For bankers delayed monetary policy only adds to their long list of woes

 India’s delayed monetary policy meeting adds to growing uncertainty for bankers over how to bolster lending and handle record levels of bad debt.

The Reserve Bank of India’s decision to reschedule this week’s interest-rate meeting makes it difficult for lenders to price loans and deposits because they usually track the monetary policy’s outlook for liquidity and interest rates. Banks monitor the regulator’s projections for economic growth, which is closely linked to credit demand.

Lenders usually make these decisions at monthly asset-liability meetings, planned for shortly after the RBI’s monetary policy statement, according to bankers with knowledge of the meetings who asked not to be named because they are private. Banks have now rescheduled these meetings, they said.

The RBI on Monday abruptly postponed its policy announcement, without giving a reason. Governor Shaktikanta Das, in recent weeks, has flagged his growing concerns about the health of the nation’s fragile banking system and, in particular, under-capitalized state-run lenders. Banks -- already weakened by a two-year-old shadow lending crisis -- are seeking more guidance from the regulator on how to battle one of the world’s worst bad loan ratios.

‘Non-Communication’

“The monetary policy statement is a very important document for banks as it sets the tone on interest rates, liquidity, growth, inflation and macro-prudential measures like the loan moratorium,” said Rupa R. Nitsure, group chief economist at L&T Finance Holdings Ltd. “It is necessary for future loan pricing depending on the central bank’s outlook and comments on economy, rates and liquidity. RBI’s non-communication adds to uncertainty on these factors.”

October’s monetary policy meeting is important because it takes place half-way through the financial year and gives banks a clear picture of second-half business conditions.

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Bankers were also awaiting more clarity on the regulator’s views on the loan moratorium after the Supreme Court allowed lenders to classify all loans that hadn’t turned bad at the end of August as performing until further orders, overturning an RBI cutoff date.

The central bank has pumped in billions to support banks, but Das is particularly worried about the risk-averse nature of lenders even as he seeks to maintain financial stability. This week’s delay could make banks even more wary to cut lending rates and boost credit ahead of a traditionally busy season of spending during the festival season next month.

“Financial sector stability is perhaps the most critical of all at the moment given the uncertainty around the pace of economic recovery, the prevailing stress on asset quality and inadequate loss-absorption buffers across many banks, including state-run banks,” said Saswata Guha, director of financial institutions at Fitch Ratings Ltd.

Although it’s not unusual to have bank-specific issues surface at times, there have been “several instances of mis-governance across the financial sector in the recent past, which perhaps requires greater regulatory attention,” he said.

Postponement of MPC meeting sows doubts about the RBI's credibility

 India's worst economic slump is no time for the government to sow doubts about the credibility of its institutions.

On Monday, the Reserve Bank of India postponed its three-day, rate-setting meeting without giving a reason. It was probably canceled because the panel didn’t have enough people to convene; the six-person committee requires four officials to proceed. The terms of three members have expired, and requests that the government extend their tenure were met with the formation of a group to select new ones instead. (By law, they can’t be appointed to second terms)

No matter how you read this, the signals are discouraging. If it’s purely a scheduling snafu, then the timing is particularly poor. Gross domestic product dived 23.9% in the second quarter from a year earlier, easily the worst performance in Asia. India is crumbling beneath the toll of the coronavirus, with more than 6 million cases and is at risk of overtaking the U.S. for the unenviable mantle of most infections. The RBI postponement was announced after markets closed Monday; traders were already wrestling with record government borrowing.

If this is yet another example of Prime Minister Narendra Modi undermining the RBI, which is on its third governor in four years, investors are left wondering whether India has become something of a halfway house. It has the form of a modern central bank but lacks the substance of a truly independent institution. Current chief Shaktikanta Das’s two immediate predecessors left after spats with the government. Das, who has held the job since 2018, hasn't directly opposed New Delhi. Indeed, his first decision of any import was an unexpected rate cut in early 2019.

The RBI was forecast to keep its benchmark rate unchanged at 4% this week, reflecting the persistence of inflation above its 2% to 6% target. India was one of Asia's most aggressive rate-cutters amid a credit crisis in 2019. Officials also reduced borrowing costs at the start of the year, as the pandemic rippled across the country. Lately, its ardor for such easing has cooled. But the overall trend for inflation is down globally and India isn't likely to be an exception for very long. Bloomberg Economics sees price increases abating and the RBI resuming reductions later this year.

Economic circumstances compel more cuts; the collapse in growth is simply too dramatic to ignore. If Modi's prevarication about new appointments comes down to wanting to faster reductions, that’s understandable. The three outgoing members consist of a hawk, a dove and a person in the middle, according to Bloomberg Economics' Abhishek Gupta. If Modi instead wants three doves — that is, advocates of easier policy — then he should hurry up and appoint them.

Governments the world over want central banks to give them the results they crave. In 2018, U.S. President Donald Trump mused about firing Federal Reserve Chair Jerome Powell because he apparently wasn't moving fast enough to lower rates. (Trump eventually demurred.) A century of Fed credibility and the primacy of the dollar meant America paid no price for the president’s freelancing. Even if he had nudged Powell aside, the rate-setting Federal Open Market Committee still would have met. Its size and rotating system means there are always enough officials around.

Developing countries don’t get the same pass. So let’s start with some housekeeping that could help avoid a repeat of this fiasco. The first step should be expanding the MPC to seven members, which would avert the prospect of a tie. The RBI should also consider staggering terms and allowing for re-appointment. Modi enjoys an overwhelming majority in parliament; this shouldn’t be a heavy lift.

Central banks that operate free of political meddling tend to get it more right than wrong. The MPC came into existence in 2016, during Modi's first term. India’s dire economic predicament has made serious demands on this young system, but the stakes are too high for it to falter.

No reason to doubt govt will meet fiscal deficit targets: RBI Guv backs FM

Throwing his weight behind Finance Minister Nirmala Sitharaman's budget numbers, ReserveBank Governor Shaktikanta Das has said that there is no reason to doubt that the government will be able to cut fiscal deficit to 3.5 per cent of the GDP in the fiscal beginning April 1.
In an interview with PTI, Das said the government has remained within the limits set by the Fiscal Responsibility and Budget Management (FRBM) Committee for the budget deficit.
Sitharaman missed deficit target for the third year in a row, pushing shortfall to 3.8 per cent of the GDP in the current fiscal as compared to 3.3 per cent previously planned. The fiscal deficit target for the coming fiscal year starting April 1, has been fixed at 3.5 per cent.
The fiscal deficit is the shortfall in a government's income compared with its spending. It essentially means that the government is spending beyond its means.
"With regard to the fiscal management of the government, the government has remained within the recommendations FRBM committee," Das said. "So, therefore, the excess fiscal deficit has been restricted to 0.5 per cent. The government has adhered to that and a large part of the financing of fiscal deficit next year will come from small savings."
The FRBM committee headed by N K Singh had recommended fiscal deficit to be cut to 2.8 per cent in 2020-21 fiscal and to 2.5 per cent by FY2023.
The panel had suggested an "escape clause" in case of overriding consideration of national security, acts of war, calamities of national proportion and collapse of agriculture severely affecting farm output and incomes. Under this, a deviation from the stipulated fiscal deficit target can be taken but not in excess of 0.5 percentage points in a year.
Das said there is no reason to doubt that the fiscal deficit for the next year would be met.
"There is no reason for anyone to doubt that number. The Budget has been presented just about a fortnight ago. There is no reason to disbelieve that number," he said.
The fiscal slippage announced in the government's new FY2021 budget is modest relative to its previous targets.
The RBI governor said the Budget for 2020-21 had announcements that certain bonds will be opened up for non-resident investment without any limit.
"Besides, an announcement has been made in Budget for raising limits for corporate bonds from 9 per cent to 15 per cent," he said. "So, therefore, there are a lot of foreign resources which are going to come into India. Indian corporates are also accessing a lot of money from foreign sources today through ECB."

The RBI, he said, will ensure that its borrowing programme is undertaken in a non-disruptive manner.
"So, as the debt manager of the government, the RBI will definitely try and ensure that the borrowing programme is undertaken in a non-disruptive manner," he said.
Sitharaman's second budget contains some measures which may support GDP growth in the medium-term, including reduced individual income tax rates, some easing of restrictions on foreign portfolio inflows, continued focus on public infrastructure spending, and schemes of which the details remain to be announced to encourage manufacturing in the electronics and textiles sectors.
Rating agencies have also backed the budget numbers. Fitch Ratings earlier this month said that the assumptions in the budget, including nominal growth of 10 per cent and a rise in revenues by 9.2 per cent were "broadly credible" although there were risks to the downside.
"In particular, reductions in the corporate tax rate, as previously announced, and new cuts in income tax rates are likely, in our view, to cause tax revenues to fall in the short run, before any potential medium-term benefits materialise; the divestment target appears optimistic, at over three times the estimated realisation in FY20," it had said.
The government in September last year cut the corporate tax rate to 22 per cent from 30 per cent and in the budget for 2020-21 announced reduction in personal income tax rates for those who were willing to give away present exemptions and rebates.
Indian economic growth plunged to an 11-year low in the July-September quarter when it clocked 4.5 per cent expansion.
"Greater fiscal transparency around off-budget financing is welcome, as the new budget now explicitly recognises borrowing from the National Small Savings Fund of 0.8 per cent of GDP in both FY20 and FY21, e g to finance food subsidies, although this is not incorporated in the headline figure (which would be 4.6 per cent of GDP in FY20 instead of 3.8 per cent)," Fitch had said.
(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

RBI board recommends aligning accounting year with fiscal year from 2020-21

The Reserve Bank board on Saturday recommended aligning the central bank's accounting year, beginning July, with the financial year from 2020-21, an official statement said.
The Central Board of Directors of the RBI at its 582nd meeting reviewed the current economic situation, global and domestic challenges and various areas of operations of the Reserve Bank.

The board recommended aligning the financial year of RBI, currently July-June, with the government's fiscal year (April-March) from the year 2020-21. It approved forwarding a proposal to the government for its consideration, the RBI said in the statement.
Addressing the board meeting, Finance Minister Nirmala Sitharaman outlined the thinking behind the Union Budget 2020-21 and the focus areas of the government.
She indicated increased complementarity in policy between the RBI and the government to address growth concerns, the statement said.
Complimenting the finance minister on the Budget, the board members made various suggestions for consideration of the government, it added.
The finance minister was accompanied by Minister of State for Finance Anurag Singh Thakur, Finance Secretary Rajiv Kumar and Expenditure Secretary T V Somanathan, among other senior officials.

Lending from Cash Reserve Ratio buffer to get 5-year exemption: RBI

The ReserveBank on Monday said the special lending window with CRR exemption will be open from February 14 and incremental loans disbursed under this facility will have CRR exemption for the next five years.
This means that banks will not be needed to make additional cash reserve ratio against any incremental loans disbursed to the targeted segments.

The window opens on February 14 for six months ending July 31, 2020, but the net demand and time liabilities (NDTL) will be calculated as of January 31, 2020, the central bank circular said this evening.
As an additional liquidity measure and also to nudge banks to lend more to the needy segments, the Reserve Bank at the last monetary policy announcement said banks, flushed with liquidity, could lend to these segments without making additional provisions without the requirement of parking additional cash reserve ratios (CRR), which is the money parked with the RBI without interest.
The productive sectors identified by the regulator are auto and residential housing loans, and also loans to micro, small and medium enterprises (MSMEs).
At the sixth bimonthly monetary policy on February 6, the RBI had said, "Banks can deduct the equivalent amount of incremental credit disbursed by them as retail loans to automobiles, residential housing, and loans to MSMEs (which have GST registration), over and above the outstanding level of credit to these segments as at the end of the fortnight ended January 31, 2020, from their net demand and time liabilities (NDTL) for maintenance of the CRR." Detailing the time-line and operational details in a detailed circular, the RBI on Monday said, "Banks can claim the first such deduction from the NDTL of February 14, 2020 for the amount equivalent to the incremental credit extended to the above identified sectors over the outstanding level of credit as at the end of the fortnight to January 31, 2020.
"An amount equivalent to the incremental credit outstanding from the fortnight beginning January 31, 2020 and up to the fortnight ending July 31, 2020 will be eligible for deduction from NDTL for the purpose of computing the CRR for a period of five years from the date of origination of the loan or the tenure of the loan, whichever is earlier," the RBI said.
The central bank feels revitalising credit flow to productive sectors like these can have multiplier effects to spur support growth.
The circular asks banks to report the CRR exemption availed at the end of a fortnight under "exemptions/others" in the Section 42 return, under the provisions of the master circular on CRR and SLR issued on July 1, 2015.
Proper fortnightly records of net incremental credit extended to these select sectors/NDTL exemption claimed, duly certified by the chief financial officer or an equivalent officer, must be maintained by banks for supervisory review, the circular said.
The RBI expects this special window to enable improved credit flow to needy sectors, reinforces monetary transmission, strengthens regulation and supervision, broadens and deepens financial markets; and also improves payment and settlement systems.
The RBI on June 6, 2019, set up an internal working group to review the liquidity management framework to simplify it and suggest steps to communicate the objectives and the toolkit for the same and the report was made public on September 26, 2019.
Following this, RBI fine-tuned the existing liquidity management framework and the revised framework fixed the marginal standing facility rate as its upper ceiling and the fixed rate reverse repo rate as the floor rate, with the policy repo rate in the middle of the corridor.
The special lending window however retains the width of the corridor is retained at 50 bps-the reverse repo rate being 25 bps below the repo and the MSF rate being 25 bps above the repo rate.
This also had the RBI withdrawing the daily fixed rate repo and four 14-day term repos and included fixed and variable rate repo/reverse repo auctions, outright open market operations, forex swaps and other instruments as new instruments for liquidity management.
A 14-day term repo/reverse repo operation at a variable rate and conducted to coincide with the CRR maintenance cycle would be the main liquidity management tool for managing frictional liquidity requirements.
The main liquidity operation would be supported by fine-tuning operations, overnight and/or longer, to tide over any unanticipated liquidity changes during the reserve maintenance period, the RBI said, adding if needed, the RBI will conduct longer-term variable rate repo/reverse repo operations of over 14 days, and accordingly last week, it introduced long term repos with one and three years of tenor.

Best of BS Opinion: Delhi Assembly elections, economic slowdown, and more

A day after the ReserveBank of India announced measures to boost credit demand, the largest lender, State Bank of India, reduced interest rates. Now that the two important events — the Union Budget and monetary policy review— are out the way, commentators are in a better position to gauge the possibilities for the Indian economy. Meanwhile, voters of the National Capital Territory of Delhi will vote today to elect the next state government today.
Business Standard Opinion pieces for the day talk about issues related to policy and politics

If the seas are mostly calm, and yet the Indian economy performs poorly, there must be something wrong with the ship of state, writes T N Ninan
For Modi, Nehru is a recurrent target to attack.
Not just because he believes Nehru cast India in a non-Hindu image but also to chip away and finish Gandhi dynasty and Congress, writes Shekhar Gupta
Delhi’s debate of development versus Hindu-Muslim polarisation mirrors a paradigm shift in national politics, notes Sunil Sethi
In its short life, the AAP has distinguished itself in many, many governance spheres. But, party democracy is not one of them, writes Aditi Phadnis
“We are working on the FRDI Bill; but not sure when it can get through the House.”
Finance Minister Nirmala Sitharaman

RBI policy: Repo rate unchanged at 5.15%; MPC retains accommodative stance

The ReserveBank on Thursday expectedly left interest rates unchanged amid uncertain inflation outlook but left the door open for more easing in future even as it took steps to spur credit growth in an economy facing its worst slowdown in more than a decade.
With all six members of the RBI Governor Shaktikanta Das-led Monetary Policy Committee voting unanimously, the repurchase or repo rate was maintained at 5.15 per cent while retaining its accommodative stance.

With food prices driving retail inflation to a more than five-year high of 7.35 per cent in December, the central bank raised its inflation projection for the six months to September to 5-5.4 per cent from 3.8-4 per cent previously while terming the outlook on price rise as "highly uncertain".
The RBI cut its policy rate by 135 basis points over five straight meetings last year, before hitting the pause button in December on inflationary concerns.
The RBI stuck to its prediction of 5 per cent GDP growth in the current fiscal - the lowest in 11 years but lowered its growth forecast for the first half of the coming financial year to 5.5-6 per cent from its December projection of 5.9-6.3 per cent. For the full 2020-21 fiscal, it put the GDP growth at 6 per cent, which is at the lower end of the 6-6.5 per cent expansion projected by the government's Economic Survey.
To boost credit growth, it scrapped the mandatory requirement for banks to set aside cash of 4 per cent for every new loan extended to retail automobiles, residential housing, and small businesses till July 2020.
Also, in a major relief to the real estate sector, the RBI extended the restructuring of project loans by a year. Loans for projects that have been delayed for reasons beyond the control of their promoters have been extended by another one year without downgrading the asset classification. This aligns with the treatment accorded to other project loans for the non-infrastructure sector.
The move will bring much-needed relief to the cash-starved real estate sector.
At a news conference, Das said while the pause decision may be on expected lines, the RBI has several instruments up its sleeves, hinting at the use of unconventional tools such as the ones used by the US after the global financial crisis in 2008 to boost growth as rate cuts were not effective enough.
"It has to be kept in mind that the central bank has several instruments at its command that it can deploy to address the challenges the Indian economy faces in terms of sluggishness in growth momentum," he said.
The MPC said that while easing global trade tensions should encourage exports and spur new investment, the outbreak of the new coronavirus may impact tourist arrivals and global trade.
"Downside risks to global growth have increased in the context of the outbreak of coronavirus, the full effects of which are still uncertain and unfolding,” Das said.
The MPC said economic activity remains subdued and the few indicators that have moved up recently are yet to gain traction in a more broad-based manner. "Given the evolving growth-inflation dynamics, the MPC felt it appropriate to maintain status quo." On the announcements made by Finance Minister Nirmala Sitharaman in her budget last week, the MPC said, "the rationalisation of personal income tax rates in the Union Budget 2020-21, should support domestic demand along with measures to boost rural and infrastructure spending." It said though there has been a 0.50 per cent fiscal slippage in FY20, that has not increased the market borrowings, and also noted that the government has budgeted for a Rs 70,000 crore increase in the gross borrowings in FY2021 when it has managed to crimp the fiscal gap to 3.5 per cent.
However, in the current year, the government will miss the fiscal deficit target of 3.3 per cent as it witnessed shortfall in tax revenue due to economic slowdown and a cut in the corporate tax rate.
"The Union Budget 2020-21 has introduced several measures to provide an impetus to growth. While the emphasis on boosting the rural economy and infrastructure should help the growth momentum in the near-term, the corporate tax rate cuts of September 2019 should help boost the growth potential over the medium-term," the MPC said.
There is a need for "adjustment" in interest rates on small saving schemes, the MPC said, adding that the external benchmark system adopted from October 1, has strengthened monetary policy transmission.
The government is likely to revise small savings rates downward in the coming quarter beginning in April.
Commenting on the policy, Rumki Majumdar, Economist, Deloitte India said: "The RBI decided not to cut rates and to be in a wait-and-watch mode in the February policy meeting while continuing on with an 'accommodative' stance. This is because inflationary nor demand pressures for goods other than food in the near future may remain low owing to weak demand and excess capacity issues." The expansionary monetary policy stance was necessary and is an assurance that there will be no reversal of easing and that the RBI will not hike rates immediately, she said, adding the current slowdown in the economy is driven by liquidity issues, slow credit off-take, and weak rural demand.

MARKET LIVE: Sensex, Nifty set for a flat start as indicated by SGX NIfty

The ReserveBank of India's bi-monthly monetary policy review meeting would be the key factor driving the markets today. While investors expect the central bank to hold the repo rate and, possibly, retain the stance as 'accommodative', they would eye the bank's commentary on the growth outlook and inflation going-forward. That apart, December quarter earnings, update on coronavirus outbreak, crude oil prices, stock-specific movements, and foreign fund flow would steer indices.
EARNINGS TODAY
Bata India, Eicher Motors, Hero MotoCorp, and Sun Pharma are among the 135 companies slated to report their Q3FY20 earnings today.
GLOBAL MARKETS
Asian stocks edged up on Thursday following encouraging US economic data, even as investors kept a wary eye on the impact of the coronavirus outbreak. MSCI's broadest index of Asia-Pacific shares outside Japan gained 0.39 per cent, while Japan's Nikkei rose 1.63 per cent.
In the US, President Donald Trump was acquitted on Wednesday in his Senate impeachment trial, saved by fellow Republicans, nine months before he asks voters in a deeply divided America to give him a second White House term. On Wall Street, the S&P 500 gained 1.13 per cent to a record close of 3,334.69, while the Nasdaq Composite added 0.43 per cent to 9,508.68, also a record high.
(With inputs from Reuters)
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08:38 AM
D-Street's bullet train: IRCTC climbs league table to be most-valued PSU
Currently, it is valued more than other marquee PSUs, such as The New India Assurance Company, Bharat Electronics, Oil India, and Bharat Heavy Electricals.

In the past fortnight, IRCTC has seen its m-cap swell by over Rs 10,000 crore — more than the combined market value of the bottom 20 listed PSUs. READ MORE

08:26 AM
Market Outlook :: Deepak Jasani, Head - retail research, HDFC Securities
Outlook: Indian markets could open flat to negative despite in the US markets on Wednesday and largely positive Asian markets today that are following US cues.
>> The pullback rally continued at Dalal Street on Wednesday, after the sharp fall seen last Saturday, which was triggered due to lack of sufficient stimulus measures in the Union Budget. The gains came on the back of positive global cues and after a shaky start in the morning session. Sentiments were also boosted after India's Services PMI in January rose at quickest rates in seven years. The Nifty gained 109.5 points or 0.91% to close at 12,089.15

Technical cues: Nifty has pulled back sharply, the underlying short term trend still remains down. The Nifty would need to cross the previous intermediate high of 12170 for the downtrend to reverse. Traders may also remain cautious ahead of the Reserve Bank of India (RBI)'s policy outcome tomorrow. Immediate supports to watch for resumption of weakness are now at 11954.

Stocks to watch: Among stocks under coverage, Shree Cements, Bharti Airtel, PVR, Ujjivan, Dmart, AU SFB, Tata Motors, M&M, ICICI Bank, DLF, MCX, Indigo could do well.
08:25 AM
Nifty view and top trading ideas by CapitalVia Global Research: Buy UBL
Market traded higher on Wednesday; Nifty regained 12,000 mark

Market traded higher on Thursday due to strong global cues along with soft crude prices and stable rupee. The Nifty closed at 12,089.20, gaining 109.50 points. Metal, realty and financial services stocks traded with positive sentiments through the day whereas media stocks witnessed some pressure. Nifty bank closed at 31,002, adding 315.30 points from the previous day’s closing. Today, markets will react to the RBI’s policy rate decision. READ MORE

08:23 AM
Two stocks that Vaishali Parekh of Prabhudas Lilladher is bullish on
BUY HINDALCO

CMP: Rs 196.30

TARGET: Rs 220-225

STOP LOSS: Rs 180

The stock has made almost a double bottom formation near 180 levels forming a strong support base and has given a decent bounce to imply strength and has potential to rise further in the coming days. READ MORE

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Bulk deals on NSE as on Wednesday
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Bulk deals on BSE as on Wednesday
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08:16 AM
FII/FPI & DII trading activity on NSE, BSE and MSEI
08:15 AM
Rupee Check
Source: Bloomberg

08:11 AM
Oil Check
>> Oil futures rose for a second day on Thursday as investors took optimism around unconfirmed reports of possible medical advances to combat the coronavirus outbreak in China as a sign fuel demand could rebound in the world’s biggest oil importer.

>> Prices also gained after a government report on Wednesday showed U.S. gasoline and diesel inventories fell.
>> At 8:10 am, Brent Crude Futures were at $55.95 per barrel-mark, up over 1 per cent.

08:09 AM
SGX Nifty
>> At 8:08 am, the Singaporean Exchange for Nifty Futures was down 19 points,or 0.16 per cent, at 12,081.

RBI Governor underlines need for more structural reforms to revive growth

With just a week left for the budget, ReserveBank Governor Shaktikanta Das on Friday called for structural reforms and more fiscal measures to revive consumption demand and the overall growth, saying monetary policy has its own limitations to achieve these objectives.
The Narendra Modi government in its second term will present the first full budget next Saturday, at a time when the advance estimate of GDP has projected nominal growth plunging to a 48-year-low of 7.5 per cent and real growth hitting an 11-year low of 5 per cent or thereabout.
"Monetary policy has its own limits. Structural reforms and fiscal measures may have to be continued and further activated to provide a durable push to demand and boost growth," Das told the students of St Stephen's College, Delhi, his alma mater.
The statement has to be seen in the context of growth hitting a six-year low of 4.5 percent in the September quarter.
It can be noted that successive GDP prints have been hurtling down quarter after quarter since the second term of the Modi government. Falling consumer price inflation has given the legroom to the central bank to cut interest rates by a whopping 135 bps to a nine-year low of 5.15 per cent in four successive rate reductions between February and October 2019.
Even a historic corporate tax cut to a low 25 per cent last August did not revive the animal spirit of the economy as amidst falling demand companies are holding back investment into capacity addition as most of them are under-utilising their installed capacity.
Das also listed out some of the priority areas where structural reforms are necessary and if carried out in earnest can act as potential growth drivers and through backward and forward linkages can give significant push to growth.
He called for prioritising food processing industries, tourism, e-commerce and startups and also making the domestic economy a part of the global value chain.
Das urged the states to play an important role by enhancing capex which has high multiplier effect, and can boost the Centre's focus on infrastructure spending.
Admitting that correctly assessing the current economic situation and thus formulating the necessary monetary policy is a challenge now, he said this is why monetary policy around the world is in a state of flux today.
The RBI was forced to slash its GDP forecast for FY2019-20 by a whopping 290 bps to a low 5 per cent between February and December.
"One of the major challenges for central banks is the assessment of the current economic situation. The precise estimation of key parameters such as potential output and output gaps on a real time basis is a challenging task, although they are crucial for the conduct of monetary policy."
"The shifting trend growth in several economies, global spillover effects and disconnect between the financial cycles and business cycles in the face of supply shocks broadly explain why monetary policy around the world is in a state of flux," Das said in the speech entitled the 'Seven ages of India's monetary policy'.
Das said a view must be taken on the true nature of the slack in demand and supply-side shocks to inflation for timely use of counter cyclical policies.
As a counter to this flux, he said the Reserve Bank constantly updates its assessment of the economy based on incoming data and survey based forward looking information juxtaposed with model-based estimates for policy formulation.
"This approach helped the Reserve Bank use the policy space opened up by the expected moderation in inflation and act early, recognizing the imminent slowdown before it was confirmed by data subsequently," Das concluded.

RBI to hold rates on inflation concerns, fiscal boost likely: Poll

Rising inflation is expected to keep the ReserveBank of India from cutting rates again until late this year, while an expansionary federal budget due next month attempts to put a floor under rapidly-slowing growth, a Reuters poll found.
Last month a rate cut at the Feb. 4-6 meeting was a close call but with the latest inflation print showing a sharp increase - accelerating to its highest in more than five years and above the upper band of the RBI's target range - the central bank will be forced to stay on the sidelines.
That is despite the Indian economy expanding at its weakest pace in over six years in the July-September quarter and the Jan. 17-22 poll of nearly 65 economists showing a sharp cut to the growth outlook for this fiscal year.
"Our expectation is that there might be higher inflation prints at least until April beyond which you could see some moderation," said Sakshi Gupta, senior India economist at HDFC Bank.
"Given this trajectory, it would reach a stage where inflation prints are going to become more comfortable for the RBI, we expect them to seize that opportunity and cut to support growth."
Still, in response to additional questions, all 42 economists said growth would gradually pick up in the next six months and a majority said inflation would moderate.
"A sharp pullback in credit caused growth to slow dramatically in 2019. But fiscal and monetary policy have been loosened, this should lead to a gradual recovery in investment and household spending," said Shilan Shah, senior India economist at Capital Economics.
While the RBI was the most aggressively dovish major central bank in Asia, slashing rates by a cumulative 135 basis points last year, it paused unexpectedly in December on inflation concerns.
The latest poll projected the central bank to extend that pause - keeping its repo rate on hold at 5.15% at its February meeting and until at least October.
"Going forward, inflation is going to stay at least above target for the next 6-8 months. So, there will be very limited room for them to return to an easing bias soon in terms of cutting rates," said Radhika Rao, economist at DBS.
The RBI was forecast to next cut rates by 25 basis points to 4.90% in the October-December quarter, according to the poll consensus.
Gross domestic product growth was forecast to average 5.0% this fiscal year, the lowest since polling began for the period in April 2018.
If that is realised, it would line up with the RBI's projection and mark its weakest pace since the financial crisis.
​ On Monday the IMF slashed India's prospects to 4.8%, making its biggest cutback for any emerging market.
The economy was then expected to expand 6.0% next fiscal year, a downgrade from 6.8% predicted in the October poll.
EXPANSIONARY BUDGET
With the RBI not predicted to provide an additional boost over the near term, the government was expected to announce more expansionary measures at its Union Budget on Feb. 1, rather than focus on fiscal prudence, according to 30 of 50 economists who answered a separate question.
The government was forecast to set a fiscal deficit target of 3.6% of GDP for 2020/21, up from 3.3% targeted for the current year, the poll found.
"Given the protracted and broad-based slowdown of the Indian economy, we opine the government will undertake fiscal expansion to boost the economy," said Sher Mehta, director of macroeconomic research at Virtuoso Economics.
While fiscal expansion is generally followed by a spike in price pressures, a majority - over 60% of 39 respondents - said it would not prove to be inflationary.
Virtuso Economics' Mehta said "with the marked downturn in consumption demand and the likelihood of a large stimulus limited, we don't expect fiscal expansion to be inflationary."

RBI scraps certificate of authorisation of Vodafone's mobile payment app

The ReserveBank of India on Tuesday said it has cancelled the Certificate of Authorisation (CoA) of Vodafone m-pesa on account of voluntary surrender of authorisation.
Following the cancellation of the CoA, the company cannot transact the business of issuance and operation of prepaid payment instruments, the central bank said.

However, customers or merchants having a valid claim on the company as a PSO, can approach the company for settlement of their claims within three years from the date of cancellation i.e. by September 30, 2022.
Vodafone m-pesa, a Payment System Operator (PSO), had voluntarily surrendered the authorisation, it said.
Last year, Vodafone Idea had decided to close m-pesa vertical following the closure of Aditya Birla Idea Payments Bank Ltd (ABIPBL), with which it was being merged.
Vodafone m-pesa was one of the 11 firms that was given payments bank licence by the RBI in 2015.

Claims worth Rs 4,800 cr admitted from fixed deposit holders of DHFL

The ReserveBank-appointed administrator of beleaguered Dewan Housing Finance Limited (DHFL) has admitted close to Rs 4,800 crore of claims submitted by fixed deposit holders of the company, a source said.
Nearly 55,000 public depositor holders, including retail and UP Power Corporation Employees, have demanded payments aggregating to Rs 5,200 crore from the troubled mortgage players as of December 17.

"The claims from fixed depositors that have been admitted, so far, are Rs 4,800 crore," a source said.
With this, the total amount of claim received by the company's administrator, R Subramaniakumar, who is also the resolution professional, from financial creditors, operational creditors, employees, fixed deposit holders, and other creditors has touched approximately Rs 93,105 crore.
Against that, around Rs 85,800 crore of claims have been admitted, so far, said a banker.
Following an NCLT order dated December 3, Subramaniakumar, through a public notice, had asked all the creditors including fixed depositors to submit their claims by December 17.
While financial creditors have demanded a payment of Rs 86,892.30 crore of their debt, financial creditors claimed an amount of Rs 60.76 crore, as per the latest available data.
Last week, the committee of creditors met for the first time after the stressed financier was admitted for insolvency proceedings on December 2.
Subramaniakumar informed the creditors about the status of the claims made so far during the meeting.
Among the financial creditors, the country's largest lender, State Bank of India, including SBI Singapore, submitted the highest claim of Rs 10,082.90 crore. However, claim which has been admitted from SBI and SBI Singapore is Rs 7,131.31 crore and Rs 2,951.59 crore is under verification. An overseas subsidiary of SBI- SBI (Mauritius) Ltd has also claimed payment of Rs 97.58 crore from the mortgage lender.
Other lenders include Bank of India (Rs 4,125.52 crore); Canara Bank (Rs 2,681.81 crore); Union Bank of India (Rs 2,378.05 crore); Bank of Baroda (Rs 2,074.92 crore) and National Housing Bank (Rs 2,433.79 crore), among others.
Bondholders through the debenture trustee Catalyst Trusteeship - have submitted claims worth Rs 45,550.07 crore.
The housing finance company's employees and workmen have submitted a claim of Rs 2.01crore.
Apart from financial and operational creditors, the company also received claims of Rs 950.53 crore from HM Tower Private Limited, Man Realty, Merino Shelters, and Neelkamal Realtors Tower.
DHFL, the third-largest pure-play mortgage player, is the first NBFC/HFC to face the corporate insolvency resolution process.
The RBI, on November 20, superseded the board of DHFL and appointed Subramaniakumar as its administrator after it found out governance and liquidity issues at the company.
The decision on DHFL came after the government on November 15 notified Section 227 of Insolvency and Bankruptcy Code (IBC), empowering the RBI to refer stressed financial service providers with an asset size of at least Rs 500 crore to insolvency courts.
The central bank has also appointed a three-member committee- consisting of IDFC First Bank non-executive chairman, Rajiv Lall; ICICI Prudential Life Insurance managing director and CEO N S Kanan and Association of Mutual Funds in India (AMFI) N S Venkatesh, to advise the company's administrator in the resolution process.

Financial system remains stable despite weakening domestic growth: RBI

The ReserveBank on Friday said the country's financial system remains despite slowing economic growth.
The country's GDP slowed to a six-year low of 4.5 per cent in the second quarter of FY20, forcing the RBI to slash its growth forecast by 240 basis points to 5 per cent for the fiscal in its December monetary policy review.

"India's financial system remains stable notwithstanding weakening domestic growth," the central bank said in the Financial Stability Report.
The report said all major risk groups such as "global risks, risk perceptions on macroeconomic conditions, financial market risks and institutional positions" were perceived as medium risks affecting the financial system.
However, the perception of risks on various fronts like domestic growth, fiscal, corporate sector and banks' asset quality increased between April and October 2019, it said.

Rate cuts to 'operation twist', RBI governor is pushing policy boundaries

From a 35-basis point interest rate cut to embracing a Federal Reserve-style ‘Operation Twist’, ReserveBank of India Governor Shaktikanta Das is pushing the boundaries of conventional central bank policy making to improve rate transmission and spur credit to the economy.
The central bank announced Thursday it will buy longer-dated debt and simultaneously sell shorter maturity notes in a concept similar to Operation Twist used by the U.S. Fed in 2011-12. The move is aimed at bringing down the soaring cost of borrowing, or term premia -- the difference between the benchmark 10-year yields and the central bank’s policy rate.

The new tool is part of the broader measures put in place by the RBI to bolster rate transmission after banks failed to fully pass on its 135 basis points of policy easing since February. The central bank has separately prodded banks to peg part of their loan books to external benchmarks such as treasury bills and the repurchase rate, and pumped in billions of dollars to keep liquidity in surplus in the banking system.
The policy easing cycle this year saw Das and his rate-setting panel deliver a rare 35 basis-point cut in August. The governor had then termed the move as neither “excessive” nor “inadequate.”
“Governor Das and his team are evidently open to experimenting with unconventional policy instruments,” said Saugata Bhattacharya, chief economist at Axis Bank Ltd. This is the “optimal approach” given the uncertain response from banks despite an environment of huge surplus liquidity, and yet stubbornly high credit costs.
Earlier this month, the six-member Monetary Policy Committee surprised markets by deciding to hold the repo rate steady at 5.15%, citing high inflation. The MPC, headed by Das, preferred to wait and watch for the previous rate cuts to trickle through before easing further.
“More steps are likely to smoothen the liquidity and credit premia aspects of the lending rates to hasten the pass-through of an easy monetary policy,” Radhika Rao and Eugene Leow, analysts at DBS Bank Ltd. in Singapore, wrote in a note.
Forex Swaps
Das has tried unconventional methods to manage liquidity before.
When the markets faced a cash shortfall in March, the RBI chose to do forex swaps instead of its traditional bond purchases.
It announced two swaps of $5 billion each in March and April, both of which were fully subscribed. By doing this, the RBI managed to tackle two issues: inject rupee liquidity and bring down elevated forward premia rates and reduce hedging costs.
Unlike his predecessor Urjit Patel, Das is known for widespread consultations with market participants.
Some in the market had suggested ‘Operation Twist’ as a way to pass on more of the central bank’s five rate cuts to businesses and individual borrowers. With investment and consumption weak in India, Das hasn’t dithered about measures to spur credit and lift economic growth from a six-year low.
“Unconventional problems require unconventional measures,” said Sandeep Bagla, associate director at Trust Capital Services India. “Generally, central bankers have limited influence on the longer end of the curve, which is determined more by the inflation and fiscal dynamics. But in the short run, the RBI intervention can help to reduce the steepness.”
Not all are convinced about the effectiveness of the move. A central bank experiments with such maneuvers only after extinguishing conventional monetary policy options, according to a note by ICICI Securities Primary Dealership. There could be adverse unintended consequences if the RBI adopts these measures, it said.

All is not well with the Indian economy, say analysts; remain cautious

Growth rates in India have been grinding lower over the past few quarters, with the ReserveBank of India (RBI), too, now sitting up and taking note of the problem. While reviewing the monetary policy on Thursday, the central bank lowered the forecast to 5 per cent for financial year 2019–20 (FY20), down from 6.1 per cent in the October 2019 policy review and 2 per cent lower than the June 2019 projection.
Recently, analysts at CLSA too had forecast a similar growth rate (of 5 per cent) for the Indian economy in FY20 with risks to the downside. Their worst-case scenario for FY20 is 50 basis point (bps) lower than this projection at 4.5 per cent.
“India is in the middle of a severe credit contraction that started with the liquidity squeeze triggered by the crisis in the non-bank finance companies (NBFCs), which has now spread to deposit-taking companies as well. India is growing below historical trend and there will be some pressure on broad consumption aggregates. Modi’s corporate tax cuts are bold but will take time to gain traction. India’s recovery will be postponed to late 2020,” said Eric Fishwick, chief economist at CLSA. READ ABOUT IT HERE
Meanwhile, the RBI has revised the consumer price inflation (CPI) projection upwards to 5.1 – 4.7 per cent for the second half of the financial year 2019-20 and 4 – 3.8 per cent for first half of 2020-21. A few days ago, the gross domestic product (GDP) print for the second quarter of the current fiscal came in at 4.5 per cent – the weakest in six years.
With most sectors are currently facing macro headwinds, broad macro parameters (investment, domestic and global) are all at/near to the lowest levels since FY14, reports indicate. There is a dip in both consumer and business confidence. Index of industrial production (IIP), core sector growth and rural employment numbers are nothing to write home about.
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“Under the current environment when both business and consumer sentiments are down, a rate cut alone will not spur consumption and/or investment demand. Therefore, allowing various measures announced by the government as also the policy rate cut of 135 basis points during February-October 2019 to play out perhaps is the way forward rather than reducing the headroom available for policy rate cut,” says Dr. Sunil Kumar Sinha, director for public finance and principal economist at India Ratings & Research.
In this backdrop, most experts remain cautious on the road ahead for the economy and expect a pick-up only in the second half of 2020. Analysts at Nomura, for instance, expect the GDP to remain sub-par until mid-2020 with an improvement only in the third quarter of 2020 (Q3-2020).

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“The current risks prolonging the balance sheet deleveraging cycle, postponing the private investment cycle recovery will further hurt India’s potential growth. Expect growth to continue to disappoint both in FY20 and FY21,” wrote Sonal Varma, managing director and chief India economist at Nomura in a recent co-authored report with Aurodeep Nandi. Their estimate for GDP growth in FY20 stands at 4.9 per cent and at 6.1 per cent in FY21.
Risks of delayed revival in domestic demand and further slowdown in global economic activity (as highlighted by RBI) has led to a downward revision in CARE Ratings’ GDP forecast from 5.5 per cent to 5.2 per cent in FY20. They also believe inflation to remain elevated during November – December and could ease thereafter. By March, 2020 it would be around 4 – 4.5 per cent, which is within the flexible inflation target band of 4 per cent (+/- 2 per cent).

RBI raises P2P lending limit five-fold, cap on single-party exposure stays

The ReserveBank of India has raised the lending limit of Peer-To-Peer (P2P) platforms five-fold. The apex bank said in a statement on developmental and regulatory policies issued on December 5, that the aggregate exposure of a lender to all borrowers at any point of time, across all non-banking financial company peer-to-peer platforms, will be capped at Rs 50 lakh, against Rs 10 lakh at present.
It said, “A review of the functioning of the lending platforms and lending limit was carried out, and it has been decided that in order to give the next push to the lending platforms, the aggregate exposure of a lender to all borrowers at any point of time, across all P2P platforms, shall be subject to a cap of Rs 50 lakh.”
The cap on the exposure of a single borrower, however, remains at Rs 50,000 across all NBFC peer-to-peer platforms.
Market players have welcomed the decision as it will give a much-needed boost to the segment. Bhavin Patel, Co-Founder & CEO, LenDenClub, “Now, P2P lending stands equal to other investment options like MF, FD, bonds, and PMS. Most Indian investors will fall within this cap of Rs 50 lakh.”
“This move is a big positive for all P2P companies and investors and shows the RBI's trust and confidence in P2P lending to resolve the problem of existing credit gap in the market. The announcement should definitely attract more investors towards P2P platforms. Also, we expect the existing investors on our platform to scale up their investments. Also, more HNIs would now look at P2P lending as an investment option, which is a very positive sign for the industry,” said Abhishek Gandhi, co-founder & CFO, RupeeCircle.
The central bank also did away the requirement of escrow accounts operated by a bank-promoted trustee for the transfer of funds. It also added, “It is proposed to do away with the current requirement of escrow accounts to be operated by bank-promoted trustees for transfer of funds having to be necessarily opened with the concerned bank. This will help provide more flexibility in operations.”

Monetary Policy: Reserve Bank picked a heck of a time to slow things down

The ReserveBank of India is ending the year as it began: with a shock.
Policymakers held their benchmark interest rate at 5.15 per cent Thursday. Not a single economist among the 43 surveyed by Bloomberg News predicted this outcome.

Central banks generally hate giving surprises. It makes people wonder what officials know that they don't, and tends to sap confidence. So what explains this head-scratcher?
Blame inflation. The RBI cited concerns about rising prices, given that headline inflation breached its 4 per cent medium-term target in October. Food prices have skyrocketed as a result of heavy rainfall, with the cost of onions up 45 per cent in September and a further 20 per cent the following month, according to the central bank’s statement.
With India’s economy crumbling all around him, it strikes me as a bit short-sighted that RBI Governor Shaktikanta Das is getting caught up in vegetables. Gross domestic product increased just 4.5 per cent in the third quarter, government figures showed last week. Little more than a year ago, India was notching an expansion of more than 8 per cent. If demand is sliding then price increases ought to subside. There's little inflation in a graveyard.
Das started the year with a politically expedient cut, which many doubted he’d deliver so early in his tenure. His two predecessors left their posts amid questions about central bank independence. That February decision was right, and even lucky, as I’ve written. This one is more questionable.
For a major economy, India appears far too worried about inflation targets, especially when other central banks are questioning their effectiveness. The Federal Reserve, for instance, is reviewing how it incorporates its target into monetary policy.
A better decision would have been to reduce rates by the quarter point most economists predicted, and then use the accompanying statement to signal a standstill was coming. In other words, a “hawkish cut.” Hitting the pause button so abruptly risks conveying the idea you don't know what you’re doing, or, at the very least, that your communications machinery has broken down. Das must have known this would be jarring.
The RBI appears to be counting on a brighter world economy to help tide it over. The opening paragraphs of the central bank's statement notes the dour tone of the global picture that has prevailed this year, but says “some signs of resilience are becoming visible.” It points to the global rally in stock markets.
Das got the global economy right at the beginning of the year, when the RBI became one of the first important central banks to ease. But India's domestic growth rate has sharply decelerated since, eclipsing the modest reductions in global forecasts by the International Monetary Fund.
India needs everything to go right outside the country if the domestic economy is to have a prayer. With trade wars blazing on every front, that's looking less and less likely. The RBI picked a heck of a time to slow things down.

Govt wants RBI to take over stressed assets of shadow banks: Report

India's finance ministry wants the ReserveBank of India to set up a fund to buy out stressed assets of the country's top 25 shadow lenders, a government source told reporters on Thursday.
The government has also asked the central bank to consider a one time waiver to banks from classifying some real estate loans as bad loans, the government official, who declined to be named, said.

However, the RBI has opposed the idea of opening its balance sheet to buy toxic assets of the non-banking finance companies, the official said, adding discussions were ongoing.

RBI red flags rising Mudra bad loans, asks banks to 'monitor closely'

ReserveBank deputy governor MK Jain on Tuesday warned bankers about the growing stress in Mudra loans, which has crossed more than Rs 3.21 trillion system-wide, and asked them to monitor such loans closely as unsustainable credit growth in the sector can risk the system.
Prime Minister Narendra Modi had launched the Mudra scheme in April 2015 with much fanfare to offer speedier credit up to Rs 10 lakh to small businesses which are non- corporate, non-farm small/micro enterprises and which normally do not get bank funds due to their poor and mostly no credit rating. These loans are extended by banks, NBFCs, RRBs, cooperative banks and small finance banks.

Interestingly, it can be recalled that within a year of the launch of the scheme, the then Reserve Bank governor Raghuram Rajan had warned of asset quality troubles bubbling in the scheme but the then finance minister Arun Jaitely had brushed aside the concerns.
"Mudra loans are a case in point. While such a massive push would have lifted many beneficiaries out of poverty, there has been some concerns at the growing level of non-performing assets among these borrowers," Jain told a Sidbi event on microfinance.
The commercial-banker-turned central banker said banks need to focus on the repayment capacity at the appraisal stage itself and monitor loans through the life cycle of the account much more closely.
The government had in July informed Parliament that total NPA in the Mudra scheme of over Rs 3.21 trillion has jumped to 2.68 percent in FY19 from 2.52 percent in FY18.
Since inception of the scheme, over 190 million loans have been extended under the scheme up to June 2019, the government had informed. Of the total 36.3 million accounts are in defaulted as of March 2019.
However, according to an RTI reply, the bad loans in the Mudra scheme soared a whopping 126 percent in FY19-jumping by Rs 9,204.14 crore to Rs 16,481.45 crore in FY19 from Rs 7,277.31 crore in FY8.
Jain said, "systemic risk may arise from unsustainable credit growth, increased inter connectedness, pro-cyclical and financial risks manifested by lower profitability." It is interesting to see leading e-commerce companies tying up with banks and NBFCs to offer working capital loans to their suppliers, that are mostly micro and small enterprises, at competitive terms, he said.
Stating that GST has hit the informal economy significantly, he said "as a result of the improved digital footprint, MSMEs have become attractive clients for banks, NBFCs and MFIs, thereby reducing their dependence on informal source of funds."
The cost of credit for MSMEs will also come down meaningfully as lending will shift from collateral based lending to cash flow based lending, he said.
Noting that technology has its own share of risks and challenges for the financial sector regulators and supervisors, he said, "early recognitions of these risks and initiating action to mitigate the related regulatory and supervisory challenges is key to harnessing the full potential of these developments".
Focus of the MFI sector must be on digital finance, he said adding data confidentiality and consumer protection are major areas that also need to be addressed by them.
"Keeping in view the need to increase transparency, address customer-centric issues and safeguard the interest of low income customers, micro finance lenders must put the interest of their clients first and implement the code for responsible lending," he said.
MFIs must also broaden their client outreach to reduce the concentration risk in their own interest and to serve a wider clientele base. From a financial inclusion perspective MFIs should critically review their operations so other regions don't remain underserved, he said.
Addressing the event, Sidbi chairman Mohammad Mustafa said the microfinance sector plays an instrumental role in providing credit to low-income households, helping them in their economic development and overall empowerment.

Closely monitoring situation at PMC Bank, forensic audit underway, says Das

Reserve Bank Governor Shaktikanta Das on Thursday said it is closely monitoring the situation at scam-hit PMC Bank and a forensic audit is underway.
Punjab & Maharashtra Cooperative Bank (PMC Bank), among the top 10 urban cooperative banks in the country, was placed under an RBI administrator on September 23 for six months due to massive under-reporting of dud loans.

"PMC Bank situation is being closely monitored. Forensic audit is underway in PMC Bank case," Das told reporters after a meeting of the Financial Stability and Development Council (FSDC) here.
RBI had imposed withdrawal restrictions on account-holders after it found alleged irregularities to the tune of Rs 4,355 crore due to diversion of money to infrastructure firm HDIL.
On Tuesday, the apex bank enhanced the cash withdrawal limit to Rs 50,000 per account, which was the fourth such increase since PMC Bank was placed under its direct control.
Five persons, including HDIL promoters Rakesh and Sarang Wadhwan, have been arrested by the police in the case.
Several protests have been held by the depositors in Mumbai and at least 10 depositors have died since the alleged scam came to light. Scattered protests have happened in front of the RBI main office in Delhi as well.