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Any doubts?


  1. Simran Bains

    What is portfolio investment?

    1. Arushi

      Portfolio means financial assets, like securities and bonds.
      There is both domestic and foreign portfolio investments, that come under the purview of SEBI.
      It is simply buying of shares/ equities/ debentures/ bonds etc. for a set period of time, or at times perpetual (lifelong bonds) , and are called as an investment, because they assure the buyer (investor) some sort of return in future, on a regular basis OR in certain situations (depending on the bond that has been invested in).

      In case of Foreign Portfolio Investment, their will be huge capital inflows (by way of mergers, acquisition, or simply buying some bonds), when the interest rate is high, as they will get higher value in return.

      A country over dependent on capital inflows (South East Asian crisis) might get caught into inflationary spiral, and any cut in the general interest rate (or repo rate) will result in sudden outflow of huge number of portfolio investments, for which the stakeholders (like companies) might have to pay a huge amount on account of sudden withdrawal.

      On a bigger front, the investment structure of companies matter a lot, and that depends on the overall health of the economy and supportive government policies.

      Hope it helped.

      Felt great revising Economics.

      Thanks for the question, in fact :p

      1. Sandeep Kumar

        A portfolio is a grouping of financial assets such as stocks, bonds etc.

    2. Arun Muradnar

      Portfolio investment is investment made by investors who are not particularly interested in involvement in the management of a company.
      In India, portfolio investors registered in accordance with the Securities and Exchange Board of India (SEBI) guidelines shall be called Registered Foreign Portfolio Investor (RFPI).

  2. rajiv shaw

    Cud someone kindly help me know the pros n cons of d new methodology of calculating GDP adopted by GoI?

      1. rajiv shaw

        Thanks a lot for d link 🙂 …. I hv gone thru it…..just one query…at d end it said that CSO hv to create a back series to make sense of d gdp data…..wat does this mean?

        1. Dr V

          At present new GDP and old GDP is not comparable due to different methodology and base years. So back series would be GDP data of say 2010-11, 2008-09 etc on 2011 base year with new methodology. With same base and same methodology, data would be comparable and we shall be able to make sense of new data..

          1. rajiv shaw

            Oh gr8….thnks a ton Dr. V for d instant help 🙂

  3. Rajni Bhai

    Is there a option to get archive of monthly news in a PDF or word format?
    If it is there, then how do we get that?

  4. Simran Bains

    Super collection! ?

  5. शुभम पान्डे

    Really, very helpful app. .
    And all the nec

  6. Piyush Gadekar

    Excellent app
    Highly Beneficial. . Thank you 🙂

  7. Purab B

    Your efforts are commendable. But please try to cover more topics. And this whole RBI archives at one place is boon.
    @root your app is so addictive due to its interface.short of content.

    1. Root

      Hi Purab, we will cover major current affairs article for sure. WE also release explainers of news in the CD Hub.

      1. Rajni Bhai

        Is there a option to get archive of monthly news in a PDF or word format?
        If it is there, then how do we get that?

        1. Root

          There is a way to get this and that’s by purchasing the magazine.

          http://www.civilsdaily.com/cdhub/topic/civilsdigest-online-copy-released-50-inr/

  8. Dhirendra

    It is good to have all the article at one place

RBI survey shows consumer confidence, perceptions of employment prospects at multi-year lows

Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

From UPSC perspective, the following things are important:

Prelims level: What is Consumer Confidence Index?

Mains level: Possible reasons behind the fall


News

Falling Consumer Confidence Index

  1. RBI’s Consumer Confidence Index has slipped to 91.1 in November 2017, the lowest level in the last four years
  2. A reading of above 100 denotes optimism, while one below 100 indicates pessimism
  3. The RBI survey is conducted in the six metropolitan cities of Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai and New Delhi

Reason behind this fall

  1. One of the main reasons for consumer confidence to be so low is the perception on employment prospects
  2. Clearly, demonetisation and the goods and services tax have had an adverse impact on employment

Back2basics

  1. Consumer confidence is a key driver of economic growth and is widely considered a leading economic indicator of household spending on consumption
  2. Consumers tend to increase consumption when they feel confident about the current and future economic situation of the country and their own financial conditions
  3. In economies such as India and the US, where personal consumption accounts for more than 60% and 70% of GDP respectively, consumer confidence has a particularly significant impact on the economy
  4. Measuring it can provide critical insight into the economy’s growth prospects
  5. Consumer sentiment indices are essential tools used by global investors and will be an immense aid to individual and institutional investors in India

RBI remains net buyer of U.S. dollars

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Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: Good for Foreign Reserves of India


News

India is a net buyer of U.S. dollars

  1. According to the latest RBI data, continued to remain a net buyer of U.S. dollars after it bought $1.259 billion in September from the spot market
  2. In September, the central bank had bought $3.788 billion, while it sold $2.529 billion in the spot market

Why RBI intervenes in the Foreign Market?

  1. The RBI intervenes in the foreign market to contain volatility in the rupee and not to set a price band

[op-ed snap] Fixing Accountability

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Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Rising trend Electronic Banking Transactions can be seen as result of Digital India initiative.


News

Context

  1. The article talks about the ways of countering frauds in electronic baking transactions

RBI on electronic bank transactions

  1. The RBI has from time to time issued guidelines to strengthen systems and procedures for electronic banking transactions, internet banking and mobile banking
  2. The RBI has recently instructed through a circular all banks to put in place effective systems to ensure secure electronic banking transactions

Objective

  1. The objective is clear: Customers must feel safe about carrying out electronic banking transactions

What should be done to achieve this objective?

  1. Banks must put in place robust and dynamic fraud detection and prevention mechanisms plugging gaps in the existing systems
  2. And reporting of unauthorised transactions by customers to banks with 24×7 access through multiple channels ensuring that complaints are resolved within 90 days
  3. Banks shall formulate transparent, non-discriminatory customer relations policy for customer protection
  4. And fraud investigation function must be owned by the bank’s CEO, audit committee of the board and the special committee of the board and nominate a general manager for submitting fraud returns

RBI’s clarification on Audit Committee

  1. The RBI has made it clear that in banks where the board of directors is chaired by a non-executive chairman
  2. And there will not be any restriction if she or he is also nominated to the audit committee of the board of directors (ACB )
  3. The ACB has to “oversee the internal inspection, statutory audit, inter-branch and inter-bank accounts, balancing of books, major areas of house-keeping, etc.”
  4. And focus on monitoring of frauds and taking preventive and corrective actions on frauds

Suggestions from other agencies

  1. The chief vigilance commissioner has also emphasised that there must be effective monitoring of frauds at the highest level
  2. The CBI director insisted that the board of the PSB banks must monitor fraud cases
  3. The ACB must monitor all the cases of fraud
  4. The committee is required to identify the systemic lacunae that caused perpetration of the fraud and review the efficacy of the remedial action taken to prevent recurrence of frauds

The way forward

  1. Despite the mother of all instructions for fraud detection, prevention, control, monitoring and periodical reporting to the RBI, there seems to be a laxity in implementation in different levels leading to NPAs and bank frauds
  2. These issues should be countered

RBI to make LEI must for cos with over Rs 5 crore exposure

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Particulars of the LEI

Mains level: Important measure to counter fraud and NPA problem in the Banking Sector.


News

RBI’s decision on Legal Entity Identifier (LEI)

  1. The RBI is set to make LEI compulsory for companies having aggregate fund-based and non-fund based exposure over Rs 5 crore
  2. Banks will be required to capture this number in the Central Repository of Information on Large Credits (CRILC) database that captures details of loan above Rs 5 crore
  3. Past decisions of the RBI on LEI: RBI has made LEI mandatory for transactions in interest rate, forex and credit derivative market

Benefits of the LEI number

  1. It will enable banks to effectively monitor debt exposure of companies having businesses in multiple sectors and dealing with large number of banks and NBFCs
  2. It will make it easier for banks to detect frauds and willful defaulters and prevent ever-greening of loans
  3. The need for such a system was felt after the 200b8 global financial crisis and global body, the Financial Stability Board, worked on the global structure of the LEI system
  4. It would also enable banks in preventing multiple loans to companies against the same collateral

Who can issue the LEI number?

  1. Firms can obtain their LEI code from Legal Entity Identifier India Ltd.(LEIL)
  2. The LEIL is a wholly owned subsidiary of Clearing Corporation India Ltd.
  3. LEIL is accredited by the Global Legal Entity Identifier Foundation (GLEIF) and recognised by RBI as issuer of LEI under the Payment and Settlement Systems Act, 2007
  4. Apart from the LEIL, any local operating unit accredited by GLEIF can issue LEI numbers.

Back2basics

What is an LEI?

  1. The Legal Entity Identifier (LEI) is a global reference number that uniquely identifies every legal entity or structure that is party to a financial transaction, in any jurisdiction
  2. It is a unique 20 digit alphanumeric code that is assigned to a legal entity

What is the purpose of an LEI?

  1. The global LEI system has been set up by regulatory authorities, including G20 and the Financial Stability Board, to address the global financial crisis
  2. The LEI is designed to enable the identification and linking of parties to financial transactions in order to manage counter party risk
  3. Its goal is to improve measuring and monitoring of systemic risk and support more cost-effective compliance with regulatory reporting requirements

[op-ed snap] Regulating the disruption wave: RBI issues directions to govern P2P platforms

Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

From UPSC perspective, the following things are important:

Prelims level: Particulars of the NBFC-P2P

Mains level: The article comprehensively discusses issues related to NBFC-P2P


News

Context

  1. The article talks about the RBI’s policies on NBFC-P2P.

Recent decision of RBI on NBFC-P2P

  1. The RBI has recently classified peer to peer (P2P) lending platforms as non-banking financial companies (NBFC-P2P)
  2. Following this, RBI has issued detailed master directions governing the operation of such platforms, which raise some interesting PRELIMINARY QUESTIONS

Particulars of the NBFC-P2P

  1. As a registered NBFC-P2P, the firm can only provide a technology platform, through an online marketplace, to connect the lenders and borrowers, and related services such as loan documentation, loan recovery, etc.
  2. They are not entitled to conduct the business of lending and borrowing themselves
  3. In addition, they can provide credit assessment and risk profiling of borrowers, which is disclosed to potential lenders to make an informed decision

Question.1) Is RBI regulating a tech company as an NBFC?

  1. RBI has argued that the sector needs to be regulated and to protect participants from succumbing to unethical or coercive practices
  2. RBI can generally regulate entities operating either as banks or NBFCs
  3. P2P platforms are not banks, since there is no balance sheet lending
  4. Generally, entities with their principal business being financial activity are considered as NBFCs and required to be registered with RBI
  5. These conditions too are not satisfied by P2P platforms, since their primary source of income is commission from services
  6. However, the RBI has special powers to classify any entity as an NBFC, after consultation with the government which it has exercised to classify P2P platforms as NBFC-P2Ps
  7. The RBI has used this in the past to regulate mortgage guarantee companies and account aggregators

Question.2) Are the master directions detrimental to P2P start-ups?

  1. NBFC-P2Ps are expected to be a small subset of the various NBFCs operating in India.
  2. Due to the classification, NBFC-P2Ps are now subject to new conditions such as minimum net owned funds of Rs2 crore, leverage ratio of 2 and limited scope of activities
  3. As a result, the entry barrier for new start-ups has increased considerably, and the ability to move into ancillary business lines has been restricted
  4. For existing P2P players, while there may be initial hardship, and certain modifications required to their current business model, they already have certain aspects of the regulations coveredg

Question.3) Should investors reconsider their board strategy?

  1. For all NBFCs, approval of RBI is required if more than 30% of the directors (excluding independent directors) are changing
  2. However, for an NBFC-P2P, an additional prior approval is required if any change in shareholding gives the acquirer the right to appoint a director
  3. It is not clear why this condition has been added specifically for NBFC-P2Ps

Question.4) Will the new prudential norms affect business?

  1. RBI has restricted the aggregate exposure (across all P2P platforms) of each lender and borrower to Rs10 lakh, and limited the exposure of a single lender to a single borrower to Rs50,000
  2. These conditions will severely restrict the business potential of NBFC-P2Ps, unless they are able to bring on many more borrowers and lenders onto the platform

RBI floats draft norms for setting up ETPs for fin instruments

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Note4students

Mains Paper 2: Polity | Appointment to various Constitutional posts, powers, functions and responsibilities of various Constitutional Bodies

From UPSC perspective, the following things are important:

Prelims level: ETPs

Mains level: Trading on electronic platforms is being encouraged across the world as it enhances pricing transparency, processing efficiency and risk control. It will be beneficial for the Indian Economy.


News

Electronic Trading Platforms (ETPs)

  1. The RBI today floated draft directions for setting up of ETPs for financial market instruments regulated by it
  2. It is aimed at ensuring transparency
  3. As per the draft direction, an ETP operator will be incorporated in India with full managerial and operational control exercised within India

What is an Electronic trading platform?

  1. In finance, an electronic trading platform also known as an online trading platform or electronic trading exchange, is a computer system running a software program that can be used to
    (1) place orders
    (2) store trading data and information pertaining to traded products
    (3) authenticate users and perform other operations of a trading exchange operating in electronic domain
  2. Various financial products can be traded by the trading platform, over a communication network with a financial intermediary or directly between the participants or members of the trading platform
  3. This includes products such as stocks, bonds, currencies, commodities, derivatives and others, with a financial intermediary, such as brokers, market makers, Investment banks or stock exchanges
  4. Electronic platforms provide several benefits in terms of transparency in pricing, processing efficiency in terms of transaction time and cost, improved risk controls and help in market surveillance by addressing market abuse and unfair trading practices
  5. These platforms have the potential to positively impact the market structure by broadening market access, increasing competition and reducing dependency on traditional trading methods

Draft Framework

  1. It includes detailed eligibility criteria, technology requirements and reporting standards
  2. Existing electronic trading platforms would also be required to obtain authorisation under these directions, within six months from the date of issue of these directions.
  3. The RBI has sought comments from market participants and other interested parties on its draft framework by November 10

RBI panel suggests linking bank lending rates to a market benchmark

Note4students

Mains Paper 3: Economy | Indian Economy Issues relating to planning

From UPSC perspective, the following things are important:

Prelims level: Base rate, MCLR, lending rates, etc.

Mains level: Important suggestions to hasten monetary policy.


News

Recommendations by an RBI’s committee

  1. A committee set up by the RBI has recommended linking bank lending rates to a market benchmark
  2. Why: to hasten monetary policy transmission as well improve transparency in rate setting by lenders

Other suggestions from the committee

  1. The panel recommended that all floating rate loans advanced from April could be referenced to one of three external benchmarks
  2. The panel has suggested a risk-free curve involving rates on treasury bills, or certificate of deposits rates or the central bank’s policy repo rate
  3. It also suggested that banks migrate all existing borrowers to the external benchmarked rate without any conversion fee or other charges within one year of its introduction, i.e. March 2019
  4. These borrowers are currently charged under benchmark prime lending rates, base rates or MCLR
  5. RBI will take a final view on suggestions of the panel after taking into account public feedback received until 25 October

Back2basics

For better understanding of the issue, Click here

No data on black money yet, says RBI

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Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: It is important to note RBI’s Statement on Demonetisation.


News

Statement in front of the Parliamentary Panel

  1. The RBI has told a parliamentary panel that it has “no information” on how much black money has been extinguished as a result of demonetisation
  2. According to the RBI, an estimated Rs. 15,280 crore in junked notes has come back “subject to future corrections based on verification process”

Other statements

  1. RBI also said it has “no information” whether demonetisation is being planned to be implemented at regular intervals

RBI includes HDFC Bank in the ‘too big to fail’ list

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Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: D-SIBs

Mains level: One of the many steps taken by the RBI, to enhance the capability of Banking Industry in the Indian Economy.


News

HDFC is added in the list of Domestic Systemically Important Banks (D-SIBs)

  1. The RBI has added HDFC Bank in the list of D-SIBs
  2. It is the second largest private sector lender of the country
  3. Also, RBI has clarified, the State Bank of India and ICICI Bank will continue to be in this category

Background of the D-SIBs

  1. Following the global financial crisis of 2008, it was observed that problems faced by certain large and highly interconnected financial institutions hampered the orderly functioning of the financial system
  2. And it  negatively impacted the real economy
  3. It was decided to identify such institutions and prescribe them higher capital requirements
  4. RBI had started listing D-SIBs from August 2015
  5. SBI and ICICI Bank were identified as D-SIB both in 2015 and 2016, respectively

99% of demonetised notes returned: RBI

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Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: Much awaited data on demonetized notes.


News

Returned Notes

  1. Data in the annual report, of the RBI, showed that only 89 million pieces of Rs. 1,000 were not deposited
  2. As of March 2016, there were 6,326 million pieces of Rs. 1,000 banknotes in circulation

Is this the final figure?

  1. The final deposit figures could still rise
  2. Since on June 20, 2017, the government allowed District Central Cooperative Banks to deposit the withdrawn notes that had been accepted by them from customers between November 10-14

Demonetized notes from Nepal

  1.  The central bank is also in discussion with the government whether to accept the demonetised notes held by citizens and financial institutions in Nepal

[op-ed snap] Economic Graffiti: Don’t be cautious, RBI

Decrease In Repo Rate: More Savings On Home Loan

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Note4students

Mains Paper 3: Economy | Mobilization of resources

Op-ed discusses about the impact of repo rate change on common man and it also gives, reasons why RBI should cut repo rate more.

Once you are done reading this op-ed, you will be able to attempt the below.

Discuss the impact of change in repo rate on common man? why it is said that RBI should be more aggressive in cutting the repo rate?

From UPSC perspective, the following things are important:

Prelims level: Repo rate, reverse repo

Mains level: Monetary policies of RBI and its impacts on economy


News

Context

  1. The Reserve Bank of India recently decided to lower the repo rate by 25 basis
  2. Ordinary citizens treat this as an abstruse topic, of no concern to them. In reality, the lives of ordinary citizens are greatly affected by it

Why this is important?

  1. The repo rate is the interest rate at which banks can borrow money from RBI for short durations
  2. If this is lowered, banks can lend to their borrowers at lower rates.
  3. This is the reason why changing this rate usually influences interest rates across the economy 
  4. Raising the repo rate lowers inflation but also restrains growth, while lowering it pushes up the growth rate but fuels inflation.

 Why RBI should be more aggressive in cutting the repo rate?

  1. There is no indication of rapid, generalised inflation in India.
  2. In an emerging economy, it is good to have an inflation rate of around 3 to 4 per cent. This makes the labour market more flexible and facilitates job creation.
  3. As a result of the liquidity crunch associated with demonetisation, GDP growth in India is now down to 6.1 per cent per annum. Some additional liquidity could partially offset this.
  4. Drop in the amount of investment taking place in the country. India’s investment-to-GDP ratio had risen since 2003 and was steady at above 35 per cent. This has now dropped to 28 per cent.

Global scenario

  1. The world is today caught in a low-interest rate regime. The European Central Bank cut its overnight deposit facility rate to below zero; and this prompted central banks in other countries — Sweden, Denmark, Switzerland, Japan, Hungary — to cut policy rates and enter negative territory.
  2. Such extreme low rates are, far from boosting consumption, making people save more since they are worried about not having enough money at the time of their retirement.
  3. Even the US Fed is more cautious about raising rates, because it would increase demand for dollars and cause the dollar to appreciate and hurt American exports.

Increase interest rate?

  1. If one country raises interest rates, money will flow into the country from the other economies in order to earn the higher return.
  2. As more players try to buy this country’s currency to invest in it, the currency will appreciate, causing exports to suffer.

India’s experience 

  1. By holding on to high interest rates, it is attracting capital flows into the country, as evidenced by the large foreign exchange reserve held by RBI.
  2. This is causing the rupee to be stronger than it should be and this is, in turn, stunting exports, and growth

Loan-pricing systems: For better transmission, RBI in search of yet another benchmark

Image result for Monetary transmission India RBI

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Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Base rate system, Mumbai inter-bank offer rate (Mibor), Libor, MCLR

 Mains level: MCLR System, issues and way forward.


News

Context:

  1. In 1994 Reserve Bank of India (RBI), announced a landmark decision to fully deregulate interest rates on advances above Rs 2 lakh.
  2. Since then, the RBI has introduced four benchmark lending rates for proper pricing of loans and transmission of rates. However, these rate structures have been found to be ineffective for various reasons. 
  3. The RBI has now formed a committee to formulate market-determined benchmarks to ensure a better transmission of interest rates.

What is Monetary transmission?

  • Monetary transmissionrefers to the process by which a central bank’s monetary policy decisions are passed on, through financial markets, to businesses and households.

Base rate system

  1. It included all those elements of the lending rate that are common across all categories of borrowers.
  2. Banks are allowed to determine their actual lending rates on loans and advances with reference to the base rate and by including such other customer-specific charges as considered appropriate.
  3. While all categories of loans are required to be priced only with reference to the base rate, transmission of the RBI rate cuts moved at snail’s pace

Banks and markets also briefly experimented with the Mumbai inter-bank offer rate (Mibor) on the lines of London’s Libor

Mumbai inter-bank offer rate (Mibor)

  1. It is a major global interest rate indicator
  2. In June 1998, the National Stock Exchange had developed and launched the Mumbai inter-bank bid (Mibid) rate and Mibor for the overnight money market.
  3. However, banks found it difficult to use external benchmarks for pricing their loan products, as the available external market benchmarks (Mibor, G-Sec) are mainly driven by liquidity conditions in the market, and do not reflect the cost of funds of the banks

 MCLR was experiment which was kicked off when Raghuram Rajan was the RBI Governor.

MCLR System

  1. RBI Governor Urjit Patel said experience with the MCLR system, introduced in April 2016 for improving the monetary policy transmission, has not been entirely satisfactory
  2. Banks have been selective in their rate cuts in aggressive segments such as home and auto loans, but in many other segments, borrowers are still tied to the base rate, where they can ease more.
  3. RBI’s rate cuts have not been passed on to borrowers in many segments of the economy.
  4. The base rate of some banks after the introduction of MCLR has moved significantly less than MCLR.
  5. The RBI says that the rigidity of the base rate is a matter of concern for an efficient transmission of monetary policy to the real economy
  6. MCLR failed to bring any cheers to old customers who were stuck with BPLR or base rate-linked rates.

The RBI is likely to come up with another benchmark lending rate for borrowers, speeding up the transmission of rate cuts to the customers.

Centre takes steps to drain excess cash

  1. What: The Centre has decided to increase the limit of bonds that can be issued under a market stabilisation scheme (MSS)
  2. Reason: To mop up excess liquidity from the banking system arising out of its demonetisation move

Note4students:

This news is of minor importance, just make sure you understand terms such as bonds and market stabilisation scheme.

Back2basics:

The MSS scheme was launched in April 2004 to strengthen the RBI’s ability to conduct exchange rate and monetary management. The bills/bonds issued under the MSS would have all the attributes of the existing treasury bills and dated securities. However, unlike regular bonds, these are not issued to meet the government’s expenditure and the funds raised are kept in a separate cash account. As a result, their issuance will have a negligible impact on the fiscal deficit of the government.

Sharia banking: RBI proposes ‘Islamic window’ in banks

  1. The RBI has proposed opening of “Islamic window” in conventional banks
  2. Reason: For “gradual” introduction of Sharia-compliant or interest-free banking in the country
  3. Both the Centre and RBI are exploring the possibility of introduction of Islamic banking for some time
  4. This is to ensure financial inclusion of those sections of the society that remain excluded due to religious reasons
  5. Due to the complexities of Islamic finance and various regulatory and supervisory challenges involved in the matter, it will be introduced gradually
  6. Islamic or Sharia banking is a finance system based on the principles of not charging interest, which is prohibited under Islam
  7. In its annual report for 2015-16, the RBI had said that some sections of Indian society have remained financially excluded for religious reasons

Public Debt Management Agency- a background

  1. Why PDMA? It would help divest the RBI of its dual and often conflicting roles as the banker and manager of the Centre’s borrowing
  2. Background: Former Finance Minister Pranab Mukherjee had first announced the setting up of PDMA in Budget 2011-12
  3. It was later also backed by the Financial Sector Legislative Reforms Commission in its report in 2013
  4. The proposal was then taken up by Finance Minister Arun Jaitley in the Budget 2015-16 but was later withdrawn during the discussion on the Finance Bill, 2015

RBI to be divested of debt management role in 2 years

  1. Centre has finally decided to set up an independent agency to mange its debt after years of discussions with the RBI
  2. As a precursor, the Finance Ministry will soon set up the Public Debt Management Cell (PDMC) in the Budget Division
  3. This interim arrangement will allow separation of debt management functions from RBI to the Public Debt Management Agency (PDMA) in a gradual and seamless manner, without causing market disruptions
  4. The cell will be converted to a statutory authority in about two years’ time

A background to FDMC tussle- II

  1. In February 2016, the Supreme Court made the RBI a party in public interest in a 2003 case related to bad loans advanced to a few companies by the state-owned Housing and Urban Development Corporation Ltd
  2. In April 2016, RBI gave the names of wilful defaulters to the Supreme Court asking the names be kept confidential
  3. RBI’s argument was that the intent in every default is not malicious

A background to FDMC tussle- I

  1. Context: RBI is opposed to the idea of Financial Data Management Centre as it will reduce the independence of regulators
  2. RBI’s push-back comes at a time when the central bank is facing mounting pressure to reveal data that can be used to track illicit money flows and the names of loan defaulters
  3. On 11 August 2016, the SIT on black money had written to RBI to share information on foreign exchange transactions and create a mechanism to track illicit flow of funds with the enforcement agencies
  4. Conflict of views: While RBI maintains an internal database for foreign exchange transactions, the SIT said the data it has been given showed that there are gaps in monitoring trade flows

Let’s know more about FDMC- II

  1. Initially, FDMC was to be set up as a non-statutory body to collect financial data and provide easy access to all regulators
  2. Union budget 2016-17 proposed to create the data warehouse as a statutory body
  3. Now, a draft bill proposes that FDMC collect all data from the regulators as received by them in the initial phase and directly from the regulated entities at a later stage

Let’s know more about FDMC- I

  1. Aim: To facilitate integrated data collection for the financial sector
  2. It is expected to provide a full picture of the entire financial system and reduce compliance costs for financial companies
  3. The story: The idea to set up FDMC was first floated in 2014 by the Financial Sector Legislative Reforms Commission (FSLRC)
  4. FSLRC: A panel set up in 2011 to review and rewrite the legal-institutional architecture of the Indian financial sector

RBI, govt at odds over proposed data warehousing body

  1. What? RBI has raised concerns over a proposed data warehousing body, the Financial Data Management Centre (FDMC)
  2. Independence: It will reduce the independence of regulators
  3. How? If a statutory body is created, then the regulators would not be independently in the position to collect raw data in its original format
  4. Also RBI’s ability to take corrective measures in case of systemic issues or market manipulation would be hampered

Bank customers can use post-office ATMs soon

  1. Context: India Post proposed to RBI for allowing ATMs of India Post to work on the platforms of all other banks
  2. This is the first step towards the proposed Postal Bank
  3. Benefit: Soon people will be able to withdraw money from any bank account – private or PSU through ATMs of India Post
  4. Current context: Only those with accounts in postal department can use the service

What are Basel III standards?

  1. What? A comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision
  2. Why? To strengthen the regulation, supervision and risk management of the banking sector
  3. Aim : To improve the banking sector’s ability to absorb shocks arising from financial and economic stress
  4. Improve risk management and governance, strengthen banks’ transparency and disclosures
  5. Reforms target: bank-level, or microprudential, regulation, which will help raise the resilience of individual banking institutions to periods of stress

Banks warned on asset sales

  1. Context: RBI has warned banks to be cautious about the entities to which they sell assets acquired on account of loan defaults
  2. Caution: promoters of companies acquired by banks may be using shell entities to buy back these assets at much lower prices
  3. It would also allow black money stashed by Indian businessmen overseas to come back into India
  4. Why the diligence? Because prospective buyers in a number of cases are coming from relatively unknown backgrounds and banks need to be sure that there is no foul play

What is Basel-III accord?

  1. Context: Basel III is a global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk
  2. Relevance: This accord was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08
  3. Target: To strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage
  4. Focus: Primarily on risk of a run on the bank by requiring differing levels of reserves for different forms of bank deposits and other borrowings

FII cap in state-run banks may increase to 49 per cent

  1. Why? Public sector banks(PSBs) need equity capital while their stocks have taken a hammering after reporting huge losses due to a sharp rise in non-performing assets(NPAs)
  2. Relevance: PSBs will also require capital to comply with the Basel-III norms
  3. Context: Valuations of public sector banks are subdued, so increase in FII cap will certainly attract portfolio investment
  4. Present regulations: Single non-banking institution can’t hold more than 10 % in a bank while one bank can hold maximum 5 % stake in another bank
  5. What’s Constraint? PSBs are constrained to raise equity capital from markets as most of them are trading at a significant discount to their book value

Strategic debt restructuring initiated: Sinha

  1. Context: Govt. effort to reduce the rising bad loans in the banking system
  2. News: The govt has initiated strategic debt restructuring in few cases comprising bad loans worth Rs 1 lakh crore
  3. How? Govt. has given banks the freedom to fix the projects that were causing bad loans through strategic debt restructuring
  4. Banks were given the option of even replacing the promoters of the project, if need arises

Learn more about Small Saving Schemes

  1. What? Small savings schemes are designed to provide safe and attractive investment options to the public and at the same time to mobilise resources for development
  2. Operation? These schemes are operated through about 1.54 lakh post offices throughout the country
  3. Examples: Monthly Income Scheme, National Savings Certificate, Public Provident Fund, Senior Citizen’s Savings Scheme

Small saving schemes and monetary transmission

  1. Context: Govt. decision to partially deregulate interest rates on such instruments with less than 5 years maturity
  2. Why? Higher rates divert deposits away from banks towards such schemes resulting in inability of banks to cut deposit rates
  3. Transmission: banks are thus unable to transmit RBI rate cut to lending rates
  4. But this may not help as one, deregulation affects only ⅓ of total small saving deposits
  5. Banks’ inability to mobilize rural deposits due to limited number of bank branches in rural areas
  6. Way ahead: Reduce interest rates further and make all small saving rates compatible with bank rates

Not desirable to use exchange rate to spur economic growth, says Rajan

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  1. Context: RBI and the government don’t favour undervaluation of the exchange rate as a means to spur economic growth
  2. Relevance: Problems with undervaluing the exchange rate and some of these are reflected in economic condition that countries find themselves
  3. Concern: Health of the world economy and dwindling investor confidence in PM Modi’s ability to push through economic reforms
  4. Rajan’s advice: Sustained undervaluation over a long period of time is not a feasible or desirable strategy
  5. The exchange rate should to be reasonably predictable and reasonably stable
  6. What MSMEs can do? Act as a means of social empowerment where disadvantageous sections of society can be empowered with money and wealth
  7. Problems for MSMEs: Lack of infrastructure and logistics, access to marketing, difficulty and the expense in acquiring land and financing

Reserve Bank can’t drop guard on inflation

  1. Context: Retail inflation data showed that RBI had met its Jan 2016 target of slowing the price gains to under 6%
  2. Background: In 2015, RBI entered into a historic agreement with the govt on an inflation targeting monetary framework
  3. Future: The next milestone is of 5% by March 2017, which is likely to challenge monetary policy makers
  4. Challenge: Implementation of 7th pay commission recommendations, deficient monsoon may also exert pressure on food inflation

Banks’ balance sheet clean-up imperative for growth, says Raghuram Rajan

  1. Context: RBI had conducted an asset quality review (AQR) of banks and identified specific accounts, which banks have to identify as non-performing
  2. Result: Bad loans have hit banks’ profitability in the third quarter with most of them posting heavy losses
  3. Why clean-up? Profitability of banks may be impaired in the short-run, the system, once cleaned, will be able to support economic growth in a sustainable and profitable way
  4. Rajan said: The ongoing clean-up of bank balance sheets will help spur economic growth and improve the lenders’ profitability

Reserve Bank tells banks to set aside more for stressed loans

  1. Context: RBI Governor’s drive to clean up banks’ balance sheets by March 2017
  2. RBI Direction: Banks will have to accelerate provisioning requirement, from April 1, for the existing stock of restructured loans that are showing signs of stress.
  3. How? – Lenders have to increase provisioning by 2.5% every quarter starting April 1
  4. This will take provisioning to the level of 15% by March 31, 2017, in line with sub-standard accounts
  5. Impact on Banks? – Banks are facing profitability pressure due to higher provisioning for bad loans

Let’s know highlights of RBI’s sixth monetary policy?

  1. Repo rate unchanged at 6.75 per cent
  2. Cash reserve ratio or CRR unchanged at 4 per cent
  3. Marginal standing facility rate and Bank Rate at 7.75 per cent
  4. Expects FY17 inflation at around 5 per cent
  5. RBI to create a special ecosystem for startup funding

With an eye on budget, Rajan holds interest rates

Going ahead in 2016-17, RBI said growth is expected to strengthen gradually, notwithstanding significant headwinds and projected the GVA growth for the next fiscal at 7.6 per cent.

  1. The RBI left the key policy rate unchanged at 6.75 per cent, as widely expected, ahead of the union budget.
  2. Indian economy is currently being viewed as a beacon of stability because of the steady disinflation, a modest CAD and commitment to fiscal rectitude.
  3. This needs to be maintained so that the foundations of stable and sustainable growth are strengthened.
  4. The government is targeting a fiscal deficit of 3.9 per cent for the current financial year and 3.5 per cent for FY17.

Rajan warns against straying from fiscal consolidation path

During global turmoil, macroeconomic stability should not be risked.

  1. RBI Governor Raghuram Rajan cautioned against deviation from the fiscal consolidation path, which could hurt macroeconomic stability.
  2. The growth multipliers on government spending at this juncture are likely to be much smaller, so more spending will probably hurt debt dynamics.
  3. Brazil’s experience suggests, the enormous costs of becoming an unstable country far outweigh any small growth benefits that can be obtained through aggressive policies.
  4. We should be very careful about jeopardising our single most important strength during this period of global turmoil – macroeconomic stability.
  5. Taking the fiscal deficits of the Centre and states, the consolidated fiscal deficit for the country rose last year to 7.2 per cent from 7 per cent.
  6. Deviation from the fiscal consolidation path could push up government bond yields.

We should be careful about how we measure GDP: Rajan

New GDP series, in effect for a year now, has been criticised by economists.

  1. RBI Governor has raised doubts over the new methodology used to calculate the country’s gross domestic product (GDP).
  2. He cited the example of two mothers who babysit each other’s kids, and said there is a rise in economic activity as each pays the other, but the net effect on the economy is questionable.
  3. The country’s GDP numbers were revised with the base year of 2011-12 from the earlier 2004-05.
  4. The methodology of calculating GDP was changed as the new methodology takes GDP at market prices into account, which includes indirect taxes and excludes subsidies.
  5. Governor indicated that country needed policies to incentivise job creation and rued that we have policies directed towards capital subsidies alone.

Divest to Fund Capital Expenditure aka Asset swap

Asset sales are the way for government to protect credibility while avoiding procyclical fiscal stance .

  1. Amid concerns of a slowdown, fiscal-consolidation would make fiscal policy procyclical and potentially suboptimal.
  2. Deviating from the fiscal path again is not without risks.
  3. First, it could impinge upon hard-earned credibility.
  4. Second, a larger-than-expected borrowing programme will push up private-sector borrowing costs and risk some crowding-out of private investment.
  5.  Finally, with nominal GDP growth moderating sharply and approaching the same level as the cost of government borrowing, public-sector debt dynamics have become less favourable.
  6. But does asset sale make sense when public sector commodity stocks are down?
  7. To the extent that resources are ploughed into public investment, the cost of building infrastructure is also commensurately cheaper when commodities collapse. So there is a price hedge.
  8.  Think of disinvestment as an “asset swap” on the government’s balance sheet rather than an “asset sale”.

Central Fraud Registry set up by RBI

RBI has also issued guidelines to detect frauds related to loan accounts.

  1. Borrowers indulging in fraud typically take advantage of the lack of information with banks.
  2. Thus, RBI has put in place a central fraud registry – a searchable database to help banks detect instances of fraud by borrowers early on.
  3. Frauds of 1L – 5Cr will be monitored by the respective regional office of the RBI and above 5 Cr will be monitored by the Central Fraud Monitoring Cell (CFMC) of RBI.
  4. Given the incessant rise in bad loans since the last 2 years and most of these arising out of fraudulent behaviour.
  5. RBI has been urging banks to detect such cases at an early stage to avoid a big hit later on their books.

Be tight-fisted

The ‘tight fiscal, easy monetary’ policy mix can better address problems that plague private investment.

  1. First, the debt to GDP ratio would remain under control.
  2. Second, finance minister would maintain his credibility.
  3. The decision to stick to the path of the announced fiscal targets is good not just in the long run but also in the short term.
  4. Immediately it will create space for monetary policy easing
  5. Unlike, say, in Europe, where there is no scope for cutting the policy rate that is near zero, in India, there is ample scope to cut it.
  6. Reduction in the interest burden could possibly prevent more companies from going towards bankruptcy, thus helping banks and overall economy .

RBI Dy Governor Patel gets second term

  1. Urjit Patel, Deputy Governor of RBI, in-charge of the monetary policy department, has been re-appointed for a term of 3 years.
  2. Earlier, he was head of a committee to review the monetary policy framework.
  3. The committee proposed inflation targeting as the central bank’s prime objective.
  4. It changed the main gauge for inflation to consumer price index based inflation.
  5.  It was probably the first committee which explicitly said that govt should not intervene in the functioning of public sector banks.

Let’s know about currency printing press in India

  1. There are 4 printing presses which print and supply banknotes.
  2. Places: Dewas in MP, Nasik in Maharashtra, Mysore in Karnataka, and Salboni in West Bengal.
  3. The presses in Devas and Nasik are owned by the Security Printing and Minting Corporation of India, a wholly owned GoI company.
  4. The printing of the notes in Karnataka and West Bengal are done by the Bharatiya Reserve Bank Note Mudran Private Limited, a wholly owned subsidiary of RBI.

RBI tells banks to replace defective 1,000-rupee notes

  1. Recently, a govt-owned printing presses of had printed 300 million defective banknotes.
  2. RBI has asked banks to replace such notes with them, when found.
  3. Currency experts said that the checking of notes is done at the press-level.
  4. The banking regulator is not involved with checking each and every banknote.
  5. Notes of denominations of Rs 500 & Rs 1,000 together accounted for approx. 85% of the total value of banknotes in circulation at end- March 2015.

Interest subvention should be phased out: central bank panel

The government must do away with the interest subvention scheme and plough back the subsidy into a universal crop insurance scheme for small and marginal farmers.

  1. The move can transform the agriculture sector and promote financial inclusion, according to the panel headed by Deepak Mohanty, executive director, RBI.
  2. Digitisation of land records for clear titles and credit linkage are necessary to establish evidence of cultivation.
  3. There is a specific purpose of subvention where farmers receive loans at a lower cost with the government paying the balance.
  4. In order to ensure actual credit supply to the agricultural sector, the committee recommended introduction of Aadhaar-linked mechanism for Credit Eligibility Certificates.
  5. The Mohanty panel noted significant financial exclusion continue to persists in the north-eastern, eastern and central states to achieve near-universal access.

Reserve Bank of India to prune NBFCs for effective regulation

  1. RBI is working towards harmonising regulations for NBFCs to reduce the number of categories in the sector.
  2. RBI will continue to approve of new kinds of NBFCs if the economy requires them.
  3. The business model of NBFCs is inherently risk-prone because of weaker underwriting standards, enhanced risk-taking capabilities and increased complexities of their activities.
  4. NBFCs are also exposed to key risks emanating from regulatory gaps, arbitrage and contagion effects.

RBI opens National Pension System as investment option for NRIs

RBI has taken this decision in consultation with Union Government to appease NRIs.

  1. RBI has allowed non-resident Indians to subscribe to the NPS enabling them access old age income security.
  2. NPS will act as an investment option for NRIs under Foreign Exchange Management Act (FEMA), 1999.
  3. NRIs may subscribe to the NPS through normal banking channels and the person is eligible to invest as per the provisions of the PFRDA Act, 2013.
  4. NPS is governed and administered by the Pension Fund Regulatory and Development Authority (PFRDA), launched in 2004.
  5. It was extended for all citizens of the country from 1 May 2009 including the unorganised sector workers on voluntary basis.

What is the neutral real interest rate?

The real policy rate in India is close to the neutral real interest rate, reinforces the view that RBI will desist from further rate cuts until the end of next year

  1. The RBI has said that the neutral real interest rate in India should be 1.5-2% for this stage of economic recovery.
  2. This measure is the rate at which desired savings equal desired investments or the rate at which growth is close to potential and inflation is stable.

Why is it important?

As Nomura economists point out, summing up observations from a recent RBI staff working paper, if projected inflation is higher than the inflation target, then the actual real rates must be higher than the neutral real rate to ensure than monetary policy is anti-inflationary.

RBI actions to bring annual FPI funds of Rs.48,000 crore

  1. The recent monetary policy review could attract an average annual flow of Rs.48,000 crore in govt. bonds from overseas investors for the next few years.
  2. This gradually augmented demand for govt. bonds will have a sustained, salutary impact on bond prices or sustained decline in yields.
  3. The limits for FPI investment in govt. securities will be increased in phases to 5% of the outstanding stocks by March 2018.
  4. The measure to enhance participation in state development loans by bringing the FPI investment to 2% by March 2018, are likely to enhance the market appetite.
  5. The rating agency- India Ratings, expects the rupee to outperform most emerging market currencies.

RBI crisis fund short of target

For the last two years, the RBI has made no transfers to its Contingency Fund or its Asset Development Fund.

  1. Contingency funds with the Reserve Bank of India (RBI), used in case of unforeseen shocks, have fallen to 8.4 per cent of total assets, against a target of 12 per cent, as shown in its Annual Report for 2014-15.
  2. For the last two years, the RBI has made no transfers to its Contingency Fund(CF) or its Asset Development Fund(ADF). The balance in these funds, therefore, has barely changed since 2013, when they made up 10.1 per cent of total assets.
  3. “The wider the area of responsibilities of a central bank, greater the risks and, hence, higher the requirement of capital,” the report said.
  4. “A central bank may require recapitalisation, precisely at a time when the fiscal position is under strain, say, due to a financial crisis,” it added.
  5. The annual report also showed that the RBI had been transferring 99.9 per cent of its profits to the government, without keeping any amount for itself. This is a sharp increase from the 40-50 per cent it had transferred in the 2010-13 period.
  6. In 2015, the Bank of England transferred a mere 93 pounds to the government while the U.S. Federal Reserve is required by law to transfer most of its profits to the government.

Let’s check what purpose served by RBI’s CF and ADF?

RBI releases final guidelines for PPI MTS

  1. What’s that?
  2. Prepaid Payment Instruments for Mass Transit System (PPI-MTS).
  3. Enabling the issuance of a separate category of semi-closed prepaid payment instruments for mass transit systems.
  4. This means that all Mass Transit System operators like the Indian Railways and even local buses can now issue their own prepaid cards.
  5. This move will provide considerable ease to commuters.


:( We are working on most probable questions. Do check back this section.







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