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MPC must maintain stable policy rates in the current scenario
Equities, Markets - January 29, 2025

MPC must maintain stable policy rates in the current scenario

MPC must maintain stable policy rates in the current scenario

Overview
In the month of February, the Reserve Bank of India’s Monetary Policy committee will take a decision on policy rates based on the effectiveness of the current policy rates on the economy. Under the guidance of new RBI governor, Sanjay Malhotra, the committee will take into consideration recent data of growth in GDP and consumer price index-based inflation.

In the third quarter of the financial year 2025, the CPI was around 5.6 percent which was higher than the target set but in order of the projections of RBI. While the expected actual growth in GDP is about 6.4 percent in the financial year 2025 in check with the GDP projection of the RBI which is 6.6 percent. Based on these aligned results, MPC will prepare future projections on inflation risks and growth aspects.

Recent Condition of India
After the MPC meeting in the month of December, there has been an increase in threats about short-terms risk in price stability. In present times, the Indian rupee faced depreciation of about three percent. The reasons for this are rising uncertainty about the USA position on tariffs, increased strength of dollar in the market, high fluctuations in the financial markets have resulted in affecting inflation level and rates.

In the year 2025, the Federal Reserve of USA has decided to maintain a hawkish stance and hints at not many reductions in rates. It led to development of cautious sentiments in the investors.

Baseline Projections of RBI
It states that the overall inflation in India is projected to be more than the target of 4 percent for the upcoming six months. There will be high food inflation but with a gradual decline in it. In contrast to this, core inflation will remain consistent. Both food and core inflation will be in between 4.5 percent to 5 percent in the upcoming 6 months. The depreciation of the rupee acts as an upside risk to these forecasts.
Comparatively inflation in India is high leading to overvaluation of the Indian Rupee and which in turn makes export of the country expensive. To resolve this issue, India needs to lower the value of the rupee in nominal terms. It also has to be cautious about price stability as steps taken for disinflation can lead to a burden on the cost of imported goods.

Projections of GDP
RBI’s projection on GDP is strong growth. According to it, India will speed up its growth in GDP from the second half of the financial year. In the financial year 2024-2025, its expected actual GDP is below the previous financial year’s GDP growth. While the nominal GDP is projected to remain the same for the current financial year as well. It was 9.6 percent in the previous financial year and is expected to be 9.7 percent in the current financial year. The reason lower actual growth is probably due to rising inflation levels. It has adversely affected demand levels in urban areas. It hints at the requirement of vigilant monetary policy steps towards the situation.

The expectation of the IMF is about 6.5 percent growth in the upcoming two years in India. The anticipation seems reasonable in nature. It will be aided by fixed financing by the upcoming budget. The government of India is also focusing on aspects like consistent growth in tax collection and fiscal consolidation.

Factors affecting growth
In the current financial year, lower capital expenditure led to moderate growth in investments which in turn led to cutting of development in nearly half. However, this scenario will possibly change as capex increases. On the other hand, private consumption is going to be supported by continuing return to health in rural demand. The growth in the service sector will help to boost urban demand.

Overall, the growth perspective of the financial year is going back to its potential growth level. It was earlier higher than 7 percent for three years in a row. In this scenario, it is better for India to maintain a cautious approach.

Liquidity issues
RBI must focus on keeping the weighted average call rate in the range of policy rates. From the second half of December, the country is facing an issue of liquidity deficit. The RBI took the decision of reducing CRR to about 50 basis. It also has taken actions such as daily variable rate repo auctions. Even in the condition of prevailing liquidity deficit, it has helped in keeping the call rate in the range of 6.50 percent of repo rate and 6.75 percent of marginal standing facility. Overall, it is able to keep the short-term rates at a secure level. Also, rates of deposits and credits of banks are at steady levels. Despite contraction in loan growth of the bank which was 12.5 percent, it is higher than nominal growth in GDP. The trend of government and corporate bond yields is also stable.

In the month of October, RBI had a liquidity surplus of about Rs. 4.885 trillion. In present times it is contracted to Rs. 64,350 crore. It can lead to higher rates in the economy. Also, policy cuts without sufficient liquidity can lead to weak impact on the economy.

Focus on Price Stability
In case the sale of dollars leads to contraction in liquidity, RBI can do open market buying of government bonds as it has already reduced CRR rates. In the current scenario of the US uncertainty, RBI must concentrate on price stability to maintain stability in the economy.

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Liquidity is a major concern in the Indian Banking Sector
Equities, Markets - January 28, 2025

Liquidity is a major concern in the Indian Banking Sector

Liquidity is a major concern in the Indian Banking Sector

Overview
Following the sharp decline in a crucial liquidity metric, Indian lenders have requested that the central bank inject long-term cash into the banking sector, according to six treasury officials. The liquidity management framework of the RBI has emerged as a major worry for corporates, NBFC executives, and bankers alike. Interest rate negotiations, which have historically dominated conversations between the central bank and the government, have been overshadowed by tight liquidity, a crucial concern. Given the strain on the system, the RBI should review its strategy for managing liquidity to make sure it still reflects the state of the economy and the financial system.

The RBI must provide liquidity support to maintain smooth credit flow in the face of persistent liquidity constraints in the country’s banking system. Although open market operations (OMOs) are a common method of introducing primary liquidity, structural and legal issues limit their usefulness in the present situation.

Liquidity Tightening: A rising concern
A daily liquidity shortage of more than Rs. 1 lakh crore has been present in the interbank market (LAF system) since December 16, surpassing Rs. 2 lakh crore on a regular basis since January 4, and reaching Rs. 3.3 trillion on January 23, 2025—the biggest amount since 2010. Furthermore, by late December 2024, total liquidity—including government cash balances—had drastically decreased from a surplus of Rs. 3- 4 lakh crore during the previous two years to barely Rs. 64,350 crore.

Causes of Liquidity Crunch
The RBI reduced its foreign exchange reserves from over $700 billion in October to $623 billion by mid-January 2025 as a result of selling large amounts of dollar reserves to counteract the rupee’s decline brought on the aggressive inflows of foreign funds. Equivalent rupee liquidity has been removed from the system as a result of these dollar sales. In January alone, foreign portfolio investors sold $8.2 billion worth of Indian stocks and bonds, reversing the $1.8 billion in inflows in December and significantly depleting liquidity.

Additionally, the change in asset allocation patterns is a major element causing liquidity issues. Bank fixed deposits have been replaced by investments in insurance, PFs, and pension products due to tax benefits. These vehicles make significant investments—more than 60–70%—in government securities (G-Secs) and State Development Loans (SDLs), in contrast to banks, which devote about 75% of their resources to the private sector. Due to institutional investments that disproportionately benefit the government or PSU sectors, this change has increased the cost of funding between SMEs and MSMEs. OMOs by themselves are unable to adequately meet systemic liquidity demands when banks’ contribution to government funding declines.

Steps taken by RBI
In order to inject Rs.1.13 trillion into the system, the RBI lowered the Cash Reserve Ratio from 4.5% to 4% on December 8. By January 20, the daily repo will have increased from Rs. 50,000 crore to Rs. 82 lakh crore. FX swaps and longer-term repos have also been used. The total value of the open market operations (OMO) was Rs.10,000 crore. Systemic and structural issues are the reason why the liquidity shortfall continues in spite of these steps.

Structural Challenges to Liquidity Management and Tools

OMO Challenges
The ability of banks to offer excess government securities to the RBI determines how successful OMOs are. However, banks lack the flexibility to effectively participate in OMOs because they are operating near their minimal Liquidity Coverage Ratio (LCR) criteria. OMOs give institutional investors the ability to tender bonds to the RBI in return for cash, such as insurance firms and provident funds (PFs). However, unless bondholders turn their holdings into bank deposits, this liquidity inflow has little direct effect on the banking system. As a result, OMOs frequently cause government bond yields to drop precipitously without giving banks a corresponding increase in liquidity.

Institutional investors may further disintermediate the banking system if they reallocate the funds to corporate bonds. As a result, banks’ deposit growth would be constrained, and credit and deposit expansion would both decline. Businesses that rely on bank loans, such as retail borrowers, MSMEs, and SMEs, are disproportionately affected by this situation, which keeps their cost of financing constant. The gap between high-quality borrowers and the whole economy is widened as AAA-rated corporations and government bonds profit from declining yields.

Rate Cut Issues
The RBI’s rate cuts are unlikely to have the desired effect until structural liquidity concerns are addressed. High deposit costs prevent banks from efficiently passing rate reductions on to customers. Therefore, rate cuts run the danger of being ineffectual in the absence of specific actions to reduce banks liquidity.

Other Crucial Challenges
The transition to a just-in-time payment system for state funding has resulted in idle government cash sitting outside the banking system, which brings us to the issue of unspent government balances and liquidity management. Interest rates are rising as banks like SBI, which formerly depended on government deposits, compete for customer deposits. Additionally, when the bank replaces maturing loans with new deposits, the HDFC-HDFC Bank merger has boosted competition for deposits. The FD to Mutual Fund Shift is another important aspect as bank FD holders progressively switch to mutual funds, the demand for long-term FDs declines. Furthermore, banks are being forced to hold more idle cash as a result of the unexpected needs for liquidity brought on by the quick adoption of UPI, NEFT, and RTGS.

Conclusion
The RBI must investigate fresh and creative instruments to promote banking system liquidity and encourage wider credit expansion. In addition to CRR changes, strategies like buy-sell FX swaps, long-term repo operations (LTROs), or dynamic modifications to LCR rules could guarantee liquidity flows to the most vulnerable industries. In summary, resolving the lack of liquidity in India’s banking sector necessitates a multipronged strategy that takes into account structural changes, regulatory adjustments, and creative liquidity solutions. The RBI can guarantee fair access to credit and promote sustainable economic growth by reorienting its policy instruments to the changing financial environment.

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MPC must maintain stable policy rates in the current scenario
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RBIs financial stability review spots two risk from trump 2.0

RBIs financial stability review spots two risk from trump 2.0

The Reserve Bank of India (RBI) publishes its Financial Stability Review (FSR) semi-annually in a financial year. It generally evaluates the nature and magnitudes of risks affecting the Indian financial sector. It analyzes the strength of financial institutions to mitigate these risks with the help of stress tests. These risks consist of both international and domestic risks, with special focus on domestic risks. In the month of December 2024, the FSR realised signals of two prominent risks coming from the US elected-President Donald Trump’s administration.

The Financial Stability Unit (FSU) of RBI and its FSR publication came into existence to initiate crisis management and also to prevent crises such as the global financial crisis 2008. The FSU came into existence in August 2009 by global financial crisis 2008 and implementation of semi-annual publication of FSR in October 2009. Today, the FSR is released in the months of June and December every year. The FSR focuses on both macroeconomic and market related risks.

Current FSR report
The FSR of the month of December 2024 identifies two distinct risks associated with the upcoming new administration in the USA which will assume office in a fortnight. The first risk is the uncertainty brewing in the economy due to the support given to cryptocurrency by Trump’s regime. While, the second risk is the risk to the global economy from Trump’s proposed economic policies. It could occurring due to increasing geopolitical tensions, uncertainty associated with trade and industrial policies and potential tightening of financial conditions around the world leading to lower global economic output compared to its baseline projects.

The victory of Donald Trump in the US presidential elections gave a liberating path for the people and institutions who support the idea of decentralised finance or DeFi and particularly cryptocurrency. The Trump has a favorable opinion about Bitcoins and preference for crypto friendly regulations. Following the victory of Trump, Bitcoins registered pricing hiting more than $100,000 in the secondary market. This rally was influenced by the expectation of implementation of crypto-friendly policies under his regime.

Three reasons influencing the Bitcoins
There are three reasons which strongly influenced the rally of Bitcoins. Donald Trump in his election has constantly promised that he would make a strategic bitcoin hoard. This hoard would act as a reserve asset, where the US government would accumulate and hold a significant amount of Bitcoin. This reserve asset would be similar to any country’s foreign exchange or gold reserves. The main purpose for creating this reserve asset is to bring stablization in the financial system by mitigating inflation and also to strengthen its position in the global cryptocurrency market. The second reason is Trump and his family are closely connected with the cryptocurrency and DeFi movements via investments. The last reason is Trump nominated Paul Atkins, cryptocurrency supporter for the position to head the Securities and Exchanges Commission. It hints at easing up of earlier regulatory restrictions on crypto products.

Views of RBI
The Reserve Bank of India is worried about the risks associated with crypto products on the overall financial system. Its attempt to ban crypto products in India was rejected by the Supreme Court of India. As the Supreme court said that RBI does not have the right to impose restrictions on cryptocurrency trading. After this judgement, RBI strengthened the regulations and prohibited regulated entities from financing or supporting crypto products.

Many senior officers have given their public opinions on risks associated with cryptocurrency. The Deputy governor of RBI, T. Rabi Sankar stated that cryptocurrencies are created with the specific purpose to avoid a regulated financial system in his public speech in the year 2022. Further he stated that the cryptocurrencies have the potential to destroy the currency system, the monetary system, the banking system and overall government’s capacity to control the economy. The crypto products act as a threat to the financial sovereignty of a nation. There is also a possibility of strategic manipulaton by private firms or the governments who created and control them. These are reasons which led to the formation of the most advisable and possible choice of banning cryptocurrency in India.

During the discussion at Peterson Institute, Washington DC in October 2024, the former governor of RBI, Shaktikanta Das asserted the risk associated with cryptocurrency to the financial and monetary system. He requested coordination between central banks across the world regarding regulation on the crypto products.

Despite all this, the strong position of the Trump administration towards crypto products is increasing anxiety within RBI and its view towards risks associated with it. The current FSR report particularly states that widespread use of crypto-assets and stablecoins will certainly affect macroeconomic and financial stability. It could adversely impact the effectiveness of monetary policy, fical risk and avoid capital flow managment measures. It will also draw away the resources available for the purpose of financing the real economy and in turn threaten global financial stability. Despite the crypto products market being small in size, it keeps on growing. Its association with the traditional financial system is increasing to a potential systemic risk. Stablecoins also pose a potential risk.

The RBI is worried about the linkages between the monetary system and DeFi due to the potential it carries. As instability in DeFi can lead to temporary issues like liquidity problems, maturity mismatches, price volatility in assets and also have a spillover impact on the real economy, while regulators having no control on it.

Trump is promoting tokenisation as well. He and his three sons are providing support to World Liberty Financial, who develops tokens against crypto products. Though the company declines association with Trump’s extended family, there are proofs such as purchases of tokens or play roles of advisory.

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MPC must maintain stable policy rates in the current scenario
Business, Equities, Market News, Markets - October 18, 2024

RBI Bars Four NBFCs for Regulatory Breach

RBI Bars Four NBFCs for Regulatory Breach

RBI Suspends Four NBFCs from Loan Issuance: A Regulatory Crackdown
In a significant regulatory move, the Reserve Bank of India (RBI) has prohibited four non-banking financial companies (NBFCs) from issuing new loans. The action follows these firms’ violations of regulatory norms related to lending practices, signaling the central bank’s growing vigilance toward the sector.

The four entities impacted by the RBI’s order are:

Muthoot Microfin Ltd
Handygo Technologies Pvt Ltd
Vibrant Microfinance Ltd
Pai Power Solutions Pvt Ltd
This development has far-reaching implications, given the crucial role of NBFCs in extending credit, especially to underserved segments such as small businesses and low-income households.

Reasons Behind the Regulatory Action
The RBI has not disclosed the precise nature of each company’s violations. However, it indicated that the affected NBFCs breached guidelines governing fair lending practices and responsible operations. These norms are critical to ensuring transparency, borrower protection, and financial stability within the sector.

Given the RBI’s emphasis on systemic health, even relatively minor lapses in governance, documentation, or compliance can attract swift punitive actions. Analysts speculate that the infractions could involve issues such as improper loan underwriting, failure to maintain sufficient capital buffers, or mismanagement in lending portfolios.

Implications for the NBFC Sector
The RBI’s regulatory action sends a clear message to the broader NBFC ecosystem. As financial intermediaries with less stringent regulatory oversight compared to banks, NBFCs have expanded aggressively in recent years. However, this growth has heightened concerns over asset quality and operational transparency.

For investors, the incident highlights the risks associated with non-bank lenders. Companies that fail to maintain proper compliance structures risk not only regulatory action but also a deterioration in market reputation. On the other hand, NBFCs that demonstrate robust governance may find it easier to attract capital and enhance customer trust.

This crackdown may prompt other NBFCs to reassess their processes and tighten internal controls to avoid similar repercussions. Furthermore, it underscores the importance of regulatory arbitrage—a phenomenon where NBFCs operate with fewer restrictions relative to banks—remaining in check.

Impact on Credit Flow and Borrowers
The immediate impact of the ban is expected to be limited to the operations of the four affected NBFCs. However, if systemic tightening across the sector follows, it could temporarily disrupt the flow of credit to small businesses and individuals who rely heavily on non-bank lenders.

Additionally, the affected companies will likely experience increased scrutiny from stakeholders, including investors and rating agencies. Operational constraints may also hinder their ability to grow loan portfolios, further constraining profitability.

Broader Market Implications
The regulatory crackdown aligns with the RBI’s broader objective of maintaining financial discipline across the financial services ecosystem. With the sector growing rapidly, the central bank’s proactive stance aims to mitigate risks that could destabilize the economy.

NBFCs play a vital role in filling credit gaps left by traditional banks, especially in rural and semi-urban areas. However, incidents like these highlight the need for robust compliance frameworks to ensure that the sector continues to grow sustainably.

Conclusion
The RBI’s ban on four NBFCs from issuing loans serves as a reminder of the importance of regulatory adherence within India’s financial system. It demonstrates the central bank’s focus on strengthening governance practices in non-bank lending to protect borrowers and investors.

For the affected NBFCs, the path forward will require addressing the compliance gaps identified by the regulator. On a broader level, this regulatory action reinforces the need for financial institutions to operate transparently while balancing growth with sound governance.

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RBI Shifts to Neutral Stance: What This Means for Indian Equities

RBI Shifts to Neutral Stance: What This Means for Indian Equities

This week, the Reserve Bank of India (RBI) took a significant step in adjusting its monetary policy. After holding interest rates steady at elevated levels for 20 months and maintaining its stance of “withdrawal of accommodation,” the latest Monetary Policy Committee (MPC) meeting has shifted the stance to “neutral.” This signals a potential change in the central bank’s future approach, hinting at possible rate cuts on the horizon.

Factors Behind the Shift
The RBI retained its FY25 forecasts for GDP and CPI inflation at 7.2% and 4.5%, respectively. However, the GDP estimate for the September quarter was slightly reduced from 7.2% to 7%, while subsequent quarters are projected to see better performance. CPI inflation for Q2 is also expected to come in at 4.1%, lower than the previously estimated 4.4%.

This slight reduction in growth and inflation estimates reflects the economy’s softer-than-expected performance. High-frequency indicators such as passenger vehicle sales and the manufacturing Purchasing Managers’ Index (PMI) also hint at a slowdown. As a result, the RBI deemed it appropriate to shift its stance to “neutral,” preparing for future rate cuts that could support growth in line with revised projections.

Despite this shift, the RBI has kept its policy rate unchanged, emphasizing its commitment to bringing inflation down to 4%. The central bank cited risks from weather disruptions, geopolitical tensions, and global inflationary pressures, keeping them cautious.

This change follows the U.S. Federal Reserve’s recent rate cut, underscoring the importance of maintaining attractive yield spreads between Indian and U.S. treasuries, which influences foreign investor behavior.

Implications for Indian Equities
A shift to a neutral stance lays the groundwork for the RBI to initiate rate cuts, likely before the end of the year. Lower rates should theoretically boost borrowing and spending, fueling economic growth and potentially lifting the stock market. However, in practice, rate cuts are often accompanied by stock market corrections, due to delayed transmission effects and liquidity constraints.

Globally, rapid rate hikes by central banks, including the U.S. Fed and RBI, have led to a narrowing of yield spreads between U.S. and Indian bonds. This resulted in foreign institutional investor (FII) outflows from Indian equities, totaling over Rs. 4 lakh crore. Although the U.S. Fed’s rate cut temporarily widened yield spreads, an RBI rate cut might halt this trend and encourage further FII outflows, especially as China’s economic stimulus continues to divert investment away from India.

What Should Investors Do?
Despite significant FII outflows, Indian equities have shown resilience, largely due to strong domestic institutional investor (DII) support. DIIs have injected nearly Rs. 8 lakh crore into the market, pushing indices to record highs. Behind this are retail investors, whose enthusiasm for stock markets has risen recently, often at market highs. The key question is whether these investors will stay invested through market corrections.

India’s long-term growth prospects remain solid, and any short-term market dips could present opportunities for investors to buy into fundamentally strong companies at more favorable valuations. While near-term volatility might persist, the broader outlook for Indian equities remains positive.

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Business, Equities, Expert Views, Investor Forum, Market News, Markets - October 9, 2024

RBI Signals Shift to Neutral Stance, Market Anticipates Rate Cut

RBI Signals Shift to Neutral Stance, Market Anticipates Rate Cut

The Reserve Bank of India (RBI) has taken a pivotal step in monetary policy by shifting its stance from “withdrawal of accommodation” to a more neutral position. This move, announced following the latest meeting of the Monetary Policy Committee (MPC), opens the door for potential rate cuts if inflation remains within a favorable trajectory. For months, the central bank had been in tightening mode, focused on reining in inflation. With the latest inflation print of 3.7% in August, comfortably below the 4% target, markets are already anticipating a rate cut in December. But as the RBI takes this cautious approach, a deeper examination reveals that several risks still loom large.

Stance Shift: A Prelude to Rate Cuts?
The change in stance signals the central bank’s readiness to shift gears in response to evolving macroeconomic conditions. By adopting a neutral stance, the RBI is essentially indicating that it is no longer in a mode of withdrawing liquidity but stands prepared to act as necessary to sustain growth and keep inflation in check. This is a marked change from its previous focus, where containing inflation at any cost was the top priority.

The markets have taken this as a strong signal, with expectations now leaning toward a rate cut as early as the December meeting. Bond yields have eased, and equity markets have welcomed the news, buoyed by the prospect of cheaper capital and a more accommodative monetary policy.

However, the key question is not just whether the RBI will cut rates, but how aggressive it will be in doing so. Some market participants are already wondering if this could lead to a series of rate reductions, or whether the central bank will adopt a more cautious approach. The decision will likely depend on a host of factors, both domestic and global.

Governor Das Flags Key Risks
Despite the markets’ optimism, RBI Governor Shaktikanta Das was quick to temper expectations. In his policy statement, he highlighted significant risks that could derail the inflation trajectory. “Even as there is greater confidence in navigating the last mile of disinflation, significant risks – I repeat, significant risks – to inflation from adverse weather events, accentuating geopolitical conflicts, and the very recent increase in certain commodity prices continue to stare at us,” Das warned.

The governor’s caution stems from a series of unpredictable factors that could easily upset the RBI’s inflation outlook. Geopolitical tensions, particularly in the Middle East, pose a major concern. The conflict between Israel and Iran has caused a surge in crude oil prices, which recently crossed $80 per barrel. For a net importer like India, rising crude prices could stoke domestic inflation, making it more difficult for the RBI to ease monetary policy without jeopardizing price stability.

Additionally, adverse weather events, such as prolonged heat waves and erratic monsoon rainfall, have impacted agricultural output. While the RBI expects a robust kharif and rabi harvest, there is always the possibility that unpredictable weather conditions could disrupt supply chains and drive up food prices, a key component of headline inflation in India.

Balancing Growth and Inflation
The RBI’s decision to keep its inflation and growth projections unchanged reflects its delicate balancing act. The central bank expects GDP growth for FY25 to hold steady at 7.2%, driven largely by strong investment activity. Governor Das noted that both consumer confidence and business sentiment are on the rise, with private investments playing a pivotal role in boosting the country’s economic prospects.

While the outlook for growth remains positive, the RBI is aware that risks to inflation could quickly derail progress. Das’s analogy of inflation being akin to a “horse brought to the stable” illustrates the central bank’s cautious stance. “We have to be very careful about opening the gate as the horse may simply bolt again. We must keep the horse under tight leash, so that we do not lose control,” Das said, emphasizing the need for vigilance.

Rate Cut Expectations: Cautious Optimism
While one of the MPC’s external members voted for an immediate rate cut, the overall tone of the committee remains cautious. Many analysts believe that even if the RBI does initiate a rate-cutting cycle, it will likely be shallow and gradual, with the first cut possibly in December or early next year. Much will depend on how global commodity prices and domestic inflation evolve in the coming months.

Upside risks, such as crude oil price shocks, geopolitical tensions, and weather disruptions, remain largely outside the control of the RBI. As a result, any rate cut is likely to be reactionary rather than preemptive, with the central bank taking a wait-and-see approach before committing to deeper monetary easing.

Conclusion
The RBI’s shift to a neutral stance has generated excitement in the markets, with expectations of an upcoming rate cut in December. However, the central bank is navigating a complex landscape of inflationary risks and external uncertainties. While growth prospects remain solid, the RBI is unlikely to aggressively cut rates, opting instead for a more measured approach to ensure that inflation remains under control. Governor Das’s message is clear: while the door to rate cuts is now open, the central bank will tread carefully to avoid upsetting the balance between growth and inflation.

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Business, Equities, Expert Views, Investor Forum, Market News, Markets, Research, Research Reports, Result Updates - October 7, 2024

RBI’s October MPC: Rate Status Quo Likely Amid Persistent Inflation Concerns, Global Risks

RBI’s October MPC: Rate Status Quo Likely Amid Persistent Inflation Concerns, Global Risks

India’s Monetary Policy Committee (MPC) is set to reconvene this week, marking the first meeting for its three new external members: Ram Singh (Director, Delhi School of Economics), Saugata Bhattacharya (veteran economist), and Nagesh Kumar (Director, Institute for Studies in Industrial Development). Given their fresh appointments, all three are expected to follow the Reserve Bank of India’s (RBI) house view on rates, at least initially, as noted in a recent Bank of America report. While the new members lack any known rate biases, newcomers traditionally adopt the majority stance in their early days.

This is significant because it suggests that the RBI is likely to maintain the status quo on rates for the tenth consecutive policy meeting. This pattern aligns with Governor Shaktikanta Das’ cautious stance, particularly on inflation, which remains a key concern for the central bank’s policymakers.

Despite headline inflation falling below the RBI’s medium-term target of 4%—with CPI inflation at 3.65% in August, slightly up from July’s 3.6%—the central bank continues to exercise caution. The RBI’s reluctance to declare victory over inflation stems largely from persistent food price pressures. Governor Das, in the minutes of the August MPC meeting, underscored that while the base effect has helped lower headline inflation, food prices continue to pose challenges, and inflation expectations among households are rising. Therefore, monetary policy needs to remain vigilant to the risk of food price pressures spilling over into core inflation.

Adding to these inflationary concerns are risks posed by the geopolitical tensions in the Middle East. India is one of the world’s largest importers of crude oil, and escalating conflict in the region, particularly between Israel and Iran, could disrupt oil supplies and send prices skyrocketing. This could increase India’s oil import bill, which would, in turn, fuel inflation. Although crude oil is currently trading below the RBI’s assumed $85 per barrel average for FY25, any significant upward movement could complicate the inflation outlook. The central bank will undoubtedly factor this geopolitical risk into its deliberations.

Inflation is not the only concern for the MPC, however. Economic growth, while improving, remains below potential. Although India’s economy has shown some signs of recovery, unemployment continues to rise, and small businesses are grappling with high borrowing costs. Small and medium-sized enterprises (SMEs), in particular, are struggling with rising interest payments, and there are growing concerns about asset quality in the SME sector. In light of these challenges, there is a strong case for the RBI to begin cutting interest rates to stimulate growth.

The RBI, however, faces a dilemma. On the one hand, inflation pressures, especially in food and core inflation, suggest the need for a cautious approach to rate cuts. On the other hand, the economic reality on the ground—rising unemployment, underwhelming growth, and financial strain among small businesses—argues for the central bank to shift its focus toward supporting growth.

The recent 50 basis point (bps) rate cut by the US Federal Reserve will also be a topic of discussion at the upcoming meeting. While the RBI Governor has consistently maintained that the Fed’s actions do not dictate India’s rate policy, the reality is that central banks around the world, including India’s, cannot fully ignore rate moves in major economies like the US. The Fed’s rate cut may influence the MPC’s thinking, particularly if global economic conditions continue to weaken.

In summary, while the October meeting is likely to result in a rate status quo, the groundwork is being laid for a potential rate cut in the next few months. With inflation pressures still present but stabilizing, and economic growth faltering, the RBI will likely need to pivot toward growth support soon. However, much will depend on how inflation, particularly food prices, evolves in the coming months, and how global risks, such as the Middle East conflict and US monetary policy, unfold. If inflationary pressures subside, a rate cut could be on the horizon by the end of the year.

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Equity Right
Editorials, Equities, Markets - July 27, 2022

Government allows Indian public companies to directly list shares overseas.

Government allows Indian public companies to directly list shares overseas.

 

Government’s vision for betterment of Indian companies:

In late January 2020 Government of India communicated to media that they are planning to allow direct listing of Indian companies in foreign markets. This will help Indian companies to not only rely on domestic markets but they can also raise capital on large scale from various foreign markets which will help companies in diversification and growth. This move can directly help Indian companies in increasing their turnover and profits.

Till now Indian companies go for the depository receipts to attract investors globally but this is bit unfamiliar amongst the investors globally and been less attractive in recent years. A minimum of 15 Indian companies currently attract foreign investors via ADR’s and GDR’s. These companies includes Reliance Industry, HDFC Bank, Infosys and many others.

 

Green signal by Indian Government:

Finance Minister Nirmala Sitharaman had announced an economic package of ₹ 20 lakh crore under government’s Atma Nirbhar Bharat Abhiyan. This is done for the revival of Indian Economy. It is an umbrella of massive ₹ 20 lakh crore economic booster package. The government ensured to provide some relaxation in all the sectors.

To improve “ease of doing business” in India, government allowed Indian public companies to list their shares in foreign markets. This provision will help Indian companies for better valuations, rapid growth and expand their businesses on a large scale. This move will help Indian companies to get funds at a cheaper rate from various foreign markets. This will directly help Indian economy to recuperate in a speedy way.

Government noted private companies that listed Non-convertible debentures (NCDs) on Indian stock exchanges not to be considered as listed companies. It is also expected that this provision is to prevent Indian companies to register themselves in foreign markets like Singapore and London for raising a fund and going global.

 

Existing vs proposed rule:

The existing rule states that companies which are listed on Indian stock markets can only list their company in foreign markets. Whereas, new proposed rule states that there is no compulsion for it. Indian companies can list themselves directly in various foreign markets to raise capital.

Until now, only American Depository Receipt (ADR’s) and Global Depository Receipt (GDR’s) can collect capital from foreign market sources. At least 15 Indian companies follow this mechanism to raise capital from foreign markets. However, this is not much familiar amongst the global investors. To eradicate this the new provision will allow Indian companies to a fresh new issue of shares or sale of existing holdings.

 

Rules and regulation:

All the required rules and regulation for listing an Indian company at abroad will be notified soon by the government. Once the provisions to the Foreign Exchange Management Act (FEMA) and Company Law Regulations are passed. Media noted Indian foreign exchange control laws do not require free capital convertibility, and there are other regulatory limits on capital account transactions.

Nevertheless, this proposal has been under discussion for a couple of years between stakeholders and regulators, especially regarding the selection of foreign jurisdiction. SEBI had indicated in 2018 that this route would be open only to the financially sound companies, so that the mechanism could not be used for exploitation. Sources indicated that final rules in this respect would probably be based on the Financial Action Task Force’s recommendations.

Finance Minister Nirmala Sitharaman noted, this provision of direct listing. If Indian public companies are not available over the globe but will be allowed in permissible jurisdictions.

 

Precautionary measures:

However, the approval will not come without any protections. The Indian government is likely to go along with the recommendations raised by SEBI in 2018. This requires a direct listing of Indian companies in abroad. It had suggested 10 overseas jurisdictions, including the US, UK, Japan, China, Hong Kong and South Korea for Indian companies to list. The selection was based on the fact that these jurisdictions are part of the Financial Action Task Force (FATF), The Anti-Money Laundering Global Task Force (GTF-AML) and IOSCO.

SEBI also suggested that this provision should be available only for financially stable . This will aid  to minimize frauds and manipulation. The firms with a  paid-up capital of 10% will be allowed to list in the foreign market.

The provision of capital raising in an overseas market can also have an impact on the Indian currency market. Since the flow of overseas capital can put pressure on the Indian currency and may lead to volatility. RBI and SEBI can be jointly involved to check this.

 

 

 

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MPC must maintain stable policy rates in the current scenario
Business, Expert Views - July 11, 2022

RBI expects Inflation to cool from October.

RBI expects inflation to cool from October:

Inflation in India is expected to slow down from October. The Central bank will minimize its aggressive action to cut down inflation, as per Governor Das.

As per RBI governor Shaktikanta Das, global factors should have more consideration while assessing inflation targets and current developments in Europe. The governor was focused on the importance of monetary policy. It will help in reducing inflation and inflation targets, despite fears that policy tightening could crease economic growth. He also added, after controlling inflation in the second half, there are chances of recession in India.

The Central bank on Friday eased its monetary policy to increase foreign investment and lift foreign exchange reserves. In India, inflation is above RBI’s target since the start of the year. This affected a hike in interest rates by 90 basis points in the last 2 months. All the central banks have been fighting against inflation driven by surging commodity prices, the Russia-Ukraine war, and supply chain disruptions. In June, RBI said expected inflation was at 6.7% and will cool down from October.

The impact of global factors on the domestic economy has increased over past years due to pandemics and war. So there should be greater recognition of global factors in local inflation and economic growth. This requires more coordination among countries to tackle problems. As per International Monetary Fund’s Latest projections, around 77% of countries have reported an increase in inflation, and this number could reach up to 90% in 2022.

Conclusion:

RBI governor suggested that not all tightening sessions have ended in recession.  He even mentioned that these measures won’t last long. The Central Bank and other major banks have revised GDP projections. It indicates a loss of pace in the growth of the economy rather than loss of a level. RBI governor mentioned many times that RBI plans to bring down inflation to 4% with a sensible slowdown in the economy. Inflation has also raised concerns about whether monetary tightening will end in a global recession or if there can be a soft landing. Global factors have difficult policy alternatives between price stability and economic activity.

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Economy - May 5, 2020

RBI to make TLTRO more effective

RBI to make TLTRO more effective

The RBI is expected to take steps in order to make the Targeted Long Term Repo Operations (TLTRO) more effective so it solves the liquidity crisis of NBFCs. The RBI Governor Shaktikanta Das said that it promises the representatives of NBFCs sector and microfinance sectors that they are working on strengthening the mechanism of TLTRO.

 

The meeting and discussions:

As per the statement given by RBI, the meeting was held with the representatives of NBFCs and micro financial institutions to discuss the issues regarding unavailability of liquidity from the banks and the extension of loan moratorium. In the meeting, it was requested to shift the loan moratorium period from March-to-May and April-to-June since the repayments from the customers are already collected for the month of March.

 

The suggestions given by Sa-dhan:

Sa-dhan, the micro lenders association suggested that there should be a direct lending given by the RBI to small and medium financial institutions to sustain the liquidity crisis faced by them. It has also requested for a relaxation in the norms relating to asset classifications for the next 3 months i.e. up to 30th September 2020.

The representatives of NBFC sector for the meeting were Ramesh Iyer, the chairman and TT Srinivasaraghavan, the director of Finance Industry Development Council (FIDC). The chairman Manoj Nambiar and CEO Harsh Shrivastava, the co chairperson K Paul Thomas and executive director P Satish of Sa-dhan attended the meeting as the representatives for the microfinance sector.

 

TLTRO can inject liquidity for smaller NBFCs:

Some of the industrial leaders said that TLTRO, which has been created by the RBI to solve the problem of illiquidity cannot be accessed by the smaller firms. RBI said that the banks can borrow and invest at least 50% of it in securities issued by microfinance sectors and NBFCs.

The first auction of Rs 25,000 crores had bid just above 50% because the banks were not willing to invest in smaller firms. The RBI identified the reason for such uninterested response and is taking necessary steps to solve it.

 

Problems of NBFCs & MFIs:

P Satish said to the media that NBFCs and MFIs have started operations on Monday and many of them are finding it difficult to have funds for salary payments and other operational expenses. Nearly 24% of the NBFCs have only received the payment from lenders in the lock down period. If the moratorium is not extended by the SIDBI, Mudra and SBI, it would cause a huge problem since they have a vast exposure to small and medium-sized MFIs.

 

 

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