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RBI’s innovative measures expand scope of digital payments

Incremental CRR came unexpected, say experts

The RBI has chosen to maintain the repo rate at 6.5% while introducing an additional 10% Cash Reserve Ratio for banks. Let’s delve into the intriguing viewpoints of industry leaders, key BFSI entities, and economists on the RBI’s announcements post the August 10, 2023, MPC meeting.

Dinesh Khara, Chairman, SBI: The RBI policy communication is nuanced, and has rightly exercised caution and warranted vigil on the inflation trajectory given the current jump in vegetable prices. With capacity utilization currently running higher than the long-term trend, the central bank does have the bandwidth to look through the current increase in food prices. On the developmental front, the widening of options in payment systems, the creation of a digital public tech platform, and putting in place a transparent framework for EBLR are enabling provisions for the creation of an efficient and effective market microstructure.

Rajeev Yadav, MD & CEO, Fincare SFB: “The monetary policy decision reflects a commitment to navigating the complex economic landscape. Notably, the introduction of an additional 10% Cash Reserve Ratio on the growth in net demand and time liabilities from May 19 to July 28, while preserving the prevailing CRR, is a strategic step to uphold financial stability. Furthermore, the impending integration of offline payments through UPI and the inclusion of conversational payments within the platform highlight the commitment to innovation and enhancing the digital payment landscape.

Girish Kousgi, MD & CEO, PNB Housing Finance: RBI’s decision to keep the repo rates unchanged at 6.5% is positive news for the real estate industry. The home buyer sentiment has been strong thus far in 2023, and the stability in rates will help keep up this momentum. Looking ahead, the housing finance industry will benefit from this buoyancy and continue to capitalize on this opportunity by offering a variety of home loan products at competitive rates to potential homebuyers.

Jahnavi Prabhakar, Economist, Bank of Baroda: It is slightly hawkish with an incremental CRR coming in and inflation forecasts revised upwards. No rate cut this financial year is our view and if things get bad, a rate hike can be considered for discussion. There is an assurance that the central bank will ensure that liquidity is available during the busy season. But for sure, we cannot expect any repo rate cut this financial year – a rate hike too cannot be ruled out if inflation surges past 6% on a continuous basis.

Subhrakant Panda, President, FICCI: RBI has adopted a balanced approach by maintaining status quo on policy rates which will support growth while targeting inflation which has inched up recently. The FICCI Manufacturing Survey had indicated revival of private capex on the back of the government’s significant outlay and business optimism which has been reiterated by the Governor. We also compliment the RBI on facilitating innovative measures such as ‘conversational payments’ on UPI which will expand the scope of digital payments.

Rajiv Sabharwal, MD & CEO, Tata Capital:  RBI has maintained its status quo on rates and reaffirmed its withdrawal policy stance. This move would help accelerate growth in the economy and demonstrates RBI’s balanced approach considering the current economic conditions

The GDP growth projection at 6.5% poses as an optimistic sign for the growth potential of all sectors of the economy.

Manushree Saggar, Vice President, ICRA: The proposed changes in the IDF regulations will help these entities diversify on both assets as well as liabilities. Simultaneous opening up of avenues for funding, capital raise and expansion of eligible segments for financing can boost the overall growth for these entities. At the same time, it would be critical to maintain the stringent risk guardrails to ensure the good asset quality reported so far by these entities.

Rajesh Sharma, Managing Director, Capri Global Capital: With the base effect stabilizing, non-banking financial companies (NBFCs) are expected to see growth in loan segments. This is a positive step with a long-term view of promoting the growth of the MSME segment and ensuring a greater access to formal credit at stable rates.

Anil Gupta Senior Vice President, Co Group Head, Financial Sector Ratings, ICRA: As per our estimates, there will be an increase the incremental CRR requirements of the banks by almost 900-950 billion and reduce the liquidity surplus by a similar amount in the banking system. As a result, we expect the short-term rates on money market instruments like call money rates, treasury bills and commercial paper to increase by 15-20 bps in the near term. The impact on the profitability of the banks is expected to be minimal as this is proposed to be a temporary measure.

Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI: Halfway past the year, there are no signs that Central Banks are going to be unhinged from the show-stopper position they have enjoyed through early 2022, the most keenly watched actors in the current milieu that looks high on near permanent disruptions even while on a positive side, there are multiple innovations amidst technology eating the world! Against this backdrop, MPC of RBI decided to keep the repo rate at 6.50% and decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth. The temporary measure amounts to increasing the CRR rate by 30 bps (4.8%). With the current move of incremental CRR of 10%, the surplus liquidity will come down to Rs 2.6 lakh crore. The move will not have any material impact on the 10-year G-sec yield as banks will not have to resort to selling of government securities to meet the additional CRR requirement. But it will have an adverse impact on short-term yield of 91-D treasury bills as it is a temporary measure. Relaxation of guidelines for NBFCs should be funds accretive for infra sector’s huge demands while consolidation and harmonisation of the instructions for submission of applicable Supervisory Returns into a single Master Direction should ease the burden for compliance.

Suyash Choudhary, Head, Fixed Income, Bandhan AMCThe RBI continues to draw comfort from the robustness of local growth while being watchful of spillovers emanating from weak external demand and protracted geopolitical tensions. The I-CRR move is temporary, meant to address the surge in liquidity owing to a host of recent reasons including the return of 2000 banknotes, RBI’s surplus transfer to the government, pick up in government spending, and capital flows. One does get the sense, however, that had banks been more receptive of longer term VRRRs then the RBI may perhaps have been more patient with the deploying the I-CRR tool. With circa INR 250,000 crores of currency in circulation drain pending for the rest of the financial year, our own estimates also suggest that the ‘excess’ core liquidity is a temporary problem. Even here, the I-CRR announcement comes as a relief to the tail risk in market expectation of a more permanent measure that would have turned out to be far more disruptive. Bond yields have risen reflecting the movement in global bond yields as well as our own recent food inflation dynamics. I-CRR hike should keep overnight rates more aligned to repo rate going forward. Money market rates may feel some impact as a result. Eventually one should expect some steepening of the curve when market starts to get greater clarity on when to expect the first rate cut. We retain preference for 3 – 6 year segment.

Ms. Achala Jethmalani, EconomistRBL Bank: The MPC’s decision is seen as a ‘hawkish pause’. The RBI tinkers with liquidity to align it with the current monetary policy stance to enhance transmission of prior hikes. As India CPI inflation starts tapering-off in 2H FY24, we expect the repo rate to remain unchanged at 6.50%. Any price shocks could alter expectations.

Subha Sri Narayanan, Director, CRISIL RatingsAbout Rs 1 lakh crore of liquidity will be drained from the banking system because of the RBI’s move. The impact of this move on the profitability of banks this fiscal is unlikely to be material. If rolled back by September 8, 2023, profit after tax for the banking system this fiscal would be impacted a bare 0.3%. If it continues through this fiscal — a less likely scenario given deposit growth is yet to catch up with credit growth — the impact would be 2%.

Nikhil Gupta, Chief Economist, MOFSL Group: The revision in 2QFY24 is in line with our forecast but RBI appears to be more cautious and sees it stickier than our estimates. Overall, the incremental CRR was unexpected and a reduction in liquidity surplus represents monetary tightening. We expect no further hikes in interest rates in India.

Manish Raj SinghaniaFederation of Automobile Dealers Associations (FADA) President: The decision to retain the Repo Rate at 6.5%, coupled with the RBI’s dedication to anchoring inflation at 4%, serves as a bolstering force for the auto retail industry, which is currently on a commendable growth trajectory. As we approach the festive season, a cornerstone of India’s consumer market, the consistent Repo Rate is poised to benefit the consumers significantly.

Churchil Bhatt, Executive Vice President & Debt Fund Manager, Kotak Mahindra Life Insurance Company: Reflecting the continuing innovative mind set of the Central Bank, RBI made an interim, albeit marginal, adjustment in CRR to address the surplus liquidity.

Deepak Sood, ASSOCHAM Secretary General: The review focuses on ensuring sustainable growth of 6.5 per cent or more for the economy while navigating challenges of inflation related more to weather conditions, expressing confidence that the RBI would ensure adequate liquidity in the banking system for a momentum to the India Growth Story. The outcome of the policy review, notably, encompasses a wider spectrum including a boost to infrastructure funding, transparency in the EMI resetting for the borrowers and an innovative technology interface for the frictionless credit delivery through end-to-end digital platforms. All these initiatives along with additional features in the globally recognised UPI would take India further up on the scale of global technology leaders in the financial sector. Enabling UPI with Artificial Intelligence under the RBI supervision is a leap frog not only for the financial sector but also for  wider usage of AI for the common good of the people.


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