Archive for the ‘Indian Economy/Financial Markets’ Category

RBI turns 85!

April 1, 2020

Starting on April 1 (Fool’s day!) 1935, RBI completes 85 years today.

Aunindyo Chakravarty has a piece on the anniversary in the Quint:

During the First World War, India spent more than 8 per cent of its GDP to finance Britain’s war effort. About half of that money went as direct cash contribution, a fifth went in low-interest loans and the remaining went in kind. This massive drain should have caused inflation, raised interest rates and weakened the rupee. But, the British Empire managed it through price controls, interest rate ceilings and by not letting the rupee-pound exchange rate budge, till the war was over.

This was fine as long as British officials in India were gaining as well. But, after the war ended, the Rupee was allowed to weaken and that meant the money officials of the Raj earned in India converted into fewer Pounds when they sent it home. This trouble with ‘remittances’ was one key reason why the Viceroys’ officers in India began sparring over financial independence with the India Office in London.

This stand-off between two sides of the coin of the British ruling establishment, ended up in a peculiar truce – the founding of the Reserve Bank of India on All Fool’s Day in 1935. The RBI accorded some semblance of financial autonomy to the officials of the British Raj on the ground, but it also ensured that the ‘London market’ would continue to control it.

As Andhra Bank Fades Into the Pages of History, an Emotional Sting for Telugu States

April 1, 2020

Today, 6 public sector banks were amalgamated with 4 banks:

  • Union Bank amalgamates Andhra Bank and Corporation Bank
  • Indian Bank amalgamates Allahabad Bank
  • Canara Bank amalgamates Syndicate Bank
  • PNB amalgamates United Bank and OBC

Gali Nagaraja pays tribute to Andhra Bank in this Wire piece:


What if a digital virus hits our payment systems?

April 1, 2020

My new article on moneycontrol.

I argue that we should go slow on the digital payment push. The entire system could just break down due to a computer virus. Lessons from Covid19 should be learnt.

RBI DG Mr. N.S. Vishwanathan retires 3 months before his tenure

April 1, 2020

As I wrote this post on BP Kanungo’s extension, one got this news late in the evening:

Consequent upon the demitting of office by Shri N.S. Vishwanathan, Deputy Governor, the portfolios of the Deputy Governors would be as follows with effect from April 1, 2020..

Well, this is totally not needed. I had actually written saying Mr NSV is serving a one year extension and his term was to end in July-2020. Thus, we should either find a replacement by now or give him another extension given the times.  On the contrary, Mr NSV has demitted office  three months ahead. We do not know whether he did this by himself or there was some order.

We just take all these appointments with so casually…


WMA limit for H1 2020-21 at Rs 1.2 lakh crore: highest so far

March 31, 2020

The virus is stretching most things under the sun.

Just before the start of the new financial year, the RBI along with government announces WMA (Ways and Means Advances) limits. Anything over the limit becomes an overdraft.  The limit for H1 2020-21 is placed at Rs 1.2 lakh crore:


Shri B. P. Kanungo re-appointed as RBI Deputy Governor

March 31, 2020

I had argued earlier to give a fixed, long-term and non-renewable contract for RBI Governors and DGs.

The government recently reappointed current RBI DG BP Kanungo whose three year term was to end on 2-April 2020.


RBI’s “whatever is necessary” moment arrives…

March 27, 2020

What a tough time Mr Shaktikanta Das is having! He has been dealing with so many crises ever since his appointment in Dec-2018. But the latest one of dealing with Covid19 crisis will surpass all challenges.

There was criticism that RBI has not cut policy rates where other central banks have thrown whatever possible at the crisis. As per RBI Act, only the MPC can take the interest rate decision. The Act specifies the following:

45ZI. Meetings of Monetary Policy Committee.
(1) The Bank shall organise at least four meetings of the Monetary Policy Committee in a
(2) The meeting schedule of the Monetary Policy Committee for a year shall be published by the Bank at least one week before the first meeting in that year.
(3) The meeting schedule may be changed only––
(a) by way of a decision taken at a prior meeting of the Monetary Policy Committee; or
(b) if, in the opinion of the Governor, an additional meeting is required, or a meeting is required to be rescheduled due to administrative exigencies.
(4) Any change in meeting schedule shall be published by the Bank as soon as practicable

This was clearly a call taken by the RBI Governor. Perhaps he could have taken the decision a little earlier.

In this meeting under exigencies, RBI has lowered policy repo rate by 75 bps to 4.4%. It has also taken several measures to support the banking and financial markets.

I am surprised that the MPC members did not agree to a deeper cut of 100 bps. Infact, there was a split with 4 members voting to cut rates by 75 bps and 2 members by 50 bps.

All members voted for a reduction in the policy repo rate and maintaining the accommodative stance as long as it is necessary to revive
growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target.

Dr. Ravindra H. Dholakia, Dr. Janak Raj, Dr. Michael Debabrata Patra and Shri Shaktikanta Das voted for a 75 bps reduction in the policy repo rate.
Dr. Chetan Ghate and Dr. Pami Dua voted for a 50 bps reduction in the policy repo rate.

The MPC also stated it will do “whatever is necessary”:

The MPC is of the view that macroeconomic risks, both on the demand and supply sides, brought on by the pandemic could be severe. The need of
the hour is to do whatever is necessary to shield the domestic economy from the pandemic. Central banks across the world have responded with monetary
and regulatory measures – both conventional and unconventional.  

Governments across the world have unleashed massive fiscal measures, including targeted health services support, to protect economic activity from
the impact of the virus.

The virus has just changed so many things. It questions whatever edifice and protection humans have built over centuries…

Yes Bank crisis: Why is a Financial Redressal Agency missing when it is needed most?

March 19, 2020

My new piece in moneycontrol.

The piece reflects on how AT1 bonds reached retail investors and they have nowhere to go to file their complaints. The FSLRC had argued for a Financial Redressal Agency and there was a Task Force which advocated starting FRA by late 2016/early 2017. However, the plan was shelved only for retial investors to face the heat in Yes Bank case.

I also connect the piece to Elizabeth Warren..:-)

Change in Yes Bank shareholding pattern

March 18, 2020

I have been wondering how Yes Bank shareholder pattern will look like. In Dec-2019, the shareholding pattern was like this. Yday, the Yes Bank released a new shareholding pattern

This is how it is:


Post Yes Bank: Increasing concern for small private banks

March 18, 2020

This news in Mint on how deposits have declined in one of the small private sector banks in the last one week.

The moratorium on Yes Bank is going to be lifted today at 6 PM. On opening Yes Bank website, pop comes this message:

We will find out soon how good is this new foundation. One of the leading business TV journalists appeals to Yes bank depositors and not panic. Moody’s has also upgraded the bank by a notch which should provide some relief.

Indian banking gets murkier. Private bankers who once laughed at miseries of public sector bankers would be getting a taste of their own medicine now.

RBI-Occasional Papers-Vol. 40, 2019

March 17, 2020

RBI has published its latest occasional paper series Vol 40:

1. Fiscal Rules and Cyclicality of Fiscal Policy: Evidence from Indian States

Dirghau Keshao Raut and Swati Raju examine the impact of fiscal rules on the cyclicality of fiscal policy of Indian states using data for the period from 1990 to 2018. The results suggest that fiscal rules have reduced pro-cyclicality of fiscal policy, particularly in terms of development expenditure, in the post-FRL period. Fiscal deficit also changed its nature from pro-cyclical in the pre-FRL period to acyclical in the post-FRL period. Capital outlay displayed acyclical behaviour in both pre-and post-FRL periods.

2. Payment Systems Innovation and Currency Demand in India: Some Applied Perspectives

Dipak R. Chaudhari, Sarat Dhal and Sonali M. Adki postulate currency demand for transaction purposes driven by income effect, and a payment technology induced substitution effect working through velocity of currency. Innovations in payment systems have shown a statistically significant long-run inverse relationship with currency demand in India. However, the magnitude of its coefficient indicates that the substitution effect of payment systems on currency demand is smaller than the dominant income effect.

3. Can Financial Markets Predict Banking Distress? Evidence from India

Snehal S. Herwadkar and Bhanu Pratap test whether equity markets provide any lead information about stress in the banking system before quarterly data become available to the supervisors. The authors find that markets are able to price-in the banking stress concurrently but not much in advance. As the supervisory data are available with a lag, there is some merit in incorporating market-based information to track banking distress. Interestingly, the findings suggest that markets are relatively less efficient in providing such lead information in the case of public sector banks vis-à-vis private sector banks.

The last paper is interesting. Did equity markets do better in indicating stress at Yes Bank given it is a private sector bank?

Yes Bank rescue: echoes of the 1998 LTCM Bailout

March 17, 2020

My new article in Bloomberg Quint.

The Yes Bank consortium bailout is quite similar to consortium bailout of LTCM (Long Term Capital Management) in US in 1998.   I explore the connections…

Capital market integration can reduce misallocation: Evidence from India

March 16, 2020

Interesting research by Natalie Bau and Adrien Matray. They try and find out whether India’s capital market reform has helped firms increase output and productivity:


After WMA declines to zero, it again begins to rise..

March 13, 2020

WMA update:

In the week ended Feb-21-2020, WMA had finally declined to zero levels after nearly 2 months.

However, this was short lived. In subsequent weeks, government has again started availing WMA. On week ended Feb-28 and Mar-5, WMA amounts were Rs 5081 cr and Rs 32976 cr respectively.

I am really surprised how WMA continues to be used by the government…

The year 2020 marks 100 years of Catholic Syrian Bank!

March 12, 2020

I had blogged on how some banks in India are lined up for 100 year anniversaries,

In 2020, Catholic Syrian Bank will complete its 100 years of functioning. The bank started from Thrissur which has an amazing history of banking. The bank is now known as CSB as it was still considered as a community run bank.

The IPO Prospectus of the Bank gives a glimpse of its history:

Our Bank was incorporated on November 26, 1920 under the Indian Companies Act, 1913 as ‘The Catholic Syrian Bank Limited’. A fresh certificate of incorporation under the Companies Act, 1956 was issued by the RoC on April 14, 1987. The Shareholders of our Bank approved the change of name of our Bank from ‘The Catholic Syrian Bank Limited’ to ‘CSB Bank Limited’ through a postal ballot resolution dated May 4, 2019, and RBI, through its letter
bearing reference number DBR.PSBD.No.8231/16.01.060/2018-19 dated April 1, 2019, conveyed its ‘no objection’ in terms of Section 49B of the Banking Regulation Act to change of name of our Bank from ‘The Catholic Syrian Bank Limited’ to ‘CSB Bank Limited’.

Subsequently, a fresh certificate of incorporation under the Companies Act, 2013 was issued by the RoC on June 10, 2019 and a fresh license bearing no. MUM-147 dated June 28, 2019 was issued by the RBI under our new name to carry on the banking business in India, in lieu of our previous license dated June 19, 1969, consequent to the change of name of our Bank. Our Bank has sent an intimation to RBI on June 25, 2019 in relation to the change of name of our Bank to ‘CSB Bank Limited’ in the second schedule of the RBI pursuant to the issue of fresh license bearing reference no. MUM-147 dated June 28, 2019.which is currently pending final notification in the official gazette.

In 1964 and 1965, our Bank took over the assets and liabilities of six small and medium sized banks located in Kerala, namely, Ollur Bank Limited, Puthenpeedika Bank Limited, Kottapadi Bank Private Limited, Oriental Christian Bank Limited, Indian Insurance & Banking Corporation Limited, and Mar Appraem Bank Limited. In  August 1969, our Bank was included in the second schedule to the RBI Act. Additionally, in 1975, our Bank attained the status of ‘A’ class scheduled bank.

The 1960s were obviously very tough for the bank post failure of Palai Central Bank. How the bank survived the period and managed to remain a private sector bank is quite a story. I hope the bank releases a good review of its history as it comes closer to its Centenary on 26 Nov 2020.

Forbes ran a nice piece on the bank in 2010 on how Federal Bank wanted to merge CSB with itself but the deal never saw light of the day..

How Wells Fargo top management is grilled by US House Financial Services Committee: Lessons for India?

March 12, 2020

The Wells Fargo misseling accounts scam happened in 2016 but the officials continued to be grilled by the US authorities.

The US House Committee on Financial Services continues to grill the officials at Wells Fargo. There was a hearing on 11 March 2020.

The statement of Chair Maxine Water read as follows:

Today, we receive testimony from Elizabeth Duke and James Quigley, who until earlier this week served as chair of the board of directors of Wells Fargo & Company and Wells Fargo Bank, respectively. Both resigned after I called for their resignations following the release of a scathing Majority staff report on Wells Fargo’s compliance failures and their individual failures as board chairs.

But their resignations do not absolve them of their failures. Directors at Wells Fargo and institutions across this country must understand that they are the last line of defense when it comes to protecting their companies’ shareholders, employees, and customers. And while Ms. Duke and Mr. Quigley said they resigned to “avoid distraction,” let me be clear that this is not a distraction—we are examining misconduct and dereliction of duty.

Over the past decade, Wells Fargo’s board, management, and regulators have all failed to fix the company’s internal control weaknesses that caused enormous harm for millions of consumers throughout the country.

The Majority staff’s report examined Wells Fargo’s compliance with five consent orders that required the company’s board and management to clean up the systemic weaknesses that led to widespread consumer abuses and compliance breakdowns. As board members, Ms. Duke and Mr. Quigley were responsible for ensuring that Wells Fargo’s CEO and other management executed an effective program to manage those risks. However, the Majority staff report found that Wells Fargo’s board:

    1. Failed to ensure management could competently address the risk management deficiencies;
    2. Allowed management to repeatedly submit materially deficient plans to address consumer abuses;
    3. Prioritized financial considerations over fixing consumer abuses; and,
    4. Did not hold senior management accountable for repeated failures.

The Majority staff report also revealed attitudes and failures on the part of Ms. Duke and Mr. Quigley that are dismaying.

When the Consumer Financial Protection Bureau included Ms. Duke on letters requesting actions from the bank, she responded asking, “Why are you sending it to me, the board, rather than the department manager?” This was surprising to CFPB officials, and gives the appearance of a see-no-evil mentality from Ms. Duke, and an unwillingness to exercise oversight required of her as a member of the board.

Mr. Quigley also did not appear to understand the gravity of his board responsibilities. When the Office of the Comptroller of the Currency wanted to schedule a meeting with the bank’s directors to discuss “progress and accountability,” Mr. Quigley told other bank officials that he was, “currently scheduled to be in the Galapagos Islands on these dates,” and commented that “the sense of urgency is surprising…”

These statements were made after several public enforcement actions against Wells Fargo for massive consumer abuse scandals.

While Ms. Duke and Mr. Quigley have resigned, they must be held accountable for the dereliction of their duties as members of Wells Fargo’s board.

Hmm. For all you know Elizabeth Duke served on the Federal Reserve Board and then joined Wells Fargo.

We should adopt some of these practices to figure large scale banking frauds in India. We have a problem in all possible banking sectors: NBFCs, HFCs, Cooperatives, Public Sector Banks and now Private Sector Bank. However, we hardly see the Parliament grilling executives and regulators.

Monetary Policy Transmission in India – Recent Trends and Impediments

March 12, 2020

RBI Monthly Bulletin Mar-2020 has an article on the burning question: Why is RBI’s monetary policy transmission weak?

The article is written by Arghya Kusum Mitra and Sadhan Kumar Chattopadhyay of Monetary Policy Department

This article examines monetary policy transmission to various segments of the financial system in India with aspecial emphasis on banks’ deposit and lending interest rates during the current easing cycle so far, i.e., since February 2019. While transmission to money market and long-term rates has been swift and almost complete, the transmission to deposit and lending interest rates has been muted. A key factor impeding quick and adequatetransmission to banks’ lending rates has been long maturity profile of bank deposits at fixed interest rates.

Even otherwise, banks are slow in adjusting their deposit interest rates. Under the external benchmark system introduced effective October 1, 2019 for select categories of loans, transmission to banks’ lending rates will no longer be contingent upon adjustment in deposit interest rates. Instead, changes in lending rates will induce changes in deposit interest rates.


Give RBI Governors a longer, fixed, non-renewable and non-dismissible tenure

March 11, 2020

My new piece in Moneycontrol:

The Supreme Court has said the relatively short tenure of RBI Governors fixed by the central government undermines their independence.


Yes Bank Saga: History of RBI’s tryst with large Private Bank Failures

March 9, 2020

My new piece in BloombergQuint on history of large private bank failures in India and how RBI has navigated through these failures.  The piece also shows how banking regulation in India has changed/moved with each of these failures.

Well, no matter how much one says banking has progressed, technology had led to enormous changes and so on, some things never change in banking. The rise and decline of Yes Bank is quite a story but is hardly a new story..

Supreme Court upholding RBI ban on cryptoexchanges: How RBI lost the match in the last over

March 6, 2020

My piece in Moneycontrol where I review the recent Supreme Court (cant locate on the website now) ruling on RBI’s circular which led to death knell of cryptoexchanges and crypto trading in India.

The Reserve Bank of India must be really edgy this week. The week started with the central bank being worried over the possible impact of coronavirus on the Indian economy and financial markets. The central bank had to issue a statement saying it “stands ready to take appropriate actions to ensure orderly functioning of financial markets, maintain market confidence and preserve financial stability”.

Just when things would have calmed a bit, came the news that the Supreme Court has struck off a Reserve Bank circular which banned virtual currencies (VC) in April 2018. This marks the second case in less than a year of the Supreme Court ruling against a central bank circular/policy. The first case was of a circular released in February 2018 which allowed banks to file defaulting firms under the new bankruptcy code.

But it’s this case of virtual currencies that is really interesting. In SC’s own words, the case had a “nail biting finish”. In April 2018, the RBI had directed the entities regulated by it to not do business with firms engaging in VCs and exit in case they have been in such a business relationship.

More in the piece…

Obviously, the edginess continues with decision on Yes Bank..phew…

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