RBI Head Calls for Greater Central Bank Independence
By NUPUR ACHARYA And KHUSHITA VASANT
MUMBAI--Reserve Bank of India Governor Duvvuri Subbarao has called for greater independence of central banks to act on monetary policy, and said that governments should also act on the fiscal side as central banks alone can't fix economies.
"The issue of monetary policy independence has acquired greater potency following the expansion of the mandates of central banks and their more explicit pursuit of real sector targets such as growth and unemployment," Mr. Subbarao said at a lecture organized by the central bank.
Mr. Subbarao cited Japan as an example of where the issue of central bank independence was playing out. The Bank of Japan has been under political pressure to adopt a higher inflation target so as to create more room for growth stimulus, he said.
While Mr. Subbarao didn't specifically refer to India, his comments come at a time when the Indian central bank is facing immense pressure from the government and industry bodies to revive flagging growth by cutting interest rates.
The RBI, which previously said that its autonomy should not be "compromised," has kept its key policy rate unchanged at 8% in the previous five rate-setting meetings, owing to high inflation. The RBI last cut its key rate by 0.50 percentage point in April. The policy meeting is held every six weeks or eight times a year.
Asia's third-largest economy has been grappling with high inflation for the past three years. Inflation, as measured by the wholesale price index, fell to a 10-month low of 7.24% from a year earlier in November, but is still considered too high for the RBI to soften its stance.
The RBI doesn't have an official inflation target but previously said it was comfortable with inflation in a range of 4% to 5% in the medium term, or about five years. The next rate-setting meeting is on Jan. 29.
Meanwhile, gross domestic product growth has sputtered to its slowest pace in nearly a decade, limiting the central bank's policy choices. In the past, the RBI expressed its inability to reduce rates due to India's gaping fiscal deficit--5.75% of GDP in the fiscal year that ended March 31--and lack of economic reforms. New Delhi also said it intends to narrow the budget gap to 3% of GDP by March 2017.
Since September, the government has taken a series of steps to set its fiscal house in order, including raising fuel prices, opening up the country's retail sector to foreign retailers such as Wal-Mart Stores Inc.,and liberalizing the broadcast and aviation sectors to attract offshore capital.
The government and industry bodies have also asked the RBI to lower interest rates to boost domestic growth but the central bank has refrained from such action, instead calling for non-monetary policy steps, such as boosting agricultural output to ease price pressures.
"Governments need to act too from the fiscal side, and monetary and fiscal policies have to act in harmony. On top of this, governance needs to improve to inspire the trust and confidence of consumers and investors," Mr. Subbarao said.
Meanwhile, U.S. economist and Nobel laureate Joseph Stiglitz, who spoke at the same event, offered a counterpoint to Mr. Subbarao's argument.
"One of the outcomes of the [2008] crisis was that the countries with the so-called independent central banks, in Europe and the United States, were really the worst performers," Mr. Stiglitz said.
In fact, the countries with less independent central banks such as China, India and Brazil did much better. "There is no such thing in society as really an independent central bank, institution..."
Monetary authorities, he added, need to be held more accountable, especially when they are engaged in policies with strong distributive consequences and which are quasi-fiscal in nature.
Fri, Jan 04, 2013 at 17:33
Govt to soon send comments on new bank licences to RBI: FM
The government will soon send its comments to the Reserve Bank on issuing new bank licences, finance minister P Chidambaram said today. "We are sending our comment on banking licence to RBI," he told reporters here.
The government will soon send its comments to the Reserve Bank on issuing new bank licences, finance minister P Chidambaram said today. "We are sending our comment on banking licence to RBI," he told reporters here.
"Entities or groups having significant (10 per cent or more) income or assets or both from real estate, construction and broking activities individually or taken together in the last three years will not be eligible to set up new banks,"
the draft said.
Also read: RBI may issue new bank licence norms by month end
RBI is preparing final guidelines for issuance of new bank licences after Parliament approved Banking Laws (Amendment) Bill last month. The Bill, now approved, aims at strengthening banking regulation. It allows RBI to supersede boards of private banks and increase the cap on voting rights of private investors in public sector banks to 10 per cent, from 1 per cent now.
As per the draft guidelines on new bank licences, business houses with successful track record and a minimum capital of Rs 500 crore will be allowed to set up commercial banks. Currently, the minimum capital requirement for opening a bank is Rs 300 crore.
The draft guidelines said companies which are primarily engaged in the real estate business or stock broking will not be eligible for promoting bank.
"Entities or groups having significant (10 per cent or more) income or assets or both from real estate, construction and broking activities individually or taken together in the last three years will not be eligible to set up new banks,"
the draft said.
On foreign holding, it said the aggregate non-resident shareholding in the new bank should not exceed 49 per cent for the first five years. At present, the foreign shareholding in private sector banks is allowed up to 74 per cent of the paid-up capital.
Over the last two decades, the RBI licensed 12 banks in the private sector in two phases -- 10 in 1993 and two later. There are 26 public sector banks, seven new private sector banks, 15 old private sector banks.
Fri, Jan 04, 2013 at 16:48
RBI may issue new bank licence norms by month end
After the passage of the Banking Amendment Bill the RBI is working on the bank licence guidelines which are expected by the end of the month, reports Aakansha Sethi of CNBC-TV18.
After the passage of the Banking Amendment Bill the RBI is working on the bank licence guidelines which are expected by the end of the month, reports Aakansha Sethi of CNBC-TV18.
http://www.moneycontrol.com/news/cnbc-tv18-comments/rbi-may-issue-new-bank-licence-norms-by-month-end_803590.html
The RBI is keen that the new banking norms should be issued before the retirement of deputy governor Anand Sharma who is in-charge of the banking portfolio. The RBI has sort a one-year extension for Sharma.
Sources in the finance ministry say that they are discussing the guidelines with the RBI. The discussions are on and they will send their comments shortly. One can expect comments from the finance ministry in next one week.
The finance ministry feels that there should be three levels of banks, namely regional banks, national banks and local banks instead of having one minimum capital requirements for banks at Rs 500 crore. The minimum capital requirement should vary according to the size of the bank. There are other areas also where the finance ministry has expressed his concerns and hence the final structure should be ready by the end of the month.
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