IFSCCodeof.in

The Reserve Bank of India today released the October 2021 issue of its monthly Bulletin. The Bulletin includes Governor’s Statement, Monetary Policy Statement, 2021-22 Resolution of the Monetary Policy Committee (MPC) October 6-8, 2021, Monetary Policy Report – October 2021, five Speeches, five Articles and Current Statistics.

The five articles are: I. State of the Economy; II Should Financial Stability be a Monetary Policy Goal? Evidence from India; III. Return on Physical Capital: Lessons from Firm Level Data; IV. Renewable Energy – The Silent Revolution; and V. The low yield environment and Forex Reserves management.

I. State of the Economy

Amidst an accentuation of global risks, the Indian economy is picking up steam, although the recovery is uneven and trudging through soft patches. The step up in vaccination, slump in new cases/mortality rates and normalising mobility has rebuilt confidence. Domestic demand is gaining strength while aggregate supply conditions are recouping, powered by the robust performance of kharif agricultural production and revival in manufacturing and services. Softer than expected food prices have eased headline inflation into a closer alignment with the target.

II. Should Financial Stability be a Monetary Policy Goal? Evidence from India

Literature is divided on whether financial stability should be adopted by an inflation targeting central bank as an ‘explicit’ policy objective. The present article empirically evaluates the question in the Indian context where financial stability is not an ‘explicit’ goal of monetary policy, but macroprudential policies and interest rate decisions are coordinated for simultaneous pursuit of both goals. Major highlights of the article are presented below:

Highlights

• In this article, an aggregate macroprudential policy (MPP) index has been constructed using risk weights and provisioning for standard assets in housing, commercial real estate (CRE), consumer loans and capital market exposure; loan-to-value (LTV) ratio and cash reserve ratio (CRR).

• An empirical analysis using macroeconomic variables for the period June 1997 to March 2020 suggests that monetary policy does exert influence over inflation and business cycles, but, at the same time, does not intensely influence financial cycles. Financial cycles are influenced by credit cycles, which in turn are impacted by macroprudential policies. Juxtaposing the MPP index with the repo rate shows that macroprudential policies in India have generally evolved in sync with the monetary policy.

• The article concludes that the approach of using monetary and macroprudential policies in a coordinated manner has served the economy well, even after the adoption of flexible inflation targeting (FIT).

III. Return on Physical Capital: Insights from Firm Level Data

Return on physical capital (RoPC) is an important metric to gauge value creation in manufacturing due to the predominant role of physical capital in production. This study explores the variation in RoPC in the formal manufacturing sector across various firm characteristics such as age, location, size, type of ownership, capital intensity and type of activity using the firm level Annual Survey of Industries (ASI) data for the year 2017-18.

Highlights

• The aggregate RoPC of the Indian formal manufacturing sector estimated at 19.5 per cent stands comparable to the returns observed in other developing countries.

• In MSMEs category, RoPC increases with size of the firms. For large firms, it decreased owing to its high capital-intensity.

• The RoPC of Government (public) companies is slightly higher than that of Non-Government (public) companies. Nevertheless, the average return of Non-Government (private) firms is significantly higher than that of Government (private) firms.

• RoPC holds an inverted U-shape relationship with firms’ age and labour employed, while it decreases monotonically with capital intensity.

• Region wise, the north-east outperformed others due to very high returns of Pharma industry in Sikkim and Petroleum industry in Assam. These two industries pulled up the aggregate RoPC of the entire region.

IV. Renewable Energy – The Silent Revolution

Renewable Energy (RE) has played a pivotal role in India’s transition to a power surplus country. This article examines India’s current electricity market structure and the role of RE in electricity inflation. Empirical analysis suggests that sustained fall in generation costs for RE sources are exerting downward pressures on electricity tariffs in the whole sale and short-term markets. It argues that realizing the potential of the progress made in RE development of the promises of RE for a greener and low-cost economy warrants strategic policy changes, focusing on curbing cross-subsidisation, speedier resolution of financial stress facing DISCOMs, promotion of decentralised production and distribution and creating an environment for innovations and faster adoption of green technology.

Highlights

• The share of REs in overall installed capacity has more than tripled from 11.8 per cent at end-March 2015 to 37.9 per cent at end-August 2021. The Government of India (GoI) has set a target of 175 GW installed capacity by 2022 for renewable electricity generation.

• Empirical analysis shows significant positive relation between producer price of electricity (WPI electricity) and auction prices for conventional power, RE energy and spot price of energy exchange.

• As regards CPI electricity, no meaningful relation was observed with the same set of regressors. The methodology for calculation of retail power tariffs, inter-sectoral cross subsidisation and the exclusion of other segments of electricity consumption barring household consumption in CPI electricity may have bearing on this result.

• India’s per capita electricity consumption at 804.5 kwh in 2014 is much lower than the world average of 3132.8 kwh. RE by providing low-cost electricity can meet the increased demand in coming years.

• Deregulation of the tariff structure and success in minimising transmission and distribution losses and cross-subsidisation could promote efficient price discovery and attract higher RE investment.

V. The Low Yield Environment and Forex Reserves Management

This article highlights the prominent drivers of the declining trend in nominal yields and the scope for looking beyond traditional ways to manage foreign exchange reserves in order to augment portfolio returns without undermining the goals of safety and liquidity.

Highlights

• The short term and long-term interest rates in advanced economies have been witnessing a trend decline since the early 1980s. This ultra-low interest rate environment is a reflection of structural changes in the advanced economies and global financial markets, in particular well anchored low inflation/expected inflation, and trend decline in equilibrium real interest rates over the last 3 to 4 decades.

• This low yield environment has made it an arduous task for the asset managers in general and reserve managers in particular, to generate reasonable returns. In light of the likely persistence of various structural reasons for low yields, it is imperative that reserve managers look beyond the traditional approaches for the management of reserves to maintain and enhance returns.

• Some alternate ways to enhance returns on forex reserves could be increasing duration of portfolio, investment in new products/asset classes, active management of gold and investment in new markets. The choice of strategy, however, would require to be tailored to suit the risk appetite, investment priorities, skill sets and operational capabilities of individual institutions.

(Yogesh Dayal)     
Chief General Manager

Press Release: 2021-2022/1062

Government of India (GOI) has announced the sale (re-issue) of four dated securities for a notified amount of ₹24,000 crore as per the following details:

2. GoI will have the option to retain additional subscription up to ₹2,000 crore each against one or more security/ies mentioned above.

3. The securities will be sold through Reserve Bank of India Mumbai Office, Fort, Mumbai – 400001. The sale will be subject to the terms and conditions spelt out in the ‘Specific Notification’ mentioned above and the General Notification F.No.4(2)–W&M/2018, dated March 27, 2018.

4. The auction will be conducted using uniform price method for 4.26% GS 2023, 5.63% GS 2026, 6.67% GS 2035 and multiple price method for 6.67% GS 2050. Both competitive and non-competitive bids for the auction should be submitted in electronic format on the Reserve Bank of India Core Banking Solution (E-Kuber) system on October 22, 2021 (Friday). The non-competitive bids should be submitted between 10.30 a.m. and 11.00 a.m. and the competitive bids should be submitted between 10.30 a.m. and 11.30 a.m. The result will be announced on the same day and payment by successful bidders will have to be made on October 25, 2021 (Monday).

5. Bids for underwriting of the Additional Competitive Underwriting (ACU) portion can be submitted by ‘Primary Dealers’ from 9.00 a.m. up to 9.30 a.m. on October 22, 2021 (Friday) on the Reserve Bank of India Core Banking Solution (E-Kuber) system.

6. The Stocks will be eligible for “When Issued” trading for a period commencing from October 20, 2021 – October 22, 2021.

7. Operational guidelines for Government of India dated securities auction and other details are given in the Annex.

Ajit Prasad
Director   

Press Release: 2021-2022/1061

ANNEX

Type of Auction

1. For multiple price-based auction, successful bids will get accepted at the respective quoted yield/price for the security. For uniform price-based auction, bids will get accepted at the cut off yield/price accepted in the auction.

2. The auction will be yield based for new security and price based for securities which are re-issued.

3. In case of a Floating Rate Bonds (FRB), the auction will be spread-based for new security and price based for securities which are reissued. At the time of placing bids for new FRB, the spread should be quoted in percentage terms.

Minimum Bid Size

4. The Stocks will be issued for a minimum amount of ₹10,000/- (nominal) and in multiples of ₹10,000/- thereafter.

Non-Competitive Segment

5. In all the auctions, Government Stock up to 5% of the notified amount of sale will be allotted to the eligible individuals and institutions under the Scheme for Non-competitive Bidding Facility in the Auctions of Government Securities.

6. Each bank or Primary Dealer (PD) on the basis of firm orders received from their constituents will submit a single consolidated non-competitive bid on behalf of all its constituents in electronic format on the Reserve Bank of India Core Banking Solution (E-Kuber) system.

7. Allotment under the non-competitive segment to the bank or PD will be at the weighted average rate of yield/price of the successful bids that will emerge in the auction on the basis of the competitive bidding.

Submission of Bids

8. Both competitive and non-competitive bids for the auction should be submitted in electronic format on the Reserve Bank of India Core Banking Solution (E-Kuber) system.

9. Bids in physical form will not be accepted except in extraordinary circumstances.

Business Continuity Plan (BCP)-IT failure

10. Only in the event of system failure, physical bids will be accepted. Such physical bids should be submitted to the Public Debt Office, Mumbai through (email; Phone no: 022-22632527, 022-22701299) in the prescribed form which can be obtained from RBI website (https://www.rbi.org.in/Scripts/BS_ViewForms.aspx) before the auction timing ends.

11. In case of technical difficulties, Core Banking Operations Team should be contacted (email; Phone no: 022-27595666, 022-27595415, 022-27523516).

12. For other auction related difficulties, IDMD auction team can be contacted (email; Phone no: 022-22702431, 022-22705125).

Multiple Bids

13. An investor can submit more than one competitive bid in electronic format on the Reserve Bank of India Core Banking Solution (E-Kuber) system.

14. However, the aggregate amount of bids submitted by a person in an auction should not exceed the notified amount of auction.

Decision Making Process

15. On the basis of bids received, the Reserve Bank will determine the minimum price up to which tenders for purchase of Government Stock will be accepted at the auctions.

16. Bids quoted at rates lower than the minimum price determined by the Reserve Bank of India will be rejected.

17. Reserve Bank of India will have the full discretion to accept or reject any or all bids either wholly or partially without assigning any reason.

Issue of Securities

18. Issue of securities to the successful bidders will be by credit to Subsidiary General Ledger Account (SGL) of parties maintaining such account with Reserve Bank of India or in the form of Stock Certificate.

Periodicity of Interest Payment

19. Interest on the Government Stock will generally be paid half-yearly other than in case of securities with non-standard maturities. The exact periodicity of coupon payment is invariably mentioned in the specific notification for the issue of security.

Underwriting of the Government Securities

20. The underwriting of the Government Securities under auctions by the ‘Primary Dealers’ will be as per the “Revised Scheme of Underwriting Commitment and Liquidity Support” announced by the Reserve Bank vide circular RBI/2007-08/186 dated November 14, 2007 as amended from time to time.

Eligibility for Repurchase Transactions (Repo)

21. The Stocks will eligible for Repurchase Transactions (Repo) as per the conditions mentioned in Repurchase Transactions (Repo) (Reserve Bank) Directions, 2018 (Reserve Bank) Directions, 2018 as amended from time to time.

Eligibility for ‘When Issued’ Trading

22. The Stocks will be eligible for “When Issued” trading in accordance with the guidelines on ‘When Issued transactions in Central Government Securities’ issued by the Reserve Bank of India vide circular No. RBI/2018-19/25 dated July 24, 2018 as amended from time to time.

Investment by Non-Residents

23. Investments by Non-Residents are subject to the guidelines on ‘Fully Accessible Route’ for Investment by Non-residents in Government Securities and Investment by Foreign Portfolio Investors (FPI) in Government Securities: Medium Term Framework (MTF).