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Rbis fresh agility helps tame indias money market volatility

Oct 9 The Reserve Bank of India (RBI) has finally made progress in taming the country's volatile money markets, displaying two traits it has been rarely associated with in the past: flexibility and a willingness to correct course mid-way. The overnight cash rate, a key indicator of liquidity, has recovered from a summer of wild swings that threatened RBI Governor Raghuram Rajan's key goal of reforming India's money market. The swift response shown by a central bank under new management impressed bankers. Appointed a little over a year ago, Rajan, a former chief economist at the International Monetary Fund, is credited with making the RBI more amenable to change."The new RBI management has been very proactive in responding to markets, be it money markets or forex markets," said Pramod Patil, an assistant vice-president of fixed income and foreign exchange trading at United Overseas Bank in Mumbai. Money markets are crucial in India because banks rely on overnight funding to finance longer-term borrowing - a reliance that has often made the market volatile. After Rajan pledged in August to look into the causes of the volatility that gripped the overnight cash rate the previous month, the bank quickly made the changes that bankers wanted, including injecting short-term cash more frequently. That instantly calmed the market, sending a message that, under Rajan, the RBI was no longer staid and unresponsive but had instead become more attuned to market needs.

RBI officials declined to comment on the central bank's nimble action, but fired by success they appear set to make further reforms. Among the RBI's plans is the introduction of longer-term repos - potentially as long as 180 days, according to one official - and to build a yield curve that allows banks to borrow in several maturities. The longest-term repo regularly offered is currently 14 days. Other initiatives include the development of a private repo market, where lenders would be allowed to lend to each other, as in the United States and other more developed markets.

READINESS TO CORRECT By reducing banks' reliance on overnight funding and shifting to a longer-term policy tool, the RBI hopes to force banks to plan their short-term cash needs better. To accomplish that, a year ago the RBI had started injecting funds via term repos - or cash-for-loans transactions - to smoothen volatility.

Banks welcomed the steps, but panned the implementation, saying the RBI was not injecting funds often enough and not unveiling repos of shorter terms than 7 days. Rajan's term repo initiative had appeared to unravel in July, when the overnight cash rate suffered volatility, with bankers and RBI officials privately blaming each other for the wild swings. Rajan stunned bankers in early August by acknowledging that the RBI's measures appeared to be failing and, days later, by announcing that overnight repos would be injected at weekly auctions. This readiness to correct stood in contrast to the six years the RBI had taken before admitting the bond futures it implemented in 2003 had flopped, and another five years to admit it had got it wrong a second time. Two months on, with the overnight cash rate stable at around the repo rate of 8 percent, bankers are growing confident that those measures have worked. The ends of the next two quarters will be critical tests of whether Rajan has succeeded in taming the money markets. The big test will come at the end of March when the fiscal year ends and banks tend to hold on to cash."If these issues do not recur at the end of December and March, then we can say this model works in smoothening out liquidity in the system, and therefore is a model that can be followed for an extended period of time," said Mohan Shenoi, a treasurer at Kotak Mahindra Bank.

Us climate finance in limbo, risking trust gap before paris

A looming federal budget confrontation and Republican hostility to UN global-warming talks threaten a U.S. down payment into a key climate-aid fund, money considered vital to a climate deal in Paris this December. President Barack Obama had requested $500 million in the 2016 budget for the first tranche of its $3 billion pledge into a UN-administered Green Climate Fund (GCF) that would help poorer countries make a transition to clean energy technologies and adapt to climate change. But Congressional Republicans have vowed to oppose that spending request, and the wider dispute between the President and Republicans over the federal budget has raised the possibility that Obama will not be able to guarantee that U.S. funding before the December summit. Some U.S. officials have started to warn island states and developing countries - among the fund's main potential beneficiaries - of the looming shortfall. The fund is seen as a down payment by rich countries toward a longer-term climate finance package that would total $100 billion a year by 2020, an amount that developing nations say is a condition for them to sign onto any deal in Paris that would reduce global carbon emissions. So far, 43 percent of the $10.2 billion pledged to the climate fund has not been fulfilled, with the United States responsible for most of that shortcoming."If there's not a firm commitment to financing, there will be no accord, because the countries of the (global) south will reject it," French President Francois Hollande said this month. A U.S. State Department official told Reuters that meeting its funding pledge is a "key administration priority" and said its ability to convert it into an actual contribution is "key to advancing U.S. interests globally.""We are working intensively with Congress to make this appropriation happen," the official said in a statement. But with just two months left before the Paris talks the funding faces stiff resistance.

The House of Representatives passed an appropriations bill this summer directly prohibiting the U.S. from funding the GCF. And an aide to the Senate environment committee aide told Reuters that Republican senators plan new legislation this fall requiring Congressional oversight for GCF funding."Climate finance is an under-riding element of the UN talks that can either further propel this agreement or undermine it completely," the aide said. "The finance issue is a direct hook for the Senate to get involved in the climate talks process."Republican Senator John Barrasso, chair of the Senate panel that oversees multilateral agreements, told Reuters he will push legislation to require any international aid related to climate change to require Congressional approval.

"It's hard to see an easy path to $500 million. It will be difficult, if not impossible, to have Congressional loose ends tied up by December," said Karen Orenstein, senior policy analyst at Friends of the Earth, an environmental advocacy group."This can shift a lot of the plates in the negotiations."TRUST GAP Tony de Brum, foreign minister of the Marshall Islands, said countries like his that will rely heavily on climate finance have no confidence that sum will be delivered.

"The fact that the United States - which originally put the $100 billion target on the table - is yet to make its own initial contribution to the GCF is a cause for concern," said de Brum. "This is a big, gaping trust gap that needs to be filled before Paris."Religious groups joined environmental organizations to press for Congress to approve the funding and have been lobbying since the August recess. Reverend Mitch Hescox of the Evangelical Environment Network said his group has met with Senate Republicans such as Lindsay Graham, Lamar Alexander and Bob Corker on key committees such as appropriations and foreign relations."We are working with Republicans in the Senate to show them this is a moral issue for us," Hescox said. "We are going to do all that we can to make sure these funds are appropriated and released."He said the group's outreach showed some success in July when Republican Senator Mark Kirk voted to support an amendment to the Senate Appropriations Committee bill that would allow the U.S. to contribute to the fund, reversing a prior prohibition. Developing countries warned U.S. officials not to use Congressional politics as an excuse for not living up to their financial commitments."The Americans always say: 'You know how hard it is for us to deal with Congress on the budget.'," said Ronny Jumeau, UN Ambassador of the Seychelles, a member of the Association of Small Island States negotiating bloc."Obama cannot come to Paris and not put money on the table. He's got to put his money where his mouth is," he said.