RBI in its communication dated 31st August 2020 informed that it had announced special open market operations on August 25, 2020 and that it would continue to monitor evolving liquidity and market conditions and take measured steps for the orderly functioning of financial markets.
We are aware that market sentiments were impacted by concerns relating to the inflation outlook and the fiscal situation amidst global developments resulting in firming up of yields abroad. This caused widespread discussions among the enlightened public on yields on bonds and what actions could be taken by RBI to meet the emerging threats.
Let us recollect the information on inflation quoted by RBI in its communication dated August 6, 2020, as part of minutes of the Monetary Policy Committee (MPC) which is crystal clear with the ugly rise of inflation with its demonic effects on the Indian economy coupled with the pandemic at its worst effects on the society.
I am exactly quoting the statements of RBI as under:
“The National Statistical Office (NSO) released data on headline CPI for the month of June 2020 on July 13, 2020, along with imputed back prints of the index for April and May 2020. This resulted in a sharp upward revision of food inflation for the month of April and May. During Q1:2020-21 food inflation moderated from 10.5 percent in April to 7.3 percent in June 2020.
Meanwhile, fuel inflation edged up as international kerosene and LPG prices firmed up. Inflation excluding food and fuel was at 5.4 percent in June, reflecting a spike in prices across most sub-groups. Inflation in transport and communication, personal care and effects, pan-tobacco, and education registered significant increases in June. Headline CPI inflation, which was at 5.8 percent in March 2020 was placed at 6.1 percent in the provisional estimates for June 2020”.
Anyone with common sense would have felt the price of vegetables which skyrocketed during the last two quarters and most of them non-available due to constraints related to the movement of goods among states, failure of markets to function and the epidemic fear among the masses.
RBI has reassured us that MPC decided to pause and remain vigilant and try to support the revival of the economy.
How about the recovery signs? Is there any progressive tilt towards encouraging movements that would reassure our sentiments?
In view of stabilizing prices of food and fuel and cost-push factors getting moderated, RBI decided to remain vigilant about these developments, and in support of the accommodative stance of monetary policy, it was committed to ensuring comfortable liquidity and financing conditions in the economy.
This attitude resulted in the following action of MPC.
“On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting, today (August 6, 2020) decided to:
Consequently, the reverse repo rate under the LAF remains unchanged at 3.35 percent and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 percent.
These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent while supporting growth.”
Now, let us go back to the communication of RBI dated August 31, 2020, which added the following interesting developments:(From the communication itself)
Let us discuss the decisions of RBI in the following paras.
RBI informs that banks are allowed from today to hold fresh acquisitions of SLR securities acquired from September 1, 2020, under HTM (Held till Maturity) up to an overall limit of 22 % of NDTL in SLR securities. It is obvious that under a notion of fully secured nature of the securities and that too under HTM value, the banks would mop up additional securities with their huge resources fully remaining with them unused. In fact, they are struggling to pay even interest on deposits and have considerably reduced the interest on fixed deposits.
It is said that in spite of repeated advice from RBI, the Government of India or other Federations of Industrial units or the industrial units itself, the required credit from commercial banks is not moving towards the borrowers or industrial units which are the lifeline of the Indian economy.
Further, under the revised instructions of RBI, banks would rush to fill up their coffers with HTM securities since it offers them a feeling of security in their actions. Here too, I have the following observation from RBI instructions originally issued to merge the banking accounting standards with Ind AS standards which have engulfed the whole Indian economy but the commercial banks have not yet introduced its implementation.
Let me analyze the same again.
The following article from taxguru.in written by me in 2016 throws detailed lights of the issues involved.
What does it say on HTM valuations?
“The extant instructions provide for rule-based markups over the YTM based rates which may not be consistent with Ind AS 113 principles.
Where the valuation provided by an independent agency such as FIMMDA is the reference valuation (as currently mandated by RBI for many securities), it may be necessary for FIMMDA to put in place a valuation methodology and provide valuations for such securities taking into consideration the application guidance and valuation principles specified in Ind AS 113 to ensure consistent application across the banking industry.”
One may refer RBI information on Ind AS committee recommendations for guidance.
Only the real position with regard to investments even in government securities has to be in tune with IFRS standards which expects the valuation as on the date of preparation of financial statements.
Now let us consider the present situation on credit dispersal by banks. While the position is getting regularized for industrial units, a positive growth of nearly 3% has been shown by agriculture production as per statistics issued yesterday.
The following issues do arise for bankers’ treatment of agriculture financing.
Recent extant guidelines issued by RBI/state governments or newspapers in their editorials have not received the special attention of bankers who have risk aversion for financing agriculture.
Recent developments in liberalizing agriculture marketing, creation of food parks, or special efforts like organic farming which entail a substantial income, multifold of current income require special departments with the ultra-technological equipment, special and qualified manpower to study and take quick decisions.
Complete an uncertain future with full risk potential is on the horizon and banks with the best human resource have to face the future by entertaining the opportunities with the best tools of risk management.
It is essential to keep in mind the minutes of MPC which were circulated on August 6, 2020, titled with the communication “Monetary Policy Statement, 2020-21 Resolution of the Monetary Policy Committee (MPC) August 4 to 6, 2020” which was from the following web site:
Some of the thoughts expressed in the above communication also add value to the matter under discussion. Actual reproduction since the statistical information quoted is from RBI and I may not add my observations to them:
“Domestic financial conditions have eased substantially and systemic liquidity remains in large surplus, due to the conventional and unconventional measures by the Reserve Bank since February 2020. Cumulatively, these measures assured liquidity of the order of ₹9.57 lakh crore or 4.7 percent of GDP. Reflecting these developments, reserve money (RM) increased by 15.4 percent on a year-on-year basis (as on July 31, 2020), driven by a surge in currency demand (23.1 percent). Growth in money supply (M3), however, was contained at 12.4 percent as of July 17, 2020.
The above bare facts compiled by RBI require our admiration to open up our eyes to reality and also give a sense of promise in the future, again on the basis of positive performance.
The bare facts of the gloomy economic picture on the basis of facts can not be wished away. But, significant growth of 3% in agriculture and pick up of goods in rural areas add positive outlook if the pandemic is settled in the near future of the next three months. FMCG has also shown substantial growth in the last 6 months.
Disclaimer: I tried to express my views based on available web sites of RBI which are purely personal as I look at the events. Neither taxguru.in nor RBI is responsible for my views. One should refer to the actual communication for clearer understanding.