RBI scales down GDP growth projection to 7.4% for 2015-16
Assessment
* Since the third bi-monthly statement of August 2015, global growth has moderated, especially in emerging market economies (EMEs), global trade has deteriorated further and downside risks to growth have increased.
* In India, a tentative economic recovery is underway, but is still far from robust. In agriculture, southwest monsoon is currently deficient. Rural demand, however, remains subdued as reflected in still shrinking tractor and two-wheeler sales.
* Manufacturing has exhibited uneven growth in April-July. Weak external demand is contributing to continuing domestic capacity under-utilisation, decelerating new orders and a rising ratio of finished goods inventories to sales.
* In the services sector, construction activity is weakening as reflected in low demand for cement and the large inventory of unsold residential houses in some localities.
Policy Stance and Rationale
* The disinflation has been broad-based and inflation excluding food and fuel has also come off its recent peak in June.
* The Federal Reserve has postponed policy normalisation.
* Markets have transmitted the Reserve Bank's past policy actions via commercial paper and corporate bonds, but banks have done so only to a limited extent.
* Looking forward, inflation is likely to go up from September for a few months as favourable base effects reverse. Inflation is expected to reach 5.8% in January 2016.
* GDP growth projected for 2015-16 is marked down slightly to 7.4% from 7.6%
* RBI stance will continue to be accommodative, the focus of monetary action for the near term will shift to working with the Government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate are removed.
Part B: Developmental and Regulatory Policies
* The Reserve Bank has put out for comment draft guidelines for banks on the computation of base rate, based on their marginal cost of funds. Guidelines will be issued by end-November 2015.
* In March 2015, the Reserve Bank issued a Discussion Paper titled “Large Exposures Framework and Enhancing Credit Supply through Market Mechanism” for stakeholders' comments. Based on suggestions received from stakeholders, the Reserve Bank will issue a draft circular by end-December 2015.
* In order to bring in greater transparency, better discipline with respect to compliance with income recognition, asset classification and provisioning (IRACP) norms as well as to involve other stakeholders, the Reserve Bank will mandate disclosures in the notes to accounts to the financial statements of banks where such divergences exceed a specified threshold. Instructions in this regard are being issued separately.
* The Union Budget for 2014-15 emphasised the urgent need for convergence of the current Indian accounting standards (IND AS) with International Financial Reporting Standards (IFRS). The Reserve Bank has recommended to the Ministry of Corporate Affairs a roadmap for the implementation of IND AS by banks and non-banking financial companies from 2018-19 onwards. The Reserve Bank constituted a Working Group (Chairman: Sudarshan Sen) for its implementation. The Report of the Working Group will be placed on the Reserve Bank's website by end-October 2015 for public comments.
* At present, the minimum risk weight applicable on individual housing loans is 50%. With a view to improving “affordability of low cost housing” for economically weaker sections and low income groups and giving a fillip to “Housing for All”, while being cognisant of prudential concerns, it is proposed to reduce the risk weights applicable to lower value but well collateralised individual housing loans. Detailed guidelines are being issued separately.
* Banks are permitted to hold investments under the HTM category in excess of the limit of 25% of their total investments, provided the excess comprises only SLR securities and the total SLR securities held under the HTM category are not more than 22% of NDTL. The SLR has been reduced to 21.50% of NDTL with effect from February 7, 2015. To align them, it has been decided to bring down the ceiling on SLR securities under HTM from 22% to 21.50% with effect from the fortnight beginning January 9, 2016. Thereafter, both the SLR and the HTM ceiling will be brought down by 0.25% every quarter till March 31, 2017.
* The report of the High Powered Committee (HPC) on UCBs (Chairman: R. Gandhi) to examine and recommend permissible business lines, appropriate size, conversion of UCBs into commercial banks and licensing of new UCBs was placed on the Reserve Bank's website on August 20, 2015 for comments and suggestions. Based on the feedback received, the recommendations of the Committee will be considered for implementation during the second half of 2015-16.
* The Reserve Bank will update all its master regulations, and streamline the required procedure for compliance with the regulations by January 1, 2016. All master regulations will be fully updated and placed online. The Reserve Bank will also work to improve clarity in regulatory communications.
Financial Markets
* With the objective of having a more predictable regime for investment by the foreign portfolio investors (FPI), the medium term framework (MTF) for FPI limits in debt securities, worked out in consultation with the government, is set out below.
(i) The limits for FPI investment in debt securities will henceforth be announced/ fixed in rupee terms.
(ii) The limits for FPI investment in the central government securities will be increased in phases to 5% of the outstanding stock by March 2018. In aggregate terms, this is expected to open up room for additional investment of Rs 1,200 billion in the limit for central government securities by March 2018 over and above the existing limit of Rs 1,535 billion for all government securities (G-sec).
(iii) Additionally, there will be a separate limit for investment by FPIs in the State Development Loans (SDLs), to be increased in phases to reach 2% of the outstanding stock by March 2018. This would amount to an additional limit of about Rs 500 billion by March 2018.
(iv) The increase in limits will be announced every half year in March and September and released every quarter.
(v) The existing requirement of investments being made in G-sec (including SDLs) with a minimum residual maturity of three years will continue to apply.
(vi) Limits for the residual period of the current financial year would be increased in two tranches from October 12, 2015 and January 1, 2016. Each tranche would entail an increase in limits as under:
- Rs 130 billion for central government securities composed of Rs 75 billion for long term investors and Rs 55 billion for others
- Rs 35 billion for SDL open to all FPI investors.
A circular with details of the MTF is being issued separately.
* In the first bi-monthly monetary policy statement for 2015-16, announced on April 07, 2015, it was proposed to permit Indian corporates that are eligible to raise external commercial borrowings (ECB) to issue rupee bonds in overseas centres with an appropriate regulatory framework. Based on the comments received on the draft framework and in consultation with the Government, it has been decided to permit Indian corporates to issue rupee denominated bonds with a minimum maturity of five years at overseas locations within the ceiling of foreign investment permitted in corporate debt (US$ 51 billion at present). There shall be no restriction on the end use of funds except a small negative list. Detailed instructions are being issued separately.
* The Reserve Bank has placed the draft framework on ECB on its website on September 23, 2015 for comments/ feedback. The revised framework suiting the current economic and business environment will replace the extant ECB policy.
* Scheduled commercial banks and primary dealers (PDs) are currently permitted to execute the sale leg of short sale transactions in the over the counter (OTC) market in addition to the Negotiated Dealing System–Order Matching (NDS-OM) platform. Short sale in the OTC market is, however, not permitted between the primary member (PM) and its gilt account holder (GAH). The Clearing Corporation of India Ltd. (CClL) has introduced a facility in the reported segment of NDS-OM which captures details of transactions involving gilt accounts. Accordingly, it is proposed to permit short sale by a PM to its GAH and also to treat purchase by a PM from its GAH as a cover transaction. Guidelines in this regard will be issued by end-October 2015.
* There has been significant improvement in market infrastructure in the inter-bank repo market in G-sec. This enables Reserve Bank to review restrictions placed on repo transactions, particularly relating to the participation of gilt account holders in the repo market, guided by the recommendations of the Working Group on Enhancing Liquidity in the Government Securities and Interest Rate Derivatives Markets (Chairman: R. Gandhi). New guidelines in this regard will be issued by end- November 2015.
* When Issued (WI) trading in G-sec was permitted in 2006 to facilitate the distribution process by stretching the actual distribution period for each issue and allowing the market more time to absorb large issues without disruption. In order to encourage trading in the WI market, it is proposed to:
(i) permit the scheduled commercial banks to take short positions in the WI market for both new and reissued securities, subject to limits and other conditions in place from time to time; and
(ii) permit regulated entities other than banks and primary dealers (PDs) to take long positions in the WI market.
Detailed guidelines in this regard will be issued by end-November 2015.
* Guidelines on repo in corporate debt were issued in January 2010. In order to further develop the repo market, a broad framework for introduction of electronic dealing platform/s for repo in corporate bonds will be designed in consultation with the Securities and Exchange Board of India (SEBI).
* While the currency futures market has grown, participation in this segment has been restricted to a few categories of entities. In order to diversify the participation profile in the currency futures market, stand-alone PDs will be permitted to deal in currency futures contracts traded on the recognised exchanges, subject to adherence to certain risk control measures and without diluting their existing obligations in the G-sec market. Guidelines in this regard will be issued by end-November 2015.
* At present, exchange traded currency derivatives include futures and options in four currency pairs viz., USD-INR, EUR-INR, GBP-INR and JPY-INR. With a view to enabling direct hedging of exposures in foreign currencies and to permit execution of cross-currency strategies by market participants, exchange traded currency futures and options will be introduced in three cross-currency pairs viz., EUR-USD, GBP-USD and USD-JPY.
Necessary guidelines will be issued in consultation with SEBI by end-November 2015.
* Establishing underlying exposure through verifiable documentary evidence has been a key regulatory requirement for accessing OTC forex markets. To provide more flexibility to market participants in managing their currency risk in the OTC market and for making hedging easier, it has been decided to increase the limit for resident entities for hedging their foreign exchange exposure in the OTC market from US$ 250,000 to US$ one million without the production of any underlying documents, subject to submission of a simple declaration. It is further proposed to comprehensively review the documentation related requirements in the OTC market. The possibility of participation by financially sophisticated investors up to certain limits in currency markets without underlying exposure will also be examined. Revised draft of the existing framework will be issued for public comments by end-December 2015.
