RBI permits lenders to sell fraud loans to ARCS
The Reserve Bank of India (RBI) has permitted the transfer of loans that have been classified as fraud by lenders to asset reconstruction companies (ARCS), thus paving the way for resolution of such accounts. The RBI has also said that the legal responsibilities regarding reporting, monitoring, filing of complaints with law enforcement agencies, and other such related matters with such exposures will move to the ARCS post the transfer.
Traders are seeing hints that the central bank is seeking to drain record liquidity from the banking system, another sign that the global flood of pandemic-era easy money may begin to ease.
The Reserve Bank of India (RBI) is increasingly shifting its forex intervention to the forwards market to keep from injecting rupee liquidity, according to traders and economists, including Madhavi Arora of Emkay Global Financial Services. The monetary authority is also signaling a taper to its outright bond purchases, or even do away with them totally, from next quarter, some of them said.
Amid the global move toward normalisation, led by the US Federal Reserve, RBI Governor Shaktikanta Das has maintained that monetary policy will stay easy to ensure a durable economic recovery. But add to that expectations that inflation will remain elevated, currency and bond traders are trying to gauge when the RBI will begin reversing course. An RBI spokesperson didn’t respond to requests for comment.
The bank’s rate panel is due to review policy settings early next month. While the Monetary Policy Committee has held its key repurchase rate unchanged for the past seven meetings, the central bank can still tinker with the other rates, reserve ratios and liquidity tools it deployed during Covid.
“The economy is gradually recovering and emergency policy settings are no longer necessary,” said Sonal Varma, chief economist for India and Asia ex-japan at Nomura Holdings Inc. “The first step is to reduce the quantum of durable liquidity injections via bond purchases and FX intervention or to sterilize them.”
A starting point could be keeping the excess liquidity in check amid huge inflows into the nation’s stocks and bond markets, traders said. Surplus cash that banks park with the RBI reached a record ~10 trillion earlier this month, easing since to ~8.1 trillion, according to Bloomberg Economics India Banking Liquidity
Index. For now, the RBI has been sponging away cash for shorter duration via its reverse repo operations. It started with 14-day reverse repos and is now resorting to other durations. The central bank drained ~3.4 trillion through a 14-day reverse repo and ~50,000 crore via a 4-day operation on Friday.
Swaps & sales
To keep from further adding to the cash pile, forex traders said, the RBI has been entering into so-called sell-buy swaps in the forwards market, which has pushed up the implied yields in recent weeks.
In another signal, the central bank has, for two successive auctions, announced a sell leg to its bond purchase tranches under its government securities acquisition program, or GSAP, citing current liquidity conditions.