Short-term rates crash in India with funds overflowing with cash

Source: LiveMint.com, Nov 26, 2020

A glut of cash chasing assets in India has caused short-term rates to plunge.

A three-month treasury bill was sold at a record low yield Wednesday, while the market repo clocked a trade at 0.01%. Key borrowing costs like the weighted interbank call rate and collateralized money-market rates are way below the Reserve Bank of India’s benchmark in recent days, indicating investors such as mutual funds are accepting returns lower than what RBI’s deposit window would offer banks.

Governor Shaktikanta Das has pledged to stay accommodative well into 2021 as he tries to dig the economy out of an unprecedented technical recession. But a liquidity bloat is coming from the central bank’s intervention in the foreign currency market, as it seeks to rein in the rupee and keep exports competitive.

“The RBI’s dollar buying to prevent the rupee from appreciating has driven liquidity to a large excess,” said Arvind Chari, head of fixed income and alternatives at Quantum Advisors Pvt. “The RBI may have to act to suck out liquidity to maintain the sanctity of the reverse repo rate.”

Deposit Window

Banks have parked ₹6.1 lakh crore ($82.5 billion) of excess cash with the central bank at the reverse repo rate of 3.35%, according to the Bloomberg Banking Liquidity Index. Mutual funds and other such investors don’t have access to this window, and ICICI Securities Primary Dealership suggests the RBI should consider including them if it’s worried about the depression of overnight yields.

“A weekly or fortnightly liquidity absorption window with wider participation could address the skew in excess liquidity and reinforce the reverse repo rate as the floor,” ICICI Securities economists including A. Prasanna wrote in a note. “A stronger option would be to introduce the Standing Deposit Facility at a rate slightly above reverse repo — say 3.5% — so that money market rates reset.”

The so-called SDF is a tool that would enable the central bank to take in money without offering collateral.

The State Bank of India, the nation’s largest lender, warned that a sustained cash surplus may eventually push loan rates below similar-rated bonds, introducing policy unpredictability.

“Such type of irrational pricing, because of abundant liquidity, can impact banking sector profits and initiate asset liability mismatch, if the spread is more prevalent for lower-rated borrowers,” according to Soumya Kanti Ghosh, group chief economic adviser at the lender.

“A sure recipe for financial instability in the future.” The Reserve Bank’s policy review meeting is due to start next week with the announcement on Dec. 4.

Banks lend over Rs 65,000 crore to commercial sector in a fortnight

Source: Business Standard, Nov 19, 2020

After shrinking in the second half of October, bank credit to commercial sector moved into positive territory in early November as festive season kicked off.

Banks disbursed Rs 65,609 crore of credit in the fortnight ended November 6. In the previous fortnight (October 23, 2020), credit had contracted by Rs 5,983 crore.

The year-on-year growth inched up to 5.8 per cent (November 6, 2020) from 5.2 per cent (October 23, 2020), according to the Reserve Bank of India. The outstanding credit to commercial sector was Rs 110.65 crore as on November 6, slightly higher than Rs 110.38 crore at end of March 2020.

India’s losing Rs 75,000 crore in taxes every year due to tax abuse by MNCs, individual evasion

Source: The Economic Times, Nov 21, 2020

NEW DELHI: India is losing over USD 10.3 billion (about Rs 75,000 crore) in taxes every year owing to global tax abuse by MNCs and evasion by private individuals, a report said on Friday. The State of Tax Justice report said globally countries are losing a total of over USD 427 billion in taxes each year to international corporate tax abuse and private tax evasion. This is costing countries altogether the equivalent of nearly 34 million nurses’ annual salaries every year — or one nurse’s annual salary every second.

With regard to India, the report said USD 10.3 billion, or 0.41 per cent of the USD 3 trillion GDP, is lost in taxes every year to global tax abuse.

Of this, over USD 10 billion is lost to tax abuse by multinational corporations (MNCs) and USD 200 million to tax evasion committed by private individuals.

The social impact of the lost tax is equivalent to 44.70 per cent of the health budget and 10.68 per cent of education spending. It also equals paying yearly salaries of over 42.30 lakh nurses.

It further said India is most vulnerable to illicit financial flows in the form of outward FDI and listed Mauritius, Singapore and the Netherlands as the trading partners which are most responsible for this vulnerability.

The State of Tax Justice report has been published by the Tax Justice Network, together with global union federation Public Services International and the Global Alliance for Tax Justice.
The report highlights the state of global tax abuse and governments’ efforts to tackle the menace.

Govt infuses Rs 6,000 cr in NIIF debt platform to increase infra funding

Source: Business Standard, Nov 12, 2020

New Delhi: As part of efforts to provide proper funding to infrastructure projects, the government on Thursday decided to infuse Rs 6,000 crore equity in NIIF debt platform.

The NIIF Strategic Opportunities Fund has set up a Debt Platform comprising an NBFC Infra Debt Fund and an NBFC Infra Finance Company. The Platform has a Loan book – Rs 8000 crore and deal pipeline of Rs 10,000 crore.

With the fresh infusion of equity by the government and finance including NIIF’s own equity infusion of Rs 2,000 crore and further equity from the private sector, the debt platform is expected to raise enough resources to extend debt support of Rs 1,10,000 crore to projects by 2025.

NIIF AIFL (AA rating) and IFL (AAA rating) will raise Rs 95,000 crore debt from market, including project bonds.

“By 2025, it will provide infra project financing of Rs 110,000 crore,” a government statement said.

Centre releases Rs 6,195 crore to states as revenue deficit grants

Source: The Economic Times, Nov 10, 2020

The government released Rs 6,195 crore as the eight equated monthly installment of post-devolution revenue deficit grants to 14 states on Tuesday.

“Based on the 15th Finance Commission interim recommendations, the Govt has released Rs 6,195.08 crore to 14 states on account of the eighth equated monthly installment of Post Devolution Revenue Deficit Grant,” finance minister Nirmala Sitharaman’s office said in an update via Twitter.

The 14 states included Andhra Pradesh, Assam, Himachal Pradesh (HP), Kerala, Manipur, Meghalaya, Mizoram, Nagaland, Punjab, Sikkim, Tamil Nadu, Tripura, Uttarakhand and West Bengal.

Kerala received the highest amount of this batch of grants at Rs 1,277 crore followed by Rs 952 crore to HP and Rs 638 crore to Punjab.

Apart from the states’ share in the divisible pool of taxes collected by the Centre, the Finance Commission as part of its interim report for the current fiscal, had provided a mechanism for the compensation of states for revenue losses incurred called post-devolution revenue deficit grants.

The latest grant comes after the finance ministry recently released Rs 6,000 crore to 16 states and three Union Territories as part of the second tranche of the special window for goods and services tax (GST) compensation shortfall.
Both the Centre and states have been facing an acute revenue shortage on account of the pandemic and the lockdown. The tussle for funds between the two tiers of government came to a head recently in recent months on the issue of GST compensation shortfall.

It was only in October that GST collections crossed the Rs 1 lakh mark, indicating a revival in activity after the gross domestic product growth plunged by 23.9% in the first quarter of this fiscal.

As per official data available till September, the Centre’s shortfall in gross tax revenue stood at Rs 1.98 lakh crore against last year’s figures.

FPIs invest Rs 8,381 cr in five trading sessions of November

Source: Financial express, Nov 09, 2020

Foreign portfolio investors (FPI) have put in a net Rs 8,381 crore into Indian markets in first five trading sessions of November, with participants growing more confident in view of resumption of business activities and better than expected quarterly numbers, among others.

As per depositories data, FPIs invested a net Rs 6,564 crore into equities and Rs 1,817 in the debt segment, taking the total net inflow to Rs 8,381 crore during November 2-6.

In October, overseas investors were net buyers with Rs 22,033 crore investment in Indian markets. Himanshu Srivastava, Associate Director – Manager Research, Morningstar India, said opening of the economy, resumption of business activities and better than expected quarterly results have kept investor interest intact. The fall in the COVID-19 cases in India and weak US dollar also augured well, he added.

For investment in the debt segment, Srivastava said, among other factors, expectation of the yield softening further on the back of recent measures announced by the RBI would have also attracted FPI investment.

Harsh Jain, co-founder and COO at Groww noted that “inflows into India have been across sectors and have not been sector specific”.

Money is flowing into quality companies with sound fundamentals uniformly, Jain added.

Going forward, after the US election results, more stable investor sentiment could be expected, he said.

“With MSCI announcing a rejig in the foreign ownership limits in the MSCI global indices for Indian stocks, Indian equities may witness increased investments from FPI,” Srivastava said. Also, continuation of accommodative stance by global central banks may ensure flow of foreign investments into emerging markets including India, he noted.

NPCI gives approval for WhatsApp to go live on UPI in graded manner

Source: Business Standard, Nov 06, 2020

Mumbai: The National Payment Corporation of India (NPCI), which manages Unified Payment Interface (UPI), has decided to allow Facebook backed messaging service WhatsApp to go live on UPI in the multi-bank model. WhatsApp can expand its UPI user base in a graded manner starting with a maximum registered user base of 20 million in UPI, NPCI said in a statement today.

Though the condition of 20 million will be a dampener, it is some relief for WhatsApp, which began its pilot run two years ago, while it awaited regulatory clearances to launch its UPI-based payments for its 400 million users in India.

In August, NPCI had informed the Reserve Bank of India (RBI) that WhatsApp had met data localisation requirements.

In a related development, NPCI has capped the share of total number of transaction that a third party application can process at 30 per cent of total volume of transactions processed in UPI, effective January 1,2021.

“…with UPI reaching 2 billion transactions a month and with potential for future growth, it has issued a cap of 30 per cent of total volume of transactions processed in UPI, applicable on all Third Party App Providers (TPAPs)”, NPCI said.

NPCI has said, the cap of 30 per cent will be calculated basis the total volume of transactions processed in UPI during the preceding three months (on a rolling basis). And, the existing TPAPs who have exceeded the cap, will have a period of two years from January 2021, to comply with the same in a phased manner.

Currently, third party applications such as PhonePe, Google Pay, Paytm, and Amazon Pay, dominate the UPI ecosystem, controlling majority of the transactions.According to industry estimates, the biggest player is Google Pay with over a 40 per cent market share, closely followed by PhonePe.

“It is a surprising move. Having a standard cap of 30 per cent is probably not the best way to do this because it stifles competition and makes people stick to edges. In general having an anti-monopolistic policy with specific limit would make sense. So, controlling monopoly is good but I am not sure if it’s the best way to do it. The positive thing is there is two years’ time for existing players so maybe we will have better implementation of this as we come to the two year time line”, said Harshil Mathur, CEO& Co-founder, Razorpay.

Experts agree on the fact that a hard cut off at 30 per cent is not the best way to curb dominance. UPI being an interoperable platform there should be a stance on monopoly but having hard limit is not the best thing.

UPI recorded over two billion transactions in October, a milestone that highlights the faster adoption of digital payments in a post-Covid-19 world. Launched in 2016, it had crossed 1 billion transactions for the first time in October 2019. While it took UPI three years to reach a billion transactions in a month, the next billion came in just a year. As businesses open up, there is huge uptake in UPI payments as an increasing number of customers opt for digital payments, owing to convenience and safety. With the festive season in full bloom, October has seen a huge surge in UPI payments.

RBI to continue OMO purchase auctions of Rs 20,000 cr to assure liquidity

Source: Business Standard, Nov 05, 2020

Mumbai: The RBI on Thursday said it will continue to conduct open market operation (OMO) purchase auctions of Rs 20,000 crore, as well as OMOs in State Development Loans (SDLs) to support market sentiment and assure adequate liquidity.

Since the announcements made after the Monetary Policy Committee meeting on October 9, the Reserve Bank has expanded the scale of outright open market operation purchases of Government of India securities from Rs 10,000 crore to Rs 20,000 crore per auction. It is also conducting OMO purchase auctions in SDLs.

The total amount of OMOs conducted in the second half of 2020-21 has been of the order of Rs 66,305 crore so far.

In a statement, the RBI said the response has been positive in both primary and secondary market auctions.

“Accordingly, based on an ongoing assessment of liquidity conditions, the Reserve Bank will continue to conduct OMO purchase auctions in amounts of Rs 20,000 crore as well as OMOs in SDLs, along with other operations, to support market sentiment and assure adequate liquidity all along the yield curve,” it said.

It also announced a simultaneous purchase and sale of government securities for an aggregate amount of Rs 10,000 crore each on next Thursday.

“On a review of the current liquidity and financial conditions, the Reserve Bank has decided to conduct OMOs involving a simultaneous purchase and sale of government securities for an aggregate amount of Rs 10,000 crore each on November 12, 2020,” it said. Simultaneous purchase and sale of government securities under OMOs, popularly known as Operation Twist, involves purchasing G-Sec of longer maturities and selling equal amount of G-Sec of shorter maturities.

Cabinet approves Rs 1,811 crore for 210 MW Luhri hydro plant

Source: Financial Express, Nov 05, 2020

The Cabinet Committee on Economic Affairs on Wednesday approved investment of Rs 1,811 crore for the 210-mega watt uhri Stage-I hydro-electric project in Himachal Pradesh.

The project is being implemented by state-run Satluj Jal Vidyut Nigam (SJVNL) and is scheduled to be commissioned in five years.

The hydro power plant is expected to generate 758.20 million units of electricity annually.

The Union government is also providing grants of Rs 66.19 crore for supporting this project by providing enabling infrastructure.

During the project’s life cycle of 40 years, Himachal Pradesh will receive free power worth Rs 1,140 crore cumulatively, the government said. Families affected due to this project will be provided with 100 units of free electricity per month for ten years. The cost of the project was initially estimated to be Rs 2,208 crore. It was conceived as a run-of-the-river plant to tap the hydropower potential of Satluj, requiring about 150 hectre of land.

Mega boost to Regional Rural Banks: Govt to infuse ₹670 crore

Source: LiveMint.com, Nov 01, 2020

New Delhi: In a bid to strengthen capital base, the union government has provided ₹670 crore to Regional Rural Banks (RRBs) considering their importance in agriculture finance during these difficult times.

Of the 43 RRBs, about one-third especially from north-eastern and eastern regions are in losses and they needed fund to meet regulatory capital requirement of 9 per cent, sources said.

As per the current scheme for recapitalisation of RRBs, the capital support is provided to these banks by the Centre, concerned state governments and the sponsor banks in the ratio of 50:15:35, respectively to enable them to meet the regulatory requirement of capital to risk weighted assets ratio (CRAR) of 9 per cent.

According to sources, matching funds were released by sponsor banks and many of the state governments.

With the infusion, sources said, CRAR of these weak RRBs rose to 9 per cent level as per the regulatory norms prescribed by the Reserve Bank of India (RBI).

This round of infusion would take care of capital needs till March 31, 2021, sources added.

RRBs as a group reported net loss of ₹2,206 crore in the fiscal year ended March 31, 2020, as against ₹652-crore net loss in FY19, according to data published by the National Bank for Agriculture and Rural Development (Nabard).

Gross non-performing assets as a percentage of gross loans outstanding of RRBs marginally declined to 10.4 per cent as on March 31, 2020, from 10.8 per cent as on March 31, 2019, the data showed.

Deposits and advances of RRBs increased by 10.2 per cent and 9.5 per cent, respectively during FY2019-20. Gross outstanding loans stood at ₹2.98 lakh crore as against ₹2.80 lakh crore in FY19.

Priority sector loans constituted 90.6 per cent or ₹2.70 lakh crore of the gross loans outstanding of RRBs as on March 31, 2020. Share of agriculture and MSME sectors in total loan outstanding stood at 70 per cent and 12 per cent, respectively.

As of end March 2020, 17 out of the 45 RRBs had CRAR of less than 9 per cent, of which six RRBs had negative CRAR. System-wide CRAR of RRBs deteriorated to 10.2 per cent as on March 31, 2020 from 11.5 per cent in the previous year, the data showed.

These banks were formed under the RRB Act, 1976 with an objective to provide credit and other facilities to small farmers, agricultural labourers, and artisans in rural areas.

As per RBI guidelines, the RRBs have to provide 75 per cent of their total credit under priority sector lending. RRBs are primarily catering to the credit and banking requirements of agriculture sector and rural areas with a focus on small and marginal farmers, micro and small enterprises, rural artisans and weaker sections of the society.

In addition, RRBs also provide lending to micro/small enterprises and small entrepreneurs in rural areas. With the recapitalisation support to augment CRAR, RRBs will be able to continue their lending to these categories of borrowers under their PSL target, and thus, continue to support rural livelihoods. With a view to enable RRBs to minimise their overhead expenses, optimise the use of technology, enhance the capital base and area of operation and increase their exposure, the government has initiated structural consolidation of RRBs in three phase, thereby reducing the number of RRBs from 196 in 2005 to 45 at present.