Report of the Central Board of Directors on the working of the Reserve Bank of India for the year ended June 30, 2013 submitted to the Central Government in terms of Section 53(2) of the Reserve Bank of India Act, 1934 RESERVE BANK OF INDIA ANNUAL REPORT 2012-13 CENTRAL BOARD / LOCAL BOARDS GOVERNOR D. Subbarao DEPUTY GOVERNORS MEMBERS OF LOCAL BOARDS K. C. Chakrabarty Anand Sinha H. R. Khan WESTERN AREA Urjit R. Patel Kiran Karnik K. Venkatesan DIRECTORS NOMINATED UNDER Dattaraj V. Salgaocar SECTION 8 (1) (b) OF THE RBI ACT, 1934 Jayantilal B. Patel Anil Kakodkar Kiran S. Karnik M. V. Rajeev Gowda EASTERN AREA Nachiket M. Mor Nachiket M. Mor Ms Anila Kumari DIRECTORS NOMINATED UNDER Sharif Uz-zaman Laskar SECTION 8 (1) (c) OF THE RBI ACT, 1934 Y. H. Malegam NORTHERN AREA Azim Premji Anil Kakodkar Dipankar Gupta G. M. Rao Ram Nath Ela Bhatt Kamal Kishore Gupta Indira Rajaraman Mihir Kumar Moitra Y.C. Deveshwar A. Naveen Bhandary Damodar Acharya SOUTHERN AREA DIRECTOR NOMINATED UNDER SECTION 8 (1) (d) OF THE RBI ACT, 1934 M.V.Rajeev Gowda Arvind Mayaram K. Selvaraj Rajiv Takru Kiran Pandurang As on August 8, 2013 PRINCIPAL OFFICERS (As on August 8, 2013) EXECUTIVE DIRECTORS ....................................................................... G. Gopalakrishna ....................................................................... Deepak Mohanty ....................................................................... S. Karuppasamy ....................................................................... R. Gandhi ....................................................................... P. Vijaya Bhaskar ....................................................................... B. Mahapatra ....................................................................... G. Padmanabhan ....................................................................... Jasbir Singh ....................................................................... Deepali Pant Joshi CENTRAL OFFICE Central Vigilance Cell ................................................................................ Kaza Sudhakar, Chief Vigilance Offi cer Customer Service Department .................................................................. Supriya Pattnaik, Chief General Manager Department of Banking Operations and Development .............................. Chandan Sinha, Principal Chief General Manager Department of Banking Supervision .......................................................... G. Jaganmohan Rao, Principal Chief General Manager Department of Communication .................................................................. Alpana I. Killawala, Principal Press Relation Offi cer Department of Currency Management ...................................................... B.P. Vijayendra, Principal Chief General Manager Department of Economic and Policy Research ......................................... B.M. Misra, Offi cer-in-Charge Department of Expenditure and Budgetary Control .................................. S. Ganesh, Principal Chief General Manager Department of External Investments and Operations................................ M. Sarkar Deb, Chief General Manager Department of Government and Bank Accounts ....................................... S. Ganeshkumar, Chief General Manager-in-Charge Department of Information Technology ...................................................... A.S. Ramasastri, Chief General Manager-in-Charge Department of Non-Banking Supervision .................................................. N. S. Vishwanathan, Principal Chief General Manager Department of Payment and Settlement Systems ..................................... Vijay Chugh, Chief General Manager Department of Statistics and Information Management ............................ A.B. Chakraborty, Offi cer-in-Charge Financial Markets Department .................................................................. G. Mahalingam, Principal Chief General Manager Financial Stability Unit .............................................................................. R.G. Warriar, Chief General Manager Foreign Exchange Department.................................................................. R.N. Kar, Chief General Manager Human Resource Management Department ............................................ U. S. Paliwal, Principal Chief General Manager Inspection Department .............................................................................. M. Sebastian, Principal Chief General Manager Internal Debt Management Department .................................................... K.K. Vohra , Principal Chief General Manager Legal Department ...................................................................................... G.S. Hegde, Principal Legal Adviser Monetary Policy Department ..................................................................... M. D. Patra, Principal Adviser Premises Department ................................................................................ K.R. Ananda, Principal Chief General Manager Rajbhasha Department ............................................................................. Ramakant Gupta, General Manager Risk Monitoring Department ...................................................................... M. Rajeshwar Rao, Chief General Manager Rural Planning and Credit Department ..................................................... A. Udgata, Principal Chief General Manager Secretary’s Department ............................................................................. Bazil Shaikh, Principal Chief General Manager & Secretary Urban Banks Department .......................................................................... A. K. Bera, Principal Chief General Manager COLLEGES PRINCIPALS College of Agricultural Banking, Pune ....................................................... Meena Hemchandra Reserve Bank Staff College, Chennai ....................................................... Uma Subramaniam OFFICES REGIONAL DIRECTORS Chennai ..................................................................................................... J. Sadakkadulla Kolkata ....................................................................................................... B.P. Kanungo Mumbai ...................................................................................................... J.B. Bhoria New Delhi .................................................................................................. Deepak Singhal BRANCHES Ahmedabad ............................................................................................... Sudarshan Sen Bangalore .................................................................................................. Uma Shankar Bhopal ....................................................................................................... P.R. Ravi Mohan Bhubaneswar ............................................................................................. P. K. Jena Chandigarh ................................................................................................ M. K. Singh Guwahati ................................................................................................... Pradyumna K. Jena Hyderabad ................................................................................................. K.R. Das Jaipur ......................................................................................................... Sathyan David Jammu ....................................................................................................... K.K. Saraf Kanpur ....................................................................................................... Shekhar Bhatnagar Lucknow .................................................................................................... Arun Pasricha Nagpur ....................................................................................................... Phulan Kumar Patna ......................................................................................................... M.K. Verma Thiruvananthapuram ................................................................................. Salim Gangadharan OFFICERS-IN-CHARGE Agartala ..................................................................................................... A.K. Pandey, General Manager Belapur ...................................................................................................... Ajay Michyari, General Manager Dehradun ................................................................................................... R.L. Sharma, General Manager Gangtok ..................................................................................................... E.E. Karthak, General Manager Kochi .......................................................................................................... C.V. George, General Manager Panaji ......................................................................................................... Jaikish, General Manager Raipur ........................................................................................................ Nirmal Chand, General Manager Ranchi ....................................................................................................... Saurav Sinha, General Manager Shillong ...................................................................................................... P. Shyam Sunder, Chief General Manager Shimla ........................................................................................................ I. S. Negi, General Manager Srinagar ..................................................................................................... Ramesh Chand, Deputy General Manager CONTENTS Page No. PART ONE : THE ECONOMY: REVIEW AND PROSPECTS I. ASSESSMENT AND PROSPECTS ............................................................................... 1 Assessment of 2012-13 ................................................................................................. 3 Prospects for 2013-14 .................................................................................................... 6 II. ECONOMIC REVIEW ..................................................................................................... 13 The Real Economy ......................................................................................................... 13 Price Situation ................................................................................................................ 26 Money and Credit ........................................................................................................... 38 Financial Markets ........................................................................................................... 43 Government Finances .................................................................................................... 54 External Sector ............................................................................................................... 59 PART TWO: THE WORKING AND OPERATIONS OF THE RESERVE BANK OF INDIA III. MONETARY POLICY OPERATIONS ............................................................................. 67 Monetary Policy Operations: Context and Rationale ...................................................... 67 IV. CREDIT DELIVERY AND FINANCIAL INCLUSION ..................................................... 75 Credit Delivery ................................................................................................................ 75 Financial Inclusion .......................................................................................................... 79 Financial Literacy Activities ............................................................................................ 82 V. DEVELOPMENT AND REGULATION OF FINANCIAL MARKETS .............................. 84 Government Securities Market ....................................................................................... 84 Foreign Exchange Market............................................................................................... 86 Derivatives Market .......................................................................................................... 92 VI. REGULATION, SUPERVISION AND FINANCIAL STABILITY ..................................... 93 Financial Stability Assessment ....................................................................................... 93 Assessment of the Banking Sector ................................................................................. 95 Major Decisions Taken by Board for Financial Supervision ............................................ 97 Commercial Banks ......................................................................................................... 97 Customer Service ........................................................................................................... 104 Banking Codes and Standards Board of India ............................................................... 105 Urban Co-operative Banks ............................................................................................. 105 Rural Co-operatives ........................................................................................................ 109 Deposit Insurance and Credit Guarantee Corporation ................................................... 110 Non-Banking Financial Companies ................................................................................ 110 i CONTENTS Page No. VII. PUBLIC DEBT MANAGEMENT .................................................................................... 116 Debt Management of Central Government ..................................................................... 116 Debt Management of State Governments ...................................................................... 119 VIII. CURRENCY MANAGEMENT ........................................................................................ 122 Banknotes in Circulation ................................................................................................. 122 Coins in Circulation ......................................................................................................... 122 Currency Operations ...................................................................................................... 123 Clean Note Policy ........................................................................................................... 124 Counterfeit Banknotes .................................................................................................... 125 Expenditure on Security Printing and Distribution .......................................................... 126 The way forward ............................................................................................................. 126 IX. PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY..................................................................................... 128 Trends in Payment Systems .......................................................................................... 129 Policy Initiatives ............................................................................................................. 130 Information Technology Initiatives for the Banking System ............................................. 135 Information Technology within Reserve Bank ................................................................. 138 X. GOVERNANCE, HUMAN RESOURCES DEVELOPMENT AND ORGANISATIONAL MANAGEMENT ............................................................................ 140 Initiatives for Improved Governance ............................................................................... 140 Initiatives for Improved Communication .......................................................................... 142 Human Resource Development Initiatives ...................................................................... 145 Initiatives in Organisation Management.......................................................................... 148 XI. THE RESERVE BANK’S ACCOUNTS FOR 2012-13 .................................................... 153 Balance Sheet ................................................................................................................ 155 Income ............................................................................................................................ 163 Expenditure .................................................................................................................... 165 Statement of Signifi cant Accounting Policies and Notes to the Accounts forming part of the Financial Statements for the year ended June 30, 2013 ............................... 170 Annex I : List of Speeches by Governor and Deputy Governors: April 2012 to July 2013........................................................................................... 175 Annex II : Visits of Foreign Delegations to the Reserve Bank of India during July 2012 to June 2013 .......................................................................................... 178 ii CONTENTS Page No. INDEX OF APPENDIX TABLES 1. Macroeconomic and Financial Indicators ....................................................................... 179 2. Growth Rates and Sectoral Composition of Real Gross Domestic Product .................. 182 3. Gross Domestic Saving and Investment ......................................................................... 183 4. Financial Saving of the Household Sector (Gross) ......................................................... 184 5. Agricultural Production ................................................................................................... 185 6. Procurement, Off-Take and Stocks of Foodgrains .......................................................... 186 7. Trends in Index of Industrial Production ......................................................................... 187 8. Variations in Index Numbers of Wholesale Prices .......................................................... 188 9. Variations in Reserve Money .......................................................................................... 189 10. Variations In Money Stock .............................................................................................. 190 11. Sectoral Deployment of Gross Bank Credit .................................................................... 191 12. Capital Market - Primary and Secondary ....................................................................... 192 13. Turnover in Indian Derivatives Market ............................................................................ 193 14. Indices of Real Effective Exchange Rate (Reer) and Nominal Effective Exchange Rate (Neer) of the Indian Rupee ....................................... 194 15. Key Fiscal Indicators ....................................................................................................... 195 16. Budgetary Operations of the State Governments ........................................................... 196 17. India’s Exports and Imports ............................................................................................ 197 18. India’s Overall Balance of Payments .............................................................................. 198 19. Foreign Direct Investment Flows to India: Country-Wise and Industry-wise................... 199 20. India’s Foreign Exchange Reserves ............................................................................... 200 21. India’s External Debt ...................................................................................................... 201 BOXES II.1 Industrial Slowdown: Causes and Remedies ................................................................. 19 II.2 Indian Coal Sector: Issues & Strategies ......................................................................... 23 II.3 Pricing Power and Infl ation ............................................................................................. 31 II.4 Core Infl ation: Alternate Methodologies ......................................................................... 32 II.5 Producer Price Index: The Concept and Measurement .................................................. 33 II.6 Role of Forward-looking Surveys in Monetary Policy Formulation ................................. 41 II.7 Unconventional Monetary Policy by Central Banks in Developed Economies: Impact on Financial Markets ........................................................................................... 44 II.8 Relationship between Exchange Rate Volatility and Futures Trading in India ................ 52 II.9 Non Deliverable Forward Market and Onshore INR Market: Evidence on Inter-linkages ............................................................................................. 53 iii CONTENTS Page No. II.10 Cyclicality of Fiscal Policy: The Indian Experience ......................................................... 55 II.11 Recommendations of the Working Group to Study Issues relating to Gold Imports and Gold Loan NBFCs in India ................................................................. 61 III.1 Sensitivity of Investment and Growth to Change in Real Interest Rate .......................... 72 III.2 Measurement of Infl ation Expectations .......................................................................... 74 IV.1 Recommendations of Expert Committee to examine the Three-Tier Short-Term Rural Co-operative Credit Structure (STCCS) ............................................. 79 IV.2 Guidelines on Basic Savings Bank Deposit Accounts for Financial Inclusion ................ 81 V.1 Buyback/ Switches for Liability Management ................................................................. 85 VI.1 India: Financial Sector Stability Assessment .................................................................. 94 VI.2 Impact of NPAs on profi tability of banks ......................................................................... 96 VI.3 Review of prudential guidelines on restructuring of advances by banks and fi nancial institutions – Major recommendations of the Working Group ........................... 100 VI.4 Licensing of new banks in private sector ........................................................................ 103 VI.5 Deposit Insurance in the Financial System – Some Observations ................................. 111 VI.6 NBFC-Factors ................................................................................................................. 112 VI.7 Legal developments in the banking sector ..................................................................... 113 VI.8 Major recommendations of the Financial Sector Legislative Reform Commission ......... 115 VII.1 Issuance of Infl ation Indexed Bonds ............................................................................... 118 VIII.1 Plastic Banknotes ........................................................................................................... 123 IX.1 Vision Document 2012-15 .............................................................................................. 130 IX.2 Technical Committee to Examine Uniform Routing Code and Account Number Structure ............................................................................................. 131 IX.3 Committee to Recommend Implementation of GIRO-based payment systems in India .............................................................................................................. 134 IX.4 Cloud Computing - Trends, Issues and Concerns .......................................................... 136 X.1 RBIQ ............................................................................................................................... 146 X.2 Shashi Rajagopalan Memorial Awards ........................................................................... 147 X.3 Code of Ethics and Governance ..................................................................................... 150 XI.1 Technical Committee to review the form of presentation of the Balance Sheet and Profi t & Loss Account ...................................................................... 154 CHARTS II.1 Real GDP Growth ........................................................................................................... 13 II.2 Expenditure Side of GDP ............................................................................................... 14 II.3 Rate of Saving and Investment ....................................................................................... 15 iv