RBI is least transparent, does it matter? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

RBI is least transparent, does it matter? 

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In this issue:
» RBI's gradual approach to financial reforms
» A short lifeline given to GM, Chrysler
» US losing its clout in the IMF
» Cairn India's output to slash India's import bill
» ...and more!

In a study conducted by the National Bureau of Economic Research (NBER, a non-profit organization), the RBI has been rated the least transparent of central banks in South Asia, lower than its peers in Pakistan, Bangladesh, Bhutan and Sri Lanka. This view appears to mirror the IMF's stance, which had also attacked RBI's lack of transparency in its country report on India published earlier this year. The RBI has been criticized on several grounds, chief of them being its tendency to adjust interest rates between scheduled policy review meetings. IMF called for increasing the frequency of reviews with pre-announcements of review dates. The other issue that has been raised is that the RBI does not make public the minutes of its technical advisory committee meetings, a practice which central banks in other countries follow.

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Whatever be the case, the fact that the Indian central bank is rated below banks in its neighbouring countries certainly raises an eyebrow. The fact cannot be denied that it is RBI's prudent policies that have protected Indian banks from the ills that have afflicted the latter's peers in the developed world. Therefore, in the larger scheme of things, the central bank being branded as least transparent is not of much consequence.

And speaking of RBI, the central bank is in no mood to let loose its strings. No, we are not referring to the liquidity situation here but to the central bank's policy decision with regard to allowing foreign banks wider access on the Indian shores. In its latest report highlighting the results of various stress tests carried out on Indian banks, the RBI has vouched for a gradual approach to introducing more financial market reforms. This includes opening up the economy further to foreign banks and allowing more overseas investment in local debt instruments. The panel set up by the RBI recommended that the foreign banks should not be allowed to hold more than 74% in their local units. These banks are currently allowed to set up branches or operate through wholly owned units, subject to the RBI's approval.

The basic contention of the RBI has been the lack of reciprocity by the corresponding overseas regulators in terms of allowing Indian banks to perform banking operations on foreign shores. Thus besides being cautious on offering more leeway to the foreign institutions, the RBI has advocated a gradual approach in opening up the local debt market to foreign investors, citing global financial instability. Probably the additional time frame will also offer Indian banks more flexibility to gear themselves for foreign competition.

The global economy may be in tatters currently, but this is precisely why emerging market multinationals are gaining prominence on the global map, as highlighted by the Economist in an interesting article. First is obviously the cost advantage that emerging markets (including India) enjoy, especially in the current scenario when companies across the globe are looking at various ways to slash costs. The second is that emerging economies are in a relatively better shape. While the global growth has slowed, they have not slipped into recession like the developed world. This means that even if the export markets are floundering, emerging economies have their respective domestic markets to fall back upon. The third is that many multinationals of developed and rich countries are increasingly concerned about the situation 'back home' due to the recession. As a result, they are not able to invest much to defend their market positions elsewhere, providing opportunities for disruptive new entrants.

And that is not all. Given the liquidity crunch and the scramble to generate cash, developed world multinationals are actually selling off some of their business units, which gives emerging market multinationals the opportunity to snap some good businesses, technology or brands at attractive prices. Of course, there is the other side of the coin to be considered, which is that many of these emerging market multinationals have probably become over enthusiastic in their expansion plans and have loaded generous amounts of debt onto their books. But this issue cannot be isolated to them alone and many of the rich world companies are also finding themselves in a similar situation. Therefore, it cannot be denied that companies from the emerging markets, who are increasingly looking to take their standing in the global arena one notch up, are a force to reckon with in the future.

After guzzling down billions of dollars of taxpayers' money, troubled US automakers like GM and Chrysler had shown little signs of improvement. Reason enough for the US President to raise the talk of a possible bankruptcy, albeit a controlled one. But before that a short lifeline is going to come their way. While GM has been given a couple of months to mend its ways and bring about a drastic restructuring, rival Chrysler has been given just a month to work out a deal with Fiat, as it will not be able to survive as a single entity. Some people are calling it a watershed event in the American manufacturing industry as these companies embody the American spirit perhaps more than any other firms. But it wasn't as if no one saw this coming. Year after year nimble footed competitors from Asia and Europe kept chipping away at the market shares of GM and Chrysler and the latter's half hearted attempts to bounce back only added to their woes. President Obama summed it best when he said, "Year after year, decade after decade, we've seen problems papered over and tough choices kicked down the road, even as foreign competitors outpaced us. Well, we have reached the end of that road."

The global economic meltdown has certainly raised a question mark over the standing of the US in world affairs. As if China asking for a change in reserve currency was not enough, emerging nations such as China and India believe that the crisis whose origins lie in the US, have diminished the latter's ability to set the agenda. And the agenda that they are referring to is the Obama administration's intention to make the strengthening of the IMF one of its primary goals for the meeting of the Group of 20, which includes leading industrial and developing countries and the European Union. In fact, as reported in the International Herald Tribune (IHT), these rising powers view the IMF as a place to begin staking their claim to a greater voice in global economic affairs.

The IMF, which looked like sinking into oblivion, was brought into the limelight once the global crisis erupted. In the past one year, it has made US$ 50 bn in loans to 13 countries. The US Treasury Secretary, Geithner, is looking to enhance IMF's lending capacity and has called for its financial resources to be expanded by US$ 500 bn. In this regard, the EU and Japan have pledged US$ 100 bn each and the US is also set to pledge a similar sum. China, however, is not to be easily persuaded and is taking this opportunity to make sure that emerging countries are given more say in matters pertaining to the IMF. The world order certainly seems to be changing, albeit gradually and China's stance has made it clear that the US no longer enjoys the clout that it once had.

The upcoming elections have certainly put our politicians on an overdrive. In a bid to gain political mileage and prevent a backlash from the executives of central public enterprises especially now that elections are just around the corner, the UPA has raised the salaries and allowances of 400,000 employees. The improved pay packages, over and above the hikes announced last year, will include increase in house rent allowance and retirement benefits. Readers would do well to recall that the Oil Sector Officers' Association (OSOA) had gone on a three day strike in December last year to demand pay increase for 55,000 employees. This had led to nationwide shortages of petroleum products, which severely hindered power, fertilizer, steel and aviation companies. While at that time, the government hit back by terminating the services of several executives and suspending some others, it seems to have now softened its stance. The Rao committee had proposed a 30% pay hike for employees belonging to the categories of 'executives' and 'non-unionised supervisory staff', which has largely been followed by the government. To what extent this will burden the government's already overstretched coffers remains to be seen.

The world's leaders seem determined to crack down on the activities of the entities widely accepted to be the culprits of the global recession. As per a Bloomberg report, the G-20 summit to be held two days from now will see US President Barack Obama, UK Prime Minister Gordon Brown and their G-20 counterparts meet with one aim in mind: to merge their national blueprints to unitedly strengthen regulation on hedge funds, derivatives trading, executive pay and excessive risk-taking by financial firms. These leaders of advanced and emerging economies alike are now feverishly pushing for reforms to ensure that something like this never happens again.

What is perhaps the greatest positive of such a joint regulatory approach is that it will be instrumental in preventing investors from seeking out markets with the most permissive rules. That's because such a scenario tends to have the effect of setting off a race to the bottom as countries vie to attract capital.

India imports more than 70% of its hydrocarbon energy requirements. Hence, any domestic production is more than welcome. In about 15 days, the much awaited natural gas from RIL's KG basin fields will begin to flow. Up north, production from Cairn's fields in Rajasthan will also begin in a month. In an interview with Bloomberg, the company has said that it will produce a peak output of 175,000 barrels a day. That will amount to US$ 1 bn in 2010 based on current crude prices and is likely to slash India's oil import bill by as much as 7%. It may be noted that India spent around US$ 70 bn on crude imports in the 10 months ending January 31, 2009. While we are nowhere close to energy self sufficiency, every step in the right direction counts.

The Indian markets closed higher by 1% today, led by gains in the BSE Capital Goods, BSE FMCG and BSE Healthcare (up 3% each) indices. While the Asian markets closed mixed, European indices are trading firm currently. As reported on Bloomberg, after plunging by 8% yesterday, crude oil prices rose by 2% to US$ 49.2 a barrel, as a weaker dollar bolstered the appeal of commodities.

04:56  Today's investing mantra
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