RBI tells banks to replace defective 1,000-rupee notes

Out of 300 million defective banknotes that were printed in one of the printing presses of government-owned Security Printing and Minting Corporation of India, about 100 million of those notes have hit the market leaving the general public in a tizzy.

About 200 million pieces were transferred to the RBI’s currency chests, some of which was then loaded in banks’ automated teller machines, sources close to the development said.

Currency experts said that the checking of notes is done at the press-level and the banking regulator is not involved with checking each and every banknote.

An RBI spokesperson has confirmed the development and said banks have been asked to replace such notes with the central bank, when found. Banks have also been advised to replace such notes whenever a customer approaches them. The notes are genuine though they are defective, the spokesperson said.

There are four printing presses which print and supply banknotes. These are at Dewas in Madhya Pradesh, Nasik in Maharashtra, Mysore in Karnataka, and Salboni in West Bengal.

The presses in Devas and Nasik are owned by the Security Printing and Minting Corporation of India (SPMCIL), a wholly owned company of the Government of India. The printing of the notes in Karnataka and West Bengal are done by the Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), a wholly owned subsidiary of RBI.

Sources said the defected notes were printed in the Nashik press while Security Paper Mill of Hoshangabad produced the currency note paper. The security thread was missing in the defective pieces, the sources said. The 1000-rupee notes which was introduced in October 2000, contain a readable, windowed security thread alternately visible on the obverse with the inscriptions ‘Bharat’ (in Hindi), ‘1000’ and ‘RBI’, but totally embedded on the reverse.

As on March 31, 2015, there were 5,612 million Rs 1000 denominated notes in circulation which constitutes 6.7 per cent of the total notes in circulation. In terms of value, Rs 1000 denominated notes constituted 39.3 per cent of the total value of notes in circulation.

Notes of denominations of Rs 500 and Rs 1,000 together accounted for approximately 85 per cent of the total value of banknotes in circulation at end- March 2015. Notes of Rs 10 and Rs 100 together accounted for 54 per cent of the volume at end- March 2015, RBI data shows.

Weak balance sheets, bad loans increase risks for banks: RBI

Industrial sector accounts for major share of overall credit and stressed loans.

The Reserve Bank of India expressed concern over high corporate leverage as bad loans from the country’s top corporations increased sharply between March and September, 2015.

“Corporate sector vulnerabilities and the impact of their weak balance sheets on the financial system need closer monitoring,” RBI Governor Raghuram Rajan said in the foreword of the semi-annual Financial Stability Report.

A significant increase in the gross non-performing asset ratios of large borrowers among public sector banks, from 6.1 per cent in March 2015 to 8.1 per cent in September 2015, has led to an increase in the GNPA ratio of the banking system, according to the report.

As a result, standard assets among large borrowers declined from 86.2 per cent of total gross advances as of March 2015 to 84.5 per cent as of September 2015.

Credit to top 100 large borrowers, in terms of funded amount outstanding, constituted 27.6 per cent of the credit to all large borrowers and 17.8 per cent of the credit of all commercial banks.

The share of gross NPAs of these 100 borrowers in total gross NPAs of all commercial banks increased sharply from 0.7 per cent in March 2015 to 3.1 per cent in September 2015.

Loans to the industrial sector account for a major share of their overall credit portfolio as well as stressed loans, according to the report.

“This aspect of asset quality is related to the issue of increasing leverage of Indian corporates. While capital expenditure (capex) in the private sector is a desirable proposition for a fast growing economy like India, it is observed that the capex, which had gone up sharply, has been coming down despite rising debt.”

The profitability and as a consequence, the debt-servicing capacity of companies, has seen a decline which is an indication of halted projects, rising debt levels per unit of capex, overall rise in debt burden with poor recoveries on resources employed.

“The travails of the “industrial” sector may also be exerting a demonstration effect inhibiting new investments.”

“Banks extended disproportionately high levels of credit to corporate entities / promoters who had much less ‘skin in the game’ during the boom period.”

The gross non-performing advances of commercial banks, as percentage of gross advances, increased to 5.1 per cent from 4.6 per cent between March and September 2015, the RBI data showed The restructured standard advances as percentage of gross advances declined to 6.2 per cent from 6.4 per cent while the stressed advances ratio increased to 11.3 per cent from 11.1 per cent during the same period.

House Price Index declines 13.7% in July-September

The All India House Price Index increased to 219.5 in the July-September period from 215.3 in the previous quarter mainly due to increase in the HPI of Delhi, Ahmedabad and Chennai, according to the Reserve Bank of India.

The HPI of Kolkata, Kochi and Bengaluru decreased in the July-September period from the previous quarter.

Year-on-year growth in HPI-All India further declined to 13.7 per cent in July-September (14.5 per cent in the previous quarter and 17.5 per cent in January-March 2015) mainly due to decline of y-o-y growth of HPI of Kolkata, Jaipur and Lucknow.

In July-September, maximum growth in HPI was in Delhi (21.9 per cent), and the minimum in Kochi (-7.2 per cent).

The Reserve Bank compiles quarterly HPI (base: 2010-11 = 100) for ten major cities — Mumbai, Delhi, Chennai, Kolkata, Bengaluru, Lucknow, Ahmedabad, Jaipur, Kanpur and Kochi.

Based on these city indices, an average house price index representing all-India house price movements is also compiled. These indices are based on the official data of property price transactions collected from registration authorities of respective State governments.

Rare admission by RBI as it gears up for US Fed rate hike

Central bank to intervene in currency futures market.

As market participants gear up for the U.S. Federal Reserve’s meeting next week, when it is expected to take a decision on raising interest rates for the first time in more than a decade, the Indian central bank is keeping all its powder dry to combat any volatility in the financial markets here.

In a rare admission on Wednesday, the Reserve Bank of India (RBI) said it had decided to intervene in the Exchange Traded Currency Derivatives (ETCD) segment, without specifying if it had already been active in that market.

The central bank generally intervenes in the spot currency market, and manages the rupee flows resulting from that intervention through the forwards market.

“RBI intervenes in the domestic foreign exchange market as and when required in order to manage excessive volatility and to maintain orderly conditions in the market,” the central bank said on Wednesday.

“As a further measure it has been decided to intervene in the ETCD segment, if required,” it said. The data on the intervention would be made public, like in the case of spot market intervention which comes with a lag, the central bank said.

Three exchanges — National Stock Exchange, BSE and Metropolitan Stock Exchange of India — offer paired derivative contracts of rupee-dollar, rupee-yen, rupee-pound and rupee-euro.

However, dealers said the central bank had already started intervening in the futures market, maybe since a fortnight. “It will increase the depth of the market,” said a dealer from a public sector bank.

Markets are on the edge ahead of the U.S. Fed meet and the move by the central bank is seen as another tool to curb volatility in the currency markets.

The Indian currency has been under pressure amid foreign fund outflows and has depreciated almost 7 per cent against the dollar in the current financial year. In November, the rupee almost touched a two-year low, and weakened 2.1 per cent, making it the worst performing currency in Asia. Dealers said the central bank has been intervening in the spot market to curb volatility. RBI always maintains that it does not target any specific level for the currency and intervenes only to curb volatility.

Market participants, however, do not see a 2013 like situation, when the rupee tumbled to a historic low of 68.25 a dollar on August 28. Since then, following a series of steps by the central bank and the government, including restrictions on the import of non-essential items and efforts to attract foreign fund flows, the currency had stabilised. The central bank has built up its foreign exchange reserves — adding more than $75 billion in two years. The twin deficits – fiscal and current account – have also improved since 2013.

Reserve Bank of India's tricky strategy to ease market’s pre-Fed jitters

Haunted by memories of India’s 2013 markets crash, the country’s central bank is engaging in a tricky balancing act with domestic yields to keep volatility out of its bond markets ahead of the Federal Reserve’s historic policy decision this month.

The Reserve Bank of India (RBI) is seeking to prevent wild swings in bond markets by agreeing to pay higher interest rates to investors at bond auctions, people with knowledge of the central bank's operations say, while also buying bonds in the open market to stop yields rising too much.

Although India has outperformed many emerging markets this year, the country has not been immune to Fed jitters, with foreign investors selling around $1.7 billion in bonds and shares last month.

The people familiar with RBI operations say it is worried weak market participation at its auctions ahead of the Fed’s December 15-16 meeting could trigger a selloff. In 2013, Fed ‘taper’ fears sent the rupee to a record low.

“It is best to avoid adding any negative news before the Fed,” said one of the people.

“When there is so much (bond) supply, yields can’t stay low.”

The RBI has in its past two weekly government bond auctions allotted tenders to bidders below market prices, effectively paying higher-than-normal yields.

Typically, the RBI sets a maximum cut-off yield for bids and employs a process known as ‘devolvement’ for weak bond tenders in which the auction’s underwriting dealers buy up the shortfall in undersubscribed tenders at the cut-off yield.

“A devolving auction could mean that there is not enough demand for bonds, which sends a negative signal,” the person said.

This is why the RBI has avoided devolvement at its Nov. 27 and 20 auctions, despite tepid appetite, and has chosen to accept all bids, even those demanding yields above the majority of the bidders.

The RBI’s last devolved auction took place in June when demanded yields rose to rates that were uncomfortably high for the central bank.

Last Friday, the RBI sold 150 billion rupees of bonds, almost half of which were 10-year benchmark bonds priced at a 7.76 percent yield, 4-5 basis points higher than market rates on that day.

Another person familiar with RBI operations said the central bank is also likely to avoid devolved auctions ahead of the government’s budget in February.

“It is a conscious decision to not devolve and keep things on the safer side ahead of the Fed and the budget,” the person said, adding that devolvement will only happen if yields rise dramatically.

An RBI spokesperson did not have a comment on central bank operations.

A surprise RBI announcement on Wednesday to buy $1.5 billion of government bonds in the secondary market, however, is targeted at countering the recent rise in yields and easing tight cash conditions. The move helped push yields down six basis points on Thursday.

And as a result, yields at this week’s RBI bond auction on Friday are also likely to be lower.

However, analysts say the RBI’s current strategy comes with hazards and may perversely create more problems.

Reserve Bank employees plan mass leave

The United Forum of Reserve Bank Officers and Employees, through its four constituents, has given a call for a day’s mass casual leave on November 19, to register their opposition to what they see as the government’s move to take away some of RBI’s money market operations.

“Through the proposed mechanism of Monetary Policy Committee (MPC), the government plans to intervene and decide the monetary policy which has been the exclusive jurisdiction of the RBI so far,” a UFBO&E statement said adding that the government wants to virtually take over the function under the pretext of Legislative Reforms Commission set up by the Centre.

The central bank has reacted to this proposal by saying that such en masse casual leave amounted to illegal strike under the RBI’s rules.

The UFRBO&E is an umbrella organisation of four recognised unions and associations of officers and workmen staff in RBI. The mass CL programme may deeply affect RBI’s functions, especially clearing house operations.

The United Forum comprises of two organisations each of workmen and officers, covering the 17,000 employees of the RBI.

The central bank also advised its officers to take police-help to maintain critical services such as clearing house operations. RBI central office has asked the regional offices to furnish the attendance position on that day.

The United Forum is also clubbing with this issue, some pension-related issues. These include an improvement in the pension (with periodic updation on the basic pay) and a facility to enable employees who had not opted for the pension scheme to exercise that option. This option facility was last extended over a decade ago, a union office bearer said.

All India Reserve Bank Employees Association General Secretary Samir Ghosh said that the intimation of the agitation programme was given to the RBI in end-September.

RBI rejects plan for 100% FDI in banks

The Reserve Bank of India (RBI) has turned down a proposal from the government to allow up to 100% foreign direct investment (FDI) in banks, a move that may come as a damper for several private sector lenders such as ICICI Bank and HDFC Bank.

Sources said the RBI has not provided a clear reason to turn down the proposal from the department of industrial policy and promotion (DIPP) that deals with FDI policy. But in the past the regulator has seen banking as a sensitive sector and opposed allowing significant shareholding by foreign institutional investors, who are seen as short-term investors and can enter or exit a stock for short durations, largely to book profits.

Private banks are particularly keen on a higher ceiling and investors are also hoping for a relaxation. In fact, HDFC Bank recently got permission for 74% foreign investment and was also found to be in breach of the norms for a short period.



A few years ago, in the draft norms for new banks, the RBI had suggested limiting FDI to 49%, against the 74% cap. The finance ministry, however, saw it as a retrograde step and got the regulator to stick to the prescribed ceiling. In fact, a few years before that, during UPAI's tenure, there had been a major battle between the finance ministry and the RBI on how the FDI norms should be applied, with North Block finally saying that setting the foreign investment rules was in its domain.

Currently, the government permits 74% FDI in private banks, with up to 49% allowed under the automatic route. Foreign holdings beyond 49% need to be cleared by the Foreign Investment Promotion Board (FIPB). Portfolio investment in the sector is capped at 49% and banking is one of the segments where the composite caps, which allow fungibility between FDI and FII flows, have not been applied as the government argued that it is a "sensitive sector".

RBI cuts rate by 0.25%; home, auto loans may become cheaper

Home, auto and corporate loans are likely to cost less after RBI on Tuesday cut interest rate by 0.25 per cent for the third time this year to spur investment and growth but hinted there may not be any more cuts in the near-term sending stock markets into a tizzy.

Yielding to demands of Finance Minister Arun Jaitley and India Inc, RBI Governor Raghuram Rajan "front loaded" the repo rate cut despite worries of below normal monsoon and its impact on prices.

The governor asked banks to follow suit and pass on the rate cuts -- 0.75 per cent since January -- to individual and corporate borrowers.

Most bankers felt that with today's rate cut RBI has provided space for lowering lending and deposit rates. Public sector Allahabad Bank became the first to reduce the lending rate by 0.3 per cent.



RBI cut the repo rate (short-term lending rate) from 7.5 per cent to 7.25, but left all other policy tools like cash reserve requirement unchanged at 4 per cent and Statutory Liquidity Ratio (SLR) at 21.5 per cent.

Rajan lowered projections of the economic growth as measured by GVA (gross value added) to 7.6 per cent from 7.8 per cent estimated in April due to global factors and likely impact of below normal monsoon.

At the same time, inflation still remains a worry for the central bank as it expects price rise to remain subdued till August before rising to 6 per cent by January 2016.

It asked the government to to put in place a "contingency plan" to manage the impact of low food production on inflation, mainly because of expected lower than normal rains.

The other concern for the RBI is rising crude oil prices. Since the last policy in April, the crude oil prices have witnessed an increase of 9 per cent. Soon after the policy announcement, the BSE Sensex plunged by over 400 points. The markets, however, later recovered slightly.
Chief Economic Adviser, Arvind Subramanian said: "These cuts are consistent with the trends in the economy including strongly declining inflation, contained current account deficit and ongoing strong fiscal discipline."