Reserve Bank of India Maintains Status Quo on Interest Rates

The Reserve Bank of India (RBI) today kept its interest rates unchanged while cutting its growth forecast but increasing its inflation outlook as the nation’s economic conditions remain sluggish.

While the decision to leave the policy repo rate unchanged at 8% was in line with forecasts in a recent Reuter’s poll, the RBI decided to cut the cash reserve ratio for banks by 0.25% to 4.25% in its credit policy review and indicated it may ease monetary policy further in the January-March quarter.

India’s central bank said the Survey of Professional Forecasters has lowered the country’s Gross Domestic Product (GDP) growth projection to 5.7% from 6.5% for the current fiscal year. The average wholesale price based inflation forecast is revised upwards to 7.7% from 7.3%.

“Spurring growth is back on the central bank’s agenda that had been obsessed with fighting inflation for the past two years,” said Bundeep Singh Rangar, Chairman of London-based advisory firm IndusView. “Increasing rates would have helped curb inflation but further slowed growth.”

India’s growth has been slowing, and hit a nine-year low of 5.3% in the March quarter, partly because of a global slowdown as well as weaker demand and investment activity at home. During April-May 2012 too, FDI in India declined by 59% year-on-year to $3.18 billion, reflecting the impact of slowing global economy.

“India’s strength lies in the fact that 70% of its economic activity is domestic oriented. Strengthening the domestic economy via cheaper credit will help offset the slowdown in global growth epitomized by continued troubles in the euro zone,” said Rangar.

The government has in the recent past undertaken a host of reform initiatives including the long awaited reforms allowing foreign direct investments (FDI) in multi-branded retail and aviation sectors but also financial reforms that will change the face of the insurance industry.

Last month, the RBI had kept the repo rate unchanged at 8% while industry leaders have been asking for a rate cut. It’s still well above the 6% set two years ago in Sept. 2010.

Finance Minister P Chidambaram unveiled a five-year roadmap for fiscal consolidation on Monday, emphasizing the need to control expenses and generate more revenue as the government targeted budget deficits of 5.3% of the Gross Domestic Product (GDP) this fiscal and 4.8% in the next.

Indian Government Plans FDI Increase in Insurance Industry

After introducing the long awaited reforms allowing foreign direct investments (FDI) in multi-branded retail and aviation sectors, the Indian government is now looking at financial reforms that will change the face of the insurance industry.

The government is believed to be considering a complete makeover of the country's insurance laws that would end the monopoly enjoyed by state-owned Life Insurance Corp of India, shift control of the industry to the insurance regulator, and create a legal system to deal with any failure of insurers.

Prime Minister Manmohan Singh’s government is willing to walk the talk to help foreign investors in insurance by raising the FDI stake ceiling in insurance companies to 49% from the current 26%.

“FDI is needed to stoke the simmering fire of Indian GDP growth,” said Bundeep Singh Rangar. “Reforms that were held up under the previous Finance Minister now seem to be pushed through. The insurance industry alone needs a $10 billion infusion over the next five years to make it a healthy growth sector.”

India’s growth has been slowing, and hit a nine-year low of 5.3% in the March quarter, partly because of a global slowdown as well as weaker demand and investment activity at home. During April-May 2012 too, FDI in India declined by 59% year-on-year to $3.18 billion, reflecting the impact of slowing global economy.

The Insurance (Amendment) Bill that proposes to raise the FDI limit to 49% has been pending in Parliament after it was introduced in the Rajya Sabha (Upper House) in 2008 for lack of political consensus.

The probability of Parliament voting the Bill into law, however, remains uncertain given the strong opposition from both former ally Trinamool Congreess and the Left parties.

A commission headed by former Supreme Court judge B N Srikrishna studied possible reforms in the financial sector has suggested on Monday a merger of multiple financial regulatory agencies into one overarching authority that would have oversight of the capital market, insurance sector, pension funds and commodities futures trading—a proposal that, if accepted, would help consolidate the scattered regulation of financial products.

“A Super Financial Regulator could help end some confusion over policies and streamline conflicting agendas, “ said Bundeep Singh Rangar, Chairman of London-based advisory firm IndusView. “A bigger bureaucratic beast, however, would be a bad outcome. The government has been assailed by two years of corruption allegations; less bureaucracy is needed to bring more transparency”.

The commission was set up in March 2011 with the mandate of rewriting and harmonizing decades-old financial sector legislation, rules and regulations. The Financial Sector Legislative Reforms Commission (FSLRC) was required to submit its findings within two years. The commission has invited feedback on the approach paper, after which it will release its full report in March 2013.