Over-tightening a risk given lag in monetary policy - RBI chief

MUMBAI (Reuters) - The central bank risks excessive monetary tightening given the lag in monetary policy, Reserve Bank of India (RBI) Governor Raghuram Rajan said on Wednesday in a conference call with analysts.

"If we tighten significantly more now, given the long lead times in monetary policy acting, we may find ourselves having over-tightened," Rajan said.

Rajan added there had already been some sacrifice to India's economic growth and there could be more as the central bank sought to bring down inflation.

RBI raised interest rates for the second time in as many months on Tuesday, warning that inflation is likely to remain elevated despite sluggish growth, and rolled back an emergency measure put in place in July to support the rupee.

(Reporting by Mumbai markets desk; Editing by Rafael Nam)

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Fed to maintain aggressive policy stimulus amid soft data

By Alister Bull

WASHINGTON (Reuters) - The Federal Reserve is expected to maintain its massive bond-buying campaign when it concludes a two-day meeting on Wednesday and may point to softer readings on the U.S. economy to signal that the policy will be extended into 2014.

The central bank, which will announce its policy decision at 2 p.m. (1800 GMT), has held interest rates near zero since late 2008 and has quadrupled the size of its balance sheet to more than $3.7 trillion through three rounds of bond buying. The purchases are aimed at holding down longer-term borrowing costs.

It shocked markets in September by opting to keep buying bonds at an unchanged pace, after allowing a perception to harden over the summer that it was ready to start scaling back the purchases. The central bank's caution has since been vindicated.

Consumer and business confidence has been dented by a bitter budget battle in Washington that triggered a 16-day government shutdown earlier this month and pushed the nation to the brink of a potentially devastating debt default.

"I think you will certainly see a change in tone in the statement," said Scott Anderson, chief economist at Bank of the West in San Francisco.

Like many economists, Anderson now thinks the Fed will keep buying bonds at an $85 billion monthly pace until March.

Data on hiring, factory output and home sales in September that have tumbled in over the last couple of weeks suggest the economy lost a step even before the government shut down. Readings on consumer confidence this month have shown the fiscal standoff rattled households.

Tepid demand is also keeping inflation under wraps, which is yet another factor that could help convince the Fed's policy-setting Federal Open Market Committee to maintain its asset purchase course. Over the past 12 months, producer prices rose just 0.3 percent, the smallest gain since 2009.

"The October government shutdown has undoubtedly slowed down the economy in the fourth quarter," economists at Rabobank wrote in a note to clients. "It will be 2014 before we are able to see a number of months of economic data that may convince the FOMC that the recovery is continuing at a solid pace."

NO RATE HIKES BEFORE LATE 2015

The soft tone in the data has led financial markets to recalibrate forecasts for a tapering in the Fed's bond purchases. It has also pushed rate hike expectations back into mid-2015 at the earliest.

"It is looking like most of the hikes would happen in 2016," said Anderson, adding that the shift in expectations has helped pull bond yields lower.

Futures markets indicate a 52 percent chance of the first quarter-point rate hike by April 2015; that rises to 96 percent by September 2015. Yields on the 10-year U.S. Treasury note have fallen back to 2.50 percent, compared with almost 3 percent in early September.

NEW FED CHIEF

A further wrinkle in the Fed's deliberations is the upcoming leadership transition at the central bank. Earlier this month, President Barack Obama nominated Fed Vice Chair Janet Yellen to replace Ben Bernanke at the institution's helm when his term expires on January 31.

Some economists think Bernanke would like to begin reducing the bond purchases on his watch, provided the economic data was sufficiently encouraging.

But if policymakers wait until March, it would presumably give Yellen an opportunity to lean against criticism that she is too dovish in how she weighs unemployment versus inflation.

That question will be a central theme of her confirmation hearing before the U.S. Senate Banking Committee. The hearing likely be held on November 14.

Yellen is expected to win confirmation from the Senate but will likely face tough questions from Republicans critical of the Fed's ultra-easy monetary policy, which they say risks financial instability and future inflation.

The banking panel needs to vet her nomination before it goes before the full Senate for final approval. (Editing by Tim Ahmann and Dan Grebler)

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Wall St dips before Fed policy statement on stimulus

By Chuck Mikolajczak

NEW YORK (Reuters) - U.S. stocks edged lower on Wednesday, following a string of four sessions of gains and before the release of the Federal Reserve's statement on the economy and its ultra-loose money policy.

The U.S. central bank, which will announce its decision at 2:00 p.m. (1800 GMT), is expected to keep intact its program of buying $85 billion of Treasuries and mortgage securities a month. It may indicate that its aggressive stimulus policy, which is aimed at invigorating the economy, will be extended into 2014. Several key economic indicators have shown weakness.

Many analysts expect a delay until at least March in easing the stimulus measures, which have encouraged investors to buy riskier assets, like stocks. The Dow and S&P 500 index climbed to record highs on Tuesday, the latest in a series of all-time highs.

"It's wait to see what the Fed has to say. I don't think anybody expects any surprise coming out of the Federal Reserve's meeting," said Hugh Johnson, chief investment officer of Hugh Johnson Advisors LLC in Albany, New York.

"Everybody is just stepping back to make sure."

The central bank has held interest rates near zero since late 2008 and has quadrupled the size of its balance sheet to more than $3.7 trillion through three rounds of bond buying. The purchases have made a major contribution to the S&P 500's gain of nearly 24 percent this year.

Data on Wednesday showed private-sector employers hired the fewest workers in six months in October while the consumer price index showed benign inflation, both arguments supporting the Fed's stimulus policy.

The Dow Jones industrial average fell 21.33 points or 0.14 percent, to 15,659.02, the S&P 500 lost 3.92 points or 0.22 percent, to 1,768.03 and the Nasdaq Composite dropped 10.971 points or 0.28 percent, to 3,941.367.

In the latest batch of corporate earnings, shares of General Motors Co rose 3 percent to $37.14 after the No. 1 U.S. automaker reported stronger-than-expected quarterly profit due to strength in its core North American market and a smaller-than-anticipated loss in Europe.

Shares of Yelp Inc dropped 5.6 percent to $64.99 a day after the business-search service firm reported a wider third-quarter loss.

Western Union shares slumped 12.3 percent to $16.88 after the world's largest money-transfer company reported a 20 percent drop in third-quarter profit, hurt by lower revenue from its consumer business and higher expenses.

Companies expected to report earnings after the close on Wednesday include Visa , Starbucks , MetLife and Kraft .

According to Thomson Reuters data, of the 313 companies in the S&P 500 that have reported earnings through Wednesday morning, 68.4 percent have topped Wall Street expectations, above both the 63 percent beat rate since 1994 and the 66 percent rate for the past four quarters.

Revenue's performance has been mixed, however, with 53.7 percent of S&P 500 companies beating expectations, well below the 61 percent average since 2002 but slightly above the 49 percent rate for the last four quarters.

(Reporting by Chuck Mikolajczak; Editing by Kenneth Barry)

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Home, auto loans to get costlier as RBI hikes policy rate

Mumbai, Oct 29 (IANS) The Reserve Bank of India (RBI) Tuesday hiked a key policy interest rate by 0.25 percent in less than two months to curb inflation, but eased some rupee support measures. The move would make home, auto and other loans costlier.

In its second quarter review of the monetary policy for 2013-14, the RBI hiked repo rate by 25 basis points or 0.25 percent to 7.75 percent. Repurchase or repo rate is the rate of interest that banks pay when they borrow money from the central bank to meet their short-term funds requirement.

This is the second increase in the policy rate in less than two months. The central bank had also hiked the repo rate by 0.25 percent in its previous review announced Sep 20.

Taking a cue from the stability in the currency markets, the RBI rolled back some of the measures put in place to support the rupee. The Marginal Standing Facility (MSF) rate is reduced by 0.25 percent to 8.75 percent. The move will ease liquidity in the banking system. MSF is a window for banks to borrow from the RBI.

"With the reduction of the MSF rate and the increase in the repo rate in this review, the process of re-aligning the interest rate corridor to normal monetary policy operations is now complete," RBI Governor Raghuram G. Rajan said in the policy statement.

The RBI generally maintained a 100 basis points gap between repo and MSF rate. But this gap was altered recently to support the battered rupee. With the changes now the gap is back to the usual 100 basis points.

Rajan said the policy stance and measures in the review were intended to curb mounting inflationary pressures and manage inflation expectations in a situation of weak growth.

Annual wholesale price index-based inflation jumped to a seven-month-high of 6.46 percent in September, while consumer price index-based inflation was recorded at 9.84 percent, largely due to higher food and fuel prices.

Rajan, who took charge as RBI governor Sep 4, said both wholesale and consumer price inflation are likely to remain elevated in the months ahead, warranting an appropriate policy response.

"The Reserve Bank will closely monitor inflation risk while being mindful of the evolving growth dynamics," he said.

Rajan's statement gives indication that the RBI would hike rates again if inflation remained high.

"The message from RBI is clear, as long as inflation is around, asking for a rate cut would remain a wish list," said Rana Kapoor, president of industry body Assocham.

Kapoor, who is also managing director of Yes Bank, said: "All efforts must be made through coordinated efforts by the centre, states and the RBI to fight price rise so that the economy can be brought back to the growth trajectory."

The RBI has cut economic growth forecast for the current financial year to 5 percent from its earlier projection of 5.5 percent.

"While industrial activity has weakened, strengthening export growth, signs of revival in some services along with the expected pick-up in agriculture could increase the real GDP growth from 4.4 percent in the first quarter to a central estimate of 5 percent for the year as a whole," Rajan said.

Reacting to the RBI move, the Confederation of Indian Industry (CII) said the hike in repo rate has come as a disappointment to industry especially as the investment climate continues to be weak and growth outlook remains muted.

"The RBI could have refrained from effecting a hike in repo rate as industry is already reeling under pressures of high cost of capital and low availability in a tight liquidity situation," CII said in a statement.

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UPA's policy paralysis responsible for Indian economy being in reverse: Punj

New Delhi, Oct 29 (ANI): Bharatiya Janata Party (BJP) leader Balbir Punj on Tuesday said there is absolutely no decision-making under the Congress-led UPA Government's rule, and added that as a result, the Indian economy is in reverse gear.

"The RBI is a part of a system, it doesn't run the economy. The economy is run by the Government of India and the Finance Ministry. And the way there has been a policy paralysis for the last 10 years, and the way massive scandals have taken place, and there is absolutely no decision-making. As a result, the economy is in reverse gear," said Punj.

"And, at one point of time, when the NDA left this government the growth rate was 8.4 percent and it is dropping to less than four percent. It only underlines the ugly reality that the way this government has flopped everywhere, it is flopping even on the economic front," he added.

The Reserve Bank of India (RBI) earlier in the day hiked the short-term lending (repo) rate by 0.25 percent to 7.75 percent.

This move of the central bank will make corporate and consumer loans more expensive.

RBI Governor Raghuram Rajan brought down the cost of short-term funds for banks by slashing the marginal standing facility (MSF) rate by a similar quantum to 8.75 percent.

Rajan said the policy stance and measures are intended to curb mounting inflationary pressures and manage inflation expectations in a situation of weak growth.

"These will help strengthen the environment for growth by fostering macroeconomic and financial stability. The Reserve Bank will closely monitor inflation risk while being mindful of the evolving growth dynamics," he said.

The RBI reduced the growth forecast for the current fiscal to 5 percent from 5.5 percent projected earlier.

The central bank left other rates unchanged, such as the Cash Reserve Ratio (CRR) at 4 percent, and Mandatory holdings in government securities and other liquid assets as a solvency measure (SLR) at 23 percent. (ANI)

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Gold hovers near 5-week high as Fed policy meeting looms

SINGAPORE (Reuters) - Gold was hovering near five-week highs on Monday as traders bet the U.S. Federal Reserve would stick with its bullion-friendly stimulus measures at a policy meeting later this week.

FUNDAMENTALS

Spot gold had eased 0.3 percent to $1,348.44 an ounce by 0010 GMT, after posting a near 3-percent gain the week before.

Fed officials are unlikely to make any shift in monetary policy this week and will continue to buy back bonds at an $85 billion monthly rate as they wait for more evidence of how badly Washington's budget battle has hurt the U.S. economy.

The central bank's policy-setting committee is to release a statement on its decision on Wednesday, at the end of its two-day meeting.

Turkey and Kazakhstan raised their gold holdings in September, while Russia's bullion reserves eased, according to the International Monetary Fund.

SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, said its holdings fell 4.50 tonnes to 872.02 tonnes on Friday.

Hedge funds and money managers cut bullish bets in futures and options of U.S. gold markets for the week ended October 1, but they increased their net longs in silver futures, a report by the Commodity Futures Trading Commission showed.

South Africa's hardline AMCU mining union threatened more strikes at the world's top platinum producers, just weeks after a deal to end an 11-day stoppage over job cuts.

(Reporting by A. Ananthalakshmi; Editing by Joseph Radford)

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Gold hovers near five-week high as Fed policy meeting looms

By A. Ananthalakshmi

SINGAPORE (Reuters) - Gold was hovering near five-week highs on Monday as traders bet the U.S. Federal Reserve would stick with its bullion-friendly stimulus measures at a policy meeting later this week.

Bullion has fallen nearly 20 percent this year as investors dumped gold holdings for better-performing stock markets and on fears that the end of easy money from the U.S. central bank would dim the metal's inflation-hedge appeal.

In the past two weeks, however, gold has gained about 6 percent as weak U.S. data and budget battles in Washington looked set to deter the Fed from scaling back asset purchases.

"We believe the tapering will definitely be delayed and that's positive for precious metals," said Brian Lan, managing director of GoldSilver Central Pte Ltd. "Gold prices will close above $1,400 by the end of the year."

Spot gold was down 0.1 percent at $1,350.41 an ounce by 0314 GMT. On Friday, it touched $1,355.20, its highest since September 20.

Platinum gained as much as 0.7 percent on fears that strikes in South Africa could curb supply.

The Fed's policy-setting committee will release a statement on its decision on Wednesday at the end of a two-day meeting.

The central bank is unlikely to make any shift in monetary policy this week and will continue to buy back bonds at an $85 billion monthly rate as it waits for more evidence of how badly Washington's budget battle has hurt the economy.

Traders are also closely monitoring physical demand in Asia, the biggest consumer of gold, where demand has become subdued following a big rush earlier this year.

"Physical demand is quiet because of higher prices. The only market that is buying is India," said Lan.

Premiums in India jumped to a record high of $130 an ounce last week as government restrictions on gold imports squeezed supply during the peak holiday season.

India, where gold is considered auspicious and is bought during weddings and festivals, celebrates Diwali and Dhanteras festivals in early November.

In China, premiums on the Shanghai Gold Exchange fell into negative territory on Monday although they recovered later to about $1 an ounce. Premiums were as high as $30 in April-May.

A dealer in Hong Kong said higher prices were prompting some consumers to sell.

(Reporting by A. Ananthalakshmi; Editing by Joseph Radford and Alan Raybould)

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Rupee falls; custodial banks buy dollars ahead of policy

Reuters Market Eye - The rupee falls on dollar buying by custodial banks ahead of the Reserve Bank of India's review on Tuesday. The rupee falls to 61.64/65, off 61.44 highs, versus last close at 61.46/47.

"Today's spot will be settled on Tuesday which is the policy day. So, we are seeing a spurt in buying interest by foreign banks," says dealer.

The Reserve Bank of India policy on Tuesday likely be the next trigger with any hike in the repo rate to negatively impact the INR.

Foreign funds extend buying in local stocks for a 15th session, being provisional buyers of $161.5 million on Thursday, exchange data showed.

The dollar struggled near a two-year low against the euro in early Asian trade on Friday, as strengthened expectations the U.S. Federal Reserve will maintain its asset purchases through early next year undermined the greenback.

A Reuters poll shows that investors raise long positions in Asia FX.

Technicals show USD/INR may see a relief rally.

(Reporting by Subhadip Sircar)

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