Reserve Bank Governor Raghuram Rajan today said the central bank is looking at allowing full capital account convertibility in a few years.

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10 April 11, 2015

The Hindu:

Reserve Bank Governor Raghuram Rajan today said the central bank is looking at allowing full capital account convertibility in a few years.

“My hope is that we will get to full capital account convertibility in a short number of years,” he said.

Full capital convertibility means a foreign investor can repatriate his money into his own local currency at will, which is not allowed in the country now.

Stating that the RBI is fairly open to capital inflows, the Governor said: “The only place today that we have some restrictions is inflows into debt, especially very short-term debt.

“I think most people would agree that opening up to short-term debt flows is usually not very clever for reasons of financial stability,” Rajan said while delivering Kale Memorial Lecture at the Gokhale Institute of Politics and Economics here.

Rajan’s comment on full capital convertibility assumes importance as Finance Minister Arun Jaitley today launched the country’s first international finance centre in Gujarat. Full rupee convertibility can go a long way in the effective functioning this global financial services hub.

It may be noted that many analysts had credited the RBI for its policy of partial capital control, which helped it tide over the impacts of the currency meltdown that many South Asian economies which had full capital convertibility in 1997-98.

In May-August 2013, capital control helped the country from going to the dumps following the taper talks by the US Fed. Even then the country saw as many as over USD 20 billion being pulled out of the country by foreign investors.

Following the June 1991 liberalisation, the government and the RBI have been progressively lifting curbs on capital flows, which saw the FII investment into domestic debt rise to USD 31 billion now.

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India’s first IFSC becomes operational

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10 April 11, 2015

The Hindu:

India’s first IFSC becomes operational

India’s first International Financial Services Centre (IFSC) at GIFT City near here became operational on Friday. Finance Minister Arun Jaitley unveiled rules and regulations for this global financial hub.

Jaitley also attacked the previous UPA government for being “lethargic” in giving permission to the IFSC.

“Luckily, as soon as the government changed, things started moving fast and the new government has given all the due permissions. As a result, IFSC has now formally become operational from Friday. I am confident it will provide a huge lift to the economy of Gujarat as well as of the country,” he said.

The regulations are aimed at creating a vibrant IFSC on the lines of those in Dubai and Singapore and check the flight of trading in rupee and Indian securities to such offshore financial hubs.

IFSC rules allow companies incorporated outside India to raise money in foreign currencies by issuance and listing of their equity shares on stock exchanges within the IFSC, where individual and institutional investors from India and abroad, including NRIs, would be allowed to trade.

The IFSC regulatory regime allows Indian and foreign stock exchanges to set up separate bourses within IFSC as subsidiaries, while market entities from India and abroad would be allowed to operate there by providing issuance and trading in depository receipts and debt securities of domestic as well as overseas companies.

The capital and other requirements have been relaxed for some time for exchanges, clearing corporations and depositories to set shop in the IFSC.

Mutual funds and Alternative Investment Funds set up in the IFSC can also invest in the securities listed there.

Speaking at a conference on ‘Regulatory Framework for IFSC in India’, Jaitley said proposal for IFSC had been sent to UPA government by the state in 2011, but “due to the lethargic attitude of that government, we have to wait for three years to realise that idea” and it “contributed in bringing down India’s growth rate”.

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Bring private hospitals under RTI: CIC to govt.

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Bring private hospitals under RTI: CIC to govt.

April 9, 2015

TOI RAJKOT: End “medical terrorism” and ensure that the licence to practice medicine does not become a licence to kill and extort. This was the stinging message that the Central Information Commission (CIC) delivered to lawmakers while disposing the application of a New Delhi-based advocate, Prabhat Kumar, who wanted to know the real cause of his 73-year-old father’s death in a private hospital.

In a landmark order, the CIC has recommended to the Centre, states and Union territories to bring private hospitals under the RTI ambit, which it says will force them to provide medical records of patients to their kin on a day-to-day basis. The CIC observed that this will also prevent the undesirable practice of altering records after damage has been caused to the patient.

“Forcing private hospitals to provide daily medical records will also act as a check on some hospitals from resorting to extortionist, inhuman and ruthless business of prescribing unnecessary diagnostic tests, unnecessary surgical operations, caesarean deliveries, unwarranted angioplasties, inserting stents without need, or of substandard nature or putting low-quality stent while collecting price of high-quality stent and several such malpractices amounting to medical terrorism,” observed M Sridhar Acharyulu, information commissioner, CIC.

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CIC penalizes Delhi official for not giving pension info to 70-yr-old

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CIC penalizes Delhi official for not giving pension info to 70-yr-old

8 April 2015

TOI NEW DELHI: The Central Information Commission (CIC) has slapped a penalty of Rs 25,000 on a Delhi government official for not giving information related to the pension status of a 70-year old woman. The commission has also asked for compensation of Rs 5,000 to be paid to her.

Taking a stern view of laxity in implementing his order on disclosing status of pension, information commissioner Sridhar Acharyulu warned the Delhi government’s women and child development department that if this order was not complied with and the report not provided within one month, the Commission would be compelled to take measures to prosecute the concerned officials.

The department had withheld information related to the status of pension of the 70-year-old.

He said in case of non-compliance, the official Saroj Rawat could be prosecuted under IPC sections 166 (public servant disobeying law), section 187 (omission to assist public servant when bound by law to give assistance) and section 188 (disobedience to order duly promulgated by public servant).

“It is sad to note that the officers called Public Information Officer do not give information to poor public and when they approach under RTI. They reject because they have not approached directly,” Acharyulu said.

The case relates to a 70-year old poor woman whose pension was stopped abruptly by the Delhi government without giving any intimation to open a bank account. The government had decided that pension will no longer be delivered in the post office and pensioners would have to open a bank account.

“She has never been informed by any means nor (has) anybody visited her house personally so that she was told to open a bank account,” Acharyulu pointed out.

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Nudge staff to give up LPG subsidy: PM to banks, corporates

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Business line:aPRIL 2

Nudge staff to give up LPG subsidy: PM to banks, corporates

Prime Minister Narendra Modi today asked banks and industrial houses to nudge their employees to give up subsidised LPG, saying if one crore people surrender it, an equal number of poor families would get the benefit of this clean energy.

Modi had recently launched ‘Give It Up’ campaign, asking well-off people to surrender their LPG subsidy.

Addressing the 80th anniversary of the Reserve Bank here, he said so far about two lakh consumers have joined the initiative.

There are about 15.3 crore LPG consumers in the country.

“I believe that our banks should take all their employees in confidence. Every bank should resolve that their employees would give up the subsidy. All industrial houses should decide that their employees would give up subsidy,” Modi said.

The Prime Minister said that the Government’s intention behind the campaign is not to add to its coffers by saving on subsidy bill, but to provide LPG cylinders, a clean energy, to poor households who use firewood for cooking.

“Give up voluntarily. If one crore people give up this gas cylinder subsidy… one crore poor families who burn firewood, which leads to deforestation, carbon emission (and) their children grow up in smoke… The cylinder (subsidy) you give up should reach to the house of that poor,” he said.

Since the Government started the new scheme of direct benefit transfer (DBT) for cooking gas, several persons opted out of the subsidy scheme.

Modi also said that DBT has brought transparency in cooking gas subsidy which has also checked leakages in the government support programme.

Under the DBT, the subsidy amount is directly credited into the bank accounts of consumers even as they pay full amount for LPG cylinder at the time of purchase.

The government has so far saved Rs. 8,000 crore due to subsidy transfer through DBT.

At present, consumers are entitled to 12 refills of 14.2-kg cylinders or 34 refills of five-kg bottles in a year at subsidised rates.

Public sector oil marketing companies (OMCs) have given an option to existing LPG consumers to convert their current domestic LPG connection into a non-subsidised domestic connection.

This can be done by submitting a written request to the distributor or electronically via

In 2015-16 Budget estimates, petroleum subsidy has been halved to Rs. 30,000 crore, from estimated Rs.60,270 crore, in the current fiscal.

Of Rs. 30,000 crore for next fiscal, Rs. 22,000 crore has been earmarked for LPG subsidy and the rest is for kerosene.

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Making financial inclusion sustainable

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Making financial inclusion sustainable

The trick is to reduce overheads by deriving maximum mileage from the business correspondent model

The Pradhan Mantri Jan DhanYojana, the Government’s ambitious programme for financial inclusion, is being rolled out across the country on a massive scale, targeting comprehensive coverage of over 20 crore households by March 2017. The programme poses several operational challenges to the implementing banks and service providers that could adversely impact its implementation.

In many developing countries, financial inclusion (FI) initiatives are demand driven. The focus is on delivering specific products and services to the target groups. Fund transfer facilities, electronic payment systems and small value consumer credit constitute the usual product offerings under FI. The hosting banks are at the backend, supporting the service providers that retail relevant fee-based products to the enrolled customers.

In contrast, in India, FI is being driven from the supply side, as a pivotal tool for the achievement of inclusive socio-economic development; the thrust is on making basic banking services available at affordable cost to every excluded household. The commercial sustainability of the programme has not received enough attention.

Poor balance

The FI programme is primarily anchored through “No Frills” savings accounts. While the number of basic SB accounts opened through corporate business correspondents (BCs) has moved up from 13.27 million in 2010 to 81.27 million in 2013, the aggregate balances have only marginally increased, from ₹10.69 billion to ₹18.22 billion during the period. According to the RBI Annual Report, 2013, the average balance per account has declined from ₹80 to ₹22 over the period. Given the low level of savings mobilised, compounded by defaults on overdrafts issued on the No Frill accounts, the banks could hardly earn any net interest margins on the funds front. For most banks, the cost of carriage on books per FI account works out much higher than the average balance per account.

The FI projects necessitate substantial investments and recurring costs on the part of technology service providers (TSPs) and BCs engaged by the banks. The costs of handheld POS devices provided to the last mile customer service providers (CSPs) and the commissions are the major components of the outlay on FI. Added to these are the costs of solution software, tele-connectivity, consumables, field travel, project management and cost of smartcards and now Rupay Cards issued to account-holders.

Further, the PMJDY prescribes that CSPs are assured a minimum monthly remuneration of ₹5,000, which is way higher than the average of about ₹1,000-1,500 they currently earn. With the scope of FI being extended to a large number of sub-service area villages, the costs would go up further.

Underutilised services

The revenues of the service providers are linked to the number of accounts enrolled and transactions carried out. While enrolments provide one-time revenue, transaction revenue is empirically observed to be sub-optimal, with 70-80 per cent of the FI accounts remaining dormant, since customers don’t feel compelled to operate the accounts frequently. Due to the low volume of operations, most TSPs are unable to meet their costs. Many TSPs have exited from FI ventures. Several banks have terminated the contracts with TSPs on grounds of non-achievement of targeted levels of activity. It is, therefore, imperative for banks to revise the terms of the contracts with the TSPs in alignment with the actual costs.

Banks view FI as a para-banking operation restricted to savings deposits and have been hesitant in leveraging the BC network, especially on the credit front. This renders the FI channel unprofitable. Interestingly, most No Frills FI account-holders also avail credit facilities at the link branches. The convergence of the PMJDY with priority sector lending should be expedited.

Banks may be mandated to channelise all loans to agriculture, small businesses and micro industries through the FI accounts. These would be maintained by the eligible borrowers and operated by them through POS devices. This would enable banks scale up priority sector credit and boost FI revenues.

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Modi asks Reserve Bank to prepare 20-year financial inclusion roadmap

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Business line:aPRIL 2

Modi asks Reserve Bank to prepare 20-year financial inclusion roadmap

Prime Minister Narendra Modi on Thursday asked the Reserve Bank of India to prepare a 20-year roadmap for deepening financial inclusion in the country.

Speaking at a function to commemorate the completion of 80 years of the RBI, Modi said that the financial inclusion programme should be rolled out in phases with the first target to be met by 2019, when the country will celebrate the 150th anniversary of Mahatma Gandhi.

“So, a roadmap on how the Indian banking system will reach the doorstep of the poor will have to be readied,” the Prime Minister said, even as he lauded the RBI’s contribution to the economy.

Modi emphasised that banks should zero in on target groups and achieve the financial inclusion goals.

“Cooperative banks, microfinance institutions, nationalised banks as well as the RBI should think in one direction (financial inclusion). This is possible,” he said.

Financial inclusion is the process of ensuring access to appropriate financial products and services needed by all sections of society, in general, and vulnerable groups, such as weaker sections and low-income categories, in particular, at an affordable cost and in a fair and transparent manner.

No small achievement

The Prime Minister pointed out that it was no small achievement that banks were able to open 14 crore bank accounts under the Pradhan Mantri Jan Dhan Yojana (PMJDY) since August 2014, with 41 per cent of the accounts collectively having a balance of ₹14,000 crore.

Modi said though the facility allowed the poor to open zero-balance accounts, they actually deposited money.

“Bankers must have seen the poverty of the rich many times. They must have come across the rich who don’t pay their dues on time. Bank managers must be troubled when March approaches and these borrowers don’t pay up. “So, you have seen the poverty of the rich. But PMJDY has given you the opportunity to see the richness of the poor,” the Prime Minister said.

In line with the ‘Make in India’ campaign, Modi urged the RBI to turn ‘Swadeshi’ by ensuring that the security paper as well the ink used for printing currency notes are manufactured domestically. The Prime Minister also asked banks and industrial houses, along with their employees, to give up their LPG subsidies to benefit one crore poor families.

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Monetary policy: new rules, new actors

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Monetary policy: new rules, new actors


Business Line

A proactive government role should not result in the RBI losing its powers altogether

February 20, 2015, is a watershed in the relations between the Reserve Bank of India and the Centre. For the first time an agreement has been formally signed by the RBI and the government, setting out the primary objective of monetary policy of maintaining price stability while keeping in mind the objective of growth.

Under the agreement, the RBI will aim to bring inflation below 6 per cent by January 2016, and for the financial year 2016-17 and all subsequent years, the target shall be 4 per cent with a band of plus or minus 2 per cent (according to clause 2 of the agreement).

The RBI shall be seen to have failed to meet the target if inflation is (i) more than 6 per cent for three consecutive quarters for the financial year 2015-16 and all subsequent years, and (ii) less than 2 per cent for three consecutive quarters in 2016-17 and all subsequent years (according to clause 6 of the agreement). There appears to be asymmetry between the upper bound and the lower bound for inflation. Moreover, there appears to be inconsistency between the target (in clause 2) and the determination of the failure (in clause 6).

If this asymmetry is a conscious decision it has far-reaching implications for the operation of monetary policy in 2015-16. Given that the year-on-year inflation rate as of February 2015 is 5.3 per cent, prudent management would warrant that the RBI rule out, in the first half of 2015-16, any relaxation of policy interest rates and ancillary policy measures.

Operating procedure

Under clause 4 of the agreement it will be incumbent on the RBI to publish the operating target(s) and establish an operating procedure through which the operating target will be achieved; any change in the operating target in response to evolving macro-financial conditions shall also be published. It is not clear whether there would be provision for a force majeure in the case of, say, a war, a natural disaster or pestilence.

In case force majeure is to be cited it does not appear to be appropriate to alter the targets through the operating procedure, but there should be an amendment to the agreement signed by the government and the RBI. It is hoped that the monetary policy review of April 7, 2015, would be used to publish the operating procedure.

A vital element in the new monetary policy order is the setting up of a monetary policy committee (MPC). There are sharp differences between the FSLRC and the Urjit Patel Committee on the constitution of the MPC. This issue has been discussed in extensio in earlier columns.

The agreement is notably silent on the setting up of the MPC. The FSLRC recommends an eight-member committee of which only two would be RBI executives and the government would appoint five external members.

Further, there would be a non-voting executive of the government. In contrast, the Urjit Patel Committee recommends a five-member committee of whom three would be RBI executives and two would be external members. The FSLRC model for the composition of the MPC is contrary to the set-up in all the major countries; there is probably no country in which the external members outnumber the executive members.

Insidious recommendation

The FSLRC recommendation is insidious in that it is a blatant attempt to make things awkward for the RBI by holding it accountable for the decisions of the external members. If the RBI is to be accountable it should have a majority of executives on the MPC.

The FSLRC proposal has a proviso for a veto for the governor. If there is such a veto it would be best to continue with the present technical advisory committee. It would be meaningful to have no veto for the governor but in that case the Urjit Patel Committee model should be followed while setting up the MPC. Having a government executive on the MPC, albeit without voting rights, would go against the spirit of an MPC. Big Brother may not have voting rights but can have an overbearing dominance over the working of an institution.

A match referee cannot also be the third umpire, the umpire on the field, a player and also a spectator. Such a ridiculous proposal goes against the grain of the present government’s fundamental philosophy of maximum governance with minimum government. Hence, the FSLRC recommendation on the composition of the MPC should simply be tossed out.

The amendments to the Finance Bill 2015 set out in paragraphs 154-157 imply that the money market regulatory powers would be taken away from the RBI. Such an important measure has not earned any mention in the Budget speech. The government has been quick to reassure that the RBI’s powers in the money market would not be taken away and that the provisions in the Finance Bill 2015 would be amended. This leaves one with the uncomfortable feeling that goblins have surreptitiously introduced fundamental changes in financial legislation. The government would do well to deactivate the goblins.

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A fine balance:

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Business Line New Delhi…
A fine balance:
The differences over the constitution of the Monetary Policy Committee should be ironed out by providing the Centre with a voice and the RBI governor with a veto
The Monetary Policy Framework Agreement signed by the Centre and the Reserve Bank of India a month ago has run into its first hurdle over the constitution of the Monetary Policy Committee (MPC). The RBI may have dismissed talk of disagreement with the Centre as “speculative chatter”, but it is clear that both parties are trying to gain control over the MPC, which will be the key body to determine interest rates in the country. The RBI would like the MPC to be fashioned in line with the recommendations of the Urjit Patel Committee, which went into monetary policy framework reform. This committee recommended a five-member MPC with the RBI governor as chairman, the deputy governor in charge of monetary policy as vice-chairman, the executive director and two external members to be picked by the chairman and vice-chairman. The members would have a vote each and there would be no veto power for the chairman.
The Centre, however, prefers the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC) which proposed a seven-member panel made up of the RBI governor, an executive member of the RBI board, three external members to be picked by the government, and two external members to be appointed by the government in consultation with the RBI. The government representative would be a non-voting attendee. While the RBI governor would be empowered with the power of veto, the exercise of this would need to be accompanied by a public statement explaining the reasons for the decision.
Neither recommendation is ideal, but of the two, the FSLRC version is at least invested with a degree of balance. While the composition of the committee may not be weighted in favour of the RBI, vesting the governor with the veto power is a guard against the erosion of the central bank’s institutional autonomy and undue pressure from the government. The RBI’s version of the MPC, on the other hand, is a non-starter as it is stacked with its own representatives and none from the government. What we need, therefore, is the proverbial golden mean: a committee that will strike the right balance between the government and the RBI representatives/nominees, with the veto resting with the governor. This power is important because at the end of the day it is the RBI that bears responsibility for inflation targeting. Under the monetary policy framework agreement, the governor has to explain to the government if he’s unable to meet the inflation target. The RBI aims to bring inflation down to 6 per cent by January 2016 and to 4 per cent in subsequent years. Tweaking the FSLRC version to provide a greater balance could ensure that the government voice is heard even as the RBI’s independence is not compromised.
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