Tag: sbi report

RBI may deflate hype around reverse repo rate hike: SBI report

Banking & Finance

[ad_1]

Read More/Less


The Reserve Bank of India (RBI) may deflate the hype around reverse repo hike in the monetary policy by explaining the virtues of using reverse repo change as a pure liquidity tool and not a rate tool, according to State Bank of India’s economic research report “Ecowrap”.

It emphasised that delaying normalisation measures is prudent in the current situation which would also give time for economic recovery to strengthen further.

“We believe the talks of a reverse repo rate hike in the Monetary Policy Committee (MPC) meeting may be premature as the RBI has been largely able to narrow the corridor without the noise of rate hikes and ensuing market cacophony,” said Soumya Kanti Ghosh, Group Chief Economic Advisor, SBI.

Reverse repo rate is the interest rate that banks earn for parking short-term surplus liquidity with RBI.

Section 45Z (3) of the amended RBI Act of 2016 clearly states that, “The Monetary Policy Committee shall determine the policy rate required to achieve the inflation target”.

Ghosh emphasised that nowhere in the MPC’s mandate is there any reference to its role in liquidity management, which remains internal to the functioning of the Bank consistent with its policy stance. Thus, the RBI is not obliged to act on reverse repo rate only in MPC.

Unconventional tool

Also, change in reverse repo rate is an unconventional policy tool that the RBI has effectively deployed during crisis when it moved to a floor instead of the corridor.

In this regard, the report made a reference to Goodhart’s (2010) observations that the width of the policy corridor acts as an independent instrument for the central bank in a crisis and an asymmetric corridor is a logical outcome.

According to SBI’s economic research department, the central bank can (for whatsoever reason) supply any amount of additional liquidity without pushing short-term money market rates below the key policy rate.

“Thus, the interest rate can be set to achieve monetary goals, while the amount of liquidity in the banking system can play the role of financial market stabilisation. Since the pandemic, the RBI has done exactly this balancing act, and the pandemic is not yet over!” Ghosh said.

Referring to the US Fed indicating accelerating the bond tapering program, thereby ending it earlier than anticipated, the report observed that the rate hikes are also in offing sooner than expected as inflation is no longer considered as transitory.

“Unless Omicron proves more fatal than Delta variant, this in turn would imply strengthening of the dollar and depreciation pressures for the rupee. Thus RBI would have to look for multiple objectives,” the report said.

Ecowrap noted that the forthcoming monetary policy comes against the backdrop of the global scare of Omicron, that we are still trying to unravel.

However, the good thing is India has now vaccinated 125 crore people and this might have given the country better preparation for the future as the gap between the first and second wave was only 2 months.

“…The pandemic has also worked its way through the population resulting in larger herd immunity…” the report said.

Calibrated progress

Ghosh noted that the RBI has made a calibrated progress towards liquidity normalisation since the October policy with amount parked in overnight fixed reverse repo declining to ₹2.6 lakh crore from ₹3.4 lakh crore in pre-October policy

The lower increase in currency in circulation as more people are now using digital modes of payments has also contributed to the build-up of the surplus liquidity.

The report said the RBI has also largely achieved its objective of pushing up short term rates with 3 month T-Bill rate which was below reverse repo for major part of August now at 3.52 per cent, factoring in the impact of variable reverse repo rate. Similarly, 6 month and 1-year T-Bill rates have shifted upwards by 20-30 basis points since last MPC.

[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , , , ,

Need to devise better formula for setting States’ borrowings, says SBI report

Banking & Finance

[ad_1]

Read More/Less


There is a need to devise a better formula for setting States’ borrowings and delink it from advance Gross State Domestic Product estimates, stated the State Bank of India’s economic research report, “Ecowrap”.

Referring to the Finance Commission’s (FC) recommendation that borrowings by States should be linked to the size of the GSDP, SBI’s economic research department observed that given the borrowings incentivisation, it also resulted in States projecting ambitious GSDP numbers during the budget presentations that are only revised downwards later.

“As a logical corollary, States get access to higher advance borrowing based on their higher GSDP Budget Estimate (BE) projections,” it said.

“Certain States including West Bengal, Maharashtra, Andhra Pradesh, Chhattisgarh, Uttar Pradesh, Tamil Nadu and Rajasthan have borrowed higher than 3 per cent of their actual GSDP in either or all the years ending FY21,” said Soumya Kanti Ghosh, Group Chief Economic Advisor, SBI.

He underscored that even if the additional borrowing conditions set by the FC are considered for the years, the trend is only getting broad-based.

Recommendations

The report recommended that States that are better-behaved may be rewarded in terms of an increase in size of the permissible borrowing in the subsequent year where permissible borrowing is scaled up by the lower advance borrowings.

“This scale-up can also come at a rate lower than market rate of interest,” Ghosh said.

The report suggested that a similar scheme could be envisaged for States that are borrowing more, with a scale-down in the permissible borrowing or the higher advance borrowings may be resorted to only at a rate that is higher than market rate of interest.

Another possible solution could be linking of the State borrowing to its own tax revenue. Such conditional limit on State borrowings finds echo in 15th Finance Commission recommendations also, the report said.

According to Ecowrap, in FY22, based on the 15th Finance Commission’s recommendation, the Centre had allowed States net market borrowing of up to 4 per cent of GSDP, additional 0.5 per cent of GDP conditional borrowing on fulfilment of power sector reforms.

Besides, the total amount of grants given to local bodies has increased. Of the ₹2.2 lakh crore grants permitted for FY22, ₹1.54 lakh crore is unconditional and the remaining ₹67,105 crore for local bodies is conditional and based on reform of urban local bodies, the report said.

Devolution to States

As per Ecowrap, the fiscal situation as of now looks promising even with the added expenditure that the Government has recently announced. It is only the disinvestment figures which could be undershot, it added.

Referring to the Centre’s net tax collections at ₹5.58 lakh crore for Q1FY22, the report said the Q1FY22 tax collections are 36 per cent of the budgeted tax collections. This figure used to be around 26-29 per cent in the previous years.

The Centre has budgeted ₹6.66 lakh crore as the States’ share in the tax collections.

With improvement in direct tax collections, it is expected that Centre will be able to provide this amount to States, thereby, helping them manage their finances better, the report said.

In the last fiscal, the Centre had budgeted ₹7.84 lakh crore, while it could only provide ₹5.5 lakh crore to them, it added.

[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , , ,

Large dollar supply will ensure that rupee appreciates: SBI report

Banking & Finance

[ad_1]

Read More/Less


The large supply of dollars will ensure that rupee will appreciate from the current levels, and this could potentially play to the advantage of the Reserve Bank of India (RBI) in inflation management, according to State Bank of India’s economic research report Ecowrap.

“The good thing is that given the prospects of higher domestic inflation, as supply disruptions mount, it is not doing any harm for the RBI to lean with the wind and let rupee appreciate as it is reducing imported inflation when metal prices are rising, and clearing the liquidity overhang to some extent,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

Referring to the rupee gaining 154 paise between April 12 (75.0550 to the dollar) to May 7(73.5175 to the dollar), SBI’s economic research department believes that this is perhaps the result of exchange rate anchored inflation targeting that the RBI has assiduously shifted to recently.

Changes in QPM

This is also evident from the recent changes in the RBI Quarterly Projection Model (QPM) model that has been calibrated to include balance of payments and exchange rate interactions as well, it added.

“So, what has changed? In the merchant market (in both spot and forward segment) there was an excess supply of $86 billion during April 2020 to February 2021.

“However, in the interbank market there has been excess demand of $72 billion. Overall, merchant dollar supply is far higher than demand as they anticipate a stronger rupee and hence may be holding to short position in dollars, without even adequate hedging,” said Ghosh.

Busting the myth of rupee over-valuation

This is being balanced by excess dollar demand in interbank market, but the net effect is a large supply of dollars at $14.4 billion, that has however reduced to $348 million in the last five months ended February 2021, he added.

Ghosh assessed that the supply of dollars in the spot market during April 2020 to February 2021 by the merchant segment was as much $101 billion, while in the forward merchant segment, there is an excess demand of $14.7 billion.

The interbank market, however, shows an excess demand in both the segments at $14.7 billion.

To neutralise any additional liquidity, the RBI is also intervening in the forward markets through swaps. The RBI is doing what is called a sell/buy swap, where it is selling the dollars now to buy it back at a future date and paying a premium.

“Intervention in forward market is an important aspect of maintaining financial stability, although the move has been gradual.

“Going by John Sparos (Economic Journal, 1959), the best way to fight currency speculation is to deliberately let the forward premia rise to unreasonable levels and thereby penalise the currency speculators as their exchange rate expectations about a depreciating domestic currency are belied,” said Ghosh.

Future challenge

The report underscored that rising forward premia makes the carry trade lucrative and inflows keep pouring, which again leads to further currency appreciation and hence more liquidity overhang.

“In the end, there could be limits to sterilised intervention and rise in forward premia beyond a threshold level. It may be noted that a high premia also deters importers from hedging their dollar positions,” opined Ghosh.

[ad_2]

CLICK HERE TO APPLY

Leave a comment , , ,