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RBI Governor Speech- Fiscal measures for Covid 19 impact

This is excerpt of RBI Governor’ speech on fiscal measures required for the covid19 impact on Indian economy. You can check the detailed speech on RBI official website.

Fiscal measures are important and the government is working on a package of measures. Government of India will take a judicious and balanced call on the question of fiscal deficit, while addressing the challenges arising from the COVID-19 pandemic

Fiscal measures for covid 19 impact on economy

  • Government has taken measures to contain expenditure, like freeze on its employees’ dearness allowance; and announced a relief package to support the vulnerable and disadvantaged sections.
  • Measures like in-kind support (food grains), cash support, DBT (Direct Benefit Transfer) support or depositing money in PMJDY (PM Jan Dhan Yojana) accounts, government has committed to spend 0.8% of GDP
  • GST collections are going to be significantly impacted in coronavirus time
  • Fiscal deficit target of 3.5% this year is going to be very challenging,
  • Fiscal measures under the COVID-19 package should contain specific sunset provisions.
  • Need to preserve the strength of the RBI’s balance sheet
  • Prime mandate of RBI is macroeconomic stability
  • Evaluate various alternative sources of funding
  • RBI will take a judicious and balanced judgment call on all instruments (conventional and unconventional)
  • RBI has not participated in any primary auction in T-bill and bond auctions
  • RBI participated in secondary market auction for elongation of debt maturity, filling up gaps in the maturity spectrum of our holdings
  • RBI will take a call on COVID-19 bond soon
  • Banks did not participated in TLTRO, despite the additional incentives such as exemption from being reckoned as adjusted net bank credit. Banks are not willing to take on credit risk in their balance sheets beyond a point
  • Underlying challenge of ensuring flows to the mid-sized and small-sized NBFCs and microfinance institutions, that underlying challenge still remains
  • Exit from stimulus measures. Whether it relates to fiscal deficit or liquidity or any other extraordinary measure, it has to be applied in time, and the exit also has to be made in time.
  • On key rates: Single policy rate is the repo rate, as decided by the MPC, and it alone conveys the stance of monetary policy. Reverse repo rate, on the other hand is essentially a liquidity management tool.Widen the policy corridor by cutting reverse repo.
  • Markets are treating reverse repo as the operative rate thanks to abundant liquidity. Critical active operations such as LTRO, TLTROs, lines of credit and the like are all at the policy repo rate or closely aligned to it.
  • Through a lower reverse repo, we are offering an adverse rate in our liquidity absorptions and thereby seeking to incentivize banks to stop passively depositing funds with the RBI and instead lend to the productive sectors of the economy
  • Depreciation of the Indian rupee has been orderly and much less than other comparable emerging markets
  • With so much of liquidity in the advanced economies, it will naturally spill over to economies like India which have strong macroeconomic fundamentals
  • RBI has enough forex reserves
  • Federal Reserve has come out with a general policy and opened up a dollar repo window for central banks. We also have a bilateral swap arrangement with Bank of Japan.
  • India’s debt-to-GDP ratio is deteriorating
  • Foreign investors in the last several years have exhibited their trust on the Indian economy irrespective of the rating upgrade or downgrade.
  • For loan moratorium, each bank has to assess its own liquidity position, capital adequacy and its own financials
  • Current levels of NPA and current levels of capital adequacy are concerned, Indian banks are healthy and safe
  • Temporary freeze on dividend payments by banks and deferment of last tranche of capital conservation buffer.
  • When we announced the standstill on NPA recognition, we also mandated the banks to maintain 10% additional provisions
  • Before any matter is referred to CBI or any other such agency or even before an investigation begins, the Advisory Board for Banking and Financial Frauds committee will go into it and see whether it’s a business failure or a case of malfeasance. If the committee feels there is some wrongdoing, only then will the matter be referred to the investigative agencies.
  • We have strengthened our supervisory systems and mechanisms, including a specialised Department of Supervision
  • Additional regulatory guidelines for NBFCs and Urban Co-operative Banks regulated by the RBI for financial stability
  • In the crypto-currency case, while having an issue with the principle of proportionality, the Supreme Court has clearly observed that RBI is not just another regulation
  • NPCI, and they have set up a subsidiary to internationalize UPI and the RuPay Card. The UPI model has the potential to become a vehicle for cross-border money transfer and remittances
  • We want to see that credit flow also happens through new methods using fintech and through fintech companies
  • Stakeholder consultation is an essential part of the approach at the RBI and the government is much more than a stakeholder.

Important financial terms used in this RBI speech

  • Budget deficit monetization – The process of financing (expense-revenue) difference in proposed budget by Central Bank (like RBI). This is done by either printing more money or issue government bonds.
  • Private placement of bonds– Sale of bonds to pre-selected buyers (institutions/individual) rather than in open market.
  • FRBM– Financial Responsibility and Budget Management Act, 2003. Objective was to establish financial institution to reduce fiscal deficit, deal with inflation, and introduce transparency in fiscal management system.
  • Monetize deficit – See Budget deficit monetization
  • Sunset provisions– Special clause which means that law shall cease to have effect after a specific date, unless further legislative action is taken to extend the law
  • FRBM Committee– FRBM Review Committee also known as NK Singh Committee
  • Sustainable level of fiscal deficit- India fiscal deficit is going to be 7.9% in FY20-21, due to coronavirus and government spending (20 lac crores or 10% of GDP).
  • Monetise the government deficit- See Budget deficit monetization
  • Private placement of gilts on your books – See Private placement of bonds
  • Central bank’s balance sheet– Financial position of Central bank (like RBI) and its asset, liability and equity. For example- Currency in circulation is liability for the Central Bank.
  • Phasing out of ad hoc treasury bills– Ad hoc treasury bills were in use since starting by RBI and they were used to finance fiscal deficit. Ad hoc treasury bills were phased out in 1997-98.
  • Enactment of FRBM Act – See FRBM
  • Monetary policy framework – See evolution of monetary policy framework
  • T-bill and bond auctions – Raising money from public investor when government securities and short term bonds are auctioned. This money is used to finance fiscal deficit or in project work.
  • Debt management activities – Done through Public Debt Management Agency
  • Secondary market– Previously issued financial instruments such as stock, bonds, options, and futures are bought and sold
  • Elongation of debt maturity– In case of financial crisis or special situation, maturity of bonds is increased. See the basic of bonds
  • Maturity spectrum of RBI holdings– The range of Maturity time offered on treasury bills and govt bonds. See bonds basic for more details on YTM.
  • COVID-19 bonds – Government bond (Centre or State) to finance fiscal deficit that has arised due to coronavirus. Eg Maharastra govt raised 1000 crores through Covid19 bonds
  • long maturity bonds– Longer duration bonds, these are less volatile and their yield is higher than shorter duration bonds.
  • TLTRO 2.0– Targeted Long Term Repo Rate Operations. These are specially designed for NBFCs and MFIs
  • LTROs– Central Bank (RBI) offers money to banks for a period of one to three years at the prevailing repo rate. Banks on the other hand offer government securities as collateral.
  • Standing Deposit Facility– remunerated facilitythat will not require the provision of collateral for liquidity absorption
  • Wider LAF corridor– Difference of Repo rate and reverse repo rate. Widening of LAF (Liquidity adjustment facility) will help banks to raise additional liquidity.
  • Dollar swap window– Buying and selling of US dollar by RBI to pump liquidity in the foreign exchange market
  • Debt-to-GDP ratio– Metric comparing a country’s public debtto its gross domestic product. India’ debt to gdp is 80% (FY 20)
  • Advisory Board for Banking and Financial Frauds-CVC (Central Vigilance Commission) has created Advisory Board for Banking Frauds (ABBF) to examine bank fraud over Rs 50 crore and recommend action
  • Unified Payments Interface (UPI)- See more on UPI here
  • NPCI– See more on NPCI in UPI

End note

In this article, you have seen the key points made by RBI governor on fiscal measures required in wake of Covid 19. If you have any doubt or comment regarding this article, please do comment in thread below.

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