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RBI Monetary Policy : To cut or not to cut

Ali Azar

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RBI

The last few months have been a roller coaster ride for our country in terms of macroeconomic indicators. Sitting at the helm of this bi-polarity of macroeconomic factors is everyone’s favourite commodity – Oil. Considering India’s heavy dependence on oil (said to be the fourth largest consumer in the world) and the fact that majority of it is imported (pegged to be in excess of 80%), it can safely be said that our country’s purse strings are firmly tied to the price of what the Saudis call liquid gold (oil). Crude oil in India hit a high of 85 $ per barrel in early October and cooled off to roughly 60 $ per barrel by end November. While the biggest benefactor of this U-turn in prices may be the common man, the volatility of global oil prices undoubtedly has an adverse effect on the decision making policy of the Reserve Bank of India (RBI). Being a heavy guzzler of oil, many other crucial macroeconomic indicators of our economy are intrinsically tied to the price of oil such as currency exchange rate, current account deficit, interest rates, inflation, GDP growth etc. The two most important indicators i.e. interest rates and inflation fall squarely in the domain of the RBI which is solely responsible to ensure that inflation does not exceed the targeted limit by keeping interest rates in check.

It is against the backdrop of these uncertain times that the RBI came out with its fifth bi-monthly monetary policy review yesterday afternoon. No major surprises were thrown at us and the policy was enacted on expected lines. The central bank did not alter its policy stance of “calibrated tightening” which it adopted in the immediately previous monetary policy review in October in accordance with the then-deteriorating conditions owing to rapidly rising oil prices. The Urjit Patel led outfit kept repo rates unchanged and cut its inflation forecast for the rest of the financial year owing to a steep decline in crude prices and food deflation.

Important parameters of the meet

This policy was broadly seen as a dovish policy which paves the way for a neutral stance in the forthcoming policy with inflation projections being significantly lowered. In spite of the shift in policy stance to calibrated tightening in the previous meeting, meaning that the central bank intended to raise rates in the following meetings, the downward swing in food inflation and oil prices might actually result into rates being slashed in the coming MPC meeting on 7th Feb 2019, which is a rarity. The RBI did not change its policy stance, although the governor did indicate that policy course could be changed soon because only the food inflation and oil prices have reduced (major components of inflation), while core inflation (inflation not considering food and energy sectors) continued to rise. The worry is that food and oil prices are extremely volatile and could bounce back at the same accelerated pace at which it reduced, hence the 6 member MPC decided to sit it out and take a call at a future date about rate reduction.

Other announcements made at the bi-monthly meet of the country’s top banking institution was the continued use of open market operations (OMO) to infuse liquidity into the ever thirsty economic system which has brought down the liquidity deficit to an eight-month low with Deputy Governor Viral Acharya mentioning the pace and quantum of such purchases may continue till March. Another important announcement was that of linking floating rate loans for retail and small & medium enterprises to external benchmarks such as repo rate, 91 or 182 day T-Bill rate or other approved benchmarks instead of to marginal cost of lending rate (MCLR) which brings uniformity and transparency into the process.

A wait and watch policy with minor tweaks to bring it up to date was what we got from our central bank this time around. The RBI, known to be a conservative organisation did not deviate from its mantle and threw out no surprises. It kept its calm in the face of its worst adversary, volatility, and frankly, that’s exactly what we’ve come to expect from our most sacred banking institution under the current leadership

Banking

Government announces ₹48,239 crores recapitalisation plan for 12 PSBs

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Banks

New Delhi | The finance ministry on Wednesday announced to pump in Rs 48,239 crore in 12 public sector banks in this fiscal to help them maintain regulatory capital requirements and finance growth plans.

Financial Services Secretary Rajiv Kumar said that the government will infuse Rs 9,086 crore in Corporation Bank and Rs 6,896 crore in Allahabad Bank — the two “better-performing” banks currently under the Prompt Corrective Action (PCA) supervision of the RBI.

Further, Rs 4,638 crore and Rs 205 crore will be provided to Bank of India and Bank of Maharashtra. These banks have recently come out of the regulatory supervisory framework PCA of the RBI.

Kumar further said Punjab National Bank will get Rs 5,908 crore, Union Bank of India Rs 4,112 crore, Andhra Bank Rs 3,256 crore and Syndicate Bank Rs 1,603 crore.

The government will pump in Rs 12,535 crore in four other banks under PCA — Central Bank of India, United Bank, UCO Bank and Indian Overseas Bank.

The government in December had infused Rs 28,615 crore into seven public sector banks (PSBs) through recapitalisation bonds.

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Banking

₹ 28,000 crore lifeline for Government

News Desk

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Shaktikanta

An increasingly accommodative Reserve Bank of India (RBI) under its new Governor Shaktikanta Das will, after cutting benchmark interest rates to 6.25% earlier this month, transfer an additional ₹ 28,000 crore to the government as interim dividend, after a decision was taken in this regard after its central board met on Monday. This fresh infusion of money will help the government meet its revised fiscal deficit target of 3.4% of GDP for the year 2018-19 amid a short fall in revenue collection.

This is the second consecutive year that the RBI has transferred an interim dividend and this amount is in addition to the ₹ 40,000 crore already transferred.

What is interesting to note is that unlike the government which follows the April to March financial year, the RBI follows a June to July financial year. Therefore, the central bank usually closes its books of accounts in July and transfers surplus earned during the year in the form of dividend in August. Ideally, the RBI should wait for the entire year to conclude before declaring surplus in the form of dividends and this practice of declaring an interim dividend in the middle of the year is not a good one because the future income of the RBI, which is suppose to be for the whole year, is being prepaid, and in case of central banks, things can change suddenly at any point of time and they could be in need of such money.

 

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Banking

Yes Bank Stop Misleading

Akhilesh Bhargava

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All has not been good with Yes Bank and it continues to be not so. It was the refusal of the RBI to not renew the appointment of Rana Kapoor as the CEO of Yes Bank, leading to his ignominious exit, which confirmed our suspicions that all was not well with it. It was always known, though not publicly, that the first Asset Quality Review conducted by the RBI of Yes Bank in 2015, had reported severe accounting, regulatory and disclosure malpractices at Yes Bank, which included the manipulation of its financial statements, huge loans given in violation of its own lending policies and serious regulatory and corporate non compliance. In fact Yes Bank had no serious culture of regulatory compliance, indicating poor or no respect for the regulation and the regulator.

 

In other words the audited financial statements of the Bank were false, or at best a half truth. The primary issue was one of hiding its losses, and thus inflating its profits to the tune of thousands of crores. It under reported its bad loans to the tune of Rs.4176 crores in 2015-16 and Rs.8373 crores in 2016-17. The fact that Yes Bank blatantly manipulated its financial statements year after year, meant that either the RBI went soft on its CEO the leader of these shady practices, and thus did not sack him or that Rana Kapoor was supremely confident of managing and gaming the system, which explains why despite such a serious misconduct, for many years; he was not sacked by the RBI in 2015 itself.

 

A sternly warned and chastised Yes Bank, was however forced to come clean with its books of accounts in 2017-18. It was not because it had mended its ways, but with the dismissal of Rana Kapoor, it was forced to do so, after years of blatant violations and misconduct. In a recent filing with the stock exchanges, Yes Bank triumphantly announced that in its Risk Assessment Report for 2017-18, the RBI observed NIL discrepancies in the bank’s assets clarification income recognition and provisioning. Yes Bank thus implied that the RBI had given it a clean chit and that all is good now and that it has regained regulatory credibility. The market cheered the Yes Bank stock, its share prices went up by 32% in a single day and brokerages and analysts recommended it with a ‘buy’ rating. A stock that was hitherto viewed with suspicion and treated as junk, was overnight now being recommended for investment. Investors rejoiced that the balance sheet of Yes Bank was now squeaky clean and that notion arose due to the misleading letter of Yes Bank to the stock markets.

 

This misleading information by Yes Bank, did not go unnoticed. In a stern letter to Yes Bank, the RBI expressed its displeasure and warned that it will face stringent regulatory action for not just making a confidential report public, but that it also did not reveal the many lapses of Yes Bank and was thus a deliberate attempt to mislead the public. The said report had identified several lapses and regulatory breaches in various areas of the bank’s functioning, which it did not mention in its stock exchange filing. It also said that a nil divergence as tomtommed by Yes Bank is no achievement to be published, but only a compliance, which is a statutory duty of the Bank.

 

It is apparent from RBI’s sharp rap on the knuckles of Yes Bank, that it has given no clean chit to the bank and serious skeletons abound in its cupboard. The dubious conduct of Yes Bank in misleading the public, which started with its false financial statements continues.

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