanticipated pace of US Fed tapering and the political risk surrounding the general elections call for careful monitoring and appropriate policy measures.
A 25 bps hike in policy rate undertaken in January to secure economy on disinflationary path.
* The factors impeding the pace of smooth monetary policy transmission to the credit market include rigidities in repricing for fixed deposits, size of government borrowings, level of non-performing assets, high inflation and the significant presence of informal finance.
Modest recovery likely to shape in 2014-15. FY 15 growth pegged at 5.5 per cent.
* If electoral outcomes fail to provide a stable government, the downside risks to growth could accentuate. To a large part, the recovery remains contingent on improvements in the investment climate.

Our correspondent added :-

IDFC and Bandhan Financial Services Private Ltd have been selected by the Reserve Bank of India to set up banks, from a field of 25 aspirants.

The RBI consulted the Election Commission before granting “in-principle” approval to these entities, as a precautionary measure.

Incidentally, both IDFC and Bandhan are non-banking finance companies. While Mumbai-based IDFC is classified as an infrastructure finance company, Kolkata-based Bandhan is a microfinance institution.

The central bank is issuing new bank licences for the first time in ten years. Kotak Mahindra Bank and YES Bank were set up in the last round, in 2004.

IDFC and Bandhan were recommended as suitable for grant of “in-principle” approval by the High Level Advisory Committee set up by the RBI.

Conservative approach

The RBI said its approach in this round of bank licences could be categorised as conservative.

“At a time when there is public concern about governance, and when it comes to licences for entities that are intimately trusted by the Indian public, this may well be the most appropriate stance,” the central bank said.

Rajiv B Lall, Executive Chairman, IDFC, said: “The transition from a non-banking finance company specialising in infrastructure finance to a bank will entail lot of hard work. We will become a universal bank.”

The Advisory Committee had also recommended that in the case of Department of Posts, which has applied for a licence, it would be desirable for the RBI to consider the application separately, in consultation with the Government.

Among the big names with hats in the ring are: Aditya Birla Nuvo, Bajaj Finserv, LIC Housing Finance Ltd, L&T Finance Holdings, Reliance Capital, Religare Enterprises and Shriram Capital.

The RBI said it assessed the quantitative and qualitative aspects of the applicants as per the criteria laid down in the guidelines. Based on this, it took a view on the “fit and proper” status of the applicant, it said in a statement.

The approval granted to the two applicants will be valid for 18 months, during which time they have to comply with the requirements on licensing of new banks in the private sector and fulfil other conditions stipulated by the RBI.

Once these conditions are met, they will be considered for grant of a banking licence. Until a regular licence is issued, the applicants will be barred from the banking business. “Both firms have a profitable business model and are aptly chosen from the financial inclusion and responsible banking perspective,” said Monish Shah, Senior Director with Deloitte India.

‘On-tap’ licences

Going forward, the RBI intends to use the learning from this exercise to revise guidelines appropriately and give licences more regularly, that is, virtually “on tap”. It will also frame categories of differentiated bank licences, building on its prior discussion paper, and allowing for a wider pool of entrants into the banking sector. [ Input source: beena.parmar ]

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