RBI's 2nd quarter monetary policy highlights

Repo rate increased by 25 basis points from 8.25 to 8.5 per cent.

The likelihood of a rate action in the December mid-quarter review is relatively low.

Based on the current and evolving macroeconomic situation, RBI revised projection of GDP growth for 2011-12 to 7.6 per cent from earlier 8%.

Deregulation of the savings bank deposit interest rate with immediate effect; banks are free to determine their savings bank deposit interest rate, subject to the following two conditions:

--> First, each bank will have to offer a uniform interest rate on savings bank deposits up to 1 lakh, irrespective of the amount in the account within this limit.

--> Second, for savings bank deposits over 1 lakh, a bank may provide differential rates of interest, if it so chooses. However, there should not be any discrimination from customer to customer on interest rates for similar amount of deposit.

For banking penetration RBI proposed to permit domestic scheduled commercial banks to open branches in Tier 2 centres (with population 50,000 to 99,999) without the need to take permission from the Reserve Bank in each case, subject to reporting.

In the area of financial markets, four important initiatives have been announced.

--> First, the Reserve Bank will issue the final guidelines on the cash settled 5-year and 2-year interest rate futures (IRFs), including the final settlement price by end-December 2011.

--> Second, guidelines on credit default swaps (CDS) will be made effective by end-November 2011.

--> Third, guidelines on short sale in government securities will be issued by end-December 2011.

--> Fourth, a Working Group will be constituted to examine and suggest ways for enhancing secondary market liquidity in the G-Sec and interest rate derivatives markets.

For more information, click here

Ajay Shah: Reining in the inflationary dragon

A critical feature of non-tradeables inflation is expectations. If people expect 10% inflation, they tend to wire high price rises into their negotiation of wage and other contracts. This generates inflationary momentum. Particularly in a place like India, where the institutional structure of monetary policy is primitive, economic agents have little confidence in the ability of policy makers to rein in inflation. As a consequence, inflation is highly persistent. Once high inflation sets in, economic agents expect high inflation to continue. There is a great deal of momentum in inflation.

Some argue that supply bottlenecks in India - such as hideous rules about mandis - are the cause of inflation.
The trouble with this explanation is that the supply bottlenecks have always existed. They have existed in high inflation times and in low inflation times. It is, thus, not possible to claim that supply bottlenecks have caused the inflation crisis which began in February 2006.

For more click here.

Middle class hypocrisy on the poverty line: Swaminathan S A Aiyar

I found this article interesting as lot of discussion is going on these days about Rs. 32/day/person being the poverty line. Click here for the article.