RBI says economy is moving in only one direction: Up
The move may help fund govt’s massive borrowing plan for the next fiscal
NEW DELHI: The Reserve Bank of India’s Monetary Policy Committee repeated the Union Budget’s optimistic forecast about the economy’s growth prospects in 2021-22, reiterated the need for continued policy support, and was sanguine about the inflationary outlook — all messages that highlight the Indian economy’s sharp recovery from the impact of the ongoing (but slowing) Covid-19 pandemic.
In sync with the Budget’s assessment of the economy going forward, MPC has projected a gross domestic product (GDP) growth rate of 10.5% in the fiscal year 2021-22. MPC’s decision to keep interest rates unchanged while retaining an accommodative policy stance also suggests that while having passed the baton of economic revival to fiscal policy from interest rates, the central bank will continue to support this process by maintaining liquidity.
Over the past year, MPC cut the policy rate by 115 basis points — one basis point is one hundredth of a percentage point — from February 2020 to 4% it is at now, and infused a total liquidity of ₹9.37 lakh crore (since March 2020) into an economy roiled by Covid-19 and the lockdown imposed to slow its spread. To be sure, the net excess liquidity in the system, captured by banks parking their excess cash with the RBI, could be ₹6.5-7 lakh crore. The economy contracted by 24% in the three months ended June 30 and 7.5% in the three months ended September 30, but has recovered since, with many high-frequency indicators in the green.
“While the year 2020 tested our capabilities and endurance, 2021 is setting the stage for a new economic era in the course of our history,” RBI governor Shaktikanta Das said in his press conis ference after the MPC meeting. “I would like to say that, going forward, the Indian economy is poised to move in only one direction and that is upwards,” Das said. In its first meeting after the 2021-22 Budget, MPC projected a GDP growth of 10.5%, 50 basis points less than the 11% forecast by this year’s Economic Survey. The 2021-22 Budget has projected a nominal GDP growth of 14.4%, one percentage point lower than what the Economic Survey had projected.
“Going forward, the Indian economy is poised to move in only one direction and that is upwards. It is our strong conviction, backed by forecasts, that in 2021-22, we would undo the damage that Covid-19 has inflicted on the economy.”
SHAKTIKANTA DAS, RBI governor
MUMBAI: Retail investors will now be able to directly bid for government securities (G-Secs) in Reserve Bank of India auctions, a move that may also help fund the government’s massive borrowing plan for the next fiscal.
Until now, only institutional investors were allowed to bid directly for government bonds, although retail investors are allowed to buy them through stock exchanges.
“This is a major structural reform. I am saying so because the world over only a few countries, like the US and Brazil, offer this facility. In Asia, we are the first country to do it,” Reserve Bank of India (RBI) governor Shaktikanta Das told reporters a press conference.
Allowing retail investors to invest in sovereign debt will broaden the investor base and help absorb the government’s ₹12 lakh crore borrowing plan to fund higher healthcare and infrastructure spending.
“For many years, we have been trying to broad-base the government securities market. With the size of the government borrowing, it is necessary that the investor base is broadened,” said Reserve Bank of India (RBI) deputy governor B.P. Kanungo at the same meet.
The move benefits retail investors who would be able to buy G-Secs directly at lower rates. G-Secs allow investment for the long term, where an investor can get marginally better rates than fixed deposits—along with a sovereign guarantee.
Yields of securities that will mature in 2025 and 2030 are 5.49% and 6.07%, respectively. The 5-10 year term FD rate in State Bank of India is 5.40%.
Reserve Bank of India (RBI) doesn’t expect the move to squeeze inflows into investment options such as bank deposits, mutual funds or small-savings schemes.
“As the size of the economy grows, the total volume of savings and deposit will expand. Banks have many services and functions that they render. We don’t think it will undermine the flow of deposit to banks and mutual funds. It is one more avenue. The process is now made much easier. Remember that small savings offer much higher rates than bank fixed deposits. Notwithstanding that, bank deposits this year have grown by 11.3% (deposit growth). We don’t feel that it would cut into bank deposits,” said Das.
Currently, retail investors can buy G-Secs through stock exchanges, which is called an aggregation model.
Retail investors can also buy treasury bills and state development loans on stock exchanges’ platforms.
Of the total G-Secs that are auctioned, 5% are reserved for non-competitive bidding meant for retail investors.
In non-competitive bids, the interest rates are pre-decided, based on the weighted average price in the auction.
After registering on the National Stock Exchange’s NSE goBID or BSE’s Direct platform, an investor can place orders on the day of the auction, which typically happens every week.
Reserve Bank of India (RBI) allots bonds to exchanges, which are transferred into the demat account of investors.
An alternative for a retail investor is to place an order with the broker of the exchange instead of going on the stock exchange’s platform. Now, the central bank wants to bring investors on its platform so that they can participate in auctions (primary market) and also buy and sell securities in the secondary market.
According to governor Das, RBI will soon be issuing a circular, specifying how retail investors can bid for G-Secs and trade them in the secondary market.