RBI proposes Rs 5000 crore separate IRF investment window for Foreign Investors

RBI proposes Rs 5000 crore separate IRF investment window for Foreign Investors

In order to attract more foreign funds, the RBI has proposed to institute a separate limit of Rs 5,000 crore for investment by FPIs in Interest Rate Future (IRF). Currently, the FPI limit for Government securities is fungible between investments in securities and investment in bond futures. “To facilitate further market development and to ensure FPIs access to futures remains uninterrupted during the phase when Foreign Portfolio Investors (FPIs) limits on government securities are under auction, it is proposed to allocate FPIs a separate limit of Rs 5,000 crore for long position in IRFs,” RBI said.The limits prescribed for investment by FPIs in Government securities will then be exclusively available for acquiring such securities, it said, adding, FPI’s access to interest rate futures for hedging purposes will continue as before. “The circular in this regard would be issued by the RBI after consultation with the Government,” it said.An IRF is a contract between a buyer and a seller for future delivery of an interest-bearing security such as government bonds. The product provides market participants a better option to hedge risks arising from fluctuations in interest rates. Market participants like banks, FPIs, insurance companies, corporate houses and NBFCs can also trade in this product.Besides, government would soon release simplified hedging facility to encourage a more dynamic and efficient hedging culture. The scheme of simplified hedging facility was first announced by the RBI in August 2016 and the draft scheme was released on April 12, 2017. “The scheme aims to simplify the process for hedging exchange rate risk by reducing documentation requirements and avoiding prescriptive stipulations regarding products, purpose and hedging flexibility,” it said.It is also expected to encourage a more dynamic and efficient hedging culture, it said. “The circular to operationalize the scheme has been finalized and will be released after the issue of FEMA notification by the Government,” RBI said.

India on track to meet 3.2 per cent fiscal deficit target: UBS

India on track to meet 3.2 per cent fiscal deficit target: UBS

The Indian government is on track to achieving the fiscal deficit target of 3.2 per cent of GDP in the current fiscal year, says an UBS report. The global financial services major said however that balance sheets of states remain “stretched”. The central government’s fiscal deficit has already reached 81 per cent of the full-year target in the first quarter (April to June) of 2017-18. “Accordingly, the cumulative fiscal deficit reached 2.6 per cent of GDP FYTD. That said, we believe the central government will be able to achieve the fiscal target of 3.2 per cent of GDP in FY18,” UBS said in a research note.The Centre’s fiscal deficit narrowed from a peak of 6.5 per cent of GDP in 2009-10 (after the global financial meltdown) to 3.5 per cent of GDP in 2016-17 and is estimated to fall further to 3.2 per cent of GDP in 2017-18. However, the states’ fiscal position remains stretched, with the fiscal deficit rising from a low of 1.9 per cent of GDP in 2011-12 to 3 per cent of GDP (including UDAY, a scheme to turn around state electricity boards) in 2016-17.The report noted that while pursuit of structural reforms, including a goods and services tax, bodes well for India’s sovereign rating (currently at the lowest investment grade), the risk of a worsening consolidated (centre and state combined) fiscal position may act as a deterrent.UBS said fiscal slippage due to an increase in populist spending by the government (including farm loan waivers announced by a few states) in the run up to the 2019 general elections remains a key risk for the government’s fiscal deficit position. “We believe the government’s stretched combined fiscal deficit could crowd out investment both public and private, which tends to have a durable impact on overall growth vs. consumption and poses upside risks to inflation,” it added.

RBI Monetary Policy August 2017: Centre welcomes RBI decision to cut repo rate by 25 basis points

RBI Monetary Policy August 2017: Centre welcomes RBI decision to cut repo rate by 25 basis points

Minutes after the RBI cut the repo rate by 25 basis points, the government welcomed the move taken by the Monetary Policy Committee in its third Bi-Monthly Meeting this fiscal year. While responding to the RBI decision, Department of Economic Affairs secretary SC Garg said, “Government welcomes 25 basis points cut in the repo rate announced today by the MPC in its 3rd Bi-Monthly Meeting”.We have taken note of the statement of the MPC (Monetary Policy Committee) and its assessment of the inflation and growth outlook,” he said in another statement.Earlier in the day, the subdued inflation and demand led the central bank to reduce its key policy rate by 25 basis points (bps). As per the third bi-monthly monetary policy review of 2017-18, the short-term lending rate for commercial banks on loans taken from it stood lowered to 6 percent from earlier 6.25 percent.The six-member MPC led by RBI governor Urjit Patel decided to maintain the policy stance as ‘neutral’. Four members of the committee had supported the reduction the key lending rate. During its last policy review meeting in June, the central bank did not change key lending rates but induced liquidity by reducing Statutory Liquidity Ratio (SLR).The decision to reduce key lending rates comes after four policy reviews in which RBI maintained status quo on its repo since the central bank reduced it by 25 basis points to 6.25 percent last year in October.“The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of plus, minus 2 per cent, while supporting growth,” the third bi-monthly monetary policy statement said.“The MPC noted that some of the upside risks to inflation have either reduced or not materialised… Consequently, some space has opened up for monetary policy accommodation, given the dynamics of the output gap. Accordingly, the MPC decided to reduce the policy repo rate by 25 basis points,” it added further.

Central bank flags poor transmission of past rate cuts through MCLRs

The Reserve Bank of India (RBI) on Wednesday flagged the issue of poor transmission of past rate reductions through marginal cost of funds-based lending rates (MCLRs) at banks and said it will undertake a review of the framework, including the possibility of linking bank lending rates “directly to market determined benchmarks”.The central bank said since a large chunk of floating-rate loans in the system continue to be linked to base rates, it will also explore options to make the base rate more responsive to changes in banks’ cost of funds.“The experience with the MCLR system introduced in April 2016 for improving the monetary transmission has not been entirely satisfactory, even though it has been an advance over the base rate system,” the RBI said in a press release. It has set up an internal study group to study various aspects of the MCLR system in order to improve the monetary transmission. The group will submit its report by September 24. The RBI pointed out that banks’ base rates have moved significantly less than their MCLRs. “While the extent of change in base rate may not necessarily mirror the revision in the MCLR, the rigidity of base rate is a matter of concern for an efficient transmission of monetary policy to the real economy,” the central bank observed.State Bank of India (SBI), the country’s largest lender, reduced its one-year MCLR by 120 basis points (bps) between April 2016 and January 2017 to 8%. Its base rate has fallen by a mere 30 bps between April 2016 and August 2017 to 9% — a full percentage point higher than the one-year MCLR.B Sriram, managing director, SBI (corporate banking group), observed linking lending rates to market benchmarks may be tricky because while most liabilities at Indian banks are deposits which are fixed-rate, assets have a floating rate. “So, in some way, banks will have to reposition and structure their balance sheets with both sides geared similarly as we go ahead or we could see if this MCLR could be linked to market rates, whether it will really be feasible in the current context,” he added.Banks have also been slow to migrate borrowers with loans taken before April 2016 to the MCLR regime. As on March 31, SBI had 50% of its loan book linked to the MCLR, up from 40% at the end of December. Last month, HDFC Bank had said the portion of its book which was yet to move from base rate to MCLR is about 5-6%. ICICI Bank said more than 50% of its floating-rate book is linked to MCLR. After SBI’s financial results for FY17, chief financial officer Anshula Kant had said, “Typically, in the fourth quarter, a lot of review/renewals happen, at which time, many loans have moved from base rate to MCLR. So, it has jumped by 10% in one quarter.”

Central bank flags poor transmission of past rate cuts through MCLRs

Central bank flags poor transmission of past rate cuts through MCLRs

The Reserve Bank of India (RBI) on Wednesday flagged the issue of poor transmission of past rate reductions through marginal cost of funds-based lending rates (MCLRs) at banks and said it will undertake a review of the framework, including the possibility of linking bank lending rates “directly to market determined benchmarks”.The central bank said since a large chunk of floating-rate loans in the system continue to be linked to base rates, it will also explore options to make the base rate more responsive to changes in banks’ cost of funds.“The experience with the MCLR system introduced in April 2016 for improving the monetary transmission has not been entirely satisfactory, even though it has been an advance over the base rate system,” the RBI said in a press release. It has set up an internal study group to study various aspects of the MCLR system in order to improve the monetary transmission. The group will submit its report by September 24. The RBI pointed out that banks’ base rates have moved significantly less than their MCLRs. “While the extent of change in base rate may not necessarily mirror the revision in the MCLR, the rigidity of base rate is a matter of concern for an efficient transmission of monetary policy to the real economy,” the central bank observed.State Bank of India (SBI), the country’s largest lender, reduced its one-year MCLR by 120 basis points (bps) between April 2016 and January 2017 to 8%. Its base rate has fallen by a mere 30 bps between April 2016 and August 2017 to 9% — a full percentage point higher than the one-year MCLR.B Sriram, managing director, SBI (corporate banking group), observed linking lending rates to market benchmarks may be tricky because while most liabilities at Indian banks are deposits which are fixed-rate, assets have a floating rate. “So, in some way, banks will have to reposition and structure their balance sheets with both sides geared similarly as we go ahead or we could see if this MCLR could be linked to market rates, whether it will really be feasible in the current context,” he added.Banks have also been slow to migrate borrowers with loans taken before April 2016 to the MCLR regime. As on March 31, SBI had 50% of its loan book linked to the MCLR, up from 40% at the end of December. Last month, HDFC Bank had said the portion of its book which was yet to move from base rate to MCLR is about 5-6%. ICICI Bank said more than 50% of its floating-rate book is linked to MCLR. After SBI’s financial results for FY17, chief financial officer Anshula Kant had said, “Typically, in the fourth quarter, a lot of review/renewals happen, at which time, many loans have moved from base rate to MCLR. So, it has jumped by 10% in one quarter.”

RBI proposes Rs 5000 crore separate IRF investment window for Foreign Investors

In order to attract more foreign funds, the RBI has proposed to institute a separate limit of Rs 5,000 crore for investment by FPIs in Interest Rate Future (IRF). Currently, the FPI limit for Government securities is fungible between investments in securities and investment in bond futures. “To facilitate further market development and to ensure FPIs access to futures remains uninterrupted during the phase when Foreign Portfolio Investors (FPIs) limits on government securities are under auction, it is proposed to allocate FPIs a separate limit of Rs 5,000 crore for long position in IRFs,” RBI said.The limits prescribed for investment by FPIs in Government securities will then be exclusively available for acquiring such securities, it said, adding, FPI’s access to interest rate futures for hedging purposes will continue as before. “The circular in this regard would be issued by the RBI after consultation with the Government,” it said.An IRF is a contract between a buyer and a seller for future delivery of an interest-bearing security such as government bonds. The product provides market participants a better option to hedge risks arising from fluctuations in interest rates. Market participants like banks, FPIs, insurance companies, corporate houses and NBFCs can also trade in this product.Besides, government would soon release simplified hedging facility to encourage a more dynamic and efficient hedging culture. The scheme of simplified hedging facility was first announced by the RBI in August 2016 and the draft scheme was released on April 12, 2017. “The scheme aims to simplify the process for hedging exchange rate risk by reducing documentation requirements and avoiding prescriptive stipulations regarding products, purpose and hedging flexibility,” it said.It is also expected to encourage a more dynamic and efficient hedging culture, it said. “The circular to operationalize the scheme has been finalized and will be released after the issue of FEMA notification by the Government,” RBI said.

India on track to meet 3.2 per cent fiscal deficit target: UBS

The Indian government is on track to achieving the fiscal deficit target of 3.2 per cent of GDP in the current fiscal year, says an UBS report. The global financial services major said however that balance sheets of states remain “stretched”. The central government’s fiscal deficit has already reached 81 per cent of the full-year target in the first quarter (April to June) of 2017-18. “Accordingly, the cumulative fiscal deficit reached 2.6 per cent of GDP FYTD. That said, we believe the central government will be able to achieve the fiscal target of 3.2 per cent of GDP in FY18,” UBS said in a research note.The Centre’s fiscal deficit narrowed from a peak of 6.5 per cent of GDP in 2009-10 (after the global financial meltdown) to 3.5 per cent of GDP in 2016-17 and is estimated to fall further to 3.2 per cent of GDP in 2017-18. However, the states’ fiscal position remains stretched, with the fiscal deficit rising from a low of 1.9 per cent of GDP in 2011-12 to 3 per cent of GDP (including UDAY, a scheme to turn around state electricity boards) in 2016-17.The report noted that while pursuit of structural reforms, including a goods and services tax, bodes well for India’s sovereign rating (currently at the lowest investment grade), the risk of a worsening consolidated (centre and state combined) fiscal position may act as a deterrent.UBS said fiscal slippage due to an increase in populist spending by the government (including farm loan waivers announced by a few states) in the run up to the 2019 general elections remains a key risk for the government’s fiscal deficit position. “We believe the government’s stretched combined fiscal deficit could crowd out investment both public and private, which tends to have a durable impact on overall growth vs. consumption and poses upside risks to inflation,” it added.

RBI Monetary Policy August 2017: Centre welcomes RBI decision to cut repo rate by 25 basis points

Minutes after the RBI cut the repo rate by 25 basis points, the government welcomed the move taken by the Monetary Policy Committee in its third Bi-Monthly Meeting this fiscal year. While responding to the RBI decision, Department of Economic Affairs secretary SC Garg said, “Government welcomes 25 basis points cut in the repo rate announced today by the MPC in its 3rd Bi-Monthly Meeting”.We have taken note of the statement of the MPC (Monetary Policy Committee) and its assessment of the inflation and growth outlook,” he said in another statement.Earlier in the day, the subdued inflation and demand led the central bank to reduce its key policy rate by 25 basis points (bps). As per the third bi-monthly monetary policy review of 2017-18, the short-term lending rate for commercial banks on loans taken from it stood lowered to 6 percent from earlier 6.25 percent.The six-member MPC led by RBI governor Urjit Patel decided to maintain the policy stance as ‘neutral’. Four members of the committee had supported the reduction the key lending rate. During its last policy review meeting in June, the central bank did not change key lending rates but induced liquidity by reducing Statutory Liquidity Ratio (SLR).The decision to reduce key lending rates comes after four policy reviews in which RBI maintained status quo on its repo since the central bank reduced it by 25 basis points to 6.25 percent last year in October.“The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of plus, minus 2 per cent, while supporting growth,” the third bi-monthly monetary policy statement said.“The MPC noted that some of the upside risks to inflation have either reduced or not materialised… Consequently, some space has opened up for monetary policy accommodation, given the dynamics of the output gap. Accordingly, the MPC decided to reduce the policy repo rate by 25 basis points,” it added further.