Month: March 2021

The Central Board of Directors of the Reserve Bank of India (RBI), on Friday, reviewed the current economic situation, global and domestic challenges, and various areas of operations of the Reserve Bank.

The 588th meeting of the Central Board, held under the Chairmanship of Governor Shaktikanta Das, also discussed the Reserve Bank’s activities during the current accounting year of nine months (July 2020 to March 2021) before the central bank switches over to April-March accounting year from 2021-22, RBI said in a statement.

The board also approved the budget for the accounting year 2021-22.

There is a restless urgency in the air in India to resume high growth, with signs that the capital expenditure (capex) cycle is uncoiling and turning and earnings results of corporates having beaten market expectations, according to an article in RBI’s latest monthly bulletin.

“All around, optimism is taking hold, among households and businesses, investors and markets.

“It is also likely that India will decouple from other emerging economies for which rising financing costs and rising pile-ups of debt hamstring the recovery,” as per the article prepared by 21 RBI officials, including Deputy Governor MD Patra.

The authors emphasised that incoming data point to even contact-intensive services such as personal care, recreation and hospitality gathering traction and pace even as agriculture crosses production highs in various crops and in horticulture, and manufacturing finally shrugs off the vice-like grip of contraction.

As countries rush to inoculate their populations, the global economy should regain lost momentum in Q2 (April-June), they added.

Bond vigilantes

“Bond vigilantes could, however, undermine the recovery, unsettle financial markets and trigger capital outflows from emerging markets,” cautioned the authors.

In this regard, they observed that the Reserve Bank is striving to ensure an orderly evolution of the yield curve, but it takes two to tango and forestall a tandav (destruction).

In the case of India, debt servicing did preempt more than 25 per cent of budgetary revenues in 2020-21, but there are saving graces: the maturity of public debt is 11 years, reducing refinancing risk, the authors said.

They emphasised that foreign holding of this debt is less than 2 per cent, which means low vulnerability to sudden outflows of capital because it has demonstrated capability to sell its debt in its own currency.

Also, India has growth credibility – the average rate of interest on public debt is less than the growth rate of the economy.

Even so, another outbreak, more lockdowns and restraints, will get unbearable in spite of learning from the initial experience of living with the virus

The authors assessed that in 2021, inflation will likely ease after June, but it will be higher than in prints because of statistical base effects of high inflation a year ago.

In fact, excluding vegetables, headline CPI inflation has moved in a tight range of 5.8 to 6.4 per cent from June, testing the upper tolerance band of the inflation target. Global oil markets are experiencing hardening of prices and production restraints.

“The ratcheting up of input prices to multi-year highs pose a dilemma – if they are passed on to consumers as pricing power returns to firms as aggregate demand picks up, there will be even higher inflation; if they are held back, profitability will be eroded as will gross valued added in the economy.

“India is in a strange place – rising prices amid plenty. Surely, there is a way around it…,” the authors said.

The article noted that globally, policies will seek to stimulate, but markets will stare at tea leaves and ghosts of tightening of the past – neither growth nor inflation hard data support market movements so far

Central banks will go beyond their conciliatory open mouth operations if their stated stances are challenged, it said.

“Central banks, will, perhaps step out of the ambit of their traditional mandates and go where they have not been before – environmental sustainability (UK); climate change (Euro area); house prices (New Zealand); yield control (Japan; Australia); asset purchases (everywhere). We live in interesting times,” said the authors.

The proposed Bill to ban private cryptocurrencies does not seem to have deterred investors. Players say that while there have been queries from investors on the possible ban, trading volumes continue to rise, largely due to the surge in Bitcoin prices.

“We saw our number of users and trading volume going up since the crypto Bill announcement. In fact, we just hit 40 lakh users on our platform and saw the highest trading volume in February,” said Vikram Rangala, Chief Marketing Officer, ZebPay.

While part of the volume is from short-term traders looking for quick profits when any market rallies, Rangala said the bigger trend is long-term investors who want to buy and hold for years and even decades, he further noted.

Sumit Gupta, CEO and Co-founder, CoinDCX, agreed, and said: “From the last quarter of 2020, we have been witnessing big investors and investment firms, who have been actively investing and allocating a sizable portion of cryptocurrency investments into their portfolios. This is more evident in the case of Bitcoin as it has now crossed the $61,000-mark recently.”

No anomaly

He further said that most exchanges have not seen any anomaly since the news of the ban. “We have, on the contrary, seen more adoption, with new users joining every day,” he said.

Sathvik Vishwanath, co-founder of cryptocurrency exchange Unocoin, also said there hasn’t been any kind of decline in revenue, although prices have increased.

“When it comes to investments, it hasn’t really declined,” he said, adding that general questions will be there and we have to clearly inform them on the issue.

However, some retail investors have exited, as they do not want to wait until the Bill is introduced in Parliament, sources indicated.

The government had listed the Cryptocurrency and Regulation of Official Digital Currency Bill 2021, which seeks “to create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India; however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses”.

Since then, domestic cryptocurrency players have been asking that the government should not go for a full ban, but should come out with regulations for the sector.

“Cryptocurrency has been generating jobs across a variety of functions in India and abroad. Given the scale and diversity, the good governance and regulation of the cryptocurrency ecosystem in India is critical and will give impetus to the Government of India’s Digital India vision,” said the Internet and Mobile Association of India in a recent statement.