The Reserve Bank of India decided to keep the policy repo rate at 7.5 per cent in its monetary policy statement, and the cash reserve ratio (CRR) of scheduled banks at 4.0 per cent on Tuesday.
The RBI governor Raghuram Rajan kept the policy rate unchanged until the impact of unseasonal rains on food inflation is decided. He also wanted banks to pass on benefits of previous two rate cut .
“Transmission of policy rates to lending rates has not taken place so far despite weak credit off take and the front loading of two rate cuts. With little transmission, and the possibility that incoming data will provide more clarity on the balance of risks on inflation, the Reserve Bank will maintain status quo in its monetary policy stance in this review,” said the governor.
The decision of doing so has been taken cause of the fears of spike in food prices as the unseasonal rains and hailstorm have impacted rabi crops across North and Western India.
The authorities from RBI stated that, “The RBI will await the transmission by banks of its front-loaded rate reductions in January and February into their lending rates. Transmission of policy rates to lending rates has not taken place so far despite weak credit off take and the front loading of two rate cuts.”
As the Yes Bank fiasco hit UPI-based transactions last week, PhonePe that was solely using Yes Bank’s services worked overnight with the National Payments Corporation of India (NPCI) and ICICI bank to ensure all its services were up and running within a day.
PhonePe, with close to 20 crore users, saw an extended service outage, which started immediately after the RBI moratorium on Yes Bank on March 5, lasting for nearly 24 hours. The company worked with the NPCI and ICICI bank, its new UPI partner.
All merchant payment settlements were restored by Friday noon and all consumer wallet, credit and debit card payments were restored by 3 pm, the company said in a statement. All UPI services were restored by Friday night, with PhonePe users continuing to use their UPI @ybl handles.
“Friday was an extraordinarily difficult situation with little precedence. We are grateful to the RBI, NPCI, Yes Bank, and ICICI for working collectively to ensure that millions of our customers and merchants were not inconvenienced a minute longer than necessary,” said Sameer Nigam, Founder and CEO PhonePe.
PhonePe employees had to work for 36 hours straight to achieve this. The platform processed transactions of over Rs 4,000 crore in 24 hours and saw its largest ever volume of user traffic in a single day (with over 70 million app sessions).
Several petrol pumps rejected most of the UPI-based transactions over the weekend, including Paytm, PhonePe, and GooglePay.
The Reserve Bank of India decided to hold repo rates unchanged in its meeting on December 5, 2019. In this context, apart from the outlook on inflation, the crucial area of focus should be the “transmission mechanism” of the rate cuts already delivered in 2019. In common parlance, “transmission mechanism” can be interpreted as the chain effect of rate cuts being passed on to the inter-related and inter-linked sectors in the overall ecosystem, to both lower the cost of credit and increase the availability of credit. Primarily, raise the money supply. The concept of an effective “transmission mechanism” is vital for India, both within the context of monetary policy and in the broader contexts of investments, capital flow and effective policymaking. The transmission of monetary policy, capital flows and
information must be all improved.
Within the context of monetary policy, the transmission mechanism is vital to ensure that the cost of credit is being lowered even as more substantial quantities of credit become available. It is a no brainer, that as resources for purveying credit rises with the banks so does the availability of credit for consumers. From the perspective of resolving some of the impediments that the economy is currently facing, it is critical that the low rates are passed on through a lower cost of credit and more credit availability and that the cost of credit itself is lowered across the term structure of interest rates.
An increase in short-term liquidity at the short end of the interest rate curve will eventually translate into lower longer-term yields for all. While short-dated credit availability is of prime importance, a sustainable drop in credit costs in longer tenures will significantly help in providing impetus to the investment cycle. Basically, as the cost of credit drops for longer borrowing periods, potential investment projects become increasingly attractive, given that the cost of financing the projects declines relative to the potential investment return. This increasing attractiveness of projects relative to the cost of capital will be a prime mover in getting the private investment cycle to get going in full flow.
As mentioned above, the “transmission mechanism” must not be limited to just monetary policy but must focus on the concept of capital flows.
Given the constant talk about how crucial private capital is to finance Indian infrastructure and the need global capital has for returns in a low-yield world, the essential point is that the “transmission mechanism” that allows global capital to flow truly and easily needs to be continuously improved.
Improving the “transmission mechanism” for capital flow is dependent on a variety of factors but significantly dependent on building investor trust through efficient capital flow templates. Mainly, expedited and precise project execution will be vital for India to create an effective transmission mechanism to generate significant capital flow.
In this regard, it is important to note that the efficient capital flow framework is as vital for international capital as it is for domestic capital. In fact, without domestic capital from both households and the private sector finding its way to finance the future businesses and infrastructure, international capital will be harder to come by. Effective transmission mechanisms are required for creating capital flow that can genuinely bridge the investment gap in India.
The answer to what promotes an efficient transmission mechanism of capital is not rocket science but essential. The primary factors are high contract enforcement, low bureaucracy and efficient courts of law. While the importance of these factors is well known, the governments both at the centre and the states must work together to deliver on the efficient transmission mechanisms required for efficient capital flow.
Beyond the financial implications and factors around transmission, effective transmission of both monetary policy and capital hinges upon trust that contracts will be honoured as per the law and speedy resolution of issues around contract enforcement will be provided for. For India to push ahead towards generating capital for both an investment and consumption upswing in the economy, and for continuously improving “transmission mechanisms” in the economy, a focus on the right policy in respect of “transmission mechanisms” is the need of the hour.
Additionally, ensuring that the policies that are implemented can create positive ripple effects in the economy is of equal importance. Transmitting the policy changes as far as possible within the value chain will be the real game-changer.
(The views expressed in this article are personal and that of the author. The author heads Development Tracks, an infrastructure advisory firm) (IANS)
The Reserve Bank of India (RBI) is currently working with other financial sector regulators like Sebi, PFRDA and Irda to develop an interest rate market where mutual funds, pension and insurance funds could participate in securities lending to deepen market based finance and develop an alternate to bank finance.
“IRDA, SEBI and PFRDA too could help development of interest rate markets. For instance, short selling activity could benefit if a wider pool of securities lenders can be developed.
“Insurance and pension funds, mutual funds have significant holdings of Government securities that could be used to lent to short sellers. This would avoid short-squeeze incident we saw a couple of years back, apart from generating income for these entities.
“We are working with regulators to develop a securities lending product that could enable these entities to participate in securities lending,” B.P. Kanungo, Deputy Governor, Reserve Bank of India recently said at FIMMDA meeting in Moscow.
FIMMDA is a representative body of participants in the fixed income market in India.
He said the Indian financial sector which mostly has been a bank-based one needs to develop a robust fixed income market to bring in market discipline, to augment bank finance and indeed free up bank finance for uses that cannot access the market directly.
Development of the fixed income market has been an important objective of the Reserve Bank, the Government, the SEBI and other regulators these many years. Significant progress has been made, yet a lot remains to be achieved.
The Banking regulator is also currently looking at refurbishing some regulations on treatment of cash margins as deposits, payment of interest on such margins, posting of collateral abroad to enable participants to move to global margining standards.
“The risk management at market level is pretty robust, with central counterparty settlement, exchange traded products, trade repositories, legal entity identifier.
But there is scope of improvement at entity-level as far as financial institutions are concerned, which will be tested with introduction of new accounting standards. Some other aspects of regulation – treatment of cash margins as deposits, payment of interest on such margins, posting of collateral abroad – are all under examination to enable participants to move to global margining standards.
Kanungo further said in the next five years the demand for bonds will significantly outstrip the supply.
“It is estimated that five years down the line, the demand for bonds will significantly outstrip the supply,” he said. (IANS)