Why RBI should, and likely will, raise rates

Source :BS:Sajjid Chinoy /  October 18, 2011, 0:45 IST

The writer is India economist, JPMorgan
It’s that time again. Inflation continues to remain dangerously close to double digits. Wage growth remains buoyant. Input prices increased across the board in September, and inflationary expectations remain elevated. Yet, public pressure on the Reserve Bank of India (RBI) to pause gets stronger and stronger!


Proponents of a pause would look at last week’s data and conclude the momentum of growth and inflation are slowing. They would add central banks around the world have moved to a pausing, even an easing, mode. And, this should be reason enough for RBI to call it a day


Given the pressure on RBI from the industry and the market, this is undoubtedly a close call. But, while a pause cannot be ruled out, we expect RBI to continue on a path of monetary tightening and raise policy rates by 25 basis points at the next review. And, they would be perfectly justified in doing so. Here’s why.



First of course, the economy is slowing. But that’s not the relevant question. The question is whether or not it is slowing enough to dent pricing power across the board. There is no evidence to suggest we have reached that point yet. Yes, the momentum of core inflation slowed in September. But one swallow does not a summer make.


Several times last year, the momentum of core slowed one month, only to re-accelerate sharply the next. What was ominous, and largely missed, in the September inflation print is input prices rose across the board and are likely to pressure core inflation in time to come. Until the momentum of core slows on a sustained basis, it would be premature to conclude the economy has slowed enough.


Second, much is made of the global uncertainty. Yet, recent data flow has surprised consistently on the upside, with Euro area industrial production, for example, stronger than expected for a second month. As a result, commodity and crude prices are at their highest levels in a month.
Third, there are increasing fears that fiscal policy would not be as tight as once thought. The looser the fiscal conditions are, the higher the commodity prices are, the tighter the monetary conditions would have to be.


And, here’s the irony: The sharp currency depreciation over the last two months has meant that despite the rising policy rates, overall monetary conditions have actually loosened over the last month! The weaker rupee has increased the domestic cost of tradables and thereby, undercut some of the impact of previous rate increases. The implication is policy rates need to do more of the heavy lifting.



For all these reasons, we expect (and hope) the central bank would ignore the rising chorus and continue raising rates. To pause now would be to undo much of what was courageously done in the recent past.

Black-money returning as export receipts

Source : S.Muralidharan:BL:24th Oct 2011

When black money can enter India through over-invoiced exports 

and participatory notes, VDIS will have few takers.

There was a time when exports were given a lot of tax sops — such as duty drawback, cash assistance and income-tax exemption, either full or partial — which tempted unethical businessmen to inflate their exports through over-invoicing or other means. Over-invoicing of imports is done to get a kickback from the obliging suppliers, especially those for whom access to Swiss and other convenient bank accounts is easy and laughably simple. Over-invoicing of sales and its variant, exports, on the other hand, is done to make legitimate the illegal money one has accumulated over the years.

INFLATED OR FAKE EXPORTS

At the height of fiscal indulgence to exports, there was a bizarre story doing the rounds. A crack team of sleuths headed to Dubai on a tip-off and their efforts were amply rewarded when the export consignment to that place from India, worth several crores, turned out to be a heap of rags neatly packed with layers of insulation and other material designed to give it the much-needed verisimilitude, and more importantly to ward off any attempt at opening the boxes!

This was the tip of the iceberg regarding the widespread practice of inflated or fictitious exports with an eye on the hefty tax benefits. Relentless pressure from World Trade Organisation saw the Indian government gradually withdrawing these benefits — sometimes in a phased manner. But the steady weakening of the Indian rupee over the last couple of months coupled with the government's threat to go after those who have salted away their ill-gotten wealth abroad has once again revived the practice of inflated or fake exports. Exports to Bahamas, of all places, has jumped 1000-fold from $2.2 million in 2008-09 to $2.2 billion in 2010-11, bearing out the sneaking suspicion that there is something amiss in the sudden soaring of exports all round.

Export of services lends itself to an easier manipulation of invoices, given the fact that, unlike goods, services are always unknown quantities. Who knows, several Indians may be waiting in the wings ready to proffer advice and consultancy for an exaggerated fee, all designed to bring back, duly laundered, the ill-gotten money stashed away abroad. The Indian government has recently entered into information-sharing agreements on tax matters with several recalcitrant nations allegedly giving sanctuary to crooks and criminals. Bahamas, incidentally, is one of them. India can, therefore, crack the whip and ask to verify whether all these so-called exports were real or fictitious, normal or overstated.

But if it chooses to wink at them, it would appear that it doesn't mind the shenanigans of actual or charlatan exporters in the smug knowledge that, after all, the country is getting precious foreign exchange.

In any case, the revival of the over-invoicing route to money laundering should have dampened sufficiently the enthusiasm of the government in going ahead with Voluntary Disclosure of Income Scheme (VDIS) II that seeks to exclusively address the problem of Indian money stashed away abroad.

Indeed, given this fertile and hassle-free route, no one would seriously consider pressing ahead with VDIS II. Further, a lot of water has flowed down the bridge ever since VDIS 1997 was implemented.

PARTICIPATORY NOTES

The Foreign Institutional Investors' (FII) scheme with its inscrutable Participatory Note (PN) feature enables round-tripping which, shorn of jargon, means Indian black money stashed away abroad coming back in the form of stock market investments, riding piggyback on foreign investors.

Mauritius, too, is a favourite money laundering destination for Indians with black money abroad in view of the tax exemption it confers to a Mauritius resident from tax on capital gains earned in India. With such relatively hassle-free avenues, perhaps not many would take the trouble of availing of the tax amnesty scheme, or its variant, VDIS II, supposedly on the anvil.

Investigation authorities in India have always been stymied in their work when their audit or investigation trail takes them beyond India. But the Indian government should, like the US government, read the riot act to the foreign governments indulging crooks and criminals. Better still, there must be pre-emptory strikes like abrogation of the patently invidious tax treaty with Mauritius and the scrapping of the attractive PN feature of the FII scheme.

The wily captains of industry in India have got for themselves a permanent amnesty scheme by getting written into the Indian income-tax law through the Finance Act, 2011, a hugely concessional tax of 15 per cent on dividend received from foreign companies. The government cannot be seen running with the hare and hunting with the hounds.

(The author is a Delhi-based chartered accountant.)

Clauses for Rental /Lease agreements

Source :BL;24th Oct 2011

Clauses to watch out for while preparing a rental agreement. This applies not only to commercial lease agreements but also to residential rental agreements you enter into on behalf of your company.

Repairs

A distinction should be made between major and minor repairs. The normal practice is for the landlord to be responsible for any and all major repairs to be conducted on the property (for example, any leaking / water seepage, major electrical problems, etc), and for the tenant to be responsible for all the minor ones (for example, replacing bulbs, motors, fixing minor leaks in plumbing, etc). The agreement should clearly state the same.

Wear and Tear

Certain features of the property are bound to deteriorate with time (like the paint coating, etc) and the tenant cannot be held responsible for the same.

The covenants should include a clause stating that the tenant will return the property in the condition he or she received it, subject to normal and acceptable wear and tear. This will save the tenant from having to paint the house or replace rusted fitting as long as the same was not caused by any direct act or negligence.

Maintenance / Association Charges

In the case of an apartment, there may be fixed monthly maintenance charges or apartment association charges. The normal practice is for the landlord to pay these charges. The agreement should contain a clause stating the same.

Rent

The agreement must contain the exact monthly rent payable by the tenant to the landlord, along with the method of payment (cheque, demand draft, etc) and details as to when the payment must be made (for example, rent must be paid on the 1st of every month, no later than the 5th of every month, in advance).

List of Furniture / Fixtures

If the property comes with any fixtures (lighting fixtures, paintings, chandeliers), furniture (carpets, beds, tables, chairs) or appliances (geysers, refrigerators, air conditioners), the same must be listed, counted and added as an annexure to the agreement and will form a part of the property.

The tenant must ensure that they are undamaged and in working condition before taking possession of the property, as he or she will be liable for them.

The wear and tear clause must apply to these items as well.

Duration of the Agreement

Strictly speaking, the agreement has to be registered, but as per common practice, it is not. The duration of the rental agreement varies, but is normally for 11 months with a clause for renewal of the lease on the mutual agreement of the parties. Some terms might change on renewal and the same should be mentioned in the agreement (for example, increase or rent, normally by a fixed percentage every year; increase in deposit, etc), or a clause stating that the terms may be modified pursuant to the renewal should be included in the agreement (allows the parties to decide on the terms at a later stage).

Notice of Termination

The agreement must contain a clause stating that the agreement can be terminated by either parties, and must state the manner of serving the notice and the duration (that is, informing the other party in advance if the possession of the property is to be altered. For example, notice must be served in writing, not less than one month in advance). Normally, two-month notice is sufficient.

Lock in Clause

Some agreements have a lock-in clause. This means that even though there is a fixed period of notice stated in the agreement, the tenant cannot leave until the lock-in period is over. (For example, if the lock-in period is five months, even if the tenant gives the landlord two-month notice in writing as per the agreement, he will still have to pay rent for the first five months, no matter when he gave notice). The tenant should be wary of this clause, especially if he is unsure of how long he intends to occupy the property. If the landlord is insistent on this clause, the tenant can try and add a provision for exceptional circumstances and the procedure to determine rights / liabilities in that regard (for example, lock-in clause will not apply if the tenant is transferred to another city, etc).

Contributed by vakilsearch (www.vakilsearch.com), 
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RBI moots awareness campaign on banking ombudsman scheme

Creating financial awareness: (from right) Mr M. Palaniswamy, Banking Ombudsman,

 RBI; Mr U.V. Kulkarni, DGM, RBIBangalore, and Mr J.S. Ravishankar, AGM,

 at a press conference in the city on Monday.

Source: BL:BANGALURU :OCT 24,2011
 Photo: G.R.N. Somashekar

A professor at the Indian Institute of Management, Bangalore, lost Rs 18 lakh to an SMS 

fraud which lured him with $5 billion from a multinational company.

The Reserve Bank of India's Banking Ombudsman for Karnataka, Mr M. Palaniswamy, said that such cases were on the rise, and awareness of such fraud and phishing activities on the Internet space have to be spread.

He added that the RBI has now mandated people like him and his team to visit taluks and villages every month to spread awareness on the banking ombudsman scheme. “Not many people, even in the urban areas, are aware of this scheme,” he pointed out.

According to him, 3,694 complaints were received by his team in 2010-11 (the RBI follows a July to June calendar). Of these, the highest number of complaints was on failure on commitments made by banks to customers at 1,232, while complaints on ATM, debit and credit cards were at 768, followed by deposit-related complaints at 268 and 176 pension-related complaints.

On the other hand, State Bank of India and its associate banks were the banks which were complained against most at 1,521, “mainly because they have largest volume in terms of branch network”, Mr Palaniswamy pointed out.

However, 2009-10 saw more complaints at 4,343 complaints, and 2008-09 saw 3,524 complaints.