The RBI indicated that the interest rates offered by the Union government on two of India’s most popular small savings schemes continue to languish below the rates they should have earned as per a formula-based system adopted since April 2016. File
| Photo Credit: Reuters

The interest rates offered by the Union government on two of India’s most popular small savings schemes — the Public Provident Fund and five-year recurring deposits — continue to languish below the rates they should have earned as per a formula-based system adopted since April 2016, the Reserve Bank of India (RBI) has indicated.

The PPF rate has been static at 7.1% since April 2020. The return on the five-year recurring deposit (RD), which had been frozen at 5.8% from April 2020 to March 2023, had been hiked gradually over the first three quarters of 2023-24, taking it to 6.7% by last October.

At the time, the RBI had reckoned that the returns on the PPF were 41 basis points (bps) lower than their formula-based rates, while the five-year RD rate was 21 bps lower, for the October to December 2023 quarter. One basis point equals 0.01%.

RBI formula

The formula for quarterly resets of small savings rates, mooted by a panel led by former RBI Deputy Governor Shyamala Gopinath, links them to secondary market yields on government securities of comparable maturities over a three-month period prior to each quarter.

The PPF rate was last hiked in October 2018, when it was pegged at 8% ahead of the 2019 Lok Sabha election. After that poll, the government had reduced the rate to 7.9% from July 2019, and slashed it further to 7.1% at the onset of 2020-21, when it cut rates on all small savings instruments in the range of 0.5 and 1.4 percentage points (or 50 to 140 bps).

Prior to the 2024 Lok Sabha election, the Union government announced a hike in rates on most small savings schemes for six successive quarters, culminating in the January to March 2024 quarter, when the returns on the Sukanya Samriddhi Account Scheme (SSAS) were raised from 8% to 8.2%, and the three-year time deposit from 7% to 7.1%. While there have been no changes effected in rates since, the PPF rate has been excluded from the ambit of all these hikes.

Tax-free scheme

“The Government of India kept rates on small savings schemes unchanged for Q2:2024-25 [July to September 2024]. Rates on various schemes are now aligned with the formula-based rates except for public provident funds and five-year recurring deposits,” the RBI noted, in its latest monetary policy report released as part of its monthly bulletin last week. Unlike last October, the RBI has not quantified the gap between the formula-based rate and the PPF and five-year RD rates.

The Finance Ministry has generally defended the stasis in PPF rates by emphasising that the returns on the scheme are tax-free so tax-adjusted returns are higher. But the same tax treatment is also offered on the SSAS, which was launched in 2015. The SSAS rate was frozen at 7.6% from April 2020 to March 2023, but was raised to 8% last April and 8.2% from this January.

The Reserve Bank of India approved a ₹2.11 lakh crore dividend payout to the central government for 2023-24.
| Photo Credit: Reuters

The Reserve Bank of India (RBI) on May 22 approved a ₹2.11 lakh crore dividend payout to the central government for 2023-24, more than double the amount it paid for the previous 2022-23 financial year.

The decision was taken at the 608th meeting of the Central Board of Directors of the Reserve Bank of India held under the chairmanship of Governor Shaktikanta Das.

“The Board…approved the transfer of ₹2,10,874 crore as surplus to the Central Government for the accounting year 2023-24,” RBI said in a statement.

The dividend payout was ₹87,416 crore for 2022-23.

“With the revival in economic growth in FY 2022-23, the Contingent Risk Buffer (CRB) was increased to 6%. As the economy remains robust and resilient, the Board has decided to increase the CRB to 6.5% for FY 2023-24,” the RBI said.

Analysts had expected a surplus transfer in the range of 750 billion rupees to 1.2 trillion rupees, aided by strong foreign exchange earnings.

Also Read | The state of the Indian economy today

The benchmark 10-year bond yield dropped four basis points to 7% after the announcement.

The board reviewed the global and domestic economic scenario, including risks to the outlook, the statement added.

Image for representation
| Photo Credit: Reuters

The Reserve Bank of India (RBI) has decided to facilitate wider non-resident participation in the Sovereign Green Bonds by permitting eligible foreign investors in the International Financial Services Centre (IFSC) to invest in such bonds.

“A scheme for investment and trading in SGrBs by eligible foreign investors in IFSC is being notified separately in consultation with the Government and the IFSC Authority,” Governor Shaktikanta Das announced as additional measures soon after the bi-monthly monetary policy committee meeting on April 5, 2024.

ALSO READ | RBI Monetary Policy LIVE updates

Based on an announcement in the Union Budget for FY 2022-23, the Government of India had issued Sovereign Green Bonds in January 2023. The SGrBs were also issued as part of the Government borrowing calendar in FY 2023-24.

At present, foreign portfolio investors (FPIs) registered with SEBI are permitted to invest in SGrBs under the different routes available for investment by FPIs in government securities.

Image for representation only
| Photo Credit: C. Venkatachalapathy

The Reserve Bank of India has proposed to facilitate cash deposit facility in banks through the use of UPI, an instant real-time payment system for inter-bank transactions through mobile phones.

ALSO READ | RBI Monetary Policy LIVE updates 

“Given the popularity and acceptance of UPI, as also the benefits seen from the availability of UPI for cardless cash withdrawal at ATMs, it is now proposed to facilitate cash deposit facility through use of UPI,” RBI Governor Shaktikanta Das said in the Monetary Policy Statement, released on April 5, 2024.

The Cash Deposit Machines (CDMs) deployed by banks enhance customer convenience while reducing cash-handling load on bank branches. The facility of cash deposit is presently available only through use of debit cards.

Operational instructions regarding cash deposits using UPI will be issued shortly, according to the central bank.

RBI to permit linking PPIs with UPI apps

The RBI has also proposed to permit linking of Prepaid Payment Instruments (PPIs) through third-party UPI applications to provide more flexibility to users.

At present, UPI payments from bank accounts can be made by linking a bank account through the UPI app of the bank or using any third-party UPI application. However, the same facility is not available for PPIs.

PPIs can currently be used to make UPI transactions only by using the application provided by the PPI issuer.

“To provide more flexibility to PPI holders, it is now proposed to permit linking of PPIs through third-party UPI applications. This will enable the PPI holders to make UPI payments like bank account holders,” the RBI said.

Instructions in this regard too will be issued shortly.

The Monetary Policy Committee (MPC) on April 5 decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50%. This is the 7th time that the rates have been kept on hold.

The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.

Also read: RBI Monetary Policy live updates – April 5

 “These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth,” RBI governor Shaktikanta Das announced after the MPC meeting. 

Stating that the domestic economy was experiencing strong momentum, he said as per the second advance estimates (SAE), real gross domestic product (GDP) expanded at 7.6% in 2023-24 on the back of buoyant domestic demand. 

“Real GDP increased by 8.4% in Q3, with strong investment activity and a lower drag from net external demand. On the supply side, gross value added recorded a growth of 6.9 per cent in 2023-24, driven by manufacturing and construction activity,” he said.

Looking ahead, Mr. Das said, an expected normal south-west monsoon should support agricultural activity. “Manufacturing is expected to maintain its momentum on the back of sustained profitability. Services activity is likely to grow above the pre-pandemic trend,” he said.

“Private consumption should gain steam with further pick-up in rural activity and steady urban demand. A rise in discretionary spending expected by urban households, as per the Reserve Bank’s consumer survey, and improving income levels augur well for the strengthening of private consumption,” he added. 

“The prospects of fixed investment remain bright with business optimism, healthy corporate and bank balance sheets, robust government capital expenditure and signs of upturn in the private capex cycle,” he further said. The Governor said headwinds from geopolitical tensions, volatility in international financial markets, geo-economic fragmentation, rising Red Sea disruptions, and extreme weather events, however, pose risks to the outlook. 

“Taking all these factors into consideration, real GDP growth for 2024-25 is projected at 7.0% with Q1 at 7.1%; Q2 at 6.9%; Q3 at 7.0%; and Q4 at 7.0%. The risks are evenly balanced.”

On inflation the Governor said “Two years ago, around this time, when CPI inflation had peaked at 7.8% in April 2022, the elephant in the room was inflation. The elephant has now gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis.”

“In other words, it is essential, in the best interest of the economy, that CPI inflation continues to moderate and aligns to the target on a durable basis. Till this is achieved, our task remains unfinished,” he added

He said the headline softened to 5.1% during January-February 2024, from 5.7% in December. After correcting in January, food inflation edged up to 7.8% in February primarily driven by vegetables, eggs, meat and fish. 

Fuel prices remained in deflation for the sixth consecutive month in February. CPI core (CPI excluding food and fuel) disinflation took it down to 3.4% in February — this was one of the lowest in the current CPI series, with both goods and services components registering a fall in inflation, he said. He said going ahead, food price uncertainties would continue to weigh on the inflation outlook. An expected record rabi wheat production in 2023-24, however, will help contain cereal prices. Early indications of a normal monsoon also augur well for the kharif season. 

“On the other hand, the increasing incidence of climate shocks remains a key upside risk to food prices. Low reservoir levels, especially in the southern states and outlook of above normal temperatures during April-June, also pose concern. Tight demand supply conditions in certain pulses and the prices of key vegetables need close monitoring,” he said. 

“Fuel price deflation is likely to deepen in the near term following the recent cut in LPG prices. After witnessing sustained moderation, cost push pressures faced by firms are showing upward bias. The recent firming up of international crude oil prices warrants close monitoring. Geo-political tensions and volatility in financial markets also pose risks to the inflation outlook,” he added. 

“Taking into account these factors and assuming a normal monsoon, CPI inflation for 2024-25 is projected at 4.5% with Q1 at 4.9%; Q2 at 3.8%; Q3 at 4.6%; and Q4 at 4.5%. The risks are evenly balanced. 

The MPC also noted that domestic economic activity remains resilient, backed by strong investment demand and upbeat business and consumer sentiments. Headline inflation has come off the December peak; however, food price pressures have been interrupting the ongoing disinflation process, posing challenges for the final descent of inflation to the target. Unpredictable supply side shocks from adverse climate events and their impact on agricultural production as also geo-political tensions and spillovers to trade and commodity markets add uncertainties to the outlook, Mr Das said. 

“As the path of disinflation needs to be sustained till inflation reaches the 4% target on a durable basis, the MPC decided to keep the policy repo rate unchanged at 6.50% in this meeting,” he added. 

Stating that monetary policy must continue to be actively disinflationary to ensure anchoring of inflation expectations and fuller transmission, he said the MPC would remain resolute in its commitment to aligning inflation to the target. 

“The MPC believes that durable price stability would set strong foundations for a period of high growth. The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth,” he said. 

RBI Governor Shaktikanta Das delivers the plenary address at the ‘Kautilya Economic Conclave’, in New Delhi, Friday, Oct. 20, 2023.
| Photo Credit: PTI

 

Interest rates will remain high, and any change will depend on the way the world evolves, Reserve Bank of India Governor Shaktikanta Das said on Friday, highlighting fresh uncertainties that have emerged in the global economy in the fortnight since the latest Monetary Policy review. 

Referring to the recent spurt in U.S. bond yields to a record high, combined with policy pronouncements from central banks with mixed data points from around the world, Mr. Das asserted that while central banks must remain agile to these developments, the first line of defence must be stock exchanges and financial institutions. Some uncertainties that already existed, have been exacerbated, he noted, like the rise in crude oil prices and the persistent volatility in financial markets.  

Asked about the ‘higher for longer’ interest rate prospects at the Kautilya Economic Conclave, the Governor said central banks will have to be extra vigilant about the growth-inflation dynamics while keeping a hawk’s eye on price rise.  

Editorial | Tightrope walk: On RBI holding rates

“How these economies are going to play out next year in terms of their growth, because if growth slows, that also creates other challenges for financial stability,” said Mr. Das. “So I would not venture to say how long these interest rates will be high, but I’m not giving a forward guidance,” he noted. 

Interest rate cuts in India, he emphasised, are not on the agenda at the moment. “Interest rates will remain high, how long they will remain high, I think only time and the way the world is evolving, will tell,” Mr. Das underlined. 

Representational image. File
| Photo Credit: Reuters

Reserve Bank of India (RBI) has issued fresh guidelines to the Regulated Entities (REs) such as commercial and other banks, Non-Banking Finance Companies (NBFCs) and other lenders to ensure reasonableness and transparency in disclosure of penal interest. 

This follows findings that many REs are using penal rates of interest, over and above the applicable interest rates, in case of defaults/non-compliance by the borrower with the terms on which credit facilities were sanctioned.

“The intent of levying penal interest/charges is essentially to inculcate a sense of credit discipline and such charges are not meant to be used as a revenue enhancement tool over and above the contracted rate of interest,” the RBI said in a circular. 

“However, supervisory reviews have indicated divergent practices amongst the REs with regard to levy of penal interest/charges leading to customer grievances and disputes,” it added.

According to the new directive, penalty if charged for non-compliance of material terms and conditions of loan contract by the borrower would be treated as ‘penal charges’ and shall not be levied in the form of ‘penal interest’ that is added to the rate of interest charged on the advances. 

“There shall be no capitalisation of penal charges i.e., no further interest computed on such charges. However, this will not affect the normal procedures for compounding of interest in the loan account,” the circular said. 

The REs have been asked not introduce any additional component to the rate of interest and ensure compliance to these guidelines in letter and in spirit.

Board approved policy

The REs will formulate a Board approved policy on penal charges or similar charges on loans, by whatever name called.

And the quantum of penal charges shall be reasonable and commensurate with the non-compliance of material terms and conditions of loan contract without being discriminatory within a particular loan / product category.

The penal charges in case of loans sanctioned to ‘individual borrowers, for purposes other than business’, shall not be higher than the penal charges applicable to non-individual borrowers for similar non-compliance of material terms and conditions.

Now the RBI wants the REs to clearly disclose the quantum and reason for penal charges to the customers in the loan agreement and most important terms & conditions / key fact statement as applicable, in addition to being displayed on REs website under Interest Rates and Service Charges.

“Whenever reminders for non-compliance of material terms and conditions of loan are sent to borrowers, the applicable penal charges shall be communicated. Further, any instance of levy of penal charges and the reason therefor shall also be communicated,” the RBI circular said. 

These instructions will come into effect from January 1, 2024. 

And the REs have been asked to carry out appropriate revisions in their policy framework and ensure implementation of the instructions in respect of all the fresh loans availed/ renewed from the effective date. 

In the case of existing loans, the switchover to new penal charges regime will be ensured on next review or renewal date or six months from the effective date of this circular, whichever is earlier, the circular said.

These instructions will, however, not apply to Credit Cards, External Commercial Borrowings, Trade Credits and Structured Obligations which are covered under product specific directions, the RBI has clarified. 

The Monetary Policy Committee has unanimously decided to keep the policy repo rate unchanged, RBI Governor Shaktikanta Das said in Mumbai on August 10, 2023.
| Photo Credit: Emmanual Yogini

The Monetary Policy Committee (MPC) of the Reserve Bank of India on August 10 decided unanimously to keep the policy repo rate unchanged at 6.50%. 

Consequently, the standing deposit facility (SDF) rate remains at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%. 

The MPC also decided by a majority of 5 out of 6 members to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

Explaining the MPC’s rationale for these decisions on the policy rate and the stance, RBI governor Shaktikanta Das in his statement said, “Headline inflation, after reaching a low of 4.3% in May 2023, rose in June and is expected to surge during July-August led by vegetable prices.”

“While the vegetable price shock may reverse quickly, possible El Niño weather conditions along with global food prices need to be watched closely against the backdrop of a skewed south-west monsoon so far. These developments warrant a heightened vigil on the evolving inflation trajectory,” he said. 

“The cumulative rate hike of 250 basis points undertaken by the MPC is working its way into the economy. Nonetheless, domestic economic activity is holding up well and is likely to retain its momentum, despite weak external demand. Considering this confluence of factors, the MPC decided to remain watchful and evaluate the emerging situation,” he added. 

Consequently, the MPC decided to keep the policy repo rate unchanged at 6.50% with preparedness to act, should the situation so warrant, Mr. Das said. 

He said the MPC remained resolute in its commitment to aligning inflation to the 4 per cent target and anchoring inflation expectations.

Taking all various factors into consideration, the Governor said the real GDP growth for 2023-24 is projected at 6.5% with Q1 at 8.0%; Q2 at 6.5%; Q3 at 6.0%; and Q4 at 5.7%. Real GDP growth for Q1:2024-25 is projected at 6.6%. The risks are evenly balanced.

Given the continuing external uncertainties, the latest CPI inflation projection for 2023-24, assuming a normal monsoon, has been revised to 5.4%, with Q2 at 6.2%, Q3 at 5.7% and Q4 at 5.2%. CPI inflation for Q1:2024-25 is projected at 5.2%. The risks are evenly balanced.

The Governor said considering the difficulties in major economies, the Indian economy is better placed. “India can become the new growth engine of the world,” he said.