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RBI Bars Four NBFCs for Regulatory Breach

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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RBI Signals Shift to Neutral Stance, Market Anticipates Rate Cut

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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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

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.

 

 

 

RBI Bars Four NBFCs for Regulatory Breach

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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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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Mutual fund industry in crisis due to pandemic

Mutual fund industry in crisis due to pandemic

The COVID-19 pandemic has hit nearly all sectors of businesses, people, economy, trade and the financial system worldwide. Mutual fund industry  has been adversely affected due to corona virus. All mutual fund investors have incurred huge losses in NAVs, specially those investing into categories of equity related mutual fund schemes.

Nearly 20 categories of mutual funds viz. energy funds, International funds, banking funds, large cap funds, mid cap funds, dividend yield funds, PSU funds, infrastructure funds, etc. are some of the mutual fund schemes that have faced losses tremendously in the last month. The energy sector saw a downfall of 20.08% in the last month. It was followed by the International funds category which dipped to 20.07%. The banking sector funds also had a downfall not only because of the corona virus threat but also because of the non performing assets crisis. The gold funds category is the only sector which has given positive returns in the last month.

 

Winding of 6 mutual fund schemes by Franklin Templeton:

Franklin Templeton, the leading global investment management company announced the winding up of 6 mutual fund schemes on 23rd April, 2020. 

Fear of Investors:

All these issues have led to fear in the minds of investors making them pull out Rs. 9,000 crores out of the credit risk mutual fund schemes. As per the data collected by Pulse Labs, the asset under management of these mutual funds have dropped by 19%.

A lot of tension can be seen in the credit risk fund category because of the redemption and unavailability of liquid underlying assets. The HDFC credit risk fund has the highest loss in comparison with other credit risk funds. The asset under management of the credit risk funds show the tremendous depth in comparison to the last month.

Lakshmi Iyer, chief investment officer of debt, Kotak Mutual Funds said to the media that without even considering the quality of the portfolio, investors have started redeeming the money from the funds. One of the ICICI Prudential spokesperson said to the media that the company assures the portfolio is well differentiated on the asset side and liability side.

 

RBI’s help:

RBI has recently announced rupees 50,000 crore special liquidity funds for Mutual Funds. This was announced after the winding up of 6 mutual fund schemes by Franklin Templeton. It is a measure taken by RBI to calm down the investors and reduce their panic by providing a guarantee of having adequate liquidity to meet the redemption. These funds can be borrowed by the companies from banks at a repo rate of 4.4% for 90 days. The Targeted Long Term Repo Operations is to help several financial services companies to manage their cash flow problems amid COVID-19 outbreak.

 

 

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RBI introduces Operation Twist

RBI bond introduces Operation Twist

 

The Reserve Bank of India (RBI) came up with a bond-swapping programme and coined it as Operation Twist. RBI had announced that it would conduct a synchronous buying and selling option under the Open market operations (OMO). So, an OMO of ₹10,000 Crores each was held on 27 April, 2020. The RBI mentioned that the 10,000 Crores amount will be made up of purchase of long term securities having tenure of 6 to10 years.

The sale amount of 10,000 Crores will be made up by selling short term securities having maturity dates like June 2020, October 2020 and April 2021. Short term further having two categories of cash management bills, one of 77 days and another of 84 days and two treasury bills of 182 and 364 days respectively. These short term bills are being put on sale by the RBI keeping in mind the interim cash mismatches the government is facing recently due to economic difficulties the pandemic has produced.

Auction result reveals that the cut-off yields on which the RBI bought securities was much higher than secondary market.

To illustrate:

1) 7.26% Government security (G-sec) 2029 which had secondary market return of 6.38% was bought at 6.4%.

2) 7.59% G-sec 2026 was bought at 5.9% versus the secondary market that gave 5.8%.

Under this programme, the aggregate amount of Face Value (FV) notified by RBI was 10,000 crores, against which the participants offered a total amount of 64,746 crores . RBI received bids that were six times more than the FV of the bonds. On the other hand, bids received for the sale of securities were nearly five times than the offer, which amounted to nearly ₹50,260 Crores. The near term paper was giving lower yield than normal. The Operation Twist further aggravated the same.

 

When and why does the Central Bank conduct an OMO?

Generally, the OMO sales are undertaken when the RBI wants to take out excess liquidity from the system. Whereas, OMO purchases are done to infuse instant money into the market. Recently, RBI was seen carrying out these operations to balance the sovereign yield curve. Particularly, ensuring lower returns at the shorter end of the curve.

Referring to the auction results, Naveen Singh, senior VP, ICICI Securities Primary Dealership says since RBI could buy securities at higher percentages, this believably implies that the banks are interested to book profit on the stock.

The Stocks which were held previously for maturity were made available for sale. Inversely, the cut-off rates on the sale of near-term paper was lower than prevailing market rates. For example, the 364-day T- bill was auctioned at 3.9%, when the market rate stood 4.074%. Distinctly, the RBI is desirous to lower the interest rates at the shorter end. This move is taken to enable an economic comeback against the upset which the pandemic has produced.

 

 

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SEBI and RBI review situation after Franklin fiasco

SEBI, RBI review situation after Franklin fiasco

The RBI and SEBI look to determine the damage from Franklin Templeton’s decision. After their decision to close six debt funds, RBI and SEBI look to contain the fallout from this decision. Franklin Templeton’s decision has raised concerns that investors will withdraw from similar categories across the industry.

RBI’s take on Franklin Templeton’s decision:

The RBI may change rules to encourage banks to borrow more. Through the reverse repo window, RBI may limit the amount it absorbs from banks. The amount may be set at Rs. 2 lakh crore. With banks parking Rs 7 lakh crore from reverse repo, RBI believes there is enough liquidity. To deal with liquidity positions and redemption, RBI officials has communicated with fund managers and banks. One of the proposals was to goad banks to purchase bonds of firms that are investment category. The bonds should not be triple-A rated.

SEBI seeks details from mutual funds:

SEBI also needs information from mutual funds regarding liquidity position and extent of redemption from their debt schemes portfolio. Based on current portfolios, SEBI wants to determine whether mutual funds can handle huge redemption. They also want to know the position of mutual funds regarding debt fund liquidity and days required to liquidate holdings. Debt mutual funds capital is estimated at Rs. 12 lakh crore approximately. According to estimations, Franklin Templeton froze about Rs. 55,000 crore of this credit funds.

Mutual funds approach:

To contain the fallout, mutual funds have also sought help from finance ministry and Niti Aayog for measures. RBI believes there is enough liquidity for fund houses and it is only a matter of channelizing it. However, Fund houses desire to have a separate lending window. The reverse repo rate has already been cut down to 3.75%.

On April 24, mutual funds sold a few top-rated securities assuming the pressure of redemption in the coming days. In the bond market, risk aversion led to yields higher than normal by 20-30 points on April 24.

A few of the large mutual funds persuaded SEBI to boost the borrowing limit. This increase is sought due to the COVID-19 pandemic causing financial markets to freeze as there are sharp outflows. These outflows are from different debt products.

Franklin Templeton stop redemptions:

Following the massive outflows in the last 2 months, Franklin Templeton were compelled to stop redemption. Franklin Templeton has mostly low rated papers in the rest of the portfolio. They only have a select number of buyers in the current market. They have also drained the lending limits in these schemes with banks.

RBI’s inquiry:

RBI inquiry to the mutual find industry is to assess the loan amounts taken from banks. They also need information on the ‘lines of credit’ used by asset management companies and the ‘un drawn lines’. These details are required for March 31 and April 24. To meet the other payout and redemption demands, mutual funds are granted to borrow 20% of their capital from banks. If this limit is exhausted, a raise up to 40% is allowed by SEBI based on merit.

Majority of the mutual funds except Franklin Templeton has not even utilized the 20% limit after RBI pumped money. The money was injected through long-term repo operations (LTRO) in to the system in March.

As of April 23, the borrowings of four mutual funds including Franklin Templeton was Rs. 4,427 crore. On March 31, the assets under debt schemes of the mutual fund industry was Rs. 10.3 lakh crore. This figure is 16% less from the earlier month.

 

 

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