rbi monetary policy, hfc lending

RBI Monetary Policy Committee: A Pathway towards Normalcy?

By Economy, Banking, Others No Comments

RBI’s Monetary Policy Committee

Sluggish growth, increasing vulnerability of financial institutions, mounting NPAs, non-convergence working between financial and real sectors, and poor monetary transmission continue to haunt the economy despite the Reserve Bank of India’s (RBI) intensive financial stability measures. With financial and monetary stability being RBI’s core objective, the apex bank is geared towards the restoration of equilibrium in these unprecedented times.

The Monetary Policy Committee (MPC) of RBI announced that interest rates would remain unchanged thereby taking an accommodative stance towards its policies. Amid the recent inflation in retail consumer prices, RBI also said that it would ensure that this rise in inflation remains within its targets and control. The repo rate currently stands at 4.0% and the reverse repo rate at 3.35%.

The decision indicates that MPC would monitor dynamics for a durable reduction in inflation before the policy rates are lowered again and patiently await to use its remaining monetary ammunition. On the surface, this appears to have a balancing effect between financial stability and growth support in light of the current challenges posed by the COVID-19 Pandemic.

The existing disconnect between our economy and the financial market indicates that RBI would be watchful of the current inflation as well as the existing exuberance in the markets. RBI is now prioritizing strain felt by the economy and tackling the challenges to the growth of the economy with the containment of retail inflation.

Central Banks’ MPC could be seen as judicial in their approach, playing it safe while maintaining the status quo of the current rates with the scope of further monetary action even after this apparent pause. Current rates could be accommodating enough to allow for such a break without unwarranted consequences. It also allows them to monitor the existing risks associated with Food Inflation as well as the Cost-Push pressure due to fuel price rises.

MPCs’ approach was a cautious step showing concerns over the evolution of uncertain inflation trajectory while supporting the growth prospects that could be available as and when this trajectory allows. The decision to maintain this status quo could be based upon their short-term outlook towards inflation in the current uncertainty because of cost-push factors and existing supply constraints.

RBIs’ accommodating stance with the current backdrop of diminished growth and subsequent expectation of a reduction in inflation over a medium-term period puts the current policy in congruence with the current market expectations and provides them with further space for easing of monetary measures to revive the economic growth during COVID-19.

RBIs’ step towards allowing some form of restructuring facility to the banks facing trouble in restructuring the loans without classifying them as Non-Performing Assets (NPA), could be seen as a positive step that could further ease the stress on Banking systems.

This new resolution framework could be seen as an additional systematic undertaking to tackle the stress induced by the COVID-19 Pandemic. Additionally, RBI has also recognized the need for this facility for standard accounts facing difficulties while restructuring, and this facility has also been extended to SMEs, corporations, and personal loans providing each segment with proper & necessary safeguards.

Addressing the MSME sector, which has been deeply impacted by this Pandemic, the reasonably anticipated scheme for restructuring this sector could provide them with additional support & relief in this tumultuous time. Addressing the concern regarding liquidity in this Pandemic faced by MSME could facilitate an amended system and platform for the banks.

This restructuring of the loan scheme could be seen as a breather to already liquidity-strapped financial sectors, already facing concerns over the asset quality issue. An expert committee under KV Kamath could overlook and provide recommendations regarding the scheme’s details and restructuring plans. This could give the MSME, companies as well as individuals better safeguard in this liquidity crisis during the Pandemic.

To improve the flow of credit and enhance liquidity additional measures were announced by RBI to accelerate the growth of the economy. RBI also focused on measures that could deepen the digital payment facilities among all others.

These announcements could harmonize market risk associated with capital charge treatment of investment by banks in debt instruments and ETFs as well as Debt Mutual Funds and prediction for improvement in the bond market, as there could be higher participation by banks in the bond markets over a while.

Additionally, a measure relating to increasing the sanctioned loan to value ratio (LTV) for gold loans to 90 percent by March 31, 2021, is an effort to mitigate the impact of COVID-19 on households at a micro-economic level however this move fails to soothe deeper wounds aggravated on account of the virus-induced financial distress.

Additional liquidity facilities provided to NABARD and NHB will further support the credit push in the economy. RBI has continued to focus on also bringing down borrowing costs for all.

In light of India’s sluggish economic growth, uncertain external demand, and rising inflation, the developmental and regulatory measures announced by RBI adopts a prudent approach to upholding the current policy rates in existing circumstances.

Their strategy could be seen to be in perfect conformity with the currently developing state of the economy while keeping enough headroom for future changes. However, it remains to be seen how much relief will be provided, and what will be the take-up for this resolution mechanism.


Tags: rbi’s monetary policy, rbi monetary, bi monthly monetary policy, recent monetary policy of rbi, rbi monetary policy 2021, rbi monetary policy committee

economic stimulus packages

India’s Economic Stimulus Packages: A Saving Grace For MSMEs or Lopsided Solution to a Larger Fiscal Problem?

By Economy, Labour & Employment, Others No Comments

India’s Economic Stimulus Packages: A saving grace for MSMEs

The COVID-19 pandemic has hurled some of the world’s most intrinsically strong economies into a financial abyss, and India is no exception to that. India’s economy was on its way south due to low investments, weak domestic demand, and falling exports before the onset of the pandemic. The pandemic exacerbated operational and financial constraints in terms of a decrease in working capital, unavailability of raw materials, and labor crunch due to mass migration. Evidently, MSMEs have faced a disproportionate impact of COVID-19 and the concomitant economic downturn.

With over 11 crore persons employed in the MSME sector, the Finance Ministry has, on numerous occasions, introduced a number of measures to detangle MSMEs from financial gridlocks during the crisis. In doing so, the government announced an economic stimulus package of Rs 20 lakh crore for reviving COVID afflicted MSME businesses.

Subsequently, the government revealed an array of initiatives for MSMEs, including Rs. 3 lakh crore worth of collateral-free automatic loans for businesses, Rs. 20,000 crore subordinated debt for stressed MSMEs, a Fund of Funds for equity infusion of Rs 50,000 crore followed by a revision in the MSME definition to widen the quantum of beneficiaries under the aforesaid government initiatives. Collectively, these supply-side measures are aimed at providing buoyancy to MSMEs and accelerating growth despite the current economic gloom.

At the surface, the quantum of economic packages aggregating to nearly Rs. 6 lakh crore are indicative of a fast-drying Indian treasury, however, some experts believe that the amount of money actually spent by the government could be far lower, at anywhere between Rs 16,500 crore to Rs 55,000 crore. This is because most measures are credit-focused or aimed at solving liquidity concerns of MSMEs and the NBFC sectors.

By promoting the financial institutions to lend more, none of these announcements actually involve the government spending a great deal in this financial year. However, with no end in sight to the pandemic, the resilience of financial institutions is likely to be tested over time and the numbers may vary greatly with the prolonged subsistence of the pandemic-induced lockdown.

The real requirement at this stage is to figure out the finest ways for MSMEs to stay afloat and paddle through the crisis with the least impact. A one-time economic reform can provide a preliminary push to MSMEs, but survival and growth are largely dependent on the individual borrower’s capacity to bounce back to normality. F

urther, the RBI-approved loan moratorium option for businesses provides temporary relief, however, interest on outstanding loan amounts continues to accrue during the moratorium period and further exacerbates the financial woes of distressed MSMEs in the long run.

The Brazilian government has announced part-payment of salaries of MSME employees, while Canada and New Zealand have offered wage subsidies. However, the Indian government has not announced any wage support or subsidy package to incentivize MSME employers to retain employees during this crisis although the government has directed businesses to continue paying wages in a timely manner without deductions.

Thus, it is evident that the recently introduced reforms overlook the woes of the workforce employed in the MSME sector and are not adequately addressed therein. While the recently introduced reforms do not directly provide wage support, the secondary beneficiaries of government measures are people employed in the MSME sector, who can be relatively at ease with the potential accelerated growth of MSMEs in the post-COVID era.

It is undisputed that GST and demonetization have tested the resilience of MSMEs in the last couple of years. Although the financial disruption induced by the COVID-19 pandemic is a larger threat, MSMEs are diversifying their product portfolio to paddle through the crisis and accelerate business growth.

Naturally, the collective effect of the measures introduced by the government to provide access to funding will enable numerous MSMEs to keep their heads above the water muddled with financial gridlocks on account of COVID-19. While the pièce de résistance of the Finance Ministry’s economic package was its push for micro, small and medium enterprises (MSMEs), its benefits may percolate into various interlaced industries and benefit the economy at large.


Tags: india economic stimulus, fiscal problem, fiscal stimulus, stimulus package india, global stimulus packages, economic stimulus packages, economic stimulus package india

bank nationalization

A Robust Shadow Banking System For NBFCs – A Must For The Indian Economy Having a High Quantum of Micro Borrowers

By Economy, Banking No Comments

NBFC Micro Finance Institutions

Customers for micro-entrepreneurs have dwindled. With this significant loss of demand coupled with the supply-side shock, most cannot ply their trades with any significant level of certainty and consistency. With overburdened banks and a substantial non-performing asset portfolio, the shadow financing industry’s inclination is to percolate downwards leading to a wider reach among the economically weaker sections of the society across India. In addition to this, the limited prudential regulation pertaining to NBFCs further attracted a high quantum of micro borrowers in India looking to pave their way out of the pandemic situation. 

In the past, the interests of micro-borrowers were compromised in the single-minded pursuit of increased profits by lenders with a scarce focus on the well-being of borrowers. To address this problem the Reserve Bank of India (RBI), 2011, introduced comprehensive regulations on micro-credit with “master directions” for NBFC Micro Finance Institutions, which covered products, leverage limits, market segments, pricing, and the interface with customers.

However, the potential effect of similar such comprehensive regulations was wiped off with the onset of the pandemic hurling a substantial population of micro-borrowers into a fathomless abyss of debt and penal interests. In addition to this, the recent government-led relaxations have induced a lopsided effect of pushing the demand side upward while the industry continues to be plagued with disrupted supply chains and the unavailability of the labor force.

With the attainment of demand-supply equilibrium appearing as a distant reality, the resilience of the shadow financing industry will be put to a litmus test. Therefore, safeguarding customer interests is as critical as helping the shadow financing system stay afloat when depressionary forces are mightiest. 

Adding to the woes of NBFCs is the lack of fund flow and evaporating liquidity which started from the IL&FS fiasco but continues to exacerbate under the pretext of the pandemic. For the lack of government support in this year’s Budget, the involvement of NBFCs in sensitive sectors such as real estate and infrastructure has led these shadow banking segments to gorge on public money. Evidently, the cash influx from the authorities is not sufficient to eliminate concerns among investors about NBFCs and raises concerns of rising bad debts in the coming quarters. 

The past few years have severely impacted the financial well-being of the shadow financing industry; however, they have gained a position of prominence by assuming the role of banks on some occasions.  This invariably raises an essential question of whether to bring NBFCs under similar scrutiny levels as banks to ensure the sustainability of NBFCs. The need for a strongly regulated shadow banking system was urgently felt to be addressed by the RBI to address the systemic risks inherent to NBFC in the country.

The proposal to place micro-borrowers under the least stringent regulations is likely to facilitate growth and promote the shadow financing industry which plays an integral role in lending support to micro borrowers in rural and urban areas. However, in doing so, the loss withstanding ability of various classes of NBFCs should be carefully assessed.

Since NBFCs attract a high quantum of borrowers, a robust system would enable the NBFCs to assign credit scores to individuals. Thus, propelling the existing framework towards a fool-proof one would mitigate default risks that caused the collapse of the sector in the past. As NBFCs operate more like banks and provide similar banking services at present, the current practice demands a stricter regulation on the NBFCs wherein checks and balances at regular intervals would ensure the overall financial health while securing the interests of micro-borrowers at large.


Tags: rbi guidelines for microfinance, nbfc microfinance, micro finance rbi guidelines, micro finance nbfc, nbfc micro finance institutions, rbi rules for microfinance, rbi guidelines for microfinance institutions, rbi guidelines microfinance

buy now pay later

Buy Now Pay Later: Financing the Financiers of Future!

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Buy Now Pay Later

Buy Now Pay Later: Governments of all political hues have encouraged people to save for the future. However, government messages about the value of saving are working with the grain of public opinion. So the reason for declining trends in savings may be due to concrete problems such as lack of money, insecurity, and complexity that surrounds savings products. People want to save – the government needs to make it easy for them to do so!

While the country awaits savings-centric legislation and measures, it’s no surprise that Buy Now Pay Later is on the rise. Given how the pandemic had led to the crippling of state and personal finances due to its immense impact on health and the economic sector, it has further accelerated the BNPL trend. Further, the BNPL explosion can also be attributed to the boom in the e-commerce sector.

Given that the authorities had imposed free movement and travel restrictions, the e-commerce sector was heavily relied on for basic necessities during the pandemic. This had led to a boom in the e-commerce market and hence, the BNPL services. According to various insights being offered by experts, the global BNPL sector is expected to grow 10-15 times its current volume by 2025. Thus, it can be rightfully stated that the BNPL industry might serve as a lucrative business opportunity in the future. 

What will work in favour of the BNPL industry?

But why would such an industry boom even after the pandemic? This is due to the fact that it effectively fulfils a consumer need by providing a simple and lower cost financial alternative to daily arduous payday loans and credit cards. In addition to providing seamless financial services, the industry also plans on deploying technology to deliver a more accommodating customer experience. Better consumer services will help in faster decision-making.

Another factor that will work in favour of the BNPL industry is that it provides short-term credit, usually for four to six weeks, at the point of sale with a better and frictionless experience. The frictionless experience emphatically means that short term credit will be provided without the need for credit checks on smaller purchases which you can bet is an attractive proposition. As it is known that getting smaller loans or loans in general from banks is arduous, to say the least. Thus, such an effortless option to cover your daily expenses will help lure more customers to the industry.

However, it is to be noted that no business is without any risk. This too has its own set of risks attached to it. The risk here is to the consumers in the industry as BNPL is a largely unregulated space. As it is known, other forms of credit involve harsh penalties because of their strict regulations. These penalties include harsh scrutinization of credibility, missing payments and hikes in interest charges if the credit term is extended.

But given the unregulated attribute of the BNPL system, one doesn’t have to go through such odious punishments. Another con in favour of the BNPL system is that while losses for the  BNPL sector financing are low at the moment, there is a huge concern that defaults will effectively spike when a recession occurs.

As aforementioned, the BNPL system might help in mitigating daily financing difficulties but given that there is a huge rise in consumer indebtedness; experts are sceptical about whether such a business model will work in the long term. This particular detestable attribute of the industry has led experts to pay attention to the regulative requirement of the sector. Given the huge plausibility of failure of the sector in future, various regulators have suggested its regulation. As a matter-of-fact regulation will also help drive market expansion.

This is due to the fact that certainty will prevail in the market and this will lure more finance and certainly conscious customers to the market. In a survey conducted of 1000 UK nationals, it was found that 49% of UK citizens that have used a BNPL service in the past 12 months would happily spend more if credit checks had taken place in the industry. As this will lead to more transparency in the industry, more people will be incentivized to use the service.

It is to be noted that increased regulatory oversight also comes at a time when more banks are themselves entering this space. Now, this revelation leads to an inquisitive, pertinent question that is banks better placed to provide more secure and reliable BNPL services? Theoretically, if this question is answered, the answer is yes, banks are more suitable to provide better and more secured BNPL services.

Given the greater scrutinization criteria they follow to evaluate their customers, they should have better insight into their customers’ financial standing. Thus, this can effectively lead to better risk management that in the long run will lead to lesser defaulting on loans and repayment.

But the two most important aspects of such lending that banks need to pay attention to are that to this date, most banks have not been able to use the recorded customer data to provide instant credit decisioning, which effectively is the driving source of the BNPL sector. Secondly, the banks have not managed to break down the data silos within the organization to create a holistic view of the customer. Thus, these two aspects of the banking sector need to be paid attention to.

Given the aforementioned reasons and circumstances, even the banking sector, which is recently venturing out into this space, is not well equipped to enter the business. Thus, deciding to enter the BNPL space shouldn’t be just driven by a fear of missing out. Simultaneously, it is important to empower consumers through education. However, such fears should not discourage Banks from providing BNPL services and providing their customers with services that truly solve their credit needs while being fully aware of the impact of the present-future dichotomy on their behaviour.


Tags: financing, paylater, bnpl, buy now pay later, future financiers, buy now pay later financing

bitcoins in india

The Indian Battlefield Of Bitcoins: Ban Or Buy?

By Economy, Others No Comments

The Battlefield Of Bitcoins in India

Indian government’s relationship with the volatile crypto can be best described as aversive and antagonistic. The battle against Bitcoins in India had raged long ago. But given the discovery of odds in favour of crypto, the Indian government is all ready to alter its stance. Earlier, reflecting India’s detestable, stern attitude towards cryptocurrency, India had effectively proposed a law to ban cryptocurrencies.

However, this rushed, immediate act of the government could actually have hurt the crypto economy and was on its way to becoming the world’s strictest policies against cryptocurrencies, which could have criminalized possession, issuance, mining, trading and transferring of the red-hot assets.

Along the same lines, a restrictive circular by RBI effectively banned all the banks from issuance and maintenance of crypto assets in 2018. This stringent, detestable stance of the central bank had put many enthusiastic investors on the wrong side of the law.

But it is to be noted that since then, the government’s stance has not much altered as the measure of a blanket bank was in line with a January government agenda that called for banning private virtual currencies such as Bitcoin while building a framework for an official digital currency. But hopefully and positively, the recent government comments have raised investors’ hopes that the authorities might go easier on the booming market.

Bitcoin, the world’s biggest cryptocurrency, had hit a record high of $60,000 during the pandemic. The popularity of crypto can also be assessed by the fact that in India, despite the government’s glaring threats of a ban, transaction volumes were swelling, so much so that, 8 million investors held 100 billion rupees in crypto-investments, which even now is rising. This effectively shows that even though people are panicking due to the potential ban, greed is driving such not-so-illegal choices.

The changing tide in favour of the contentious digital asset

Ripples have been sent across the crypto market since El Salvador accepted it as a legal tender. In another similar event, Miami hosted its ambitious Crypto fair in order to court various crypto investors in its state. Interestingly enough, various ambitious and promising entrepreneurs like Jack Dorsey and J Zay have also come up with a bitcoin fund that will help in endorsing and funding crypto development in developed and developing countries like India.

While all these events have great potential to shake global markets but it is yet not unambiguous whether it will be the future global currency or not but it emphatically projects that economists, governments, political leaders and investors are increasingly recognizing the robust and significant potential of a decentralized financial system. But to count India in this group of enthusiastic supporters of crypto will be a gross misjudgment.

Given all the successful points in favour of crypto, why is the Indian government so reluctant? It is due to its volatile, ambiguous, dubious and unregulated aspect that India is aversive. In support of such hostility, several prominent personalities have also stepped forward to spew their hate on the contentious digital asset.

The former President of the United States of America, Donald Trump, has aired his suspicion about the digital asset and has called for an effective ban. Similarly, after months of canvassing and endorsing, Tesla’s CEO has now come forward to debunk all the claims that crypto can be the future currency by claiming that it is not real money.

But is such a stern attitude required? Many economists and experts have come forward to express their concerns. For India, it can be a boon in disguise as the adoption of cryptocurrency and innovative technology can eventually soften India’s dependence on the US Dollar. This can materialize if global trade eventually moves to a decentralized cryptocurrency. Consequently, the country and its export-oriented companies can have better predictability with respect to trade and payments.

In addition to future innovations in the cryptocurrency space, the right set of regulations can also lead to job creation and economic growth. Thus, Cryptocurrencies and blockchain have a significant and effective potential to fuel India’s goal of becoming aatmanirbhar.

Giving thought to the same, the government has altered its stand on cryptocurrency. The government has come forward to state that they are not closing their minds to the innovative, lucrative idea but are effectively looking at ways in which experiments can happen in the digital world and cryptocurrency. In fact, the plan is to ban private crypto-assets while promoting blockchain – a secure database technology that is the backbone for virtual currencies but also a system that experts say could revolutionize international transactions.

However, we will have to wait and watch to see whether the scales will tip in favour of the volatile money or fall in the government’s protectionist lap. In hindsight, cryptocurrency is the bus that the Indian government cannot afford to miss. Therefore, calibrated response and regulations of cryptocurrencies would be far more effective than imposing a toothless blanket ban on its trading, mining and possession.


Tags: cryptocurrencies and blockchain, nft crypto, cryptocurrency in india, india cryptocurrency, crypto india, india crypto, bitcoins in india

normalize monetary policy

RBI’s Next Big Question: How to Normalize Monetary Policy?

By Economy, Banking, Others No Comments

How to Normalize Monetary Policy?

Global growth is fragile and uneven. Winds of change are blowing across the world again amidst the pandemic. While some economies are attempting to rise from their ashes, others remain in a fiscal fathomless abyss of misery and debt. Throughout the pandemic, India’s central bank has been making crucial decisions for the economy—trading off between inflation and growth. Additionally, on the foreign exchange front, Asia’s third-largest economy has been the largest recipient of foreign portfolio money, or ‘hot money emanating from developed nations.

This is due to the accommodative monetary policies adopted by the developed nations like the US, European Union, and Japan which has led to the increased inflow of FDI in India. What made India a preferred choice of investment and stand out amongst its peers was its macroeconomic stability as well as its investment-grade sovereign credit rating.

If the object of India’s Central Bank is to be scrutinized, the monetary policy committee (MPC) throughout the pandemic has kept it straightforward: don’t rock the boat. It is no news that the second wave of the pandemic has increased the uncertainty around the near-term growth outlook. But given the latest economic numbers, India has been seen recuperating from the pandemic as various indexes indicate growth. Moreover, given India’s falling infection rate, it can be maintained that the economy would not have to impose yet another stringent lockdown to curb the virulent nature of the pandemic, and hence the economy will be given some space to breathe.

The monetary policy framework in India has undergone fundamental modifications. RBI, throughout the pandemic, has kept an accommodative stance prioritizing growth over inflation. But after one successful year of maintaining such a stance, RBI now finds itself in troubled waters as headline inflation looks likely with burgeoning WPI and CPI numbers.

Moreover, the public has already been feeling the pinch of increasing fuel prices and has been demanding its inclusion in the GST regime. However, RBI is of the stance that India is facing transitory inflation which will much likely recede in the future. But given that CPI, for the month of June, was above RBI’s comfort range and the supply constraint persists in the economy due to crippled capacity and partial lockdowns, inflation is doomed to rise.

Moreover, the output gap is still negative and the recovery has not yet been secured, thus growth measures and RBI’s accommodative stance appears to be the right strategy. Thus, RBI at the moment finds itself at the crossroads of difficult choices—to maintain its accommodative stance at record low rates or to end its accommodative stance at a high rate.

The MPC may choose to give fresh time-based guidance, or one or two additional quarters, to stay accommodative, or shift to state-based guidance but an immediate overhaul to control inflation seems highly unlikely. On the other hand, markets seem to prefer the former choice of an accommodative stance, but given the circumstances, the MPC should opt for the latter to give itself maneuverability over the medium-term for various reasons.

First and foremost is the economic stimulus of Rs. 6.28 lakh that has been recently introduced by the government. Given rising inflation in the economy, economic stimulus just adds to the money supply of the economy and hence inflation. Though it is to be noted that the economic stimulus is a replica with some repeated measures of the last stimulus, its impact is too crucial to be ignored.

Secondly, the economic impact of the second wave will be limited, owing to less stringent lockdowns and as consumers and businesses have adapted to the new normal. To support this claim, high-frequency data has suggested that while mobility and passenger transport have been hit, the goods sector continued to chug along. In addition to this, growth should also be supported by medium-term tailwinds from ongoing vaccinations, a synchronized global growth recovery, and lagged effects of easier financial conditions. Hence, while sequential growth may weaken during April-June but growth, at the moment, doesn’t seem like a far-fetched idea as it did previously.

Thirdly, risks to underlying inflation are burgeoning. It is to be noted that near-term inflation moderation is largely due to the volatile vegetable component. Whereas higher freight costs and a broad-based rise in commodity prices have squeezed manufacturers’ profit margins and resulted in some of these costs being passed to consumers. Though the recent WPI and CPI data show that the producer’s cost has not yet been transferred to consumers but it is only a matter of time before it does. Initially, services inflation was subdued, but there is early evidence of higher prices in categories like recreation.

Lastly, the external environment could turn malevolent for emerging markets in the future. This will be due to the US’s growth outperformance given its higher growth rate and robust vaccination campaign. Higher US yields or the Fed’s plan to taper off its asset purchases could trigger capital outflows. Given more enticing returns in the US or any other country, capital flight in India could be triggered.

On the other hand, India, a developing economy, shouldn’t use ambitious and privileged tips from developed countries’ playbooks as in developed economies, central banks are willing to tolerate higher inflation.
Given such a strategy, the near-term versus the medium-term monetary policy strategy differs. What is meant by this is that, while policy continuity could be the correct strategy in the near term, the medium-term or long-term growth-inflation tradeoff argues for gradual policy normalization. This calls for an effective measure to assign a higher weight to inflation, relative to growth.

It goes without saying that besides the standard tools, unconventional measures to address market dislocations were introduced by RBI like asset purchase schemes, opening up of a special liquidity window for the mutual fund industry, regulatory forbearance, loan moratoriums and restructuring of debt significantly eased the pain in the financial sector.

With the pandemic-induced damage to the economy relatively unknown coupled with RBI’s multi-pronged response, credit growth is muted due to concerns over lending risks, and the sovereign bond market is again on tenterhooks.

Thus, RBI which currently faces a conundrum to make a sagacious choice for the economy will be interesting to see which strategy it prioritizes, whether it will be its long-term stabilization program, or will it be its near-term growth strategy program. As clear communication as possible on the speed, timing, and sequencing of the normalization could help guide expectations.


Tags: monetary policy, monetary policy normalization, normalize monetary policy, normalization of monetary policy, rbi monetary policy

cryptocurrency legal status

Cryptocurrency in India: What’s The Government’s Stand, Legal Status and Its Future?

By Economy, Corporate Law, Others No Comments

Cryptocurrency Legal Status in India

If cryptocurrency is to be described, it can be best described as a highly volatile market. What corroborates such claims is the recent volatile rise and fall in the crypto world, including Bitcoin’s freefall from its highest in April at $65,000 to below the $40,000 mark. The main currency manipulator, setting all the trends in the crypto market is Tesla’s CEO Elon Musk.

In a recent turn of events, Elon Musk’s statements have brought back focus on laws around the governance of cryptocurrencies, of which India has taken a special note with full enthusiasm and will to enforce it. Given, crypto’s soaring profits and returns, it can be claimed as the best enticing alternative to conventional investments. Indian investors, especially have been profoundly impacted by such skyrocketing profits, so much so that around 7 million Indians have already pumped in over $1 billion into cryptos.

Government’s stand

Indian government’s relationship with the volatile crypto can be best described as aversive and antagonistic. Given, crypto’s burgeoning following around the world, so much so, that El Salvador has given it a legal status, the Indian government has been forced to alter its antagonistic stance. From outright banning cryptocurrencies in India, the Indian government has taken an encouraging step toward regulating digital currencies in India.

Given this encouraging step, the Ministry of Corporate Affairs (MCA) has made it significantly mandatory for companies to disclose crypto trading during the financial year. This can be seen as a step to regulate the unregulated market of crypto in India to tackle any extreme situations of a financial bubble. Such a step is welcomed, as it is known that bearish and bullish activities in the stock market change rapidly, so much so that sometimes irrationality clouds the better judgment of the markets.

Expertstoo sees it as a positive step and expects the taxation rules to follow through. Given, that crypto is an unregulated currency, it usually leads to a loss of revenue for the government. Thus this is being emphatically considered the first step toward regulating cryptocurrencies in India.

Additionally, such regulation and accounting of crypto assets are aimed at curbing illegal activities and circulation of black money for nefarious purposes of money laundering and a black market that take place via cryptos. Other affirmations of such an approach include improved corporate governance with more transparent disclosures.

Crypto’s volatile legal status in India

First and foremost, a fact: Cryptocurrencies are not illegal in India. But as aforementioned, the crypto market in India does not have a regulatory framework to govern cryptocurrencies. The government had constituted an Inter-Ministerial Committee (IMC) on November 2, 2017, to study virtual currencies and had flagged the positive aspect of distributed-ledger technology but the Centre had raised concerns about its misuse and had suggested a detestable blanket ban in India.

However, witnessing changing tide in favor of crypto, some claiming it to be the future money, cryptocurrency, after all, may not face a complete ban in India. The Centre may soon set up a panel to regulate them.

The ban story

Through a circular in April 2018, RBI had stringently advised or rather threatened all entities regulated by it to not deal in virtual currencies. Such an ominous ban was also extended to not providing services for facilitating any person or entity in dealing with or settling them. Consequently, the finance ministry too had issued a hostile statement suggesting the elimination of the crypto-dominated payment system.

Moreover, in mid-2019, a government committee had suggested banning all private cryptocurrencies. It would be shocking to discover that even a jail term of up to 10 years coupled with heavy penalties for anyone dealing in digital currencies was suggested. However, such a detestable order was overturned by the Supreme Court in March 2020.

But is everything, as mentioned above, working in favor of cryptocurrency? Apparently not. The diverse nature of the world guarantees a multiplicity of views. Though El Salvador might have declared it as a legal tender, China on the other hand has ordered a complete ban on mining to curb environmental degradation.

Coupled with this stringent move, the crypto endorser, Elon Musk to has raised concerns over his hypocritical turn to no longer to accept it as a payment for Tesla and denying to give it the “future money” status. Thus, if the Indian government can be swayed by the positive tide in favor of crypto, it can very well also develop a stern attitude towards it.

While the government has some reservations regarding cryptocurrencies, it is also working on its ambitious digital currency project. Ironically, India has been promoting digitalization but has been resisting this technological development, hence it is about time that the Indian government and its bodies familiarize themselves with technological innovations, fast, as with the advent of technology comes a higher risk of uncharted novel crimes with little to no legal recourse for those at the receiving end.

Realizing the tremendous potential that the industry carries including capital appreciation and wealth creation, the introduction of a digital rupee would prove to be a head-turner for many investors. However, with the fast-changing digital currency landscape, the government must concentrate on fine-tuning existing laws to bring cryptocurrencies under the regulatory framework and also formulate a mechanism to safeguard the interest of investors in this highly volatile, but popular market.

Thus in this fight to accept and deny crypto’s existence, will the scale tip in favor of the volatile money, or will it fall in the favor of the government’s age-old archaic stance on the ban. We’ll have to wait and watch to see if RBI’s confidence in the virtual currencies remains high flying or tanks.


Tags: cryptocurrency in india, cryptocurrency future, cryptocurrency legal status, crypto ban india, crypto future, crypto india, cryptocurrency future in india, legal status of cryptocurrency, india cryptocurrency

benefits of economy

How Sitharaman’s Latest Pursuit to Boost Economy Can Prove Beneficial

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Sitharaman’s Latest Pursuit To Boost & Benefits of Economy

Given the dire state of the Indian economy, hopes and livelihoods of billions have been pinned on the government which is often riled up in providing a conducive environment for people from the lowest to the highest strata of society. Pursuant to the economic data, the Indian economy had turned a corner in the month of June after contracting 12% in the first sector, thus a stimulus package to maintain this trend was much needed.

Various sectors including MSMEs, contact intensive sectors like the beauty sector, aviation sector, and hospitality sector were the worst hit by the pandemic. Therefore, there are high expectations, particularly among these particular sectors, that the government will announce some stimulus package to boost the economy, which has been hit by the second wave of coronavirus.

It is to be noted, that last year too, the government had announced a growth-oriented budget which was to be financed by high scale privatization of PSBs. Given, the rotten state of PSBs anyway, such a move was welcomed. The finance minister Sitharaman had announced the government proposal to take up the privatization of two public sector banks (PSBs) and one general insurance company in the year 2021-22.

Additionally, the government had consolidated 10 public sector banks into four and as a result, the total number of PSBs had come down to 12 from 27 in March 2017. After consolidating its financial base, the government has now shifted its focus largely on extending loan guarantees and concessional credit for pandemic-hit sectors and investments to ramp up healthcare capacities.

It is to be noted that there is a reiteration of some steps that were already announced, as the government has pegged the total financial implications of the package. The retrieved steps include the provision of food grains to the poor till November and higher fertilizer subsidies, at ₹6,28,993 crore.

Thus, it can be rightfully stated that the elements of direct stimulus in the package and its upfront fiscal costs in 2021-22 are likely to be limited. Consequently, more stimulus steps may be needed to shore up the economy through the rest of the year.

Additionally, in an effort to stimulate growth, exports, and employment, the finance minister has announced an expansion of the existing Emergency Credit Line Guarantee Scheme (ECLGS) by Rs. 1.5 lakh crore. She also announced a new Rs. 7,500 crore scheme to guarantee loans up to Rs. 1.25 lakh to small borrowers through micro-finance institutions.

Talking about the budget as a whole, the additional burden on the 2021-22 Budget from the ‘three direct stimulus initiatives that are providing free food grains, incremental health projects’ spending, and rural connectivity, would be about 0.5% of the estimated GDP for 2021-22.

Although, as aforementioned, there will be a limited magnitude of direct stimulus, it would be desirable to follow it up with another dose of stimulus later in the year. In other words, this package is focused on stimulating the sagging credit offtake growth through interest rate concessions for priority sectors. Thus, this will immensely help and benefit a number of MSMEs, small borrowers, and entrepreneurs in contact-intensive sectors.

Talking the healthcare system, to state that the healthcare system in India had failed during the second wave would be an understatement. With record-death coffers being buried around the country during such arduous times, it is only fitting that government makes a conscious effort to ramp up the health care sector of the country. Taking into consideration the need for a robust healthcare sector, the finance minister unveiled a fresh loan guarantee facility of Rs. 1.1 lakh crore for healthcare investments in non-metropolitan areas and sectors such as tourism.

Additionally, Rs. 23,220 crore has been allocated for public health with a focus on pediatric care, which will also be utilized for increasing ICU beds, and oxygen supply and augmenting medical care professionals for the short term by recruiting final year students and interns. This has been a welcomed step as in last year’s budget, healthcare had been grossly ignored. Given the peril announcements of a third wave, such an initiative will help ramp up the prominent sector to tackle a coming third wave.

It is to be noted that the success of the enhanced credit guarantee schemes is worth Rs. 2.6 lakh crore for pandemic-hit sectors will hinge on their offtake. Schemes worth Rs. 2.4 lakh crore is significantly spread over the next two to four years. However, as aforementioned, due to the repetition of measures, some of these had already been announced at the time of the Budget, and a portion of their cost has already been factored in.

Although, given the robust numbers, the total impact amount seems large at nearly Rs. 6.29 lakh crore, it is to be noted that a large portion of this is by way of credit guarantee schemes where there is no immediate outflow. Thus, the impact on the fiscal deficit will be limited while the stock markets could give a mild positive reaction.

As aforementioned, the MSME and the travel sector were the worst affected. Further, the woes of these sectors were exacerbated by the imposition of the second lockdown. Given that consumer confidence is at an all-time low, demand will remain subdued.

Thus measure to sustain such MSMEs have been introduced. The balance of Rs. 60,000 crore will be earmarked for the sectors, including a plan to support over 11,000 registered tourist guides and travel agencies so they can survive the second wave’s adverse effects.

Additionally, working capital or personal loans will be provided to people in the sector to discharge liabilities and restart businesses affected by COVID-19. Loans will be provided with a 100% guarantee under the scheme to be administered by the Ministry of Tourism.

Production, according to reports was the worst hit by the second lockdown. Thus, large electronics manufacturers under the Production-Linked Incentive scheme have been granted an additional year to meet their production targets. This is due to the fact that many of them had struggled to sustain or scale up operations due to restrictions and lockdowns to curb the second COVID-19 wave.

Against all odds, the government introduced a stimulus to revive the economy amidst subdued demand and plummeting investors’ and consumers’ confidence. The economy, as opposed to last year, gained impetus in demand; however, this was due to the pent-up demand and festive season that had boosted sales and ultimately the economy. However, pent-up demand, cannot at the moment, revive the economy.

In addition to subdued demand, confidence has taken a hit due to the inevitable third wave. Thus, this emphatically justifies the government stimulus package that was much needed in the economy. The Budget coupled with economic stimulus laid the foundation for a sustainable recovery in GDP growth and welfare improvement thereby continuing the course of reform, despite extreme provocation. It goes without saying that history will record India’s boldness, and benefit from the vision at large.

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Tags: indian economy, economic data, gdp of india 2021, india gdp growth rate, current gdp of india, benefits of economy, gdp of india, economies of scale, india gdp 2021

crypto investors

Who’ll Blink First in India’s Crypto Standoff?

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Crypto Investors – Who Blinks First in India Crypto Standoff

RBI, the Central Bank of India has been in a cold war with the Indian crypto industry. It can be best described as antagonistic and aversive. Being concerned with India’s ability to absorb financial shocks, RBI has time and again tried to unfurl the disadvantages of using cryptocurrencies, however, the industry construed RBIs reaction as hyperbolic!

India, among other nations, has been particularly belligerent towards cryptocurrency, so much so, that it had constituted a high-level intermediate committee to report on various issues pertaining to cryptocurrency. The committee had subsequently in 2019, recommended a blanket ban on private cryptocurrencies in India hurling many crypto investors on the wrong side of the law.

The belligerent attitude of Indian authorities towards digital currency has led to banks emphatically distancing themselves from the crypto community, apparently egged on by the RBI. Working along the same lines as the government, in May, the HDFC Bank had sent a rather threatening email to their customers, warning them against virtual currency transactions. It is to be noted that the email had cited an RBI circular that was published on April 6, 2018.

The circular had reportedly instructed all of the businesses it regulates to cease any involvement with cryptocurrencies. Additionally, such a stringent activity was also conducted by the State Bank of India. Similarly, several large banks, namely ICICI Bank, the country’s largest private lender too stopped providing services to crypto exchanges. It is to be noted that due to the government’s stringent stand on the contentious matter, several cryptocurrency exchanges have reported difficulties with bank deposits and transfers.

Investors’ Woes 

As can be anticipated, the banks’ nefarious emails had prompted an uproar among their customers and crypto investors, with many taking to social media to express their discontent. But why are investors raging with anger? Fear of missing out on high, unpalpable profits that crypto trading offers them. According to a research report by Bloomberg, the technical outlook for Bitcoin remains strong with the price of the cryptocurrency all set to surge around 600% to hit the $400,000 level in 2021.

The government’s repugnant attitude throws a question in contrast to the Indian government are all authorities in India wary of the digital currency? Apparently, not. Recently, the RBI’s circular was struck down by the Supreme Court.

The Court contended in its March 2020 ruling that the RBI had failed to provide sufficient proof, and to detail instances of losses arising from crypto transactions, that might merit such a drastic measure as its de facto ban on banks’ involvement with cryptos. Therefore, it can be rightly stated, that to some extent, pressure is being built on the authorities to at least lift their temporary ban on crypto services.

Crypto Endorsers

It is no news that Elon Musk has been an ardent endorser of the cryptocurrency. While many might presume him to be the crypto guru, many can’t help but grab their aversion towards him due to his cryptocurrency manipulation charades that onsets great volatility in the market. It is to be noted, is due for this very reason, Indian authorities are so averse to the idea of cryptocurrency. The digital currency granting anonymity to criminals for nefarious crimes is considered a safe haven for digital criminals.

But more importantly, it is the inefficiency or the inability to track the real perpetrator of the crime that is the sole reason for India debunking the crypto supremacy. Interestingly enough, loss of revenue is also a big challenge that the government faces. As it is known, the crypto market is unregulated, thus it is often quite arduous or rather impossible to track payments and hence generate revenue through transactions.

Additionally, cryptocurrency being a highly volatile market, which might not be running rationally poses a big risk of a financial bubble that is doomed to burst. As it is known, during the pandemic, when consumer and investor confidence was at an all-time low, the crypto market was booming, rather skyrocketing.

In contrast to individuals, various cities like Miami have also tried to pursue cryptocurrency by conducting state-wise crypto fares in order to court crypto investors in the town. With El Salvador becoming the first country in the world to grant legal tender to the contentious digital currency, pressure to flip the coin in favor of crypto is rising.

But with irrational behavior associated with the market and various comments like “Crypto isn’t the real economy” by Elon Musk and not-so endorsing statements by the former US President Donald Trump, who at best, considers Crypto a farce, both the sides of crypto, at the current moment, are evenly balanced.

While countries like South Korea are implementing a legislative framework to regulate Cryptocurrencies and Crypto exchanges, India, on the flip side, is considering imposing an effective ban on “private” digital assets and digital currencies. Further, the Indian government has indicated to table The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 which will effectively ban “private‟ Cryptocurrencies and introduce its own digital currency called Central Bank Digital Currency.

Although India’s stance on regulating cryptocurrencies through state-backed CBDCs regulated by the RBI is worrisome, it doesn’t come as a surprise. Going forward, it is imperative to have a dialogue on stakeholder concerns or risk getting smeared in the litigation quicksand thereby leaving crypto traders in dire straits, resulting in uneasiness in the sector which is destined to accelerate to greater heights in India.

The Achilles’ heel in RBI’s approach is the delusion towards the fact that it is possible to ban cryptocurrencies whereas looking at all the other nations’, it is wise to regulate it and mitigate systemic risks vis-à-vis a blanket, yet ineffective ban. A bill regarding banning cryptocurrencies is still in parliament which if approved, will suffice the RBI’s objective however, it will be interesting to see who wins this battle of the contentious crypto war.      


Tags: financial shocks, cryptocurrency investment, crypto long term investment, crypto investors, investing in cryptocurrency 2021, private cryptocurrencies in india, investing in cryptocurrency

k shaped recovery

India Headed Towards K Shaped Recovery as Inequalities Grow: What This Means for Borrowers and Lenders?

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India Headed Towards K Shaped Recovery as Inequalities Grow

No country escapes. Only China is forecast to show positive economic growth, and that is a meager 1%. Although the International Monetary Fund (IMF) foresees a considerable rebound in 2021, the extent of the depressionary forces pressed by the pandemic remains uncorroborated and hence not comparable to any economic crises of the past.

In an economy that struggles to battle with huge unemployment and stressed asset abundances every year, the pandemic seems harshly unkind as the recovery charts start to form not a ‘v’ but a ‘k-shaped’ recovery chart.

The Economic Survey 2021, predicted a ‘v-shaped recovery and projected the real economy to grow at 11% in 2021-22. The estimates match closely to the one given by IMF, with the latter predicting 11.5% in its global outlook report. If the same is achieved, the real GDP shall reach the pre-pandemic level of 2019-20.

Across the globe, various patterns of recovery are anticipated such as V-shaped, U shaped, W shaped, L shaped and even K shaped if upper-income groups recover fast, however, low-income groups continue to lose ground. Further, it may be that all of these patterns will be observed in different countries, for the profile over time depends on the social and sanitary policies implemented to stop the spread of the virus and the nature of the economic stimulus.

However, a closer look at the GDP numbers points to a ‘k-shaped’ recovery. A ‘k-shaped’ recovery chart essentially means that different sectors of the economy shall grow and revive at different paces, thereby forming distinct staggers in the process of being mapped. While the richer households and businesses are witnessing their incomes and profits grow at a faster pace, income and consumption are plummeting to the bottom. These differences are visible in employment and consumption statistics as well.

Such a stark split in the recovery of different sectors essentially translates to a dismembered recovery pace, wherein a handful of the sectors see an upward rise whereas the other handful observes a downward trajectory, indicating the ailing sector in an economy that might need investment, restructuring or other such incentives for their upheaval. More often than not, the rather well-equipped and modernized players observe the upward trend on the chart, whereas the non-adaptive, orthodox players observe the boorish one. 

Lender-Borrower Dynamics 

The Indian scenario recounts economists as considering the rebound of the Indian economy being in tandem with the aforementioned phase of recovery, as the pandemic has rendered the already gaping inequalities in the Indian forefront as a vastly dilapidated social dynamic. This forecast further hurts the chances of the quarterly growth agendas massively as the second wave of the virus also threatens to loom large over the heads of the jurists and economists.

Such a staggering growth chart would quite obviously lead to a ballooning of the financial debt, and the said monetary incentives and policies would fail to correct the deviations kept in mind should they not be adapted to the problem at hand, thereby suggesting an even slower recovery chart, as compared to a ‘v-shaped’ form of recovery that indicates a faster and all-round revival of the economy.

The highlights from the address by Duvvuri Subbarao feature certain key points with regards to the opinion stated above, these key points entail  RBI’s pledge to buy 1 trillion rupees worth (about $14 billion) of sovereign notes through the G-Sec Acquisition Program in the upcoming quarter, supporting overall growth, ensuring price stability in the economy, financial stability of earning households, yield curve management and lastly protecting savers in India who are grappling with non-yielding deposits, moreover,  the RBI needs a separate instrument for each objective.

At the outset, the privatization of state-run banks may be a step in the right decision. Instead of utilizing scarce budgetary resources to recapitalize government-controlled lenders, it would be advisable to employ that money in an arena where it will be more productive. It is an indisputable fact that banks and NBFCs have written off over 2 trillion in the past two years.

From the lender’s perspective, the RBI moratorium provided momentary relief to borrowers, but the consequences of such stalling of the economy remain in an uncharted zone. Adding fuel to fire is the rise in bad loans as the moratorium has come to an end. These bad loans are likely to snowball in the coming quarters and propel banking institutions and NBFC-lenders to take a cautious approach just when credit is most needed to keep the economy going.

From the borrower’s perspective, the numerous schemes and relaxations accorded by the government have been formulated to push the demand side up but the key lies at the grassroots level. Therefore, though government policies and relaxations revolve around customers’ interests and well-being at the core, the well-being of banks and NBFCs themselves remains precarious in a demand-mute and liquidity-dry market therefore raising concerns about smooth policy implementation.

Especially in light of the cautious lending approach, smaller traders, MSMEs, and individual borrowers thereby hurling them into an abyss of stagnancy, litigation, and perhaps more debt and thus being severely hit.

It goes without saying that the pandemic has given rise to an urgent need to lessen the negative economic consequences, safeguard the vulnerable population of the society and pave the way for sustainable recovery.

However, it is an admitted fact that the inability of low- and middle-income countries to invest in robust immunization programs could result in “a deeper and longer-lasting crisis, with mounting problems of indebtedness, more entrenched poverty and growing inequality” as rightly pointed out by Treasury Secretary Janet Yellen.

Therefore, the subsisting inequalities and vulnerabilities that characterize the present growth path, coupled with the structural and institutional changes that are needed in India and the world should be adequately addressed to witness positive growth in the post-COVID era.