The mechanics behind RBI rate cut

RBI announced a Repo rate cut by 25bps. The Repo Rate was reduced from 6.25% to 6% after the Monetary Policy Committee of RBI meeting, as was widely speculated before the meeting. In this post, we will try and understand the reasons behind the rate cut. To understand the reasoning, it is essential to know the relation between inflation and repo rate.

Repo rate is used by RBI to influence the short term money supply in the economy. It is the (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks. RBI uses the Repo rate as a lever to influence inflation in the country.

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Inflation and Repo Rate (Source)

Inflation is a lagging indicator in response to the repo rate changes. The inflation rate typically reacts inversely changes in the repo rate.

If the inflation rate is higher than the limits targeted by  RBI, the RBI looks to increase the repo rate so as to encourage banks to increase the lending rates/savings rate for its customers. This, in turn, encourages the customers to consume less and save more. Similarly, when the prices are stable over time, RBI sometimes decreases repo rate to encourage private investments and thus help in increase in growth rate of GDP.

Since 2016, RBI has embraced inflation targeting as an official policy, in collaboration with Ministry of Finance. The RBI and the Government, have decided the inflation target between 5th August 2016 to March 31, 2021, 4% with an upper and lower limit of 6% and 2% respectively. In fact, the Monetary Policy Committee would be entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.

India has been going through a period of historically low inflation. The latest CPI numbers released for June 2017 show that YOY inflation went to 1.54%, much below the target lower rate of 2%. Prices of food and beverages have been under deflation since May 2017, with YoY growth going to -1.1% in June. It is worth noting that the infamously expensive pulses have gone back to their price levels of June 2015, after recording a massive drop of 22% YoY.

While disinflation has been observed over the past few month, it is not clear if it transitory or structural. A reduction in repo rate would lead to increase in prices, and RBI assesses risks of steep price rise, as well. However, with the reducing inflation trend observed in various commodities and a strong monsoon season this year, the RBI had room to reduce the Repo rate.


This article is written by Vishu Agarwal. He is a policy enthusiast who follows India’s economic and monetary policies very closely.

m-Aadhaar: The Paradigm Shift

 

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UIDAI, which is the authority established to issue Aadhaar numbers, has launched the m-Aadhaar app for mobile users that will allow users to carry unique identification profile on mobile. Users can download their Aadhaar number profile on their Android smartphones and will therefore not require hard copies of the card, wherever applicable.

It allows the user to carry their Aadhaar demographic information, i.e. name, date of birth, gender, address and the photograph linked with their Aadhaar number, on their smartphones.

In one shot UIDAI has addressed a lot of privacy concerns regarding Aadhaar. Now people don’t need to store their Aadhaar number unprotected on their devices, as the m-Aadhaar app comes with a password protection. It is not advisable to store your Aadhaar number without password protection on your mobile anyway. Also, you can conveniently lock your biometrics from your smartphone, which will give a lot of comfort to people who are worried about their biometric information being abused.

Aadhaar based e-KYC had a challenge, which many of us have faced, that the OTP SMS gets delayed by the order of minutes regularly, and for hours on occasions. Given the millions of OTPs which UIDAI serves every day, this is understandable. Now that problem is solved by the TOTP feature on the application, instead of waiting for the OTP SMS to arrive, you can just go to the application and get the TOTP and use it for e-KYC purposes.

Even with the push of Government and the digital nature of Aadhaar, people were using Aadhaar with its hard copy all the time. Now, with the m-Aadhaar application, Aadhaar has truly gone digital. Gone would be the days when people carry hard copies of their identity and address proofs.

As the smartphone penetration is all time high, with the numbers nearly reaching 400 million and an equal number becoming literate digitally; this will increase the feasibility and adaptability of Aadhaar platform. Especially in the context of the last 8 months, the acceptability of smartphone as a gateway for digital payments has opened the scope further. Now with the launch of m-Aadhaar, the services now offered will suit to the demand of the customers. These services can be directly accessed via their 12 digit Aadhaar number on just a single tap of their smartphone. We are heading towards an India where all services can be assessed and granted with a single tap.


Abhishek Ranjan is a Research and Policy Analyst to Members of Parliament (MPs) Mr. Ninong Ering and Mr. Dilip Tirkey. He is also working as a Consultant to DTSRDF and University of Chicago’s Delhi Center for Anubhav Lecture Series and is a Policy Consultant for FinTech startup Credy. Earlier, he was a LAMP Fellow and graduated in Engineering from Manipal Institute of Technology.

GST and financial services

On 1st July 2017, Hon’ble Prime Minister launched GST (Goods and Services Tax) from the Parliament of India. He lauded it as the step for the economic integration of India. This single tax reform is a new hope for our energized and growing economy. GST is about the vertical and horizontal integration of all indirect taxes in India. It will have long reaching impacts on the access to financial services which have been analyzed further.

Tax on financial services transactions such as banking transactions (credit card payments, fund transfer, ATM transactions, processing fees on loans etc.), mutual funds, insurance and the stock market has increased from the previous 15% to 18%, making them marginally costlier. It would have an inflationary impact in the near future. But many experts are hopeful that the increase in cost may not last in the long run as banks will pass on the benefit of input tax credit, under GST, to their customers. 

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Ninety percent of the products in the service sector were placed in the 18% bracket, which is a marginal increase but is expected to reduce complexity in the transaction and improve ease in availing of input credit. Out of all services, 63 have been put on a negative list, which is exempt from tax.

Mutual fund distributors earning up to Rs. 20 lakh will remain exempt from GST, while those earning more will see their tax rate increased from 15% to 18%. The hike from 15% to 18% will apply to the insurance sector as well.

In stock trading, the brokerage would have increased taxes. Depending on the volume of trades, the brokerage can be a maximum of 1% for a transaction value of Rs10,000.

As per Vinod Kothari Consultants, on the matter of loans coming under GST, they say that the definition of goods and supply under sections 2(52) and 2(102) of the CGST Act, exclude money to money transactions. Loan transactions being money to money transactions are therefore not subject to GST.

Further, the GST Council has also exempted money to money transactions in the Schedule of GST rates for services Entry 8 of the list of exempted services states. Therefore, interest charged on loan transactions shall not be subject to GST.

To conclude, with the arrival of GST, financial services transactions have become dearer but in the long run service providers will pass the benefits to consumers. We must embrace GST era with positive spirits!


Abhishek Ranjan is a Research and Policy Analyst to Members of Parliament (MPs) Mr. Ninong Ering and Mr. Dilip Tirkey. He is also working as a Consultant to DTSRDF and University of Chicago’s Delhi Center for Anubhav Lecture Series and is a Policy Consultant for FinTech startup Credy. Earlier, he was a LAMP Fellow and graduated in Engineering from Manipal Institute of Technology.

Banking Penetration in Tier 2 Cities

Cities are considered to be the engines of growth. These cities provide ample economic opportunities to the people and help in escalating economy overall. Realizing this, Indian government has recently started a thrust to build 100 smart cities in India.

Historically, India is gifted with four metro cities but they are already overpopulated and congested. Attempts are being made to rewrite the growth story via tier 2 cities now. India has 50+ cities with more than a million people. They carry the hopes and aspirations of the new India. These cities are able to provide employment, education and higher standards of living, compared to the rural cities.

When the Government came up with Smart Cities Plan in 2015, the idea was to develop growth centres in each of the Indian state which will expand to nearby regions also. Already state capitals have developed into economic centres where an aspirational class is thriving. With 50+ cities having more than a million population like Jaipur, Patna, Guwahati, Bhuwaneshwar, Kochi,etc. people have changed a lot from last decade. Now they travel through air, communicate via mail or mobile, travel to foreign for holidays, read and speak in English, want to work in MNCs, etc. These cities are positively engaging with their demographic dividend to reap the benefits. Already Internet penetration in urban areas is around more than 50% and mobile connectivity is higher than ever, and with Union Budget focusing on new airports construction the rate of growth of tier 2 cities will be high in coming times.

Moreover, these cities are attracting investments and are left with wider opportunities for business. However, these cities still do not have financial services infrastructure. Easy and affordable access to credit is still not available. There are 141 thousand banking branches in India. Out of this 29 thousand are in Metro cities, while 26 thousand are in other urban areas. However, only 5 crore people live in the four metro cities compared to 34 crore people living in other urban areas. Banking penetration is 7 times lesser in other urban areas compared to Metros. This is not to say that Metros have adequate banking facilities. Several pockets of slums in these cities have little or no branches, and the banking experience well off people is still far from hassle-free. However, the situation in Tier 2 cities is much worse. Without a proper banking infrastructure it is not possible for these cities to fuel the next stage of growth in India. With increasing internet penetration, FinTech companies could replace the traditional banks providing banking solutions to the population living there.

With the Government also focusing upon Rurban Mission (Rural-urban continuum fringe), there is possibility of cities growing along with attached rural areas which will provide boost to the Indian economy by creating jobs and opportunities. Tier 2 cities have the best chances to become pragmatic solution to present day problems of economy, the Government needs to invest positively and pragmatically in these areas.

 


Abhishek Ranjan is a Research and Policy Analyst to Members of Parliament (MPs) Mr. Ninong Ering and Mr. Dilip Tirkey. He is also working as a Consultant to DTSRDF and University of Chicago’s Delhi Center for Anubhav Lecture Series, and is a Policy Consultant for FinTech startup Credy. Earlier, he was a LAMP Fellow and graduated in Engineering from Manipal Institute of Technology.

Financial Inclusion in India

 

According to the Committee on Financial Inclusion headed by Dr. C. Rangarajan, Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. But the major question remains whether it has been achieved after regular efforts made by the Government? Are citizens financially included now? Were they able to get credit when they needed it?

Data from the World Bank would  (see here) says that as of 2014, nearly 53% of all Indian population has access to bank accounts. This is before the launch of the Jan-dhan Yojna which led to 28 crores new account opened by banks. This coupled with the natural increase in number of accounts and the push by the Government via the demonetization exercise in November 2016 has led to large population of India with access to bank accounts.

However, as Dr. C. Rangarajan points out in his definition, a key aspect of Financial Inclusion is timely access to credit. In the context of credit access it was found that only 7.7 % population borrowed from financial institution while the rest relied on informal means from private lenders or friends. The situation is much worse when viewed from the prism of rural credit access. Farmers and weaker sections are unable to raise money in the hours of need leading to their distressed conditions. Although the Jan Dhan Yojna increased the spread of banked families, it still does not solve the problem of credit access.

In reality, traditional banking facilities are ill-equipped to service the large population of India, and hence large sections of society are flocking to informal means of credit.  In order to get a simple loan, a person may have to get involved in many paper-works and could potentially take months time. Traditional banking institutions due to their high fixed costs are not able to service the credit needs of the credit-hungry population. It is in part due to these problems that RBI is promoting alternate institutions to provide credit via platforms like Peer-to-peer lending platforms. Given the recently controlled inflation levels, RBI’s push is to decrease interest rates, thus such platforms present a good opportunity for investing and earning returns, leading to a win-win scenario for both lenders and borrowers. Peer to peer lending is set to help India finally achieve financial inclusion for its population.

 


Abhishek Ranjan is a Research and Policy Analyst to Members of Parliament (MPs) Mr. Ninong Ering and Mr. Dilip Tirkey. He is also working as a Consultant to DTSRDF and University of Chicago’s Delhi Center for Anubhav Lecture Series, and is a Policy Consultant for FinTech startup Credy. Earlier, he was a LAMP Fellow and graduated in Engineering from Manipal Institute of Technology.

 

Poverty Alleviation In India

India is a land of paradox! On the one hand we have a thriving economy labeled as the fastest growing in the world and on the other hand still 21.2% of total India population reside below poverty line. India has done a tremendous job in pulling out a substantial population out of poverty in last decade. Yet the challenge remains big. But the monumental efforts envisaged by the Government are poised to provide good living standards to a large population in coming times.

Dr. Shashi Tharoor who gave the famous Oxford speech said, “The fact is that, before 200 years, the British came to one of the richest countries in the world- a country which had 23 per cent of global GDP… a country where poverty was unknown.”  He further adds “A country that was the world leader in at least three industries- textiles, steel and ship building. A country that had everything. And after 200 years of exploitation, expropriation and clean outright looting, this country was reduced to one of the poorest countries in the world by 1947.” More than half the population was below poverty line practicing subsistence agriculture.

The challenge before the Nehru Government was monumental and they started with Soviet style socialist planning which failed to provide the necessary trickle down effect. Hence post 1970s, the Government led by Mrs. Indira Gandhi with Twenty Point Programme tried to reduce poverty. The Governments thereafter targeted both poverty alleviation and employment generation under one umbrella and started with initiatives like Integrated Rural Development, Swarna Jayanti Rojgar Yojna, Indira Awas Yojana, etc. But the important and successful schemes were Pradhan Mantri Grameen Sadak Yojana and MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme) which proved to be very effective and efficient. PMGSY provided the necessary connectivity for the development of rural areas and pulled a substantial population out of poverty due to employment generation via roads. Whereas the path- breaking MGNREGS provided rural masses with minimum 100 days of guaranteed job with no pre required skill sets. After 10 successful years of MGNREGS, it is established that this single scheme has proved to be panacea to reduce poverty at high rates. The transmission effect of MGNREGS on poverty is appreciated by the present Government too which has made whooping Rs. 48,000 crore allocations in this year’s budget to this scheme.

Although we have miles to go to eliminate poverty as India has the highest number of people residing below poverty line but the efforts of Government in past decades must be applauded. Even the rural population today is well connected with telephone and internet and their nutritional habits are also changing keeping in view the refining trends of consumption due to increased power of purchasing. This paints a bright picture for the coming times of rural India where they can also use digital modes not only to transact but to get information and sell their produce at reasonable rates. The India of today is changing at rapid scale with the given level of technological penetration coupled with globalization effects. India has in the past leapfrogged adoption of landline phones and gone directly to usage to mobile phones. With the rapidly reducing poverty in rural India, history is poised to repeat itself, this time in the financial sector. We will delve deeper into the subject in a subsequent blog post.

As the Tendulkar Committee on Poverty found out that we still have a large population below poverty line, the present efforts by the Government to skill the rural masses will go a long way to reduce poverty line below 10%. Even the policies to boost agriculture and bring food processing industries into limelight can fetch good earning to rural poor. If the loopholes and leakages of poverty alleviation and employment generation programmes are reduced and made effective, then in near future Poverty will be truly just a state of mind!


Abhishek Ranjan is a Research and Policy Analyst to Members of Parliament (MPs) Mr. Ninong Ering and Mr. Dilip Tirkey. He is also working as a Consultant to DTSRDF and University of Chicago’s Delhi Center for Anubhav Lecture Series, and is a Policy Consultant for FinTech startup Credy. Earlier, he was a LAMP Fellow and graduated in Engineering from Manipal Institute of Technology.

 

A budget for Digital Economy

When the Union Budget was announced by the Finance Minister Shri Arun Jaitley on 1st February 2017, the key take away was the willingness of the Government to push India towards Digital Economy. A few important measures were announced in the budget which will help India in advancing towards an economy based on the digital payments, digital services, etc. The idea of Digital economy itself has gained importance in the public discourse post Demonetization where the thrust was upon going cashless. Going digital will create an environment of speedy, transparent and accountable governance and helps in fighting the problems of corruption, black money and terror funding.

The important announcements made in the regard of creating a digital economy were:-

  • 125 lakh people have adopted the BHIM App so far. The Government will launch two new schemes to promote the usage of BHIM; these are Referral Bonus scheme for individuals and a Cashback scheme for merchants. This step will help in more and more adopting the BHIM way to go for digital payments and also motivate people to use wallets and other Apps. It will overall promote the development scenario for digital payments.
  • Aadhaar Pay, a merchant version of AEPS (Aadhaar Enabled Payments System) will be launched shortly and definitely provide the much needed momentum in the digital payments and FinTech sector.
  • A mission will be set up with a target of 2500 crore digital transactions for 2017-18 through UPI, USSD, Aadhaar Pay, IMPS and Debit Cards. The mission can bring in the required behavioral changes in the way customer pays up for buying a product.
  • A proposal to bring mandate all the Government receipts through digital means, beyond a prescribed limit is under consideration. When the Government itself leads by example then citizenry can be expected to follow the new scheme of things.
  • Banks have targeted to introduce additional 10 lakh new POS terminals by March 2017. They will be encouraged to introduce 20 lakh new Aadhar based POS by September 2017. It will provide the rural India with digital connectivity and enable them to be part of financial and digital inclusion.
  • The Government has proposed to create a Payments Regulatory Board in the Reserve Bank of India by replacing the existing Board for regulation and supervision of Payments and Settlements system. A newly energized Board with a embedded vision of spearheading Digital Economy can turn the tides in favor of Digital payments.

All the above steps and the additional focus of the Government on Digital India along with Startup India, Skill India and Make in India will help in accelerating the process of creating a Digital economy very soon. We should be ready to embrace the change and see our country going digital in Indianized way!


Abhishek Ranjan is a Research and Policy Analyst to Members of Parliament (MPs) Mr. Ninong Ering and Mr. Dilip Tirkey. He is also working as a Consultant to University of Chicago’s Delhi Center for Anubhav Lecture Series, and is a Policy Consultant for FinTech startup Credy. Earlier, he was a LAMP Fellow and graduated in Engineering from Manipal Institute of Technology.