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The Reserve Bank of India (RBI) has decided to put in place a secondary market Government Security Acquisition Programme (G-SAP) 1.0 for orderly evolution of the yield curve amid comfortable liquidity.
In the first quarter, the central bank will be conducting G-SAP aggregating ₹1-lakh crore, Governor Shaktikanta Das said.
The first auction under G-SAP aggregating ₹25,000 crore will be conducted on April 15, 2021.
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Reserve Bank of India Governor Shaktikanta Das-headed rate-setting panel MPC started its three-day deliberations on the next monetary policy on Monday amid a sudden surge in Covid-19 cases and the government’s recent mandate asking the central bank to keep retail inflation around 4 per cent.
The RBI will announce the resolution of the Monetary Policy Committee (MPC) on April 7.
Also read: RBI seen leaving repo rate unchanged in first review of FY22
Experts are of the view that the RBI will maintain status quo on policy rates at its first bi-monthly monetary policy review for the current fiscal. It is also likely to maintain an accommodative policy stance.
The policy repo rate or the short-term lending rate is currently at 4 per cent, and the reverse repo rate is 3.35 per cent.
Last month, the government had asked the RBI to maintain retail inflation at 4 per cent with a margin of 2 per cent on either side for another five-year period ending March 2026.
Also read: Govt’s borrowing plan to mount pressure on G-Sec yields in H1
M Govinda Rao, Chief Economic Advisor, Brickwork Ratings (BWR), said given the rise in the spread of coronavirus infections and the imposition of fresh restrictions to contain the virus spread in the major parts of the country, RBI is likely to continue with its accommodative monetary policy stance in the upcoming MPC meeting.
“Considering the elevated inflation levels, BWR expects the RBI MPC to adopt a cautious approach and hold the repo rate at 4 per cent,” Rao said.
Rao noted that in the last MPC, RBI initiated measures towards the rationalisation of excess liquidity from the system by announcing a phased hike in the cash reserve ratio (CRR) for restoration to 4 per cent.
“In the current scenario, the RBI may like to drain in excess liquidity, while higher borrowings and the frontloading of 60 per cent borrowings in H1 FY21 may put pressure on yields, and hence, the RBI may go slow in reversing its liquidity measures announced as a Covid-19 stimulus since March 2020,” Rao added.
Meanwhile, G Murlidhar, MD and CEO, Kotak Mahindra Life Insurance Company, said 2021 has seen a rise in yields across the globe in line with the vaccination-led optimism.
“However, the case for India is a little different this time, with a rapid rise in new Covid-19 cases over the last few weeks. In the upcoming policy, MPC may continue to emphasise the importance of ‘orderly evolution of the yield curve’ given benign inflation trajectory and second wave headwinds to nascent growth recovery,” said Murlidhar.
In a bid to control the price rise, the government in 2016 had given a mandate to RBI to keep retail inflation at 4 per cent, with a margin of 2 per cent on either side, for a five-year period ending March 31, 2021.
The central bank mainly factors in the retail inflation based on Consumer Price Index while arriving at its monetary policy. On February 5, after the last MPC meet, the central bank had kept the key interest rate (repo) unchanged citing inflationary concerns.
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Bond investors are seeking higher yields as with the rise in demand the prices should rise.
They see RBI winding back its accommodative measures as the economy recovers from the pandemic. Traders, therefore, see few incentives to buy bonds.
Borrowing costs
However, RBI, the manager of government borrowing, has to keep costs low for the government and is therefore looking at pumping liquidity to ensure yields are capped.
To support the programme, the RBI will seek to buy more than Rs 3 lakh crore of debt while capping the benchmark yield at 6%.
However, the benchmark 10-year bond as its yield keeps breaching 6%, a level that’s seen as a line in the sand for the Reserve Bank of India.
The central bank typically raises funds from banks, financial institutions, mutual funds and foreign institutions. It recently allowed retail investors also in the bond market.
Inflation woes
With the rising inflation, RBI, which operates the monetary policy, is mandated to raise rates to tame inflation. This brings in conflict with its role to keep borrowing costs low for the government.
Experts this conflict rising in the coming years as the government has guided that the fiscal deficit will higher for the next few years.
So how is RBI managing?
As long as inflation is low, the RBI steps in and purchases bonds, but when interest rates start rising, it will have to increase liquidity in the system and push down rates.
The central bank is already resorting to measures such as Operation Twist, or simultaneous buying and selling of bonds via open market operations (OMOs).
It has already conducted Rs 3 lakh crore of bond purchases under OMOs this year.
In Operation Twist, the central bank buys longer maturity papers and sells shorter maturity papers to keep liquidity neutral.
However, as corporates raise money at shorter yield, Operation Twist is crowding them out of the market.
The central bank has also undertaken measures such as long-term repo operations and targeted long-term repo operations to infuse liquidity into the system.
The hitch
However, the market is jittery over such a huge borrowing plan and it also sees certain RBI measures veering from the accommodative stance as inflation rises.
Already, the borrowing programme of the central government for this financial year till date has been of around Rs 13.17 lakh crore and those of state governments around Rs 7.17 lakh crore. All these purchases are reflecting losses on investor balance sheets.
The RBI which had cut cash reserve ratio (CRR) by 100 bps in March 2020 for a period of one year, has recently announced a phased restoration of CRR to 4 per cent from March 27, which is being seen as a move towards reversal of accommodative stance.
The RBI’s strategy of pursuing multiple objectives such as exchange rate management to stop the rupee from appreciation, inflation control and liquidity management has led to confusion in the market.
Due to this the yields remain elevated. The spread of 10-year government bond over the repo rate has remained widened as also the spread of 10-year bonds over 1 year T-bills has also widened.
Some relief
The recent rise in international oil prices may reduce upward pressure on the rupee, which may give RBI elbowroom to reduce dollar purchases and step up bond buys to ensure adequate liquidity in the local market, and help the government borrowing programme.
While the market remains unconvinced over RBI’s ability to manage the government’s borrowing programme, in February, RBI governor Shaktikanta Das had exuded confidence that it will able to manage the high quantum of government borrowings at Rs 12 lakh crore for the next fiscal in a “nondisruptive” manner.
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RBI had virtually banned cryptos back in 2018. (File image)
Reserve Bank of India (RBI) Governor ShaktiKanta Das on Thursday said that there is no difference of opinion between the central bank and the government on cryptocurrencies in India. Comments from the RBI Governor have come against the backdrop of prevailing uncertainty around the future of cryptocurrencies like bitcoin India. While the RBI has retained its tough stance on alleged cryptocurrencies or crypto-related risks to financial stability and the credit system so far and had, in fact, virtually banned cryptos back in 2018, the government has seemed to be open to experiments around cryptos instead of an outright ban.
“I do not think there is any difference of opinion between the RBI and the Central government on cryptocurrencies,” Shaktikanta Das said at the India Economic Conclave. The Governor also said that both the RBI and the government are committed to financial stability and that RBI has flagged some ‘major concerns’ to the government on cryptocurrencies. However, “it is still under examination, the government will come out with a decision on it.” In February this as well, Das had told CNBC-TV18 that “we have major concerns from the financial stability angle” even as the RBI has been looking to launch a digital currency.
While the government is likely to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 in the ongoing Parliament session to ban all ‘private’ cryptocurrencies, Finance Minister Nirmala Sitharaman’s at the recently held India Today Conclave had said that “while the RBI may take a call on official cryptocurrency but from our side, we are very clear that we are not shutting off all options.” Even as crypto startups had welcomed Sitharaman’s statement, a Reuters report days later, citing a senior government official, said that India will propose a law to ban cryptocurrencies and fine anyone trading in the country or even holding such digital assets.
Amid the confusion over the crypto ban, Aadhaar architect Nandan Nilekani on Monday had backed the use of crypto among people. “We should think of crypto as an asset class and allow people to have some crypto. Crypto as a transaction medium will not work as fast as UPI, which is targeting a billion transactions a day. However, crypto has enormous capital,” Nilekani had said in a Clubhouse session on Monday with Silicon Valley angel investor Balaji Srinivasan and Blume Ventures’ Managing Partner Karthik Reddy.
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“(In) no way will it (proposed ARC) jeopardise the activities of the existing ARCs. I think there is scope to have one more strong ARC…,” the governor said at an event organised by the Bombay Chamber of Commerce.
There are close to 28 asset reconstruction companies operating in the country at present.
Das said the proposal for setting up an ARC was given by public sector lenders to the government, which accepted it and announced it in the Budget.
The proposed entity will take over stressed assets from the books of public sector banks, and try to resolve them like any other ARCs are doing, he noted.
Das also said strengthening of regulatory architecture for existing ARCs is very much on the central bank’s agenda.
“Refining and further upgrading the regulatory architecture in respect of ARCs to ensure that they have a skin in the game and they are very much in business, is one aspect which is receiving a lot of attention from us,” he said, adding last year he had interacted with a group of ARCs but COVID-19 slowed progress on that front.
Speaking about stressed assets, the governor said there is growing awareness and realisation among banks in dealing with NPAs.
Even during the period when the Supreme Court ordered an asset classification standstill, banks proactively provisioned for stressed assets, he said.
The governor said RBI has also sharpened and deepened its supervisory methods and is now going to deep dive into areas of banking that were unexplored earlier.
With the help of the Central Repository of Information on Large Credits (CRILC) data coming in from banks on a regular basis, RBI has an idea on the quantum of stressed assets in various default buckets, he said.
“We have a precise idea of the build up of stressed assets in banks and as soon as we see a sign of stress, we immediately enter into a discussion with banks and proactively deal with the problems,” he emphasised.
The governor said apart from RBI’s supervisory and regulatory initiatives, the key to all issues is improving the governance in both public and private sector banks.
One area which requires focus of the bank management is on improving their credit appraisal skills and taking measures to see whether evergreening of loans, which was happening at some point, is suitable or not, Das said.
He also said the country’s financial sector currently is in a much better place than it was earlier. HV ABM ABM
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Prospective owners wanting to take over public sector banks (PSBs) will have to meet the Reserve Bank of India’s (RBI) ‘fit and proper’ criteria and ensure that the banks, post- takeover, are well capitalised according to Governor Shaktikanta Das.
This observation comes in the backdrop of Finance Minister Nirmala Sitharaman’s announcement in the Budget that as part of the Government’s “strategic disinvestment and sale” programme it proposes to take up the privatisation of two PSBs.
“It (privatisation of PSBs) is a major reform which the government has embarked upon. So, as the owner of public sector banks, they will decide.
“But, nonetheless, I must add that there is a constant dialogue between the RBI and the Central government,” Das said in an interview to news channel CNBC TV18.
The Governor emphasised that in this privatisation exercise, RBI is directly concerned with two aspects — one is the ‘fit and proper’ criteria (the new owners should meet this requirement of RBI), and two, RBI would be very keen that the Bank, post takeover, is well capitalised.
And the promoter, who takes over the PSB, should have enough financial strength to capitalise the bank significantly, he added.
“Other than that, the approach, etc, these are constantly under discussion and the Government does consult us as and when required. The final call will be that of the government,” Das said.
He observed that amendment to the Bank Nationalisation Act will be required. And the Government is working on that.
As per the ‘Report of the Internal Working Group to Review Extant Ownership Guidelines and Corporate Structure for Indian Private Sector Banks’, the Reserve Bank issued detailed guidelines in February 2005 on ownership and governance of private sector banks. The broad principles underlying the framework of this policy was to ensure that the ultimate ownership and control of private sector banks is well diversified.
While diversified ownership minimises the risk of misuse or imprudent use of leveraged funds, the fit and proper criteria, were viewed as over-riding consideration in the path of ensuring adequate investments, appropriate restructuring and consolidation in the banking sector.
Per the Report, globally, the regulators give approvals on a case-to-case basis subject to a number of considerations including the overall sectoral impact of the transaction and the satisfaction of ‘fit and proper’ principles by the person/s acquiring the stake, which may inter alia include reputation, financial soundness, credit standing etc.
In case of acquirers being non-individuals, the due diligence may extend even to the parent institution or major shareholders.
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There are dedicated ombudsman schemes devoted to consumer grievance redressal in banking, non-bank finance companies and digital transactions, respectively, at present.
“To make the alternate dispute redress mechanism simpler and more responsive to the customers of regulated entities, it has been decided to implement, inter alia, integration of the three Ombudsman schemes and adoption of the ‘One Nation One Ombudsman‘ approach for grievance redressal,” governor Shaktikanta Das said on Friday.
The move is intended to make the process of redress of grievances easier by enabling the customers of the banks, NBFCs and non-bank issuers of prepaid payment instruments to register their complaints under the integrated scheme, with one centralised reference point, he said.
The RBI is targeting to roll out the e-Integrated Ombudsman Scheme in June 2021, he said.
Das said financial consumer protection has gained significant policy priority across jurisdictions and the RBI has been taking a slew of initiatives on the same.
“In line with the global initiatives on consumer protection, RBI has taken various initiatives to strengthen Grievance Redress Mechanism of regulated entities,” he said.
The RBI had operationalised complaint management system (CMS) portal as one stop solution for alternate dispute resolution of customer complaints not resolved satisfactorily by the regulated entities.
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Finance Ministers generally look for endorsement of their Budget exertions from two entities — the stock market and the central bank. The first comes right away, practically simultaneously, alongside the Budget. The second, from the central bank, comes in its monetary policy announcement immediately following the Budget.
Various stakeholders draw their cues from the signals that come from these two informed assessments. While market reactions are easily gauged by index and individual stock movements, the central bank’s statement and the Governor’s comments are carefully parsed. They are read to detect if the central bank is fully on board with the government plans or whether there are any reservations. Of course, even when there are misgivings, they are always couched in mild and respectful language.
The Finance Minister’s Budget has got the unequivocal thumbs up from both this time. The market was up by a whopping 5 per cent in a single day — impressed apparently by the focus on growth, infrastructure spending, privatisation plans and the attempt at transparency on the fiscal deficit numbers.
Today, the RBI monetary policy committee has provided its own support. It has left the key repo rate unchanged at 4 per cent. The RBI has already cut this rate by 250 basis points over the past two years, with about 115 bps of this coming in the past year in response to the pandemic. The policy guidance is in line with its stance of remaining ‘accommodative’ as long as necessary. Inflation numbers as evidenced by the movement in consumer price index (CPI) are relatively mild and within the comfort zone for the central bank. The projected CPI for the first half of the next year also reflects an easing to a range of 5 per cent and moving further down to 4.3 per cent in the third quarter.
The key question in this policy was what the RBI would say about the government borrowing programme. The government is set to borrow about ₹12 lakh crore or about ₹25,000 crore every week in the next year. The RBI has provided an assurance that it will manage it in a non disruptive manner. This was par for the course.
And then the RBI pulled out a rabbit from its hat by announcing direct retail participation in government bonds buying through the RBI. This is no doubt a very important step — and at least in theory, helps diversify the lender base for the government. In the long run, this may help provide more stable interest rates for both the government and the entire economy. This is also a good option for high networth individuals who may be uneasy with the vertiginous climb of the stock market indices currently.
However, it bears remembering (even as one receives the news with optimism) that past experience with regard to fostering retail participation through various other agencies have been lukewarm. Also, these measures, welcome as they are, will take time to fructify. It may be a bit too much to expect that retail investors are going to queue up and jostle outside RBI doors to buy government bonds this year (like they did to return old currency notes four years ago !)
The economy is set to begin recovering from the troughs of the past two years. As the Governor put it succinctly in his concluding remarks, the only way for the economy to go now is — up. How the RBI handles the massive borrowing programme as well as rising corporate demand for credit — without letting interest rates get out of hand — is going to be it’s biggest challenge in the year ahead. The bond markets remain sceptical if the initial movements are any indication.
(The writer is a Mumbai-based freelance journalist)
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Cheque Truncation System (CTS) is a clearing system undertaken by the RBI for quicker cheque clearance where an electronic image of the cheque is transferred with vital essential data instead of physical cheque.
RBI Governor Shaktikanta Das said, “The coverage of the Cheque Truncation System (CTS) has been extended to all legacy clearing houses by September 2020. It is, however, noticed that about 18,000 bank branches are still outside any formal clearing arrangement.”
Das added, “It is now proposed to bring all these branches under CTS clearing by September 2021. With this measure, all bank branches in the country would be covered under the CTS. This will enhance customer convenience and bring in operational efficiency to paper based clearing system.”
CTS has been in use since 2010 and covers around 150,000 branches across three cheque processing grids. All the erstwhile 1219 non-CTS clearing houses have been migrated to CTS and it has been observed by RBI that about 18000 bank branches are still outside any formal clearing arrangement.
To bring operational efficiency in paper based clearing and making the process of collection and settlement of cheques faster the RBI has proposed to bring all such branches under the CTS mechanism by 2021 and will issue separate operational guidelines in a month’s time.
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Each time a person without adequate balance in his/her account tries to withdraw cash from an ATM or uses debit cards to make a payment, the bank penalises him/her Rs 25 plus GST as ‘transaction decline’ charge. This can be termed as the digital version of a charge for bouncing a cheque.
“Such exorbitant penalty for digitally paying consumers ‘disincentivises’ them, thereby many are moving away from digital payments. This applies more to the marginalised class of depositors who may not always have adequate funds in their accounts,” the association said in its written representation.
The body said that these charges are not only unjust but also against the principle of ‘transaction decline’ as this is not like issuing a cheque to a third-party but like a depositor walking into a branch and trying to draw cash. Also, there is no cost to the card-issuing bank in such transactions.
“The NPCI does not consider it as a transaction and hence no interchange is paid by the card-issuing bank,” the letter said. “Though, we can still understand that as a deterrent, banks charge for cheque bounce, where cheque/ECS returns involve third parties and create distrust in the payment mode. However, declined POS/ATM transactions due to insufficient balances is nowhere on a par with cheque/ECS returns. It does not involve any intent of systemic inconvenience or distrust to a third party,” the bank said.
In its representation to the RBI, the association said that prior to January 2020, SBI was charging Rs 17.7 per non-cash digital transaction for over 12 crore basic savings bank deposit accounts. “SBI has agreed to refund the exorbitant charges only for the period starting January 2020, but not prior to that. As disclosed by SBI, during FY20, SBI collected over Rs 150 crore towards service charges from such accounts,” the association said.
Another wrongful charge highlighted by the association was the one imposed by payment aggregators on consumers for making digital payments on e-commerce websites. While the merchants and the banks claimed that they were not the ones pocketing the charge, they did facilitate these charges. which were against the government mandate.
The association also urged the RBI governor not to cut interest rates as inflation has been high and oil prices were firming up.
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