Showing posts with label RBI. Show all posts
Showing posts with label RBI. Show all posts

Thursday, May 09, 2013

29 suitors, 1 tuxedo

RBI should have 29 different interest rates for 29 different states based on the Taylor’s law

RBI’s interest rate fixing in India is a scattershot approach, which assumes that the country is uniform, which is not the case in reality. A uniform interest rate, therefore, is a wasteful proposition in a country that varies from the prosperity of Punjab to the utter neglect and backwardness of Tripura – both economically and socially. Progressive states like Punjab, Haryana, Gujarat, Maharashtra, Tamil Nadu and Karnataka have high per capita income, low level of hunger, better infrastructure and low poverty rate, thus inspiring confidence in the minds of investors. States like Orissa, Rajasthan, Bihar, et al find it difficult to attract investment. In this light, the current interest rate/lending rate mechanism is out of sync.

Furthermore, economist & Nobel laureate Taylor explained in his widely accepted Taylor’s law that if inflation augments by 1%, the interest rate should rise by a little over 1%. He also remarked that a rise in total output by 1% should correspond with a 0.5% rise in interest rate, and when it falls by 1%, interest rate should be cut by 0.5%. However, RBI’s methods in this direction have confounded everyone. When SDP fell for some states (like in Karnataka, last year’s growth fell to 14.92% from 17.35% the previous year), interest rate has been uniform. Similarly, when the output rose, RBI did not act in accordance with Taylor’s principle.


Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri
 
For More IIPM Info, Visit below mentioned IIPM articles
 
IIPM’s Management Consulting Arm-Planman Consulting
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IIPM: Indian Institute of Planning and Management
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Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
ExecutiveMBA
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Wednesday, May 01, 2013

10 Ways to revive the Indian Economy

With faulty policies and incompetent policy makers, the Indian economy has seen its worst. IIPM Think Tank suggests ten critical policy measures that can save the Indian economy from mirroring the paralysed socioeconomic conditions of US and Europe

When the northern, eastern and north eastern power grids in India collapsed in July and left more than half the country in the dark, it was declared to be another vivid indicator of India’s incredible growth story having run its course (following S&P’s downgrade, which predicted that India would be the first fallen angel among the BRICs). What the world chooses to ignore is that structural flaws in our power sector in generation and T&D have been holding back our economy for years, including the years where they felt so overtly optimistic (and even insecure) about India’s potential on the world stage. For the record, India achieved a net capacity addition of around 4 GW per year from 1997-2007. But a McKinsey report (however much you might wish to believe it) indicates that a growing India’s needs from 2007-2017 merit a net capacity addition of 20-40 GW per year, i.e. 5-10 times that figure. And the 11th Five Year Plan added only around 53.12 GW, or a little over 10 GW per year. In fact, the last year (2011-12) was particularly a good one with installation of 20.5 GW. In other words, despite the best attempts of the ‘powers’-that-be in scuttling our growth in the past decade, the economy has somehow pulled itself together and kept up the heat.

Clearly, it appears that countries are perceived very similarly to companies today, and you are only as good as your last quarter. By that yardstick, the Indian economy is still struggling with a depressed GDP growth of 5.5% for Q1, 2012-13; which makes it 9 consecutive quarters of declining growth rates. The surprising part is the shock and awe most Indians feel with this slowdown, as if they were in the middle of a rude awakening! That’s really because even till June last year, the government was predicting 9% GDP growth for India in FY 2011-12 and the RBI was looking at an 8% figure!

However, as B&E had concluded from its statistical analysis last year (refer B&E’s issue dated August 4, 2011 titled “The Upcoming Indian Economic Slowdown”), there were really no surprises. We had predicted it based on a multifactor correlation analysis using inflationary trends in India as the base. Interestingly – and snapping back temporarily to the start of the past decade – during the year 2000, the Indian economy followed a trend in inflation similar to the US. The trend was again repeated in 2010 when the Indian economy mirrored the US economic condition of 2008 just before it (US) stumbled into a deadly recession. As per our polynomial forecasting trend line analysis, the correlation will continue till the end of 2012 with its impact lingering till the last quarter of this fiscal year. So our prognosis is that India would see a relatively depressed growth at least till FY 2012-13. But all is not lost. In fact, this trend is based on the fact that the government will continue to simply do nothing to reverse the situation. In other words, it’s quite easy to electrifyingly turnaround our prognosis.

What is it that our government spokespersons – including our Prime Minister – have done best in this economic slowdown? Blame external factors, and that’s quite a convenient thing to do at the moment! The US grew by 1.7% yoy for the quarter ending June 2012 as compared to 2% for the previous quarter. The Eurozone remained in a quandary with GDP shrinking by 0.4% yoy for the quarter and jobless rates at a record high of 11.3% in July. And that’s why the escapist reasoning by the government. But then, that is hardly an excuse for not setting our own house in order. There is no denying the fact that the Indian economy has sufficient potential of its own accord, and if given the right impetus, India can indeed get back to 8-9% and beyond sooner than expected. B&E and IIPM Think Tank present 10 critical ways in which we can bring the economy back to its high growth phase.


Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri
 
For More IIPM Info, Visit below mentioned IIPM articles
 
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Tuesday, March 12, 2013

A Rebuilding Phase post the Worst of the Recession

She began her Journey Inheriting a Legacy of Hard-to-Change Processes, A Rebuilding Phase post the Worst of the Recession, And an ever Expanding Competition from Cutthroat Rivals. She has Weathered Every Storm and firmly Established herself as The Frontrunner among the Most Powerful Women in India Inc. In an Exclusive Conversation with B&E, Shikha Sharma defends Axis Bank’s future plans

B&E: What kind of overseas network does Axis bank has right now and what are your future plans with respect to the overseas market?
SS: We have four offices outside India right now. While Singapore, Dubai and Hong Kong are branches, Shanghai is just a representative office. However, we have RBI’s approval to convert the Shanghai office into a branch but we are still waiting for an approval from the Chinese regulatory bodies. Our intent of going international is primarily to help Indian customers and our clients who go overseas. Therefore we are looking at overseas locations where we can support our client base more efficiently. As far as UK operations are concerned, it’s a fairly lengthy process and all that we have right now is just an RBI approval.

B&E: What is the kind of growth that the bank is witnessing and what is your return from the infrastructure sector?
SS: As far as Axis Bank’s growth is concerned, we are one of the fastest growing private sector banks in the country. In fact, we have had a growth rate in excess of 40% in the last 5 years. We do not disclose our sector specific returns, but we are certainly focused on the segments which deliver us our target RoAs.

B&E: NIMs of banks have been under pressure for quite some time now and have been heading southwards. What about Axis Bank?
SS: Axis Bank had a lot of expansions in NIM last year due to factors like capital infusion, which lowered our cost of borrowing. Credit growth was also low last year so our CASA ratio went up dramatically. Lastly, refinancing of some of high cost deposits, which were raised during the crisis of October 2008, were done. All these factors led to NIM expansion and it went up to 4% in one of the quarters and we believe some of it will reverse out in the near future. In addition, policy interventions like an increase in CRR, interest on daily savings balance, are going to compress NIMs further. Though NIMs will get compressed, we still hope to maintain our long-term average of 3.5%.

B&E: But credit growth has not picked up as expected...
SS: In fact, credit growth has been quite good as growth in the sector has been around 18-19%; if we knock out the telecom part, it has been around 15-16%, but there is expectation that credit growth is likely to pick up in the next couple of quarters. In fact, as a bank, we have traditionally grown ahead of the sector and will likely be ahead in times to come. Like I said, the sector is growing at 18% and we are likely to grow at 24-25%, but it is tough to predict a specific number at this point of time. Further, interest rates will be affected by two factors, cost of borrowing and liquidity coupled with the credit demand. If there is a lot of liquidity and no credit demand then we can’t raise interest rates, at least on the lending side. We need to look at all these factors and as such can’t give specific answer. In fact, I had mentioned last year that this year is going to be a year of volatility, so you need to wait and watch.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

For More IIPM Info, Visit below mentioned IIPM articles
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Saturday, September 08, 2012

EXCLUSIVE INTERVIEWS WITH:CEOS AND TOP MANAGEMENT OF INDIA’S LUXURY AUTO GIANTS

The Indian Luxury car market is on the verge of exploding, led by the increasing affluent class. this has catapulted Germany’s big 3 into an internecine and long drawn war. Is their any winner in sight yet? B&E’s Sanchit Verma Gives an incisive sectoral update on the current relative sales figures, positioning issues, production plans...

The scenario is similar with Audi. The more technology oriented German player revised its 2010 targets to 2700 (from 2300), having exceeded expectations by clocking 63% growth with 2178 cars sold in Jan-Sep 2010. This was the best sales performance for Audi ever in India, which shows how it is also gradually climbing the sales ladder. In fact, Audi India’s countrywide vehicle sales in September 2010 grew to 292 cars as compared to 205 units sold in September 2009. If one were to see the Jan-Sep 2010 period, Audi sold 323 units of its Q7 and A8 branded cars during this period; these brands stand at par with the Mercedes-Benz S-class & SL Roadster, which clocked 343 and 421 units respectively in the same period. “We are confident that we will achieve annual sales of 3000 cars, which is more than our revised target of 2700 cars,” said Michael Perschke, Head, India Operations, Audi.

In all, these three have posted total sales of 7178 units between them in the April-September 2010 period, a phenomenal growth of 84% yoy. But the reality is that going forward, all these luxury car makers are now attempting unique strategies that are brilliantly differentiated on one hand and classically positioned on the other.

Pricing and financing differentiation: Pricing matters in India! If you’re selling in India, the faster you understand the concept of value for money, the better for your sales. Take BMW for instance. On October 5, 2010, BMW launched BMW Financial Services as a new business entity in India; this firm is a 100% subsidiary of the BMW Group and will operate as a Non-Banking Finance Company (NBFC) as per the Reserve Bank of India (RBI) norms. In 2010, we’re informed that the BMW Group will invest $50 million (Rs.2.3 billion) in this arm. The reasons are quite obvious. The financing arm is to make the product more accessible to a wider audience. Look at how superbly BMW’s positioning has changed in recent times to accommodate the lower-upper class of Indian society. BMW’s recent advertisements are already offering the 3-Series at an attractive EMI of Rs.19,999 a month. Imagine the potential such a move holds, where hundreds of thousands of well earning middle management in as many Indian companies suddenly become potential customers. K. Kumar, India Manufacturing Head, Deloitte India, echoes this view to B&E, “The most important factor to expand this segment would be to put these cars within the reach of the upper middle class consumer.” Mirroring BMW’s strategic move, Daimler (the parent company of Mercedes-Benz) also announced that their financial services arm will start supporting India sales.

But BMW already has the first mover’s advantage, because while BMW’s financial arm is ready and active as of right now – and the festive season is the most critical of all times – Mercedes’ financial services are likely to be available only by next year. Audi still hasn’t expressed any views towards launching any financial services arm, as their current strategy encompasses significant investments in branding and marketing, exclusive dealerships and after sales service for the upcoming year. Evidently, this financing round is being won by BMW hands down.


Source : IIPM Editorial, 2012.
For More IIPM Info, Visit below mentioned IIPM articles.
 
IIPM : The B-School with a Human Face


 
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Tuesday, September 04, 2012

REAL ESTATE: INTEREST RATES

Yes, we can! RBI must move immediately to ensure banks charge logical rates

While the RBI might succeed in demotivating new home buyers from taking loans, the past home buyers would slowly be pushed to the brink of defaulting, if not insolvency.

As per a recent study by CRISIL, the share of bad loans to total loans in banks, which was 2.3% in 2009 is likely to swell up to 4% in 2010; the same is further expected to rise to 5% in 2011. The final effect will be both economical (As per May, 2010 figures, total bank loans equalled Rs.305,325 crores) and psychological (as asset demand would crash).

The solution? Delink home loan rates from other base rates. Force banks to ensure that each home loan’s base rate remains at the original cost at which the bank procured the money (to then give it to the home loan customer). By arbitrarily increasing home loan rates across even old loans, banks are doing their mite to destabilise the economic situation. An RBI move is required right now.


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Saturday, July 28, 2012

Alok Sheel, Secretary, Ministry of Finance, Government of India

B&E: Is there any probability that India might see recession by 2012?
AS: Recession technically means negative GDP growth in two consecutive quarters and nobody really envisages that would happen in India even in the worst case scenario. If there is another global recession, or a second dip, India cannot escape. However, while its growth rates might fall by a few percentage points, it is highly unlikely, given its domestic growth drivers and a well regulated financial system, that it will see negative growth.

B&E: If India faces a recession or dramatic slowdown, do you think that the Indian government is prepared enough to tackle that?
AS: As I said earlier, the trend in the reduction of the public debt ratio has been very encouraging. At the same time, interest rates have been repeatedly raised by RBI. Therefore, unlike advanced countries, India has both fiscal and monetary space to respond to another severe global downturn, although it would be more difficult this time. Also, monetary space is amore than the fiscal space, since the fiscal deficit is coming down more slowly.

B&E: What steps need to be taken globally to tackle such a crisis as it affects all nations?
AS: A discussion on global imbalances is going on in the G20. There are major seven systemically important economies in this premier global forum for international cooperation that individually comprise more than 5% of G20 GDP at either market exchange rates or at PPP. These countries are US, UK, Germany, France, China, Japan and India. All these countries have large imbalances. US and the UK have big current account deficits; and China, Germany and Japan have huge current account surpluses. India has only a 2-3% current account deficit though, a level that can be financed on a sustainable basis over the medium to long term, especially in view of our large hard currency reserves.


Source : IIPM Editorial, 2012.

An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

For More IIPM Info, Visit below mentioned IIPM articles.

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