The Tribune, Chandigarh, India

RBI cuts repo rate by 25 bps, warns of little room for more
CRR unchanged at 4%
No immediate EMI relief for loans
Sanjeev Sharma/TNS

New Delhi, May 3
Citing concerns on inflation and a high current account deficit, the Reserve Bank of India on Friday delivered a modest 25 basis points cut in benchmark rates thereby dashing hopes of an aggressive rate cut cycle this year.

In its monetary policy review today, the central bank cut the repo rate by 0.25% to 7.25%, the third cut since January totaling 75 basis points. However, in the absence of a liquidity enhancing measure, banks may not have too much room to pass on today’s rate cut.

RBI governor D. Subbarao in his review said the growth-inflation dynamic yields little space for further easing. He also pointed out that recent monetary policy action, by itself, cannot revive growth.” It needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping up public investment, alongside continuing commitment to fiscal consolidation”, he said.

The RBI’s stance has disappointed markets and industry which had been clamouring for bigger rate cuts to revive growth in the economy. The RBI cited upside risks to inflation and high CAD as its main concerns. “The biggest risk to the economy stems from the CAD, at a record high last year, which will put pressure on servicing of external liabilities”, it said.

Analysts read the RBI stance as hawkish. Motilal Oswal, chairman & MD of MOFSL, said while the RBI did cut rates by 25 bps as expected, it has adopted an unexpectedly hawkish stance despite mounting evidence for easing inflation going ahead and still soft economic activity. “Clearly the RBI is now shifting its focus in gearing monetary policy towards external balances (in keeping rates high to attract debt flows and finance CAD) and financial stability (in targeting asset prices, particularly housing)”, he said.

Pegging GDP growth at 5.7%, the RBI projected that economic activity during the current year is expected to show only a modest improvement over last year, with a pickup likely only in the second half of the year. It said the outlook for industrial activity remains subdued because the pipeline of new investment has dried up and existing projects remain stalled by bottlenecks and implementation gaps.

The central bank also expressed its concerns on investments. “Investment sentiment remains inhibited owing to subdued business confidence and dented business profitability. Both borrowers and lenders have become risk averse. Borrowers have become risk averse because of governance concerns, delays in approvals and tighter credit conditions. For lenders, risk aversion stems from the erosion of asset quality, deteriorating cash flow situation of borrowers eroding their credit worthiness and heightened risk premiums”, it said.

Crisil Research said lower repo rates would help lift consumption demand only if lending rates come down. In FY13 despite a 1.0% cut in repo rate, lending rates came down by a much lower magnitude. Moreover, lower interest rates can revive investments only if other issues such as delays in land acquisition, forest and environmental clearances and insufficient supply of raw materials are resolved. In the absence of these supportive measures, the ability of cut rates to revive the economy is limited.

Monetary policy highlights

Repo rate cut by 25 basis points to 7.25%

Economic growth for current fiscal pegged at 5.7%

Headline inflation will remain range-bound at around 5.5% in 2013-14

FY14 bank credit growth projected at 15%

Food inflation to add further pressure to inflation management

Biggest risk to economy stems from CAD

Priority sector lending cap to MSMEs proposed to be doubled to Rs 5 crore

EU says eurozone recession to continue in 2013

Brussels, May 3
Recession in the crisis-hit eurozone will continue unabated for the rest of the year with unemployment remaining at record levels, the EU warned today, though signs of recovery could emerge in 2014.

Economic output in the 17-nation area — home to 340 million people and a global rival to the United States, Japan and emerging giants —will shrink by 0.4% this year, the European Commission (EC) said, worse than the 0.3% forecast in February and after a 0.6% contraction last year.

Record unemployment in the single currency area will endure, the Commission's spring forecasts showed, with strong divergence between richer eurozone states to the north and members to the south mired in deep recession.

Repeating its last estimate, the Commission said eurozone joblessness this year would hit a record 12% and 11% across the whole 27-member EU. The rates vary hugely, with an alarming 27% in Spain and a low 4.7% in Austria."In view of the protracted recession, we must do whatever it takes to overcome the unemployment crisis in Europe," EU Economic Affairs Commissioner Ollie Rehn said in statement accompanying the Commision's latest economic forecast for the eurozone and the full European Union.

"In Spain and Greece unemployment rates are at unbearably high levels," Rehn said at a news conference.

France, which has barely avoided recession despite significant headwinds, will in the end shrink by 0.1% in 2013 as weakness in household demand, a key economic driver, finally takes its toll. France will then rebound to 1.1% growth in 2014, the data said.

But France will widely miss its commitment to meet the EU's 3% of GDP deficit ceiling and will post a 3.9% deficit this year and 4.2% shortfall next year.

Spain will continue a hard slog from its crisis, brought on by the 2008 implosion of a decade-long housing bubble, and should contract by 1.5% in 2013 before reversing to 1.4% in growth in 2014.

But Spanish public finances will remain dire well into next year with a government deficit of 6.5% in 2013 expected to worsen in 2014 to 7.0% as certain measures expire.

The crisis will be hugely felt in recently bailed out Cyprus where output is expected to contract by 8.7% this year in the wake of a severe restructuring of the island nation's key banking sector, including a controversial "haircut" on deposits.

The Cypriot recession will prolong into 2014 and beyond, the EC said, with the economy expected to contract by an overall 15% between 2012 and 2015. In a rare glimpse of encouragement, the EC saw recovery in Greece by the end of the year after six consecutive years of recession. — AFP/PTI

ICICI, HDFC, Axis banks not yet out of the woods
Show cause notices are on the way: RBI

Mumbai, May 3
The Reserve Bank of India said Friday it has not given a “clean chit” to ICICI Bank, HDFC Bank and Axis Bank, which are accused of money laundering and flouting KYC norms, and stated the probe against the three banks is still on.

"No. we have not. And we are saying that we are (going) to issue show cause notices. So, the inquiry is still in progress," governor D. Subbarao told reporters when asked whether the RBI had cleared the three banks.

Subbarao, speaking at the customary post-policy media interaction, asserted that while money laundering, which involves use of criminal money, has not been observed in any of the banks, certain "specific transgressions" on the “know-your-customer” (KYC) front have been discovered.

"We have talked to those banks, called those CEOs for a meeting, told them about what the deficiencies are and they have gone back and implemented some of the systemic improvements," Subbarao said, adding RBI officials have also spoken with forensic auditors appointed by these banks.

He said the RBI launched a suo motu probe following the sting operation by news portal Cobrapost early February showing officials from ICICI Bank, HDFC Bank and Axis Bank selling investment products without paying heed to the mandatory KYC norms. It later turned into a thematic study involving over 30 banks in the country, the governor said.

RBI deputy governor K.C. Chakrabarty, who had in March given a near clean-chit to these banks saying there were no transactions, today said the show cause notices will be sent not just to these three banks, but all erring lenders.

"Whomsoever we find that there are mistakes, there are transgressions, violation of the thing, we will definitely issue show-cause notice and take the appropriate action," he said, adding there are no systemic issues.

"The system is strong enough but there are aberrations and we are trying to improve that," Chakrabarty, who oversees banking regulation at the monetary authority, said. — PTI

Bharti to sell 5% stake to Qatar for $1.3 bn

New Delhi/Dubai, May 3
Gulf state Qatar has bought a 5 per cent stake in telecoms firm Bharti Airtel Ltd for US US $1.26 billion, the firm said on Friday, extending an overseas buying spree from mainly developed countries to Asia's third-largest economy.

The deal is being channelled through Qatar Foundation Endowment and a source close to QFE said it would be an active investor in Bharti Airtel, securing a board seat at the world's fourth-biggest mobile phone company by customers. "QFE is in for the long-term," the source said, speaking on condition of anonymity.

The purchase by QFE — an investment vehicle of the Qatar Foundation controlled by Sheikha Mozah, the second wife of the country's emir — pushes India ahead of China to top Asia's inbound league table for mergers and acquisitions this year.

According to Thomson Reuters data, India's inbound M&A now totals $9.83 billion so far this year, compared with China's $7.7 billion and Australia's $6.9 billion.

Qatar's first major investment in a listed Indian company provides Bharti Airtel with much-needed capital that strengthens its balance sheet and future growth.

Bharti's profit has fallen for three years in a row, hit by fierce competition in its main Indian market, and also dragged down by losses at its African operations, which it bought in 2010 from Kuwait's Zain for $9 billion.

Controlled by billionaire Sunil Mittal and also nearly a third owned by SingTel, Bharti had $11.7 billon of net debt, or about 2.5 times its operating profit, as of end-March. It operates in 20 Asian and African countries and has about 260 million mobile phone customers. — Reuters

Rupee weakens as policy disappoints; Sensex retreats from 3-month high

Mumbai, May 3
The rupee weakened on Friday as the RBI disappointed markets with a hawkish tone in its annual monetary policy, despite delivering a widely expected 25 basis point rate cut. Meanwhile, the BSE Sensex fell on Friday, retreating from the three-month high hit on Thursday, after the RBI cautioned it has limited room for further monetary easing, overshadowing the 25 basis point cut in key interest rate.

The RBI cut its benchmark interest rate for the third time since January, as growth slows and inflation ebbs, but said there is little room to ease monetary policy further.

"I feel lucky to have a 25 bps cut after reading the macroeconomic report yesterday," said Vikas Babu Chittiprolu, a senior foreign exchange dealer with state-run Andhra Bank.

The BSE Sensex fell 0.81%, or 160.13 points, to end at 19,575.64. It, however, posted a third straight week of gains, adding 1.5%. The NSE Nifty was down 0.92%, or 55.35 points, to end at 5944. It gained 1.24% in the week. — Reuters

RBI tightens rules to curb funding of gold imports

Mumbai, May 3
Amid a steep fall in gold prices recently and the resultant risks to the system, the Reserve Bank of India today further tightened screws on gold loans by banks, restricting them to finance import of the precious metal only for gold jewellery exporters.

The RBI also restricted the lending against gold coins up to 50 grams only.

"With a view to reducing demand for gold for domestic use, it has been decided to restrict gold import on consignment basis by banks only to meet the genuine needs of exporters of gold jewellery," RBI said in its annual monetary policy review for 2013-14.

The RBI added detailed guidelines on the same will be issued by the end of the month.

It may be noted that in the past two months, as the global economic sentiment improved, gold lost its glitter and lost almost 25%. — PTI