We don’t mean to keep banging on about it. But the bad loans in India’s banking system are both a significant barrier to a new, and badly needed, investment cycle getting properly underway — and a source of some hilarious numbers.
From Credit Suisse’s Ashish Gupta on the Reserve Bank of India (the regulator here): Read more
Right, we’ve had a few looks at India over the last while — at its crumbling rupee, widely reported deficits and stumbling, ineffective political system. Heck, Standards & Poor’s even got in on the act and prompted us to ask if the Brics are about to become the Brcs.
That all makes Monday’s decision to keep rates on hold by the Reserve Bank of India a bit more suprising than it might otherwise have been. From the RBI’s statement (our emphasis): Read more
“Bas! Bas!” is surely a familiar cry in the Reserve Bank of India right now as India’s rupee continues to plummet. So far, it has dropped 15 per cent against the US dollar since the start of February, hitting multiple new record lows on its way.
The central bank has attempted to get inventive in response but nothing seems to be stopping the slide (metaphorically speaking, in the chart, the higher it gets the weaker the rupee): Read more
1. The central bank bashing doesn’t start and end with Bernanke.
Central banks just about everywhere make fantastic political punching bags, and the popularity of this tactic is growing. For example:
Tuesday 21.05 BST. Growing worries that the European Union will be unable to deliver an agreed and comprehensive plan to tackle the continent’s sovereign debt crisis at Wednesday’s summit is encouraging traders to pare risk asset positions after the recent strong run, the FT reports. In twitchy trading the FTSE All World equity index is down 1 per cent and commodities are weaker. Currencies and Treasuries point to mild risk aversion, with the dollar index up 0.1 per cent and yields nudging lower. The yen is among the biggest beneficiaries, rising to a new post-World War II high of Y75.75, despite rumbles among traders that the Bank of Japan is discussing additional measures to stem its rise, which is harmful to the country’s large export businesses. Gold is also benefiting from the uncertainty, rising 3 per cent to $1,708 an ounce, its highest in a month. Industrial and energy commodities have turned tail as sentiment sours. Copper is down 0.8 per cent to $3.41 and Brent crude oil is off 0.2 per cent to $111.29 a barrel. Wall Street’s S&P 500 fell 2 per cent to 1,229, falling since the open after reports that showed US consumer confidence in October fell to its lowest level in 2½ years, and that median home prices fell from August to September. An auction of 2-year US Treasuries also saw strong demand despite yielding less than 0.3 per cent. Ten-year US note yields fell 12 basis points on the day to 2.11 per cent, their lowest in a week, and notably ending the day at their low point.
Monetary policy meetings in India are now met with anguish by the country’s industrialists, reports the FT. A drum beat of seven successive rate rises by the Reserve Bank of India since March has business leaders fretting that monetary tightening will choke off industrial production and knock the economy off its trajectory of 8.5 per cent growth this year. While many of the worries about India’s high inflation surround rising food prices and the hurt they inflict on India’s millions of poor people, industrialists are as concerned about the rising cost of energy and raw materials. Amit Mitra, the secretary-general of the Federation of Indian Chambers of Commerce and Industry, on Tuesday urged the central bank to be prepared to reverse interest rate rises if a slackening of industrial production persisted. In November, it slumped to 2.7 per cent from earlier double-digit performance.
One of the G20′s most active monetary policy tighteners has had to raise rates again in response to inflation and overheating, the FT reports. The Reserve Bank of India raised its policy rate by 25bps and brought repo rates to their highest since early 2008, building on six key rate rises during 2010. However, inflation has not fallen as quickly as expected. December’s wholesale price index rose 8.4 per cent, from 7.5 per cent in the previous month. India’s Sensex stock exchange has fallen 6 per cent this year on the inflation concerns. Despite the warning signs flashing over prices forcing households to cut spending, emerging-market consumer stocks are being valued at record highs, Bloomberg says.
India’s central bank experts have called for a nationwide regulatory regime for microfinance institutions – including a cap of 10 per cent to 12 per cent on microlenders’ interest margins – to facilitate the extension of credit to poor borrowers while preventing exploitation, reports the FT. The proposals, which are likely to serve as the framework for new Reserve Bank of India rules for the sector, come as the microfinance industry struggles to survive an intense regulatory backlash prompted by mounting concern that overlending by aggressive, for-profit microlenders has created serious hardships for the very poor borrowers they claim to be trying to help.
Pranab Mukherjee, India’s finance minister, warned that the slowdown in industrial output growth coupled with rising inflation would damage the country’s overall economic growth. Production by manufacturing, mining and power industries grew 2.7 per cent – a 20-month low and less than expected – in November from a year earlier, the Indian government said on Wednesday. The figure is a fraction of the 11.3 per cent rise seen in October, reports the FT. The data will add to the pressure on the Reserve Bank of India not to raise interest rates at its meeting on January 25. It had been expected to increase lending rates to combat spiralling inflation.
India’s economy grew close to 9 per cent in the three months to the end of September, putting pressure on the central bank to continue its aggressive campaign of raising interest rates over the next two months, reports the FT. The economy’s acceleration by 8.9 per cent in the third quarter, released on Tuesday, considerably surpassed analysts’ expectations that growth would fall short of the 8.8 per cent year-on-year recorded in April to June. Some observers now expect the Reserve Bank of India to raise rates promptly to cool an economy being lifted by increased agricultural output and a resurgent services sector. FT’s Lex argues that there’s not a lot wrong with India’s rate of growth but there is a problem with the way that growth is being financed: by non-Indians, via financial markets.
“Immediate future rate action is unlikely barring some shocks,” Reserve Bank of India Governor Duvvuri Subbarao said in Mumbai yesterday after increasing benchmark rates for the sixth time this year, Bloomberg reports. “The question is what is immediate future? I would believe it is three months,” he said, adding that global liquidity and interest-rate differentials with advanced nations may lead to an “intensification” of capital flows into India. His words came as central banks considered fresh rounds of monetary stimulus to aid growth. The FT reported on Tuesday that India and Australia raised interest rates amid rising inflation fears as the US Federal Reserve prepared to take aggressive monetary policy action to stimulate the stuttering US economy.
Australia’s central bank has defied market predictions by lifting its official interest rate by 25 basis points to 4.75 per cent as it attempts to damp inflationary pressures as the country’s economic recovery gathers pace, the FT reports. The surprise move on Tuesday lifted the Australian dollar by as much as 1.1 per cent to US$0.9993. The central bank has now raised rates seven times since October last year when they hit a 49-year low of 3 per cent. Australia stood alone among the developed world by narrowly avoiding technical recession during the global financial crisis and its central bank was the first among the Group of 20 nations to begin raising rates in the aftermath of the downturn. Meanwhile Bloomberg reports that India’s central bank has raised interest rates for a sixth time this year, the Reserve Bank of India increasing the repurchase rate to 6.25 per cent and the reverse repurchase rate to 5.25 per cent.
India has delivered its fifth interest rate rise of the year, signalling that the accommodative monetary policy adopted during the global financial crisis has come to an end as it bids to contain fast-rising consumer prices, reports the FT. India has emerged this year as the most aggressive tightener of monetary policy among major economies as it wrestles with the highest inflation of any Group of 20 nation. The Reserve Bank of India said on Thursday that it was moving closer to a neutral monetary policy by raising its repo rate – at which the central bank lends to commercial banks – by 25 basis points to 6 per cent. It increased the reverse repo rate 50 bps to 5 per cent.
Strong seasonal rains helped push India’s inflation last month to its lowest level since January, but economists still expect the central bank to raise its benchmark interest rate this week, the FT reports. The drop in the wholesale price index, India’s most followed inflation measure, was magnified by a change to the base year and the basket of goods tracked. The index rose 8.5 per cent for the month year-on-year with those changes, compared with 9.5 per cent under the old data series. Inflation rose 9.8 per cent in July. The deceleration in August was largely due to lower food prices, as monsoon rains supported crop yields and food inflation slowed to 10.6 per cent from 13.6 per cent in July. Non-food inflation also decelerated to 7.7 per cent last month from 8.4 per cent in July. The Reserve Bank of India is expected to raise rates for the fifth time this year as it unwinds an ultra-loose monetary policy adopted to weather the global financial crisis and seeks to bring inflation closer to its 6 per cent comfort zone. The bank has been cautiously raising rates to minimise the impact on economic growth, which rose to 8.8 per cent last quarter, the fastest pace since 2007.
India’s economy grew a brisk 8.8 per cent in the June quarter year-on-year, its fastest pace since early 2008, highlighting the strength of the economy despite the impact of high inflation on consumer spending, the FT reports. Growth during the first quarter of India’s April to March financial year accelerated from the 8.6 per cent last quarter, driven by robust manufacturing and services growth, and a pick-up in farm production. The strong performance will encourage the Reserve Bank of India to persist with its’ aggressive monetary tightening to control inflation, which has dropped slightly – to 9.97 per cent in July – from its previous double-digit peak, but remains uncomfortably high.
The Reserve Bank of India warned on Tuesday that volatile capital flows threatened to increase pressure on the country’s balance of payments, which is recording the widest current account deficit among large emerging economies, the FT reports. Analysts identify the current account deficit – which will put downward pressure on the Indian rupee – alongside double-digit inflation as the biggest challenges for the Indian economy. The Reserve Bank of India said on Tuesday that the country’s current account deficit had grown to 2.9 per cent in 2009-10 from 2.4 per cent in the previous year. One reason, the central bank said, for the deterioration in the balance of payments was a decline in an “invisible surplus”, caused in part by falling revenues to India’s prized outsourcing sector.
India is planning to conduct twice-yearly stress tests on its banks, following financial regulators in the US and Europe, the FT reports. The Reserve Bank of India said on Tuesday it had conducted rudimentary stress tests in the global financial crisis to check credit and interest rate risk, but would carry out more sophisticated tests in future to build confidence in the country’s banking system.
Someone killed the rally in London’s markets on Monday, and the Reserve Bank of India is a suspect – but FT Alphaville fears a miscarriage of justice.
(Shiva is the Hindu god of destruction and benefaction, of course.) Read more