Author: root

Thank you for having me in this interaction with members of the National Council of the Confederation of Indian Industry (CII). I am pleased to note that the CII has realigned its functioning and thought processes around a new theme for 2020-21 – Building India for New World: Lives, Livelihood, Growth – under the able and visionary leadership of Shri Uday Kotak, Shri T V Narendran, Shri Sanjiv Bajaj, Shri Chandrajit Banerjee and other eminent members.

2. Currently, COVID-19 is the compelling theme in all conversations. Questions abound about flattening of the Covid curve; arrival of the elusive vaccine; protection of lives and livelihood; and the shape of economic recovery. These questions haunt us day in and day out. There are no credible answers as yet; the only thing that is certain for now is that, we must fight on relentlessly against this invisible enemy and eventually win.

3. Today, I thought I should move away from this preoccupation with the uncertain present and reflect on some dynamic shifts that are underway in the Indian economy. They may escape our attention in this all-consuming engrossment with the pandemic, but they could be nursing the potential to repair, to rebuild and to renew our tryst with developmental aspirations. These dynamic shifts have been taking place incipiently for some time. In order to recognise and evaluate these shifts for their potential in shaping our future, one needs to step back a bit and take a more medium-term perspective. In my address today, I propose to touch upon five such major dynamic shifts: (i) fortunes shifting in favour of the farm sector; (ii) changing energy mix in favour of renewables; (iii) leveraging information and communication technology (ICT), and start-ups to power growth; (iv) shifts in supply/value chains, both domestic and global; and (v) infrastructure as the force multiplier of growth.

I. Fortunes Shifting in favour of the Farm Sector

4. Indian agriculture has witnessed a distinct transformation. The total production of food grains reached a record 296 million tonnes in 2019-20, registering an annual average growth of 3.6 percent over the last decade. Total horticulture production also reached an all-time high of 320 million tonnes, growing at an annual average rate of 4.4 percent over the last 10 years. India is now one of the leading producers of milk, cereals, pulses, vegetables, fruits, cotton, sugarcane, fish, poultry and livestock in the world. Buffer stocks in cereals currently stand at 91.6 million tonnes or 2.2 times the buffer norm. These achievements represent, in my view, the most vivid silver lining in the current environment.

5. Shifting the terms of trade in favour of agriculture is the key to sustaining this dynamic change and generating positive supply responses in agriculture. Experience shows that in periods when terms of trade remained favourable to agriculture, the annual average growth in agricultural gross value added (GVA) exceeds 3 per cent. Hitherto, the main instrument has been minimum support prices, but the experience has been that price incentives have been costly, inefficient and even distortive. India has now reached a stage in which surplus management has become a major challenge. We need to move now to policy strategies that ensure a sustained increase in farmers’ income alongside reasonable food prices for consumers.

6. An efficient domestic supply chain becomes critical here. Accordingly, the focus must now turn to capitalising on the major reforms that are underway to facilitate domestic free trade in agriculture. First, the amendment of the Essential Commodities Act (ECA) is expected to encourage private investment in supply chain infrastructure, including warehouses, cold storages and marketplaces. Second, the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020 is aimed at facilitating barrier-free trade in agriculture produce. Third, the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020 will empower farmers to engage with processors, aggregators, wholesalers, large retailers, and exporters in an effective and transparent manner. With this enabling legislative framework, the focus must turn to (a) crop diversification, de-emphasising water-guzzlers; (b) food processing that enhances shelf life of farm produce and minimises post-harvest wastes; (c) agricultural exports which enable the Indian farmer take advantage of international terms of trade and technology; and (d) public and private capital formation in the farm sector. The Committee on Doubling Farmers Income expects the total quantum of private investment in agriculture to increase from ₹61,000 crore in 2015-16 to ₹139,424 crore by 2022-23. All these initiatives have opened a whole new world of opportunities for industry and businesses. The consequential creation of jobs and augmentation of farmers’ income can indeed be enormous.

II. Changing Pattern of Energy Production in favour of Renewables

7. A similar opportunity space now exists in the energy sector, especially renewables. India’s progress in addressing the demand-supply imbalance in electricity has been remarkable. It has now become a power surplus country, exporting electricity to neighbouring countries. While the demand for electricity grew at an average rate of 3.9 per cent in India during 2015-16 to 2019-20, supply grew at an average rate of 4.5 per cent and installed capacity increased at an average rate of 6.7 per cent during the same period.

8. What is particularly striking is the role of renewable energy. The share of renewable energy in overall installed capacity has doubled to 23.4 per cent at end-March 2020 from 11.8 per cent at end-March 2015. As much as 66.6 per cent of the addition to total installed capacity during the last five years has been in the form of renewable energy, which contributed 33.6 per cent of the incremental generation of electricity. About 90 per cent of this jump stems from solar and wind energy. This spectacular progress has set the stage for India targeting to scale up the share of renewable energy in total electricity generation to 40 per cent by 2030. The shift to greener energy will reduce the coal import bill, create employment opportunities, ensure sustained inflow of new investments and promote ecologically sustainable growth.

9. A major factor driving this shift in energy mix has been the steep fall in the generation cost of renewable energy. As a result, renewable power generation technologies have become the least-cost option for new capacity creation in almost all parts of the world. The weighted-average cost of addition to renewable capacity in India was one of the lowest in the world in 2019. This has started exerting significant downward pressures on spot prices of electricity.

10. Going forward, this landmark progress could result in a significant overhaul of the power sector, encompassing deregulation, decentralisation and efficient price discovery. Policy interventions in the form of renewable purchase obligations (RPO) for DISCOMs, accelerated depreciation benefits and fiscal incentives such as viability gap funding and interest rate subvention will have to go through a rethink/need review. Reforming retail distribution of electricity while reducing commercial, technical and transmission losses remains a key challenge. The end of cross subsidisation by industry for other sectors, and closing the gap between average cost of supply (ACS) and average revenue realised (ARR) will require speedier/accelerated DISCOM reforms (including privatisation and competition). A nationwide Grid integration that can take supply from renewable sources as and when generated is needed to take care of daily/seasonal peaks and troughs associated with renewable sources. These dynamic shifts in renewables could help increase India’s per capita electricity consumption, currently among the lowest in the world. Here too, Indian industry has a crucial role to play.

III. Leveraging Information and Communication Technology (ICT) and Start-ups to Power Growth

11. Information and communication technology (ICT) has been an engine of India’s economic progress for more than two decades now. Last year, the ICT industry accounted for about 8 per cent of country’s GDP and was the largest private sector job creator across both urban and rural areas. In 2019-20, software exports at US$ 93 billion contributed 44 per cent of India’s total services exports and financed 51 per cent of India’s merchandise trade deficit during the last five years.

12. These headline numbers, however, understate the contribution of the sector to the economy. IT has revolutionised work processes across sectors and has generated productivity gains all around. The ICT revolution has placed India on the global map as a competent, reliable, and low-cost supplier of knowledge-based solutions. Indian IT firms are now at the forefront of developing applications using artificial intelligence (AI), machine learning (ML), robotics, and blockchain technology. This has also helped to strengthen India’s position as an innovation hub, with several start-ups attaining unicorn status (USD 1 billion valuation). India added 7 new unicorns in 2019, taking the total count to 24, the third largest in the world¹.

13. The ‘Start-up India’ campaign recognizes the potential of young entrepreneurs of the country and aims at providing them a conducive ecosystem. According to Traxcn database, funding for Indian tech start-ups touched US$ 16.3 billion in 2019, over 40 per cent increase over the level a year ago. While Healthtech and Fintech are the leading segments, entrepreneurs are leveraging opportunities across sectors and markets, and increasing the depth and breadth of this ecosystem. Interestingly, a significant proportion of start-ups in India are serving small and medium businesses, and low and middle income groups.

14. COVID-19 has impacted the outlook for startups, particularly availability of funding due to the generalized atmosphere of risk aversion. Even before COVID-19, a global technological churn was underway, with lower spending by firms on legacy hardware and software systems, but with rapid advances in digital technologies and computing/analytical capabilities. Fierce competition from other developing economies with the potential to provide cost-effective IT services, is rapidly emerging as a challenge to India’s position as the leading outsourcing hub of the world. Globally, regulatory uncertainty relating to work permits and immigration policies may also amplify challenges. The sector has to also deal with concerns relating to data privacy and data security.

15. Creative destruction is an integral feature of a robust dynamic economy. The IT sector is best placed to drive this process and also manage its consequences. There is a significant association between the count of new firms born in a district and the gross domestic product of that district². Promoting young firms and start-ups will be critical for greater employment generation and higher productivity-led economic growth in India. It would be essential to reorient resources and policy focus in this direction. Innovation and ability to nurture ideas into actualisation would be the key challenge. In this context, private enterprise and investment have a game-changing role.

IV. Shifts in Supply/ Value Chains – Domestic and Global

16. In a competitive market economy, an efficient supply chain can enhance economic welfare. Investment in sectors with strong forward and backward linkages in the supply chain can generate higher production, income and employment. Consequently, identification of such sectors becomes critical for strategic policy interventions. Stronger inter-sectoral interdependence can help enhance efficiency of domestic value chains.

17. Strengthening the position of a country in the global value chain (GVC) can help maximise the benefits of openness. GVC encompasses the full range of activities starting from the conception stage of a product to its designing, production, marketing, distribution and post-sale support services performed by multiple firms and workers located in different countries. The higher the GVC participation of a country, the greater are the gains from trade as it allows participating countries to benefit from the comparative advantage of others in the GVC. More than two-thirds of world trade occurs through GVCs.

18. World Bank (2020)³ research findings suggest that one per cent increase in GVC participation can boost per capita income levels of a country by more than one per cent. India’s GVC integration, as measured by the GVC participation index, has been low (34.0 per cent, as a ratio of total gross exports) relative to the ASEAN countries (45.9 per cent as a ratio to total gross exports). This needs to change.

19. Global shifts in GVCs in response to COVID-19 and other developments will create opportunities for India. Besides focusing on diversifying sources of imports, it may also be necessary to focus on greater strategic trade integration, including in the form of early completion of bilateral free trade agreements with the US, EU and UK.

V. Infrastructure as Force Multiplier for Growth

20. In India, the progress made on physical infrastructure in the country in the last five years needs to be viewed as no less than a dynamic shift. Road construction, the primary mode of transportation in India, has increased from 17 kms per day in 2015-16 to close to about 29 kms per day in the last two years. India is the third largest domestic market for civil aviation in the world with 142 airports. On airport connectivity, India ranked 4th among 141 countries in the Global Competitiveness Report, 2019 of the World Economic Forum. In telecommunication, the overall tele-density (number of telephone connections per 100 persons) in India at end of February 2020 was 87.7 per cent. Growth of internet and broadband penetration in India has increased at a rapid pace. Total broadband connections rose almost ten times – from 610 lakh in 2014 to 6811 lakh in February 2020 – enabling large expansion in internet traffic. India is now the global leader in monthly data consumption, with average consumption per subscriber per month increasing 168 times from 62 MB in 2014 to 10.4 GB at end-2019. The cost of data has also declined to one of the lowest globally, enabling affordable internet access for millions of citizens.

21. The shipping industry is the backbone for external merchandise trade as around 95 per cent of trading volume is transported through ships by sea routes. The average turnaround time of ships in Indian ports – which is an indicator of efficiency of ports – improved from 102.0 hours in 2012-13 to 59.5 hours in 2018-19. As regards the power sector, I have already mentioned the achievements. With regard to the railways, Eastern and Western dedicated freight corridors are being developed at a fast pace and are expected to bring down freight charges significantly. A total of 15 critical projects covering around 562 km track length were completed in 2019-20 and railway electrification work of total 5782 route kms was also completed in 2019-20. India has also recorded an impressive growth in metro rail projects for urban mass transportation.

22. Notwithstanding this progress, the infrastructure gap remains large. According to estimates of NITI Aayog, the country would need around US $4.5 trillion for investment in infrastructure by 2030. On financing options for infrastructure, we are just recovering from the consequences of excessive exposure of banks to infrastructure projects. Non-performing assets (NPAs) relating to infrastructure lending by banks has remained at elevated levels. There is clearly a need for diversifying financing options. The setting up of the National Investment and Infrastructure Fund (NIIF) in 2015 is a major strategic policy response in this direction. Promotion of the corporate bond market, securitisation to enhance market-based solutions to the problem of stressed assets, and appropriate pricing and collection of user charges should continue to receive priority in policy attention.

23. As in the case of the golden quadrilateral, a big push to certain targeted mega infrastructure projects can reignite the economy. This could begin in the form of a north-south and east-west expressway together with high speed rail corridors, both of which would generate large forward and backward linkages for several other sectors of the economy and regions around the rail/road networks. Both public and private investment would be key to financing our infrastructure investments. CII can play a creative role in this regard.

24. In my address today, I have tried to move away from an outlook overcast by the morbidity of the pandemic to one of optimism. These dynamic shifts in our economy need to be converted into structural transformations which yield sizable benefits for our economy and help to position India as a leader in the league of nations. They involve testing challenges but also the reaping of significant rewards. Indian industry will have the pivotal role in what could be a silent revolution. Can the CII be its spearhead? I leave you with these ideas and dare you to dream.

Thank you.

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A very warm good morning to you all. I wish to thank the State Bank of India for inviting me to deliver the keynote address today. I sincerely appreciate the efforts of the organising team in putting together this virtual conference which has now become a new normal. Banks and other financial entities are today at the forefront of the country’s counter measures against the economic impact of COVID-19. They are the transmission channels for RBI’s monetary, regulatory and other policy measures. They are the implementation vehicles for the financial backstop measures announced by the government.

2. The outbreak of COVID-19 pandemic is unambiguously the worst health and economic crisis in the last 100 years during peace time with unprecedented negative consequences for output, jobs and well-being. It has dented the existing world order, global value chains, labour and capital movements across globe and needless to say, the socio-economic conditions of large section of world population.

3. The COVID-19 pandemic, perhaps, represents so-far the biggest test of the robustness and resilience of our economic and financial system. In the extraordinary circumstances that we face today, history could provide us with some useful guidance with respect to the role of central banks. Guided by the age-old wisdom summarised in Bagehot’s dictum¹ that ascribes the role of Lender of Last Resort (LOLR) to the central bank, the Reserve Bank of India has taken a number of important historic measures to protect our financial system and support the real economy in the current crisis. While the eventual success of our policy responses will be known only after some time, they appear to have worked so far. While reiterating our intent and dedication to steer the economy through the crisis, I would like to highlight certain key aspects of our policy measures.

I. Monetary Policy Measures

4. Monetary policy was already in an accommodative mode before the outbreak of COVID-19, with a cumulative repo rate cut of 135 basis points between February 2019 and the onset of the pandemic. Reversing the slowdown in growth momentum was the key rationale for this distinct shift in the stance of monetary policy, even as unseasonal rains caused temporary spikes in food inflation in the second half of 2019-20. Consistent with this policy stance, liquidity conditions were also kept in ample surplus all through since June 2019. The lagged impact of these measures was about to propel a cyclical turnaround in economic activity when COVID-19 brought with it calamitous misery, endangering both life and livelihood of people.

5. Given the uncertainty regarding the evolution of the COVID curve, it was absolutely critical to anticipate the emerging economic risks and take pro-active monetary policy actions of sizable magnitude, using a comprehensive range of policy instruments to optimise policy traction. The fast-changing macroeconomic environment and the deteriorating outlook for growth necessitated off-cycle meetings of the Monetary Policy Committee (MPC) – first in March and then again in May 2020. The MPC decided to cumulatively cut the policy repo rate by 115 basis points over these two meetings, resulting in a total policy rate reduction of 250 basis points since February 2019.

Liquidity Measures

6. The conventional and unconventional monetary policy and liquidity measures by the Reserve Bank have been aimed at restoring market confidence, alleviating liquidity stress, easing financial conditions, unfreezing credit markets and augmenting the flow of financial resources to those in need for productive purposes. The broader objective was to mitigate risks to the growth outlook while preserving financial stability. The liquidity measures announced by the RBI since February 2020 aggregate to about ₹9.57 lakh crore (equivalent to about 4.7 per cent of 2019-20 nominal GDP).

II. Financial Stability and Developmental Measures

7. Heading into the pandemic, the financial system of the country was in a much improved position, owing mainly to various regulatory and supervisory initiatives of the Reserve Bank. We had put in place a framework for resolution of stressed assets in addition to implementing multiple measures to strengthen credit discipline and to reduce credit concentration. For the five years between 2015-16 and 2019-20, the Government had infused a total of ₹3.08 lakh crore in public sector banks (PSBs). As a result of the efforts by both the Reserve Bank and the Government, the overhang of stressed assets in the banking system had declined and capital position had improved. As per available numbers (some of which are provisional) at this point of time, the overall capital adequacy ratio for scheduled commercial banks (SCBs) stood at 14.8 per cent as in March 2020, compared to 14.3 per cent in March 2019. The CRAR of PSBs had improved from 12.2 per cent in March 2019 to 13.0 per cent in March 2020. The gross NPA ratio and net NPA ratio of SCBs stood at 8.3 per cent and 2.9 per cent in March 2020, compared to 9.1 per cent and 3.7 per cent as on March 2019, respectively. The Provision Coverage Ratio (PCR) improved from 60.5 per cent in March 2019 to 65.4 per cent in March 2020, indicating higher resiliency in terms of risk absorption capacity. The profitability of SCBs had also improved during the year. The gross and net NPAs of NBFCs stood at 6.4 per cent and 3.2 per cent as on March 31, 2020 as against 6.1 per cent and 3.3 per cent as on March 31, 2019. Their CRAR declined marginally from 20.1 per cent to 19.6 per cent during 2019-20.

Supervisory and Regulatory Initiatives

8. An important objective of the Reserve Bank’s supervisory initiative has been to put in place systems and structures to identify, assess and proactively mitigate or manage the vulnerabilities amongst financial institutions. During the last one year, based on the assessment of events which had the potential to pose a threat to the financial stability, the Reserve Bank has reorganised its regulatory and supervisory functions with an objective of establishing a holistic approach to regulation and supervision. The unified approach is aimed at addressing the growing size, complexities, and inter-connectedness amongst banks and NBFCs. It is also aimed at effectively addressing potential systemic risks that could arise due to possible supervisory or regulatory arbitrage and information asymmetry. Further, a calibrated approach has been designed to provide the required modularity and scalability to the supervision function to ensure a better focus on the risky institutions and practices; to deploy appropriate range of tools and technology to achieve the supervisory objectives; and to enhance capability to conduct horizontal or thematic studies across supervised entities on identified areas of concern. As a fulcrum of the calibrated supervisory approach, the Reserve Bank has strengthened its off-site surveillance mechanism to identity emerging risks and assess the vulnerabilities across the supervised entities for timely action. We are also working towards strengthening the supervisory market intelligence capabilities, with the help of both personal and technological intelligence.

9. Specialised handling of weak institutions at the Reserve Bank now helps in closer monitoring and successful resolution of such entities in a non-disruptive manner. The timely and successful resolution of Yes Bank is an example. After exhausting all possible options and with a view to safeguard the interest of the depositors and ensure stability of financial system, we decided to intervene at an appropriate time when the net worth of the bank was still positive. The Yes Bank reconstruction scheme forged a unique public-private partnership between leading financial entities of India, and it was implemented in a very quick time, which helped the bank’s revival, successfully safeguarded the interest of the bank’s depositors and ensured financial stability. I wish to compliment the State Bank of India for providing leadership to this initiative. With regard to the Punjab & Maharashtra Co-operative Bank, the Reserve Bank is engaged with all stakeholders to find out a workable solution, as losses are very high, eroding deposits by more than 50 per cent.

10. For NBFCs, active engagement with stakeholders was useful to identify emerging risks and take prompt action. Considering their increasing size and interconnectedness, the Reserve Bank has taken steps to strengthen the risk management and liquidity management framework of NBFCs. As you may be aware, NBFCs with a size of more than ₹5,000 crore have been advised to appoint a functionally independent Chief Risk Officer (CRO) with clearly specified role and responsibilities. Also, government-owned NBFCs have been brought under the Reserve Bank’s on-site inspection framework and off-site surveillance. The amendment to the Reserve Bank of India Act, 1934 effective from August 1, 2019 has strengthened the ability of Reserve Bank to better regulate and supervise the NBFCs. Besides, some large NBFCs and NBFCs with certain weaknesses are monitored closely on an ongoing basis.

11. In case of the Urban Co-operative Banks (UCBs), special efforts are being made to move towards a risk-based and pro-active supervisory approach to identify weaknesses in their operations early. An early warning system with a stress-testing framework has been formed for timely recognition of weak banks for appropriate action. Formation of an ‘umbrella organization’, has been approved to provide liquidity, capital, IT and capacity building support to UCBs. The exposure limits of the UCBs have been brought down to reduce credit concentration and the priority sector targets have been revised substantially upwards so that UCBs remain focused on their core segment – i.e., micro and small borrowers. The recent amendments in the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949 will facilitate our supervision processes with respect to NBFCs and UCBs, respectively.

Response to the Pandemic

12. As a part of response to the pandemic, the RBI has undertaken a series of measures which are already in the public domain. Besides, the Reserve Bank’s focus was also to ensure that the contingency response to COVID-19 was implemented by all regulated entities swiftly to minimise disruptions. Accordingly, right from the onset of the crisis, the policy measures were aimed at operational issues, and in particular, ensuring business continuity and unhindered operations of the financial market infrastructure. The Reserve Bank activated an elaborate business continuity plan for its own operations as well as ensured that banks also activate their own business continuity plans. We advised all banks on 16th March, 2020 to take stock of critical processes and revisit their Business Continuity Plan (BCP). All entities were also advised to assess the impact of COVID-19 on their balance sheet, asset quality and liquidity, and take immediate contingency measures to manage their risks.

13. As the lock-down has obstructed our on-site supervisory examination to an extent, we are further enhancing our off-site surveillance mechanism. The objective of the off-site surveillance system would be to ‘smell the distress’, if any, and be able to initiate pre-emptive actions. This requires use of market intelligence inputs and on-going engagements with financial institutions on potential vulnerabilities. The off-site assessment framework, which takes into account macro and micro variables, is more analytical and forward looking and aimed at identifying vulnerable sectors, borrowers as well as supervised entities.

14. While the multipronged approach adopted by the Reserve Bank has provided a cushion from the immediate impact of the pandemic on banks, the medium-term outlook is uncertain and depends on the COVID-19 curve. Policy action for the medium-term would require a careful assessment of how the crisis unfolds. Building buffers and raising capital will be crucial not only to ensure credit flow but also to build resilience in the financial system. We have recently (19th June and 1st July, 2020) advised all banks, non-deposit taking NBFCs (with an asset size of ₹5,000 crore) and all deposit-taking NBFCs to assess the impact of COVID-19 on their balance sheet, asset quality, liquidity, profitability and capital adequacy for the financial year 2020-21. Based on the outcome of such stress testing, banks and non-banking financial companies have been advised to work out possible mitigating measures including capital planning, capital raising, and contingency liquidity planning, among others. The idea is to ensure continued credit supply to different sectors of the economy and maintain financial stability.

III. Major Challenges

15. Going forward, there are certain stress points in the financial system, which would require constant regulatory and policy attention to mitigate the risks. The economic impact of the pandemic – due to lock-down and anticipated post lock-down compression in economic growth – may result in higher non-performing assets and capital erosion of banks. A recapitalisation plan for PSBs and private banks (PVBs) has, therefore, become necessary. While the NBFC sector as a whole may still look resilient, the redemption pressure on NBFCs and mutual funds need close monitoring. Mutual funds have emerged as major investors in market instruments issued by NBFCs, which is why the development of an adverse feedback loop and the associated systemic risk warrants timely and targeted policy interventions. Increasing share of bank lending to NBFCs and the continuing crunch in market-based financing faced by the NBFCs and Housing Finance Companies (HFCs) also need to be watched carefully.

16. The global financial crisis of 2008-09 and the COVID-19 pandemic have dispelled the notion that tail risks to the financial system will materialise only rarely. The probability distribution of risk events has much fatter tails than we think. Shocks to the financial system dubbed as ‘once in a lifetime events’ seem to be more frequent than even ‘once in a decade’. Accordingly, the minimum capital requirements of banks, which are calibrated based on historical loss events, may no longer be considered sufficient enough to absorb the losses. Meeting the minimum capital requirement is necessary, but not a sufficient condition for financial stability. Hence, it is imperative that the approach to risk management in banks should be in tune with the realisation of more frequent, varied and bigger risk events than in the past. Banks have to remember the old saying that care and diligence bring luck. To paraphrase Oscar Wilde, being caught unprepared in the face of a shock may be regarded as a misfortune, but to be caught unawares more than once may be a sign of carelessness².

17. Notwithstanding the numerous steps already taken, there is always room for improvement to address several issues that may emerge in the medium to long-term. These issues are as common to NBFCs and other financial intermediaries as they are to banks. The supervisory approach of the Reserve Bank is to further strengthen its focus on developing financial institutions’ ability to identify, measure, and mitigate the risks. The new supervisory approach will be two-pronged – first, strengthening the internal defenses of the supervised entities; and second, greater focus on identifying the early warning signals and initiate corrective action.

18. To strengthen the internal defenses, higher emphasis is now being given on causes of weaknesses than on symptoms. The symptoms of weak banks are usually poor asset quality, lack of profitability, loss of capital, excessive leverage, excessive risk exposure, poor conduct, and liquidity concerns. These different symptoms often emerge together. The causes of weak financial institutions can usually be traced to one or more of the following conditions: inappropriate business model, given the business environment; poor or inappropriate governance and assurance functions; poor decision making by senior management; and misalignment of internal incentive structures with external stakeholder interests³.

19. We are placing special emphasis on the assessment of business model, governance and assurance functions (compliance, risk management and internal audit functions), as these have been the areas of heightened supervisory concern. Supervised entities generally tend to focus more on business aspects even to the detriment of governance aspects and assurance functions. There was also an apparent disconnect between their articulated business strategy and actual business operations. The thrust of the approach, therefore is, to improve the risk, compliance, and governance culture amongst the financial institutions. In this regard, the Reserve Bank has released a discussion paper on “Governance in Commercial Banks in India” with the objective to align the current regulatory framework with global best practices while being mindful of the context of the domestic financial system. The main emphasis of the discussion paper is to encourage separation of ownership from management – while owners focus on the return on their investment, the management should focus on protecting the interest of all stakeholders. The Board, on its part, should set the culture and values of the organization; recognise and manage conflicts of interest; set the appetite for risk and manage risks within that appetite; exercise oversight of senior management; and empower the oversight and assurance functions through various interventions. The Reserve Bank will extend these principles of good governance to large-sized NBFCs in due course.

IV. The Way Forward

20. Despite the substantial impact of pandemic in our daily lives, the financial system of the country, including all the payment systems and financial markets, are functioning without any hindrance. The Indian economy has started showing signs of getting back to normalcy in response to the staggered easing of restrictions. It is, however, still uncertain when supply chains will be restored fully; how long will it take for demand conditions to normalise; and what kind of durable effects the pandemic will leave behind on our potential growth. Targeted and comprehensive reform measures already announced by the Government should help in supporting the country’s potential growth. Possibly in a vastly different post-COVID global environment, reallocation of factors of productions within the economy and innovative ways of expanding economic activity could lead to some rebalancing and emergence of new growth drivers. The policy measures, i.e., monetary, fiscal, regulatory and structural reforms, provide the enabling conditions for a speedier recovery in economy activity while minimising near-term disruptions.

21. The need of the hour is to restore confidence, preserve financial stability, revive growth and recover stronger. At the central bank, we strive to maintain the balance between preserving financial stability, maintaining banking system soundness and sustaining economic activity. Post containment of COVID-19, a very careful trajectory has to be followed in orderly unwinding of counter-cyclical regulatory measures and the financial sector should return to normal functioning without relying on the regulatory relaxations as the new norm. The Reserve Bank is making continuous assessment of the changing trajectory of financial stability risks and upgrading its own supervisory framework to ensure that financial stability is preserved. Banks and financial intermediaries have to be ever vigilant and substantially upgrade their capabilities with respect to governance, assurance functions and risk culture.

22. It is true that the pandemic poses a challenge of epic proportions; however, human grit – manifesting through collective efforts, intelligent choices, and innovation – will tremendously help us to come out of the present crisis. Mahatma Gandhi had said, “…the future depends on what you do today”. I have presented a bird’s eye view of the resolutions that the Reserve Bank has taken currently to combat this unprecedented situation. I am confident that these will complement the measures undertaken by the Government in achieving our policy objectives. Along with the tireless efforts of thousands of people and the undying spirit of our populace, I am optimistic that these policy actions will yield desired results. These trying times will only strengthen world’s faith in the resilience of our economy. We shall prove this together.

Thank you.

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In his first media interaction since the nationwide lockdown took effect to contain the spread of COVID-19, Reserve Bank of India Governor Shaktikanta Das told Cogencis that the central bank is yet to take a view on budget deficit monetisation or private placement of bonds.

Below is the full transcript of the Governor’s interview to Cogencis:

(Note – Some elements of the transcript may be used with an attribution to Cogencis)

Q. RBI has emerged as the first line of defence against the impact of COVID-19, and some may say, the only line of defence. Do you think more fiscal measures are needed for the relief package to be effective? Also, what is your advice to the government? Should they suspend FRBM or monetise deficit?

A. Fiscal measures are important and the government is working on a package of measures. The finance minister has gone on record on this. I expect that the government will take a judicious and balanced call on the question of fiscal deficit, while addressing the challenges arising from the COVID-19 pandemic.

The government has taken measures to contain expenditure, like freeze on its employees’ dearness allowance; at the same time, the government has announced a relief package to support the vulnerable and disadvantaged sections. Through measures like in-kind support (food grains), cash support, DBT (Direct Benefit Transfer) support or depositing money in PMJDY (PM Jan Dhan Yojana) accounts, government has committed to spend 0.8% of GDP.

So, therefore, meeting the fiscal deficit target of 3.5% this year is going to be very challenging, and going beyond it becomes unavoidable. Also, because of the lockdown, GST collections are going to be significantly impacted, and impact on direct taxes cannot be ruled out.

While deciding on the size of the fiscal package, it would be very important to prioritise the support measures and interventions. All measures should be well targeted to optimise the outcome. Equally important is to have an exit strategy of fiscal interventions. In other words, fiscal measures under the COVID-19 package should contain specific sunset provisions. This would be in line with the recommendations of the FRBM Committee.

In terms of exceeding the fiscal deficit, two straight replies, one is the 3.5% fiscal deficit target for this year will be very challenging to meet. As regards, how much it will exceed and how much the government will spend, that will depend on the view taken by the government, with regard to how much they can exceed the deficit number, and what kind of support measures can be taken that produce maximum impact.

In other words, it has to be a judicious and balanced call keeping in mind the need to support the economy on one hand and the sustainable level of fiscal deficit that is consistent with macroeconomic and financial stability.

Q. Will the RBI monetise the government deficit and will you look at private placement of gilts on your books, given that everybody realises that the only solution is to expand the central bank’s balance sheet? Some of the former RBI governors have also said this may not be a bad thing to do.

A. There is an animated public discourse around this subject. Within the RBI, the debate is not new, and governors before me have had to contend with it. In fact, dealing with this issue has produced some landmark reforms like the phasing out of ad hoc treasury bills, the enactment of FRBM Act, the monetary policy framework, to name a few. For every governor who has confronted with the situation, the solutions have been based on prevailing operating conditions. To illustrate, ad hoc treasury bills were phased out over a three-year timeframe to facilitate a smooth transition to market borrowing.

On the current situation, we haven’t taken a view on it. We will deal with it keeping in view the operational realities, the need to preserve the strength of the RBI’s balance sheet, and most importantly, the goal of macroeconomic stability, our primary mandate. In the process, we also evaluate various alternative sources of funding too.

Q. You are not ruling out private placements?

A. (Laughs) I will not give a specific reply to your specific question. My generalised response to all such questions is that all instruments, both conventional and unconventional, are on the table. I have said this before. RBI will take a judicious and balanced judgement call, depending on how the evolving situation plays out.

Q. There is talk of the RBI indirectly or directly participating in the T-bill and bond auctions in the last two weeks. Could you explain what the advantage of RBI’s participation in these auctions was?

A. Let me say very clearly, we have not participated in any primary auction so far. Our financial market operations as well as debt management activities warrant participating in the secondary market from time to time for a variety of reasons such as elongation of debt maturity, filling up gaps in the maturity spectrum of our holdings and the like.

Q. Could COVID-19 bonds, which may be long maturity bonds that the government places with RBI, be an option?

A. This is the same question as the one you asked on private placement. What you are perhaps suggesting is that COVID bonds could be among the instruments of private placement. As I said earlier, we have not taken any view on the subject. When the time comes, we will take a judicious and balanced view, keeping in mind the parameters I set out earlier.

Q. Were you surprised that banks did not participate in the TLTRO 2.0? The RBI has been proactive but banks just didn’t come to the table.

A. We had a sense that the response may not be as good as TLTRO, despite the additional incentives such as exemption from being reckoned as adjusted net bank credit. The auction results convey a telling message, which is that the banks are not willing to take on credit risk in their balance sheets beyond a point. We are reviewing the whole situation and based on that, we would decide on our approach.

Q. Would that mean a move to more general liquidity tools like LTROs or TLTROs?

A. That I cannot say, but the underlying challenge of ensuring flows to the mid-sized and small-sized NBFCs and microfinance institutions, that underlying challenge still remains. That is an issue that is very much on our table. We will take further measures as necessary to address that challenge. The RBI remains in battle-ready mode.

Q. There are many parallels drawn between 2008 and 2020. While 2008 was more a financial sector problem spilling over to the real sector, this time it is a real sector problem which is being addressed through financial sector. This may be a necessary condition but not a sufficient one to bring the economy back on track. To that extent would you acknowledge that the role the central bank can play is limited?

A. The central bank’s role should not be underestimated. Monetary policy, liquidity management, financial regulation and supervision are very powerful tools and are known to have lasting effects on economic and financial conditions. That said, we are dealing with a pandemic superimposed on a slowdown. The response has to be a coordinated one, with all arms of public policy as well as other stakeholders in the economy pulling together and working in close cooperation. Obviously, the government has a very important role in the response to the crisis.

Q. You mentioned the exit from stimulus measures earlier. Even in 2008-09, it was easy to enter the ‘chakravyuh’ but difficult to get out of it. How do you ensure we don’t cause new problems with our crisis response?

A. This is a pertinent question you have asked, as there has to be a very well calibrated and well thought out roadmap for entry and exit. The mantra of coming out of the ‘chakravyuh’ has to also be thought through very carefully and be factored in when entering the ‘chakravyuh’. So, both have to be done simultaneously. Whether it relates to fiscal deficit or liquidity or any other extraordinary measure, it has to be applied in time, and the exit also has to be made in time.

To ensure the markets don’t read me differently and think that RBI is going on a tightening mode, let me make it very clear: the exit has to be well-timed, when you are confident that things are working and near normal. It should not be premature. At the same time, it should not be delayed beyond a point, in the interest of all.

Q. Will the exit decision be more difficult than the entry at this point?

A. (Laughs) In the current juncture, all decision-making is very tough. It is an extraordinarily challenging situation, but both decisions on entering and exiting from the ‘chakravyuh’ are important.

Q. You have taken the decision to widen the policy corridor by cutting reverse repo. What is the rationale there as markets are treating reverse repo as the operative rate thanks to abundant liquidity? Would the corridor stay wide, even in future if the MPC acts on repo?

A. Please note that the single policy rate is the repo rate, as decided by the MPC, and it alone conveys the stance of monetary policy. Reverse repo rate, on the other hand is essentially a liquidity management tool.

With regard to the corridor being wider and having a lower reverse repo, this issue has been discussed in MPC earlier. The reverse repo decision is very much in the domain of the RBI; but having said that, let me reiterate that having a wider corridor and lowering of reverse repo has been discussed several times earlier in the MPC.

Even in the last MPC (meeting), when we reduced the repo rate by 75 basis points, we reduced the reverse repo by 90 bps. The MPC was fully briefed about the rationale for our decision on reverse repo. The MPC was very much taken into confidence, so far as the RBI thought process was concerned.

On widening or narrowing of the corridor, even in April 2017, the corridor was narrowed to 25 bps, and it was not an MPC decision, it was an RBI decision. Even this time, it was an RBI decision, but the RBI thought process had been shared with MPC members even during earlier meetings.

Through a lower reverse repo, we are offering an adverse rate in our liquidity absorptions and thereby seeking to incentivise banks to stop passively depositing funds with the RBI and instead lend to the productive sectors of the economy.

Q. Is reverse repo effectively the operative rate, as that’s not the intention of the MPC?

A. No. I want to repeat for the benefit of your readers: the repo rate is the single policy rate and it alone conveys the stance of monetary policy. The lowering of reverse repo rate should be seen as a transient arrangement necessitated by the imperatives of liquidity management, specifically, a huge overhang of liquidity. We live in extraordinary times and our policy responses have to be out of the ordinary. But do bear in mind that our critical active operations such as LTRO, TLTROs, lines of credit and the like are all at the policy repo rate or closely aligned to it.

Q. Is it time to bring in Standing Deposit Facility as approvals are already in place? Has an SDF rate been decided?

A. That instrument is always available with RBI and it can be activated at any moment. We have not taken a final view on the rate yet.

Q. Any concern that the wider LAF corridor can accentuate some outflows, when capital outflows emerge driven by risk aversion towards emerging markets?

A. As regards foreign exchange markets, if you compare India with other emerging markets, I think the depreciation of the Indian rupee has been orderly and much less than other comparable emerging markets. I am talking about the trends during the pandemic situation of the last one-and-a-half months.

I won’t rule out the possibility of inflows picking up. That can also happen with so much of liquidity in the advanced economies, it will naturally spill over to economies like India which have strong macroeconomic fundamentals. As far as the Indian economy is concerned, even compared to the aftermath of the global financial crisis, we are better placed in a comparative sense.

In any case, the RBI has enough forex reserves. They are robust and we will be able to deal with any eventuality.

Q. Has the US Federal Reserve committed to provide dollar support to RBI, if needed?

A. Federal Reserve has come out with a general policy and opened up a dollar repo window for central banks. That option is available for a large number of countries. We also have a bilateral swap arrangement with Bank of Japan.

Q. Although India’s debt-to-GDP ratio is deteriorating, many former central bankers have said that policymakers like RBI should not fear these rating agencies and be shackled by them…

A. Irrespective of rating upgrade or downgrade, so far as India is concerned, we have seen that India has continued to enjoy the trust of foreign investors, both in terms of foreign portfolio investment and foreign direct investment. It is the policies which a country follows, macroeconomic fundamentals and the outlook that foreign investors have on an economy that matters. Today, with the information explosion, thanks to the internet and electronic media, investors abroad, are much better informed about what is actually happening in India, than they were, say, 20 years ago.

I am not saying rating agencies are totally irrelevant. Rating agencies do influence some foreign investors who follow their own methods of indexation where there is application of ratings for investment. But, by and large, foreign investors in the last several years have exhibited their trust on the Indian economy irrespective of the rating upgrade or downgrade.

Q. Many feel that RBI proposes and bank disposes, as its proactive measures are not translating to action by banks, including that on the moratorium, where RBI said ‘all loans’ were eligible but banks aren’t offering it to NBFCs.

A. We have said two things in the Mar 27 circular that there will be a moratorium on repayment of instalments falling due during three months. The exact words are ‘…lending institutions are permitted to grant a moratorium of three months on payment of all instalments…’. We have also said ‘…lending institutions shall frame Board approved polices for providing the above-mentioned reliefs…’

What is meant by this is that each bank has to assess its own liquidity position, capital adequacy and its own financials. The banks have to take a considered call taking into account these factors. So far as RBI is concerned, there is sufficient clarity. So far as implementation is concerned, each bank has to take into account these factors and then grant moratorium.

Q. In view of the hit expected from COVID-19, are you comfortable with capital ratios of Indian banks to tackle this? Would you nudge some Indian banks to shore up some capital?

A. So far as the current levels of NPA and current levels of capital adequacy are concerned, Indian banks are healthy and safe. We have announced the temporary freeze on dividend payments by banks and deferment of last tranche of capital conservation buffer.

We have to take a calibrated call. Recently, when we announced the standstill on NPA recognition, we also mandated the banks to maintain 10% additional provisions. That is essentially to protect the bank balance sheets in future.

We are constantly monitoring the sector. Going forward, whatever measures are required, we would mandate that.

Q. How can policymakers help bankers overcome the fear of investigative agencies as that is coming in the way of bankers taking credit decisions?

A. This has been a problem. But, recently the government has taken certain measures and come out with guidelines and CVC has formed an advisory committee named Advisory Board for Banking and Financial Frauds. It’s a five member committee.

Before any matter is referred to CBI or any other such agency or even before an investigation begins, the committee will go into it and see whether it’s a business failure or a case of malfeasance. If the committee feels there is some wrongdoing, only then will the matter be referred to the investigative agencies.

If it’s a case of business failure or a business decision that has gone wrong, and there is no malfeasance then adequate protection has been provided. This problem was there in the past. This mechanism set up by the government will help alleviate the situation a lot.

Q. The RBI’s key mandate is financial stability, but recent issues at YES Bank, IL&FS, PMC Bank, Altico Capital and Dewan Housing show chinks in various layers of financial institutions. How does the RBI plan to restore confidence? Is there a review planned?

A. As I have said in the past, we have strengthened our supervisory systems and mechanisms, including a specialised Department of Supervision. I have already listed out the measures elsewhere.

We are doing a much more granular, deep-dive into financial institutions where we see some signs of vulnerability.

This is much deeper than it was done ever before. We have improved and sharpened our supervisory systems and methods. It’s a very proactive system.

At the same time, we have mandated additional regulatory guidelines for NBFCs and Urban Co-operative Banks regulated by the RBI.

Q. Is this speeding up the RBI’s journey to limiting deposit-taking activity to only banks?

A. There is no such policy thought at the moment.

Q. Based on when a bank is licensed, there are different regulations governing them, such as promoter stake or permission to promote other lending institutions. Any plan to harmonise these regulations?

A. These issues are under examination.

Q. RBI has not had a great time in terms of judicial pronouncements. Are courts moving away from treating RBI as a sector expert? How can RBI restore its place in the eyes of the judiciary?

A. Some judgments have gone against us but under the law, it is the courts that do have the prerogative. But you will agree that in a number of cases, we have approached the courts and got amended orders from the same court or got a more favourable judgment from a higher court.

In the crypto-currency case, while having an issue with the principle of proportionality, the Supreme Court has clearly observed that RBI is not just another regulator. I think that position has been made clear by the Supreme Court itself.

Q. What is the vision behind the new fintech department? Will it take forward the strides made in the payments space or will it go much beyond?

A. With regard to the payments space, India is an innovator and a pioneer. The Unified Payments Interface (UPI) is being internationally commended. The BIS has come up with a paper on what all UPI has achieved. We advised the NPCI, and they have set up a subsidiary to internationalise UPI and the RuPay Card. The UPI model has the potential to become a vehicle for cross-border money transfer and remittances.

That is the payments aspect, but the fintech department will push these kind of initiatives. Plus, we have a regulatory sandbox, where we want to see fintech activity to flourish in a calibrated and orderly manner. We want to see that credit flow also happens through new methods using fintech and through fintech companies. This new department will provide the required thrust in that area.

Q. Most commentators believe that we have the best person in the top job at the RBI, given your experience across the bureaucracy and government. How helpful has this been, given there is a fair bit of coordination that you have to do with the government and at the same time, protect the autonomy of the central bank?

A. The RBI’s autonomy is never in doubt. All decisions are independently taken by the RBI. We take our own decisions but we do engage with various stakeholders, including the private sector and markets.

Stakeholder consultation is an essential part of the approach at the RBI and the government is much more than a stakeholder. Obviously, we do consult with them and they also consult us. Consultation flows both ways between the government and the RBI.

My experience of working in the government does help me to take a balanced call on all issues, without in any manner compromising the core principles of central banking. Let me also say that even when I was in the North Block, my effort was always to take a balanced call taking into account the requirements on the government and the viewpoint of the RBI.

During my tenure in the finance ministry, it was always my endeavour to take a balanced call between the expectations of the government and the central bank viewpoint. The same approach continues even now.

Q. You have delivered some very strong messages from the RBI in recent times such as ‘don’t discount the RBI’ and ‘we shall endure’. In a crisis period, as the monetary authority of the country, what is your message to the financial sector and the common man on the streets?

A. This is a time of trial; an endurance test. We must remain resilient and believe in our capacity to come back stronger.