Category: Speeches

Introduction

The idea of “Central Bank Digital Currencies” (CBDC) is not a recent development. Some attribute the origins of CBDCs to Nobel laureate James Tobin², an American economist, who in 1980s suggested that that Federal Reserve Banks in the United States could make available to the public a widely accessible ‘medium with the convenience of deposits and the safety of currency.’ It is only in the last decade, however, that the concept of digital currency has been widely discussed by central banks, economists & governments.

2. Except as currency notes, all other use of paper in the modern financial system, be it as bonds, securities, transactions, communications, correspondences or messaging – has now been replaced by their corresponding digital and electronic versions. On anecdotal evidence, use of physical cash in transactions too has been on the decline in recent years, a trend further reinforced by the ongoing Covid19 pandemic. These developments have resulted in many central banks and governments stepping up efforts towards exploring a digital version of fiat currency. Some of this interest among central banks has been indigenous in nature for pursuing specific policy objectives – for example, facilitate negative interest rate monetary policy. Another driver is to provide the public with virtual currencies, that carry the legitimate benefits of private virtual currencies while avoiding the damaging social and economic consequences of private currencies.

What is a CBDC?

3. It is important to understand and appreciate what precisely is a CBDC, and to do that one needs to understand what a currency is and what money is.

What is a currency?

4. Let us start with money. As societies developed from hunters and gatherers material needs increased – to build a house, wear clothes, make weapons and implements etc. Since these needs could not be produced individually, people had to purchase them from others. These purchases were paid initially by barter – a leather skin cloak for a spear, maybe. As barter had its limits – how many cloaks for a spear – barter got standardized in terms of metals or cowrie shells. Now people knew the value of both the cloak and the spear in terms of bronze or cowrie shells. This was still barter, as both bronze and shells had intrinsic value (shells were desired for their beauty). This system evolved over time into metal currencies. Gold and silver coinage were the offshoot of this system where they had features of barter (both gold and silver had intrinsic value) as well as money (they were standardized representation of value). Somewhere along the way people improvised – instead of actual goods for barter they started using claims on goods, a bill of exchange in fact. These could be clay tablets in Mesopotamia or, as in China in the eleventh century, paper currency.

5. In respect of money two facts emerge historically.

1. Money has taken the form of either commodities (which have intrinsic value) or in terms of debt instruments. When money does not have intrinsic value, it must represent title to commodities that have intrinsic value or title to other debt instruments. Paper currency is such a representative money and it is essentially a debt instrument. The owner of the currency knows who owes him or who has the underlying liability. There is always an ISSUER of representative money.

2. Money is usually issued by a sovereign. Private issuance of money – whether under sovereign license or otherwise – has existed in the past but has over time given way to sovereign issuance, for two reasons. Firstly, being a debt issuance, private money is only as good as the credit of the issuer. By definition, there can be multiple issuers. This makes private currency unstable. On the other hand, public currency, as it is backed by a sovereign, is unique to an economy and has better credit standing; therefore, it is more stable. Secondly, paper currency involves seignorage – the difference between the intrinsic value and the representative value which accrues to the issuer. This seignorage should not accrue to any private individual. It should accrue to the Government and thus used for public spending.

6. Now we are in a position to provide a definition of a currency. In modern economies, currency is a form of money that is issued exclusively by the sovereign (or a central bank as its representative). It is a liability of the issuing central bank (and sovereign) and an asset of the holding public. Currency is fiat, it is legal tender. Currency is usually issued in paper (or polymer) form, but the form of currency is not its defining characteristic.

What is a central bank digital currency?

7. Having defined a currency as a liability issued by the central bank, we are now in a position to define a CBDC. A CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.

8. It is also important to understand what a CBDC is not. CBDC is a digital or virtual currency but it is not comparable to the private virtual currencies that have mushroomed over the last decade. Private virtual currencies sit at substantial odds to the historical concept of money. They are not commodities or claims on commodities as they have no intrinsic value; some claims that they are akin to gold clearly seem opportunistic. Usually, certainly for the most popular ones now, they do not represent any person’s debt or liabilities. There is no ISSUER. They are not money (certainly not CURRENCY) as the word has come to be understood historically.

9. A line of argument that has helped private virtual currencies gain some degree of legitimacy is that most money in modern societies is in fact already private since they represent deposit liabilities of private banks. There are two factors that are conveniently pushed under the carpet. One, deposits are issued by banks under license of the sovereign issuer of currency (usually the central bank). Two, deposits are accepted by the public only because they are convertible one-to-one into sovereign currency. A simple way to understand the distinction is to look at deposits as lending of sovereign currency to banks by the public, on interest (credit, its opposite side, is lending of sovereign currency by banks to the public, on interest). Bank deposits are money, certainly, but they have no independent existence as money, shorn of sovereign authority and the resultant public confidence. In any case bank deposits are very different from private currencies which (a) do not have an issuer, and (b) are not convertible one-to-one into the sovereign currency.

10. To sum up, CBDC is the same as currency issued by a central bank but takes a different form than paper (or polymer). It is sovereign currency in an electronic form and it would appear as liability (currency in circulation) on a central bank’s balance sheet. The underlying technology, form and use of a CBDC can be moulded for specific requirements. CBDCs should be exchangeable at par with cash.

What is the need for a CBDC?

11. While interest in CBDCs is near universal now, very few countries have reached even the pilot stage of launching their CBDCs. A 2021 BIS survey of central banks found that 86% were actively researching the potential for CBDCs, 60% were experimenting with the technology and 14% were deploying pilot projects. Why this sudden interest? The adoption of CBDC has been justified for the following reasons:-

1. Central banks, faced with dwindling usage of paper currency, seek to popularize a more acceptable electronic form of currency (like Sweden);

2. Jurisdictions with significant physical cash usage seeking to make issuance more efficient (like Denmark, Germany, or Japan or even the US);

3. Central banks seek to meet the public’s need for digital currencies, manifested in the increasing use of private virtual currencies, and thereby avoid the more damaging consequences of such private currencies.

12. In addition, CBDCs have some clear advantages over other digital payments systems – payments using CBDCs are final and thus reduce settlement risk in the financial system. Imagine a UPI system where CBDC is transacted instead of bank balances, as if cash is handed over – the need for interbank settlement disappears. CBDCs would also potentially enable a more real-time and cost-effective globalization of payment systems. It is conceivable for an Indian importer to pay its American exporter on a real time basis in digital Dollars, without the need of an intermediary. This transaction would be final, as if cash dollars are handed over, and would not even require that the US Federal Reserve system is open for settlement. Time zone difference would no longer matter in currency settlements – there would be no ‘Herstatt’ risk.

Do we need CBDC in India?

13. The advantages of issuing a CBDC discussed briefly in the previous paragraph might be enough to justify India issuing a CBDC, although to realize benefits of global settlements, it is important that both the countries in a currency transaction have CBDCs in place. Let us, however, look at it from India’s own point of view.

14. India is leading the world in terms of digital payments innovations. Its payment systems are available 24X7, available to both retail and wholesale customers, they are largely real-time, the cost of transaction is perhaps the lowest in the world, users have an impressive menu of options for doing transactions and digital payments have grown at an impressive CAGR of 55% (over the last five years). It would be difficult to find another payment system like UPI that allows a transaction of one Rupee. With such an impressive progress of digitisation, is there a case for CBDCs?

15. A pilot survey conducted by the Reserve Bank on retail payment habits of individuals in six cities between December 2018 and January 2019, results of which were published in April, 2021 RBI Bulletin (please see charts below) indicates that cash remains the preferred mode of payment and for receiving money for regular expenses. For small value transactions (with amount up to ₹500) cash is used predominantly.

16. There is thus a unique scenario of increasing proliferation of digital payments in the country coupled with sustained interest in cash usage, especially for small value transactions. To the extent the preference for cash represents a discomfort for digital modes of payment, CBDC is unlikely to replace such cash usage. But preference for cash for its anonymity, for instance, can be redirected to acceptance of CBDC, as long as anonymity is assured.

17. India’s high currency to GDP ratio holds out another benefit of CBDCs. To the extent large cash usage can be replaced by CBDCs, the cost of printing, transporting, storing and distributing currency can be reduced.

18. The advent of private virtual currencies (VCs) may well be another reason why CBDCs might become necessary. It is not clear what specific need is met by these private VCs that official money cannot meet as efficiently, but that may in itself not come in the way of their adoption. If these VCs gain recognition, national currencies with limited convertibility are likely to come under threat. To be sure, freely convertible currencies like the US Dollar may not be affected as most of these VCs are denominated in US Dollar. In fact, these VCs might encourage the use of US Dollar, as has been argued by Randal Quarles³. Developing our own CBDC could provide the public with uses that any private VC can provide and to that extent might retain public preference for the Rupee. It could also protect the public from the abnormal level of volatility some of these VCs experience. Indeed, this could be the key factor nudging central banks from considering CBDCs as a secure and stable form of digital money. As Christine Lagarde, President of the ECB has mentioned in the BIS Annual Report “… central banks have a duty to safeguard people’s trust in our money. Central banks must complement their domestic efforts with close cooperation to guide the exploration of central bank digital currencies to identify reliable principles and encourage innovation.”

19. The case for CBDC for emerging economies is thus clear – CBDCs are desirable not just for the benefits they create in payments systems, but also might be necessary to protect the general public in an environment of volatile private VCs.

CBDC and the Banking System

20. CBDCs, depending on the extent of its use, can cause a reduction in the transaction demand for bank deposits. Since transactions in CBDCs reduce settlement risk as well, they reduce the liquidity needs for settlement of transactions (such as intra-day liquidity). In addition, by providing a genuinely risk-free alternative to bank deposits, they could cause a shift away from bank deposits which in turn might reduce the need for government guarantees on deposits (Dyson and Hodgson, 2016).

21. At the same time reduced disintermediation of banks carries its own risks. If banks begin to lose deposits over time, their ability for credit creation gets constrained. Since central banks cannot provide credit to the private sector, the impact on the role of bank credit needs to be well understood. Plus, as banks lose significant volume of low-cost transaction deposits their interest margin might come under stress leading to an increase in cost of credit. Thus, potential costs of disintermediation mean it is important to design and implement CBDC in a way that makes the demand for CBDC, vis‑à‑vis bank deposits, manageable.

22. There is another risk of CBDCs that could be material. Availability of CBDC makes it easy for depositors to withdraw balances if there is stress on any bank. Flight of deposits can be much faster compared to cash withdrawal. On the other hand, just the availability of CBDCs might reduce panic ‘runs’ since depositors have knowledge that they can withdraw quickly. One consequence could be that banks would be motivated to hold a larger level of liquidity which could result in lower returns for commercial banks.

23. In actual fact, notwithstanding the benefits of CBDCs vis-à-vis bank deposits, since CBDCs are currency and therefore do not pay interest, their impact on bank deposits may actually be rather limited. Depositors that require CBDCs for transactional purposes are likely to sweep day end balances to interest-earning deposit accounts.

CBDC and Monetary Policy

24. CBDCs may bring about a change in the behaviour of the holding public. And what the nature of that change would be cannot be gauged a priori given that no central bank has launched CBDC. If there is overwhelming demand for CBDC, and CBDCs are issued largely through the banking system, as is likely, more liquidity may need to be injected to offset the currency leakage from the banking system.

25. Much recent discussion has focussed on the use of negative interest-bearing CBDCs for effectiveness of monetary policy, for a specific reason. The extremely low inflationary environment in many advanced economies has constrained their ability to reduce interest rates as negative interest rates are not effective because of the shift to cash. However, monetary transmission of negative policy rates to boost demand would be more effective if currency itself can carry a negative interest rate. Hence the argument in favour of payment of negative interest rate on CBDC as an unconventional monetary policy tool to boost spending. Such steps may need to be taken with care as any instrument that pays interest (positive or negative) is strictly not a currency.

CBDC and Technology Risk

26. CBDC ecosystems may be at similar risk for cyber-attacks as the current payment systems are exposed to. Further, in countries with lower financial literacy levels, the increase in digital payment related frauds may also spread to CBDCs. Ensuring high standards of cybersecurity and parallel efforts on financial literacy is therefore essential for any country dealing with CBDC.

27. Absorption of CBDCs in the economy is also subject to technology preparedness. The creation of population scale digital currency system is contingent upon evolution of high speed internet and telecommunication networks and ensuring the wider reach of appropriate technology to the general public for storing and transacting in CBDCs. In developing countries, lower level of technology adoption may limit the reach of CBDCs and add to existing inequalities in terms of accessing financial products and services.

RBI’s approach on CBDC

28. Central Banks across the globe are engaged in exploring CBDCs and a few countries have also introduced proofs of concept / pilots on CBDC. The High Level Inter-Ministerial Committee (November 2017) constituted by Ministry of Finance, Government of India (GoI) to examine the policy and legal framework for regulation of virtual / crypto currencies had recommended the introduction of CBDCs as a digital form of fiat money in India. Like other central banks, RBI has also been exploring the pros and cons of introduction of CBDCs since quite some time.

29. Generally, countries have implemented specific purpose CBDCs in the wholesale and retail segments. Going forward, after studying the impact of these models, launch of general purpose CBDCs shall be evaluated. RBI is currently working towards a phased implementation strategy and examining use cases which could be implemented with little or no disruption. Some key issues under examination are – (i) the scope of CBDCs – whether they should be used in retail payments or also in wholesale payments; (ii) the underlying technology – whether it should be a distributed ledger or a centralized ledger, for instance, and whether the choice of technology should vary according to use cases; (iii) the validation mechanism – whether token based or account based, (iv) distribution architecture – whether direct issuance by the RBI or through banks; (v) degree of anonymity etc. However, conducting pilots in wholesale and retail segments may be a possibility in near future.

Legal Framework

30. Although CBDCs are conceptually no different from banknotes, introduction of CBDC would require an enabling legal framework since the current legal provisions are made keeping in mind currency in paper form. Under the Reserve Bank of India Act, 1934, the Bank is empowered to “…regulate the issue of bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage” (Preamble). The Reserve Bank derives the necessary statutory powers from various sections of the RBI Act – with respect to denomination (Section 24), form of banknotes (Section 25), status as legal tender (Sec 26(1)) etc. There is a need to examine consequential amendments to other Acts like The Coinage Act, 2011, FEMA, 1999, Information Technology Act, 2000 etc. Even though CBDCs will be a primarily technology driven product, it will be desirable to keep the legislation technology neutral to enable coverage of a variety of technology choices.

Conclusion

31. Introduction of CBDC has the potential to provide significant benefits, such as reduced dependency on cash, higher seigniorage due to lower transaction costs, reduced settlement risk. Introduction of CBDC would possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option. There are associated risks, no doubt, but they need to be carefully evaluated against the potential benefits. It would be RBI’s endeavour, as we move forward in the direction of India’s CBDC, to take the necessary steps which would reiterate the leadership position of India in payment systems.

CBDCs is likely to be in the arsenal of every central bank going forward. Setting this up will require careful calibration and a nuanced approach in implementation. Drawing board considerations and stakeholder consultations are important. Technological challenges have their importance as well. As is said, every idea will have to wait for its time. Perhaps the time for CBDCs is nigh.

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April 14, 2015

Dear All

Welcome to the refurbished site of the Reserve Bank of India.

The two most important features of the site are: One, in addition to the default site, the refurbished site also has all the information bifurcated functionwise; two, a much improved search – well, at least we think so but you be the judge.

With this makeover, we also take a small step into social media. We will now use Twitter (albeit one way) to send out alerts on the announcements we make and YouTube to place in public domain our press conferences, interviews of our top management, events, such as, town halls and of course, some films aimed at consumer literacy.

The site can be accessed through most browsers and devices; it also meets accessibility standards.

Please save the url of the refurbished site in your favourites as we will give up the existing site shortly and register or re-register yourselves for receiving RSS feeds for uninterrupted alerts from the Reserve Bank.

Do feel free to give us your feedback by clicking on the feedback button on the right hand corner of the refurbished site.

Thank you for your continued support.

Department of Communication

Reserve Bank of India

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It is not like any other year, when inflation goes up, you start tightening the monetary policy: RBI Governor Shaktikanta Das

Over the last few months, the government has taken steps to address the price rise in pulses, edible oils as also the imported inflation, but we do expect more measures from both the Centre and states to soften the pace of inflation.

By Shobhana Subramanian and KG Narendranath

Retail inflation print stayed above the upper band of the Reserve Bank of India’s 2-6% target for the second straight month in June, causing the stakeholders to watch its moves more intently. RBI started easing the policy rate since February 2019; it adopted ‘accommodative’ monetary policy stance in June 2019 and has since maintained it, given the grave challenge to economic growth due to the pandemic. Governor Shaktikanta Das expounds on the current priorities of the central bank, which is also the government’s debt manager, in an exclusive interview with Shobhana Subramanian and KG Narendranath.

Excerpts:

Is the latest retail inflation number (6.26% in June, upon a high base of 6.23%) a cause for worry or has it come as a relief (given it eased a tad from a six-month high of 6.3% in May)? How long will the RBI be able to retain the growth-supportive bias in the conduct of monetary policy?

The CPI inflation number for June is on expected lines. The year-on-year growth in ‘core’ inflation (eased marginally to 6.17% in June compared with 6.34% in May. The momentum of the CPI inflation has come down significantly in the both headline and core inflation in June.

The current inflation is largely influenced by supply-side factors. High international commodity prices, rising shipping charges and elevated pump prices of diesel and petrol (which are partly due to high taxes) are putting pressure on input prices. Prices of several food items including meat, egg, fish, pulses, edible oils, non-alcoholic beverages have risen too.

Supply-chain constraints have also arisen out of the Covid 19 related restrictions on movement of goods, and these are easing slowly. Over the last few months, the government has taken steps to address the price rise in pulses, edible oils as also the imported inflation, but we do expect more measures from both the Centre and states to soften the pace of inflation.

Last year, in July and August, CPI inflation was in excess of 6%; in September and October, it was in excess of 7% and in November, almost 7%. That was the time when the Monetary Policy Committee (MPC) had assessed that the spike in inflation was transitory and it would come down going forward. In hindsight, the MPC’s assessment was absolutely correct. Now, the MPC has assessed that inflation will moderate in Q3FY22, so I emphasise on the need to avoid any hasty action. Any hurried action, especially in the background of the current spike in inflation being transitory, could completely undo the economic recovery, which is nascent and hesitant, and create avoidable disruptions in the financial markets.

At 9.5% (real GDP) growth projected by us for FY22, the size of the economy would just about be exceeding the pre-pandemic (2019-20) level. Given that growth is still fragile, the highest priority needs to be given to it at this juncture.

We need to be very watchful and cautious before doing anything on the monetary policy front. Also, all this we have to see in the context of the truly extraordinary situation that we are in, due to the pandemic. It is not like any other year or occasion, when inflation goes up, you start tightening the monetary policy.

The Centre’s fiscal deficit is high (the budget gap more than doubled to 9.3% of GDP in FY21 and is projected to be 6.8% this year), but given the huge revenue shortfall, the size of the fiscal stimulus is limited and not adequate to push growth. Yet, the RBI needs to focus a lot on the yield curve to ensure that the government’s borrowing cost doesn’t skyrocket. Some would say the RBI’s debt management function is taking precedence over its core function, which is inflation-targeting. Is the RBI open to creating new money to directly finance the fiscal deficit?

I would not agree with the formulation that debt management is undermining inflation-targeting. In fact, our debt management operations throughout the past year and more has ensured better transmission of monetary policy decisions. We are using the instruments at our command to ensure transmission of rates. Thanks to our debt management operations, the interest rates on government borrowings in 2020-21 were the lowest in 16 years, and private-sector borrowing costs have also substantially reduced. If the real estate and construction sectors are out of the woods now, the all-time low interest rates on housing loans have had a big role in it.

We have not only reduced interest rates in consonance with monetary policy, but have also ensured availability of adequate – even surplus– liquidity in the system through OMO, Operation Twist and GSAPs. These have resulted in lower borrowing costs and financial stability across the entire gamut of stakeholders including banks, NBFCs and MFIs, and, therefore, been very supportive to economic growth.

If you look at the M3, the growth of money is just about in the range of 9-10%, meaning our accommodative stance is not really creating high inflation.

As far direct financing of the government’s fiscal deficit is concerned, this apparently easy option is out of sync with the economic reforms being undertaken; it is also in conflict with the FRBM law. In fact, this option has several downsides and the RBI has refrained from it.

What’s important is the (high) efficiency with which the RBI is meeting the borrowing requirement of the government. The Centre and states, among themselves, borrowed about ₹21-22 lakh crore, a record high amount in FY21, but at historical-low interest rates. In the current year too, there could be a borrowing quantum of the same order, and the RBI will use all the tools at its disposal to ensure that the borrowings are non-disruptive and at low interest rates.

There is ample liquidity in the system, yet the banks appear to be extremely risk-averse. They would rather park the excess funds under the reverse repo window, than lend to the industry. Even the government’s schemes like ECGLS – which insulates banks from credit risk on loans to MSMEs and retail borrowers – and the targeted liquidity policy of RBI for small NBFCs don’t seem to change the outlook much. As the regulator, how do you get this fear psychosis out of banks?

The banks have to do prudent lending with proper appraisals. Risk aversion on the part of the banks is arising from the current pandemic situation, and its possible consequences. Demand for credit from the industry is also not as high as one would expect it to be. This is because there is still a large output gap that constrains new investments.

Many large companies considerably deleveraged their bank loans in FY21, while raising money from the corporate bond market. So banks have to lend where there is a demand, and that is one reason why lending to retail sector is growing. There is no gainsaying that bank credit needs to rise; I’m sure banks will indeed lend if there is demand for credit and the projects are viable.

There is a lot of demand for loans from companies that are relatively low-rated. Banks are not willing to take any risk…

Of course, the risk perception (among lenders) is high and, precisely for that reason, the government unveiled the ECLGS scheme (under which guaranteed loans up to a limit of ₹4.5 lakh crore will be extended). If you see our TLTRO scheme or the refinancing support (special facilities for ₹75,000 crore were provided last year to all India financial institutions, including Nabard and SIDBI; a fresh support of ₹50,000 crore has been provided for new lending in FY22), the objective is that they would lend to small and micro businesses. We have also given ₹10,000 crore to small finance banks and MFIs at the repo rate (4%), again to ensure adequate fund flow to micro and small firms.

As for the healthcare sector, banks are allowed to park their surplus liquidity up equivalent of the size of their Covid loan books with the RBI at a higher rate. We are also according priority-sector status to certain loans for the healthcare sector. So, because of the extraordinary situation, we are incentivising the banks to lend more through a series of measures.

As the regulator, our job is to provide an ecosystem where the banking sector functions in a very robust manner. But beyond that, who the banks will lend to or won’t lend to must be based on their own risk assessment, and the prudential norms.

In the recent financial stability report (FSR), the worst-case NPA scenario after the full withdrawal of forbearance is foreseen to be better than the best case perceived in the January edition…

We had a much clearer view of the assent quality in the July FSR than when the January edition was drafted, when the regulatory forbearance partially blurred the picture. Still, these are assumptions and analytical exercises rather than projections. These could serve as guidance to the banks in their internal analysis of, say, a possible severe stress scenario. We expect the banks could use these inputs to take proactive, pre-emptive measures on two fronts specifically: increasing the provision coverage ratio and mobilsing additional capital to deal with situations of stress or a severe stress, should these happen.

These assumptions, based on real numbers, could by and large hold true, unless a third Covid-19 wave plays spoilsport.

In the auction held on Friday, you allowed the benchmark yield to go up to 6.1%, while it had long seemed you won’t tolerate a rate above 6%…

We’ve never had any fixation that the yield should be 6%, but some of our actions might have conveyed that impression. After the presentation of the Budget (for FY22) and other developments such as the enhanced government borrowing, the bond yields suddenly spiked. The 10-year G-secs, for example, reached 6.26%. But after that, through our signals and actions (in the form of open market operations, Operations Twist and G-SAP, and our actions during auctions, going sometimes for the green-shoe option or sometime for cancellations, etc) we signalled our comfort level to the markets.

So, we are able to bring down the yield and the rates, by and large, remained less than 6% till about January or so. The first auction that we did last Friday when we introduced the new-tenure benchmark reflected one important thing that the focus of the central bank is on the orderly evolution of the yield curve and the market expectations seem to be converging with this approach. So, it will be in the interest of all stakeholders, the economy, if the same spirit of convergence between the market participants and other stakeholders, and the central bank continues and I expect it will continue.

A jump in the RBI’s ‘realised profits’ from sale of foreign exchange enabled you to transfer a higher-than-expected ₹99,122 crore as surplus to the government for the nine months to March 31, 2021. Are you sticking to the economic capital framework as revised on the lines of the Bimal Jalan committee’s recommendations?

One of the key recommendations of the committee is that unrealised gains will not be transferred as a part of surplus and we are strictly following that. We intervene in the market to buy and sell foreign currencies, and what we earn out of that are realised gains. A large part of the surplus transfer constitutes the exchange gains from foreign exchange transactions. So whatever gains we make out of this are not unrealised (notional) gains (which can’t be transferred under ECF). We also make losses in such transactions, because RBI isn’t in the game of making profit but in the game of maintaining stability of the exchange rate and ensuring broader financial stability.

Last year, about ₹70,000 crore had to be transferred to the contingency reserve fund because it was falling short of the 5.5% level recommended by the Jalan committee. This was because our balance sheet size grew substantially last year due to liquidity operations that we undertook in March, April and May. So, last year the larger size of the RBI’s balance sheet required that as much as ₹70,000 crore be transferred to the contingency reserve fund. This year, the expansion of balance-sheet wasn’t that much, so the transfer was much less at about ₹25,000 crore.

April 14, 2015

Dear All

Welcome to the refurbished site of the Reserve Bank of India.

The two most important features of the site are: One, in addition to the default site, the refurbished site also has all the information bifurcated functionwise; two, a much improved search – well, at least we think so but you be the judge.

With this makeover, we also take a small step into social media. We will now use Twitter (albeit one way) to send out alerts on the announcements we make and YouTube to place in public domain our press conferences, interviews of our top management, events, such as, town halls and of course, some films aimed at consumer literacy.

The site can be accessed through most browsers and devices; it also meets accessibility standards.

Please save the url of the refurbished site in your favourites as we will give up the existing site shortly and register or re-register yourselves for receiving RSS feeds for uninterrupted alerts from the Reserve Bank.

Do feel free to give us your feedback by clicking on the feedback button on the right hand corner of the refurbished site.

Thank you for your continued support.

Department of Communication

Reserve Bank of India

Next

April 14, 2015

Dear All

Welcome to the refurbished site of the Reserve Bank of India.

The two most important features of the site are: One, in addition to the default site, the refurbished site also has all the information bifurcated functionwise; two, a much improved search – well, at least we think so but you be the judge.

With this makeover, we also take a small step into social media. We will now use Twitter (albeit one way) to send out alerts on the announcements we make and YouTube to place in public domain our press conferences, interviews of our top management, events, such as, town halls and of course, some films aimed at consumer literacy.

The site can be accessed through most browsers and devices; it also meets accessibility standards.

Please save the url of the refurbished site in your favourites as we will give up the existing site shortly and register or re-register yourselves for receiving RSS feeds for uninterrupted alerts from the Reserve Bank.

Do feel free to give us your feedback by clicking on the feedback button on the right hand corner of the refurbished site.

Thank you for your continued support.

Department of Communication

Reserve Bank of India

Next

April 14, 2015

Dear All

Welcome to the refurbished site of the Reserve Bank of India.

The two most important features of the site are: One, in addition to the default site, the refurbished site also has all the information bifurcated functionwise; two, a much improved search – well, at least we think so but you be the judge.

With this makeover, we also take a small step into social media. We will now use Twitter (albeit one way) to send out alerts on the announcements we make and YouTube to place in public domain our press conferences, interviews of our top management, events, such as, town halls and of course, some films aimed at consumer literacy.

The site can be accessed through most browsers and devices; it also meets accessibility standards.

Please save the url of the refurbished site in your favourites as we will give up the existing site shortly and register or re-register yourselves for receiving RSS feeds for uninterrupted alerts from the Reserve Bank.

Do feel free to give us your feedback by clicking on the feedback button on the right hand corner of the refurbished site.

Thank you for your continued support.

Department of Communication

Reserve Bank of India

Next

Hasty withdrawal of easy policy can undo gains: RBI Governor Shaktikanta Das

Inflation is showing signs of stickiness, but it is only a “transitory hump” that should moderate in the third quarter, he said.

The govt has taken certain supply side measures in recent weeks but more such measures are necessary, especially on taxes from both Central and state governments, the RBI Governor said

Any hasty withdrawal from the present monetary policy accommodation can potentially undo all the gains that have been achieved after the devastating Covid-19 pandemic, Reserve Bank of India (RBI) Governor Shaktikanta Das told Business Standard in an exclusive interview.

Inflation is showing signs of stickiness, but it is only a “transitory hump” that should moderate in the third quarter, he said. Therefore, the monetary policy committee (MPC) is more inclined to look through the perk-up in prices, as “growth is the main challenge” for now.

The governor said the RBI is still very watchful about the inflation scenario, but is taking comfort in the 2-6 per cent range allowed by the flexible inflation targeting regime. Ultimately, the aim of the central bank is to ensure that inflationary expectations remain firmly anchored at around 4 per cent.

The governor is confident of his 9.5 per cent growth rate projection for this fiscal. “The second wave of Covid is behind us, and high-speed indicators point to a pick-up in economic activities, though it’s a long shot to reach the pre-pandemic level of growth.”

Notwithstanding the monetary policy tightening guidance given by the US Federal Reserve, India’s own monetary policy will be driven by domestic considerations, the governor said.

India’s foreign exchange reserves of $609 billion give adequate protection against any volatility, and should give protection to the domestic exchange rate. The reserves cover 15 months of imports, and are more than the country’s overall external debt. With the reserves, there should be “no doubt in the market about India’s capacity to deal with the situation of outflows,” the governor said.

However, the RBI is also mindful that the reserves are capital-flow driven. There is a liability created against the reserves and they have not been generated due to trade surpluses.

Therefore, there is no question of using the reserves for any other purposes.

The governor was also candid enough to admit that the central bank does intervene in the offshore non-deliverable forwards market to quell volatility in the domestic exchange rate.

Ultimately, the aim is that the offshore and onshore markets get integrated and price discovery happens in an efficient manner, he said.

Reserves remove doubt on ability to act: RBI Governor Shaktikanta Das

Economic activities are expected to improve further going into July or into the second half, says Governor Das

The Reserve Bank of India (RBI) is mindful of the entire yield curve and is not just focused on the 10-year bond. However, the 10-year bond has a larger impact on other rates. Hence, the central bank’s intervention in it was greater than in other papers, said RBI Governor Shaktikanta Das in an interview with Anup Roy and Vishal Chhabria. India’s monetary policy will be driven by domestic considerations, notwithstanding the stance taken by the US Federal Reserve. Any volatility in the currency can be addressed with the vast foreign exchange reserve of $609 billion, the governor said. Edited excerpts:

You have said the impact of the second wave of Covid-19 could be limited to the first quarter, but your survey in the Financial Stability Report (FSR) says business expectations are down; the job scenario, wages, and productivity are unlikely to improve in the short term…

Activities had revived in the fourth quarter (Q4) of last year, and in the second half the economy had emerged out of contraction and had entered positive territory. Then we had the interruption of the second wave, which peaked in May. If you look at the high speed indicators, sequentially there are growing signs of improvement in certain indicators. For example, data on freight traffic, GST e-way bills, import and export, electricity consumption, volume of transactions in the payment and settlement systems are showing sequential improvement. The lockdowns were localised this time and economic activities, including manufacturing, continued. Individuals and businesses have better adapted to Covid protocols. So, we feel that the worst of the second wave is behind us. Economic activities are expected to improve further going into July or into the second half. Further, congenial financial conditions continue to prevail and vaccination is gathering pace. We made our detailed assessment on that basis, and we feel our projection of 9.5 per cent is quite realistic.

The numbers probably capture the formal economy. How do we gauge the informal economy, where the impact could have been much more?

In the rural areas there was good agricultural production last year, and there are expectations of a good monsoon this year. Both of them provide strong support to the rural sector and going forward that should support rural demand and also incomes. We do our own internal assessments and surveys to gauge informal economy data.

RBI’s resolution framework 2.0 was specifically targeted at the micro, small and medium enterprises (MSMEs) and small businesses. We have also provided targeted liquidity support through the banks, including the small finance banks and through them to the smaller non-banking financial companies (NBFCs) and the microfinance institutions.

The FSR says the true state of bank balance sheets will be revealed once the effects of regulatory forbearance fully plays out, but your worst case estimate this year is better than the best case estimate of last year, in terms of non-performing assets…

When we came out with the last FSR in January, the regulatory forbearances were still in operation. The Supreme Court had ordered asset classification standstill immediately after the six months moratorium was over and our resolution framework 1.0 was still under implementation. So, therefore, asset quality recognition was camouflaged because of these dispensations. So, the FSR had relied upon the figures of December 2019 as the base because it was not contaminated by the Covid numbers.

In the July 2021 FSR, we have a clearer picture of bad debts. The base of March 31, 2021, numbers are, therefore, far more realistic. The second wave’s impact is something that we’ll see over the coming months. But having said that, I would like to add that Indian banks are far more resilient today than they were earlier. Today, the gross non-performing assets (GNPAs) are about 7.5 per cent. The provision coverage ratio is close to 69 per cent, capital adequacy ratio is about 16 per cent. So, therefore, in terms of resilience, the banks are in a better place today. Having said that, there is also a necessity to continuously monitor and augment the capital adequacy of banks, given the overall uncertain outlook on the Covid front.

If there is an unexpected rise in bad debts, will RBI extend a helping hand to banks in terms of regulatory dispensation?

I would not like to comment on what we would do in future, but let me make one thing clear: RBI, as an institution, would not like to delay or postpone any asset quality recognition. It is always better that the asset quality is recognised in time and addressed and resolved in time.

RBI has decided to look past inflation for now. But, inflation is sticky and the real interest rate is negative. Are you worried?

The headline inflation, and inflationary expectations were well anchored at 4 per cent before the onset of the pandemic. We would like to consolidate and preserve those gains. Stable inflation has its advantages in terms of reducing uncertainty for investors, for businesses, for everybody, and eventually it supports growth. But then we had an extraordinary situation arising because of the pandemic. The flexible inflation targeting framework allows us to target within a range of 2-6 per cent. The Monetary Policy Committee, therefore, focused on keeping headline inflation within this range. The consumer inflation narrative comes from other emerging economies’ central banks, some of them have increased their rates, of course, but the narrative is that it is a transitory phenomenon. The current inflation spike appears to be transitory, driven largely by supply side factors and going forward, it is expected to moderate in the third quarter. We are very watchful of the emerging inflation trends and momentum. Any hasty withdrawal of monetary policy support will negate the nascent or incipient recovery that is taking place. So, therefore, RBI will remain watchful. And the MPC will take appropriate decisions depending on the evolving situation.

You have shifted your guidance to state based, from time based. Why so?

As I said, any hasty withdrawal can undo the gains in the face of economic revival. In 2020, the CPI inflation exceeded 6 per cent in July-August and 7 per cent in September-October. But the MPC believed that inflation would moderate in December and January. So, the MPC decided to continue with the accommodative stance with the belief that inflation was transitory. The MPC focussed on assuaging market expectations of an inflation spike. Sure enough, inflation came down to little above 4 per cent during December 2020-March 2021. In hindsight, the time-based guidance provided by the MPC was the right call to take because it anchored market expectations. We are monitoring the inflation situation closely and we now feel that the state based guidance is appropriate in the current context.

Are you not building up expectations in the market? The bond market seems to be assured that whatever happens to inflation, bond yields will remain stable.

We are very watchful about inflation and growth. But the main challenge is economic revival and growth. Let us not forget that 2020-21 witnessed a severe contraction of 7.3 per cent and the 9.5 per cent growth projection for the current year is built on that.

The economy needs to reach and exceed the pre-pandemic level of growth. We are acutely conscious and sensitive to the fact that a hasty reversal of monetary policy stance or monetary policy approach can have serious consequences for the economic recovery. But we also want to anchor inflation expectations within the tolerance band and closer to the inflation target in the medium term. The current inflection in inflation is also largely impacted by supply side issues. International commodities and crude prices have also risen. The government has taken certain supply side measures in recent weeks but more supply side measures are necessary and we are actually looking forward to more such measures, especially on taxes from both Central and state governments.

Is the RBI policy hostage to the huge borrowing programmes of the government?

It is a fact that the borrowing programmes of both the Centre and states are huge. The pandemic crashed government revenues last year. This year it looks better so far. But on the expenditure side also there are pressures on the government to spend more. The net result is that the borrowing had to be higher, both for the Centre and the states. RBI as the debt manager of the government is committed to ensuring non-disruptive implementation of the borrowing programme at the lowest possible cost and our efforts are in that direction.

The Reserve Bank will continue to deploy various instruments at its command. Interestingly, over the last one year, the debt management function of the RBI has actually facilitated better monetary policy transmission.

The various conventional, unconventional and the new kinds of measures which RBI has undertaken, such as G-SAP, TLTRO, etc. together with appropriate communication and signals have ensured the lowest borrowing cost for the government in the last 16 years in 2020-21.

The G-Sec yields act as a benchmark for the private sector borrowing.

Corporates and businesses were able to raise cheaper funds by way of corporate bonds. This has helped them to have adequate liquidity and undertake deleveraging, etc. The debt management exercise of RBI throughout the pandemic has indeed ensured better interest rates for the entire economy. All conventional and unconventional actions of RBI as a debt manager, and also the central bank are basically in that direction.

Why did you buy most of the 10-year bonds from the market?

The 10-year benchmark has a bigger influence on the yield curve as a whole. But it is wrong to assume that we are focusing only on 10-year bonds. We are focused on the entire maturity curve. If you look at our last G-SAP announcement, we are targeting six- to 12-year maturity G-Secs.

Why have you accumulated so much reserves? Is it to address volatility, or are you building a sort of permanent reserve for other purposes as well?

Internationally, capital flows involve a lot of volatility. Especially, in the current context when all the advanced economies have adopted ultra-accommodative monetary policies, there is naturally a lot of liquidity floating around. But capital flows are also very volatile. The emerging market economies, in this kind of a scenario, have to build their own buffers, their own safety nets.

A strong foreign exchange reserve is the best safety net against global spillovers. Also, it renders a considerable amount of stability to the exchange rate. It also eliminates doubts in the market about a country’s capacity to deal with a situation of outflows. Today, India is much better placed at $609 billion forex reserves. It covers about 15 months of projected imports for 2021-22. It covers more than our overall external debt.

Are you taking private help for managing reserves?

These are all options. There is no plan to outsource the forex reserve management functions of RBI. The reserve management will be done by RBI, and while doing so, we are always considering various options of how to improve our internal skills by harnessing external expertise.

The reserve management works on three principles — safety, liquidity and return — in that order. RBI is not chasing any return as such, it is our last priority. So, utilisation of external expertise would augment our own capabilities.

Can the reserve be used for other purposes as well?

The reserves are not our own money. It is not that we have built it up by way of trade surplus. If we have reserves, we also have liabilities against them. Capital flows are a strong contributor to our reserves. We have to be watchful. Our current level of reserves gives us confidence, but we cannot be complacent.

How concerned are you now that the Fed has indicated raising rates?

The monetary policy action of the US Fed will impact all economies across the globe, particularly emerging market economies, and India will also be affected. But the principal focus of our monetary policy will be the domestic macroeconomic situation and the domestic growth inflation dynamics. Our policy will be more governed by domestic factors.

Do you get a feeling that the currency market is getting out of hand for the RBI because of the non-deliverable forward (NDF) size? By bringing it onshore, are you legitimising NDF?

NDF is a fact of life. The volumes are much more than the onshore transactions. It is bound to happen in a country, as long as there are capital controls. Our current endeavour is to address market segmentation between offshore and onshore markets. We have given access to non-residents to the onshore market. We have enabled Indian banks to participate in the offshore market 24 hours and five days a week. The segmentation between onshore and offshore markets is steadily getting eliminated. This will improve pricing and efficiency.

How happy are you with the way IBC is progressing? There are delays, and the haircuts are steep.

The main concern around the IBC resolution is that it is taking too much time — more than a year. It happens because of litigation and counter-litigation. The average time for resolution under IBC needs to be compressed. That is something we expect should happen because this is a new law, which was enacted and implemented in 2016. The jurisprudence around the new law is also getting established. The average resolution time taken under IBC needs to be quicker.

If we look at the numbers for the comparable period (2014-15 to 2019-20), the average recovery in the case of Lok Adalat was 5 per cent. In the case of DRT, it was 6 per cent; in the case of SARFAESI, it was 20 per cent. In the case of IBC, the average is still 40 per cent. If you exclude 2020-21 — the pandemic year — the average recovery under IBC was 45 per cent.

We should judge the success of IBC, not just from the point of view of percentage of recovery. There are other parameters to judge its success. IBC has spurred banks to recognise their bad debts in time. It has also instilled a strong credit and repayment culture by both banks and borrowers.

You have been a bold governor. Can a country like India afford to adopt a whatever-it-takes policy?

Covid-19 was a shocker of extraordinary proportions. India, after several decades, witnessed a contraction of 7.3 per cent. The loss of lives and livelihoods was unprecedented. It was a global shock and central banks the world over came to the forefront to battle economic crises. For central banks, it was a whatever-it-takes moment, and the RBI was no exception. We adopted conventional, unconventional, and new measures. Some of them were similar to what the advanced economies were undertaking, some designed to deal with local challenges.

For example, the resolution framework factored in the prudent principles of resolution and the need to support businesses. We adopted measures such as bond purchase programmes, reduced interest rates, and adopted an accommodative stance. At the same time, we undertook other measures like targeted liquidity for smaller NBFCs and mutual funds. The RBI’s whatever-it-takes approach has helped insulate the economy and the financial markets from a possible crisis and ensured financial stability.

What is the status of India’s inclusion in the global bond indices and the central bank’s digital currency?

They are both works in progress. As far as our inclusion in the global bond index is concerned, we are working closely with three or four agencies. In fact, one of the bond index providers has placed India on the watchlist, perhaps as a prelude to our inclusion in the bond index. We are in active dialogue with them, as also with the other bond index providers. We hope to see this effort gain more traction in the days to come. With regard to the central bank’s digital currency, we are discussing the technology/cybersecurity aspects. I cannot give a timeline. This is something that has got other implications on monetary policy and on overall savings.

April 14, 2015

Dear All

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Next

As the financial year 2020-21 – the year of the pandemic – was drawing to a close, the Indian economy was advantageously poised, relative to peers. India was at the foothills of a strong recovery, having regained positive growth, but more importantly, having flattened the infections curve. In a few weeks since then, the situation has altered drastically. Today, India is fighting a ferocious rise in infections and mortalities. New mutant strains have emerged, causing severe strains on healthcare and medical facilities, vaccine supplies and frontline health personnel. The fresh crisis is still unfolding. India has mounted a valiant defence, domestically and globally, to ramp up vaccines and medical support, and save lives.

2. Simultaneously, shoring up livelihoods and restoring normalcy in access to workplaces, education and incomes becomes an imperative. As in the recent past, the Reserve Bank of India (RBI) will continue to monitor the emerging situation and deploy all resources and instruments at its command in the service of the nation, especially for our citizens, business entities and institutions beleaguered by the second wave. The devastating speed with which the virus affects different regions of the country has to be matched by swift-footed and wide-ranging actions that are calibrated, sequenced and well-timed so as reach out to various sections of society and business, right down to the smallest and the most vulnerable. While doing so, our admiration and gratitude goes out to the brave citizens of our nation, to our doctors, healthcare and medical staff, police and law enforcement agencies and to other authorities who battle the second surge selflessly and tirelessly and have been at the frontline for more than a year. Their services to our nation are needed now, more than ever. The quarantine facilities of the RBI continue to operate with more than 250 RBI personnel and service providers – away from their homes – to ensure continuity of various segments of financial markets and RBI operations.

3. Since the pandemic began, I have on several occasions expressed my genuine faith in India’s resilience and capacity to overcome all odds. To quote Mahatma Gandhi – “My faith is brightest in the midst of impenetrable darkness¹.” Over a year now, we have struggled to free ourselves from the pandemic’s deadly grip. Between mid-September and February, as a country, we did manage to lower infections at a time when the rest of the world was reeling under malevolent surges of the virus. This time around, we have to marshal our resources and fight it again with renewed vigour, ignited by the determination to overcome, and to return to normalcy and sound health.

Assessment of the Current Economic Situation

4. Before I set out the measures that the RBI is proposing to undertake as the first part of a calibrated and comprehensive strategy against the pandemic, let me reflect on the macroeconomic and financial conditions that prevail, so that the context in which today’s measures are being taken, can be appreciated.

5. The global economy is exhibiting incipient signs of recovery as countries renew their tryst with growth, supported by monetary and fiscal stimulus. Still, activity remains uneven across countries and sectors. The outlook is highly uncertain and clouded with downside risks. In April 2021, the International Monetary Fund (IMF) revised up its global growth projection for 2021 to 6.0 per cent (from 5.5 per cent projected in January 2021) on the assumption that vaccines would be available in advanced economies (AEs) and some emerging market economies (EMEs) by the summer of 2021 and in most other countries by the second half of 2022. World merchandise trade maintained its recent uptrend, growing by 5.4 per cent in February 2021 on a year-on-year (y-o-y) basis. Consumer price index (CPI) inflation remains benign for major AEs; in a few EMEs, however, it persists above targets on account of firming global food and commodity prices. Global financial markets regained buoyancy in April on vaccine optimism after bouts of volatility in February-March, followed by corrections.

6. Moving to domestic developments, aggregate supply conditions are underpinned by the resilience of the agricultural sector. The record foodgrains production and buffer stocks in 2020-21 provide food security and support to other sectors of the economy in the form of rural demand, employment and agricultural inputs and supplies, including for exports. The forecast of a normal monsoon by the India Meteorological Department (IMD) is expected to sustain rural demand and overall output in 2021-22, while also having a soothing impact on inflation pressures.

7. Aggregate demand conditions, particularly in contact-intensive services, are likely to see a temporary dip, depending on how the COVID situation unfolds. With restrictions and containment measures being localised and targeted, businesses and households are learning to adapt. Consequently, the dent to aggregate demand is expected to be moderate in comparison to a year ago. Reports suggest that the disruption in manufacturing units so far is minimal. Consumption demand is holding up, with sales of consumer goods rising in double digits in January-March 2021, and average daily electricity generation up by 40.0 per cent year-on-year in April. Rail freight has registered growth of over 76 per cent year-on-year in April. Toll collections in April suggest that mobility has declined but quite unlike the abrupt halt in mobility during April last year. Registration of automobiles in April 2021 has shown moderation compared to March. The tractor segment continues its robust pace. The Purchasing managers’ index (PMI) for manufacturing continued in expansion mode at 55.5 in April 2021 compared to 55.4 in the preceding month. Overall, the high frequency indicators are emitting mixed signals. The RBI will closely and continuously monitor all incoming data to assess on a real time basis the impact of the second wave on macro-economic and financial conditions.

8. CPI inflation edged up to 5.5 per cent in March 2021 from 5.0 per cent a month ago on the back of a pick-up in food as well as fuel inflation while core inflation remained elevated. High-frequency food prices data for April 2021 from the Department of Consumer Affairs (DCA) suggests further softening of prices of cereals and key vegetables while price pressures in pulses and edible oils remain. Prices of petrol and diesel registered some moderation in April. Manufacturing and services PMIs along with rising WPI inflation show a persistence of input price pressure. The May 12 release of the National Statistics Office will throw more light on inflation developments in April. Going forward, a normal south-west monsoon, as forecast by the IMD should help to contain food price pressures, especially in cereals and pulses. The build-up in input price pressures across sectors, driven in part by elevated global commodity prices, remains a concern. The inflation trajectory over the rest of the year will be shaped by the COVID-19 infections and the impact of localised containment measures on supply chains and logistics.

9. In the external sector, India’s merchandise exports and imports rose sharply in March 2021. For the year 2020-21 as a whole, the merchandise trade deficit shrank to US $98.6 billion from US $ 161 billion a year ago. Preliminary data released by the Ministry of Commerce & Industry indicate that India’s merchandise exports and imports continue to witness broad-based robust growth performance in April 2021. The current account balance, which had been recording surpluses from January 2020 through September 2020, flipped and turned into a slender deficit of 0.2 per cent of GDP in Q3:2020-21. Foreign exchange reserves were at US$ 588 billion on April 30, 2021. This gives us the confidence to deal with global spillovers.

10. Domestic financial conditions remain easy on abundant and surplus system liquidity. The average daily net liquidity absorption under the liquidity adjustment facility (LAF) was at ₹5.8 lakh crore in April 2021. The first auction under G-SAP 1.0 conducted on April 15, 2021 for a notified amount of ₹25,000 crore elicited an enthusiastic response as reflected in the bid-cover ratio of 4.1. G-SAP has engendered a softening bias in G-sec yields which has continued since then. Given this positive response from the market, it has been decided that the second purchase of government securities for an aggregate amount of ₹35,000 crore under G-SAP 1.0 will be conducted on May 20, 2021. With system liquidity assured, the RBI is now focusing on increasingly channelising its liquidity operations to support growth impulses, especially at the grassroot level.

Additional Measures

11. In the fight against the second wave, alleviating any constraint from the financing side for all stake holders – government, hospitals and dispensaries, pharmacies, vaccine/medicine manufacturers/importers, medical oxygen manufacturers/suppliers, private operators engaged in the critical healthcare supply chain, and above all the common man who may be facing sudden spike in health expenditure – requires a comprehensive targeted policy response. Small businesses and financial entities at the grassroot level are bearing the biggest brunt of the second wave of infections. Against this backdrop and based on our continuing assessment of the macroeconomic situation and financial market conditions, we propose to take further measures, as enumerated below.

Term Liquidity Facility of ₹50,000 crore to Ease Access to Emergency Health Services

12. To boost provision of immediate liquidity for ramping up COVID related healthcare infrastructure and services in the country, an on-tap liquidity window of ₹50,000 crore with tenors of up to three years at the repo rate is being opened till March 31, 2022. Under the scheme, banks can provide fresh lending support to a wide range of entities including vaccine manufactures; importers/suppliers of vaccines and priority medical devices; hospitals/dispensaries; pathology labs; manufactures and suppliers of oxygen and ventilators; importers of vaccines and COVID related drugs; logistics firms and also patients for treatment.

13. Banks are being incentivised for quick delivery of credit under the scheme through extension of priority sector classification to such lending up to March 31, 2022. These loans will continue to be classified under priority sector till repayment or maturity, whichever is earlier. Banks may deliver these loans to borrowers directly or through intermediary financial entities regulated by the RBI. Banks are expected to create a COVID loan book under the scheme. By way of an additional incentive, such banks will be eligible to park their surplus liquidity up to the size of the COVID loan book with the RBI under the reverse repo window at a rate which is 25 bps lower than the repo rate or, termed in a different way, 40 bps higher than the reverse repo rate.

Special Long-Term Repo Operations (SLTRO) for Small Finance Banks (SFBs)

14. Small finance banks (SFBs) have been playing a prominent role by acting as a conduit for last mile supply of credit to individuals and small businesses. To provide further support to small business units, micro and small industries, and other unorganised sector entities adversely affected during the current wave of the pandemic, it has been decided to conduct special three-year long-term repo operations (SLTRO) of ₹10,000 crore at repo rate for the SFBs, to be deployed for fresh lending of up to ₹10 lakh per borrower. This facility will be available till October 31, 2021.

Lending by Small Finance Banks (SFBs) to MFIs for on-lending to be classified as Priority Sector Lending

15. At present, lending by Small Finance Banks (SFBs) to Micro-Finance Institutions (MFIs) for on-lending is not reckoned for priority sector lending (PSL) classification. In view of the fresh challenges brought on by the pandemic and to address the emergent liquidity position of smaller MFIs, SFBs are now being permitted to reckon fresh lending to smaller MFIs (with asset size of up to ₹500 crore) for on-lending to individual borrowers as priority sector lending. This facility will be available up to March 31, 2022.

Credit to MSME Entrepreneurs

16. With a view to incentivise credit flow to the micro, small, and medium enterprise (MSME) borrowers, in February 2021 Scheduled Commercial Banks were allowed to deduct credit disbursed to new MSME borrowers from their net demand and time liabilities (NDTL) for calculation of the cash reserve ratio (CRR). In order to further incentivise inclusion of unbanked MSMEs into the banking system, this exemption currently available for exposures up to ₹25 lakh and for credit disbursed up to the fortnight ending October 1, 2021 is being extended till December 31, 2021.

Resolution Framework 2.0 for COVID Related Stressed Assets of Individuals, Small Businesses and MSMEs.

17. The resurgence of COVID-19 pandemic in India in recent weeks and the associated containment measures adopted at local/regional levels have created new uncertainties and impacted the nascent economic revival that was taking shape. In this environment the most vulnerable category of borrowers are individual borrowers, small businesses and MSMEs. The following set of measures are being announced today, specifically targeting these groups of borrowers.

(a) Borrowers i.e. individuals and small businesses and MSMEs having aggregate exposure of upto ₹25 crore and who have not availed restructuring under any of the earlier restructuring frameworks (including under the Resolution Framework 1.0 dated August 6, 2020), and who were classified as ‘Standard’ as on March 31, 2021 shall be eligible to be considered under Resolution Framework 2.0. Restructuring under the proposed framework may be invoked up to September 30, 2021 and shall have to be implemented within 90 days after invocation.

(b) In respect of individual borrowers and small businesses who have availed restructuring of their loans under Resolution Framework 1.0, where the resolution plan permitted moratorium of less than two years, lending institutions are being permitted to use this window to modify such plans to the extent of increasing the period of moratorium and/or extending the residual tenor up to a total of 2 years. Other conditions will remain the same.

(c) In respect of small businesses and MSMEs restructured earlier, lending institutions are also being permitted as a one-time measure, to review the working capital sanctioned limits, based on a reassessment of the working capital cycle, margins, etc.

Rationalisation of Compliance to KYC Requirements

18. Taking forward the initiatives of the Reserve Bank for enhancing customer convenience, it has been decided to rationalise certain components of the extant KYC norms. These include (a) extending the scope of video KYC known as V-CIP (video-based customer identification process) for new categories of customers such as proprietorship firms, authorised signatories and beneficial owners of Legal Entities and for periodic updation of KYC; (b) conversion of limited KYC accounts opened on the basis of Aadhaar e-KYC authentication in non-face-to-face mode to fully KYC-compliant accounts; (c) enabling the use of KYC Identifier of Centralised KYC Registry (CKYCR) for V-CIP and submission of electronic documents (including identity documents issued through DigiLocker) as identify proof; (d) introduction of more customer-friendly options, including the use of digital channels for the purpose of periodic updation of KYC details of customers.

19. Further, keeping in view the COVID related restrictions in various parts of the country, Regulated Entities are being advised that for the customer accounts where periodic KYC updating is due/pending, no punitive restriction on operations of customer account(s) shall be imposed till December 31, 2021 unless warranted due to any other reason or under instructions of any regulator/enforcement agency/court of law, etc. Account holders are requested to update their KYC during this period.

Utilisation of Floating Provisions and Countercyclical Provisioning Buffer

20. In order to mitigate the pandemic related stress on banks and as a measure to enable capital conservation, banks are being allowed to utilise 100 per cent of floating provisions/countercyclical provisioning buffer held by them as on December 31, 2020 for making specific provisions for non-performing assets with prior approval of their Boards. Such utilisation is permitted with immediate effect and up to March 31, 2022.

Relaxation in Overdraft (OD) facility for States Governments

21. To enable the State Governments to better manage their fiscal situation in terms of their cash-flows and market borrowings, certain relaxations are being permitted with regard to availment of Overdraft (OD) facilities. Accordingly, the maximum number of days of OD in a quarter is being increased from 36 to 50 days and the number of consecutive days of OD from 14 to 21 days. This facility will be available up to September 30, 2021. The Ways and Means Advance (WMA) limits of states have already been enhanced on April 23, 2021.

22. The relevant circulars/notifications relating to all the announcements will be issued separately, starting today.

Concluding Remarks

23. The immediate objective is to preserve human life and restore livelihoods through all means possible. The second wave, though debilitating, is not unsurmountable. As I have said earlier, it is during our darkest moments that we must focus on the light. We have lessons to draw from our experience of last year, when as a nation we came together and overcame the once-in-a-generation challenge imposed by the first wave of the pandemic.

24. At the RBI, we stand in battle readiness to ensure that financial conditions remain congenial and markets continue to work efficiently. We will work in close co-ordination with the Government to ameliorate the extreme travails that our citizens are undergoing in this hour of distress. We are committed to go unconventional and devise new responses as and when the situation demands. We must also stay focused on our future, which appears bright even at this juncture, with India set to emerge as one of the fastest growing economies in the world. Today, we have taken some steps and we will continue to be proactive throughout the year – taking small and big steps – to deal with the evolving situation. We must remain resolutely focused on a post pandemic future of strong and sustainable growth with macroeconomic and financial stability. I call upon all stakeholders to come forward once again to address the challenges posed by the current wave of the pandemic, while remaining on guard against future waves. In closing, I again quote the words of Mahatma Gandhi, “Our faith should be like an ever-burning lamp which not only gives us light but also illuminates the surroundings.”²

Thank you, Namaskar.

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April 14, 2015

Dear All

Welcome to the refurbished site of the Reserve Bank of India.

The two most important features of the site are: One, in addition to the default site, the refurbished site also has all the information bifurcated functionwise; two, a much improved search – well, at least we think so but you be the judge.

With this makeover, we also take a small step into social media. We will now use Twitter (albeit one way) to send out alerts on the announcements we make and YouTube to place in public domain our press conferences, interviews of our top management, events, such as, town halls and of course, some films aimed at consumer literacy.

The site can be accessed through most browsers and devices; it also meets accessibility standards.

Please save the url of the refurbished site in your favourites as we will give up the existing site shortly and register or re-register yourselves for receiving RSS feeds for uninterrupted alerts from the Reserve Bank.

Do feel free to give us your feedback by clicking on the feedback button on the right hand corner of the refurbished site.

Thank you for your continued support.

Department of Communication

Reserve Bank of India

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