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Liquidity Stance Moved to Positive by RBI

Money creation to pick up pace

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A further implication of this is that domestic net government bond supply between October and March is largely agnostic to whether the government decides to do a foreign currency sovereign bond issue or not. Pixabay

The focus of monetary policy is now conclusively on ensuring better transmission. Towards this, for the first time in recent history the RBI has consciously moved liquidity stance to positive. Indeed, the Governor has lately referred to the Rs 1-1.5 lakh crore positive system liquidity as a comfort factor and facilitator for banks.

It thus seems reasonable to infer, in the absence of an official framework on liquidity ‘targets’, that the RBI will want to ensure sustained liquidity surpluses of this magnitude going forward as well.

The micro aspects:
As per our estimates, the so-called ‘core’ system liquidity (total banking liquidity minus government balances) is around Rs 65,000 crore as on early August. Assuming currency in circulation (CIC) seasonality of last year and superimposing a nominal growth rate to this, the system will lose around Rs 2,20,000 crore from here to March 2020.

Adding back a higher RBI dividend and some balance of payment accretions, we are largely left with zero core liquidity by end of the financial year. However given the RBI’s current liquidity preference, we would assume they would want core liquidity to be at least be in surplus by a similar magnitude as today. This means that one should reasonably expect further open market operation (OMO) bond purchases from the RBI of at least Rs 65,000-75,000 crore between now and end of the financial year.

RBI
Adding back a higher RBI dividend and some balance of payment accretions, we are largely left with zero core liquidity by end of the financial year. Pixabay

A further implication of this is that domestic net government bond supply between October and March is largely agnostic to whether the government decides to do a foreign currency sovereign bond issue or not. This is assuming that say $10 billion raised by government from offshore sovereign bonds would have been entirely converted by RBI into rupee liquidity. Thus the need for OMOs would have fallen to that extent.

Refreshing a table we had done in an earlier note, the Rs 70,000 crore assumed for the sovereign bond issue may just end up getting replaced as RBI OMO should the bond issue not happen.

While on the subject, one has to comment on the conceptual fallacy in the criticism often levied towards RBI’s OMOs as being monetisation of government deficit. Assuming an unwillingness to cut Cash Reserve Ratio (CRR), the only two other tools for policy driven liquidity creation is purchase of forex or bonds. Long term repos are no solution since this is ‘borrowed’ and not permanent liquidity.

Given that purchase of forex is a function of flows that the RBI doesn’t directly influence, it has to resort to purchase of bonds for discretionary enhancements in core liquidity. Now, if this were being done much beyond the requirements of liquidity creation for the explicit purpose of supporting the bond issuance program or was systematically tied to the quantum of such program or didn’t display two-way directionality, then one could have legitimately argued for backdoor monetisation.

However, there is no evidence of this as well. Thus, any impact from OMOs has to be treated as largely an unavoidable cost of policy implementation just as other tools affect other market variables.

RBI
Governor has lately referred to the Rs 1-1.5 lakh crore positive system liquidity as a comfort factor and facilitator for banks. Pixabay

The macro aspects:
As can be seen, after the disruption from the global financial crisis (GFC) had subsided, the ratio of broad money (M3) as proportion of quarterly GDP had largely settled in a range. This broke lower post demonetisation, but hasn’t reverted still to its previous range. This is despite the well acknowledged growth slowdown that has now been underway for some time.

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After largely tracking nominal GDP growth rates between 2012 and 2015, M3 growth had started to fall below GDP growth from early 2016, even before demonetisation. It is only very recently that M3 growth has been catching back with nominal GDP.

It can be argued that a necessary ask from monetary policy in response to the broad-based slowdown is for a higher rate of money supply growth than what has been in the recent few years. Indeed, that seems to have been the case also in the ‘golden’ growth period of 2005 – 2008, where M3 growth was much above nominal GDP growth. Assuming no changes to the money multiplier, this implies a higher pace of expansion in RBI’s balance sheet, including through more aggressive purchases of domestic bonds. (IANS)

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Finance Minister Nirmala Sitharaman Measures To Boost Export and Housing Sector

With GDP growth sliding to six-year low of 5 per cent, Finance Minister Nirmala Sitharaman on Saturday announced a fresh set of measures to boost exports and the housing sector.

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TV, LED panels, Finance Minister, India, import duty
Finance Ministry has abolished the import duty on open cell LED TV panels from 5 per cent to zero. Wikimedia Commons

With GDP growth sliding to six-year low of 5 per cent in April-June quarter and several sectors facing low demand, Finance Minister Nirmala Sitharaman on Saturday announced a fresh set of measures to boost exports and the housing sector.

The key measures include extending the scheme of Reimbursement of taxes and Duties for export promotion, fully automated electronic refund for Input Tax Credits (ITC) in GST, revised priority sector lending norms for exports and expanding the scope of Export Credit Insurance Scheme (ECIS). An inter-ministerial working group has also been formed to monitor export finance.

Accordingly, the Scheme for Remission of duties or Taxes on Export Product (RoDTEP) was announced which will replace Merchandise Exports from India Scheme (MEIS) for textiles. In effect, RoDTEP will more than adequately incentivise exporters than existing schemes put together.

Revenue foregone on this account is projected at up to Rs 50,000 crore.

Existing dispensation in textiles of MEIS plus old ROSL scheme will continue up to December 12, 2019. Textile and all other sectors which currently enjoy incentives upto 2 per cent over MEIS will transit into RoDTEP from January 1, 2020.

Finance, Minister, Nirmala Sitharaman, GDP, Measures
There is concern about the speed and nature of the government and industry’s response, and will these actions turnaround things immediately, or not. Pixabay

Sitharaman also announced to reduce turnaround time for exports by leveraging technology and benchmarking it to Boston and Shanghai ports.

She said that priority sector lending norms for exports is being examined by the RBI and the guidelines will come out soon. Further, government will provide Rs 1,700 crore for export guarantees and to cut credit cost for the exporters.

The minister came out with several measures to prop up country’s housing sector which is considered one of the main job creators. Now, there would be relaxed ECB norms for housing sector. Further, interest on house building advance would be lowered by linking it with 10-year government securities.

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Sitharaman said that there would be special window for affordable and middle-income housing. Under this, a special window to provide last-mile funding for housing projects which are non-NCLT, non-NPA cases to complete unfinished projects. For this, a fund of Rs 10,000 crore would be contributed by the government and “roughly the same size by outside investors.”

The fresh set of measures to boost the economy has come in the wake of sinking business sentiment across the industry.

With most engines of growth stuttering, the Reserve Bank of India recently lowered its GDP forecast and pegged it at 6.9 per cent in 2019-20. Several rating agencies and research firms expect the growth to be in the range of 6.5-7 per cent.

Besides domestic consumption slowdown, the external factors remain adverse threatening to pull down the economy. A lingering US-China trade war and fears of a global recession could make things worse. (IANS)