Our only 'truly independent' Institution under threat?

Dec 16, 2013

In this issue:
» EU regulator warns on dangers of Bitcoin
» Why wall street banks just get bigger?
» Is power sector out of the woods?
» China bubble fears return
» and more....

It is no hidden secret that the Finance Ministry and the RBI enjoy a love-hate relationship. Since a year and half, the Indian economy is struggling and the growth rate numbers have fallen from over 9% per annum to 5%. The government has repeatedly accused the RBI of being inconsiderate towards GDP growth, since it has been refusing to cut interest rates. The RBI, on the other hand, says that while it is mindful of growth, it cannot sacrifice its inflation objectives.

It is clear that the government is not impressed with RBI's guidance on interest rates. The RBI has repeatedly blamed the government for high inflation and high fiscal deficit. This has infuriated the politicians and bureaucrats, who are planning a full-fledged takeover of some of RBI's key functions.

In fact according to an article in the Economic Times, the FM has once again said that the powers of RBI should be curbed. According to him, the RBI should only oversee monetary policy formulation and banking regulation. All the other powers should be handed over to the government or other regulators. The FM also said that the Financial Sector Legislative Reforms Commission (FSLRC), headed by Justice B N Srikrishna should be implemented. If the FSLRC is implemented, the RBI stands in real danger of losing its independence and its governor could be stripped of his exclusive prerogative to frame monetary policy.

The former RBI governor D Subbarao was one of the strongest critic of FSLRC as it clipped RBI's wings. In our view, the RBI deserves the credit for maintaining the autonomy of the central bank and not succumbing to constant government pressure to cut rates. The RBI has been one of the finest and most important institutions in India. If the government is successful in this coup then, the danger of a massive inflation and imbalance in the Indian economy increases by several-fold.

The government has to get its priority right. It has to take immediate steps to tackle issues related to supply chain bottlenecks, inflation, subsidies and the deficits. Blaming the RBI and trying to clip its powers is not the solution to solving India's economic problems.

Should the RBI powers be diluted? Let us know your comments or post them on our Facebook page / Google+ page.

 Chart of the day
Steel is a key building block for an economy. As such, the development of the steel sector is crucial for long term economic growth of an economy. Take the case of the Chinese economy. A decade ago, China's steel capacity was 190 million tonnes per annum (mtpa). This has nearly quadrupled to about 750 mtpa now. As per the chairman and managing director of state-run steel major Steel Authority of India Ltd (SAIL), India will need steel production capacity of about 300 mtpa by 2025. It is worth noting that India's current steel capacity stands at 90 mtpa. This means that over the next 11 years India would have to add another 210 mtpa steel capacity, a growth rate of 12% CAGR. Now given that 1 mtpa capacity addition requires investments of about US$ 1 bn, adding 210 mtpa would mean total investments of US$ 210 bn in the steel sector over the next decade.

In our view, these are quite overoptimistic targets. The steel sector moves largely in tandem with the overall economy. So if steel capacity has to grow 12% annually, it means India's economy too should grow by double digits. But India's economy has currently fallen off to decade low growth rate of sub-5%. And this is no temporary blip. There are serious structural issues that could prevent India from growing at the pace witnessed in the previous decade. Hence, steel capacity should come on line keeping in mind the economic prospects. Simply trying to ape China's growth rates makes no sense.

Should India's steel capacity compete with China's?

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We may be called naysayers. But the warnings signs for those over optimistic about the future of virtual currencies were all over the place. Bitcoins have been at the centre of controversy on virtual currencies over past few weeks. Economists, investors and supporters of virtual currencies have firmly raised the stakes in favour of bitcoins. The value of bitcoins soared from US$ 13 in January 2013 to a peak of US$ 1,200. However, central banks and regulators have been quite a spoil sport. Very recently the Chinese central bank expressed its reservations about the rampant use of bitcoins in the nation. It also banned usage of the same in China. It seems the European regulator has followed close on the heels. As per CNN Money, the European Banking Authority, has warned investors that investment in bitcoins could become worthless. Therefore those hoping for an alternative reserve currency in bitcoins may have a long and anxious wait ahead. As far as Indian investors are concerned, the RBI offering any degree of acceptance to bitcoins is not even a remote possibility for the time being.

Mark our words, the health of the US economy is not as great as is being made out to be. And thus it is easy to infer which industry is possibly under the biggest threat? It has to be the financial industry of course. Simply because of its inherently high leverage and also the risk of lot of the loans turning non-performing. However one look at the performance of these banks in recent times and you are likely to get a totally different picture.

If these banks were already fat at the time the last crisis struck. They have now gotten fatter. The reason? Investors are under the impression that the recovery of these financial institutions is for real and their multi-billion dollar profits sustainable. In fact, even stricter regulations like the Dodd-Frank Act and the Volcker rule have not been able to dissuade investors from pouring money into these firms. It is indeed sad that the serious short comings that the Wall Street firms have is currently being covered by a huge Fed driven liquidity. However, it is only a matter of time when the tide goes out. Then as Warren Buffett says, it will be interesting to see who all are found swimming without their clothes on.

Well, the New Year seems to have lot to offer. Few subdued sectors of the economy may get some respite. And one amongst them is the beleaguered power sector. The power sector is soon set to see much needed respite from choked income streams. That's because the government's financial restructuring plan for the ailing power distribution companies (discoms) is reaching its fruition. The most impacted discoms in the states of Rajasthan, Uttar Pradesh, Tamil Nadu and Haryana have turned out to be the biggest beneficiaries. These states account for as high as almost 75% to the total debt of discoms worth Rs 1.9 lakh crores. As per the scheme, the distribution companies in these states have already issued bonds to the lenders. These bonds are backed by state government guarantee and cover half of the liability. The remaining half has been rescheduled by lenders as per the plan. Besides this financial support, tariff hikes will also come to the rescue of these companies. Not just that, the Centre too has provided the helping hand. This is through a capital reimbursement support of 25% of the principal repayments by state governments on their share of the liabilities. Not only this will prove instrumental in reviving the fragile discoms, but the good news is that they are expected to breakeven early next year.

Fears of a bubble in China have once again resurfaced. And this could be because of the Chinese government's intention to introduce reforms. The reforms are expected to focus on easing capital controls and liberalizing interest rates among others. But the timeline for this and the government's overall plan in terms of implementation remains hazy. Meanwhile, the talk of such reforms has had the effect of more capital flows into the country. Not just that, China is also plagued by the rising prominence of an unregulated shadow banking sector. As per an article in Marketwatch, credit doled out by these shadow banks has surged in recent times. This is despite the fact that lending rates of banks have been rising. China will have to find ways of controlling shadow banking activities and improving the transparency of data. Otherwise, implementing the reforms stated could be quite difficult.

In the meanwhile Indian equity markets have extended their losses and are trading at day's low. At the time of writing, the benchmark BSE-Sensex was down by 64 points (-0.31%). FMCG and oil and gas stocks were the biggest losers. All the Asian stocks were trading weak led by Japan and China. The European markets opened on a negative note.

 Today's investing mantra
"The bottom line is to have a responsible plan for your investments and know what you own and why you own it. There's too much at stake not to." - Peter Lynch

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13 Responses to "Our only 'truly independent' Institution under threat?"

B K Katyal

Dec 18, 2013

It is beyond comprehension as to how the present regime headed by Dr. Manmohan Singh, who is an economist of International standing and an ex Governor of RBI,is even allowing any thought on diluting the activities and authority and autonomy of the minetory authority of the Country . If at all, there is need to strengthen the regulators so that vote bank politics is not used by political parties to loot the country by devicing so called schemes as are, as per them, meant to help popes. Hope the Governor RBI and the Board of RBI will be forthright and firm in putting their foot down.



Dec 17, 2013

Every Indian (apart from the die hard Congress loyalists) knows that the present state of the Indian economy is due to the inefficiency, corrupt and callous attitude of the government and not RBI. In fact, RBI's efficient administration saved India numerous times in the past (2008 global financial system crash for instance). If RBI is relegated to a caged parrot (like the CBI) then God save India! This Congress government is by far the worst (wish I could find better words to describe such a govt.) in the history of India hell bent on destroying what's left of India. Every patriotic Indian would urge the Governor of RBI to stand firm and block any policy which is going to compromise the Financial Independence of the Country.



Dec 17, 2013

What else would you expect from the political class - who believe they are a class apart?
Unfortunate - that they want to trample any sign of any institution that can stand-up to the corrupt and those involved in nepotism.
We had an Anna Hazare and eventually an AAP that made the PM sit up and act on Lok Pal bill.
Our FM will probably understand only when such a situation arises.
Our FM thought that once he saw the back of Prasad D, and he had personally appointed the next RBI Gov - the institution would operate as an extension of his ministry. Alas when that proved to be wrong and the new governor - behaved truly like a RBI governor... the FM wants to use the ultimate weapon - strip the powers of RBI...

God Bless India!


samir chatterjee

Dec 17, 2013

Is there any country in the world, developed or emerging, which has such high inflation as we have! Growth has trickle down effect while inflation is automatically inclusive( affects poorest the most). Moreover interest rates affect only those with high debt, who want cheap funds, they can play with, and create non performing assets, for poor farmers it is debt default, they either commit suicide or have their assets taken away, while for rich it is restructuring which is important.
What more harm can be done to society!



Dec 17, 2013

RBI is the only Institution now left to take care of the monetary policies and directions unbiased by extraneous factors and Government needs which are short term benefits for the ruling class. Hence there is no question of diluting it's autonomy.


Amit Sengupta

Dec 16, 2013

Having destroyed the economy, the political class is now determined to destroy all the institutions in almost every domain- economy, education, administration-every institution that could challenge the establishment in their wrong-doings, any time in the future. The fear is that whatever this dispensation does will be vigorously followed by the next set that occupies power and that all of them are smart people, much more smart than most of us. All that we could hope is that construction follows destruction as a matter of natural phenomenon- could happen- may be in a few decades from now. Is there a way to stop this FSLRC- sure enough most tax payers won't love to fund such efforts.

Like (1)

Sunil B. Kapadia

Dec 16, 2013

All RBI powers should be retained which prevails as on date.
Autonomy of RBI must be preserved and respected by all the stakeholders including finance ministry, P.M. and the ruling government.

Like (1)

virendra bapna

Dec 16, 2013

rbi,government.politicions,are all the same.you do not require a highly eduacated person,ias officer to understand the 200% to 300% price increase from the point of farmer-producer to the consumer.the apmc markets and every thing is controlled by corrupt politicans. useless to discuss all these matters and waste our aam aadmi valuable time.relax and enjoy.

Like (1)

nalin patel

Dec 16, 2013

government wants to pump in more money in the system, apart from this it collects more income tax under the guise of alternate minumum tax, from individuals, they make future laws in respect of alternate minumum tax , in presnet, retrorespective mode

Like (1)

H K Prakash

Dec 16, 2013

It is no secret that the government (and not RBI) is responsible for the biggest blows to fiscal prudence
1) Continuing and large imports of unnecessary items like gold, silver, coal, Chinese crap (China exports 10 times its imports from India, India recently begged China to import more basmati and other rice!!!), Italian crap (to please the Empress), etc. India imports freely stuff like paprika, Cajun masala powder, Tabasco sauce, peanut butter: stuff it should be exporting!!!
2) Continuing, large and senseless subsidies to rice, wheat and sugar sectors. Stocks are kept in open fields to rot and more pour in each year. M A D N E S S!!!
3) Continuing and unnecessary pampering of "poor" consumers by giving power, water, etc practically free to a large section of society, beggaring the utility which is burdened by debts. Also means waste as cheap supply leads to lavish usage
4) Huge wasteful expenditure maintaining our leaders and mandarins in power on items like like free 'everything', any number of unnec trips abroad, lavish "developed world" life styles, large convoys, etc

Like (1)
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