By Soumya Kanti Ghosh
Candour, a hallmark of the current Reserve Bank of India (RBI) governor, has been a push factor for markets to stay focused on growth and regulatory innovations. It continued unfettered today as the Monetary Policy Committee (MPC) achieved a significant feat of a half century of deliberations in its rather brief sojourn since 2016.
The governor’s emphasis remained on the skewed probability of downside risks gaining currency, as the choppiness in global markets can foretell. This was even when the fragmented MPC (4-2) pledged support to keep the policy rates unchanged the ninth time in a row, in line with broader market expectations.
An interesting observation in this regard could be the frenzied buoyancy in the calls for the US Federal Reserve to take a significant pivot, either through an off-cycle rate cut or cutting the Federal funds rate by as much as 50 basis points (bps) in its ensuing September meet.
This is when the lopsided job markets (full- and part-time) as well as the spike in joblessness across whites and Asian sub-groups alike is creating a ripple effect globally. In addition to this, the US government has run up deficits of $9 trillion in the last four years, including the most recent $1.7 trillion, while interest on the debt is now shockingly more than the national defence expenditure. This limits fiscal flexibility and increases economic uncertainty, as carry trades are greatly unleveraged globally. The sell-off in risky assets is nudging a vicious cycle to take off.
The instability could prime other central banks too, with the ensuing European Central Bank’s meet in September being dubbed “wide open” by market watchers. Bank of Japan unnerved the markets last week through whiplashing currency traders and hiking its policy rate.
To cut a long story short, the choices before most of the central banks suddenly appear between a fire or a frying pan, with hurried action and little communication likely to fan more panic among markets/investors.
Against this backdrop, Mint Street walked a razor-thin line, balancing the two sides of the coin as food inflation remains volatile and sticky, and an intense pan-India monsoon spell does not help in even spatial distribution.
The trade front looks hazy, with supply-side issues possibly aggravating if economies undergo a slowdown, doubling down on the catastrophic effects of a flaring Middle East. The RBI retained its inflation projection for FY25 at 4.5% and real GDP at 7.2%. The outlook for inflation will largely be shaped by the food inflation trajectory and base effect.
The RBI has been actively managing liquidity through main and fine-tuning operations and has ensured liquidity remains adequate. The impending just-in-time mechanism that keeps government cash balances out of the banking system could have an impact on liquidity. Furthermore, capital flows in FY25 could pose challenges and opportunities for the RBI’s liquidity management. The RBI thus needs to innovate on liquidity management, especially given the pressure on the rupee.
The regulator has now shifted its action to online digital lending apps (DLAs). With a view to provide information and differentiate between genuine lending apps and otherwise, the RBI has decided to create a public repository of DLAs deployed by regulated entities that will be available on the RBI website. This is expected to put some check on the digitalised loan shark business.
The RBI has also decided to alter the frequency of reporting to credit information companies, shortening it from the present 30 days to 15 days. This is expected to give a more up-to-date picture of a borrower’s indebtedness. Lenders will be able to make better risk assessments for borrowers and also reduce the risk of over-leveraging by them.
By addressing the likelihood of building up of risks in the system from different known-unknown quarters, the regulator has sent a clear and present message to faltering entities to set their houses in order. While hailing the fall in unsecured credit flows via non-banking financial companies/ credit card issuers, the regulator has also warned of a focus on top-up loans attached to otherwise secured loans, viz. housing/gold, which are eventually finding ways in speculative purposes.
Among other measures, the RBI has proposed to increase the UPI limit for tax payments from Rs 1 lakh to Rs 5 lakh after it hiked the limit to Rs 5 lakh from certain payments in December 2023.
The transaction limit for the Retail Direct Scheme and IPO subscriptions was also increased to Rs 5 lakh in December 2021. The hike in the limit will help taxpayers pay higher tax liabilities quickly and sans expenses, as the payments made via UPI usually do not attract any additional charges. Self-assessment tax is around 7% of the total gross direct receipts.
The RBI has also announced the introduction of delegated payments via UPI, which would allow an individual to set a UPI transaction limit for another individual on the primary user’s bank account.
This implies that an individual will be able to provide access to their bank account for UPI payments to another individual, say a family member. This is in line with the add-on card facilities provided by credit card companies and is expected to add to the reach and usage of digital payments across India. The RBI has proposed to transition the Cheque Truncation System from the current approach of batch processing to continuous clearing with “on-realisation-settlement”, which will reduce from the present duration of T+1 days to a few hours, helping customers release their value quickly in an otherwise stagnant sector.
The concerns on stable, retail-led deposit accretion to banks should see the stakeholders ramping up efforts to reward the average depositor through efficient and effective mechanisms.
However, this would also imply a fair tax treatment for bank deposits, in line with other competing asset classes by policymakers. Interestingly, UPI transactions are also ensuring that stable current account savings account deposits are moving across the banking system, as such deposits are mostly used for transaction purposes. Clearly, deposit mobilisation will remain a challenge for the banking system, with the overall lending pie also subject to regulatory checks.
The author is Member, 16th Finance Commission and Group Chief Economic Advisor, State Bank of India.
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