In line with the Centre's massive borrowings target of Rs12-lakh crore during 2021-22 financial year, the banking regulator has decided to create an online platform to the Government Securities (G-Sec) enabling retail investors to access primary and secondary transactions via Retail Direct (RBI). The measure not only enhance investor base in India, but also offer an enhanced access to G-Sec market. Investors are allowed to open Gilt accounts with the RBI, which will have more funds as the apex bank has decided to raise cash reserve ratio (CRR) in two tranches from three per cent to four per cent, while maintaining status quo on repo rate, which is at four per cent. As part of the new decisions announced by Monetary Policy Committee (MPC) of RBI, the CRR would be raised to 3.5 per cent from March 27 and four per cent from May 22.
The hike in CRR helps RBI offer a gamut of market operations to boost liquidity to support government's borrowings. With the latest MPC meeting, RBI gets into balancing act to support growth and managing core inflation (retail inflation excluding food and fuel).
The liquidity ensuring measures announced in the RBI Monetary policy spurred the stock market benchmark indices as NSE Nifty and BSE Sensex recorded a strong reversal post-Budget and one of the best weekly returns since 2009.
The centre has further extended dispensation of parking G-Sec and state development Loans (SDLs) in Enhanced-to-Maturity (HTM) investment bucket. With this All the G-Securities and State development Loans acquired by banks during April 1, 2021, and March 31, 2022, in enhanced HTM. Banks are allowed to keep G-Secs and SDLs equal to 22 per cent of their deposits in HTM. It also helps banks not to create investment depreciation and also provides certainty to market participants in the wake of mega borrowing programme of the central and state governments.
Uday Shankar, president, Ficci, said: “Allowing of retail investors to open Gilt accounts with the Reserve Bank marks a huge structural change and places India amid few selected countries with a similar facility giving this category of investor an opportunity to participate in GILT market directly."
The HTM limit for banks would be restored to 19.5 per cent in a phased manner from June quarter of 2023. yields on 10-year benchmark G-Secs eased by 23 paise to Rs87.45.
“We are encouraged to note the support offered by the Reserve Bank of India through the broad mix of regulatory measures today. The assurance and the clear communication by the Governor with regard to liquidity management and the government borrowing programme infuses optimism. The Central Bank is seen using all available policy tools to keep the liquidity at optimum levels. While CRR rates have been elbowed towards gradual normalization, the MSF relaxation and SLR holdings in HTM category have been extended,” added Shankar.
RBI forecasts retail inflation at 5.2 per cent in fourth quarter (Q4) of FY21, as against previous prediction of 5.8 percent, five per cent in the first half of FY22 and 4.3 per cent in Q3 of FY22. RBI also made a forecast on GDP at 10.5 per cent in FY22 including growth rate in a range of 8.3%-26.2% in H1, and six per cent in Q3.
Another major decision by RBI was extending relaxation in Market Standing Facility (MSF) for six months till September 2021. The measure will comfort the banks on liquidity requirements. The banking regulator also deferred capital conservation buffer implementation of 0.625 per cent and implementation of net stable funding ratio by another six months from April to October 1, 2021.
RBI is working on a policy framework for micro finance sector. The objective of RBI is to harmonize policy framework for NBFCs, banks, small finance banks (SFBs) and NBFC MFIs. The final document on policy framework on micro finance sector is expected in March 2021.
Microfinance Institutions Network (MFIN) is positive on the new policy as it expects more safeguard measures in the interests of the customers. MFIN is working through its Code of Responsible Lending (CRL), which comprises 113 signatories accounting for 70 per cent of the Indian microfinance market.
“Also, the incentivisation of new credit flow to the micro, small, and medium enterprise (MSME) borrowers is a big positive and indicates the targeted approach towards meeting the needs of the most stressed. MSMEs have been reeling under tremendous pressure and this measure should further nudge the banks to lend to these enterprises,” Shankar said.
“The RBI policy announcements are on the expected lines in terms of holding of policy rates and maintaining an accommodative stance. The policy has perfectly complemented the Union Budget in supporting the growth impulses,” Says CH SS Mallikarjuna Rao, MD and CEO at Punjab National Bank (PNB).
Uday Shankar said: "The direction of the policy statement is positive. It is reassuring to note that the RBI continues with its accommodative stance to accelerate economic growth. The recovery signs are getting stronger and the guidance provided by the Central Bank reflects its commitment towards supporting growth. We see that both the Government and the Central Bank are moving in tandem - which is the need of the hour. The innovative measures and reformist approach to meet the borrowings programme of the government is indeed laudable."
Prabhat Chaturvedi, CEO, Netafim Agricultural Financing Agency (Nafa), elaborated that "allowing banks to permit NBFCs to access these funds for the targeted lending to the desired segments such as the agriculture value chain and MSME would significantly facilitate meeting the objective of inclusive growth. These NBFCs borrow only for on-lending and can act as a force-multiplier and expand the credit reach to various sectors. The relief would improve cash flow and prevent further downslide from hereon. It indicates the willingness of the policymakers to ensure liquidity in the system."
Previous three TLTROs infused over Rs75,000 crore into the banking system. The liquidity mostly went to major players in the banking sector, while NBFCs were not benefited on expected lines. Addressing this, RBI has come out with a fresh set of guidelines on Targeted Long-Term Repo Rate Operations (TLTROs). The new tranche of TLTROs will ensure Rs50,000 crore liquidity in the domestic banking system for NBFCs and MFIs. Banks should park 50 per cent of funds availed in TLTROs in NBFCs and MFIs.
Mallikarjuna Rao further added that “extending the TLTRO to NBFCs and incentivizing lending to new MSME borrowers will support lending to these sectors. Unveiling of structural reform of retail participation in G-sec market along with extension of HTM limit relaxation will aid smooth completion of government's borrowing programme. The normalization of CRR in a phased manner would smoothen the liquidity absorption process.”
Uday Shankar, president, Ficci, said: “We are particularly happy to note the inclusion of NBFCs in the TLTRO on tap scheme for specified stressed sectors. NBFCs have emerged as a major source of organized lending especially for the MSMEs and play a vital role. However, we have noted that banks continue to favor high rated NBFCs and this distortion needs to be corrected to ensure a broad-based outreach."
Industry body Ficci says there were no tinkering of taxes in the new Budget-2021. Uday Shankar said: "The most satisfying aspect of this Budget is that we did not see much tinkering of taxes. This adds to policy certainty and investor confidence. The budget also continues the government’s efforts towards enhancing ease of doing business through easier compliances and faceless tax assessment. This is a big relief to taxpayers and, in the long run, will help widen the country’s tax base."
"The Monetary Policy Committee’s sustained accommodative stance is positive from the perspective that RBI is giving utmost priority to growth. Today’s announcements by RBI to provide funds from banks under the TLTRO on tap scheme to NBFCs is a step that would ease liquidity challenges of small and mid-sized NBFCs and incentivize bank credit flows for them," adds Chaturvedi.
Union Minister for Finance and Corporate Affairs Nirmala Sitharaman said that the Budget would pave the way for a clear directional change for the Indian economy and that directional change is not what the government has offered as a sudden response, but it was something that was preoccupying the Indian minds for over 30 years.
Addressing the Ficci’s National Executive Committee Meeting, via video conferencing Sitharaman said that this budget was trying to raise resources which are non-tax resources at a time when we need a lot of money to spend.
“It’s a budget which raises resources but not on the back of increased taxation. There is a directional change in the budget which is so distinct that it will fuel the entrepreneurial spirit which the Indians show given the right opportunities,” the FM added.
The Finance Minister further stated, “I underline that we have not burdened any section of Indian society with any additional demand for even an additional rupee. She added that we have good confidence that revenue generation will improve through this year and we are confident that we will be bringing in non-tax revenue other than just disinvestments through various other monetization of assets and so on.
Sitharaman also urged the industry to come forward to make investments. “I hope the industry will understand the spirit with which the budget is placed before you and therefore also come forward to participate in this inevitable exercise. Industry, having cleared all its debts and finances, should now be in a position to invest money to expand and grow and clearly show signs that it is now ready to receive any joint ventures for the sake of technology that it prefers to have,” Sitharaman emphasised.
The Finance Minister further stated that for providing immediate stimulus to the economy, the government will be spending in a big way in public infrastructure and three large areas where big ticket expenditure will happen include infrastructure, health and agriculture. “Government alone, even if it brings bags full of money, cannot just meet the demand of the growing and aspirational India,” Sitharaman said.
Speaking on the setting up of Development Financial Institutions (DFI), Sitharaman said that we will enable one DFI and the entire financing of long-term infrastructure will happen in a very market driven way. That itself will bring in efficiency, she added.
"The proposed Debt financing for REIT’s and InvIT’s (through a suitable amendment) is expected to provide a major fillip and will attract more investments for the sector," observes Chintan Patel, partner and head, building construction and real estate, KPMG in India.
The Centre has taken a confident, trustworthy and transparent accounting statement in our budget. “There is no patching up or white washing. It has honest attempt to give honest statement of the government’s finances and with the reforms announced along with the stimulus. It is clear that this government is not sitting cautiously, and it is coming forward with faith in Indian industry and business leaders,” added the Finance Minister
Welcoming the slashing of customs duty on gold and silver, World Gold Council (WGC) said that the rationalisation of import duty on gold to around 10.75 per cent from 12.5 per cent is a welcome move and timely.
Somasundaram PR, Managing Director, WGC-India, said: "Hopefully, this is the first of a series of such cuts to make bullion an asset class that operates mainstream. It is a much needed incentive for the organised and compliant players in the bullion and gold jewellery market. A rationalised duty structure and simplified processes are fundamental to an organised trading market. Following appointment of IFSCA to regulate the International Bullion Exchange at GIFT City last year, the regulatory clarity in this budget around a domestic bullion exchange will spur infrastructure development and good delivery standards, enabling India to emerge as a major bullion trading hub. Revision of the procedure for disposal of seized gold to expedite the process will further prevent illicit trade."
Rural welfare schemes announced by the government to boost consumer sentiment will set the consumption cycles in motion and help the jewellery retailers as well. Overall, the budget should lead to positive outcomes for the industry.
The writer is a business journalist with 27 years of experience