Following is the list of PSU banks and the amount of capital infusion each will receive in FY14
SBI--Rs 2,000 crore
IDBI Bank --Rs 1,800 crore
Central Bank -- Rs 1,800 crore
Indian Overseas Bank --Rs 1,200 crore
Bank Of India -- Rs 1,000 crore
Bank of Maharashtra --Rs 800 crore
Bank of Baroda --Rs 550 crore PNB -- Rs500 crore
Union Bank --Rs 500 crore
What is Bank rate? Bank Rate is the rate at which central bank of the country (in India it is RBI) allows finance to commercial banks. Bank Rate is a tool, which central bank uses for short-term purposes. Any upward revision in Bank Rate by central bank is an indication that banks should also increase deposit rates as well as Base Rate / Benchmark Prime Lending Rate. Thus any revision in the Bank rate indicates that it is likely that interest rates on your deposits are likely to either go up or go down, and it can also indicate an increase or decrease in your EMI.
RBI uses CRR either to drain excess liquidity or to release funds needed for the growth of the economy from time to time. Increase in CRR means that banks have less funds available and money is sucked out of circulation. Thus we can say that this serves duel purposes i.e.
(a) ensures that a portion of bank deposits is kept with RBI and is totally risk-free.
(b) enables RBI to control liquidity in the system, and thereby, inflation by tying the hands of the banks in lending money.
What is CRR (For Non Bankers):
CRR means Cash Reserve Ratio. Banks in India are required to hold a certain proportion of their deposits in the form of cash. However, actually Banks don’t hold these as cash with themselves, but deposit such cash with Reserve Bank of India (RBI) / currency chests, which is considered as equivlanet to holding cash with RBI. This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by RBI and is known as CRR or Cash Reserve Ratio. Thus, When a bank’s deposits increase by Rs100, and if the cash reserve ratio is 6%, the banks will have to hold additional Rs 6 with RBI and Bank will be able to use only Rs 94 for investments and lending / credit purpose. Therefore, higher the ratio (i.e. CRR), the lower is the amount that banks will be able to use for lending and investment. This power of RBI to reduce the lendable amount by increasing the CRR, makes it an instrument in the hands of a central bank through which it can control the amount that banks lend. Thus, it is a tool used by RBI to control liquidity in the banking system.
After 2008 financial crisis, Fed has been takings steps to bring the US economy out of woods by cutting rates to ultra low levels. Such a policy provided stimulus to the sagging economy through two programmes popularly known as (a) Operation Twist; and (b) Quantitative Easing or QE.. Out of the two, the latter one ie QE is more relevant for our discussions today. Under QE, Fed is purchasing $85 billion of fixed income securities per month ($40 billion of mortgage backed securities, and $45 billion of US Treasuries). Usually, the central banks do such activities across the world, for a limited periods say two-three months (or upto a fixed dead line). However, in view of the deep crisis in US economy, Fed’s QE programme did not set any end dates, but the consensus was that Fed will begin to wind down i.e. “taper” the size of its purchase before the year is over with the goal of ending the programme at some point in 2014. Since December, 2008, the Fed had been trying to maintain a target rate not exceeding 0.25%. It intends to keep the rates at this level until inflation rises to an annualized rate of 2.5% or unemployment falls to 6.5%. Thus, Fed will continue with the current QE till incoming economic data does not meet the above targets.
“Tapering” has come to financial jargon when in May 2013, Ben Bernanke stated that Fed may taper the bond-buying program known as quantitative easing (QE) in the coming months. What he meant by tapering was that Fed will start reducing the amount of bonds being currently purchased by Fed. At that time, Fed was purchasing $85 billion of bonds per month. The next meeting is on 18th September and thus there were wide speculations that after 18th September, 2013, Fed may reduce the size of monthly bond purchases to $70 or $75 billion i.e. tapering to the extent of $10 to 15 billion Such a step is reducing the size of QE is being termed as “tapering”.
Everybody knew from beginning that QE is not meant to last forever. Thus, it has to come to an end once US economy signs of recovery. Fed has rightly thought to bring the change slowly rather than stop the same abruptly. Thus, it will be brought to end through ‘tapering’.
The mere statement of ‘tapering’ has sent shock waves in financial markets not only in US but also in India. The shrinking of pumping of more money through regular purchase of bonds, will squeeze the liquidity and will impact the stock markets immediately. The follow up of the tapering will show hardening of interest rates in US, which may even touch 3% in the medium range. This increase in interest rates in US is likely to result in shifting of capital from India to US. This can badly hit Indian stock and bond markets, and interest rates are likely to go up affecting the growth prospects of Indian corporate. Moreover, the flight of capital from India will put additional pressure on Rupee which can again see sharper depreciation and move towards Rs70-Rs75 range.