Archive for November 4th, 2010

Greece 2009 vs Argentina 2001

November 4, 2010

At the peak of the Greece and Europe crisis, comparisons were drawn betwwen Greece and Argentina.

This short paper from Fernanda Nechio of FRBSF explains the similarities and differences.

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Indian Government Debt- Status and Road ahead

November 4, 2010

Finmin has released a new paper on the topic. I have not read it so far.

PIB has a press release explaining key thoughts:

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Monetary Transmission is working somewhat

November 4, 2010

In previous post, we looked at How is India financing its growth?

Carrying forward from there I was looking at the financial markets chapter. There are deposit and lending rates of banks. Looking at this data it tells us about monetary transmission. If bank rates are moving in line with policy rates, we can say monetary transmission is working. After all it is banks through which this transmission mechanism works.

In this crisis, monetary transmission suffered worldwide. First even though central banks cut-rate sharply, same was not seen in the case of banks. In advanced economies lending still remains weak.

In India, as RBI cut rates banks did not cut rates as much. To this RBI Governor said:

The efficacy of the monetary transmission mechanism hinges on the extent and speed with which changes in the central bank’s policy rate are transmitted through the term structure of interest rates across markets. While the transmission of policy rate changes by the Reserve Bank has been faster in the money and government securities markets, it has been slow to the banks’ lending rates. This has been a cause for concern. As indicated in the Annual Policy Statement, some of the major factors that impede the transmission of policy rates to the banks’ lending rates are:

(i) the administered interest rate structure on small savings, which constrains the reduction in deposit rates;

(ii) a substantial portion of bank deposits is mobilised at fixed interest rates, which discourages banks to reduce their lending rates in line with the policy rates;

(iii) concessional lending rates linked to BPLRs for some sectors, which make overall lending rates less flexible; and

(iv) persistence of the large market borrowing programme of the government, which hardens interest rate expectations. As liquidity remains ample, the competitive pressure on lending rates has increased. Consequently, the transmission of policy rate changes to bank lending rates has improved since the last Annual Policy Statement in April 2009. As the short-term deposits contracted earlier at high rates mature and get repriced, it opens up room for banks to further reduce their lending rates.

Now as RBI as been hiking rates since Mar-10, what do we see in deposit and lending rates? Well they did not change till Jun-10 but have edged up slightly in Oct-10. Banks have increased deposit rates to mobilize higher time deposits.

Deposit Rates of Banks (in %)
  Sep-09 Dec-09 Mar-10 Jun-10 Oct-10
Public Sector Banks           
Up to 1 year 1.00-7.00 1.00-6.25 1.00-6.50 1.00-6.25 1.00-7.00
> 1year-3 years 6.50-8.00 6.00-7.25 6.00-7.25 6.00-7.25 7.00-7.75
> 3 years 7.00-8.50 6.25-7.75 6.50-7.75 6.50-7.75 7.00-8.00
Private Sector Banks           
Up to 1 year 2.00-7.50 2.00-6.75 2.00-6.50 2.00-6.50 2.50-7.25
> 1year-3 years 6.00-8.75 5.25-7.50 5.25-7.75 6.25-7.50 6.50-8.25
> 3 years 6.00-9.00 5.75-8.00 5.75-8.00 6.50-8.00 6.50-9.00
Foreign Banks           
Up to 1 year 1.80-8.00 1.25-7.00 1.25-7.00 1.25-7.00 1.25-7.30
> 1year-3 years 2.25-8.50 2.25-7.75 2.25-8.00 3.00-8.00 3.00-8.00
> 3 years 2.25-9.50 2.25-8.50 2.25-8.75 3.00-8.50 3.00-8.25

 

Lending Rates of Banks  (in %)
 BPLR/Base Rate Sep-09 Dec-09 Mar-10 Jun-10 Oct-10
1. Public Sector Banks 11.00-13.50 11.00-13.50 11.00-13.50 11.00-13.50 7.50-8.50#
2. Private Sector Banks 12.50-16.75 12.50-16.75 12.50-16.75 12.50-16.75 7.00-9.00#
3. Foreign Banks 10.50-16.00 10.50-16.00 10.50-16.00 10.50-16.00 5.50-9.00#
Actual Lending Rate*          
1. Public Sector Banks 3.50-17.50 3.25-18.00 3.25-18.00 3.25-18.00
2. Private Sector Banks 4.10-26.00 3.50-25.84 3.00-28.00 2.80-26.00
3. Foreign Banks 2.76-25.50 3.50-22.00 3.60-23.00 3.60-25.00
# Base Rate system replaced BPLR system with effect from July 1, 2010.

So, again monetary transmission is not working as per RBI expectations.  Banks are still sluggish in raising rates. The continued global uncertainty and poor quality of data continue to complicate matters.

How is India financing its growth?

November 4, 2010

RBI’s quarterly review of Macroeconomic and Monetary Developments deserves far more coverage than it gets. It has so much information and useful data and it is by far the best review of Indian economy on a quarterly basis.  One reason could be it is just released before the monetary policy and hence loses its relevance as focus moves to monetary policy.

For instance, those who read Second Quarter Review 2010-11, a rate hike next day became imminent. The review was hawkish on inflation.  RBI believed growth dynamics were in place despite recent weak IIP and core index numbers.

I found some interesting trends. See this Table IV.10 in Monetary and liquidity Conditions chapter. It has data on sources of finance for commercial sector. I have simplified the table a bit. Here is how it looks:

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