Will Shaktikanta Das Change the Picture of Indian Economy, Sensex& Rupee?

Urjit Patel’s sudden resignation is a clear indication of escalating tension between RBI and the government and then just a day after Patel’s resignation, appointment of Shaktikanta Das as the new governor insinuates something fishy in the whole series of events. But the question arises here is that will Das succumb to government’s mounting pressure or will he do the something off the track to handle situation?

Admittedly, the new incumbent at Mint Street starts off with a handicap. While his vast experience in managing economic affairs is not in question, he has an unfortunate reputation as the man under whom the government launched its controversial demonetisation programme. The speed with which he has been appointed has also raised questions whether this was the government’s game plan all along.

While several bureaucrats from the Finance Ministry have gone on to become excellent RBI governors and have asserted their independence, they did not assume office in similar circumstances. Simply put, Das will have to prove his independence. The dice is loaded against him, which means that given the circumstances, he will initially be seen to have been appointed to obey the diktats of the Finance Ministry. He will not only have to take an independent line, but must be seen to do so. He will have to work extra hard to show he is no pushover.

To be sure, tensions have always existed between the governor of the central bank and the government. No central bank is fully independent. That is true not just for India, but across the world. But these are not normal times. That two RBI governors have left their posts under the same government is not just unprecedented, but signals that the government does not know how to handle dissent. One could of course argue that is precisely why the soothing hand of a seasoned bureaucrat is needed to soothe tempers and Das fits that requirement.

The question is: what will be the cost of that compromise? Clearly, Urjit Patel thought that what the government was asking would not be in the best interests of the RBI, which is why he took the extreme step of resigning. Compromise cannot be a one way street — the government too will have to show maturity and a spirit of accommodation. It is in nobody’s interest to squander the reputation of the RBI, carefully built up over decades.

That said, the saving grace is that interest rates decisions are now taken by the Monetary Policy Committee, which insulates it from crises such as the governor suddenly resigning. Continuity of monetary policy is therefore taken care of, although it would be interesting to watch whether the new governor turns out to be a dove.

The immediate issues before Das are the ones that apparently forced Patel to resign — taking some banks out of the Prompt Corrective Action (PCA) framework, increasing powers of the RBI board, providing a liquidity window to non-banking finance companies, the appropriate level of RBI reserves and the one-day default norm.

How he handles these issues will be crucial for establishing his credibility. And he needs to swiftly earn this credibility, because, as he himself tweeted, “Emerging economies need to be prepared for prolonged global headwinds, emanating from US Fed rate hikes, intensifying trade conflicts, volatile oil prices and sanctions. Fiscal policies should remain prudent and monetary policies in sync with the curve.”

Will MPC Continue to Maintain A Status Quo on the Repo Rate?

Unequivocally two different pictures emerged from the analysis of current policy and performance review in comparison to October’s performance, by the Monetary Policy Committee in December.

Subsequent to the fall in crude oil prices by 20 percent and upsurge in the rupee by 5 percent, upside risks to inflation have, for now, turned to downside risks. No surprise then that most economists are predicting a status quo on rates.

48 of the 52 economists polled, believe that the MPC will continue to maintain a status quo on the repo rate. After 50 basis points in repo rate hikes so far this financial year, the benchmark rate now stands at 6.5 percent.

Beyond the near-term decision of keeping rates on hold, the MPC will need to do some soul-searching on its inflation forecasting abilities. Retail inflation has remained below forecasts for the last five months and is currently under the mid-point of the inflation target of 4 (+/- 2) percent.

To be sure, the MPC does not need to respond to monthly prints and is looking to bring inflation down to 4 percent in a durable manner. However, the trajectory of low food prices gives them enough reason to debate whether inflation will end the year lower than the projection of 3.9-4.5 percent.

Saugata Bhattacharya, chief economist at Axis Bank expects inflation to end the year just above 4 percent and sees a probability of the MPC moving back to a ‘neutral’ stance. Prachi Mishra, chief India economist at Goldman Sachs, argues to the contrary and expects the base effect on inflation to wear out. She expects rate hikes to resume in 2019.

At the October policy review, the committee had highlighted the upside risks to inflation emerging from oil prices. “Oil prices remain vulnerable to further upside pressures, especially if the response of oil-producing nations to supply disruptions from geopolitical tensions is not adequate,” the committee had noted in its resolution.

“The combination of the close to 25 percent fall in oil prices since the last policy meeting, the 5 percent appreciation of the rupee versus the U.S. dollar over the same time, and the absence of any MSP-related food inflation, suggests that inflation will remain low for longer,” wrote Pranjul Bhandari, chief India economist at HSBC India. Bhandari sees no change in rates in December but expects one rate hike in 2019.

At 7.1 percent, GDP growth came in lower than expectations for the second quarter of the current fiscal year. The recently released second quarter GDP data showed some signs of a fall in consumption growth, possibly due to rural distress and heightened crude oil prices.

WhatsApp Wheedled RBI for Expansion of Its Payments Services

Seeking expansion of its payment services to a plethora of its customers, WhatsApp Chief implored Reserve Bank of India to expand payments services to all its 200 million users in India.

Recently engulfed in the fake message controversy being promulgated on its platform, WhatsApp has already driven government’s hostility.

WhatsApp is waiting for a regulatory clearance to launch full-fledged payments operations in India – months after its ‘testing’ amassed nearly one million users, and almost two years since it first began discussions with the government on its payments services plans.

The development comes at a time when competitors such as Google have forged ahead with their payments offerings.

WhatsApp is currently piloting WhatsApp payments, and its Chief Chris Daniels has now written to the RBI urging that a formal approval be granted to take the payments product to all its users in the country.

“I write to request your formal approval to immediately expand WhatsApp’s BHIM UPI (Unified Payments Interface) compliant payments product to all users in India, giving us the opportunity to offer a useful and secure service that can improve the lives of Indian people through digital empowerment and financial inclusion,” Daniels said in the letter addressed to the RBI Governor.

The letter, dated November 5, mentions that WhatsApp’s partner banks have also submitted a request for formal approval.

When contacted, a WhatsApp spokesperson said the platform is working closely with the Indian government, National Payments Corporation of India (NPCI), and multiple banks, including payment service providers to expand the feature to more people and support the country’s digital economy.

“Today, almost 1 million people are testing WhatsApp payments in India. The feedback has been very positive, and people enjoy the convenience of sending money as simply and securely as sending messages,” the company’s spokesperson said, responding to a specific email query on the recent plea to the RBI.

In the letter, WhatsApp noted that the platform had rushed to ensure that the payments data is stored in India, immediately after the RBI came out with a directive outlining the new payments data storage requirements in April this year.

“Today, (the) RBI has unfettered supervisory access to payments data as prescribed by the RBI circular…,” said the letter. PTI has seen a copy of the letter.

The Facebook-owned company has also demanded a “level playing field” for all companies that offer payment services, including “a certain and transparent regulatory and operating environment”.

WhatsApp has also made a case for scaling up its operations by citing the productivity gains that have accrued to Indian small business as a result of the digital tool, and expressed its deep commitment to the market.

“Based on feedback from NPCI and our bank partners, we are confident that we are fully compliant with the UPI checklist, have made all necessary submissions and have passed the security audits required to launch WhatsApp Payments,” Daniels said.

WhatsApp’s ambitious payment services’ blueprint has been caught in a bind, over concerns around authentication and its data storage practices. In the past, its home grown rivals have alleged that WhatsApp’s payment platform has security risks for consumers and is not in compliance with the guidelines.

RBI Eased Rules for NBFCs

NBFCs can now securitise loans of more than five-year maturity after holding those for six months on their books, the Reserve Bank of India said. Earlier, they had to hold these assets for at least one year as the Reserve Bank of India (RBI) on November 29 relaxed rules for non-banking financial companies (NBFCs) to sell or securitise their loan books, in a bid to ease persistent stress in the sector.

However, the relaxation on the minimum holding period will be allowed when the NBFC retains 20 percent of the book value of these loans, the RBI said.

NBFCs, loosely known as shadow banks, are facing stress on their balance sheets after a debt crisis hit a large infrastructure funding company in September, triggering panic amongst investors and a cash crunch in the sector.

Following the massive volatility in the financial markets, the RBI and the government have taken steps to ringfence the crisis and support financing needs of the sector, including providing additional liquidity to banks and credit enhancement for refinancing needs.

RBI Rejects Rana Kapoor’s Plea for Tenure Extension

The banking regulator rejected Rana Kapoor’s request to extend his tenure as managing director and chief executive for three years.

Former Yes Bank chairman Ashok Chawla had met RBI governor Urjit Patel in his office to discuss the re-appointment of Kapoor, whose term was to end in August. At the meeting, Chawla requested Patel to take an early decision on the re-appointment based on Kapoor’s record. Nearly 10 days after the meeting, RBI sent a letter to Chawla denying an extension for Kapoor.

In a trail of letters sent to Yes Bank, RBI had questioned the lender on “poor compliance culture”, “serious violations of statutory and regulatory guidelines between 2014-15 and 2017-18”, and “persistent governance and compliance failure” as the letters read.

On 15 October, Yes Bank’s board has recommended clawing back of bonuses paid to Kapoor for two years ended 31 March 2016 following RBI’s adverse observations. The board has also recommended that no bonuses be paid to Kapoor for fiscals 2016-17 and 2017-18 and didn’t propose any bonus for the following year.

To be sure, the bank in its subsequent correspondence did indicate to the RBI about actions taken to rectify the deficiencies observed by the central bank.

“It will, however, be appreciated that these are only post facto corrective measures initiated after persistent governance and compliance failure reflected by the bank’s highly irregular credit management practices, serious deficiencies in governance and a poor compliance culture,” RBI said in the letter, adding that it observed that certain incremental actions which have been mentioned in Yes Bank’s letter dated 28 August have been initiated by the bank only after RBI’s email on 21 August and not as compliance actions in normal course.

Will RBI Resolve the Liquidity Crisis in India?

Indian Economy is writhing in the clutches of liquidity crunch where NBFCs are suffering a privation of cash, banks’ intrepid frauds and losses and economic stagnation are some of the oozing wounds. On the other side RBI’s burden to lessen the impact and maintain the supply of liquid assets in the market is burgeoning.

Being the lender of the lender it becomes RBI’s priority to ensure supply of liquid assets to cash-ridden NBFCs as well as to assure smooth lending in the economy.

Some of the demands were that RBI should provide funds to NBFCs through a dedicated window, buy more government bonds from the market to infuse money and even cut the cash reserve ratio.

But before we examine the solutions, here is a look at the problem first.

The leakage through cash, or in other words currency with the public, has grown 23% from a year ago. Another drain on the banking system’s liquidity is of credit growth far outstripping deposit growth. As of 9 November, credit had grown 14.9% from a year ago, while banks were able to mop up just 9.1% more deposits than they did a year ago. RBI’s own forex intervention has sucked out close to $18.7 billion (roughly ₹1.3 trillion) from the banking system between April and September.

Clearly, the stock of liquidity has ebbed and it is not at the neutral level envisaged by RBI. To that effect, the central bank needs to infuse funds into the banking system, which it has. RBI has infused ₹1.29 trillion into banks so far in the current fiscal year by buying government bonds from them. It has reiterated it would buy more, if needed.

By giving the option to borrow from its various repo tenders, RBI provides the necessary seat belt for banks for their daily manoeuvres on liquidity. It even gives long-tenure money through term repos. For durable liquidity, it takes sovereign bonds off the books of banks and gives them cash.

The current liquidity crisis is not just of stock, but also of flow. The blow to the sterling image of non-banking financial companies (NBFCs) has made them unworthy of credit in the eyes of banks. Capital markets are willing to lend, but the price of trust is steep here.

Thus, the flow of money from one agent to another has been blocked. At such times, the central bank can only prod the agents through incentives to restart the flow. It has done this by allowing banks to give partial credit enhancements to bond issuances of finance companies.

While demands for doing more are not unusual, asking RBI to take on the credit risk of non-banks, by giving them a direct line to funds, would be akin to taking on the driver’s seat. Guaranteed money tends to manifest into slack risk assessments and it could be dangerous in this case. RBI is justified in allowing NBFCs to find their own feet in this liquidity crisis through discipline and consolidation.

RBI’s New Norms Will Have Cynical Impact on State-Run Banks

After the long marathon meeting RBI came down to a conclusion to revisit the lending structure to MSMEs vis-à-vis revisiting its loan recovering tenure in borrowers favor. But this decision can have an impact over state run banks.

The Reserve Bank of India’s decision to allow lenders more time to adhere to additional capital buffer norms under Basel 3 is credit negative for the country’s state-run banks, Moody’s Investors Service said in a release on Tuesday.

The RBI after a nine-hour marathon board meeting announced late Monday that it has extended the timeline for Indian banks to set aside an additional 0.625 percent as capital conservation buffer by one year to March 31, 2020 to help banks to lend more.

The decision came after persistent demand from top government officials and one independent director to ease lending and capital rules for banks, provide more liquidity to the shadow banking sector, support lending to small businesses and let the government use more of the RBI’s surplus reserves to boost the economy.

“The decision to extend the timeline for the full implementation of Basel 3 guidelines by a year is a credit negative for Indian public sector banks,” said Srikanth Vadlamani, vice president, financial institutions group at Moody’s Investors Service.

The common equity Tier 1 ratio or core capital “over the next 12 months would be lower than what we currently expect” for some banks, Vadlamani added.

He also raised concerns over the central bank considering to give banks a leeway in classifying stressed assets of small borrowers which will ease the credit flow to this sector.

“The track record of such dispensations on asset classification, when seen over the last few years in India, has shown that they have largely been unsuccessful in addressing the underlying stress,” he added.

Government and RBI Brushed Aside Dissentions; Agreed for Bilateral Support

Anomalous to the norm, a long 9 hours marathon meet between Government officials and RBI’s top executives carved out a midway for both the parties to settle differences. The meeting on Monday terminated on a good note as both factions come down to revisit their stance on the disputed issues.

Culmination of the meeting had RBI announcing a restructuring plan for SMEs- minutiae still to be worked out- for a loan exposure of up to Rs 25 crore as advised from the board. The board had advised that the loan scheme should be subject to such conditions as restructuring is essential for ensuring financial stability.

One of the biggest reasons behind tiff between the government and Central bank which was pertaining to non-banking financial companies (NBFCs) and its liquidity is yet to be discussed at a final level. The Union government is of the opinion that NBFCs are facing a severe liquidity crisis, which is extensively impacting the real estate businesses.

After a 9-hour long marathon meeting, the RBI board decided to constitute an expert committee to review the request to transfer Central bank’s surplus funds to the government. The membership and terms of reference of which would be finalized jointly by the government and RBI, the central bank said in a statement. Finalising an economic capital framework of RBI or the capital required by the central bank in different risk scenarios has also been a crucial point.

As the Union government is struggling to meet its fiscal deficit target of 3.3 per cent of GDP due to poor tax collection numbers, fixing a capital framework could restrict government’s dependency on RBI’s surplus reserves.

During the meeting, both parties came to a conclusion that the Board for Financial Supervision (BFS) – an existing committee of RBI – will now review the Prompt Corrective Action or PCA framework which imposes restrictions on lending for banks which have been hit by bad loans and weak capital.

The Board also advised that the RBI should consider a scheme for restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs 25 crore, subject to such conditions as are necessary for ensuring financial stability.

The reports also suggest that both the parties, while deciding to retain the CRAR at 9 per cent, agreed to further extend the transition period for implementing the last tranche of 0.625 per cent under the Capital Conservation Buffer (CCB), by one year that is up to March 31, 2020. The CCB currently stands at 1.875 per cent but as per the previous deadline by RBI, the remaining 0.625 per cent was to be met by March 2019.

Reports have also emerged that the next RBI Board meeting will take place on December 14. The meeting comes as a relief for many who were worried about government invoking Section 7 of the Reserve Bank of India Act, 1934. The act empowers Central government to issue directions to the RBI Governor.

RBI’s Board Meet; Dissensions, Discussions, Clashes And Much More…

The monetary regulator is facing tough time as its board members and government officials met today for the board meeting.

Swaminathan Gurumurthy, a chartered accountant turned newspaper columnist, has set the tempo by chiding the monetary authority for being too tough in its efforts to rid banks of bad debts and arguing the case for lower reserves—a step that would give the government more cash ahead of an election year.

The central bank—led by RBI governor Urjit Patel—has pushed back against the moves, keen to burnish its inflation-targeting credentials and clean up one of the world’s worst bad-debt piles. Patel’s deputy Viral Acharya took the spat public in late October in a fiery speech in defence of central bank independence.

For a nation that relies on imported capital to fund investment, failure to reach middle ground threatens to erode investor confidence in the world’s fastest-growing major economy. Those elevated stakes are making the RBI board meeting in Mumbai a must-watch affair for India market watchers.

Gurumurthy, who is associated with the economic wing of Rashtriya Swayamsevak Sangh—the ideological parent of Modi’s Bharatiya Janata Party—and is a champion of small-traders who are BJP’s key voting bloc, was chosen by the government to push easier access to credit for micro and medium-sized enterprises (MSMEs). Lending to the sector has suffered after RBI tightened norms for state-run banks saddled with bad debts.

The central bank, which is also the banking regulator, may be open to easing tight money conditions in the banking sector by injecting cash through open market purchases of bonds. But it’s unlikely to part with its reserves as some of these are notional and may resist relaxing capital buffers for banks.

The government can still have its way with RBI by invoking a rule that hasn’t been used in the central bank’s 83-year history. The finance ministry last month sought Patel’s views on the issues of contention by citing Section 7 (1) of the Reserve Bank of India Act, 1934.

The RBI’s board is only meant to advise and guide and not decide on policy issues, people familiar with the matter said. But Gurumurthy and the government nominees Subhash Chandra Garg and Rajiv Kumar have been vocal about bank supervision, flow of credit to industry and easier financial conditions for India to overcome a crisis in its shadow banking sector.

An activist board has not been taken too kindly by RBI. While the first clause of Section 7 of RBI Act confers powers to the government to give directions, the third part indicates that the governor shares power with the board, the people said, adding that the powers of the governor are reiterated in another section of the RBI Act.

  1. Rangarajan, a former governor of the central bank, said in an interview with CNBC-TV18 television that Section 7 should never have been used, and both government and RBI should be accommodating.

The government is separately seeking more powers to supervise the central bank, a departure from the board’s current role as an advisory body, people with knowledge of the matter said.