RBI plays safe on key rates but bullish on growth and startup push

Indian economy is being viewed as a beacon of stability, says Rajan

GN Bureau | February 2, 2016



Not springing any surprises in budget month, the risk conscious governor of reserve bank of India today maintained status quo on key interest rates. Raghuram Rajan has kept the repo or short term lending rate remains unchanged at 6.75 per cent and the reverse repo rate at 7.75 per cent.

“Structural reforms in the forthcoming Union Budget that boost growth while controlling spending will create more space for monetary policy to support growth, while also ensuring that inflation remains on the projected path of 5 per cent by the end of 2016-17,” Rajan said announcing the 6th and final monetary policy for the current fiscal.

The central bank will now eye the government’s annual budget statement this month to decide on whether to cut interest rates further. The government is slated to deliver its 2016/17 budget on Feb 29.

The RBI had slashed the policy repo rate by 125 basis points in 2015.

The RBI governor said the Indian economy is being viewed as a beacon of stability because of the steady disinflation, a modest current account deficit and commitment to fiscal rectitude.

This needs to be maintained so that the foundations of a stable and sustainable growth are strengthened, he said

Growth forecast
On the GDP, RBI maintained its growth forecast at 7.4 per cent with a downside bias.

Rajan has pegged the growth to quicken to 7.6 per cent in the next fiscal. “The Indian economy is currently being viewed as a beacon of stability because of the steady disinflation, a modest current account deficit and commitment to fiscal rectitude.

“For 2016-17, growth is expected to strengthen gradually, notwithstanding significant headwinds. Based on an assessment of the balance of risks, GVA (Gross Value Added) growth for 2016-17 is projected at 7.6 per cent”, Rajan said.

He said the current momentum of growth is reasonable, though below what should be expected over the medium-term.

RBI stressed that the underlying growth drivers need to be rekindled to place the economy durably on a higher growth trajectory.

Inflation may go down

On inflation, Rajan said normal monsoon and subdued oil prices are expected to bring down retail inflation to around 5 per cent by the end of next fiscal.

He also listed a number issues, including implementation of the pay commission’s recommendations for central government employees and movement in global commodity prices, which could build up inflationary pressures.

“Going forward, under the assumption of a normal monsoon and the current level of international crude oil prices and exchange rates, inflation is expected to be inertial and be around 5 per cent by the end of fiscal 2016-17,” he said.

Inflation has evolved closely along the trajectory set by the monetary policy stance, he said, adding that with unfavourable base effects on the ebb and benign prices of fruits and vegetables and crude oil, the January 2016 target of 6 per cent should be met.

Inflation, both at wholesale and retail levels, has been on a rising trend. In December, Wholesale Price Index-based inflation stood at (-)0.73 per cent, while retail inflation moved up to 5.61 per cent.

Steps for startups
The governor has unveiled a series of measures to make it easier for startups to raise foreign capital and do business in India.

"In keeping with the government's Start-up India initiative, the RBI will take steps to ease doing business and contribute to an ecosystem that is conducive for growth of startups," said Rajan in his policy statement.

Broadly the measures are aimed at creating an eco-system conducive for growth of entrepreneurship, particularly in respect of start-up enterprises, the statement said.

RBI plans to enable startups across sectors receive foreign venture capital investment and also enable transfer of shares from foreign venture capital investors to other residents or non-residents.

The central bank is also in discussion with the government to allow startups raise rupee denominated loans from foreigners and permit them to use innovative convertible instruments to raise funds. It also wants to government to allow them to issue shares without cash payment through sweat equity or any legitimate payment owned by the company provided the payment does not fall within the ambit of the Foreign Exchange Management Act (FEMA).

"Today if a startup wants to raise money, it can raise it through complicated contracts which are currently not allowed by the FEMA. We are looking at if we can make this possible," said Rajan.

He added that another measure was to permit receipt of consideration on a deferred basis in case of transfer of ownership. This would be made possible by enable buyers to create an escrow arrangement or indemnity arrangement up to a period of 18 months. Although RBI is the regulator for enforcing FEMA the rules are made in consultation with the government since these pertain to policy.

To improve the ease of doing business and make compliance easier the RBI would now enable online submission of forms for outward remittances and allowing a document upload facility if it was required. The central bank also proposed to simplify the process for dealing with delayed reporting of FDI related transaction by building a penalty structure into the regulations itself. Earlier last year, RBI had set up a dedicated email helpline to help startups..

Monetary policy review highlights

* Repo rate under LAF unchanged at 7.75%.

* SLR of SCBs reduced by 50 bps from 22% to 21.5% of their NDTL from February 7.

* ECR facility replaced with system-level liquidity from February 7.

* Forex remittance limit enhanced to $250,000 per person from $125,000.

* Reinvestment of coupons in gilts by FPIs even when $30-billion cap utilized.

* Future FPI investment in debt market only in paper with a minimum residual maturity of 3 years.

* Easier norms for pricing instruments under FDI to encourage investments.

* To permit stock exchanges to introduce cash settled Interest Rate Futures contracts on 5-7-Year and 13-15 year G-Secs.

* Domestic entities and FPIs will be allowed to take foreign currency positions in the USD-INR pair up to

$15 million per exchange.

* New ownership or management of a company will merit an extension in date of commercial operation of an asset with no impact on asset classification.

* In talks with Sebi to make it easier for conversion of debt into equity. RBI guidelines expected in 3 months.

* Allows banks to prospectively reverse excess provision in books when NPAs sold to ARCs and cash received exceeds the book value of the asset.

* Evaluation for small and payment banks licences.

*Expects inflation to be around 5 per cent by March 2017.

* Expects GDP growth of 7.6 per cent for FY17, 7.4 per cent with downward bias for FY16

* Indian economy lost momentum in Q3

– Have not factored in 7th pay panel recommendation in inflation target

* Continue to remain accommodative even if rates remain unchange

* Working with banks and government to ensure identification of stressed assets

* Bearish commodity price dynamics are also likely to impact investor sentiment

*RBI to create a special ecosystem for startup funding

* Prospects for the rabi harvest are improving slowly;

Full Report: click here

Comments

 

Other News

Fewer and fewer parliament sittings

The winter session of parliament this year is going to be from December 15 to January 5, which will result in fewer sittings and impact legislative productivity. When parliament meets for a fewer days, it is bound to have an adverse impact on the work. The parliamentarians do get to spend mo

Indians most affected by global internet policies: Aruna Sundararajan

 People in India are most affected by global internet policies, said secretary, department of telecommunications, Aruna Sundararajan. Flagging the challenges of national governance, Sundararajan said on social media India has the largest number of users.   

Three killed as train derails in UP

Three passengers were killed and around a dozen sustained grievous injuries after nine coaches of Vasco Da Gama-Patna express derailed near Manikpur railway station in Uttar Pradesh on Friday morning. Similarly, 14 wagons of a goods train also jumped off the track near Cuttack in Odisha. 

Should Patidars of Gujarat be given reservation?

Should Patidars of Gujarat be given reservation?

Job market is currently experiencing structural change: Nathan

SV Nathan, partner and chief talent officer, Deloitte India spoke to Praggya Guptaa about the current job market situation and the upcoming opportunities in India. How would you assess the job market situation in India? If you look at the economy today

Are we seriously fighting malnutrition?

It did not surprise me when the India: health of the nation’s states, the India state-level disease burden initiative report released recently reported malnutrition the prime risk factor driving the most deaths and disability in Madhya Pradesh. Even in 1990 malnutrition was the frontrunner and after



Video

Current Issue

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter