[‘Daily News Updates’ will provide you with a simplified understanding of the important economic/financial events across the country]
RBI Keeps Interest Rates Unchanged; Cuts Growth Forecast
In the ongoing Monetary Policy Committee meeting, interest rates have been kept unchanged as predicted by many experts (and reported by us on 2nd June, 2021). In other words, the RBI has not gone for inflation targeting. In its annual report last week, RBI had made its intentions clear when it said that the monetary policy would be guided by the macroeconomic conditions with a bias towards remaining accommodative of growth till it gains ‘traction on a durable basis’ while keeping inflation in check at the same time.
They have also cut their annual growth forecast to 9.5 % from 10.5 % earlier for the current fiscal, owing to the ravaging second wave of the virus.
Public Sector Lending Share at an all-time Low
As reported by the Mint, “the share of lending carried out by state-run banks as a proportion of total lending by commercial banks in India has declined to a record low as of 31 March.” Currently, the share is 56.5 %, i.e., Rs. 62.29 trillion out of the total Rs. 110.35 trillion loans. The share has been falling for over a decade now, after it peaked in March 2010. The process picked up after March 2015 when state-run banks were asked to clean up a large amount of their bad loans (‘Non-Performing Assets’), leading to a slowdown in lending. This is a classic case of ‘privatisation by malign neglect,’ (as described by Ruchir Sharma in his book ‘The Rise and Fall of Nations’), i.e., the state is allowing the private banks to run the state-run banks into irrelevance as it cannot bring itself to sell off its enterprises directly.
[Read our article on the ‘Twin Balance Sheet Challenge’ for understanding the events in 2015 with respect to bank NPAs.]
RBI Issues Note on Cryptocurrency Signalling a Shift in Approach
The RBI, on 31st May 2021, issued a circular, asking banks not to cite its April 2018 circular on virtual currencies (VCs) (where it had banned payments related to cryptocurrencies) as it was set aside by the Supreme Court in March 2020. The apex court, last year, clarified that cryptocurrencies could fall under ‘other similar instruments’ under the definition of currency in FEMA and hence be regulated by the RBI. In February this year, the Government had announced that it would come up with a law banning all private cryptocurrencies (which seems unlikely now), after which many banks have cut ties with crypto exchanges citing the 2018 circular, causing issues with deposits and withdrawals for the customers. The recent circular issued by the RBI will come as a relief to the investors, but further clarity is required for building confidence.
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