Impact 
The RBI has been insisting on monetary policy transmission through the banking channel for a long time. However, banks have been reluctant to pass on the benefits of policy rate cuts to the borrowers. Since January 2015, the RBI reduced repo rates by 150bps (or 1.5 percentage points), but banks have not held up their side of the deal with borrowers. At present, the repo rate stands at a five-year low of 6.50%.
Earlier, banks blamed the high-interest rates on the Small Savings Schemes run by the Government for making their deposits incompetent. They claimed, higher cost of borrowing made it difficult for them to lower the lending rates. The Government took the corrective action in due course and lowered the interest rates on popular schemes such as the Public Provident Fund (PPF) and National Savings Certificates (NSCs) among others. However, banks did not cut their base rates to match the reduction in policy rates. The base rate of a bank acts as the reference point in loan pricing.
They also claimed that the liquidity deficit in the system was impeding the way for monetary transmission. As banks frequently borrow from the open market to meet their short term demand-supply mismatches, any deficit in liquidity affects their borrowing cost, eventually affecting the base rate calculations and loan pricing. To cross this hurdle, the RBI, in its 1st bi-monthly monetary policy conducted on April 05, 2016, took a stance to end the long-term liquidity deficit in the system. Keeping its word, the Central Bank has pumped Rs 40,000 crore into the system since. Now, banks state that the recent injection of cash is nowhere near the current cash deficit of Rs 1 lakh crore and insist on achieving neutral liquidity (zero deficit in long-term liquidity) as soon as possible.
In response, the Central Bank highlighted that Rs 17 lakh crore have been withdrawn from banks in the second week of May—highest weekly withdrawals witnessed in the last 15 years. The RBI is concerned about this cash getting back into the system in the future. This, in RBI the view, might create excess liquidity and make it complicated for the Central Bank to achieve the inflation target effectively. The currency in circulation has also jumped rapidly since October 2015 due to elections scheduled in 2016. Officials of India’s Central Bank also pointed out that the yield on 91-day treasury bills has dropped substantially since the RBI announced its 1st bi-monthly monetary policy in April this year.
The bottom line is Banks are not going to lower lending rates in a hurry. Nor will the RBI inject greater liquidity in quick time. In fact, it looks like the RBI will hold policy rates steady in the 2nd bi-monthly monetary policy scheduled on June 07, 2016.
How does a common man react to these developments?
Though he may not understand all these technical aspects, he knows one thing—interest rates on his loans have not gone down substantially. Unfortunately, nobody is answerable to him in real life. Banks might insist on fulfilling even the most frivolous requirement while sanctioning a retail loan, but the monster of bad loans brutally exposes the laxity in their processes. A commoner reads the newspapers these days, and he thus knows how banks restructure loans of big corporations. He is left with this feeling, no banker allowed him to delay EMIs as generously as it allowed its corporate client.
This might be the real reason for not lowering rates...
Who knows, The real reason for banks not to cut rates might be the high provisions they make for tackling the problem of poor asset quality. Non-Performing Assets (NPAs) have hit the profitability margin of banks severely, with some public sector banks recording jaw-dropping losses. Unchanged base rates might be a desperate attempt to safeguard profit margins.
Still a few are asking a question—who’s to blame the RBI or Banks?
Impact
After making sideways moves between 66 and 67 mark, the Indian Rupee (INR) has declined below 67 against US$ in the 3rd week of May. In fact, the US$ strengthened against some of the world’s major currencies. The Dollar Index rose above 95, breaking a psychological barrier. The currency markets have started speculating about the Fed’s stance on interest rates in the upcoming Fed meet scheduled in June. In all likelihood, the Federal Reserve (Fed) is going to hike its target federal funds range from the present 0.25-0.50 to 0.50-0.75 per cent.
How should you read this fall in the Rupee?
Reuters conducted a poll of 80 economists asking for their views on the Fed’s action in June. More than 2/3rd opined that the Fed is set to raise rates. So, the consensus is clearly building around Fed raising rates by only 25 bps. What we are currently seeing on the INR movement is the market’s reaction to the broader agreement. If the Fed indeed raises rates faster and higher than the market expectations, US$ is likely to move further up, causing depreciation in the value of many emerging market currencies including that of India’s.
Another reason why INR may not fall much in relative terms...
The RBI has built a massive war chest of US$ to tackle the sudden volatility on account of huge capital outflows. Last month, Dr. Rajan made some suggestive comments while speaking at the Columbia Law School in New York. He said, “We really don't want the currency to move only as result of capital flows, we would like it to be more focused on the underlying fundamentals of trade and services.” Recently, the RBI Governor expressed confidence in the ability of the central bank to curtail the exchange rate volatility through better foreign currency management.
Apart from capital flows, fiscal policies, monetary policies, import-export numbers, and the Government’s commitment to economic growth among other affect the value of domestic currency. Although the capital flows have been volatile for some time, other indicators do not appear to be discouraging.
PersonalFN believes, speculation in any form does more bad than good to your portfolio, so avoid it. Markets may become volatile as the day of the Fed meet draws near. You would be better-off ignoring speculative moves of the market. Instead, you should focus on your long-term financial goals.
Impact
The significance of food to mankind by no means can be undermined. It is biologically know fact, that every living organism needs food to survive and grow. Hence besides clothing and shelter, food is considered to be a primary need.
As you may know, countries across the world follow a different diet. In India, the land of multi-cultural cuisines, a predominant portion of the population stick to a lacto-vegetarian diet; meaning they consume mainly vegetables and dairy products such as milk, cheese, butter, cream, yogurt, ghee, etc. but exclude eggs. Hence when prices of these products rise, household budgets go awry, leaving breadwinners and homemakers uncomfortable. And interestingly when that happens, it also becomes a political hot potato for the opposition parties.
The Consumer Price Index (CPI) inflation for April 2016 snapped the descending trend with the data coming in at 5.39% from 4.83% the month before, mainly led by food prices (due to an early summer heat wave). And over the next few months, the prices of many food items such as vegetables, pulses, sugar, and poultry products are set to rise over on contracting supply. This is notwithstanding the forecast of an above-normal southwest monsoon this year by the Indian Meteorological Department (IMD).
You see, farmers will start sowing kharif crops in June and wait for the harvest in October. Thus, in the interim, there are chances that inflation would report an uptick led by food prices.
To ready more about this story and Personal FN’s views over it, please click here.
Impact
Please check your bank account for the credit of Rs 15 lakh. Hey, don’t be shocked. In the run-up to the Lok Sabha Elections 2014, the then Prime Ministerial candidate had made a promise of distributing Rs 15 lakh to every citizen. Rs 15 lakh was supposed to be your share of money that criminals of Indian society stashed abroad. The current Government promised to condemn anyone with black money. Later it was clarified that the promise of Rs 15-lakh was just “an illustrative statement”.
Is Government serious about recovering black money?
Like in many other economies, black money transactions are a major problem India faces today. A loss of revenue due to tax avoidance and dodging acts as an impediment to the progress of our nation. To clean up the system, the Government proposed a unique scheme in the Budget 2016-17. They stated the Income Declaration Scheme would allow an individual to disclose his/her black money by paying the tax at an aggregate rate of 45%. Moreover, the Government offered the assessee immunity against any prosecution under the Income Tax Act or under the Wealth Tax Act. However, there were some confusions about what classifies as black money; as well as what can be disclosed and what can’t be. The department seemed to be flooded with a whole host of similar queries. To address once and for all, the Central Board of Direct Taxes (CBDT) discussed some Frequently Asked Questions (FAQs) on the matter. Clarifications from the Department have brought forward some interesting aspects of the scheme that may completely change your perspective.
After careful analysis, PersonalFN has arrived at the conclusion that the Income Declaration Scheme may not receive the expected response as there are too many traps for black-money holders (who expect a red-carpet treatment from the Government). They seek absolute immunity—not just against the provisions of a couple of Acts. They need a safety blanket.
To ready more about this story and Personal FN’s views over it, please click here.
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