Annual Report of the RBI for the Year 2016-17

Report of the Central Board of Directors on the working of the Reserve Bank of India for the year ended June 30, 2017 submitted to the Central Government in terms of Section 53(2) of the Reserve Bank of India Act, 1934 RESERVE BANK OF INDIA ANNUAL REPORT 2016-17CENTRAL BOARD / LOCAL BOARDS GOVERNOR Urjit R. Patel MEMBERS OF LOCAL BOARDS DEPUTY GOVERNORS N. S. Vishwanathan Viral V. Acharya B. P. Kanungo WESTERN AREA Vallabh Roopchand Bhanshali DIRECTORS NOMINATED UNDER SECTION 8 (1) (b) OF THE RBI ACT, 1934 Dilip S. Shanghvi DIRECTORS NOMINATED UNDER EASTERN AREA SECTION 8 (1) (c) OF THE RBI ACT, 1934 Natarajan Chandrasekaran Sunil Mitra Bharat Narotam Doshi Sudhir Mankad Rajiv Kumar NORTHERN AREA Ashok Gulati Manish Sabharwal DIRECTORS NOMINATED UNDER SOUTHERN AREA SECTION 8 (1) (d) OF THE RBI ACT, 1934 Prasanna Kumar Mohanty Anjuly Chib Duggal Subhash Chandra Garg (Position as on August 16, 2017)PRINCIPAL OFFICERS (As on August 11, 2017) EXECUTIVE DIRECTORS ....................................................................... Deepak Kumar Mohanty ....................................................................... Deepali Pant Joshi ....................................................................... Michael D. Patra ....................................................................... K.K. Vohra ....................................................................... Meena Hemchandra ....................................................................... Deepak Singhal ....................................................................... Sudarshan Sen ....................................................................... M. Rajeshwar Rao ....................................................................... Surekha Marandi ....................................................................... Malvika Sinha ....................................................................... S. Ganesh Kumar CENTRAL OFFICE Central Vigilance Cell ................................................................................ Lily Vadera, Chief General Manager Consumer Education and Protection Department ..................................... Arun Pasricha, Chief General Manager Corporate Strategy and Budget Department ............................................. Sadhana Verma, Chief General Manager Department of Banking Regulation ........................................................... S.S. Barik, Chief General Manager-in-Charge Department of Banking Supervision .......................................................... Parvathy V. Sundaram, Chief General Manager-in-Charge Department of Communication .................................................................. A.I. Killawala, Principal Adviser-Communications Department of Co-operative Bank Regulation .......................................... Neeraj Nigam, Chief General Manager Department of Co-operative Bank Supervision ........................................ Rohit Jain, Chief General Manager Department of Corporate Services ............................................................ Thomas Mathew, Chief General Manager Department of Currency Management ...................................................... P. Vijayakumar, Chief General Manager Department of Economic and Policy Research ........................................ – Department of External Investments and Operations................................ T.K. Rajan, General Manager-in-Charge Department of Government and Bank Accounts ....................................... S. Ramaswamy, Principal Chief General Manager Department of Information Technology ...................................................... – Department of Non-Banking Regulation .................................................... C.D. Srinivasan, Chief General Manager Department of Non-Banking Supervision .................................................. Sathyan David, Chief General Manager Department of Payment and Settlement Systems ..................................... Nanda Dave, Chief General Manager-in-Charge Department of Statistics and Information Management ............................ G. Chatterjee, Principal Adviser Enforcement Department ......................................................................... Anil K. Sharma, Chief General Manager Financial Inclusion and Development Department ................................... Uma Shankar, Principal Chief General Manager Financial Markets Operations Department ................................................ R.S. Ratho, Chief General Manager Financial Markets Regulation Department ................................................ T. Rabi Sankar, Chief General Manager Foreign Exchange Department.................................................................. Shekhar Bhatnagar, Chief General Manager-in-Charge Financial Stability Unit ............................................................................... R. Gurumurthy, Chief General Manager Human Resource Management Department ............................................. A.K. Sarangi, Chief General Manager-in-Charge Inspection Department ............................................................................. R. Sebastian, Chief General Manager Internal Debt Management Department .................................................... Archana Mangalagiri, Chief General Manager International Department ........................................................................... M.K. Saggar, Adviser Legal Department ...................................................................................... Mona Anand, Legal Adviser-in-Charge Monetary Policy Department ..................................................................... Janak Raj, Principal Adviser Premises Department ................................................................................ Arvind K. Sharma, Chief General Manager-in-Charge Rajbhasha Department ............................................................................. Lily Vadera, Chief General Manager Risk Monitoring Department ...................................................................... A.K. Misra, Chief General Manager Secretary’s Department ............................................................................. Susobhan Sinha, Chief General Manager & Secretary COLLEGES PRINCIPALS College of Agricultural Banking, Pune ....................................................... M. Sarkar Deb Reserve Bank Staff College, Chennai ....................................................... Rabi N. Mishra OFFICES REGIONAL DIRECTORS Chennai ..................................................................................................... Arundhati Mech Kolkata ....................................................................................................... S.C. Murmu Mumbai ...................................................................................................... S. Rajagopal New Delhi .................................................................................................. K.K. Saraf BRANCHES Ahmedabad ............................................................................................... J.K. Dash Bengaluru .................................................................................................. E.E. Karthak Bhopal ....................................................................................................... Ajay Michyari Bhubaneswar ............................................................................................. P.K. Das, General Manager (Offi cer-in-Charge) Chandigarh ................................................................................................ Nirmal Chand Dehradun ................................................................................................... Subrata Das, General Manager (Offi cer-in-Charge) Guwahati ................................................................................................... B.K. Mishra Hyderabad ................................................................................................. R. Subramanian Jaipur ......................................................................................................... Arnab Roy Jammu ....................................................................................................... N.K. Sahu Kanpur ....................................................................................................... Vivek Deep Lucknow .................................................................................................... Ajay Kumar Nagpur ....................................................................................................... J.M. Jivani Patna ......................................................................................................... N.P. Topno Raipur ........................................................................................................ Saraswati Shyamaprasad Ranchi ....................................................................................................... Patric Barla Shimla ........................................................................................................ Amar Nath Thiruvananthapuram ................................................................................. S.M. Narasimha Swamy OFFICERS-IN-CHARGE Agartala ..................................................................................................... Tamal Biswas, General Manager (O-i-C) Aizawl ....................................................................................................... Deng Mary Lainlunkim, General Manager (O-i-C) Belapur ...................................................................................................... S.N. Panda, Chief General Manager Gangtok ..................................................................................................... Manabendra Misra, General Manager (O-i-C) Imphal ........................................................................................................ Hauzel Thangzamuan, Chief General Manager Kochi .......................................................................................................... M.K. Mall, Chief General Manager Panaji ........................................................................................................ S.T. Kannan, General Manager (O-i-C) Shillong ...................................................................................................... Anurag Asthana, General Manager (O-i-C) Srinagar ..................................................................................................... Rakesh Raina, Assistant General Manager (O-i-C)CONTENTS Page No. PART ONE: THE ECONOMY - REVIEW AND PROSPECTS .............................................. 1 I. ASSESSMENT AND PROSPECTS ......................................................................... 1 Assessment: 2016-17 ............................................................................................... 1 Prospects: 2017-18 .................................................................................................. 5 II. ECONOMIC REVIEW .............................................................................................. 11 The Real Economy ................................................................................................... 11 Price Situation .......................................................................................................... 22 Money and Credit ..................................................................................................... 31 Financial Markets ..................................................................................................... 39 Government Finances .............................................................................................. 50 External Sector ......................................................................................................... 56 PART TWO: THE WORKING AND OPERATIONS OF THE RESERVE BANK OF INDIA ... 64 III. MONETARY POLICY OPERATIONS ...................................................................... 64 Monetary Policy ........................................................................................................ 65 The Operating Framework ........................................................................................ 68 Monetary Policy Transmission .................................................................................. 72 Sectoral Lending Rates ............................................................................................ 73 IV. CREDIT DELIVERY AND FINANCIAL INCLUSION ............................................... 78 Credit Delivery .......................................................................................................... 79 Financial Inclusion ................................................................................................... 81 Financial Literacy ..................................................................................................... 85 V. FINANCIAL MARKETS AND FOREIGN EXCHANGE MANAGEMENT ................. 88 Financial Markets Regulation Department ............................................................... 88 Financial Markets Operations Department ............................................................... 90 Foreign Exchange Department ................................................................................ 91 VI. REGULATION, SUPERVISION AND FINANCIAL STABILITY ............................... 94 Financial Stability Unit .............................................................................................. 98 Regulation of Financial Intermediaries ..................................................................... 98 Commercial Banks: Department of Banking Regulation .......................................... 98 iCONTENTS Page No. Cooperatives Banks: Department of Cooperative Bank Regulation ......................... 105 Non-Banking Financial Companies: Department of Non-Banking Regulation ......... 106 Supervision of Financial Intermediaries ................................................................... 108 Commercial Banks: Department of Banking Supervision ......................................... 108 Cooperative Banks: Department of Cooperative Bank Supervision ......................... 111 Non-Banking Financial Companies: Department of Non-Banking Supervision ........ 111 Enforcement Department ......................................................................................... 112 Consumer Education and Protection Department .................................................... 113 Deposit Insurance and Credit Guarantee Corporation ............................................. 115 National Housing Bank ............................................................................................. 115 VII. PUBLIC DEBT MANAGEMENT .............................................................................. 117 Debt Management of the Central Government ........................................................ 118 Debt Management of State Governments ................................................................ 121 VIII. CURRENCY MANAGEMENT .................................................................................. 124 Trends in Currency ................................................................................................... 124 Currency Management Infrastructure ....................................................................... 125 Clean Note Policy ..................................................................................................... 126 Counterfeit Notes and Security Printing ................................................................... 127 Department of Currency Management ..................................................................... 130 Bharatiya Reserve Bank Note Mudran Private Limited ............................................ 133 IX. PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY 134 Department of Payment and Settlement Systems.................................................... 134 Trend and Progress in Payment Systems ................................................................ 134 Department of Information Technology .................................................................... 142 X. GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT 145 Governance Structure .............................................................................................. 146 Communication Processes ...................................................................................... 148 Human Resource Initiatives ..................................................................................... 151 Strategic Research Unit ........................................................................................... 155 iiCONTENTS Page No. Enterprise Wide-Risk Management .......................................................................... 155 Internal Audit/ Inspection .......................................................................................... 158 International Relations ............................................................................................. 159 Government and Bank Accounts .............................................................................. 163 Managing Foreign Exchange Reserves ................................................................... 164 Economic and Policy Research ................................................................................ 164 Statistics and Information Management ................................................................... 165 Legal Issues ............................................................................................................. 167 Corporate Strategy and Budget Management .......................................................... 168 Corporate Services .................................................................................................. 170 Rajbhasha ................................................................................................................ 170 Premises Department .............................................................................................. 172 XI. THE RESERVE BANK’S ACCOUNTS FOR 2016-17 ............................................. 178 Balance Sheet .......................................................................................................... 180 Statement of Signifi cant Accounting Policies for the year ended June 30, 2017 ...... 186 Income ..................................................................................................................... 200 Expenditure .............................................................................................................. 202 Annex: Chronology of Major Policy Announcements: July 2016 to June 2017 ............ 205 Appendix Tables ................................................................................................................. 215 iiiCONTENTS Page No. BOXES II.1 Is Consumption-Led Expansion Sustainable?: A Case Study of India ..................... 14 II.2 Dynamics of Pulses Production ................................................................................ 18 II.3 Distribution of Infl ation in India ................................................................................. 23 II.4 Decoding CPI Infl ation Excluding Food and Fuel ..................................................... 24 II.5 Credit and Output: Macro and Sectoral Dimensions ................................................ 35 II.6 Indian Equity Prices: A Sustainability Analysis ......................................................... 44 II.7 Fair-value of the Rupee ............................................................................................ 47 II.8 Recommendations of the FRBM Review Committee ............................................... 52 II.9 Farm Loan Waiver .................................................................................................... 54 II.10 Assessment of India’s External Sector Resilience ................................................... 61 III.1 MCLR, Lending Rates and Health of the Banking Sector ........................................ 75 IV.1 National Strategy for Financial Inclusion .................................................................. 84 IV.2 Pan India Financial Literacy and Inclusion Survey ................................................... 86 IV.3 Pilot Project on Setting up Centres for Financial Literacy (CFLs) ............................. 86 VI.1 Market Reaction to the NPA Ordinance .................................................................... 95 VI.2 The Insolvency and Bankruptcy Code, 2016 ............................................................ 99 VI.3 Rationalisation of Branch Authorisation .................................................................... 100 VI.4 Modifi cations in Permissible Activities of IFSC Banking Units (IBUs) ....................... 101 VI.5 Implementation of Ind AS - Guidance on the Expected Credit Loss Framework ...... 102 VI.6 Discussion Paper on Wholesale and Long-Term Finance Banks ............................ 103 VI.7 Two-tier Rural Cooperative Structure in Jharkhand .................................................. 105 VI.8 Asset Reconstruction Companies: Progress and the Way Forward .................... 107 VI.9 Asset Quality Review (AQR) in Perspective - Lessons Learnt ............................. 108 VI.10 Revised Prompt Corrective Action Framework for Banks ..................................... 109 VI.11 Standing Committee on Cyber Security ................................................................ 110 VI.12 Sachet Portal ........................................................................................................... 112 ivCONTENTS Page No. VI.13 Supervisory Enforcement Framework ................................................................... 112 VI.14 The Ombudsman Scheme for Non-Banking Financial Companies ..................... 114 VI.15 Complaint Management System ............................................................................ 114 VIII.1 Survey-Based Estimation of Fake Indian Currency Notes (FICNs) ..................... 128 IX.1 Distributed Ledger Technology (DLT) .................................................................... 140 X.1 Social Media and Central Bank Communication: An Overview ........................... 150 X.2 The RBI Academy ................................................................................................... 152 X.3 Risk Tolerance Framework of the Reserve Bank .................................................. 156 X.4 Developments in the Incident Reporting System .................................................. 157 X.5 Approaches to Capital Account Liberalisation: OECD and IMF .......................... 160 X.6 Effects of G-20 Regulatory Reforms on India ...................................................... 161 X.7 Corporate Strategy in the Reserve Bank .............................................................. 169 APPENDIX TABLES 1. Macroeconomic and Financial Indicators ................................................................. 215 2. Growth Rates and Composition of Real Gross Domestic Product (At 2011-12 Prices) .................................................................................................. 217 3. Gross Savings ......................................................................................................... 218 4. Infl ation, Money and Credit ...................................................................................... 219 5. Capital Market - Primary and Secondary ................................................................. 220 6. Key Fiscal Indicators ................................................................................................ 221 7. Combined Receipts and Disbursements of the Central and State Governments .... 222 8. India’s Overall Balance of Payments ........................................................................ 223 9. Foreign Direct Investment Flows to India: Country-wise and Industry-wise ............. 224 vLIST OF ABBREVIATIONS AD - Authorised Dealer BSR - Basic Statistical Returns ADF - Asset Development Fund CA - Current Account ADWDR - Agricultural Debt Waiver and Debt CAB - College of Agricultural Banking Relief CAD - Current Account Defi cit AEs - Advanced Economies CAFRAL - Centre for Advanced Financial Research and Learning AIFIs - All India Financial Institutions CASA - Current Account and Saving Account AMCs - Asset Management Companies CART - Classifi cation and Regression Tree AMRMS - Audit Management and Risk Approach Monitoring System CBRMC - Central Bank Risk Managers’ APMC - Agricultural Produce Market Conference Committee CBS - Core Banking Solution AQR - Asset Quality Review CCB - Committee of the Central Board ARCs - Asset Reconstruction Companies CCC - Certifi ed Credit Counsellors ATMs - Automated Teller Machines CCIL - Clearing Corporation of India Limited BC - Business Correspondent CCM - Committee on Currency Movement BCM - Business Continuity Management CD - Certifi cate of Deposit BE - Budget Estimates CDES - Currency Distribution and Exchange BEST - Brihanmumbai Electric Supply and Scheme Transport Undertaking CDSL - Central Depository Services Limited BFS - Board for Financial Supervision CEPD - Consumer Education and Protection BIA - Basic Indicator Approach Department BIS - Bank for International Settlements CF - Contingency Fund BO - Banking Ombudsman CFLs - Centres for Financial Literacy BoP - Balance of Payment CGRA - Currency and Gold Revaluation Account BPSS - Board for Payment and Settlement System CIC - Currency in Circulation CMBs - Cash Management Bills BRBNMPL - Bharatiya Reserve Bank Note Mudran Private Limited CPC - Central Pay Commission BRICS - Brazil, Russia, India, China and South CPI - Consumer Price Index Africa CPI-ALs - Consumer Price Index-Agricultural BSE - Bombay Stock Exchange Labourers viLIST OF ABBREVIATIONS CPI-IWs - Consumer Price Index-Industrial DNBS - Department of Non-Banking Workers Supervision CPI-RLs - Consumer Price Index-Rural DPSS - Department of Payment and Labourers Settlement Systems CPMI-IOSCO - Committee on Payments and DSGE - Dynamic Stochastic General Market Infrastructures-International E quilibrium Organisation of Securities DSIM - Department of Statistics and Commissions Information Management CPs - Commercial Papers ECB - External Commercial Borrowings CRAR - Capital to Risk-Weighted Assets Ratio EDMS - Electronic Document Management CRILCs - Central Repository of Information on System Large Credits EFD - Enforcement Department CRR - Cash Reserve Ratio EMDEs - Emerging Markets and Developing CSBD - Corporate Strategy and Budget Economies Department EMEs - Emerging Market Economies CSF - Consolidated Sinking Fund EMS - Enterprise Management System CSO - Central Statistics Offi ce ERM - Enterprise-Wide Risk Management DBR - Department of Banking Regulation ETCD - Exchange Traded Currency Derivatives DBS - Department of Banking Supervision EXIM Bank - Export Import Bank DCBS - Department of Cooperative Bank Supervision FAQs - Frequently Asked Questions DCCBs - District Central Cooperative Banks FCA - Foreign Currency Assets DCS - Department of Corporate Services FCCB - Foreign Currency Convertible Bond DDs - Demand Drafts FCNR(B) - Foreign Currency Non-Resident (Bank) Account Deposits DEA - Depositors’ Education and Awareness Fund FCVA - Foreign Exchange Forward Contracts Valuation Account DEIO - Department of External Investments FDI - Foreign Direct Investment and Operations FED - Foreign Exchange Department DGBA - Department of Government and Bank Accounts FEMA - Foreign Exchange Management Act DICGC - Deposit Insurance and Credit FER - Foreign Exchange Reserves Guarantee Corporation FIAC - Financial Inclusion Advisory DISCOMs - Electricity Distribution Companies Committee viiLIST OF ABBREVIATIONS FIP - Financial Inclusion Plan GVA - Gross Value Added FMCG - Fast-moving Consumer Goods HLCCSM - High Level Committee on Currency Storage and Movement FMOD - Financial Markets Operations Department HRA - House Rent Allowance FMRD - Financial Markets Regulation HRMD - Human Resource Management Department Department FOMC - Federal Open Market Committee HTM - Held to Maturity FPI - Foreign Portfolio Investment IAC - Internal Advisory Committee FRBM - Fiscal Responsibility and Budget IBA - Indian Banks’ Association Management IBBI - Insolvency and Bankruptcy Board of FSAP - Financial Sector Assessment India Programme IBC - Insolvency and Bankruptcy Code FSB - Financial Stability Board ICCR - Incremental Cash Reserve Ratio FSDC - Financial Stability and Development IDPMS - Import Data Processing and Council Monitoring System FSR - Financial Stability Report IDS - Income Declaration Scheme FSU - Financial Stability Unit IFA - International Financial Architecture FVCIs - Foreign Venture Capital Investors IFSC - International Financial Service Centre FWG - Framework Working Group IGBC - Indian Green Building Council G-20 - Group of Twenty IGIDR - Indira Gandhi Institute of Development Research GDP - Gross Domestic Product IIP - Index of Industrial Production GFC - Global Financial Crisis IIP - International Investment Position GFCF - Gross Fixed Capital Formation IMD - India Meteorological Department GFD - Gross Fiscal Defi cit IMF - International Monetary Fund GMM - Generalised Method of Moments INR - Indian Rupee GNDI - Gross National Disposable Income IPDS - Integrated Power Development GoI - Government of India Scheme GRF - Guarantee Redemption Funds IRA-FS - Investment Revaluation Account- GSDP - Gross State Domestic Product Foreign Securities G-secs - Government Securities IRA-RS - Investment Revaluation Account- GST - Goods and Services Tax Rupee Securities viiiLIST OF ABBREVIATIONS IPOs - Initial Public Offerings NDA - Net Domestic Assets IT - Information Technology NDS-OM - Negotiated Dealing System-Order Matching ITES - Information Technology Enabled Services NDTL - Net Demand and Time Liabilities KYC - Know Your Customer NEFT - National Electronic Funds Transfer LAF - Liquidity Adjustment Facility NEM - North-East Monsoon LEI - Legal Entity Identifi er NFA - Net Foreign Assets LPA - Long Period Average NHB - National Housing Bank NIBM - National Institute of Bank LPG - Liquefi ed Petroleum Gas Management M - Money Supply 3 NIC - National Industrial Classifi cation MA-SAAR - Moving Averages of Seasonally NiC - Notes in Circulation Adjusted Annualised Growth NIIP - Net International Investment Position MCLR - Marginal Cost of Funds Based Lending Rate NPAs - Non-Performing Assets MGNREGA - Mahatma Gandhi National Rural NPS - National Pension System Employment Guarantee Act NRE - Non-Resident (External) Rupee MoSPI - Ministry of Statistics and Programme Accounts Implementation NRO - Non-Resident Ordinary Accounts MPC - Monetary Policy Committee NRLM - National Rural Livelihood Mission MSEs - Micro and Small Enterprises NSE - National Stock Exchange MSF - Marginal Standing Facility NSDL - National Securities Depository Limited MSMEs - Micro, Small and Medium Enterprises NSFI - National Strategy for Financial MSPs - Minimum Support Prices Inclusion MSS - Market Stabilisation Scheme NSFR - Net Stable Funding Ratio OFCBs - Overseas Foreign Currency NABARD - National Bank for Agriculture and Borrowings Rural Development OM - Original Maturity NAMCABS - National Mission for Capacity Building of Bankers for fi nancing the MSME OMO - Open Market Operations sector OPEC - Organisation of Petroleum Exporting NBFCs - Non-Banking Financial Companies Countries NCDs - Non-Convertible Debentures OROP - One Rank One Pension ixLIST OF ABBREVIATIONS OSMOS - Off-Site Monitoring and Surveillance REER - Real Effective Exchange Rate System RERA - Real Estate (Regulation and OTC - Over the Counter Development) Act PAs - Provisional Accounts RFCA - Revaluation of Forward Contracts PACS - Primary Agricultural Credit Societies Account PADO - Public Administration, Defence and RM - Reserve Money Other Services RMD - Risk Monitoring Department PCA - Prompt Corrective Action RRBs - Regional Rural Banks PCR - Public Credit Register RTF - Risk Tolerance Framework PDs - Primary Dealers RTGS - Real Time Gross Settlement System PFCVA - Provision for Forward Contracts RTI - Right to Information Act Valuation Account PLF - Plant Load Factor RTP - Reserve Tranche Position PMGKDS - Pradhan Mantri Garib Kalyan Deposit S4A - Scheme for Sustainable Structuring of Scheme Stressed Assets POs - Payment Orders SAA - Swap Amortisation Account PPAs - Power Purchase Agreements SAARC - South Asian Association for Regional Cooperation PPI - Producer Price Index PPIs - Prepaid Payment Instruments SARFAESI - Securitisation and Reconstruction of Financial Assets and Enforcement of PSBs - Public Sector Banks Security Interest PSUs - Public Sector Undertakings SBNs - Specifi ed Bank Notes PSLCs - Priority Sector Lending Certifi cates SCBs - Scheduled Commercial Banks QIPs - Qualifi ed Institutional Placements SDF - Special Drawing Facility RBI - Reserve Bank of India SDL - State Development Loans RBIA - Risk Based Internal Audit SDR - Special Drawing Rights RBSC - Reserve Bank Staff College SEBI - Securities and Exchange Board of RCS - Regional Connectivity Scheme India RD - Revenue Defi cit SGBs - Sovereign Gold Bonds RDBs - Rupee Denominated Bonds SGL - Subsidiary General Ledger ReBIT - Reserve Bank Information Technology Private Limited SHGs - Self Help Groups xLIST OF ABBREVIATIONS SLR - Statutory Liquidity Ratio USSD - Unstructured Supplementary Service Data SMS - Short Message Service WACR - Weighted Average Call Rate SPARC - Supervisory Programme for Assessment of Risk and Capital WADR - Weighted Average Discount Rate SPMCIL - Security Printing and Minting WADTDR - Weighted Average Domestic Term Corporation of India Limited Deposit Rate SPSEs - State Public Sector Enterprises WAEIR - Weighted Average Effective Interest SRU - Strategic Research Unit Rate StCBs - State Cooperative Banks WALR - Weighted Average Lending Rate SWM - South-West Monsoon WAY - Weighted Average Yield T-Bills - Treasury Bills WDV - Written Down Value UCBs - Urban Cooperative Banks WMA - Ways and Means Advances UDAY - Ujwal DISCOM Assurance Yojana WPI - Whole Sale Price Index UMPP - Ultra Mega Thermal Power Projects XBRL - eXtensible Business Reporting Language UNCTAD - United Nations Conference on Trade and Development y-o-y - Year-on-Year This Report can be accessed on Internet URL : www.rbi.org.in xiTHE ANNUAL REPORT ONAS TSHEESS WMEONRTK AINNDG P ROOFS TPHECET SRESERVE BANK OF INDIA For the Year July 1, 2016 to June 30, 2017* PART ONE: THE ECONOMY - REVIEW AND PROSPECTS I ASSESSMENT AND PROSPECTS I.1 Headwinds from the global slowdown direct investment (FDI). Improvement in external and the transient impact of demonetisation vulnerability indicators and fiscal credibility should notwithstanding, the Indian economy boost business and investment sentiment. The demonstrated resilience in 2016-17, marked sluggish growth of industry and fixed capital by moderate expansion and macroeconomic formation, however, remain areas which warrant stability - low inflation, and improvement in priority in policy attention. The progress in current account and fiscal deficits. Financial resolving the highly indebted corporates and markets priced in global and domestic shocks and improving the financial health of public sector volatility ebbed, with excess liquidity conditions banks (PSBs) is critical for restarting credit flows induced by demonetisation persisting through the to the productive sectors, apart from reviving the second half of the year. In this milieu, the outlook investment climate, in general. The attainment of for growth in 2017-18 has brightened, with the the inflation target under the new monetary policy likelihood of another favourable monsoon and the framework should strengthen the transparency, implementation of major policy reforms – led by credibility and effectiveness of monetary policy, the introduction of the Goods and Services Tax which would anchor the progress of reforms going (GST) from July 1, 2017 - that would help to unlock forward. bottlenecks to growth. The likely normal southwest ASSESSMENT: 2016-17 monsoon for the second successive year is expected to boost rural demand besides keeping I.2 In 2016-17, Gross Domestic Product a check on food inflation. Urban consumption (GDP) growth moderated due to slowdown in too is expected to remain buoyant, following gross capital formation as waning business the upward revision in the house rent allowance confidence and flagging entrepreneurial energies (HRA) to central government employees as also took their toll on the appetite for new investment. the likely implementation of the 7th Central Pay On the other hand, both government and private Commission (CPC) award at the state level. consumption accelerated and held up aggregate With further progress in implementing policy demand. While the turnaround in the growth of reforms that ease doing business, India may agriculture paved the way for a pick-up in rural continue to be a preferred destination for foreign demand, urban demand remained resilient due to * While the Reserve Bank of India’s accounting year is July-June, data on a number of variables are available on a fi nancial year basis, i.e., April-March, and hence, the data are analysed on the basis of the fi nancial year. Where available, the data have been updated beyond March 2017. For the purpose of analysis and for providing proper perspective on policies, reference to past years as also prospective periods, wherever necessary, has been made in this Report. 1ANNUAL REPORT hikes in salary, wages and pensions of the central structural bottlenecks associated with project government employees. There has also been an implementation, which led to a reduction in the improvement in households’ financial savings, number of stalled projects and cost overruns in post demonetisation. central sector infrastructure projects during 2016- 17. During the year, there was the highest ever I.3 On the production side, agriculture and awarding and construction of national highway allied activities rebounded sharply in 2016-17. projects. The resolution of stalled projects, Record foodgrains and horticulture production, development of roads under Bharat Mala project, facilitated by the normal monsoon as well as steps taken to streamline land acquisition, inter considerable hike in pulses’ Minimum Support alia, helped to speed up road construction. Prices (MSPs), augmented the sector’s growth Capacity addition in major ports was also the during the year. On the other hand, deceleration highest ever in a single year with improvement in services Gross Value Added (GVA) across all in total turn-around time1 and average output per sub-sectors barring public administration, defence ship berth day2. In respect of the power sector, and other services (PADO), moderated the overall the shortfall in meeting total energy requirements GVA growth. The slowdown was pronounced in bottomed out during the year. In addition, India H2 as construction and real estate sectors, which turned around from a net importer to a net exporter relied to a large extent on cash transactions, were of electricity for the first time. Concomitant to severely impacted following demonetisation. The the impetus for cleaner energy, the renewable growth in industrial GVA also decelerated from energy sector surpassed thermal power in annual a year ago, dragged down by a slowdown in capacity addition, also for the first time. This apart, manufacturing and mining, even though electricity increased capacity addition in solar energy and generation accelerated. On the use-based front, enhanced private sector interest, coupled with consumer non-durables posted the highest the availability of cheaper voltaic cells, resulted growth across sectors while consumer durables in historically low solar tariffs in recent reverse decelerated significantly. Industrial output seemed auctions. Moreover, almost all state governments to have been impacted, albeit transiently, by joined the Ujwal DISCOM Assurance Yojana demonetisation as IIP growth during November (UDAY) scheme during the year, strengthening 2016 to March 2017 was 2.6 percentage points prospects for financial turnaround of distribution lower than in the pre-demonetisation period (April companies (DISCOMs) on a macro scale, going – October 2016). forward. Amidst these positive developments, I.4 As the infrastructure sector is widely capacity utilisation in thermal power plants perceived to hold the key to revival of growth, top continued to decline for the seventh year in priority was accorded to addressing environmental succession, weighed down by the stressed clearances, land acquisition issues and other health of power DISCOMs and lower energy 1 Turn-Around Time – Total time spent by a ship since its entry till its departure. It was 3.43 days on an average in 2016-17 as against 3.64 days during the previous year. 2 Output per ship berth day – Total tonnage handled/distributed over total number of berth days. It was 14,576 tonnes in 2016-17 as against 13,748 tonnes during the previous year. 2ASSESSMENT AND PROSPECTS demand. Similarly, the pace of capital investment circumscribed the ability of banks to lend, as in railways slackened even as electrification of reflected in the declining credit growth in recent railway lines and commissioning of broad gauge years. Large NPAs also led to risk aversion on the lines moderated. part of banks as apprehensions of loans turning into NPAs intensified. Furthermore, banks engaged I.5 Inflation picked up during the first four in diversifying their credit portfolios, reducing months of 2016-17 driven by an upsurge in food their exposure from large industries and shifting prices, outweighing favourable base effects. towards the relatively less stressed categories of With the monsoon gaining momentum, however, housing, personal loans and services. inflation reversed into a declining trajectory beginning August 2016, which got accentuated by I.7 As the banking sector struggled with the falling food prices, especially those of vegetables, sizeable volume of NPAs, the Reserve Bank in the wake of demonetisation in November 2016. continued its efforts to fortify the regulatory Rapid disinflation in the food group drove down framework through significant policy interventions headline inflation month after month - barring for improving the banking system’s ability to deal February and March - to a low of 1.5 per cent in with distress. Pursuant to the promulgation of the June 2017. Eventually, the year 2016-17 ended Banking Regulation (Amendment) Ordinance, up with a subdued inflation of 3.6 per cent in Q4, 2017, the Reserve Bank constituted an Internal undershooting the Bank’s projection of 5.0 per Advisory Committee (IAC) to recommend cases cent. that might be considered for reference under the Insolvency and Bankruptcy Code (IBC), 2016. I.6 The asset quality of the banking sector On the recommendation of the IAC, the Reserve continued to be a concern during 2016-17. In Bank directed banks to file proceedings under the the aftermath of the asset quality review (AQR) IBC in respect of 12 accounts comprising about undertaken by the Reserve Bank beginning July 25 per cent of the current gross NPAs of the 2015 and concomitantly with better recognition of banking system. The Reserve Bank also brought non-performing assets (NPAs), the asset quality the Overseeing Committee under its aegis and of banks, particularly the PSBs, deteriorated strengthened it by adding three more members sharply. As of end-March 2017, 12.1 per cent and by expanding its mandate to review the of the advances of the banking system were resolution of cases other than those under the stressed (sum of gross NPAs and restructured Scheme for Sustainable Structuring of Stressed standard advances). A sharp increase in Assets (S4A scheme). Final guidelines on large provisioning for NPAs adversely impacted the exposures framework and enhancing credit supply profitability of banks, with the PSBs as a whole for large borrowers through market mechanism continuing to incur net losses during 2016-17. The were also issued in order to align the exposure capital position of many banks also witnessed norms for Indian banks with the Basel Committee erosion even though the capital to risk-weighted on Banking Supervision (BCBS) standards and to assets ratio (CRAR) for the banking system as a further diversify the lending base of banks. whole marginally increased and continued to be above the regulatory minimum under the Basel I.8 Apart from slowdown in credit, one-off III framework. The large amount of bad loans factors like demonetisation and the redemption of 3ANNUAL REPORT Foreign Currency Non-Resident (Bank) (FCNR(B)) independence of monetary policy formulation. deposits impacted the behaviour of monetary The conduct of monetary policy during 2016- aggregates during the year. Predominantly driven 17 was guided by an inflation objective of 5.0 down by the compression in currency in circulation, per cent for Q4 of 2016-17. With inflation, then reserve money contracted during the year while expected to be below its objective for Q4: 2016- the growth of money supply moderated, despite 17, the MPC in its resolution of February 8, 2017 the surge in deposits. Besides demonetisation, emphasised its commitment to the medium-term intra-year spikes in deposits growth were caused inflation target of 4 per cent within a band of +/- 2 by mobilisation under the Income Declaration per cent while supporting growth. Keeping this in Scheme (IDS) and arrears of the 7th CPC to view, the stance of monetary policy was changed central government employees. The surge in from accommodative to neutral in February 2017. deposits led to excess liquidity in the banking The inflation objective for Q4: 2016-17 was met system which was absorbed through an array with a considerable undershoot on the back of of liquidity management measures, viz., reverse strong disinflation in food items, driven partly by repo under the Liquidity Adjustment Facility demonetisation. (LAF), incremental Cash Reserve Ratio (CRR), I.10 Post demonetisation, the pace of monetary and issuance of Cash Management Bills (CMBs) transmission from the policy repo rate to banks’ under the Market Stabilisation Scheme (MSS). lending rates accelerated significantly, aided Credit growth touched a low in more than two by the increase in the share of low cost current decades on account of factors such as subdued account and saving account (CASA) deposits in state of economic activity, risk aversion of the bank funding. However, the transmission to actual banking sector, capital adequacy requirements, lending rates was uneven across sectors, reflecting loan write-offs, substitution of bank credit by sector-specific credit risk dynamics. Asset quality UDAY bonds, loan repayment by use of specified concerns also appeared to have constrained the bank notes (SBNs) and banks’ pre-occupation banks from passing on the full benefits of rate cuts. with exchange of notes and deposits following Also, the transmission of past cumulative cuts in demonetisation. As the pace of remonetisation the repo rate to lending rates has not propelled a gathered momentum, monetary aggregates revival in credit growth as banks, especially PSBs, started recovering with currency in circulation as appeared to have turned risk-averse and strapped of end-June 2017 reaching around 85 per cent of by large provisioning requirements, as mentioned its pre-demonetisation peak. earlier. As such, private investment activity remained depressed. The recent experience I.9 The institutional architecture for the conduct suggests that monetary easing alone may not of monetary policy underwent a fundamental shift, help in reviving the investment sentiment unless with the formal transition to a flexible inflation structural factors affecting it are addressed. targeting framework and the constitution of a six member monetary policy committee (MPC) for I.11 Notwithstanding a deferment of the target setting the policy rate. These reforms marked of 3.0 per cent gross fiscal deficit to gross domestic the culmination of efforts made since early 2014 product (GFD/GDP) ratio to 2018-19 as announced to strengthen the transparency, credibility and in the Union Budget 2017-18, adherence of the 4ASSESSMENT AND PROSPECTS central government to the fiscal consolidation path account deficit (CAD), robust FDI inflows, build- in 2016-17 enhanced fiscal credibility, thereby up of forex reserves and improvement in other anchoring inflation expectations in the economy. external vulnerability indicators. The trade deficit Fiscal consolidation was achieved during 2016-17 narrowed with stronger exports and subdued through a strategy of revenue augmentation rather imports and offset the impact of lower net receipts than expenditure compression, exemplifying from services exports and remittances, and improvement in the quality of public finances. Tax higher outgo of investment income payments. Net revenues were shored up by collections under capital flows were in excess of CAD, resulting in the IDS, upward revision or imposition of cess, an increase in foreign exchange reserves during additional excise duty and pruning of the negative the year. Following the redemption of FCNR(B) list for services tax. Capital expenditure exceeded deposits by banks without much disruption in the budget estimates even as revenue expenditure the foreign exchange market, India’s external was broadly contained within the budgeted level. debt turned much lower than its level a year ago. Consequently, the gross fiscal deficit remained The reduction in the CAD and external debt, and at the budgeted level of 3.5 per cent. In contrast, build-up of foreign exchange buffers, fortified the state finances deteriorated on account of UDAY resilience of the external sector in 2016-17. scheme and revenue shortfalls despite cutbacks PROSPECTS: 2017-18 in capital outlays. I.14 Global growth is gaining traction in I.12 During 2016-17, the benchmark Indian 2017-18 with the recovery, driven primarily by equity indices, viz., BSE Sensex and Nifty 50 a cyclical upturn in investment, manufacturing increased by 16.9 per cent and 18.5 per cent, and trade. Tailwinds are also expected from the respectively, as against some contraction in the improving performance of emerging markets previous year. The stock market gained on account and developing economies (EMDEs). However, of optimism over the Union Budget proposals, the path and pace of global growth will likely be passage of the GST Bill, favourable monsoon, shaped by structural factors, viz., the inward- expectations of steady progress of economic looking protectionist policies in advanced reforms, better macroeconomic data, higher than economies, low productivity growth and high expected Q3 earnings of companies and huge buying by institutional investors amid positive income inequality impinging on the cyclical cues from global equity markets. The Indian upturn. Amid elevated asset prices, financial equity market had eased temporarily in Q3 owing markets remain vulnerable to systemic factors, to several factors such as the US Presidential including geo-political risks and the pace of election outcome, increasing expectations of normalisation of monetary policy and balance interest rate hike by the US Fed, withdrawal of sheets by major central banks. Consequently, legal tender status of SBNs, and foreign portfolio external risks to the domestic economy remain. investment (FPI) selling, but recovered in the next I.15 Against the backdrop of these external quarter. developments, strengthening external demand I.13 India’s external sector strengthened will likely play a role in supporting the domestic during 2016-17 as reflected in a lower current economy. Favourable domestic conditions are 5ANNUAL REPORT mainly expected to enable a quicker pace of frequency services sector indicators, shows signs overall economic activity during the year. While of improvement thus far, though some sectors growth is again expected to be consumption-led, such as commercial vehicles have been adversely continuing remonetisation should enable a pick- affected by external factors like emission norms. up in discretionary consumer spending, especially Construction and real estate seem to be on the in cash-intensive segments of the economy. path of recovery as reflected in rebounding of new Government spending continues to be robust, residential project launches to pre-demonetisation cushioning the impact of a slowdown in other levels. Furthermore, government initiatives such constituents. Furthermore, reductions in bank as infrastructure status for affordable housing, lending rates post-demonetisation should support improved customer protection and transparency investment demand of stress-free corporates. through the real estate regulatory agencies, On the downside, global political risks remain modified policy norms on real estate investment elevated. Second, rising input costs may prove a trusts to address funding issues, and the provision drag on the profitability of firms, pulling down the for 75 per cent upfront payment of the arbitral overall GVA growth. Third, the twin balance sheet amount by Public Sector Undertakings (PSUs) problem - over-leveraged corporate sector and to builders and contractors, should provide a stressed banking sector - may delay the revival in boost to the housing sector. On the whole, real private investment demand. GVA growth is projected to rise from 6.6 per cent in 2016-17 to 7.3 per cent in 2017-18, with risks I.16 The expected normal monsoon and the resultant replenishment of reservoirs, policy evenly balanced. initiatives of the government such as hike in MSPs I.18 Headline inflation remained around 2.2 and increasing crop insurance coverage are likely per cent in the first quarter of 2017-18. In June to help in boosting crop production and supporting 2017, inflation declined to a historic low of 1.5 per rural demand. The implementation of HRA as per cent, primarily driven by disinflation in food and the recommendation of the 7th CPC for central large favourable base effects. Excluding food government employees from July 2017 and the and fuel, inflation eased on account of subdued possibility of its implementation at the state level price pressures in services, particularly transport should strengthen urban consumption demand. and communication, reflecting fall in global crude An offsetting impact on aggregate demand could, oil prices. With the likely progress of the south- however, emerge if state governments restrain or west monsoon, food prices are likely to remain scale down capital spending, keeping in view the moderate over the ensuing months, consequent objective of fiscal consolidation. upon the dissipation of seasonal price pressures of I.17 Early indicators for 2017-18 based on IIP select vegetables such as tomatoes. Furthermore, and the performance of eight core industries point in view of the bumper production and record to subdued industrial activity. The prospects for the procurement of pulses during 2016-17, inflation manufacturing sector remain uncertain in the short in pulses – a major driver of food inflation during term in view of the implementation of GST. The 2015-16 and early 2016-17 – is expected to remain services sector is, however, expected to perform muted. Notwithstanding these developments, better during the year. The majority of the high some uptick in overall food inflation could be 6ASSESSMENT AND PROSPECTS expected as unfavourable base effects set in from moderated but remain high. There appears to be August 2017. In contrast, the implementation of a structural break in the volume and value of retail the GST is not expected to have a material impact electronic payments, coinciding with the onset of on headline inflation in the near term. However, demonetisation and the special measures put in the announcements of farm loan waivers and the place to promote digital payments. Going forward, implementation of the 7th CPC with the likelihood the Reserve Bank would continue its efforts of adoption at the state level have implications in towards migrating to a less-cash economy while terms of fiscal slippages with upside pressures to ensuring safety and enhancing the efficiency of the future trajectory of headline inflation. On the the payments system. whole, headline inflation is forecast in the range I.21 In the fiscal sphere, while the gains to of 2.0-3.5 per cent in the first half of 2017-18 and growth, efficiency and tax buoyancy over the 3.5-4.5 per cent in the second half. medium term from the recent implementation of I.19 The continuing increase in currency in GST are unequivocally recognised, near-term circulation on the back of remonetisation is likely uncertainties with regard to revenue mobilisation to reduce the magnitude of the liquidity overhang therefrom – which could impact fiscal consolidation during the course of the year. In this scenario, the at both centre and state levels – cannot be ruled Reserve Bank will continue to manage liquidity to out as this fundamental reform gains pan-India ensure that the operating target – weighted average traction. Additionally, state government finances call money rate (WACR) – remains aligned to the are likely to face several challenges during 2017- policy repo rate. Continuing government initiative 18. First, the announcement of farm loan waivers towards a full implementation of the formula for by four state governments (so far in 2017-18) adjustment in the interest rates on small savings and the potential announcement by several schemes to changes in yields on government others pose a major fiscal risk over the medium securities of corresponding maturities will further term. Besides impacting credit discipline, vitiating strengthen the transmission of policy rates to credit culture and dis-incentivising borrowers from bank lending rates, which will help increase credit repayment, they may have a destabilising impact demand. on yields of state development loans (SDL), I.20 Notwithstanding the rapid remonetisation thereby posing a higher interest burden for the process, currency demand appears to have states in future. Concomitantly, ratchet effects attained a new normal (currently around 87 per can firm up the general level of interest rates cent of the pre-demonetisation peak) in view and crowd out private borrowers. Second, the of the sharp increase in electronic modes of committed liabilities of states may increase in case payments since demonetisation. Indeed, year- they decide to implement the recommendations of on-year growth rates of the total volume of retail their own pay commissions in 2017-18. Third, the electronic payments, that had averaged around existing high level of state government guarantees 37 per cent during April to October 2016, shot up constitutes a major fiscal risk. Fourth, the interest to nearly 70 per cent in November and then further liabilities of states that have participated in financial to as much as 123 per cent in December 2016; restructuring of DISCOMs (through UDAY) would in subsequent months, the growth rates have increase in the years ahead. Fifth, many states 7ANNUAL REPORT (particularly the fiscally prudent ones), which were and simplification of procedures in recent years. earlier refraining from seeking additional funds Foreign portfolio flows, on the other hand, remain through market borrowing, may now borrow as per vulnerable to bouts of global risk aversion. the flexibility provided by the Fourteenth Finance However, an optimistic growth outlook, pro-reform Commission. measures and augmented level of reserves are expected to mitigate the negative spillovers of I.22 Thus, even as the central government global market disruptions. makes significant efforts toward fiscal consolidation, the higher debt burden of the states I.24 In the banking arena, the actions of the could push up general government debt. Keeping central government authorising the Reserve Bank in view the recommendation of the FRBM Review to direct banking companies to resolve specific Committee (Chairman: Shri N. K. Singh) that a stressed assets by initiating insolvency resolution sustainable debt path – consisting of a debt-GDP process are expected to significantly improve ratio of 40 per cent for the central government and the resolution of stressed assets, particularly in 20 per cent for state governments by 2022-23 – consortium or multiple banking arrangements. must be the principal macro-economic anchor of The corporate insolvency resolution process, fiscal policy, the states too will need to tread the liquidation and cross-border insolvency under the fiscal path with caution to reach this benchmark. IBC, 2016 and the establishment of the Insolvency and Bankruptcy Board of India (IBBI) will help in I.23 In the external sector, a slump in export reorganisation and resolution of corporates and growth and an increase in imports widened the individuals in a time-bound manner. The proposal trade deficit to US$ 40 billion in Q1 of 2017-18, of the Union Budget 2017-18 to introduce a bill the highest since Q2 of 2013-14. The evolution relating to resolution of financial firms is expected to of terms of trade is likely to be largely shaped improve the resilience and stability of the financial by the outlook for oil production in the US and system through speedy and efficient resolution of compliance with the extended production cuts financial firms in distress, and also help address announced by the Organisation of the Petroleum the moral hazard problem associated with explicit Exporting Countries (OPEC). Even though the and implicit government guarantees. outlook among major trade partner economies entails a modest expansion, increasing recourse I.25 The prescription of stringent penalties to protectionist measures in advanced economies by the Reserve Bank for breaching the risk could impose a challenging business environment thresholds under the revised Prompt Corrective for exports. The global economic environment Action (PCA) framework - restrictions on dividend is prone to other downside risks such as high payments, remittance of profits and branch policy uncertainty in advanced economies and expansion; higher provisions; and restriction on the possibility of financial market disruptions due management compensation are expected to help to faster normalisation of monetary policy by restore the health of banks currently under PCA. advanced economies. Nevertheless, the CAD is The Reserve Bank’s instructions to banks to put expected to be comfortably financed by stable in place a Board-approved policy for making capital inflows as FDI may remain strong with provisions for standard assets at rates higher than further progress in the ease of doing business the regulatory minimum, based on evaluation of 8ASSESSMENT AND PROSPECTS risk and stress in various sectors, will help control that is accessible to all stakeholders – that would build-up of fresh stressed assets in a pre-emptive help in enhancing efficiency of the credit market, manner. The fine-tuning of macro-prudential increase financial inclusion, improve ease of measures in the form of reduction in risk weights doing business, and help control delinquencies, and provisioning on standard assets on certain as corroborated by international evidence. To categories of individual housing loans will provide begin with, by incorporating unique identifiers a boost to the flow of credit to the housing sector. for the borrowers (Aadhaar for individuals and Corporate Identification Number (CIN No.) for I.26 In pursuance of the regulatory stance in companies), the Reserve Bank’s Basic Statistical 2016-17, the Reserve Bank will continue to monitor Returns (BSR1) data set could be quickly and respond to banks’ asset quality issues in 2017- transformed into a PCR covering customers of 18 as well. Implementation of Indian Accounting scheduled commercial banks, which could then Standard (Ind-AS) and the Basel III framework will be expanded to cover other financial institutions remain the areas of focus during 2017-18. The in India. In this regard, a High-level Task Force revised framework for securitisation, the minimum comprising experts as well as major stakeholders capital requirement for market risk, guidelines on is being constituted to, inter alia, review the net stable funding ratio (NSFR) and the guidelines current availability of information on credit in India on corporate governance as per Basel standards and suggest a roadmap, including priority areas, will be considered during the course of the year. The revised regulatory framework for the All India for developing a transparent, comprehensive and Financial Institutions (AIFIs), including extension near-real-time PCR for India. of various elements of Basel III standards I.28 Infrastructural development of the relevant to these institutions, will also be taken economy would continue to play a critical role up. The banking sector has undergone significant in shaping growth prospects, particularly over transformation by digital innovations in the past the medium to long run. Several initiatives – few years and the Reserve Bank will work on increased public infrastructure investment; framing an appropriate response to the regulatory innovative ways of infrastructure financing; the challenges posed by developments in FinTech. fast-track awarding and construction of national Taking note of changes in the global and financial highway projects; effective streamlining of land sector environment, the Reserve Bank formalised acquisition issues; Regional Connectivity Scheme a framework for taking enforcement action against (RCS) to connect the unserved and under- banks for non-compliance with guidelines and served airports; the proposal to achieve 100 per instructions issued by it. Accordingly, a separate cent rural electrification by May 2018; providing Enforcement Department has been created within infrastructure status to affordable housing; and a the Reserve Bank in April 2017. new Metro Rail Policy and Metro Rail Act – are I.27 Going forward, an important initiative in the pipeline which would provide an enabling under active consideration of the Reserve environment for growth path in the years to come. Bank is the setting up of a transparent and The recent policy measures for easing of norms comprehensive public credit register (PCR) – an for state PSUs to directly borrow from bilateral extensive database of credit information for India agencies, launching of Infrastructure Investment 9ANNUAL REPORT Trust and full-fledged rolling out of National Mahatma Gandhi National Rural Employment Investment and Infrastructure Fund are also Guarantee Act) and the Pradhan Mantri MUDRA expected to address the infrastructure financing Loan Scheme are going to be the most important constraints significantly. In the power sector, factors. As labour regulations get further simplified, higher capacity addition in renewables may pose more jobs are expected to be included and multiple challenges with regard to the integration created in the formal sector. On labour reforms, of renewables into the electricity grid and the the codification of labour laws into four codes, viz., possible dampening effect on already worsened wages, industrial relations, social security and thermal Plant Load Factor (PLF). However, the welfare, and safety and working conditions, will new coal linkage policy and the impetus for more help avoid multiplicity of labour laws. At the same nuclear power plants would engender a positive time, the job loss threat, particularly in Information outlook for the sector. Technology and Information Technology Enabled I.29 Finally, in the area of employment Services (IT and ITES) sector emanating from generation, spending on priority sectors (roads, the emerging global protectionism cannot be railways, health and housing), MGNREGA (i.e., overlooked. 10ECONOMIC REVIEW II ECONOMIC REVIEW In the midst of global slowdown accentuated by the vicissitudes of financial markets and the transient impact of demonetisation, the Indian economy turned out resilient, marked by both internal and external stability. While economic growth moderated in 2016-17, there were visible signs of improvement in macroeconomic fundamentals – low inflation, and modest current account deficit and fiscal deficit. Going forward, even as the recent launch of the Goods and Services Tax (GST) gains traction across the country, strengthening fiscal consolidation, particularly at the sub-national level; reviving bank credit, and bringing investment back on rails, remain a challenge. II.1 The Real Economy 6.6 per cent. GVA in mining and quarrying activities also decelerated sharply. However, mining output II.1.1 Against the backdrop of activity and expanded as the narrative on aggregate supply in trade slowing across advanced and emerging this section will show. economies, firming commodity prices and bouts of volatility interrupting generally rallying II.1.2 In contrast, agriculture and allied activities financial markets, the Indian economy posted a shrugged off the fetters of two consecutive resilient performance in 2016-17, underpinned by monsoon failures and rebounded on the back macroeconomic stability. The provisional estimates of all-time highs in the production of foodgrains, of national accounts released by the Central fruits and vegetables. A key driver turned out to be Statistics Office (CSO) in May 2017 reveal that pulses, profiled in Box II.2. Manufacturing slowed real Gross Value Added (GVA) growth moderated in relation to the preceding year but held up in 2016-17 from a year ago, mainly located in the above trend. It was sustained by healthy revenues services sector (Chart II.1a). Public administration, of manufacturing corporations, alongside an defence and other services (PADO) cushioned the improvement in the output of the unorganised slowdown, adding 2.2 percentage points to the sector. Electricity generation and the supply of growth of real GVA in the services sector and 1.4 other utilities were boosted by the inclusion of percentage points to the growth of overall GVA of renewable sources of energy in the new index 11ANNUAL REPORT of industrial production (IIP) as discussed in para II.1.16. II.1.3 Aggregate demand, which is featured in the immediately following sub-section, suffered from a sharp slowdown in gross capital formation as entrepreneurial energies flagged and a sluggish appetite for new investment took its toll on business confidence. As a consequence, gross fixed capital formation (GFCF) contributed barely 0.7 percentage point to the real GDP growth of 7.1 per cent in 2016-17 despite accounting for around one-third of real GDP (Chart II.1b). Net exports contributed 0.4 percentage point, helped by a turnaround in merchandise export performance after contraction in the previous year. The rest of the real GDP growth was consumption-driven mirrored in proximate coincident indicators - both private and public. In fact, absent the – steel consumption and cement production implementation of the 7th Central Pay Commission (Chart II.3). This development is worrisome and one-rank-one-pension (OROP) for defence in view of the secular-like retreat of the rate of services embedded in government consumption, gross domestic investment in the 2011-12 based real GDP growth would have been lower by 2 GDP series [incorporating the new indices of percentage points. Private consumption spending industrial production (IIP) and wholesale prices alone contributed two-thirds of the growth of (WPI)] to 29.5 per cent of GDP in 2016-17. aggregate demand. In this context, Box II.1 addresses issues around the sustainability of consumption-led growth and its unintended consequences. Aggregate Demand II.1.4 The slackening of aggregate demand set in from the first quarter of the year. This is confirmed by the loss of momentum showing up in three-quarter moving averages of seasonally adjusted annualised growth rates (MA-SAARs) (Chart II.2). II.1.5 Underlying the loss of momentum, GFCF began to lose height from Q2 and sank into contraction in Q4 of 2016-17. This was 12ECONOMIC REVIEW production. New investment intentions contracted in 2016-17 with respect to both government and private sectors, with the cost of private projects remaining elevated (Chart II.5a). Plant load factors in thermal power plants underwent a sustained decline, largely reflecting weakness in demand from financially stressed distribution companies. II.1.7 The resilience of some infrastructure sectors in the face of this downturn is noteworthy and brightens the outlook. First, there was a decline in cost and time overruns in central sector infrastructure projects (`1.5 billion and above). Second, awarding and construction of highway projects in the road sector reached an all-time high even as daily additions to the roads constructed II.1.6 While the falling away of fixed investment touched a peak of 22.6 km during 2016-17 from mainly occurred in household dwellings, other 16.6 km last year. Third, stalled projects declined buildings and structures (Chart II.4), the investment by 40 per cent in terms of value and 37 per cent climate remained sombre. Fixed investment in terms of number (Chart II.5b). Fourth, capacity by other agents – government and private non- addition in major ports was the highest ever in a financial corporations – increased, but marginally, single year and 12 major ports recorded higher to provide an offset. The Reserve Bank’s survey growth in cargo traffic as well as efficiency gains of order books, inventories and capacity utilisation measured in turnaround time (3.43 days in 2016- indicated persisting slack in capacity utilisation 17 as against 3.64 days in the previous year), (seasonally adjusted) in manufacturing in 2016- and average output per ship berth day (14,576 17. The capacity utilisation was observed to tonnes in 2016-17 as against 13,748 tonnes in the co-move closely with the de-trended industrial previous year). 13ANNUAL REPORT II.1.8 In the power sector, 27 states/UTs joined fixed investment. Government final consumption, the Ujwal DISCOM Assurance Yojana (UDAY) to boosted by revisions in salaries and pensions deleverage and revive distribution companies, referred to earlier, provided nearly a third of this and issued bonds worth `2.32 trillion (86.3 per support. Private consumption expenditure also cent of the target of `2.69 trillion). In the civil benefited from rising real incomes – from the aviation sector, a Regional Connectivity Scheme sharp fall in inflation and crowding-in income (RCS) was launched in October 2016. In the effects of government spending – and raised its automobile sector, the government provided contribution to real GDP growth from 57 per cent incentives for demand and manufacture of in H1 of 2016-17 to about 79 per cent in H2. The electric/hybrid vehicles. In matters of government strength of private consumption was reflected in procurements, a new policy decision has been the acceleration of agricultural GVA as well as the taken in favour of domestically manufactured sizable increase in telephone connections, indirect goods. tax collections and the index of manufacturing II.1.9 Consumption expenditure set a floor constituting a part of industrial production. to the slowdown in real GDP growth in 2016- Consumption as a driver of growth has been 17 and actually accelerated in the second half associated with low growth multipliers and ‘half- of the year when the impact of demonetisation life’, with some evidence that side effects such as was the most intense. This proved fortuitous as rising household indebtedness could turn out to it coincided with the deepening retrenchment in be growth-retarding in the medium-term (Box II.1). Box II.1 Is Consumption-Led Expansion Sustainable?: A Case Study of India In recent years, GDP growth in India has been consumption- and Kohlscheen 2017). Consumption-led growth can led, more so during 2013-14 and 2016-17 (Chart 1a). In such arguably lead to a slackening of future growth if it entails a phase of growth, consumption grows faster than GDP, growing imbalances due to limits to capacity creation, and either in nominal or real terms, so that the consumption- rising debt burdens, particularly for households. Evidently, to-GDP ratio increases over time or alternatively, real while borrowings helped smoothen private consumption consumption growth exceeds real GDP growth (Kharroubi in the short-run after the recession of 2001-02, excessive (Contd....) 14ECONOMIC REVIEW leverage led to the debt-servicing burden which, in turn, In the next step, the impact of growth in household credit debilitated consumption and overall growth during 2007 to to GDP ratio and growth in the debt service ratio of the 2009 in the U.S (Dynan 2012). household sector, apart from the number of episodes of consumption-led growth in the preceding three years, on Private consumption contributes more than half of India’s subsequent real consumption growth was estimated. GDP growth and is less volatile than other sources of expenditure. At a high growth level (above 8 per cent), the + + + + + + = growth process was observed to be non-consumption-led where, 1,2,..., (2) (Chart1b)1. Given that India has a large domestic consumer C is real consumption growth, and HHC is growth in market, consumption may be the inevitable means of t economic growth. However, whether consumption-led household credit-to-GDP, and DSRHH is growth in the debt growth is beneficial for economic growth or acts as a drag service ratio of household in year t. remains to be assessed, particularly in view of the fact tha t Consumption-led growth was found to have a negative rates of growth in investment and net exports have not been impact on GVA growth one-year ahead by 1.39 percentage very impressive in recent years. points at 5 per cent significance level. The impact of the Drawing on Kharroubi and Kohlscheen (2017), two debt service ratio was significant neither numerically (-0.1 issues were examined for the period 1993-94 to 2014-15: percentage point) nor statistically, indicating the muted (i) whether consumption-led growth was associated with a role of formal finance in driving consumption growth. subsequent slowdown in real GVA growth; and (ii) whether Consumption-led growth did have, albeit not statistically the debt burden of the household sector was a mechanism significant, a negative impact on consumption growth one- thereof. Growth in private (corporate plus household) credit year ahead. These results corroborate the imperative for a to GDP ratio and growth in combined debt service ratio2 judicious balance in the growth drivers for non-disruptive (interest payment to GDP ratio) for corporate and household and sustainable long-term growth. sectors were included as control variables: References: where, 1,2,..., (1) 1. Dynan, K. (2012), “Is a Household Debt Overhang Holding Back Consumption?”, Brookings Papers on Y is real GVA growth, CL is a variable counting the number Economic Activity. of years of consumption-led growth between year t-3 and t, PC is growth in private credit-to-GDP, and DSR is growth in 2. Kharroubi, E. and E. Kohlscheen (2017), “Consumption- the debt service ratio in year t. led Expansions”, BIS Quarterly Review, March. II.1.10 In terms of financing, household financial front, households’ physical assets declined savings - the most important source of funds for sharply to 10.7 per cent in 2015-16, contributing investment in the economy - picked up to 7.8 to the overall decline in fixed capital formation. The per cent of Gross National Disposable Income net inflow of resources from abroad to supplement (GNDI) in 2015-16 on the back of improvement in domestic saving remained muted, mirrored in real income (Table II.1). Savings of private non- modest current account deficits as presented financial corporations increased to 10.8 per cent in Section II.6. As per preliminary estimates, of GNDI in 2015-16. At the same time, general household financial savings rate increased further government’s dissaving declined to 1.0 per cent to 8.1 per cent of GNDI in 2016-17 on account in 2015-16 (Appendix Table 3). On the investment of an increase in households’ assets in bank 1 In case consumption-led growth is defi ned in terms of weighted contribution to overall growth, almost all such episodes in India could be characterised as consumption-led, given the large share of private consumption in GDP. 2 Debt service ratio is calculated by applying weighted average lending rate to outstanding credit and then dividing by GDP. 15ANNUAL REPORT Table II.1: Financial Saving of the Household Sector (Per cent of GNDI) Item 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17* 1 2 3 4 5 6 7 A. Gross financial saving 10.4 10.5 10.4 10.1 10.9 11.8 Of which: 1. Currency 1.2 1.1 0.9 1.1 1.4 -2.1 2. Deposits 6.0 6.0 5.8 5.0 4.8 7.3 3. Shares and debentures 0.2 0.2 0.2 0.2 0.3 1.2 4. Claims on government -0.2 -0.1 0.2 0.0 0.5 0.5 5. Insurance funds 2.2 1.8 1.8 2.4 1.9 2.9 6. Provident and pension funds 1.1 1.5 1.5 1.5 2.0 1.9 B. Financial liabilities 3.2 3.2 3.1 2.9 3.1 3.7 C. Net financial saving (A-B) 7.2 7.2 7.2 7.2 7.8 8.1 *: As per the latest estimates of the Reserve Bank; GNDI: Gross national disposable income. Note: Figures may not add up to total due to rounding off. Source: CSO. deposits, life insurance and mutual funds, even pronounced in H2. MA-SAAR reveals this sharp though currency with the public contracted during loss of momentum (Chart II.2). the year. Higher financial savings were mainly II.1.12 The quarterly pattern of GVA growth supported by lower inflationary scenario as also tracked that of the services sector in which, too, portfolio adjustment from physical to financial the deceleration was stark in H2 and co-moving assets by households. At the same time, there was in all constituents, barring PADO. Although not an increase in financial liabilities of the household as well synchronised, the evolution of the GVA sector. of industry also dragged during H2, essentially in Aggregate Supply manufacturing (Table II.2). II.1.11 On the supply side, GVA at basic prices – II.1.13 GVA in agriculture and allied activities GDP stripped of net product taxes – also slowed rose to recent peaks with every harvest arrival quarter after quarter in 2016-17, the slump more during the year and cushioned the impact of the Table II.2: Real GVA Growth (2011-12 Prices) (Per cent) Item 2015-16 2016-17 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1 2 3 4 5 6 7 8 9 I. Agriculture, forestry and fi shing 2.4 2.3 -2.1 1.5 2.5 4.1 6.9 5.2 II. Industry 7.7 9.2 12.0 11.9 9.0 6.5 7.2 5.5 i. Mining and quarrying 8.3 12.2 11.7 10.5 -0.9 -1.3 1.9 6.4 ii. Manufacturing 8.2 9.3 13.2 12.7 10.7 7.7 8.2 5.3 iii. Electricity, gas, water supply and other utility services 2.8 5.7 4.0 7.6 10.3 5.1 7.4 6.1 III. Services 8.9 9.0 9.0 9.4 8.2 7.4 6.4 5.7 i. Construction 6.2 1.6 6.0 6.0 3.1 4.3 3.4 -3.7 ii. Trade, hotels, transport, communication and services related to broadcasting 10.3 8.3 10.1 12.8 8.9 7.7 8.3 6.5 iii. Financial, real estate and professional services 10.1 13.0 10.5 9.0 9.4 7.0 3.3 2.2 iv. Public administration, defence and other services 6.2 7.2 7.5 6.7 8.6 9.5 10.3 17.0 IV. GVA at basic prices 7.6 8.2 7.3 8.7 7.6 6.8 6.7 5.6 Source: CSO. 16ECONOMIC REVIEW downturn in other sectors. This strong revival occurred on the back of normal precipitation [97 per cent of the Long Period Average (LPA)] in the south-west monsoon (SWM). Out of 36 sub-divisions, 27 sub-divisions received normal/ excess rainfall. The initial delay in the monsoon’s onset was more than compensated by recovery in July-August 2016 and a belated departure. This helped maintain soil moisture and replenished reservoirs. Consequently, even though the north- east monsoon (NEM) ended at 45 per cent below LPA, the reservoir position remained above the 10-year average. At the end of December 2016, the water level in 91 major reservoirs across the country stood at 126 per cent of the live storage a year ago. Rabi sowing turned out to be higher by of horticulture increased by 3.1 per cent to 295.2 5.7 per cent than in the previous year, aided by million tonnes, another record. higher MSPs (especially for pulses) and availability II.1.15 For 2017-18, the Ministry of Agriculture set of key agricultural inputs. higher targets of production for foodgrains (both II.1.14 The fourth advance estimates of crops cereals and pulses) as well as commercial crops for 2016-17 have placed the production of (sugarcane, oilseeds and cotton). Early indications foodgrains at 275.7 million tonnes, which is 9.6 based on the progress of kharif sowing, and per cent higher than in the previous year and a arrival of monsoon augur well for achieving the historical record. Within foodgrains, rice, wheat, production targets. Region-wise, the distribution of pulses and coarse cereals recorded their highest rainfall during 2017-18 so far has, however, been ever production levels. Besides favourable agro- somewhat uneven, with the east and north-east climatic conditions, multi-pronged initiatives such region receiving rainfall above LPA while the south as incentives for crop diversification, issuance of peninsula (particularly Kerala and Karnataka) and soil health cards, focus on integrated irrigation the central India (particularly Madhya Pradesh) schemes, a simplified crop insurance scheme and experiencing deficiency (Chart II.7). improved marketing facilities created an enabling II.1.16 The deceleration in the growth of GVA in environment. The record production spurred industry in 2016-17 in relation to the preceding an extensive drive to procure rice and wheat to year is not reflected in the new series of IIP. The replenish depleted stocks (Chart II.6). The all-time CSO released a new series on the IIP in mid-May high production of pulses at 22.95 million tonnes, 2017, changing (a) the constituent items to better combined with a surge in imports of as much as represent the evolving industrial structure; and (b) 6.6 million tonnes, facilitated the build-up of buffer the base year to 2011-12 from 2004-05, thereby stock during the year (Box II.2). The production aligning it with national accounts and the new 17ANNUAL REPORT Box II.2 Dynamics of Pulses Production In India, which is the largest producer, consumer and importer of pulses - a major plant source of protein - domestic demand follows the celebrated Bennett’s Law: the pattern of consumption shifts in favour of nutritious food as incomes rise. Low and near stagnant productivity, and excessive reliance on the monsoon are widely identifi ed as the biggest impediments to augmenting domestic output (Chart 1.a & b). As a fallout, 15-20 per cent of the domestic requirement of pulses was made up by imports through the last 15 years (Chart 1.b). Noting that the production of pulses seems to have linkages with the price support system, the role of prices of pulses as a determinant of production is examined in a dynamic panel generalised method of moments (GMM) framework, using data of 28 states for 2006-16: J-Statistics= 98.69; prob(J-stats)= 0.16 Arellano-Bond test for AR(1) in fi rst differences: z = -5.08, Pr > z = 0.00 Arellano-Bond test for AR(2) in fi rst differences: z = 1.04, Pr > z = 0.28 *: Signifi cant at 1% level; **: Signifi cant at 10% level Instrumental variables: log(P.MSP); log(P.MSP) ;log(AI); Log(SWMA); log(P.CPI) ; Log(SWMA) ; log(P.import) ; log(S.MSP) 0 –1 0 0 –1 –1 wt 0 Variables defi nition (sub-script refers to the year): log(P.Prod) : Pulses production; log(P.Area) : Area under pulses; log(P.CPI) : Pulses – CPI x x x log(P.Yield) : Pulses yield; log(P.MSP) : Production weighted pulses minimum support price; log(AI) : WPI based x x x agricultural input cost index; Log(SWMA) : South west monsoon rainfall in mm; log(S.MSP) : Soyabean MSP; x x log(P.import) : Pulses import distributed among states using consumption basket weight as per NSS 72nd round wt (July, 2014 – June, 2015) of household expenditure survey. The results indicate that much of the increase in production respectively, were statistically signifi cant as instrumental during the period was due to increased acreage though the variables. Prices and production of pulses share a positive impact of own lag was found to be insignifi cant statistically. relationship of statistical signifi cance. The instrumental Yield has a relatively subdued effect, albeit signifi cant and variables, viz., CPI with a one year lag, imports and input positive in sign, possibly refl ecting its low and stagnant costs that have a bearing on current prices, also turned level. Rainfall and MSP up to a year lag, that directly affect out signifi cant. The signifi cance of soyabean’s MSP – a acreage, which also proxy for absence of adequate pulses competing crop for pulses - as an instrumental variable irrigation (only 19.0 per cent of net sown area irrigated) and possibly indicates a shift in acreage across crops. the prospect of remunerations (as MSP sets fl oor price), (Contd....) 18ECONOMIC REVIEW Prices of pulses follow a cycle. Years of bumper production operations as also providing vent in the form of export and are preceded by monsoon failure, high pulses infl ation, and futures trading to liquidate excess stocks, may be necessary their imports. Subsequently, farmers are incentivised by safeguards against prices crashing during harvests so that remunerative global and/or domestic prices coupled with production is sustained. higher than usual hikes in MSPs to bring in more areas References: under cultivation. Thereafter, prices of pulses generally 1. Government of India (2000), “Expert Committee Report crash when they arrive in the markets, which acts as a on Pulses” (Chairman: Dr. R.S. Paroda). dis-incentive for production in the next season and causes pulses prices to rise again, akin to the Cobweb Model or Hog 2. _______ (2012), “Report of Expert Group on Pulses” Cycle (alternatively called pork cycle or cattle cycle) based (Chairman: Dr. Y. K. Alagh), DAC. on production lags and adaptive expectations (Rosen, et al. 3. _______ (2016), “Incentivising Pulses Production 1994). The cycle has traversed the full distance from peak Through Minimum Support Price (MSP) and Related to peak, rendering pulses cultivation six times riskier than Policies” (Chairman: Dr. Arvind Subramanian), paddy (GoI 2016). September. Raising pulses production through integrated management 4. Rosen, S., K. Murphy and J. Scheinkman (1994), “Cattle (seeds, fertilisers, insecticides and pesticides) to improve Cycles”, Journal of Political Economy, 102 (3): 468-492. yields, and weather proofi ng by expanding irrigation 5. The National Academy of Agricultural Sciences (2016), facilities, should be the Government’s strategy for the “Towards Pulses Self-Suffi ciency in India”. medium to long-term. In the interregnum, however, targeted use of remunerative MSPs – announced on time without 6. Thangzason, S., D. K. Raut, Pallavi and D. P. Rath, “What delay in payment, coupled with predictable procurement has Gone Wrong with Pulses?”, mimeo. WPI. In terms of the new IIP, industrial production II.1.17 The new IIP has expanded the coverage of accelerated in 2016-17 across sectors. The wedge manufacturing sector from 620 items in 397 groups between industrial GVA and IIP mainly reflects the to 809 items in 405 groups. With the increase impact of falling input costs. in item groups reporting in value terms from 53 to 109 (mostly in the capital goods category), capital goods now include ‘work-in-progress’ and thus account for longer production cycles and minimise the volatility resulting from bulk reporting on delivery. Other major changes in the manufacturing index include higher weightage to petroleum products (from 6.7 per cent to 11.8 per cent) to account for subsidies and inclusion of a new sub-group “Manufacture of pharmaceuticals, medicinal chemical and botanical products”. The new index excludes unorganised manufacturing while deciding on weights. Electricity index now captures electricity generation out of renewable sources while the number of minerals have been reduced from 62 to 29 in the mining index, taking into account the reclassification done by the 19ANNUAL REPORT Mineral Conservation and Development Rules, 2016. A new use-based category, ‘infrastructure/ construction goods’ has been introduced while ‘basic goods’ have been re-christened as ‘primary goods’. The weights of primary goods and consumer non-durables have declined on transfer of items to the infrastructure/construction category. The weight of manufacturing has increased while that of electricity has reduced in the overall index. A standing Technical Review Committee to be chaired by the Secretary, Ministry of Statistics and Programme Implementation (MoSPI), has been set up for an on-going revision of IIP. Based on the new index, industrial production recorded a compound annual growth of 3.8 per cent during 2012-13 through 2016-17 as against 1.2 per cent in the old index. In 2016-17, IIP increased by 4.4 manufacturing sector also gained speed over the per cent as against a contraction of 0.1 per cent year, particularly with respect to pharmaceuticals, under the old index (Chart II.8). motor vehicles, transport equipment, basic II.1.18 Structural bottlenecks became manifest metals, petroleum products, wearing apparel, and in a persistent sluggishness in the production machinery and equipment. Despite a moderation of crude oil and natural gas sub-sectors; yet, in in the dominant thermal segment, the electricity spite of this drag, mining output accelerated, sector managed a slight uptick on the back of which was led by coal and refinery products. The renewable energy sources (Table II.3). Efforts are Table II.3: Index of Industrial Production (Base 2011-12) (Per cent) Industry Group Weight in IIP Growth Rate 2012-13 2013-14 2014-15 2015-16 2016-17 Apr-June Apr-June 2016-17 2017-18 1 2 3 4 5 6 7 8 9 Overall IIP 100.0 3.3 3.3 4.1 3.4 4.4 7.1 2.0 Mining 14.4 -5.3 -0.2 -1.3 4.3 5.3 7.5 1.3 Manufacturing 77.6 4.8 3.6 3.8 3.0 4.1 6.6 1.8 Electricity 8.0 4.0 6.0 14.8 5.7 5.8 10.0 5.3 Use-Based Primary goods 34.0 0.5 2.3 3.7 5.0 4.9 8.3 2.2 Capital goods 8.2 0.4 -3.6 -0.8 2.1 3.5 12.9 -4.0 Intermediate goods 17.2 5.1 4.5 6.2 1.6 3.3 3.4 1.4 Infrastructure/construction goods 12.3 5.4 5.7 5.0 2.8 3.9 5.0 1.9 Consumer durables 12.8 5.0 5.7 4.0 4.3 1.9 7.8 -0.9 Consumer non-durables 15.3 6.1 3.7 4.1 2.7 7.6 7.2 7.7 Source: CSO. 20ECONOMIC REVIEW underway to financially turn around the electricity concrete blocks, however, remained in contraction distribution companies (DISCOMs) through mode for most part of 2016-17 along with other UDAY, as discussed earlier. Besides, a number construction materials like glassware and cement of policy initiatives were taken by the government clinkers. The acceleration in intermediate goods to strengthen the electricity sector such as a new was driven mostly by increased production of coal linkage policy, push for more nuclear power chemicals and chemical products, polymers and plants, state specific plans on 24x7 power for all auto components. The production of consumer and the Integrated Power Development Scheme durables was in contraction mode for the last four (IPDS) for strengthening sub-transmission and months of the year, and April-June 2017 too was distribution infrastructure. During the year, the gap dragged down by components like textiles, apparel, between the average cost of supply and revenue leather, wood and paper products. Production of realised by DISCOMs declined by 11 paise to 45 consumer non-durables, in contrast, grew steadily paise per kwh through cost realisation programmes through the year and in April-June this year, and tariff hikes. With lower demand for power and driven by the phenomenal growth of ‘digestive declining solar tariff, power purchase agreements enzymes and antacids’; excluding this item group, (PPAs) have turned costly for DISCOMs and the the production of consumer non-durables would Ultra Mega Thermal Power Projects (UMPP) have have been in contraction. The sub-components of become unattractive. In the process, the DISCOMs consumer non-durables like food and beverages have taken advantage of the prevailing lower spot remained in contraction mode for most part of H2: rates. 2016-17. II.1.19 All use-based segments, with the exception II.1.20 GVA in services decelerated in 2016-17 of primary goods (which decelerated marginally, across sectors, barring PADO. With respect to dragged by a decline in production of petrol, financial, real estate and professional services, the kerosene, urea and hard coke despite acceleration slowdown was the sharpest, accentuated by the in mining and electricity) and consumer durables, impact of demonetisation on the cash-intensive expanded at an accelerated pace during the year. real estate sector. Reflecting the slackening of The pick-up in capital goods output in 2016-17 construction activity, steel consumption and needs to be monitored closely as it has occurred cement production decelerated/contracted from on the back of a favourable base effect that, their levels a year ago. Some lead/coincident however, could not sustain it in April-June 2017. indicators of services activities, however, showed An important component of capital goods, namely, improvement during 2016-17. For instance, electrical equipment had been in contraction mode transportation activity – railway freight, port cargo since October 2016 but machinery and equipment and civil aviation – accelerated during 2016-17. accelerated in 2016-17. In the infrastructure/ Communication activity was boosted by increased construction goods segment, robust growth in competition in the sector and adoption of wireless steel products - HR coils, sheets, bars and rods broadband services with the entry of Reliance of mild steel - driven both by domestic demand Jio. Notwithstanding the transitory impact of and exports, offset the slowdown in cement demonetisation, automobile sales accelerated, production. The newly introduced pre-fabricated reflecting up-tick in consumer sentiment, new 21ANNUAL REPORT launches and discount offers. Foreign tourist employment survey, which covers units with 10 or arrivals grew robustly, providing a boost to trade, more persons in eight select sectors, there has hotels and restaurants. However, slowdown been a net addition of 0.23 million jobs during in construction and financial, real estate and Q2-Q4, 2016-17, mainly in manufacturing and professional services sector hurt services sector education, taking the total employment to 20.75 growth in Q4: 2016-17. million at end-March 2017. II.1.21 The Reserve Bank’s service sector II.1.23 Going forward, consumption demand is composite index (SSCI), which extracts and likely to remain robust on the back of expected combines information gleaned from high frequency normal south-west monsoon and possible indicators and statistically leads GVA growth in the implementation of the 7th CPC at the state level, services sector, is showing early signs of recovery, apart from the gathering pace of remonetisation. led by construction and trade – an upbeat steel Further, the thrust of the Union Budget on consumption in Q1: 2017-18 that is likely to be capital expenditure, housing, MSME and farm sustained by favourable base effects in the next sector coupled with other reforms such as the quarter and the firming up of trade indicators implementation of GST from July 2017 and (Chart II.9). the Real Estate (Regulation and Development) Act (RERA), 2016 is expected to reinvigorate Employment economic activity during 2017-18. II.1.22 During 2016-17, emphasis was laid on investment in human capital, through initiatives II.2 PRICE SITUATION in the form of various skill development and II.2.1 Headline inflation, measured by the apprentice schemes with a view to improving Consumer Price Index (CPI), underwent the quality of labour and addressing skill gaps. exceptional movements during 2016-17. This According to the Labour Bureau’s new quarterly sparked considerable debate about the level at which it will eventually settle (Box II.3). In the first four months of the year, favourable base effects could not restrain an extra-seasonal and monotonic surge in food prices across the board, barring cereals. Food price pressures were exacerbated by the delayed onset of the south-west monsoon and consequently, headline inflation reached an intra-year peak of 6.1 per cent in July 2016 (Chart II.10). II.2.2 As surprising as the intensity of this spike was, its sudden downturn from August 2016 unhinged expectations. Once again, it was food prices at work – their rapid disinflation drove down headline inflation month after month - barring February and March 2017 - to a low 22ECONOMIC REVIEW Box II.3 Distribution of Infl ation in India With headline CPI inflation easing from 5.8 per cent in lower than that using 2015-16 and 2016-17 data. This is 2014-15 to 4.5 per cent in 2016-17, the likely level at which because inflation at the beginning of 2014-15 had hovered it would stabilise assumes importance. Accordingly, CPI in higher bands before dipping sharply, leading to a relatively inflation is analysed at a disaggregated level for 2014-15 higher number of transitions from higher to lower bands. In through 2016-17, using a Markov chain framework. Markov contrast, such transitions were limited during 2015-16 and chain is a sequence of discrete time stochastic process. 2016-17, as inflation was range-bound. The median inflation In this framework, the conditional probability distribution of derived from the steady-state equilibrium for the combined future states of the process, given the present state and three-year period is 4.13 per cent for the full data set and 4.10 information on past states, depends only upon the present per cent for the filtered data set (Table 1). The corresponding state. Mathematically, standard deviation of inflation in respect of both the data sets has moderated, corroborating the convergence of the P [ X ∈ A | Xs = x, Xs = x, Xs = x,…, Xs = x, Xs = x] t 1 1 2 2 3 3 n n inflation to around 4 per cent. = P [X ∈ A | Xs = x] for all times s<s<s<…<s<s<t, all t 1 2 3 n states x, x, x,…,x and x in S and all subsets A of S. The above analysis is based on the assumption that the 1 2 3 n transition probabilities, as estimated from the data set, do The central tendency of CPI inflation is observed to be settling around 4 per cent with an upward bias in the long- not change over time. However, these probabilities could be run. The monthly switches in inflation for major groups of impacted by changes in the nature of various shocks in the CPI rural/urban data sets across states were tracked across economy, going forward. Subject to this caveat and purely 32 defined bands of inflation. The 32 bands were formed on the basis of a stochastic process, this analysis provides to cover every possible value of inflation, consisting of two preliminary evidence about the inflation rate, based on the extreme bands, viz., (i) less than -10 per cent and (ii) equal new CPI series, converging to around 4 per cent. to or more than 20 per cent, and 30 bands of equal width Table 1: Implied Infl ation from Steady State Equilibrium of one percentage point within the interval from -10 per (Per cent) cent to 20 per cent. Given these initial conditions, transition Full Data Set Filtered Data Set probability matrices were constructed for full as well as Year Mean* Median SD Mean Median SD filtered data sets (i.e., excluding the first and the last bands) 2014-15 3.74 3.86 4.41 3.44 3.61 4.39 and steady state equilibria were derived under the Markov 2015-16 4.46 4.30 3.78 4.58 4.38 3.73 chain framework for each year as also for the full three-year 2016-17 3.89 4.21 3.93 3.99 4.23 3.72 period (Chart 1). Combined (3 Years) 4.10 4.13 3.82 4.08 4.10 3.70 *: Trimmed, i.e., excluding the fi rst and the last bands. SD: Standard The central tendency of CPI inflation (both mean and deviation. median) in steady state using 2014-15 data is found to be Source: CSO and RBI staff estimates. References: 1. Reserve Bank of India (2014), “Report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework” (Chairman: Dr. Urjit R. Patel), Mumbai. 2. Sinha, R. K. (2017), “Stochastic Transitions of CPI-C in the Era of New Monetary Policy Framework of RBI’’, mimeo, July. 23ANNUAL REPORT of 1.5 per cent in June 2017. In hindsight, the inflation outcomes since August 2016 mark the confluence of several forces. First, as the Phase-1 Phase-2 Phase-3 monsoon quickly gained full strength and spatial spread, conditions came together for a bumper kharif crop. Second, anecdotal evidence pointed towards fire sales of perishables from November 2016 post demonetisation. Third, the cumulative impact of the government’s supply management measures, particularly with regard to pulses, sent the disinflationary spiral into overdrive. Given the paucity of data points, these factors are still difficult to disentangle but a combination of transitory and supply-side effects overwhelmed the firming up of global commodity prices from October 2016 as well as the unfavourable base effects that kicked in from December 2016. A modest uptick around 4.9 per cent from September 2016 till in inflation during February-March 2017 proved March 2017, reflecting both inertial behaviour to be weak and short-lived and sub-3 per cent attributable to inflation in services and movements readings appeared in May-June 2017. In the in international crude prices. However, a modest event, inflation undershot the target of 5.0 per cent decline in inflation, excluding food and fuel, was for Q4 of 2016-17 by 140 basis points. Excluding witnessed during the first quarter of 2017-18 food and fuel, inflation remained unyielding at (Box II.4). Box II.4 Decoding CPI Infl ation Excluding Food and Fuel CPI inflation has declined sharply in recent years. However, cent. Conceptually, inflation can be decomposed into two excluding food and fuel, inflation remained sticky at around components: core and non-core. The underlying inflation 4.8 per cent in 2016-17 (Chart 1), until recently, when the as shaped by the pressure of aggregate demand against fall during April-June 2017 brought it down to around 4 per capacity is captured in the core component while the non- core part reflects short-term price movements caused by shocks or relative price changes (see, e.g., Laflèche and Armour 2006). Central banks generally monitor core inflation as it acts as a signal for persistent movements in inflation. Headline and core inflations may diverge in the wake of relative price shocks. If headline inflation reverts to core inflation, the role of food and fuel price shocks is considered transitory. On the other hand, if core inflation catches up with headline inflation, it suggests a generalised movement in prices through second round effects and inflation expectation channels (Anand, et al. 2015). The (Contd...) 24ECONOMIC REVIEW observed deceleration in headline inflation in India in the Table 1: Measurement of Persistence: recent period could, therefore, potentially be a transitory 2011 (January) - 2017 (March) phenomenon in the wake of sharp correction in food prices Mean Standard Persistence and favourable terms of trade aided by a decline in global Deviation commodity prices. Infl ation AR(1) Sum of AR (Y-o-Y) Coeffi cients Measuring inflation persistence is widely addressed up to 2 lags in empirical literature starting with the seminal work of Rotemberg (1982) which relied on nominal price contracting Pan, tobacco and intoxicants 9.2 1.9 0.99* 0.97 Clothing 8.5 3.0 1.25* 0.99 to impart a degree of inertia in a rational expectation setting. Footwear 7.4 3.0 0.99* 0.99 Drawing on literature, inflation persistence was tracked by Housing 6.6 1.8 -0.15 -0.14 autoregressive behaviour. The autoregressive coefficients, Health 6.0 1.3 0.51* 0.97* using an ARIMA model on a de-seasonalised CPI from Education 7.3 1.6 0.65* 0.96* January 2011 to March 2017, corroborated persistence in Personal care and effects 6.2 3.8 1.01* 0.92 inflation, both at the overall and sub-group levels, barring Recreation and amusement 4.9 0.9 0.67* 0.84 housing, and transport and communication (Table 1). Transport and communication 3.9 3.1 -0.31 -0.14 However, the degree of persistence varied across sub- Excluding food and fuel 6.4 1.9 0.46 0.58* groups. For example, the level of inflation persistence was *: Signifi cant at 5 per cent level. found to be relatively high for services components such as health and education. Moreover, health and education months to core inflation could have worked through second- inflation had lower volatility, suggesting relatively steady round effects and inflation expectations. inflation. The persistence in inflation could be attributable References: to multitudes of factors such as market structure, levels of productivity and habit formation. Intensifying competition 1. Anand, R., E. Prasad and B. Zhang (2015), “What in goods and services markets coupled with productivity Measure of Inflation Should a Developing Country enhancing measures could help address persistence in Central Bank Target?”, IMF Working Paper, WP/15/205. inflation more on a durable basis. During April-June 2017-18, 2. Laflèche, T. and J. Armour (2006), “Evaluating Measures inflation excluding food and fuel declined and persistence of Core Inflation”, Bank of Canada Review, pp. 19-29. also faded across all sub-groups. This is also reflected in the out-of-sample forecast performance of the ARIMA model. 3. Rotemberg, Julio J. (1982), “Sticky Prices in the United Possible pass-through of lower headline inflation in recent States’’, Journal of Political Economy, 90(6), December. II.2.3 On an annual average basis, inflation II.2.4 Inflation edged up in a number of came down to 4.5 per cent in 2016-17 from economies to or above target levels in 2016-17, 4.9 per cent in the previous year in a fairly reflecting tighter labour market conditions and the generalised movement, except in the housing firming up of commodity prices, especially crude and miscellaneous categories (Appendix Table oil and metals. Turkey and South Africa remained 4). Household’s inflation expectations adapted outliers in an otherwise low inflation environment to salient price movements and broadly tracked (Chart II.11). inflation developments over the year as reflected II.2.5 Globally, prices of agricultural commodities, in the March 2017 round of the Reserve Bank’s especially food items, firmed up during the year inflation expectations survey conducted during due to a moderation in excess supply (Chart the year. An ebbing of inflation expectations II.12). Metal prices also hardened due to higher was also corroborated in various rounds of the real estate investments and efforts for reduction of more forward-looking responses in the survey of excess industrial capacity in China, which accounts professional forecasters. for more than half of the global consumption 25ANNUAL REPORT The price of the Indian basket of crude oil moved in tandem and rose to about US$ 51 per barrel in March 2017 from around US$ 36 per barrel in March 2016. Constituents of Inflation II.2.6 Intra-year movements in headline inflation were underpinned by significant shifts at the sub- group level. Broadly, there was a sharp decline in the contribution of food and beverages in H2: 2016-17, while that of non-food components, notably transport and communication, and fuel and light, picked up. Housing and services such as health and education were the other drivers of inflation (Chart II.13). Food of metals. Easing of fiscal policy in the United II.2.7 Inflation in food and beverages (weight: States also supported the firming up of global 45.9 per cent in CPI), declined the most during metal prices. Global crude oil prices trended up 2016-17, with its contribution to overall inflation after the OPEC’s November 2016 decision to cut down to 46 per cent from 49 per cent a year ago. production by around 1.2 million barrels per day, Both kharif and rabi seasons produced bumper effective January 01, 2017 to bring the ceiling to harvests, aided by a normal monsoon after two 32.5 million barrels per day in the first half of 2017. consecutive years of drought-like conditions. 26ECONOMIC REVIEW In January 2017, food inflation touched an intra- year trough of 1.4 per cent, although prints in May and June took it down even lower to (-) 0.2 per cent and (-) 1.2 per cent, respectively (Chart II.14). II.2.8 Perishable items - primarily vegetables - that account for 13 per cent of the food group in CPI were the principal agents driving the collapse of food inflation. Vegetable prices faced an unprecedented downturn in August 2016 following significantly higher arrivals in mandis relative to the seasonal pattern. The loss of momentum intensified from Q3 with demonetisation and fresh winter crop arrivals (Chart II.15). II.2.9 While there was a sharp decline in prices of inflation-sensitive vegetables such as As stated earlier, distress sales of vegetables potatoes and tomatoes that typically provide the and other perishables following demonetisation inflexion points in the trajectory of inflation, this accentuated the loss of momentum in food prices. time around it was the price of vegetables like 27ANNUAL REPORT cabbages, cauliflowers and peas that plunged II.2.13 At a granular level, inflation in terms of disproportionately providing tangential evidence arhar and urad prices, which drove up inflation of distress sales and re-deployment of supplies in the whole category during 2015-16 and in the towards urban areas post-demonetisation. CPI- beginning of 2016-17, slid down substantially urban food inflation declined faster than its rural and even deflated in the second half of the year counterpart (Chart II.16). (Chart II.18). Arhar prices at the mandi level in the major producing states of Maharashtra, Madhya II.2.10 The evolution of food prices from August 2016 points towards a possible role of non- transitory factors in bringing down inflation as reflected in a statistically significant break in the series. This was corroborated by the vegetable price series, in particular. II.2.11 Excluding vegetables, average food inflation would have been higher by 2.2 percentage points during August 2016-January 2017 (Chart II.17). II.2.12 Pulses, with a weight of 5 per cent in the food group, contributed substantially to the large swings in food inflation during the year. Their contribution to overall inflation shifted from (+) 12.6 per cent in the first half to (-) 3.6 per cent in the second half of the year. 28ECONOMIC REVIEW Pradesh, Gujarat and Karnataka dropped even 2.9 per cent till November 2016 to 4.1 per cent below the minimum support price (MSP). Gram thereafter. While in the case of kerosene there was was an outlier with an unprecedented surge in a reduction in subsidy, domestic LPG prices rose prices during 2016-17, barring Q4. After two in line with international prices. As a result, input consecutive years of shortfalls, pulses production cost pressures picked up, especially with respect increased substantially to 23.0 million tonnes in to raw materials and intermediates. 2016-17 from 16.4 million tonnes in the previous Non-Food, Non-Fuel year in response to a normal rainfall and a II.2.16 CPI inflation excluding food and fuel significant increase in acreage incentivised by remained sticky through the year with a modest policy interventions, including an increase in ebbing since April 2017 (Chart II.19). Inflation in MSP. Other supply management measures taken transport and communication shot up from 0.7 per by the government such as imports at zero duty, cent in May 2016 to 6.0 per cent in March 2017, extension in stockholding limits for traders and reflecting the increase in international crude oil building of buffer stocks also helped to rein in prices. Housing inflation increased during the year, pulses inflation. although its contribution to inflation excluding food II.2.14 Within the overall moderation, sugar and fuel remained stable. Inflation in personal care and confectionery posted double-digit inflation, and effects remained high till Q3 before declining reflecting a drop in sugar production. In response, in the last quarter. the government put in place a number of II.2.17 Items that showed a moderation in inflation price control measures including imposition included clothing and footwear, pan, tobacco of stockholding limits on traders, discouraging and intoxicants and services such as household exports of sugar and allowing imports of raw sugar. goods and services, health and recreation and Cereals and prepared meals also showed upside impulses in prices during the year. The dwindling of wheat stocks below the quarterly buffer norm, beginning August 2016, prompted supply-side measures in the form of reduction in import duty to zero in December 2016 that led to an upsurge in imports. Fuel II.2.15 The fuel group (6.8 per cent weight in the CPI) contributed 4.8 per cent to headline inflation during the year, down from 7.1 per cent a year ago. Changes in administered prices of coal, electricity and LPG and hardening of prices of other household fuels including firewood and chips led to fuel inflation increasing from an average of 29ANNUAL REPORT amusement. Inflation excluding food, fuel and dynamically update the item basket in tune with petrol and diesel components of transportation the changing structure of the economy. averaged 4.9 per cent in 2016-17, down from 5.2 II.2.20 WPI inflation as per new series was lower per cent in the previous year. during 2016-17 than that based on the old series, Other Indicators of Inflation even as trends in inflation - overall and major sub- group-wise - remained largely unchanged in the II.2.18 In April 2017, the Ministry of Commerce and new series (Chart II.20). Industry revised the base year for the Wholesale Price Index (WPI) from 2004-05 to 2011-12 in sync II.2.21 For the year as a whole, while inflation with CPI. WPI inflation, based on the new series, as measured by WPI and GDP/GVA deflators ruled higher than CPI inflation from January 2017, increased during 2016-17, sectoral CPI inflation reflecting the rise in global commodity prices, based on CPI-IW, CPI-AL and CPI-RL eased in particularly crude oil and metals. WPI inflation line with the overall CPI inflation. Following the rise reached an intra-year peak of 5.5 per cent in in global crude oil and metal prices, domestic farm February 2017 before easing under the influence and non-farm input costs posted considerable of fuel and power group. As such, the narrowing of escalation in the second half of 2016-17. Moderate the gap between measures of inflation based on increases in MSPs were announced during the CPI and WPI, which started in October 2015, got year for crops such as cereals and coarse grains, reversed in January 2017 before its re-emergence while the government continued to incentivise the in June 2017. production of pulses and oilseeds by raising their MSPs along with a hike in bonus for pulses. II.2.19 The WPI series is now akin to the Producer Price Index (PPI) as the former excludes indirect II.2.22 Rural wage growth firmed up from August taxes. The coverage of WPI was raised to 697 2016, both for agricultural and non-agricultural items from 676 and the number of quotations labourers. In the corporate sector, staff costs to 8,331 from 5,482. The primary articles’ group is now weighted higher while the weights of fuel and power and manufactured products have decreased. In consonance with CPI and international practices, item level aggregation for WPI is based on geometric mean as against arithmetic mean in the old series. The number of 2-digit groups in manufactured products has been increased from 12 to 22 as per the National Industrial Classification (NIC) - 2008. The index for electricity is now compiled as a unified item as against the earlier practice of separate sectoral indices such as for agriculture and industry. A high level standing Technical Review Committee, headed by Secretary, Industrial Policy and Promotion has been set up to review and 30ECONOMIC REVIEW as a proportion of the value of production 1. Reserve Money moved up during the year even as pricing power II.3.2 Over the first seven months of 2016-17, gradually returned with improvements in demand the behaviour of reserve money (RM) was largely conditions. conditioned by the stance of liquidity management– II.2.23 In sum, during 2016-17 CPI inflation ebbed the Reserve Bank’s resolve in its April 2016 bi- significantly largely reflecting the sharp downturn monthly policy statement of progressively moving in the prices of pulses and vegetables following ex ante liquidity in the system towards neutrality. In bumper production and supply management terms of components, currency in circulation (CIC) measures and later accentuated by the transitory rose sharply in Q1 but fell back in Q2, reflecting the effects of demonetisation. Nonetheless, upside usual seasonality. Buoyed by festival demand and risks may emerge from input costs, wages and a bumper kharif harvest, a renewed pick-up in CIC was beginning to form in Q3 when demonetisation imported inflation. abruptly stifled it. On November 4, 2016, CIC had scaled an all-time high of `18 trillion taking RM to II.3 MONEY AND CREDIT a peak of `22.5 trillion. During this seven-month II.3.1 Several significant developments period, bankers’ balances with the Reserve Bank fundamentally impacted the evolution of monetary – the other component of RM – unwound from the aggregates during 2016-17. Up to October 2016, usual balance sheet related build up at the end of market operations, intended to balance system- March 2016 and banks generally economised on level liquidity, set the path of reserve money their holdings of excess reserves in view of the and money supply. Thereafter, demonetisation Reserve Bank’s liquidity provision operations in and its after-effects, i.e., initial limits on cash consonance with its stance including the reduction withdrawals, war-time operations to absorb the in daily maintenance requirements with respect to resultant liquidity overhang and the rapid pace the cash reserve ratio (CRR) from 95 per cent to of remonetisation, altered their paths drastically 90 per cent. as portrayed in sub-sections 1 and 2. Somewhat II.3.3 Demonetisation imposed a compression obscured underneath these tectonic shifts, was a on the level and path of RM. Following the large redemption of FCNR(B) deposits swapped withdrawal of legal tender status of specified with the Reserve Bank at the time of the taper bank notes (SBNs) on November 9, 2016, CIC tantrum, with counter-balancing operations to fell precipitously to a low of `9 trillion on January even out the liquidity effects. During the year, a 6, 2017 (around 50 per cent of the peak), a level combination of factors also restrained the demand seen more than six years ago. While banks’ for and supply of bank credit (as brought out in vault cash shot up in the immediate aftermath, it sub-section 3) and consequently, the mobilisation quickly dropped as the Reserve Bank mounted of deposits. Box II.5 revisits the relationship unprecedented liquidity absorption operations between credit and output in the context of the (see Chapter III) to mop up the massive influx of seismic changes in monetary conditions during the liquidity as SBNs were returned by the public. As year. Since January 2017, however, the monetary a result of these large changes, a downward spiral aggregates are progressively realigning with their in RM took it down to `13.8 trillion (61 per cent of usual patterns. the peak) by January 6, 2017. 31ANNUAL REPORT II.3.4 As remonetisation gathered pace, CIC II.3.7 On the sources side, the year began moved up week after week and reached 74.3 per with considerable turbulence in global financial cent of the peak by the end of the financial year. markets amidst worries about global growth. At end-March 2017, CIC amounted to 8.8 per cent With capital influx dwindling, accretions to net of GDP, down from 12.2 per cent in the previous foreign assets (NFAs) through net purchases from year. At this level, India’s currency to GDP ratio authorised dealers (ADs) were relatively muted compares well with a host of advanced and during Q1 (Chart II.22). Compensating variations emerging market economies (such as Germany, in net domestic assets (NDAs) to ensure a neutral France, Italy, Thailand and Malaysia). liquidity position took the form of net open market II.3.5 As in the past, scheduled commercial operations (OMOs), i.e., purchases of `805 billion banks (SCBs) built up sizable year-end balances, in Q1 of 2016-17 as against net OMO sales of even as excess reserves maintained by them came `51 billion in Q1 a year ago. As financial markets down to 17 per cent at end-March 2017 from 23 priced in the Brexit referendum, capital inflows per cent a year ago (Chart II.21). This reflected the resumed in Q2 and accordingly, the pace of abundance of liquidity following demonetisation. OMO purchases moderated to `200 billion. Net purchases from ADs increased from `78 billion II.3.6 For the year as a whole, RM contracted by in Q1 to `680 billion in Q2. Furthermore, the around 13 per cent for the first time after 1952- transfer of the Reserve Bank’s surplus of `659 53, as against a similar order of expansion in billion in August 2016 augmented spending by 2015-16. CIC declined by `3.3 trillion, while the government and added to the liquidity in the bankers’ balances with the Reserve Bank banking system. increased by `423 billion. As at end-March 2017, the net Reserve Bank credit to banks and II.3.8 During the third quarter of the fiscal year, commercial sector declined by `6.1 trillion vis-à- the sources of RM underwent significant changes vis an increase of `1 trillion in the previous year. after demonetisation unleashed a wave of liquidity 32ECONOMIC REVIEW into the system. Initially, reverse repos under per cent as on November 4, 2016 to 27 per cent the liquidity adjustment facility (LAF) were the as on January 6, 2017 before increasing to 41.1 principal instrument of absorption, bringing net per cent at end-March 2017. Furthermore, the Reserve Bank credit to banks and the commercial MSS impound and other deposits (mainly LAF sector down to `(–)5.2 trillion as on November 25, reverse repo with banks) increased significantly. 2016 from `3 trillion at the beginning of the year. The switch from non-interest bearing currency As surplus liquidity mounted, the Reserve Bank liabilities to interest bearing deposits, coupled with a decline in the Reserve Bank’s credit to banks, imposed an incremental CRR of 100 per cent of the has implications for the Reserve Bank’s surplus. increase in net demand and time liabilities (NDTL) (between September 16, 2016 and November II.3.10 In 2017-18 (upto June 30), with CIC falling 11, 2016) on November 26, 2016. This temporary short of its level a year ago by `2.0 trillion, RM impounding of liquidity of the order of about `4 was lower by 5.6 per cent. CIC, in fact, was placed trillion was withdrawn from December 10, 2016 at 85.2 per cent of its pre-demonetisation level with the enhancement of the ceiling on issuance on June 30, 2017. Bankers’ deposits increased under the market stabilisation scheme (MSS) to by 16.2 per cent as compared to 13.1 per cent `6 trillion from `300 billion. As the MSS issuances in the corresponding period of the previous year, grew and liquidity was sequestered, net Reserve reflecting a surge in deposits in the banking system. Bank credit to the government declined from `4.2 Net Reserve Bank credit to the government and trillion at the beginning of the year to a low of `37 to the banks and the commercial sector drove billion by December 23, 2016. The outstanding down the RM, offsetting the upward push from net purchases from authorised dealers. MSS issuances peaked at `6 trillion as on January 6, 2017. While remonetisation gathered pace, MSS 2. Money Supply issuances matured by mid-March, and LAF reverse II.3.11 The year-on-year growth of money supply repo re-emerged as the principal instrument (M ) slackened during 2016-17, reflecting subdued of liquidity absorption. The government’s cash 3 credit growth and a sizable redemption of FCNR balances also declined by `613 billion by end- (B) deposits. Barring a short-lived spike during March 2017 and as a result, net Reserve Bank Diwali, the deceleration became sharper in the credit to the government increased to `6.2 trillion second half following demonetisation. by the end of the year vis-à-vis `4.2 trillion a II.3.12 Turning to the components of money year ago. supply, currency with the public largely followed II.3.9 A comparison of the Reserve Bank’s the patterns of CIC discussed in the preceding balance sheet size pre- and post-demonetisation section. Aggregate and demand deposits follow a shows a decline of `0.8 trillion (2.4 per cent) during seasonal pattern akin to currency with the public, November 4, 2016 through March 31, 2017 as while time deposits are largely stable. However, in against an increase of `4.7 trillion (16.1 per cent) 2016-17, aggregate deposits increased sharply in in the corresponding period a year ago. Moreover, Q2 on account of the release of the 7th CPC award the composition of liabilities changed significantly, of salaries and pension arrears and mobilisation of with the share of the largest component, viz., deposits under the income declaration scheme. In notes in circulation declining sharply from 54.3 terms of year-on-year growth, however, aggregate 33ANNUAL REPORT Table II.4: Monetary Aggregates Item Outstanding as on Year-on-year growth (per cent) March 31, 2017 (` billion) 2015-16 2016-17* 2017-18 (as on June 23) 1 2 3 4 5 I. Reserve Money (RM) 19,005 13.1 -12.9 -5.6 II. Broad Money (M) 128,444 10.1 7.3 7.4 3 III. Major Components of M 3 1. Currency with the public 12,637 15.2 -20.8 -12.6 2. Aggregate deposits 115,596 9.4 11.6 10.6 IV. Major Sources of M 3 1. Net bank credit to government 38,691 7.7 21.0 14.1 2. Bank credit to commercial sector 84,514 10.7 4.7 5.7 3. Net foreign exchange assets of the banking sector 25,582 12.6 1.1 1.5 V. M net of FCNR(B) 127,084 10.1 8.9 9.1 3 M Multiplier 6.8 3 Note : The data for RM pertain to June 30, 2017. * : March 31, 2017 over April 1, 2016 barring for RM. deposits decelerated till October 28, 2016 largely in line with subdued credit growth. Following demonetisation, deposits accelerated sharply as these substituted the currency with the public (Table II.4). The pace of deposits turned somewhat tempered by the redemption of FCNR(B) deposits mobilised under the Bank’s swap scheme, which coincided with demonetisation. As a result, the increment in deposits post-demonetisation till mid- February was less than the contraction in currency with the public (Chart II.23). The M growth in 3 2017-18 (upto June 23, 2017) at 7.4 per cent remained much lower than the growth registered in the corresponding fortnight last year (10.3 per cent). II.3.13 On the sources side, the growth in net bank credit to the government accelerated II.3.14 The extraordinary developments during sharply reflecting the quantum increase in banks’ the year – exchange of notes/deposits – had investment in government securities in the context a fundamental impact on the money multiplier. of a surge in deposits following demonetisation. On In contrast to the previous year, the currency- the other hand, growth in credit to the commercial deposit (c/d) ratio underwent a steep fall due to sector moderated during the year mainly due to the contraction in currency with the public and the lower credit growth of PSBs. concomitant increase in deposits. On the other 34ECONOMIC REVIEW hand, the reserve-deposit (r/d) ratio remained largely stable, barring the fortnight when the incremental CRR of 100 per cent was applied and the last fortnight of the financial year. The money multiplier, which hovered around 5.5 in the pre- demonetisation phase, scaled up to peak at 8.8 by early January 2017. As remonetisation quickened, the money multiplier declined gradually but remained elevated relative to its own history at 6.8 at end-March 2017 (5.3 a year ago). Adjusted for reverse repo (net) with banks – analytically akin to banks’ deposits with the central bank – the money multiplier, however, turned out to be lower and aligned to its pre-demonetisation level at 5.8 at end-March 2017 vis-à-vis 6.2 a year ago (Chart II.24). last fortnight accounted for 74.2 per cent of the 3. Credit annual increase (38.3 per cent in the previous II.3.15 The growth in non-food credit extended year). Excluding this window-dressing, non- by scheduled commercial banks (SCBs) reached food credit growth as on March 17, 2017 was a low of 5.8 per cent at end-March 2017, the even lower at 5.1 per cent vis-à-vis 10.9 per lowest since 1994-95 (10.9 per cent in the cent on the corresponding day in the previous previous year). Banks typically build up credit year. A combination of factors drove down credit portfolios at the end of the year for balance sheet growth despite softening of lending rates – the considerations. Non-food credit expansion in the subdued state of economic activity (Box II.5); Box II.5 Credit and Output: Macro and Sectoral Dimensions Bank lending accounted for around 50 per cent of the total flow of resources to the commercial sector in 2015-16 and about 37 per cent in 2016-17. In a bank-based economy, bank credit is considered critical in determining output (Korkmaz, 2015). Higher credit growth is expected to lead to higher GVA growth and vice versa. However, in recent years, there appears to be a disconnect in the growth rates of credit and GVA in India (Chart 1). The anaemic growth in bank credit in the recent period is attributed to various factors such as stressed assets, subdued economic activity and sticky capacity utilisation. Nevertheless, the data on sectoral deployment of credit reveal divergence in credit growth across sectors (Contd....) 35ANNUAL REPORT The estimated long-run co-integrating relation between GVA and sectoral credit is: Log (gva)=5.26+0.58*log(agr_cr)-0.006*log(ind_cr) + 0.53*log (ser_cr)………..(2) where agr_cr= real credit to agriculture; ind_cr= real credit to industry; and ser_cr= real credit to services sector. Dummy was used for the period since the asset quality review of banks by the Reserve Bank. At a sectoral level, credit to agriculture and services was associated with higher output; however, industrial credit was not found to be statistically significant, possibly reflecting substitution by other sources of finance such as (Chart 2). For example, credit for agriculture and allied commercial papers and corporate bonds (RBI 2015). The large and statistically significant coefficient of services’ activities, and personal loans showed healthy growth, while credit may be seen in the context of an increase in the flows to industry and services sectors were subdued. share of the services sector’s credit in total non-food credit The quarterly seasonally adjusted data on real bank credit from 23 per cent in 2007 to 26 per cent in 2017. The healthy and GVA for 1996-2017 and sectoral credit for 2007-17 growth in credit to the services sector in recent years was were found to be non-stationary in levels but stationary in driven by professional services, retail trade, NBFCs and first difference. Following Izz and Ananzeh (2016), a co- transport operators. integrating relationship and a significant error correction To sum up, while the relationship between credit and GVA mechanism were found between GVA and credit (at still holds at the aggregate level, increasing substitution of aggregate and sectoral levels). A long-run co-integrating industrial credit by alternative sources against the backdrop relation between credit and GVA has been estimated as: of impaired assets in banks seems to have weakened the relation between industrial credit and output. Log (gva)=6.99+0.64*log (bc)………..(1) References: where gva=real GVA; bc=real bank credit. Dummies for 2009-10 Q2 to 2012-13 Q1 (identified through least squares Izz Eddien and N. Ananzeh (2016), ‘‘Relationship between with breakpoints) and for 2015-16 Q2 to 2016-17 Q4 were Bank Credit and Economic Growth: Evidence from Jordan’’, used to account for the global financial crisis and asset International Journal of Financial Research, 7(2). quality review of banks by the Reserve Bank, respectively. Korkmaz, Suna (2015), ‘‘Impact of Bank Credits on Equation (1) indicates that with every 1 per cent increase Economic Growth and Inflation’’, Journal of Applied Finance & Banking, 5(1). in real credit, real GVA increases by 0.64 per cent. Further, the error correction term has a negative sign Reserve Bank of India (2015), ‘‘Box II.4: Factors Underlying and is statistically significant, implying that the underlying Recent Credit Slowdown: An Empirical Exploration’’, mechanism corrects disequilibrium. Annual Report 2014-15, page No. 32. risk aversion in the banking sector with a legacy such as loan write-offs, substitution of bank of NPAs and capital adequacy requirements credit by UDAY bonds, loan repayment by use of acting as a binding constraint on banks; and SBNs and banks’ pre-occupation with exchange disintermediation via increasing recourse to of notes/deposits following demonetisation. Even market-based instruments, such as comm ercial inclusive of CPs, non-food credit growth during papers (CPs) and corporate bonds. Credit growth 2016-17 was lower at 6.4 per cent as against 10.2 was also impacted by one-off/statistical factors per cent in the previous year. Real credit growth 36ECONOMIC REVIEW showed a sharp deceleration to 1.8 per cent from 5.8 per cent a year ago. In terms of intra-year variations, non-food credit flow dipped albeit a little more than usual in the first quarter of 2016- 17 before posting a sharp recovery in the next quarter – a contrast to its customary behaviour (Chart II.25). While non-food credit flows started receding thereafter, a declining momentum got entrenched in the aftermath of demonetisation. However, it recovered somewhat towards the end of the fourth quarter of 2016-17, reflecting the usual year-end window dressing. During 2017- 18 (upto June 23, 2017), NFC growth remained lower at 6.7 per cent when compared with the growth of 9.3 per cent in the corresponding period of the previous year. II.3.16 Among bank groups, public sector banks barring services, decelerated/contracted during trailed behind private banks in terms of credit 2016-17 (Table II.5). Credit to agriculture slowed growth during 2016-17, a secular-like movement down to 12.4 per cent from 15.3 per cent in the evident since 2011-12. Credit to all major sectors, previous year. Table II.5: Sectoral Credit Deployment by Banks Sectors Outstanding as on Year-on-year growth (per cent) March 31, 2017 (` billion) 2015-16* 2016-17# 2017-18$ 1 2 3 4 5 Non-food Credit (1 to 4) 7,0947 9.1 8.4 4.8 1 Agriculture & allied activities 9,924 15.3 12.4 7.5 2 Industry (micro & small, medium and large) 26,800 2.7 -1.9 -1.1 (i) Infrastructure 9,064 4.4 -6.1 -2.5 Of which: (a) Power 5,254 4.0 -9.4 -1.6 (b) Telecommunications 851 -0.7 -6.8 -9.1 (c) Roads 1,800 5.2 1.4 -6.5 (ii) Basic metal & metal product 4,211 7.9 1.2 -1.0 (iii) Food processing 1,455 -12.5 -3.1 -0.7 3 Services 18,022 9.1 16.9 4.7 4 Personal loans 16,200 19.4 16.4 14.1 Priority sector 24,357 10.7 9.4 4.0 Note : Data are provisional and relate to select banks which cover about 95 per cent of the total non-food credit extended by all SCBs. * : March 18, 2016 over March 20, 2015; #: March 31, 2017 over March 18, 2016. $ : June 23, 2017 over June 24, 2016. 37ANNUAL REPORT II.3.17 Credit to industry, particularly infrastructure, flow to the services sector improved significantly food processing and iron and steel segments, has to 16.9 per cent from 9.1 per cent last year led by been contracting since October 2016. Credit to the professional services and trade. industry contracted by 1.9 per cent during 2016-17 II.3.20 During 2017-18 (up to June 2017), overall in contrast to a growth of 2.7 per cent in the previous credit slowdown has persisted with most sectors year. Credit to infrastructure (which accounts for witnessing deceleration or contraction. While about one-third of the outstanding bank credit credit to industry continued to contract, credit to industry) contracted by 6.1 per cent in 2016- growth to agriculture slowed down significantly to 17 on top of a low growth of 4.4 per cent in the 7.5 per cent in June 2017 from 13.8 per cent in the previous year. Within infrastructure, credit growth corresponding period of the previous year. Credit to contracted/decelerated in respect of all major segments such as power, telecommunication and the services sector decelerated sharply, reflecting roads. Credit to textiles and engineering goods slowdown across all its sub-components, barring also slowed. However, credit to fertilisers, petro trade and other services. chemicals and construction activity accelerated II.3.21 During 2016-17, the flow of financial sharply. resources to the commercial sector declined, II.3.18 The overall contraction in credit to industry largely mirroring the anaemic non-food credit was due to the inter-play of several factors. First, (Table II.6). In contrast, banks’ non-SLR investment investment activity has been weak in recent increased sharply by 47.2 per cent while the years, which has severely impacted credit offtake. flow of resources from non-banks recorded an Second, within industry, several sector-specific uptick. Within non-bank sources, notably, private factors contributed to contraction in credit. For placements by non-financial entities and CPs example, the power sector, which accounts for subscribed by non-banks increased during the about 58 per cent of the outstanding credit to year. Among foreign sources, external commercial infrastructure, has been facing hurdles like stalled borrowings (ECB)/foreign currency convertible projects, operational inefficiencies and high bonds (FCCB) recorded net outflows for the outstanding debt. Telecommunication industries second year in a row, while the flow of FDI was were experiencing declining revenue and a grim largely sustained. profit outlook due to technological innovations and stiff competition among the service providers. The II.3.22 The primary issuance of corporate bonds iron and steel sector was stressed due to weak was dominated by private placements vis-à-vis prices and stiff international competition. public issues, with the former constituting 95.7 per cent of total issuance in 2016-17, up from 92.1 II.3.19 Belying the general trend, personal loans per cent in the previous year. Further, the share of continued to grow at a healthy rate, although the growth was somewhat lower (16.4 per cent vis- financial entities as against non-financial entities à-vis 19.4 per cent in the previous year) due to in the resource mobilisation through corporate marked deceleration in housing loans which bonds increased to 71.7 per cent from 71.2 per constituted more than half of the outstanding cent over the same period. During 2017-18 (up to credit to this sector. Credit to consumer durables June 2017), the share of financial entities increased and vehicles also grew at a healthy rate. Credit further to 84.6 per cent over the previous year. 38ECONOMIC REVIEW Table II.6: Flow of Financial Resources to Commercial Sector (` billion) 2014-15 2015-16 2016-17 2016-17 2017-18 Apr-June Apr-June 1 2 3 4 5 6 A. Adjusted non-food bank credit 5,850 7,754 5,025 263 -1,927 i) Non-Food credit 5,464 7,024 3,950 -168 -1,886# of which: petroleum and fertiliser credit -139 -18 134 -23 -133 ii) Non-SLR investment by SCBs 386 731 1,075 431 -41# B. Flow from Non-banks (B1+B2) 7,005 7,358 9,257 1,276 1,654 B1. Domestic sources 4,740 4,899 6,499 1,185 1,166 1 Public issues by non-fi nancial entities 87 378 155 29 52 2 Gross private placements by non-fi nancial entities 1,277 1,135 2,004 240 240 3 Net issuance of CPs subscribed to by non-banks 558 517 1,002 720 148 4 Net credit by housing fi nance companies 954 1,188 1,346 110 225* 5 Total accommodation by 4 RBI regulated AIFIs - NABARD, NHB, 417 472 469 15 108 SIDBI & EXIM Bank 6 Systemically important non-deposit taking NBFCs (net of bank credit) 1,046 840 1,245 35 285 7 LIC’s net investment in corporate debt, infrastructure and social sector 401 369 277 36 108 B2. Foreign Sources 2,265 2,459 2,758 91 488 1 External commercial borrowings/FCCB 14 -388 -509 -167 11 2 ADR/GDR Issues excluding banks and fi nancial institutions 96 0 0 0 0 3 Short-term credit from abroad -4 -96 435 -23 - 4 Foreign direct investment to India 2,159 2,943 2,833 281 477* C. Total Flow of Resources (A+B) 12,855 15,112 14,282 1,539 -273 Memo: Net resource mobilisation by Mutual Funds through debt (non-gilt) Schemes 49 147 1,206 388 191 Note: *: Up to May 2017; #: Up to June 23, 2017. Source: RBI, SEBI, BSE, NSE, Merchant Banks, LIC, NHB and NSDL. II.3.23 In sum, the evolution of monetary and II.4 FINANCIAL MARKETS liquidity conditions during 2016-17 were shaped II.4.1 Sporadic episodes of volatility buffeted by developments such as the withdrawal of global fi nancial markets during 2016-17, SBNs, redemption of FCNR (B) deposits, liquidity largely refl ecting uncertainties surrounding the management stance of the Reserve Bank and materialisation of political risks such as the global factors. The fast pace of currency expansion unexpected outcome of the Brexit referendum was reversed by demonetisation leading to a surge and the results of the US Presidential election. in liquidity in the system and a slew of measures Market sentiment was also unsettled by increased by the Reserve Bank to manage it. Subdued credit prospects of monetary policy tightening by the growth and redemption of FCNR(B) moderated US. While markets in advanced economies (AEs) money supply growth. With liquidity and currency levels progressing towards neutral/normal, the generally relied on refl ation trade on perceptions of resolution of stressed assets and recapitalisation better growth prospects, those in emerging market of public sector banks will be critical for improving economies (EMEs) plunged on fears of capital credit off-take. outfl ows and the Fed rate hike. Subsequently, 39ANNUAL REPORT however, equity prices recovered in most EMEs as capital outfl ows ceased and infl ows resumed as refl ation exuberance subsided and the stance of the US Federal Reserve was read as being less hawkish. II.4.2 In India, fi nancial markets were not immune to global developments, especially in equity and foreign exchange segments but others were mostly driven by domestic factors. In the money market, interest rates remained anchored to the policy repo rate on the strength of changes in the Reserve Bank’s liquidity management framework in April 2016. In the government securities (G-sec) market, yields generally softened in response to surplus liquidity conditions that were accentuated by demonetisation from November 2016. Abstracting weighted average call rate (WACR) with the policy from global spillovers, the equity market surged rate. Further, the minimum daily maintenance of during the year, largely in response to domestic the cash reserve ratio (CRR) was reduced from reforms and improved macroeconomic conditions, 95 per cent of the requirement to 90 per cent, as depicted in Box II.6 which evaluates the bull effective April 16, 2016. With the introduction of run in the equity market and its sustainability. The the new liquidity management framework, the domestic forex market remained stable for most Reserve Bank started conducting open market part of the year with the Indian rupee (INR) mostly operations (OMO) outright purchases. As a result, trading with an appreciating bias, except during the average monthly liquidity defi cit in the system episodic turbulence caused by global factors. consistently declined from April through June Money Market 2016. Consequently, WACR remained anchored to the policy repo rate and traded with an easing II.4.3 The money market moved in close bias within the policy interest rate corridor. Other sympathy with the stance of the Reserve Bank’s money market rates evolved in close alignment liquidity management framework in April 2016 with WACR (Chart II.26). engendered, inter alia, by (i) smoothening of the supply of durable liquidity; and (ii) progressive II.4.4 During Q2, overnight money market rates lowering of the average ex ante liquidity defi cit in continued to soften and, on an average, remained the system to a position closer to neutrality. The 10 bps below the policy rate, refl ecting the surplus width of the liquidity adjustment facility (LAF) liquidity conditions emanating from a decline interest rate corridor between the reverse repo in government cash balances and injection of rate and the marginal standing facility (MSF) rate durable liquidity through OMO outright purchases. was also lowered from 200 bps to 100 bps in The rates moderated further following the 25 bps April 2016 with the objective of better aligning the reduction in the policy repo rate in early October. 40ECONOMIC REVIEW II.4.5 Demonetisation in November led to a II.4.7 Surfeit of liquidity with banks and enervated signifi cant softening of money market rates lasting credit growth obviated the need for mobilising bulk till the end of the fi nancial year. Notwithstanding the deposits and, as a consequence, the issuance of unprecedented surplus liquidity conditions, money certifi cates of deposit (CDs) declined substantially. market rates were generally aligned with the The weighted average effective interest rate policy rate with a downward bias from December (WAEIR) on CDs also declined by 1.8 percentage 2016, mainly on account of proactive liquidity points in 2016-17. The average fortnightly management by the Reserve Bank involving, inter issuance during Q1 of 2017-18 was lower than alia, temporary imposition of the incremental CRR Q4 of 2016-17 and there was a marginal uptick (ICRR) during the fortnight beginning November in WAEIR during the period. In contrast, issuance 26, 2016, issuance of securities under the market of commercial paper (CP) increased by around stabilisation scheme (MSS) and absorption through 28 per cent during 2016-17, partly refl ecting the the overnight fi xed rate reverse repo and variable substitution of short-term bank credit with market- rate reverse repos of various tenors ranging from based funding by highly rated corporates taking overnight to 91-days. The outstanding issuances advantage of the lower rates. Weighted average under MSS peaked at `5,966 billion in mid-January discount rate (WADR) on CPs generally declined 2017. Alongside, the average daily outstanding during the year. net liquidity absorption under LAF increased to II.4.8 The persistence of easy liquidity conditions `2,888 billion during November 09, 2016 to March resulted in money market rates remaining below 31, 2017 from `70 billion during November 01-08, the policy rate by an average of 25 bps in April- 2016. Moreover, the usual fi nancial year-end spike June 2017. In order to ensure a fi ner alignment in money market rates remained muted in 2016- of the operating target with the policy rate, the 17 on account of persistence of surplus liquidity Reserve Bank narrowed the policy rate corridor in the system. to 50 bps from 100 bps in its fi rst bi-monthly II.4.6 Average daily volume in the money market monetary policy statement for 2017-18 issued in [call money, collateralised borrowing and lending April. Furthermore, the Reserve Bank undertook obligation (CBLO) and market repo] increased issuance of treasury bills (T-Bills) under MSS and signifi cantly by 32 per cent to `1,441 billion during OMO sale auctions in addition to regular LAF 2016-17 from `1,090 billion in 2015-16. Volume operations. The average daily outstanding net in call money, CBLO and market repo segments liquidity absorption under LAF was `3,558 billion increased by 13 per cent, 32 per cent and 41 per in Q1 of 2017-18. cent, respectively, during the year. Call money, G-sec Market CBLO and market repo segments accounted for 11 II.4.9 The aggregate volume of transactions in per cent, 59 per cent and 30 per cent, respectively, central and state governments dated securities of the total volume during 2016-17 compared to and T-bills (outright as well as repo) increased 12 per cent, 59 per cent and 29 per cent in 2015- by 56 per cent, even as yields generally softened 16. During Q1 of 2017-18, average daily volume during the year, barring some occasional upticks in money market (call money, CBLO and market in Q4 (Chart II.27). repo) increased further to `1,575 billion. 41ANNUAL REPORT II.4.12 G-sec yields hardened marginally after the release of Federal Open Market Committee (FOMC) minutes in mid-October 2016, which markets read as signalling an imminent raising of rates in the US. The unprecedented surplus liquidity conditions following demonetisation in November 2016 led to a sharp decline in yields, with the 10-year benchmark touching a low of 6.26 per cent on November 24, 2016. Subsequently, yields hardened on announcement of the ICRR, a hike in the MSS ceiling and maintaining of status quo on the policy rate in early December 2016. Yields continued to trade in a narrow range till mid- December 2016. The hike in the Fed fund rate by 25 bps on December 14, 2016 and the perceived rising probabilities of three more such increases in 2017, pushed up yields thereafter. II.4.10 In Q1, yields remained range-bound with II.4.13 With the policy repo rate held unchanged, a softening bias on the back of positive sentiment a change in the policy stance from accommodative following a reduction in the policy repo rate on April to neutral in February 2017 caused a sharp sell-off 05, 2016, the change in the liquidity management in gilts. It was only when positive market sentiments stance and reduction in the minimum daily returned post-state election results and the less CRR maintenance requirements, coupled with hawkish stance of the US Fed around mid-March stability in the domestic foreign exchange market, 2017 that a mild softening of yields ensued which expectations of monetary easing by major central lasted till the end of the fi nancial year. banks and an increased likelihood of a dovish II.4.14 Yields hardened moderately in April stance of the US monetary policy. Yields, however, 2017 following the enunciation of upside risks hardened transiently in the run up to the Brexit to infl ation in the minutes of the Reserve Bank’s referendum on June 23. Monetary Policy Committee meeting, released on April 20, 2017. During May 2017, yields II.4.11 Yields continued to soften in Q2 of 2016- hardened initially tracking the US yields ahead 17, tracking positive market sentiments generated of the outcome of the FOMC meeting on May 03, by the passage of the constitutional amendment 2017. Subsequently, yields softened on account bill enabling the introduction of Goods and of a fall in crude oil prices, issuance of a new 10- Services Tax (GST), coupled with comfortable year benchmark security and lower than expected liquidity conditions. The accommodative policy infl ation numbers for April 2017. Yields softened stance of the monetary policy in early August further after the monetary policy statement on 2016 also helped to bring down yields, which was June 07, 2017 and this trend continued with the sustained through September and early October yield moving in a range-bound manner following 2016 when the policy repo rate was reduced by the release of lower reading on CPI infl ation in 25 bps. June 2017. 42ECONOMIC REVIEW Corporate Debt Market for 76 per cent of the limit as compared to 69 per cent a year ago. II.4.15 Taking advantage of low yields, the resources mobilised through the corporate II.4.16 During Q1 of 2017-18, resources mobilised bond market increased to `6,700 billion during through corporate bonds increased to `1,747 billion from `1,364 billion in the corresponding period of 2016-17 from `4,922 billion in the previous the previous year. The turnover in corporate bonds year. Corporate bond yields softened during also increased substantially to `4,347 billion from 2016-17, tracking movements in G-sec yields `2,610 billion over the same period. The yield of and measures taken by the Reserve Bank and 5-year AAA rated corporate bonds softened by 16 the Government to deepen the corporate bond bps in Q1 of 2017-18. Also, the yield spread of market. These measures include a hike in the the 5-year AAA rated corporate bond over 5-year aggregate limit of partial credit enhancement G-sec declined by 14 bps refl ecting moderation in provided by banks, permission to brokers in the perceived credit risk. corporate bond repos, and authorisation of a Equity Market platform for repo in corporate bonds. The 5-year AAA rated corporate bond yield softened by 0.8 II.4.17 During 2016-17, the benchmark Indian percentage point during the year. However, the equity indices, i.e., the BSE Sensex and Nifty 50 yield spread of the 5-year AAA rated corporate increased by 16.9 per cent and 18.5 per cent, bond over 5 year G-sec increased during the year respectively, remaining generally resilient to refl ecting higher perception of credit risk (Chart multiple shocks during the year (Chart II.29). II.28). The turnover in the corporate bond market II.4.18 The stock market surged in the fi rst half increased by around 44 per cent during 2016-17. of 2016-17 on the back of positive sentiments Foreign portfolio investment in corporate bonds fl owing from the government’s resolve to adhere increased to `1.9 trillion at end-March 2017 from to fi scal discipline in Union Budget 2016-17, the `1.7 trillion in the previous year and accounted announcement of structural reform measures 43ANNUAL REPORT (such as, the insolvency and bankruptcy code, and in March 2017, better than expected Q3 GDP liberalisation of the FDI regime), a normal south- growth data, passage of the GST Bill in the Lok west monsoon, implementation of the 7th Central Sabha and expectations of steady progress on Pay Commission’s (CPC’s) recommendations and economic reforms. In fact, the BSE Sensex and net purchases by foreign portfolio investors amidst sectoral indices, except BSE auto, surpassed favourable cues from global equity markets. their pre-demonetisation levels in Q4 of 2016-17, indicating that the impact of demonetisation was II.4.19 Following demonetisation, however, the only transitory. BSE indices of cash-sensitive sectors such as realty, fast-moving consumer goods (FMCGs) II.4.20 In Q1 of 2017-18, the BSE Sensex and and automobiles declined sharply, indicating NSE Nifty 50 increased by 4.4 per cent and 3.8 per market expectations of a fall in demand. The cent, respectively in the backdrop of favourable stock markets, however, rallied thereafter on progress in monsoon, perseverance with economic better-than-expected Q3 earnings of companies, reforms, strong macroeconomic fundamentals optimism over Union Budget 2017-18 proposals and positive cues from global markets. However, to stimulate growth while adhering to the path the exuberance in the stock markets thus far, has of gradual fi scal consolidation, revival of foreign also raised apprehensions about its durability in portfolio investments with a record net buying some quarters (Box II.6). Box II.6 Indian Equity Prices: A Sustainability Analysis The Indian stock markets surged in 2017 vis-à-vis their component is expected to change fairly gradually over time, peers, with the BSE Sensex and NSE Nifty 50 trading at while the bubble component can increase in an explosive or all-time highs with stretched valuations. This has sparked a exponential manner. lively debate as to whether the stock market exuberance is The empirical identifi cation of asset price bubbles has durable (Chart 1). been animatedly debated (see, Diba and Grossman 1988). The market price of an asset consists of a fundamental Recognising the limitations of the existing methodologies component, i.e., the expected discounted fl ow of the asset to identify multiple bubbles in a data series, Phillips, et al. price and a bubble component, which is defi ned as a (2015) used a variant of the standard ADF unit root test, dramatic rise in asset prices driven by speculative behaviour, viz., the generalised supremum ADF (GSADF) test on the far exceeding its fundamental value. The fundamental following reduced form equation: (Contd....) 44ECONOMIC REVIEW where y is the stock price, µ is the intercept, p is the maximum number of lags; for i = 1, ..., p are the differenced lags coeffi cients and is the error term. Testing for bubble (explosive behaviour) is based on a right-tail variation of the standard ADF unit root test where the null hypothesis is of a unit root and the alternative is of a mildly explosive autoregressive coeffi cient, i.e., it tests for H0:  = 1 and H1:  > 1. The presence of explosive behaviour in the asset price, i.e.,  > 1 can be taken as evidence of a bubble. This methodology was applied to the infl ation adjusted price- to-dividend ratio of the average monthly BSE Sensex during in the aftermath of the general election results, which April 1994 to April 2017, taking the ratio of April 1994 as ended on concerns over retrospective taxes on FPIs, high the baseline. The GSADF test statistic was greater than the valuations and weak earnings growth. No bubble is detected critical value at 1 per cent level, possibly indicating evidence currently when stock prices have reached historical highs. of bubbles in the market (Table 1). The current rally in stock prices seems to refl ect the strong Chart 2 identifi es three major asset price bubble periods macro fundamentals of the Indian economy, easy liquidity during April 1994 to April 2017. The fi rst two bubble periods conditions prevailing in the system and buoyancy in global (June 2005 to May 2006, and August 2006 to February markets. Nonetheless, a constant vigil of stock prices may be 2008), coincided with the booming phase of FPI infl ows warranted at this juncture, keeping in view the ramifi cations and bust after the global fi nancial crisis in 2007-08. Another for fi nancial and price stability. bubble is identifi ed during August 2014 to February 2015 References: Table 1: The GSADF Test for the Sensex 30 Index Caspi, I. (2014), “Rtadf: Testing for Bubbles with EViews”, MPRA Paper No. 58791. Test Stat Finite Sample Critical Values (p-value) Diba, B.T, and H.I. Grossman (1988), “Explosive Rational 90% 95% 99% Bubbles in Stock Prices?” American Economic Review, 78: GSADF test 5.258 1.92 2.14 2.93 (0.000) 520-530. Note: Critical values of the GSADF test are obtained from the Monte Phillips, P.C.B., S. Shi and J.Yu (2015), “Testing for Multiple Carlo simulation with 1000 replications (Caspi 2014). The smallest Bubbles: Historical Episodes of Exuberance and Collapse in window has 33 observations. Source: RBI and BSE. the S&P 500”, International Economic Review, 56(4). Primary Market Resource Mobilisation during Q1 of 2017-18 as refl ected in resource mobilisation of `78.6 billion compared to `58.6 II.4.21 The primary segment of the equity market billion in the same period of the previous year. sustained its upward momentum during 2016-17 against the backdrop of improved macroeconomic II.4.22 Resource mobilisation through mutual conditions and policy reforms such as passage funds (MFs) more than doubled to `3,431 billion of GST Bill. Resource mobilisation through initial in 2016-17 on account of higher mobilisation public offerings (IPOs) more than doubled to `291 under income and debt schemes. During Q1 of billion in 2016-17. The gains in IPO activity were 2017-18, mutual fund resource mobilisation marked by a few mega issues. IPO activity remained increased by 3.3 per cent to `934 billion from `904 subdued during October 2016 to February 2017 in billion in the same period of the previous year. view of the volatility in the stock markets and the Private placement of corporate bonds showed a post-demonetisation uncertainty, but recovered marked improvement of 39.9 per cent in 2016- in March 2017. IPO activity accelerated further 17 vis-à-vis 13 per cent in 2015-16. During Q1 of 45ANNUAL REPORT 2017-18, private placement of corporate bonds increased by 28.3 per cent to `1,725 billion from `1,345 billion in the corresponding period of 2016- 17. Public issues of non-convertible debentures (NCDs), however, decreased by 14.0 per cent in 2016-17 as against a very high growth of 262 per cent in 2015-16. But, during Q1 of 2017-18, public issues of NCDs increased by 15 per cent over the corresponding period last year. II.4.23 Resource mobilisation through qualifi ed institutional placements (QIPs) declined by 42 per cent during 2016-17 on top of a decline of 50 per cent in 2015-16. However, it recovered during 2017-18 so far (upto May 2017). During April-May 2017, `125 billion was raised through seven QIP issues. mid-May to mid-July 2016 when it came under II.4.24 Indian companies mobilised US$ 3,671 pressure due to the uncertainty surrounding the million through offshore Rupee-denominated Brexit referendum. In fact, INR, which stood at bonds (Masala Bonds) during 2016-17. The 66.33 per US dollar at end-March 2016, touched framework of Masala Bonds was harmonised with a low of 68.01 per US dollar on June 24, 2016, the guidelines on external commercial borrowings the day of the Brexit referendum result. However, in June 2017 for providing an additional avenue for INR recovered by early July and remained range- Indian corporates and banks to raise longer-term bound. funds. Foreign Exchange Market II.4.25 The Indian foreign exchange (forex) market was generally stable during 2016-17, except for brief episodes of volatility. In March 2017, INR appreciated strongly in response to domestic political developments. The episodes of volatility can be corroborated by conditional variance from an estimated exponential generalised autoregressive conditional heteroscedastic (EGARCH) model (Chart II.30). However, viewed in relation to EME peers, the implied volatility of INR was one of the lowest and hovered in a narrow range (Chart II.31). II.4.26 During the fi rst half of 2016-17, INR traded mostly in a range bound manner, except during 46ECONOMIC REVIEW II.4.27 In November 2016, INR again came under US President’s protectionist policies. However, downward pressure from simultaneous impact INR posted signifi cant gains following the of the result of the US Presidential election and announcements in the Union Budget 2017-18 on demonetisation in India. Uncertainties surrounding February 01, 2017 and diminished expectations of the policies of the new US administration steep rate hikes by the Federal Reserve post the FOMC meet on February 01, 2017. During March generated sharp volatility in currencies across the 2017, INR appreciated signifi cantly as domestic globe. US bond yields rose sharply on speculation political developments signalled stability on policy that the Federal Reserve’s rate hikes during 2017 issues. This, coupled with softer infl ation prints might be steeper than anticipated. This led to and improving macroeconomic conditions, led large FPI outfl ows aggregating US$ 9.5 billion to large FPI infl ows into debt and equity markets from the Indian debt and equity markets during during the month. The strengthening bias of INR November-December 2016. Notwithstanding this, was generally sustained during April through repayments of the FCNR (B) swaps with banks June 2017 on continued FPI infl ows. During Q1 amounting to US$ 24 billion were conducted of 2017-18, INR traded in the range of 64.00 to smoothly over September - December 2016. 65.04 per US dollar. The recent appreciation of II.4.28 At the beginning of 2017, the markets the INR has regenerated a debate on its fair value turned cautious due to uncertainty over the new (Box II.7). Box II.7 Fair-value of the Rupee The appreciation of the Indian rupee (INR) against the US dollar (US$) since January 2017 has rekindled the debate on the fair value of the INR. Relative to the long-term trend however, the recent appreciation appears to be a minor blip (Chart 1). Further, the Dollar Index suggests that US$ has been depreciating over the past six months (Chart 2), likely on account of inflation outlook, dovish Fed guidance, and uncertain political climate in the US. Theory suggests that the nominal exchange rate should depreciate to maintain competitiveness of Indian exports if Indian inflation is higher than those of trading partners. But the India-US inflation differential, as seen in Chart 1, has declined significantly compared to 2014, and the INR is not the only currency that has appreciated vis-à-vis US$, between November 1, 2016 and August 8, 2017, amongst other currencies of emerging market economies (EMEs) (Chart 3). To evaluate whether the INR is fairly valued, two different methodologies are adopted. The first approach is a “Productivity Based” approach, which argues that the currency will depreciate less if the economy’s productivity (Contd....) 47ANNUAL REPORT In order to determine the real effective exchange rate valuation (REER) – a summary indicator of movements in the exchange rate of home currency against a basket of currencies of trading partners adjusted by the ratio of domestic to foreign prices, as implied by the B-S type growth effects, a parsimonious framework, as in Subramanian (2010) and IMF (2006) is attempted here. Eq. (1) below is estimated using the 2014 cross-section for 180 countries from the Penn World Tables (version 9.0), latest available in the database: (1) , growth is higher than those of trading partners (the so-called where represents price level of GDP (the Real Exchange Balassa-Samuelson effect). Rate) for country ‘’, and is GDP per capita in PPP terms.  The second approach or the “Sustainable Current Account” measures the equilibrium impact of economic growth on the approach is based on a normative evaluation of the real exchange rate. The coefficient estimated for  is 0.23 for sustainable level of Current Account (CA). The equilibrium the 2014 cross-section of countries (Chart 4). The estimated value of the currency is then estimated based on the gap coefficient is used to project the increase in REER between between the actual and the sustainable CA and the elasticity 2014 and 2017 for a predicted increase in for India.4 As of CA with respect to the exchange rate. per the projections of the model, the 6-country INR-REER at 131.2 in June 2017 is closely aligned to its fair value.5 A I. Productivity Based Approach sensitivity analysis over the 90 per cent confidence interval Improvement in productivity vis-à-vis trading partners on the estimated also suggests that the Indian REER as plays a crucial role in explaining movements in equilibrium of June 2017 is broadly aligned to its fair value according to exchange rates – also known as the Balassa-Samuelson this approach. (B-S) effect. The B-S theory suggests that as EMEs grow over time, labour productivity of their traded-goods sector II. Sustainable Current Account Approach will tend to rise, spilling over to wages and prices in the Another approach to determine REER valuation relies on non-traded goods, and thereby leading to an increase in the a normative evaluation of current accounts and exchange overall price level (Balassa 1964; Rogoff 1996), causing the rates. One way to assess a sustainable level for the current currency to appreciate3. account is based on the “External Sustainability” (ES) approach developed by the Consultative Group on Exchange Rate Issues (CGER, IMF). Rangarajan and Mishra (2013) applied this approach to India and estimated the sustainable current account deficit (CAD) to be 2.3 per cent of GDP. This approach, therefore, suggests that the CAD at 0.6 per cent of GDP in Q4: 2016-17 is below the level that can be sustained over the medium term. The equilibrium REER for India is then estimated using the following equation: REER – REEReq (CA/GDP) – (CA/GDP)benchmark it it = it (2) REEReq  it it (Contd....) 3 This is not to say however, that if Indian infl ation differentials corrected for productivity differentials remain high, the INR will not need to depreciate in the future. 4 Source: World Economic Outlook Database, International Monetary Fund, April 2017. 5 GDP per capita in PPP terms has been used as a proxy for productivity differential in tradable and non-tradable sectors (relative to trading partners). Although the PPP approach captures simultaneity of exchange rate determination covering maximum number of countries, it could have its limitation in determining country specifi c fair value. 48ECONOMIC REVIEW broadly consistent with medium-term fundamentals and desirable policy settings.” Conclusion To sum up, despite minor blips, the INR real exchange rate remained closely aligned to its fair value over the long term. Short run nominal exchange rate movements in EMEs (Chart 5) incorporate several other factors, capital flows perhaps being the most important among them, and require further careful analysis. References: Balassa, B. (1964), “The Purchasing Power Parity Doctrine: A Reappraisal”, Journal of Political Economy, 72:584-596. IMF (2006), “Methodology for CGER Exchange Rate Assessments”, International Monetary Fund. Using a Current Account/GDP-REER semi-elasticity ( ) t of 0.18 based on CGER6, the REER is estimated to be Rogoff, K. (1996), “The Purchasing Power Parity Puzzle”, moderately undervalued. Journal of Economic Literature, 34(2):647–668. A sensitivity analysis using a ± 1 percentage point band R angarajan C. and P. Mishra (2013), “India’s External Sector: Do We Need to Worry?”, Economic and Political around the sustainable-CAD to GDP ratio suggests that the Weekly, 48(7). Indian REER as of June 2017, is broadly aligned to its fair value to being moderately undervalued. These are in line Subramanian, A. (2010), “New PPP-Based Estimates of with the IMF (Article IV consultation press release 2017) Renminbi Undervaluation and Policy Implications”, Peterson observation that “India’s external position in FY2015/16 was Institute for International Economics, No. PB10-8. II.4.29 In nominal effective terms (a 36-currency basket), the INR remained almost stable during 2016-17. In contrast, the real effective exchange rate (REER) of the INR appreciated for the third successive year, though marginally, mirroring the increase in India’s relative price index vis-à-vis its trade partners (Chart II.32). II.4.30 Notwithstanding a short-lived upsurge post-demonetisation, forward premia generally decreased during 2016-17 - mainly refl ecting declining interest rate differential between India and the US. While activity in the merchant segment remained at the previous year’s level, inter-bank turnover showed a slight uptick. Overall, activity in both the spot and forward/swap segments picked consolidation, moderate current account defi cit up during 2016-17. and increasing capital infl ows, the Indian fi nancial II.4.31 With improved macroeconomic conditions markets are expected to remain resilient in the as refl ected in low infl ation, continuing fi scal near term. 6 Estimate of semi-elasticity for India is close to the CGER estimate. 49ANNUAL REPORT II.5 GOVERNMENT FINANCES7 environment cess, imposition of an infrastructure cess on certain motor vehicles, additional excise II.5.1 Revenue mobilisation became the duty on jewellery articles and increase in excise cornerstone of fi scal consolidation in 2016-17, duty on tobacco products. The imposition of the enabling the central government to achieve the Krishi Kalyan Cess on services from June 1, 2016 targets for key defi cit indicators; the immediately and pruning of the negative list fortifi ed service following subsection provides analytical details. tax collections. Customs duty collections were, While revenue expenditure was broadly maintained however, circumscribed by subdued imports. at the budgeted level, capital expenditure was stepped up over and above the budget estimates II.5.3 Non-tax revenues recorded a shortfall of (BE). This marked a welcome departure from 15.1 per cent from budgetary targets, mainly on earlier years when capital expenditure was account of lower receipts from interest, dividends invariably pruned to meet defi cit targets. The and profi ts. Receipts from communication services government has budgeted to bring down the gross fell short of the budgeted targets as high value fi scal defi cit (GFD) and the revenue defi cit (RD) spectrum bands remained unsold. Proceeds from further in 2017-18 (see subsection 2). At the sub- disinvestment – amounting to `477 billion – were national level, all the three major defi cit indicators the highest in any fi nancial year so far, even though - the consolidated GFD, the primary and revenue they were lower than the BE by 15.5 per cent defi cit to GDP ratios - overshot the BE for 2016- due to a shortfall from the strategic sale target. 17. States plan to rein in their primary and fi scal Nonetheless, total non-debt receipts registered a defi cits and post a revenue surplus in 2017-18 growth of 14.5 per cent during the year vis-à-vis (see subsections 3 and 4 for a disaggregated 9.1 per cent in the previous year. analysis). II.5.4 Committed expenditure towards CPC 1. Central Government Finances in 2016-17 and OROP awards was largely offset by scaling down provisions under interest payments, keeping II.5.2 The fi scal strategy for 2016-17 was mainly the overall level of revenue expenditure close to revenue-driven, keeping in view the commitments the budgeted level. On the other hand, a sizable relating to the implementation of the 7th Central enhancement of capital outlay over the BE was Pay Commission (CPC) and the one-rank-one targeted at key physical infrastructure sectors. pension (OROP) award. Net tax revenue of the centre (i.e., net of devolution to states) exceeded II.5.5 Refl ecting these developments, the the budgeted amount by 4.6 per cent. While gross budgeted target for GFD-GDP ratio at 3.5 per cent direct tax revenues were buoyed by collections of was met in the Provisional Accounts (PA). Owing around `674 billion under the Income Declaration to robust tax revenues, the RD-GDP ratio at 2.0 Scheme (IDS), higher revenues from indirect taxes per cent was lower than the budgeted 2.3 per cent were generated by an upward revision in clean (Table II.7). 7 The discussion on central government fi nances for 2016-17 is based on Provisional Accounts (PA) while that on states for the same year is based on Revised Estimates (RE). 50ECONOMIC REVIEW Table II.7: The Central Government’s Fiscal Performance (Per cent to GDP) Item 2004-08 2008-10 2010-15 2013-14 2014-15 2015-16 2016-17 2016-17 2017-18 (RE) (PA) (BE) 1 2 3 4 5 6 7 8 9 10 Non-debt receipts 10.4 9.5 9.5 9.4 9.3 9.2 9.7 9.5 9.5 Tax revenue (gross) (a+b) 10.6 10.2 10.2 10.1 10.0 10.6 11.2 11.3 11.3 Tax revenue (net)* 7.8 7.5 7.3 7.3 7.3 6.9 7.2 7.3 7.3 a) Direct tax 5.0 5.9 5.7 5.7 5.6 5.4 5.6 5.6 5.8 b) Indirect tax 5.5 4.3 4.5 4.5 4.4 5.2 5.6 5.7 5.5 Non-tax revenue 2.1 1.8 1.8 1.8 1.6 1.8 2.2 1.8 1.7 Non-debt capital receipts 0.4 0.3 0.4 0.4 0.4 0.5 0.4 0.4 0.5 Total expenditure 13.8 15.8 14.3 13.9 13.4 13.1 13.3 13.0 12.7 Revenue expenditure 11.9 14.1 12.6 12.2 11.8 11.2 11.4 11.1 10.9 Capital expenditure 1.9 1.7 1.8 1.7 1.6 1.8 1.8 1.9 1.8 Revenue deficit 2.0 4.9 3.5 3.2 2.9 2.5 2.0 2.0 1.9 Gross fiscal deficit 3.4 6.2 4.8 4.5 4.1 3.9 3.5 3.5 3.2 BE: Budget Estimates; RE: Revised Estimates; PA: Provisional Accounts. * Tax revenue (net) represents gross tax revenue less devolution to state governments. 2. Central Government Finances in 2017-18 revenue from the likely implementation of the Goods and Services Tax (GST) also impinged on II.5.6 The central government remains the budget estimates. Direct tax revenues, on the committed to fi scal consolidation, budgeting a 0.3 other hand, are expected to be supported by a percentage point reduction in the GFD-GDP ratio surcharge of 10 per cent on the income bracket for 2017-18. The timeline for attainment of the of `5 million to `10 million. Non-tax revenues are target of 3.0 per cent has, however, been shifted budgeted to increase by a modest 5.3 per cent. from 2017-18 to 2018-19. This deferment was also Proceeds from disinvestment are pegged at `725 a deviation from the fi scal roadmap proposed by billion in the BE – refl ecting an expected growth the Fiscal Responsibility and Budget Management of 51.8 per cent – despite a signifi cant shortfall in (FRBM) Review Committee, 2017 (Chairman: Shri past realisations. This is proposed to be achieved N.K. Singh) (Box II.8). through a `465 billion stake sale in Public Sector II.5.7 The budgeted reduction in defi cit Enterprises (PSEs), `150 billion disinvestment in indicators is based on increases in tax revenues strategic and minority stake holdings and `110 and disinvestment proceeds, and containment billion by listing of insurance companies. of the growth in expenditure. At the same time, II.5.9 The government has merged plan and enhanced budgetary allocations have been made non-plan expenditure with a view to simplifying for the farm and rural sectors, the social sector, budget accounts. Total expenditure is shown as infrastructure and employment generation. ‘scheme’ and ‘other than scheme’ expenditure. II.5.8 The buoyancy of gross tax revenue is The re-classifi cation of expenditure will facilitate budgeted to decline to 1.03 in 2017-18 from 1.64 effective monitoring and outcome assessments of in 2016-17. Conservative accounting of potential various projects/schemes of the government. 51ANNUAL REPORT Box II.8 Recommendations of the FRBM Review Committee The FRBM Review Committee (Chairman: Shri N. K. Singh), of national proportion and collapse of agriculture severely constituted in May 2016 was mandated to (i) look into various affecting farm output and incomes; (ii) far-reaching structural aspects, factors and considerations going into determining reforms in the economy with unanticipated fi scal implications; FRBM targets; (ii) judge the merit of having a fi scal defi cit and (iii) a sharp decline in real output growth of at least 3 range as the target in place of the existing point estimates; percentage points below the average for the previous four and (iii) examine the need and feasibility of aligning the fi scal quarters. Even in the above circumstances, deviations from expansion/contraction with credit contraction/expansion in the stipulated GFD-GDP ratio target should not exceed 0.5 the economy. percentage point in a year. In addition, there is a buoyancy clause which can be invoked by the government if there is a The Committee, which submitted its report in January 2017, sharp increase in real output growth of at least 3 percentage proposed the establishment of a new fi scal framework for points above the average for the previous four quarters. India designed to target the debt-to-GDP ratio, in addition In this scenario, the fi scal defi cit must fall by at least 0.5 to the existing defi cit targets. Separate debt targets for the percentage point below the target. central and the state governments have been recommended to align with solvency considerations, following international The Committee also recommended the constitution of best practices in order to avoid the threat of a debt trap. a fi scal council comprising experts in public fi nance, In order to improve fi scal governance, the Committee economics, or public affairs to provide an independent recommended setting up of an autonomous fi scal council assessment of the central government’s fi scal performance under the Ministry of Finance. For the fi rst time in India, the and compliance with targets. In terms of institutional reforms Committee outlined a well-defi ned escape clause as well as in fi scal management, the Committee recommended (i) a buoyancy clause, clearly setting out the conditions under issuing detailed policy guidelines by the central government which these can be invoked. to provide proactive guidance to state governments; (ii) The new rules include a proposal for a prudent medium-term assigning to the 15th Finance Commission the task of ceiling for general government debt of 60 per cent of GDP - determining inter-state allocations for state governments 40 per cent for the centre and the balance 20 per cent for the for achievement of the overall debt and fi scal targets; (iii) states - to be achieved no later than 2022-23. In this context, requesting the Reserve Bank of India to arrange for issuance one of the earlier studies also found that a reasonable and of a consolidated annual prospectus of planned annual feasible public debt ceiling for India’s medium-term fi scal bond and loan issuances by each state government; and (iv) framework could be in the range of 60-65 per cent of GDP introducing credit ratings for each prospectus by approved (Topalova and Nyberg 2010). credit rating agencies. With a view to enhancing fi scal transparency, the Committee recommended adoption of The fi scal defi cit would remain the key operational target international best practices for compilation and presentation to achieve the medium-term debt ceiling and would be of fi scal accounts, as laid out in the International Monetary progressively brought down to 2.5 per cent by 2022-23. Fund’s Government Finance Statistics Manual 2014. Concomitantly, the revenue defi cit-GDP ratio is projected to decline steadily by 0.25 percentage point each year to reach Reference: 0.8 per cent in 2022-23. Topalova, P. and D. Nyberg (2010), “What Level of Public The proposed ‘escape clauses’ are (i) over-riding Debt Could India Target?”, IMF Working Paper, WP/10/7, consideration of national security, acts of war; calamities January. II.5.10 Total expenditure is budgeted to grow by social sector (Chart II.33). Expenditure on major a modest 8.7 per cent in 2017-18 (10.3 per cent subsidies, viz., food, fuel and fertiliser is budgeted in 2016-17), led by a deceleration in revenue to remain at 1.4 per cent of GDP as in the previous expenditure. Capital expenditure is budgeted to year. In line with the Indradhanush plan, `100 grow at 6.7 per cent, with emphasis on priority billion has been allocated towards recapitalisation areas such as physical infrastructure and the of public sector banks (PSBs). 52ECONOMIC REVIEW 3. State Finances in 2016-17 II.5.12 Available information pertaining to 26 state governments indicates a deterioration in GFD, revenue and primary defi cits in 2016-17 (RE) vis-à-vis the BE. The revenue account worsened because of shortfall in revenues and expenditure overshooting. Compared with the actuals of the previous year, the consolidated GFD increased by 0.4 percentage point to 2.9 per cent of GDP in 2016-17. 4. State Finances in 2017-18 II.5.13 The GFD-GDP ratio of states is budgeted to improve to 2.3 per cent during 2017-18 (from 2.9 per cent in the RE for 2016-17), largely on the back of a projected rise in tax revenue – both own tax revenue as well as tax devolution – and moderation II.5.11 As per the latest information available, the in revenue expenditure (Chart II.34). The revenue fi scal position of the central government in terms account is also expected to post a surplus during of key defi cit indicators deteriorated during the fi rst the year. States have, however, a weak track quarter of 2017-18 (April-June) as compared to the record of fi scal marksmanship. Moreover, several corresponding quarter of the previous year. RD and risk factors such as implementation of their own GFD, both in absolute terms as well as per cent of pay commission recommendations and farm BE, were higher than those in the corresponding quarter of the previous year. Deterioration in fi scal position was the outcome of lower growth in revenue and higher growth in expenditure. On the receipts side, growth in tax revenue decelerated sharply on account of a slowdown in all major taxes (income tax collections, customs duties, excise duty and service tax), except corporation tax. Total expenditure at 30.3 per cent of BE was higher than 25.9 per cent in the corresponding quarter of the previous year due to higher revenue expenditure and a sharp turnaround in the capital account – in conformity with the government’s intention of front-loading expenditure before the onset of monsoon. Going ahead, the pickup in capital expenditure augurs well for improvement in expenditure quality. 53ANNUAL REPORT loan waivers may impact state fi nances in the borrowings. On the revenue side, the transition to near term (Box II.9). The fl exibility for additional GST may temporarily impact tax receipts, although borrowings given by the 14th Finance Commission the proposed compensation clause from the centre may encourage states to take greater recourse may provide some headroom (see Chapter III of to market borrowings which, in turn, could exert the report on State Finances: A Study of Budgets pressure on yields, thereby raising the cost of of 2016-17). Box II.9 Farm Loan Waiver Recent instances of farm loan waivers in India include the billion – around 2.5 per cent of UP’s GSDP. Maharashtra Agricultural Debt Waiver and Debt Relief (ADWDR) Scheme has recently announced a loan waiver scheme for farmers; announced by the central government in 2008 and state- similarly, Punjab has announced a waiver on crop loans specifi c farm loan waivers announced by Andhra Pradesh and benefi tting small and marginal farmers while Karnataka has Telangana in 2014; Tamil Nadu in 2016; and Uttar Pradesh, announced a waiver amounting to `81.7 billion for farmers Maharashtra, Punjab and Karnataka in 2017, so far. availing farm loans from cooperative banks. While the benefi t of debt relief to individual households Implications can be substantial, the merit of unconditional bailouts in First, the benefi t of full loan waiver to farmers under improving productivity and enhancing welfare remains the ADWDR of 2008 turned out to be highly skewed and debatable. While it has been argued that debt relief measures concentrated in states where concentration of land holdings improve the productivity of recipient households as high was low on account of land reforms (Ramakumar 2013). levels of indebtedness distort investment and production Second, waivers can have two major implications for the decisions, the counter narrative suggests that loan write banking system: (i) while it may cleanse banks’ balance offs are detrimental to the culture of prudent borrowing and sheets in the short-term, it may disincentivise banks from repayment and stigmatise borrowers in default. Moreover, lending to agriculture in the long-term (EPW Research they do not increase productivity of benefi ciaries and Foundation 2008; Rath 2008); and (ii) farmers may tend to affect households’ expectations about the reputational factor in future credit constraints and reluctance of formal consequences of default leading to a decline in investment institutions to lend to them following waivers; hence, they expenditure (Kanz 2012). may tend to shift to informal sources of credit (Kanz 2012). In the Indian context, the ADWDR of 2008-09 was expected Consequently, loan waivers can have a dampening impact to benefi t around 37 million small and marginal farmers and on rural credit institutions. Moreover, they impact credit around 10 million other farmers. The cost of the Scheme discipline, vitiate credit culture and dis-incentivise borrowers was estimated to be about `717 billion (RBI 2008). In June to repay loans, thus engendering moral hazard. 2016, the government of Tamil Nadu ordered the waiver of Finally, loan waivers could add to the fi scal burden over agricultural loans outstanding as at end-March, 2016 from the medium term as they are essentially a transfer from co-operative banks to small and marginal farmers, the cost tax payers to borrowers. As per initial estimates, the total of which was estimated at around `60 billion over a 5-year loan waivers announced during 2017-18 (upto August period ending March 2022. The budgetary provision for 2, 2017) amount around 0.4 per cent of GDP. Depending the same in the form of grants amounted to `18 billion in on possible cutback under other expenditure heads, this the revised estimates for 2016-17 and `18 billion in 2017- may result in an increase in the consolidated GFD-GDP 18 – both around 0.1 per cent of Tamil Nadu’s gross state ratio of states by about 20-40 basis points. An empirical domestic product (GSDP). A recent direction by the Madras exercise reveals that such random policy shocks have an High Court to the state government to extend the scheme enduring impact on market borrowings as evident from past to all farmers would further add to the state’s fi scal burden. episodes of such waivers. If overall government borrowings In April 2017, Uttar Pradesh (UP) announced a farm loan increase, yields on state development loans (SDL) may fi rm waiver scheme which is expected to benefi t small and up posing higher interest burdens for states in the future. marginal farmers by writing off their loans of around `360 (Contd....) 54ECONOMIC REVIEW Concomitantly, they can also crowd out private borrowers as References: the general cost of borrowings increases with pressure from 1. Rath, N. (2008), “Implications of the Loan Waiver for higher government borrowings on the fi nite pool of investible Rural Credit Institutions”, Economic and Political Weekly, resources in the economy. An empirical exercise indicates June 14. that a one percentage point increase in the ratio of state 2. EPW Research Foundation (2008), “The Loan Waiver debt issuance to GDP is associated with a decline of 0.067 Scheme”, Economic and Political Weekly, March 15. percentage point in the ratio of corporate bond issuance to 3. Kanz, M. (2012), “What Does Debt Relief Do for total assets of corporates. Thus, state government farm loan Development? Evidence from India’s Bailout Program waivers have the potential to crowd out corporate borrowing for Highly-Indebted Rural Households”, Policy Research if fi nanced through state debt issuance. Working Paper 6258, World Bank. In order to understand the forces that drive loan waivers and 4. Reserve Bank of India (2008), Annual Report 2007-08, their long term consequences for the entire economy, the Mumbai. Reserve Bank is organising a seminar on ‘Agricultural Debt 5. Ramakumar, R. (2013), “India’s Agricultural Debt Waiver Waiver-Effi cacy and Limitations’ on August 31, 2017. Scheme, 2008”, Review of Agrarian Studies, 3(1): 135-146. 5. General Government Finances8 Outstanding liabilities of the general government are budgeted to decline to 62.7 per cent of GDP at II.5.14 The general government GFD is expected end-March 2018 from 63.9 per cent at end-March to be brought down further to 5.5 per cent of 2017 (RE). Moreover, the debt servicing capacity GDP in 2017-18 from 6.4 per cent in the revised of the general government has improved over the estimates for 2016-17. This refl ects the rigorous previous two years (Chart II.35). intent towards consolidation by the states. II.5.15 The central government’s fi scal strategy for 2016-17 was mainly revenue-driven, with buoyant tax collections comfortably funding additional expenditure commitments relating to the implementation of CPC and OROP awards, signifying the unswerving commitment to fi scal consolidation. At the state level, however, there was a slippage in FD, RD and primary defi cit (PD) in 2016-17 (RE) along with a deterioration in debt position, partly due to their participation in UDAY. Going forward, GST remains the best bet for states in getting back to the path of fi scal consolidation over the medium term. The cushion of compensation by the centre for any loss of revenue in the initial fi ve years should safeguard against uncertainty about the revenue outcome from the GST implementation. 8 Data pertain to 26 states. 55ANNUAL REPORT II.6 EXTERNAL SECTOR II.6.1 India’s external sector remained resilient in 2016-17 amidst considerable fl ux in the international environment; the Box in sub-section 6 on the external vulnerability watch argues the case analytically. Shrugging off a two-year contraction, merchandise exports turned around in the face of muted global demand. Drivers of this rebound are profi led in the immediately following sub-section. This development also assumes signifi cance in view of the decline in net invisible receipts addressed in sub-section 3. Merchandise imports remained sluggish, although a signifi cant pick-up occurred in H2. Consequently, rising international commodity prices and the erosion in terms of trade gains after a largely protracted decline (Chart II.36). notwithstanding, India’s merchandise trade While the modest recovery in global trade was defi cit narrowed further in 2016-17 and helped driven by a pick-up in imports by emerging market compress the current account defi cit (CAD) as economies (EMEs), India’s export recovery was discussed in sub-section 4. largely led by shipments to advanced economies II.6.2 Sub-section 5 discusses external fi nancing (AEs), notwithstanding the persistence of high and the predominance of non-debt creating infl ows. tariff and non-tariff barriers in major trade partner Considerable volatility characterised portfolio economies (Chart II.37). investment fl ows against a backdrop of turbulent global fi nancial markets and political risks. In contrast, direct investment infl ows reached an all- time high. Net outfl ows were recorded under other major categories of fi nancial fl ows barring trade credits which picked up in H2 in tandem with import activity. At the end of March 2017, India’s foreign exchange reserves covered for 11.3 months of imports and were the ninth largest in the world. 1. Merchandise Exports II.6.3 As global trade recuperated, and international commodity prices upturned, exports weathered transient disruptions in some labour intensive sectors and returned to a trajectory of persistent positive growth from August 2016, 56ECONOMIC REVIEW II.6.4 The upsurge in exports in H2 spanned several commodity groups with a combined weight of 87.5 per cent in the export basket. The notable drivers were engineering goods, petroleum products, iron ore, cotton yarn, chemicals, marine products, gems and jewellery and readymade garments. A few of these sectors – petroleum products; iron ore; steel; cotton; and marine products – benefi tted from a surge in international commodity prices. Exports of iron ore responded to strong demand from China. Steel exports accelerated sharply on the back of trade remedial measures, and underpinned the performance of engineering goods. Notwithstanding a transitory stress post-demonetisation, exports of labour intensive sectors such as readymade garments and gems and jewellery, quickly returned to II.6.7 The volume of gold imports dipped by expansion mode. Export recovery continued in about one-fi fth over the previous year. Strikes by April-June 2017 on the back of robust growth jewellers against the one per cent excise duty, in engineering goods, petroleum products and cash shortages following demonetisation, the readymade garments, though at a softer pace income declaration scheme and high gold prices than Q4 of 2016-17. took their toll translating into a decline of 13.4 per 2. Merchandise Imports cent in value terms. II.6.5 Imports started picking up from H2 of II.6.8 Non-oil non-gold imports remained muted 2016-17. However, they were largely sluggish for the year as a whole, even though a sharp pick- in 2016-17, albeit with a marginal increase. Oil up was discernible across various commodity imports, in fact, turned around in 2016-17 in groups in H2 (Chart II.39). While the pick-up contrast to a large contraction in the previous year. in demand for domestic coal reduced import On the other hand, there was a sharper reduction volumes, the global surge in coal prices led to in gold imports and a slim increase in non-oil non- an increase in value terms. An uptick in imports gold imports (Chart II.38). of vegetable oil occurred on account of a modest II.6.6 The expansion in the oil import bill occurred increase in volume; however, this also refl ected on the back of an increase in volume. International the uptrend in international prices. Imports of crude oil prices gradually fi rmed up through the pearls and precious stones moved in tandem year on a revival in the oil market sentiment, with higher exports of gems and jewellery. Import a temporary weakening of the US dollar, large of pulses rose for the third consecutive year supply disruptions and production cuts by the despite the highest ever domestic production, Organisation of the Petroleum Exporting Countries refl ecting growing consumption and build-up of (OPEC). buffer stocks. 57ANNUAL REPORT II.6.9 In contrast, a fall in raw material prices growth in new businesses. Going forward, global encouraged substitution of imports in the case headwinds for domestic software companies may of fertilisers, even though global prices softened intensify further with emphasis on local hiring, sharply. Anti-dumping and safeguard measures and higher demand for automation across major undertaken by the government helped reduce export markets. steel imports signifi cantly. With the improvement in II.6.12 Net travel receipts increased by 5.3 the domestic production of capital goods, imports per cent during 2016-17, as gains from higher of machinery and project goods moderated. tourist arrivals offset the burgeoning demand for II.6.10 During April-June 2017, merchandise travel services by residents. Under transfers, in- imports witnessed robust growth. While high growth bound remittances to India were dampened for in gold import volume contributed signifi cantly to the second successive year by the weakening of the increase in imports, oil and electronics imports growth and labour market “nationalisation” policies also aided import growth further. that impacted hiring of foreign workers in source 3. Invisibles countries. II.6.11 Net receipts from invisibles, comprising II.6.13 Net outgo with respect to profi ts and services, income and transfers, declined during dividends also increased, largely refl ecting higher 2016-17 mainly due to moderation in software exports, private transfer receipts and higher net returns that accrued to foreign investors on their outgo on primary incomes (Chart II.40). In a phase investments in the domestic economy. In the of successive years of lowered global IT spending, aggregate, the net surplus from invisibles fi nanced domestic software companies faced pricing 86 per cent of the merchandise trade defi cit, up pressures in traditional services such as banking, from 83 per cent during the previous year, despite fi nancial services and insurance, and subdued a contraction of 10 per cent during 2016-17. 58ECONOMIC REVIEW 4. Current Account Defi cit II.6.14 The bottoming out of international prices of major commodities in 2016 eroded gains in India’s terms of trade vis-à-vis the preceding two years (Chart II.41). Another downside factor that impacted the current account defi cit (CAD) was the lower order of net receipts from services and remittances as well as higher outgo on income payments during 2016-17. Nevertheless, with the trade defi cit shrinking on the back of stronger exports and subdued imports, CAD shrank to 0.7 per cent of GDP in 2016-17 as against 1.1 per cent a year ago (Chart II.42). II.6.15 The gains in terms of trade realised in the preceding two years were slightly undermined by a modest upturn in international commodity prices in 2016-17. The erosion in terms of trade recovery in export volumes and a modest decline is estimated to have widened the merchandise in import volumes. Further, the positive impact of trade defi cit by 0.3 percentage point of GDP. the trade volume also outweighed the negative The impact, however, was more than offset by contribution of software exports and remittances compression in the trade defi cit on the back of a (Chart II.43). 59ANNUAL REPORT 5. External Financing II.6.16 Net capital fl ows were in excess of CAD, leading to an increase in foreign exchange reserves during 2016-17 to a level of US$ 370 billion by the end of the year (Chart II.44). Gross foreign direct investments (FDI) to India reached an all-time high of US$ 60 billion in 2016-17, up from US$ 56 billion a year before. This jump was catalysed by wide ranging domestic reforms, in particular, easing of FDI norms; the Goods and Services Tax; the Insolvency and Bankruptcy Code 2016; the new corporate insolvency framework, including the National Company Law Tribunal and the National Company Law Appellate Tribunal; and ease of doing business. Services topped the list of recipient sectors, followed by II.6.17 Foreign portfolio investment (FPI) fl ows manufacturing and construction. A recent report remained volatile throughout the year. With the by FDI Intelligence reveals that India was ahead recovery in global equity markets on expectations of China and the US as the world’s top destination of expanded monetary accommodation from for greenfi eld FDI in 2016. Further, the UNCTAD’s systemic central banks, net FPI infl ows were survey of multinational enterprises ranked India robust up to Q2. Subsequently, global risk aversion as the third most favourite host country for FDI for driven by the outcome for the US Presidential 2017-19 after the US and China (Chart II.45). elections and expectations of an increase in the Federal funds rate, culminated in intense selling pressure in domestic equity and debt segments during November 2016 through January 2017. FPI fl ows (net), turned positive once again thereafter – aggregating US$ 23.4 billion during February to end-June 2017. II.6.18 Net infl ows of short-term trade credit turned positive in H2 of 2016-17; this was in line with growing imports. In 2016-17, net infl ows in the form of trade credit amounted to US$ 6.5 billion as against a net repayment of US$ 1.6 billion in 2015- 16. Major sectors that took recourse to trade credit during the year included gold, oil, steel, edible oil and coal. II.6.19 External commercial borrowings (ECB) (net), recorded outfl ows on higher repayments. 60ECONOMIC REVIEW Even though ECB fl ows to India moderated in to the redemption, the Reserve Bank took up 2016-17, domestic companies took increasing short positions in the forward market for the US recourse to rupee denominated bonds (RDBs) dollar, and reversed those positions during the amounting to US$ 3,671 million as compared with redemption period. US$ 14 million a year ago. The distribution pattern II.6.21 India’s external debt as at end-March 2017 shows that one-third of the RDBs were raised stood much lower than a year before. This decline for repayments of domestic rupee loans. About is mainly attributed to the fall in long-term external 41.0 per cent of the total ECB agreement amount debt, particularly non-resident deposits refl ecting (other than rupee denominated bonds/loans) was the redemption of FCNR(B) deposits and intended to be hedged as compared to 39.1 per commercial borrowings. As at end-March 2017, cent a year ago. the share of US dollar denominated debt was 52.1 II.6.20 Notwithstanding positive accretions of per cent of the total external debt, followed by the deposits under Non-Resident (External) Rupee Indian rupee (33.6 per cent), SDR (5.8 per cent), (NRE) accounts; and Non-Resident Ordinary Japanese yen (4.6 per cent), Euro (2.9 per cent), (NRO) accounts, there was a net outfl ow of US$ and others (1.0 per cent). 12.4 billion from non-resident deposits during 6. External Vulnerability Indicators 2016-17, following a lumpy redemption of FCNR (B) deposits raised by banks under the Reserve II.6.22 India’s external sector vulnerability Bank’s special swap window during September indicators are being monitored continuously. The to November 2013. In order to ensure a smooth confi guration of a lower CAD, declining external redemption of FCNR(B) deposits, the Reserve debt, rising foreign exchange reserves and stable Bank front-loaded liquidity provisions through domestic fundamentals point towards greater open market operations and spot interventions/ resilience of the external sector in the recent deliveries of forward purchases. In the run-up period (Box II.10). The foreign exchange cover Box II.10 Assessment of India’s External Sector Resilience India’s external sector parameters have improved over the With this background, two inter-related issues relating to last few years drawing strength primarily from a lower current external sector resilience were examined, viz.; (i) whether account defi cit (CAD). In general, a lower current account and, to what extent, the resilience of India’s external sector defi cit augurs well for lower external fi nancing requirements, has improved over the period 2006-07:Q1 to 2016-17:Q4; build-up of reserves and a stable currency, albeit there could and (ii) what the risks could be to the current level of be other factors at play impacting each indicator separately. resilience. For instance, CAD, even if lower, fi nanced through short- Applying the Classifi cation and Regression Tree Approach term debt may alter the composition of external debt and (CART) adopted by Lau et al (2003), data on fi ve external thus worsen reserve adequacy indicators. Hence, it is sector indicators, viz., export growth, current account important to examine the external sector’s resilience in a balance, net capital fl ows, reserve adequacy for short- more holistic manner by simultaneously focusing on key term debt and the net international fi nancial position were external indicators. (Contd....) 61ANNUAL REPORT converted into probability-weighted “strong” and “weak” Weak exports, lower capital fl ows, higher net international signs. Data points above (below) 80th (20th) percentile were fi nancial liabilities and a lower reserve cover for short-term assigned a probability of one of being a strong (weak) debt dragged down the current resilience score from the pre- indicator. Data points within the 20th and 80th percentile global fi nancial crisis period. However, all indicators except were assigned probability depending on their relative net capital fl ows/GDP were stronger during Q4 of 2016-17 closeness to either percentile values. Then, a decision matrix than during the pre-taper tantrum period, thus translating was drawn up to assign rating scores between 1 (weak) and into a higher resilience score. 5 (strong) to each of the 32 possible combinations of the Even the recent improvement in the resilience score is “strong” and “weak” signs of the fi ve indicators. Finally, a subject to some downside risks. If terms of trade gains turn fuzzy logic system was applied to the combinations to obtain unfavourable in tandem with projected higher international an overall resilience score in a range of 1 to 5 (least resilient commodity prices and the global demand conditions do to most resilient) for each quarter. not improve enough to support export volumes, CAD could India’s external sector resilience score improved to 1.89 increase due to a widening of the merchandise trade defi cit. as at end-March 2017 from 1.54 as at end-March 2013, In fact, based on data for 1980-2016, it is estimated that i.e., during the pre-taper talk period. However, the current a one per cent positive shock in terms of trade reduces resilience score is not only weaker than that of 3.68 at India’s CAD by 0.03 per cent of GDP. Secondly, India’s end-September 2008, i.e., just before the onset of global software exports – a major source of fi nancing merchandise fi nancial crisis but also, being closer to the lower end, it trade defi cit, face heightened uncertainty from protectionist signals a general deterioration (Chart 1). For a robustness policies being envisaged in advanced economies, especially check, in an alternative specifi cation, ‘export growth’ was with regard to H1B visa in the US, which may stress the replaced with the ‘terms of trade index’. The resilience score current balance of payment (BoP). Thirdly, the short-term then improved marginally to 1.79 in March 2017 from 1.11 in outlook for remittances fl ows to India largely depends on the pre-taper talk period, but continued to be lower than the income conditions in source countries, especially the Gulf peak observed during the pre-global fi nancial crisis period. region which is facing low growth and undergoing fi scal consolidation, even though the assessment of the World Bank (2017) is more optimistic on this count. Finally, robust FDI infl ows which were at the forefront in fi nancing CAD in the previous three years, entail servicing through higher income payments which could have implications for CAD. References: Lau, Francis, Sunny Yung and Ivy Yong (2003), “Introducing a Framework to Measure Resilience of an Economy”, Quarterly Bulletin, Hong Kong Monetary Authority, June. World Bank (2017), Migration and Development Brief 27, April. for external debt improved during the year while II.6.23 India’s net international investment position the share of short-term debt (residual maturity) (NIIP) as a ratio to GDP improved, albeit the stock in total external debt fell by over a percentage of foreign assets held by domestic residents point, following the redemption of FCNR(B) (assets) and domestic assets held by foreign deposits. India’s external debt to GDP ratio stood residents (liabilities) surged during 2016-17 out one of the lowest amongst major peer EMEs (Table II.8). The dominance of FDI infl ows over (Chart II.46). other forms of capital fl ows in recent years points 62ECONOMIC REVIEW Table II.8: External Sector Vulnerability Indicators (Per cent, unless indicated otherwise) Indicator End- End- End- End- End- Mar Mar Mar Mar Mar 2013 2014 2015 2016 2017 1 2 3 4 5 6 1. External Debt to 22.4 23.9 23.9 23.5 20.2 GDP ratio 2. Ratio of Short-term to 23.6 20.5 18.0 17.2 18.6 Total Debt (OM) 3. Ratio of Short-term to 42.1 39.7 38.5 42.7 41.5 Total Debt (RM) 4. Ratio of Concessional 11.1 10.4 8.8 9.0 9.3 Debt to Total Debt 5. Ratio of Reserves to 71.3 68.2 72.0 74.3 78.4 Total Debt 6. Ratio of Short-term Debt 33.1 30.1 25.0 23.1 23.8 (OM) to Reserves (%) 7. Ratio of Short-term Debt 59.0 58.2 53.5 57.4 52.9 (RM) to Reserves (%) towards a desirable qualitative compositional shift 8. Reserves Cover of 7.0 7.8 8.9 10.9 11.3 Imports (in months) in India’s net international investment position. 9. Debt Service Ratio 5.9 5.9 7.6 8.8 8.3 The share of non-debt liabilities increased to 50.3 (Debt Service Payments to Current Receipts) per cent as at end-March 2017 from 46.3 per cent 10. External Debt 409.4 446.2 474.7 485.0 471.9 a year ago. (US$ billion) 11. Net IIP (US$ billion)* -326.7 -340.8-364.3 -359.5-392.9 II.6.24 To sum up, India’s external sector benefi ted 12. Net IIP/GDP ratio -17.8 -18.2 -18.3 -17.4 -16.8 13. CAD/GDP ratio 4.8 1.7 1.3 1.1 0.7 from lower CAD, robust FDI infl ows, build-up of Note: OM: Original Maturity, RM: Residual Maturity, IIP: International reserves and improvement in other vulnerability Investment Position. * (-) sign implies net claims of non-residents on India. indicators. However, global factors continue Source: RBI. to weigh on India’s external sector outlook. In particular, developments in the global oil market US which can affect its export potential. However, will have implications for India’s oil import bill. domestic macroeconomic fundamentals continue Further, India’s IT sector could face a challenging to remain strong, rendering the external sector business environment from policy changes in the resilient to global shocks. 63THE ANNUAL REPORT ON THAEN WNOURAKLI NRGEP OOFR TTHE RESERVE BANK OF INDIA PART TWO: THE WORKING AND OPERATIONS OF THE RESERVE BANK OF INDIA III MONETARY POLICY OPERATIONS Fundamental institutional changes impacted monetary policy in India following the amendment to the Reserve Bank of India (RBI) Act, 1934, effected on June 27, 2016. The policy rate was reduced by 50 bps during 2016-17 and the policy stance shifted from accommodative to neutral in February 2017. Even as inflation undershot the target of 5 per cent set for Q4 of 2016-17, monetary policy operations had to contend with massive surplus liquidity conditions, necessitating a mix of conventional and unconventional instruments of liquidity management. In spite of faster transmission of policy rate changes to marginal cost of funds based lending rates (MCLRs), pass-through to actual lending rates remained incomplete. III.1 The conduct of monetary policy in India of monetary policy’s goal variable, viz., headline underwent a fundamental institutional reform consumer price infl ation at 4.0 per cent with a ± 2 during the year 2016-17 in an environment fraught per cent tolerance band, and how it relates to the with several challenges. Bouts of turbulence conditional policy forecasts in numerical terms is ricocheting through global fi nancial markets, the recurring theme of the narrative of this chapter. volatility in global crude oil prices, risk-laden Even as infl ation outcomes were falling off cliffs political climate globally, a distinctive break in during the year, the monetary policy framework infl ation formation in the domestic economy, was undergoing a regime shift. demonetisation and its side-effects, and new III.2 Parliament amended the RBI Act to accord data releases that overtook perceptions of the primacy to infl ation as the goal of monetary policy state of the economy – all of these developments in India, while keeping in mind the objective of impacted the setting of monetary policy with growth. Subsequent notifi cation in the Gazette different degrees of intensity and duration. In of India defi ned the goal. A Monetary Policy this unsettled milieu, the agenda set for the Committee (MPC) was constituted and enjoined year was accomplished. The infl ation target of 5 to make the monetary policy decision under per cent for Q4 of 2016-17 was achieved with a explicitly laid out process of transparency and sizable undershoot as in the preceding two years accountability. The amended Act also required underscoring how extraordinary and intense ‘tail’ the Reserve Bank to set out in the public domain events, especially the food price dynamics, have the operating procedure of monetary policy and overwhelmed the trajectory of infl ation in India. changes therein from time to time that would The agenda for 2017-18 will be guided by the secure the goals of monetary policy. mandate as enshrined in the RBI Act, 1934 “to maintain price stability, while keeping in mind the III.3 In accordance, a revised liquidity objective of growth’’. The materialisation of the path management framework was implemented in 64MONETARY POLICY OPERATIONS April 2016 and published in the Monetary Policy III.5 Amendments to the RBI Act, which came Report (MPR), which became a statutory bi- into force on June 27, 2016, provided the legislative annual requirement under the amended Act. mandate to the Reserve Bank to operate the The operating framework of monetary policy was monetary policy framework of the country with the further fi ne-tuned to enhance its effectiveness to primary objective explicitly defi ned to “maintain achieve the medium-term target of 4 per cent – price stability while keeping in mind the objective the centre of the target band – on a continuous of growth”. While the monetary policy objective of basis. Operations under this framework are price stability has been explicitly specifi ed in terms examined in the sub-section on The Operating of the commitment to meet the infl ation target Framework: Liquidity Management especially in based on the headline Consumer Price Index the context of the exceptional swings in liquidity (CPI), the factors that constitute a failure to achieve that have characterised the year gone by. Issues the infl ation target, i.e., if the average infl ation is in the transmission of monetary policy impulses to more (less) than the upper (lower) tolerance level actual lending rates in the economy, particularly for three consecutive quarters, have also been those lost to structural impediments (Box III.1) defi ned and notifi ed in the offi cial Gazette. To are addressed in sub-section on Monetary operationalise this mandate, the Government, on Policy Transmission. Finally, the chapter sets out August 5, 2016, notifi ed the infl ation target as four an agenda that will guide the formulation and per cent year-on-year growth in CPI-Combined implementation of monetary policy in 2017-18 in pursuit of the mandate of price stability, keeping in infl ation, with upper and lower tolerance levels of mind the objective of growth. six per cent and two per cent, respectively. Agenda for 2016-17: Implementation Status III.6 The amended RBI Act also provided for the constitution of a six member MPC. As per the Monetary Policy amended RBI Act, the MPC would be entrusted III.4 The fi rst bi-monthly monetary policy with the task of fi xing the benchmark policy rate statement for 2016-17 issued in April was (repo rate) required to contain infl ation within the formulated to subserve an accommodative specifi ed target level. Out of the six members of the policy stance. The key policy repo rate was cut MPC, three members would be from the Reserve by 25 bps to 6.5 per cent, its lowest since March Bank and the other three members would be 2011. Given the weak state of domestic demand appointed by the central government. The three relative to potential, the policy rate reduction was external members would hold offi ce for a period of expected to help in reviving investment activity. four years. The MPC is stipulated to hold meetings By the time of the second bi-monthly monetary at least four times a year. To ensure transparency policy statement in June 2016, infl ation readings of the MPC proceedings, the amended RBI Act showed a sharper-than-anticipated upsurge, prescribes for attributing the vote of each member driven primarily by food prices, interrupting the phase of policy rate reductions signalled in April. of the MPC. It also requires each member of the Accordingly, the policy rate was left unchanged MPC to write a statement specifying the reasons while persevering with an accommodative stance, for voting in favour of, or against the proposed as further clarity from incoming data was awaited resolution. At the end of each meeting, the MPC on the evolving infl ation trajectory. would publish the resolution adopted by the 65ANNUAL REPORT Committee. On the fourteenth day after every easing of food infl ation, was also highlighted by meeting of the MPC, the minutes of the meeting the policy statement. However, the monetary containing the resolution adopted at the meeting policy stance continued to be accommodative with of the MPC, the vote of each member of the MPC emphasis on pro-active liquidity management to ascribed to such member, and the statement of enable faster pass-through of the past policy rate each member of the MPC are required to be put out cuts to the banks’ MCLRs. in the public domain. In the case of failure to meet III.9 Under the new framework, the six-member the target, wherein the average infl ation remains MPC constituted on September 29, 2016 met for more (less) than the upper (lower) tolerance level the fi rst time on October 3 and 4, 2016 in the of the infl ation target for any three consecutive context of the fourth bi-monthly monetary policy quarters, the Reserve Bank would have to explain statement. Observing that space had opened in a report to the central government setting out up by the moderating trajectory of infl ation, the reasons for failure to achieve the infl ation underpinned by the supply side measures taken target; the remedial actions proposed to be taken by the Government, the MPC unanimously voted by the Reserve Bank; and an estimate of the time for a reduction in the key policy rate by 25 bps. The period within which the infl ation target would be steady improvement in liquidity conditions from achieved. defi cit at the beginning of the year to surplus by July III.7 The amended RBI Act also requires the 2016, under the modifi ed liquidity management publication of MPR, once in every six months, framework, helped transmit the policy rate explaining the sources of infl ation; and the reduction to various segments of the market. The forecasts of infl ation for the period between six MPC assessed that infl ation would remain within 5 to eighteen months from the date of publication per cent by Q4 of 2016-17, though potential cost- of the document. The Reserve Bank has been push pressures, including the impending 7th CPC’s publishing the MPR since September 2014. award on house rent allowances, and the increase in minimum wages with potential spillovers to III.8 The third bi-monthly monetary policy minimum support prices, were fl agged as upside statement of August 2016 kept the policy repo rate risks to infl ation. unchanged, assessing that risks to the infl ation target of 5 per cent for March 2017 still remained on III.10 The MPC’s meeting of December 6 and the upside, given the implications of the 7th Central 7, 2016 for the fi fth bi-monthly monetary policy Pay Commission’s (CPC’s) award on infl ation statement was overcast by heightened uncertainty trajectory and infl ation expectations. Further, around the outlook for growth and infl ation in the uncertainty on trajectory of infl ation excluding aftermath of demonetisation. In the MPC’s view, food and fuel arose from the possibility of higher short-run disruptions in economic activity in cash- input price pressures and whether the then benign intensive sectors were likely to be transitory, movement in crude prices would turn out to be given the war-time drive launched by the Reserve transient, feeding to output prices as output gap Bank to restore the pre-demonetisation stock continued to close. An upturn in infl ation excluding of currency in circulation by ramping up the food and fuel on account of these factors, possibly circulation of new currency notes, alongside even counterbalancing the benefi t of the expected the greater usage of non-cash based payment 66MONETARY POLICY OPERATIONS instruments in the economy. The large surplus 140 bps largely driven by defl ation in pulses and liquidity following the demonetisation in November vegetables. The sustained decline in food prices 2016, was also considered transitory in view since August 2016 has been unprecedented by of liquidity management operations targeted at historical patterns. The initial drop in food prices restoring system-level liquidity to a position closer was driven by correction in prices of pulses and to neutrality. Accordingly, the MPC unanimously vegetables in response to supply management decided to keep policy repo rate unchanged, while measures. Since November, collapse in vegetable continuing with an accommodative policy stance. prices across the board was driven by demand III.11 In the sixth bi-monthly monetary policy compression and fi re sales of vegetables post statement of February 8, 2017, the MPC judged demonetisation in a scenario of high seasonal that growth would recover sharply in 2017-18 on supply. While the sharp decline in vegetable account of the following factors: (i) a resurgence prices was expected to be transitory as effects of discretionary consumer demand, held back of demonetisation fade, there was considerable by demonetisation; (ii) quick revival of economic uncertainty on the timing and the strength of the activity in cash-intensive sectors; (iii) pick-up expected reversal, especially during the summer in both consumption and investment demand months. Pulses were expected to remain soft on as the demonetisation-induced ease in bank the back of a sharp rise in production and imports. funding conditions leads to a sharp improvement III.13 In the fi rst bi-monthly monetary policy in transmission of past policy rate reductions into statement for 2017-18 of April 6, 2017, the MPC MCLRs, and in turn, to lending rates for healthy held the policy repo rate unchanged at 6.25 borrowers; and (iv) the positive impact on growth per cent while persevering with a neutral policy of measures announced in the Union Budget for 2017-18 to step up capital expenditure, boost stance. The statement observed that although the rural economy and affordable housing. The CPI headline infl ation fell to the then historic low MPC reiterated its commitment to bring headline in January 2017 due to sharp moderation in food infl ation closer to 4.0 per cent on a durable basis infl ation, infl ation excluding food and fuel had and in a calibrated manner, noting that this required remained relatively sticky since September 2016 further signifi cant decline in infl ation expectations. and was signifi cantly above the headline infl ation. While observing that the persistence of infl ation Though infl ation was projected to be moderate excluding food and fuel could set a fl oor on further in the fi rst half of the year, signifi cant upside risks downward movements in headline infl ation and remained in the form of uncertainty of monsoon, trigger second-order effects, the MPC indicated implementation of allowances under the 7th CPC that it needed more time to assess the manner in even as moderation in crude prices and softening which the transitory effects of demonetisation on of food prices could help contain infl ation infl ation and the output gap could play out. The impulses. Growth was projected to strengthen committee decided to change the policy stance to 7.4 per cent in 2017-18 from 6.7 per cent in from accommodative to neutral while keeping the 2016-17. As the output gap could gradually close, policy rate on hold. aggregate demand pressures would build up, with III.12 The headline infl ation target of 5.0 per implications for the infl ation trajectory, which was cent for Q4 of 2016-17 undershot by around projected to move up in the second half of the 67ANNUAL REPORT year. In this context, the MPC noted that the future weighted average call rate (WACR) – with the policy course of monetary policy would largely depend repo rate through proactive liquidity management on incoming data and evolving macroeconomic consistent with the stance of monetary policy. conditions and underlined the need to closely and Liquidity management during 2016-17 can continuously monitor infl ation developments. be heuristically categorised into two distinct phases. First, active operations were launched to III.14 The second bi-monthly monetary policy progressively move the ex-ante liquidity position statement for 2017-18 of June 7, 2017 was in the system from defi cit to closer to neutrality. overshadowed by infl ation falling below 4.0 per Second, managing the post-demonetisation surge cent in May 2017. While reiterating its commitment in surplus liquidity became an overriding priority, to keep headline infl ation close to 4.0 per cent on warranting unorthodox instruments to augment a durable basis, the MPC took cognizance of the the arsenal of regular operations so as to prevent unusual softening of headline infl ation on account excessive softening of money market rates under of the sharp moderation in food infl ation. Infl ation the weight of the deluge of liquidity. projections were revised downwards to a range of 2.0-3.5 per cent in the fi rst half of the year and III.16 The liquidity management framework 3.5-4.5 per cent in the second half of 2017-18. The was modifi ed in April 2016 in the fi rst phase. The Committee noted that the risk of fi scal slippages, Reserve Bank proactively injected durable liquidity which, by and large, could entail infl ationary of `2.1 trillion during the year up to November 8, spillovers, had risen with the announcements 2016 (i.e., the pre-demonetisation period) in the of large farm loan waivers. This along with the form of open market purchase operations, net forex global, political and fi nancial risks materialising market operations, and buyback of government into imported infl ation and the disbursement of securities. As a result, the system level ex-ante allowances under the 7th CPC’s award would be liquidity position transited from a defi cit of about the upside risks. Given, however, the uncertainty `813 billion, on a daily average basis, in Q1 to a surrounding the evolving infl ation trajectory, surplus of `292 billion in Q2 and `64 billion in Q3 especially for the near months, the MPC was of the (up to November 8, 2016). view that premature monetary policy responses III.17 Two other changes under the modifi ed risk disruptive policy reversals later and the loss liquidity management framework worked in of credibility. The MPC’s resolution underlined combination to tightly anchor money market rates the need to revive private investment, restore with the policy rate. First, the cash reserve ratio banking sector health and remove infrastructural (CRR) maintenance requirement was reduced bottlenecks for monetary policy to play an effective to a daily minimum of 90 per cent from 95 per role. Accordingly, the MPC decided to keep the cent earlier, which moderated banks’ holdings of policy repo rate unchanged at 6.25 per cent with excess reserves. Second, the policy rate corridor a neutral stance while remaining watchful of the was narrowed to +/-50 bps on April 5, 2016, on the incoming data. back of assurance of both durable and frictional The Operating Framework: Liquidity Management liquidity. This narrowed the spread of WACR vis-à- III.15 The operating framework of monetary vis the repo rate and reduced its volatility (Charts policy aims at aligning the operating target – the III.1 and III.2). The Reserve Bank also ensured 68MONETARY POLICY OPERATIONS front-loading of adequate liquidity proactively surplus liquidity. Recognising, however, that these in anticipation of potential pressure and market operations could potentially be constrained by the concerns arising out of scheduled redemptions of fi nite stock of domestic securities available with foreign currency non-resident (bank) [FCNR (B)] the Reserve Bank, a pre-emptive strategy was put deposits. As a result, liquidity turned into surplus in place involving two unconventional measures. even prior to the announcement of demonetisation III.20 First, an incremental cash reserve ratio on November 8, 2016. (ICRR) of 100 per cent on the increase in net III.18 With regard to the unprecedented surge of surplus liquidity created by demonetisation, a mix of instruments was employed by the Reserve Bank at different points in time (Chart III.3). Each instrument has distinct advantages and disadvantages (Table III.1). III.19 After demonetisation, currency in circulation declined by about `8,997 billion (up to January 6, 2017), which resulted in a large increase in surplus liquidity with the banking system, equivalent to a Phase Phase Phase Phase Phase cut in the CRR by about 9 per cent. This, in turn, I II III IV V posed a formidable challenge to the Reserve Bank’s liquidity management operations. Initially, conventional instruments, especially reverse repo auctions under the liquidity adjustment facility (LAF) window, were deployed to absorb 69ANNUAL REPORT Table III.1: Advantages and Disadvantages of Instruments for Absorbing Surplus Liquidity Instruments Advantages Disadvantages Incremental cash reserve ratio Most effective in absorbing any amount of Unremunerated and therefore a cost to surplus liquidity without being constrained by the banking system; not a market based collateral. instrument. Securities issued under the MSS This is a market based instrument and Requires timely consent of the Government suitable for absorbing liquidity for a longer of India. period relative to reverse repos under Can bid up yields due to repetitive auctions. the LAF. Market participants prefer this instrument vis-à-vis reverse repo because of liquidity of the underlying instrument. Open market (outright) operations – sales Key market based indirect instrument for Requires adequate stock of domestic absorbing durable surplus liquidity; most securities in the portfolio of the Reserve effective indirect instrument. Bank; large scale operations can potentially infl uence yields that may not be consistent with the stance of monetary policy. Term reverse repo auctions Provide fl exibility in terms of responding to Inadequate market appetite for longer-term fast changing liquidity conditions on a daily auctions; may not prevent signifi cant easing basis; rollover option; simultaneous auctions of WACR under persistently high surplus of multiple tenor; can aid the development of liquidity conditions; domestic securities the term money market. available with the Reserve Bank can limit the use of term reverse repo. Fine tuning overnight reverse repo auctions Robust market appetite because of the ease Not suitable for dealing with large durable of rollover; ideal instrument for managing surplus; most effective not in isolation frictional surplus liquidity. but when used in conjunction with other instruments. Fixed rate reverse repo window (the fl oor of Provides certainty to market participants Extensive use can lead to excessive easing the LAF corridor) about the surplus liquidity to be parked of the WACR relative to the repo rate within overnight at a rate that is known in advance. the LAF corridor; domestic securities As there is no limit on the amount that could available with the Reserve Bank can limit be parked, it prevents WACR falling below the amount of absorption; can lead to ‘lazy’ the lower bound of the corridor. liquidity management by banks and thus effectively shift the money market on to the Reserve Bank’s balance sheet. demand and time liabilities (NDTL) of banks in capital fl ows. The ICRR was withdrawn after between September 16 and November 11, the Reserve Bank’s capacity to auction securities 2016 was applied. Second, the Government expanded under the enhanced MSS limit. was requested to enhance the limit of securities III.21 With fast paced remonetisation, surplus issuable under the market stabilisation scheme liquidity in the system declined by mid-January (MSS) to `6,000 billion from `300 billion. Open 2017. As a result, the Reserve Bank reverted to its market sales of cash management bills (CMBs) conventional instruments – reverse repo auctions issued under the MSS were undertaken (from December 2, 2016 to January 13, 2017), which – and discontinued further issuances of MSS marked a departure from the original intent of the securities from January 14, 2017. All outstanding MSS of dealing with liquidity arising from surges MSS securities matured by end-March 2017. 70MONETARY POLICY OPERATIONS III.22 The post-demonetisation period has had in March, but net absorption of liquidity under fi ve different phases of liquidity management the LAF declined to `3,141 billion by end-March, (Chart III.3). refl ecting the build-up of cash balances by the Government and higher excess CRR maintained III.23 In the fi rst phase (November 10 to by banks. November 25, 2016), the Reserve Bank extensively used variable rate reverse repos of III.28 In the fi fth phase that began in April 2017 tenors ranging from overnight up to 91 days. The with the fi rst auction of Treasury Bills (T-Bills) outstanding amount of surplus liquidity absorbed under the MSS, surplus liquidity was managed through reverse repos (both variable rate and with a mix of issuance of T-Bills under the MSS fi xed rate auctions) reached a peak of `5,242 and reverse repo auctions. Anticipating that the billion on November 25. surplus liquidity conditions may persist through 2017-18, in April 2017 the Reserve Bank provided III.24 In the second phase (November 26 to guidance on liquidity, which contained the following December 9, 2016), 100 per cent ICRR was elements: (i) use of T- Bills and dated securities applied, which helped drain excess liquidity in the under the MSS up to `1 trillion; (ii) issuances of system to the extent of about `4,000 billion. CMBs of appropriate tenors in accordance with III.25 In the third phase (December 10, 2016 the memorandum of understanding (MoU) with to January 13, 2017), the surplus liquidity was the Government of India to manage enduring managed through a mix of reverse repos and surpluses due to government operations up to issuances of CMBs under the MSS, with a `1 trillion; (iii) open market operations with a view gradually increased reliance on the latter. The to moving system level liquidity to neutrality; and peak net outstanding liquidity absorbed was (iv) fi ne tuning reverse repo/repo operations to `7,956 billion on January 4, 2017 (`2,568 billion modulate day to day liquidity. The Reserve Bank absorbed through reverse repos and `5,466 billion auctioned T-Bills (tenors ranging from 312 days to through CMBs). 329 days) aggregating `1 trillion in April and May III.26 In the fourth phase (January 14 to end- 2017. March 2017), the Reserve Bank returned to the III.29 The WACR – the operating target of conventional reverse repo operations as the key monetary policy – traded at only about 15 instrument to absorb surplus liquidity, particularly basis points (bps) below the repo rate between the liquidity released through the maturing CMBs November 9, 2016 and January 13, 2017 and under the MSS. about 27 bps below the repo rate on daily average III.27 The usual year-end liquidity pressure basis between January 14 and March 31, 2017. stemming from banks’ balance sheet adjustments While the WACR remained within the LAF and tax payments to the government did not lead corridor, the large deviation of the WACR from the to a very sharp spike in money market rates this policy repo rate during Q4 was mainly on account time around due to the large post-demonetisation of exclusive reliance on reverse repos to absorb liquidity overhang. The absorption of liquidity surplus liquidity arising out of maturing CMBs surplus using reverse repos (at both fi xed and (Chart III.4). After narrowing of the LAF corridor to variable rates) peaked at `5,522 billion on March +/- 25 bps on April 6, 2017, the average spread of 6, 2017. The surplus liquidity conditions continued WACR below the repo rate declined to 17 bps in 71ANNUAL REPORT Monetary Policy Transmission III.30 The Reserve Bank reduced the policy repo rate by a cumulative 175 bps during January 2015 to June 2017. In response, banks reduced their weighted average domestic term deposit rate (WADTDR) by 126 bps during January 2015 to October 2016. The weighted average lending rate (WALR) on fresh rupee loans and outstanding rupee loans declined by 97 bps and 75 bps, respectively, during the same period. The reduction in the WADTDR was signifi cantly higher than that in the lending rates (Table III.2). III.31 Monetary transmission, however, improved signifi cantly post-demonetisation. Buoyed by the surplus liquidity, the share of current account and June as compared with 31 bps and 21 bps in April saving account (CASA) deposits in aggregate and May, respectively. deposits increased to 40.6 per cent as at end- Table III.2: Deposit and Lending Rates of SCBs (Excluding RRBs) (Per cent) End-Month Repo Rate Term Deposit Rates Lending Rates Median Term WADTDR Median Base WALR - WALR - Fresh MCLR Deposit Rate Rate Outstanding Rupee Loans 1- Yr Median Rupee Loans 1 2 3 4 5 6 7 8 Dec-2014 8.00 7.53 8.64 10.25 11.84 11.45 - Mar-2015 7.50 7.49 8.57 10.20 11.76 11.07 - Mar-2016 6.75 6.81 7.73 9.65 11.20 10.47 - Apr-2016 6.50 6.65 7.64 9.65 11.23 10.59 9.45 June-2016 6.50 6.63 7.59 9.65 11.19 10.43 9.45 Sep-2016 6.50 6.52 7.41 9.65 11.13 10.35 9.35 Oct-2016 6.25 6.54 7.38 9.64 11.09 10.48 9.30 Dec-2016 6.25 6.22 7.19 9.64 11.07 10.12 9.15 Mar-2017 6.25 6.15 6.97 9.55 10.80 9.74 8.60 May-2017 6.25 6.08 6.86 9.50 10.66 9.84 8.55 June-2017 6.25 5.98 6.81 9.50 10.67 9.50 8.53 Variation (Percentage Points) Oct-16 over Dec-14 -1.75 -0.99 -1.26 -0.61 -0.75 -0.97 - Oct-16 over Mar-16* -0.50 -0.27 -0.35 -0.01 -0.11 0.01 -0.15 Jun-2017 over Oct-16 0.00 -0.56 -0.57 -0.14 -0.42 -0.98 -0.77 WADTDR: Weighted Average Domestic Term Deposit Rate. WALR: Weighted Average Lending Rate. MCLR was introduced on April 1, 2016. *: For MCLR, the period pertains to October 2016 over April 2016. Source: Special Monthly Return VIAB, RBI and banks’ websites. 72MONETARY POLICY OPERATIONS Table III.3: Share of CASA Deposits in Aggregate Deposits (Amount in ` billion) Fortnight ended Demand Deposits@ Time Deposits@ Saving Deposits Aggregate Deposits Share of CASA Deposits (in per cent) 1 2 3 4 5 6 18-Mar-16 6,874 59,530 23,930 90,333 34.1 28-Oct-16 7,175 62,295 26,673 96,143 35.2 31-Mar-17 10,135 61,774 32,022 1,03,931 40.6 23-Jun-17 8,356 62,586 31,034 1,01,976 38.6 @: Net of liabilities from saving account. Source: Section 42 Banking Data, RBI. March 2017 from 35.2 per cent at end-October 15 bps during the preceding seven months when 2016, before declining to 38.6 per cent on June 23, the policy rate was cut by 50 bps. The largest 2017 (Table III.3). As the cost of CASA deposits reduction in MCLR post-demonetisation was (3.2 per cent) is signifi cantly lower than the effected by public sector banks, followed by private WADTDR, the overall cost of borrowings declined, sector banks and foreign banks (Chart III.5). enabling banks to cut their lending rates. Banks Sectoral Lending Rates also lowered their median term deposit rate by 56 bps during November 2016 to June 2017. As a III.33 Transmission was asymmetric across result, the WALR on fresh rupee loans declined sectors, refl ecting varied credit conditions and by 98 bps, while the WALR on outstanding rupee risk appetite. Since January 2015, lending rates loans declined by 42 bps (up to June 2017). across sectors, barring credit card segment, declined in the range of 15-238 bps, with the III.32 It is signifi cant that the one-year median largest transmission taking place in the case of MCLR declined by a cumulative 77 bps from Rupee export credit (Table III.4). November 2016 to June 2017 even when the policy rate was unchanged. This is in sharp contrast to III.34 Interest rates on fresh rupee loans declined the decline in the median one-year MCLR by just signifi cantly in respect of housing in personal loan 73ANNUAL REPORT Table III.4: Sector-wise WALR of SCBs (Excluding RRBs) - Outstanding Rupee Loans (at which 60 per cent or more business is contracted) (Per cent) End-Month Rupee Trade Industry Profes- Infra- Personal- Personal MSMEs Personal Personal Agricul- Per- Export (Large) sional struc- Other@ Education Housing Vehicle ture sonal Credit Services ture Credit Card 1 2 3 4 5 6 7 8 9 10 11 12 13 Dec-14 12.16 13.09 12.95 12.39 13.05 14.24 12.90 13.05 10.76 11.83 10.93 37.86 Mar-15 12.04 13.07 12.80 12.46 12.89 13.94 12.87 12.91 10.99 11.62 10.96 37.88 Mar-16 11.46 12.50 12.36 11.81 12.06 13.90 12.48 12.25 10.56 11.65 10.74 38.00 Jun-16 11.17 11.99 12.17 11.64 12.20 13.96 12.32 12.08 10.50 11.39 10.77 38.26 Sep-16 10.54 11.91 11.68 11.65 12.07 12.89 12.09 12.18 10.01 11.46 10.91 39.07 Oct-16 10.78 11.86 11.64 11.56 11.89 12.98 12.40 12.23 10.00 11.45 10.88 39.01 Dec-16 10.61 11.78 11.63 11.49 11.78 13.11 11.95 12.03 9.95 11.24 10.86 38.84 Mar-17 10.98 11.59 11.57 11.21 11.80 12.85 11.70 11.88 9.78 11.05 10.95 39.02 May-17 10.61 11.36 11.44 10.97 11.94 12.97 11.79 11.73 9.75 11.00 10.81 38.93 Jun-17 9.78 11.41 11.28 10.91 11.59 12.85 11.53 11.75 9.59 10.87 10.78 38.88 Variation (Percentage Points) Jun-17 over Dec-14 -2.38 -1.68 -1.67 -1.48 -1.46 -1.39 -1.37 -1.30 -1.17 -0.96 -0.15 1.02 Jun-17 over Oct-16 -1.00 -0.45 -0.36 -0.65 -0.39 -0.13 -0.87 -0.48 -0.41 -0.58 -0.10 -0.13 @: Other than housing, vehicle, education and credit card loans. Source: Special Monthly Return VIAB, RBI. segment and vehicle loans in the commercial III.35 The pace of transmission to lending rates segment during January 2015 to June 2017 was signifi cantly slower than to deposit rates and (Table III.5). the MCLR on account of several factors. First, banks treated the increase in CASA deposits as Table III.5: WALR of Select Sectors of SCBs (Excluding RRBs) - Fresh Rupee transitory. The share of CASA deposits, which Loans Sanctioned had peaked in December 2016, declined with (Per cent) progressive remonetisation; consequently, banks End-Month Personal Commercial were reluctant to adjust their lending rates fully. Housing Vehicle Housing Vehicle Second, a sizeable share of past loans continues 1 2 3 4 5 to be priced with reference to the base rate. As Dec-14 10.53 12.28 11.73 12.53 against a cumulative decline of 85 bps in the Mar-15 10.47 12.42 12.04 12.30 Mar-16 9.78 11.98 11.14 11.21 1-year median MCLR during 2016-17, the median Jun-16 9.64 11.79 10.53 11.49 base rate declined by only 10 bps over the same Sep-16 9.58 11.79 10.94 11.73 Oct-16 9.55 11.50 10.70 11.79 period, resulting in a slower pace of transmission Dec-16 9.50 11.13 10.59 11.17 to WALR on outstanding rupee loans. Third, Mar-17 8.94 10.77 10.03 10.24 May-17 8.93 10.97 10.05 11.21 among the various components of the MCLR, only Jun-17 8.99 10.81 10.42 10.83 the term deposit rates responded to the change in Variation (Percentage Points) Jun-17 over Dec-14 -1.54 -1.47 -1.31 -1.70 the policy rate. Fourth, the higher lending spread Jun-17 over Oct-16 -0.56 -0.69 -0.28 -0.96 maintained by banks in the wake of stressed Source: Special Monthly Return VIAB, RBI. asset quality of banks impeded transmission 74MONETARY POLICY OPERATIONS (Box III.1). Fifth, administered interest rates on securities to which they are to be linked for small savings have not moved adequately in line quarterly resetting. Going forward, greater liquidity with underlying changes in yields on government across various segments and maturity spectrum Box III.1 MCLR, Lending Rates and Health of the Banking Sector The MCLR system, introduced in April 2016, was expected to improve monetary policy transmission to banks’ lending rates. Preliminary evidence suggests that while transmission of the policy rate to MCLR has improved, the transmission to lending rates has remained muted. This is because banks often adjust the spread they charge over MCLR – both in respect of the outstanding rupee loans and fresh rupee loans sanctioned by banks (Chart 1). An inter-sectoral comparison reveals that the spread between WALR and 1-year median MCLR increased across most sectors during 2016-17 (Table 1). While some change in the spread is inevitable due to sector-specifi c factors and the underlying risk, banks appeared to have also changed spreads to improve their net interest margins (NIMs), i.e., the difference between interest income and interest expenditure, to compensate for increased credit risk. Regression analysis based on the data for the period Q1:2010-11 to Q3:2016-17 suggests that an increase in Table 1: Spread between WALR and 1-Year Median MCLR (Basis Points) Sector Apr-16 Mar-17 Jun-17 Agriculture 128 235 225 Industry (Large) 287 297 275 MSMEs 284 328 322 Infrastructure 281 320 306 Trade 307 299 288 Professional Services 230 261 238 stressed assets1 is associated with higher NIMs (Raj, et Personal Housing 110 118 106 al, 2017)2. The foreign banks that experienced increase in Personal Vehicle 220 245 234 stressed assets from relatively lower levels were also able Education 297 310 300 to increase their NIMs. The coeffi cient of stressed assets Credit Card 2891 3042 3035 in respect of public and private sector banks is positive but Rupee Export Credit 180 238 125 statistically insignifi cant (Table 2). Source: Special Monthly Return VIAB, RBI. (Contd....) 1 Stressed assets = gross NPAs + restructured assets (in relation to total assets). 2 NIM b,t = c + £ b + y t + ɗ 1 * NIM b,(t-1) +  * X + Ɛ b,t, where £ b represents the bank fi xed effects, and y t represents the time fi xed effects and X represents the vector of explanatory variables. In this regard, dynamic panel data regression technique has been applied following linear generalised method of moments (GMM). Asset quality apart, there are several other bank-specifi c, institutional, regulatory and macroeconomic factors that determine NIM. These include credit growth, bank size, capital adequacy, return on assets, operating expenses, non interest income, investment in SLR securities, GVA growth and infl ation. 75ANNUAL REPORT Table 2: Determinants of Net Interest Margin Variables Public Sector Banks Private Sector Banks Foreign Banks SCBs 1 2 3 4 5 NIM(-1) 0.785* 0.650* 0.521* 0.568* Stressed Assets 0.002 0.005 0.023* 0.008* CRAR -0.005 0.003 0.002** 0.003* Credit Growth 0.000 -0.001 0.0003** 0.0002** Operating Expense 0.213* 0.296* 0.128** 0.162* *: Signifi cant at 1 per cent level; **: Signifi cant at 5 per cent level. Notes: Model Specifi cation: Arellano-Bover/Blundell-Bond dynamic panel-data regression-System GMM with bank fi xed effects. NIM = (Interest income minus interest expense) to total assets (in per cent). Stressed assets = (Restructured assets plus gross NPAs) to total assets (in per cent). The regressions are controlled for seasonality, credit growth, bank size, capital adequacy, return on assets, operating expense, non-interest income, investment in SLR securities, GVA growth and infl ation. Hansen test for over identifi cation restrictions and Arellano-Bond test for residual auto correlations are found to be satisfactory. Source: Supervisory Returns, RBI. Reference: Raj, Janak, D.P. Rath, A. K. Mitra and J. John (2017), “Banks’ Health and Monetary Transmission”, Reserve Bank of India, mimeo. of fi nancial markets, particularly, term money reassessment of the Phillips curve relationship in and corporate bond markets, could facilitate India; (ii) an analysis of food infl ation in the recent emergence of an external benchmark for pricing period – particularly in terms of behaviour of of credit, contributing to speedier monetary policy perishables; and (iii) an assessment of exchange transmission. rate pass-through. Agenda for 2017-18 III.37 Data suggest that investment has remained depressed despite signifi cant monetary easing III.36 The agenda for 2017-18 will be guided by and pass-through of such easing to bank lending the mandate as enshrined in the RBI Act, 1934 “to rates. Capacity utilisation has also remained maintain price stability, while keeping in mind the below the long-term trend. In this backdrop, a objective of growth’’. The key agenda for 2017-18, study will be conducted to analyse factors that therefore, will focus on studying those aspects, have impacted investment activity and capacity which may have a signifi cant bearing on infl ation utilisation. projections going forward. This will include: (i) III.38 The GST in India has been implemented examining the impact of implementation of the from July 01, 2017. This is expected to remove 7th CPC’s award on infl ation; (ii) assessing the distortions and improve productivity. A study will impact of GST on infl ation; (iii) analysing the be conducted to assess the impact of GST on impact of farm loan waivers on the fi scal situation growth, including the second order effects. and infl ation; and (iv) assessing the output gap position incorporating fi nancial conditions III.39 The MCLR introduced in April 2016 has not and infrastructure constraints. The agenda will performed as expected. Although the introduction also include studies on infl ation such as: (i) a of MCLR resulted in better transparency on fi xing 76MONETARY POLICY OPERATIONS of lending rates by banks vis-à-vis the base transmission. Third, the Basel III liquidity coverage rate system, banks have frequently adjusted ratio (LCR) was introduced in a phased manner the spreads, thereby impeding transmission beginning January 2015. In order to ensure the to the actual lending rates. A detailed inter- smooth implementation, the Reserve Bank has departmental study will be conducted to examine allowed a carve out of 11.0 per cent of statutory liquidity ratio (SLR). The Reserve Bank has also various aspects of MCLR with a view to bringing reduced SLR to provide fl exibility to banks to meet necessary refi nements and exploring market rates the LCR norms by January 2019 when banks have as alternative benchmarks. to reach the minimum LCR of 100 per cent. The III.40 An effective monetary transmission is the initial experience suggests that the introduction key to successful implementation of monetary of LCR has altered banks’ activity in the call policy. In this context, the following studies will money market in the post-LCR regime. A study be conducted. First, post-demonetisation, there will be undertaken to assess as to whether the have been large swings in liquidity. A study will be introduction of the LCR has impacted monetary conducted to assess the impact of liquidity swings transmission. on the transmission of monetary policy impulses. III.41 As surplus liquidity is expected to pose Second, the poor health of the banking sector a challenge, especially in the fi rst half of 2017- has been a matter of concern. This appears to 18, the Reserve Bank will endeavour to manage have impacted monetary transmission as banks liquidity using multiple instruments available at have either not responded adequately to cuts in its disposal. However, the use of any particular the policy rate or did not cut their lending rates. instrument will be situation-specifi c with the sole A detailed study will be conducted to assess objective of ensuring closer alignment of the whether banks’ poor health has impeded monetary operating target to the policy repo rate. 77CREDIT DANENULALI RVEPEORRT Y AND IV FINANCIAL INCLUSION The Reserve Bank placed greater emphasis on effective credit delivery during the year by intensifying its ongoing efforts under the financial inclusion plans as well as adopting innovative approaches in expanding credit and spreading financial literacy. The major thrust was on operationalising a market mechanism for enhancing priority sector credit, strengthening the business correspondent (BC) model through BC registry and certification to promote financial inclusion, and enhancing financial literacy through a digital focus in literacy camps, experimenting with ground level camps, capacity building of financial literacy counsellors and observation of a financial literacy week. Work is also underway for the formulation of a National Strategy for Financial Inclusion. IV.1 The role of the Reserve Bank in the area of a BC registry and introduction of a framework of fi nancial inclusion involves developing policies for BC certifi cation. In this context, the Financial towards ensuring the availability of banking Inclusion and Development Department of the services at affordable costs for those vulnerable Reserve Bank formulates policies for promoting sections of society who have hitherto been left fi nancial inclusion. outside the scope of formal fi nancial services IV.2 Given the signifi cant role of micro, small due to factors such as illiteracy, lack of banking and medium enterprises (MSMEs) in employment infrastructure, diffi culty in physical access to such generation and GDP growth, a number of initiatives services in far fl ung areas and perceived lack were undertaken to enhance the fl ow of credit to of creditworthiness. Recognising that fi nancial these sectors, including trading in priority sector illiteracy is a major impediment to the diffusion of lending certifi cates (PSLCs), expanding the scope fi nancial inclusion, the Reserve Bank focused on of the ‘additional working capital limit’ for banks to the dissemination of simple messages introducing account for possible cash fl ow mismatches faced people to the benefi ts of active savings, prudent by micro and small enterprises (MSEs) borrowers borrowing practices, fi nancial planning as well due to withdrawal of legal tender status of Specifi ed as unravelling the world of digital transactions Bank Notes (SBNs), scaling-up the capacity for them. Consumer protection also forms an building programmes by launching Version 2 of the important aspect of these messages, which are National Mission for Capacity Building of Bankers also issued in vernacular language. During 2016- for Financing the MSME Sector (NAMCABS) and 17, the Reserve Bank aimed to provide a fi llip to laying down a framework for accreditation of credit fi nancial literacy through a digital focus in literacy counsellors. camps, experimenting with ground level camps, Agenda for 2016-17: Implementation Status capacity building of fi nancial literacy counsellors and observation of a fi nancial literacy week. In IV.3 Drawing upon the recommendations of order to propel the economy onto a medium-term the Committee on Medium-term Path on Financial sustainable inclusion path, greater emphasis Inclusion (Chairman: Shri Deepak Mohanty), was placed on strengthening the business the Reserve Bank focused on strengthening correspondent (BC) model through the creation the mechanism for effective credit delivery to 78CREDIT DELIVERY AND FINANCIAL INCLUSION the productive sectors of the economy. Major Table IV.1: Performance in Achievement of Priority Sector Lending Targets recommendations of the Committee viz., creating a BC registry; formalising certifi cation training (` billion) programmes for BCs; and designing a framework End-March Public Private Foreign Sector Banks Sector Banks Banks for accreditation of credit counsellors are nearing 1 2 3 4 the fi nal stage of implementation. 2016 19,850 6,480 1,104 (39.3) (44.1) (35.3) IV.4 The Financial Inclusion Advisory 2017* 19,889 7,110 1,238 Committee (FIAC) which is tasked with the (39.5) (42.5) (36.9) preparation of the National Strategy for Financial * : Provisional. Notes: Figures in parentheses are percentages to adjusted net Inclusion (NSFI) deliberated extensively on its bank credit (ANBC) or credit equivalent of off balance sheet formulation, while also drawing upon international exposures (OBE), whichever are higher, in the respective groups. best practices on digital fi nancial inclusion. The strategy document is slated to be launched various groups of scheduled commercial banks nation-wide in the coming year. For more (SCBs) is given in Table IV.1. effective monitoring of the fi nancial inclusion IV.6 An important development during 2016- initiatives being undertaken, granular data up to 17 was the operationalisation of priority sector district level is being called for from the banks, lending certifi cates (PSLCs) scheme in April 2016. as part of the third phase of Financial Inclusion The PSLC scheme is a mechanism to incentivise Plan (FIP) progress reports. A 2-tier training banks having surplus in lending to different programme focusing on the core competencies categories of the priority sector and thereby to of fi nancial literacy has been designed for the boost overall priority sector lending. PSLCs allow capacity building of fi nancial literacy counsellors the market mechanism to drive priority sector in collaboration with the College of Agricultural lending by leveraging the comparative strength Banking (CAB), Pune. of different banks. This scheme allows a bank to CREDIT DELIVERY benefi t by selling over-achievement of its target Priority Sector in a particular sector through PSLCs to another bank, which can buy it to meet its target in that IV.5 Priority sector lending aims to ensure sector, while selling its own over-achievement of adequate and timely availability of credit for those the target in another sector to another bank and so vulnerable sections of society which are often on. A platform to enable trading in the certifi cates deprived of credit due to the perceived lack of has been provided by the Reserve Bank through viability and creditworthiness. Priority sector loans its core banking solution (CBS) portal (e-Kuber). include small value loans to farmers for agriculture and allied activities, MSMEs, poor people for IV.7 The PSLC platform recorded active housing, students for education, other low income participation from all the eligible entities including groups and weaker sections. Social infrastructure urban co-operative banks and small fi nance banks and renewable energy are also eligible categories during 2016-17. Among the four PSLC categories, under this mechanism. The performance in the highest trading was observed in case of PSLC achievement of priority sector lending targets by – Small & Marginal Farmer, and PSLC – General 79ANNUAL REPORT Categories, with the transaction volumes being New Initiatives for the MSME sector `229.9 billion and `200.2 billion, respectively. An IV.10 The Government took several initiatives expected cyclical trend, however, was observed related to the MSME sector as it plays a crucial in the trading volume, which peaked mostly in the role in the economy both from the point of view of last month of every quarter. its employment generation and poverty alleviation IV.8 In view of the introduction of quarterly potential. The Reserve Bank also accords monitoring of priority sector targets, the timing signifi cant importance to this sector in its agenda of the transactions in the earlier or later part of for fi nancial inclusion, with its policy focused on the year also had an impact on the premium. improving access, adequacy, timeliness, and Accordingly, PSLCs traded during the fi rst quarter price of credit for MSMEs. The Reserve Bank of 2016-17 witnessed higher premiums in the took several unique initiatives, one of which range of 3-5 per cent. The total volume of PSLCs was launching NAMCABS in collaboration with on offer was `1,265.5 billion, while the amount CAB, Pune, in August 2015. Continuing in this fi nally settled was `498.0 billion as on March 31, direction, the Reserve Bank launched Version 2017. This indicates that with better information 2 of NAMCABS by employing newer and more dissemination and increased awareness among comprehensive training material covering the all the eligible participants, the PSLC market is latest developments in the sector and providing expected to pick-up in the future, which should lead professional advice to MSME entrepreneurs in the to higher margins for all PSLC sellers, incentivising form of credit counsellors. increased lending to the priority sector. Sanction of Additional Working Capital Limits to Flow of Credit to Agriculture Micro and Small Enterprises (MSEs) IV.9 The Government has been fi xing the target IV.11 In August 2015, banks were advised to for agricultural credit every year. During 2016-17, incorporate with their Boards’ approval, a clause commercial banks over achieved the target by 28.0 for fi xing a separate additional limit in their per cent. All other bank groups under-performed lending policy to MSEs, at the time of sanction/ in achieving their targets for agricultural credit renewal of working capital limits, specifi cally for though the overall fl ow of credit had exceeded the meeting the temporary increase in working capital target as in the previous year (Table IV.2). requirements arising mainly due to unforeseen/ seasonal increase in demand for products Table IV.2: Targets and Achievements for produced by them. During 2016-17, keeping in Agricultural Credit view the possible cash fl ow mismatches likely to (` billion) be faced by MSE borrowers due to the withdrawal Year Commercial Co-operative RRBs Total Banks Banks of legal tender status of SBNs, banks were further Target Achieve- Target Achieve- Target Achieve- Target Achieve- advised to use the same facility of providing ment ment ment ment ‘additional working capital limit’ to their MSE 1 2 3 4 5 6 7 8 9 borrowers to overcome such diffi culties. This was 2015-16* 5,900 6,430 1,400 1,533 1,200 1,193 8,500 9,155 announced as a one-time measure up to March 2016-17* 6,250 7,998 1,500 1,428 1,250 1,232 9,000 10,658 31, 2017 and to be normalised thereafter in the *: Provisional. Source: National Bank for Agriculture and Rural Development (NABARD). fresh working capital assessment cycle. 80CREDIT DELIVERY AND FINANCIAL INCLUSION Framework for rolling out Certifi ed Credit detail the inter-connectedness between SBLP and Counsellors (CCC) through SIDBI the National Rural Livelihoods Mission (NRLM) as well as the long-run feasibility and usefulness of the IV.12 Following the recommendation of the SHG programme so that it can serve its intended Committee on Medium-term Path on Financial purpose without building up excessive credit risk Inclusion to explore a system of professional credit in the system. The report is under fi nalisation. intermediaries/advisors for MSMEs, the Reserve The Reserve Bank also conducted an impact Bank had announced in its fi rst bi-monthly monetary assessment survey, modelled on a randomised policy statement for 2016-17 that a framework for control trial (RCT) basis, with the completion of accreditation of credit counsellors who can act a year of conducting the NAMCABS workshops as facilitators for entrepreneurs to access the for the branch managers of the specialised formal fi nancial system with greater ease and MSME branches through its select nine regional fl exibility would be drawn up. Credit counsellors offi ces. The survey revealed that the branches were to also assist MSMEs in preparing project with trained personnel generally outperformed reports in a professional manner which would, those with untrained ones, especially in lending in turn, help banks make more informed credit decisions. Accordingly, the Reserve Bank fi nalised to micro enterprises. The impact on qualitative a framework for accreditation of credit counsellors parameters also showed positive developments and the same was provided to Small Industries by way of work process innovations, viz., Development Bank of India (SIDBI) for rolling out (i) helping borrowers in preparing project reports the certifi ed credit counsellors scheme by acting and assisting in documentation; (ii) introduction as their registering authority. SIDBI, after fi nalising of simplifi ed application formats for MSME loans; the board-approved operational guidelines, (iii) branch offi cials going to the doorsteps of the launched the scheme in July 2017. borrowers to educate them on various schemes; and (iv) introduction of the lending automation IV.13 Credit fl ow to the MSE sector is refl ective processing system (LAPS) for speedy processing of these measures taken by the Reserve Bank and sanction of MSME loans. It was, therefore, during the year and several Government initiatives decided to continue with an enhanced and undertaken during the past few years (Table IV.3). comprehensive capacity building programme as Studies on the Effi cacy of Credit Delivery Models NAMCABS Version 2 by incorporating, inter-alia, IV.14 The Reserve Bank conducted a study on the newer developments in terms of government effi cacy of the Self Help Group (SHG)-Bank Linkage initiatives, Reserve Bank policy initiatives and use Programme (SBLP) with a view to analysing in of technology in MSME fi nancing. Table IV.3: Credit Flow to MSEs FINANCIAL INCLUSION Year Number of Amount MSE credit as IV.15 The Reserve Bank continued with its Accounts Outstanding per cent of (million) (` billion) ANBC efforts towards fulfi lling the fi nancial inclusion 1 2 3 4 agenda during the year to help realise the intended 2015-16 20.4 9,964.3 14.6 economic and social objectives. In this direction, 2016-17* 23.2 10,698.2 14.3 several new initiatives were undertaken during the *: Provisional. year. 81ANNUAL REPORT IV.16 The Committee on Medium-term Path on pertaining to the existing or potential business Financial Inclusion, which submitted its report in correspondents. The BC registry will give a December 2015, sought to propel the economy holistic view of under-banked and less penetrated on to a medium-term sustainable inclusion path. areas in a region and accordingly the delivery The Committee had recommended for setting up of fi nancial services can be improved in such a framework for a BC registry and BC certifi cation, areas through appropriate policy interventions. It following which instructions regarding the will help in effective monitoring and oversight of same were issued to Indian Banks’ Association BC operations. It is expected that banks and the (IBA) during the year. As recommended by regulators would utilise this database to gather the Committee, a fi nancial literacy week was critical insights and frame policies accordingly for conducted across the country from June 5-9, strengthening the BC infrastructure. The Reserve 2017. The literacy week focussed on four broad Bank has developed the framework for the BC themes, viz., Know Your Customer (KYC), registry and IBA is in the process of setting up the Exercising Credit Discipline, Grievance Redressal online registry portal. and Going Digital (UPI and *99#). During the BC Certifi cation week, banks were advised to display posters on the four common themes inside branch premises IV.19 As the customers served by the BCs and also display one message each day on the are usually new to the formal fi nancial system, homepage of their respective websites as well as it is essential to have knowledgeable business ATM screens across the country. Further, Financial correspondents. Thus, a need was recognised Literacy Centres (FLCs) and rural branches were to upgrade the skill sets of the BC agents advised to conduct special camps during the thereby making them more sensitive towards the week. A movable asset registry was also launched requirements of various customer groups who use by the Central Registry of Securitisation Asset the BC channel, viz., small and marginal farmers, Reconstruction and Security Interest of India SHGs, micro, medium and small entrepreneurs, (CERSAI), as recommended by the Committee to migrant labourers and retired people. Accordingly, facilitate lending to the MSME sector. the Reserve Bank has developed a framework Strengthening the BC Model for BC certifi cation with basic and advanced level courses to enhance the functional and behavioural IV.17 Strengthening the BC model has been competencies of BCs. On the basis of this one of the important development agendas, framework, IBA has set up a Governing Council recognising the signifi cant role played by BCs in providing last mile fi nancial services in the under- comprising members each from IBA, NABARD, banked and unbanked regions of the country. two members each from academics and experts Having a BC registry and certifi cation process in from industry. The Council is in the process of place would go a long way in strengthening the BC developing the course curriculum. model. Financial Inclusion Plans BC Registry IV.20 The Board approved Financial Inclusion IV.18 A BC registry is proposed to be structured Plans (FIPs) prepared by the domestic scheduled as a database of comprehensive information commercial banks provide a structured and 82CREDIT DELIVERY AND FINANCIAL INCLUSION Table IV.4: Financial Inclusion Plan : A Progress Report Particulars End- March 2010 End- March 2016 End- March 2017 1 2 3 4 Banking Outlets in Villages – Branches 33,378 51,830 50,860 Banking Outlets in Villages>2000-BCs 8,390 98,958 105,402 Banking Outlets in Villages<2000- BCs 25,784 432,271 438,070 Total Banking Outlets in Villages – BCs 34,174 531,229 543,472 Banking Outlets in Villages- Other Modes 142 3,248 3,761 Banking Outlets in Villages -Total 67,694 586,307 598,093 Urban Locations covered through BCs 447 102,552 102,865 BSBDA-Through branches (No. in million) 60 238 254 BSBDA-Through branches( Amt. in ` billion) 44 474 691 BSBDA-Through BCs (No. in million) 13 231 280 BSBDA-Through BCs (Amt. in ` billion) 11 164 285 BSBDA-Total (No. in million) 73 469 533 BSBDA Total (Amt. in ` billion) 55 638 977 OD facility availed in BSBDAs (No. in million) 0.2 9 9 OD facility availed in BSBDAs (Amt. in ` billion) 0.1 29 17 KCCs -Total (No. in million) 24 47 46 KCCs -Total (Amt. in ` billion) 1,240 5,131 5,805 GCC-Total (No. in million) 1 11 13 GCC-Total (Amt. in ` billion) 35 1,493 2,117 ICT A/Cs-BC-Total Transactions (No. in million) 27 827 1,159 ICT A/Cs-BC-Total Transactions (Amt. in ` billion) 7 1,687 2,652 planned approach to fi nancial inclusion. The Plans BC channel increased by 332 million, while the capture self-set targets of the banks on parameters amount transacted increased by `965 billion. such as the number of outlets (branches and BCs), IV.22 With the conclusion of the second phase Basic Savings Bank Deposit Accounts (BSBDAs) of FIP on March 31, 2016, all domestic scheduled opened by bank branches and BCs, overdraft commercial banks (including RRBs) were advised facilities availed in those accounts, transactions to set new Board approved FIP targets for the next in Kisan Credit Card (KCC), General Credit Card three years (April 2016-March 2019). Recognising (GCC) accounts and transactions through the the importance of granular data for effective BC-ICT channel. The progress made on these monitoring of the progress made by banks, parameters is reported to the Reserve Bank by the third phase FIP template has been revised banks on a monthly basis and the progress in incorporating new parameters keeping in view this regard as on end-March 2017 is set out in the emerging fi nancial inclusion landscape. In this Table IV.4. phase, banks have been asked to provide data IV.21 During 2016-17, the banking outlets up to the district level across population groups opened through BCs in villages increased by of metro, urban, semi-urban and rural segments. 12,243, while the number of accounts opened Work is also underway for the formulation of a through BCs increased by 49 million. Similarly, National Strategy for Financial Inclusion (NSFI) the total number of transactions through the (Box IV.1). 83ANNUAL REPORT Box IV.1 National Strategy for Financial Inclusion The Reserve Bank had set up the Financial Inclusion consultative process involving, among others, public and Advisory Committee (FIAC) in 2012 to review fi nancial private sector stakeholders engaged in fi nancial sector inclusion policies on an on-going basis and to provide development. Typically, it will include an analysis of the expert advice to the Reserve Bank in this matter. Given the current status of, and constraints on, fi nancial inclusion in renewed focus on fi nancial inclusion by the Government of the country; a measurable fi nancial inclusion goal; how the India, the on-going implementation of the Pradhan Mantri country proposes to reach this goal and by when; and how it Jan-Dhan Yojana (PMJDY) and the need for convergence will measure the progress and achievements of the strategy. of the fi nancial inclusion efforts of various stakeholders, The proposed strategy pillars for NSFI include: developing FIAC was reconstituted in June 2015. Apart from continuous physical and digital infrastructure, regulatory framework, reviewing of the fi nancial inclusion policy, monitoring the fostering competition, increased fi nancial awareness, progress of fi nancial inclusion and fi nancial literacy, and grievance redressal mechanism and scientifi c assessment assessing their impact, the reconstituted FIAC has been measures. actively involved in the process of formulating the National Given the recent thrust on digital fi nancial inclusion and Strategy for Financial Inclusion (NSFI), a public document. in line with international best practices, NSFI also seeks NSFI will comprehensively present the strategy developed to draw upon the G-20 High Level Principles on Digital at the national level to systematically accelerate the level Financial Inclusion, adapted to meet the India-specifi c of fi nancial inclusion. It is being developed through a broad requirements. Penetration of Banking Services: Achievement of had been covered comprising of 19,875 villages Roadmaps through brick and mortar branches, 431,359 villages through BCs and 20,902 villages through IV.23 The Reserve Bank had taken several steps other modes. to provide banking facilities in all the unbanked villages in the country. A roadmap to cover villages IV.24 Continuing with its efforts to provide with population more than 2,000 was fi rst rolled out banking services in unbanked villages, the SLBC in 2010. A total of 74,414 villages with population convenor banks were advised in December 2015 more than 2,000 were identifi ed and allotted to to identify villages with population above 5,000 various banks (public sector banks, private sector without a bank branch of a scheduled commercial banks and regional rural banks) through State bank in their State and allot these villages Level Bankers’ Committees (SLBCs) for coverage. among scheduled commercial banks for opening All the identifi ed villages have been provided branches. banking services through branches or business IV.25 On May 18, 2017, the Reserve Bank correspondents or through other modes such as issued revised guidelines on branch authorisation ATMs and mobile vans. In June 2012, a roadmap was rolled out to provide banking services to policy with a view to facilitate fi nancial inclusion as unbanked villages with population less than 2,000. also to provide fl exibility to banks on the choice A total of 491,825 unbanked villages across the of delivery channel. Accordingly, SLBC convenor country with a population of less than 2,000 banks have been advised to review and identify were allotted to various banks through SLBCs for the unbanked rural centres (URCs) in villages coverage. As on March 31, 2017, 96.0 per cent with population above 5,000 and ensure that (472,136 villages) of the total villages allotted such unbanked rural centres are banked forthwith 84CREDIT DELIVERY AND FINANCIAL INCLUSION by opening of CBS enabled banking outlets by of SBNs and the push for digital transactions. A December 31, 2017. number of initiatives were undertaken, which included conducting a pan-India Financial Literacy Assignment of SLBC Convenorship, Telangana and Inclusion Survey (Box IV.2), Pilot Project on IV.26 In view of the merger of State Bank of Setting up Centres for Financial Literacy at the Hyderabad with State Bank of India, the SLBC block levels (Box IV.3), digital focus in literacy Convenorship of Telangana has been assigned to camps, capacity building for FLC counsellors the State Bank of India. and rural branch managers, and observation of a Assignment of Lead Bank Responsibility fi nancial literacy week (Also see para IV.16). IV.27 During the year, 21 new districts were Financial Literacy by Financial Literacy Centres formed in Telangana, taking the total number of and Rural Branches of Banks - A Policy Review districts in the State to 31. State Bank of Hyderabad, IV.29 Following withdrawal of legal tender status of Andhra Bank, Syndicate Bank and Canara Bank SBNs, the policy on conduct of camps by FLCs and were assigned lead bank responsibility of the new rural branches of banks was reviewed with a focus districts. In Manipur, seven new districts were on going digital. Accordingly, banks were advised formed taking the total number of districts in the to conduct special camps through their FLCs (2 State to 16. United Bank of India and State Bank camps per month) for a period of one year on of India were assigned lead bank responsibility of ‘Going Digital’ through UPI and *99# (USSD). Two the new districts. In Haryana and West Bengal, one posters on UPI and *99# have been prepared for new district each was created and Punjab National this purpose. The Financial Awareness Messages Bank and State Bank of India were assigned (FAME) booklet that contains 11 institution- lead bank responsibility of the new districts, neutral fi nancial awareness messages has been respectively. Lead bank responsibility of the three published in 13 languages for the benefi t of the newly created districts in Arunachal Pradesh was trainers and the camp participants. Rural branches assigned to the State Bank of India. Further, in of banks are required to conduct one camp per view of the merger of Associate Banks with the month covering all the messages that are part of State Bank of India, the lead bank responsibility the FAME booklet and the two digital platforms of districts hitherto held by the Associate Banks UPI and *99# (USSD). in the states of Karnataka, Kerala, Rajasthan, Telangana and Punjab have been assigned to Train the Trainers Programme (TOT) State Bank of India. As on June 2017, lead bank IV.30 A two-tier training programme has responsibility has been assigned in 706 districts been designed for the capacity building of FLC across the country. counsellors and rural branch managers. During FINANCIAL LITERACY Tier-1 of the program, CLOs (Chief Literacy Offi cer IV.28 Financial literacy has been an important attached to the corporate offi ce of the banks), element in the fi nancial inclusion plan of the LLOs (Lead Literacy Offi cers - faculty members Reserve Bank. During 2016-17, added importance of the Banks’ training/staff colleges) and RLOs was attached to spreading fi nancial literacy, given (Regional Offi ce Literacy Offi cers from regional the skewed distribution and limited reach of offi ces of the Reserve Bank) have been trained fi nancial literacy centres in some states as well at CAB, Pune. In Tier-2 of the programme, faculty as in view of the withdrawal of legal tender status members of the Bank’s training/staff colleges will 85ANNUAL REPORT Box IV.2 Pan India Financial Literacy and Inclusion Survey The Reserve Bank of India undertook a pan-India Financial 7, 5 and 9, respectively. India’s average scores in the three Literacy and Inclusion Survey based on the OECD/INFE components are 3.7, 2.6 and 5.6, respectively. In India, the (International Network on Financial Education) Toolkit. The average score is 11.9 out of the total score of 21. survey was conducted in 29 states and 5 union territories OECD/INFE considers the threshold score as 5 out of 7 for (excluding Andaman & Nicobar Islands and Lakshadweep fi nancial knowledge, 3 out of 5 for fi nancial attitude, and 6 Islands). Quotas for age, gender and socio economic classes out of 9 for fi nancial behaviour. The percentage of Indian were fi xed across the locations to achieve a representative population scoring above the minimum required threshold sample. The total sample size for the survey was 20,573 score is 32 per cent for fi nancial knowledge, 28 per cent respondents. for fi nancial attitude, and 56 per cent for fi nancial behaviour. As per the OECD/INFE methodology, fi nancial literacy is The results of the survey are presented in the chart below. measured across three components viz. fi nancial knowledge, attitude, and behaviour. Questions on fi nancial knowledge test the concepts of time value of money, calculation of interest, compounding, defi nition of infl ation, risk and return, and diversifi cation. Financial attitude captures the trade- off between short term gratifi cation (consumption) and long term planning (saving). Financial behaviour questions are designed to test decision making in the household, budgeting, active saving, considered purchasing, paying bills on time and choosing fi nancial products. The maximum score for the three components of fi nancial knowledge, fi nancial attitude and fi nancial behaviour are undertake training sessions for FLC counsellors IV.31 As at end-March 2017, 1,376 FLCs were and rural branch managers. A comprehensive operational in the country. During the year ended curriculum on the core competencies of fi nancial March 2017, 96,315 fi nancial literacy activities literacy has been prepared for the benefi t of the were conducted by the FLCs as against 87,710 trainers. activities during the preceding year. Box IV.3 Pilot Project on Setting up Centres for Financial Literacy (CFLs) To explore innovative and participatory approaches to Micro Finance for Women (ISMW), Samarpit and PACE fi nancial literacy, the Reserve Bank is initiating a pilot Foundation have been selected to execute the pilot project project on fi nancial literacy at the block level. The pilot in collaboration with the banks. The pilot project will be project is being commissioned in nine states across 80 executed with the objectives of active saving and good blocks by NGOs in collaboration with the sponsor banks. borrowing, fi nancial planning and goal setting, going digital Six NGOs registered with the Depositors Education and and consumer protection. CFLs would be set up under a Awareness Fund (DEA Fund) viz., CRISIL Foundation, common name and logo “Moneywise Centre for Financial Dhan Foundation, Swadhaar FinAccess, Indian School of Literacy”. 86CREDIT DELIVERY AND FINANCIAL INCLUSION Agenda for 2017-18 2017-18, following which an independent impact assessment study would be conducted by the IV.32 Going forward, work related to the Reserve Bank. As integrity and consistency of preparation of National Strategy for Financial data are crucial for framing policy and designing Inclusion, which will comprehensively lay down strategies, an Automated Data Extraction Project the policy approach to hasten the process of fi nancial inclusion, will be completed. Financial (ADEPT) from banks to the Reserve Bank and a literacy content for certain target groups like portal to capture data relating to natural calamities SHGs, farmers, MSEs, students and senior will be implemented to strengthen the existing citizens will be introduced. The block level CFLs processes for information and data collection from are expected to begin fi nancial literacy activities in banks on a real time basis. 87FINANCIALA NMNUAAL RREPKORETTS AND V FOREIGN EXCHANGE MANAGEMENT During 2016-17, the Reserve Bank undertook a number of measures for developing various segments of the financial markets. In the money market, the Reserve Bank undertook proactive liquidity management operations, with a view to aligning money market rates with the policy rate for better transmission of monetary policy. Orderly conditions were maintained in the spot, forward and futures segments of the forex market, alongside further liberalisation of the capital account and rationalisation of the reporting requirements to promote ease of doing business. V.1 The Reserve Bank has been developing were issued in October and December, 2016 financial markets in tune with the evolving needs respectively, with the objective of developing the of a growing economy. During the year, the Bank interest rate market. These directions are intended provided more operational flexibility to market to enhance flexibility and product development participants and conducted market operations in line with market requirements. Exchanges as to align money market rates with the stance of well as over-the-counter (OTC) participants are monetary policy. Interventions in the forex market free to propose any product that meets the broad were also carried out in pursuance of the stated requirements set in these directions. objective of maintaining orderly conditions. In V.4 The report of the Working Group on an endeavour to facilitate external trade and development of the corporate bond market in payments, and promote ease of doing business, India (Chairman: Shri H R Khan) was submitted in many existing rules on foreign investment in India August 2016. The department has taken concerted and external commercial borrowings (ECBs) were efforts to implement the various recommendations rationalised and reporting was simplified. of the Group. FINANCIAL MARKETS REGULATION V.5 In line with these recommendations, DEPARTMENT (FMRD) foreign portfolio investment (FPI) was permitted in V.2 The mandate of the FMRD is to regulate unlisted corporate debt securities and securitised and develop money, government securities debt instruments in November 2016 up to `350 (G-sec), foreign exchange and related derivatives billion within the extant investment limits for markets. The department undertook a number of corporate bonds. Further, with a view to easing measures during 2016-17, aimed at easing norms access to the G-sec market, foreign portfolio for market participants, improving accessibility, investors were allowed from December 2016 to increasing the number of financial products, trade G-sec in the secondary market directly on strengthening market infrastructure apart from the negotiated dealing system-order matching harnessing market analytics and pursuing richer (NDS-OM), without involving brokers. surveillance for policy formulation. V.6 Repo directions were further liberalised Agenda 2016-17: Implementation Status during the year with the objective of deepening V.3 Final directions on introduction of the market and widening the participation base. money market futures and interest rate options Effective September 06, 2016, listed companies 88FINANCIAL MARKETS AND FOREIGN EXCHANGE MANAGEMENT were allowed to borrow or lend in the repo market facilitate the development of term repo market. without the minimum seven-day restriction. Gilt Taking into account the feedback received from account holders (GAHs) were permitted to enter the market, final directions were issued on August into a repo transaction with their custodians or with 10, 2017. another GAH. Further, in August 2016, brokers V.10 With a view to providing operational undertaking market-making activities in corporate flexibility to multinational entities and their Indian bonds were permitted access to corporate bond subsidiaries exposed to currency risk, the non- repo market to meet their liquidity requirement. resident centralised or regional treasury of such V.7 In order to stimulate retail participation entities was permitted in March 2017 to enter in the G-sec market, an implementation group into foreign exchange derivative contracts with with representation from all stakeholders was authorised dealer (AD) banks in India to hedge the constituted to recommend specific measures to exposure of their Indian subsidiaries by entering enable seamless movement of securities from the into tri-partite agreement involving the Indian Subsidiary General Ledger (SGL) form to demat subsidiary, its non-resident parent or treasury and form and vice versa and to provide demat account the AD bank. holders a functionality to put through trades on Agenda for 2017-18 NDS-OM. Accordingly, demat account holders of National Securities Depository Limited (NSDL) V.11 Initiatives currently under consideration and Central Depository Services Limited (CDSL) include a framework for authorisation of trading were permitted from August 2016 to put through platform for OTC markets under the Reserve trades in G-sec on the NDS-OM platform through Bank’s ambit, introduction of a comprehensive their respective Depository Participant (DP) bank code of fair practices for debt market in line with which should also be an SGL account holder and global standards and framing of guidelines on a direct member of NDS-OM and the Clearing financial markets in the International Financial Corporation of India Limited (CCIL). Service Centre (IFSC), viz., Gujarat International Finance Tec-City (GIFT). V.8 Existing directions on commercial paper (CP) were reviewed with a view to broadening V.12 Draft guidelines for simplified hedging access to it, strengthening disclosure requirements facility for residents and non-residents were by issuers, and reviewing the role of issuing and released in April 2017 for comments and feedback paying agents while putting in place an information from the stakeholders. Under the proposed facility, dissemination mechanism, and revised draft documentary evidence of forex exposure would directions were placed on the Bank’s website for not be required for booking derivative contracts public comments. The final directions were issued and net gains on the derivative positions would be on August 10, 2017. passed on to the customer on delivery. To begin with, entities with forex exposure of up to US$ 30 V.9 Draft directions on the introduction of tri- million would be permitted under the facility. party repo were placed on the Bank’s website in April 2017 for public comments, with the V.13 In fulfilment of the G20 mandate for shifting objective of enabling market participants to use OTC derivatives on to exchanges or electronic the underlying collateral more efficiently and to trading platforms, a framework for authorisation 89ANNUAL REPORT of such platforms would be put in place. The reserve ratio of 100 per cent, with effect from the implementation of the legal entity identifier (LEI) fortnight beginning November 26, 2016, on the regime for financial market entities would begin increase in net demand and time liabilities (NDTL) during the year. between September 16, 2016 and November 11, 2016. This was a temporary measure and was FINANCIAL MARKETS OPERATIONS withdrawn from the next fortnight, i.e., the fortnight DEPARTMENT (FMOD) beginning December 10, 2016. The liquidity V.14 FMOD is entrusted with the responsibility surplus was also managed through (1) issuance of of conducting liquidity management operations cash management bills (CMBs) under the market for maintaining appropriate level of liquidity in the stabilisation scheme (MSS), which touched a peak financial system for monetary transmission. It also outstanding level at `5,966 billion during the first works towards ensuring that orderly conditions are half of January 2017; and (2) undertaking multi- maintained in the forex market through operations tenor variable rate reverse repos. The liquidity in the spot, forward and futures segments. absorbed by the Reserve Bank (including through Agenda 2016-17: Implementation Status MSS) during this period touched a high of `7,956 billion on January 04, 2017. Money Markets and Liquidity Management V.16 The department also introduced measures V.15 The department continued its efforts to to facilitate the development of the term money maintain an appropriate level of liquidity in the market that included security substitution, market- financial system through liquidity management based valuation of collateral securities in LAF operations, using fixed and variable rate repo operations and re-repo of collateral received by and reverse repo under the liquidity adjustment market participants under term reverse repo with facility (LAF), the marginal standing facility (MSF) the Reserve Bank. and outright open market operations (OMOs), Foreign Exchange Market with a view to aligning money market rates with the policy rate for more efficient transmission of V.17 Orderly conditions were maintained in the monetary policy signals. In line with the change forex market during the year through operations in the monetary policy stance from a deficit to a in the spot, forward and futures segments. position close to neutrality, as enunciated in the The Reserve Bank’s foreign exchange market monetary policy statement of April 05, 2016, operations, aimed at containing excessive the department conducted nine OMO purchase volatility and maintaining orderly conditions in the auctions during April-October 2016, injecting forex market, resulted in net purchase of foreign liquidity amounting to `1.1 trillion into the banking currency amounting to US$ 12.3 billion during system. The Government of India’s decision on 2016-17 (US$ 10.2 billion in 2015-16) and US$ November 8, 2016 to withdraw `500 and `1000 8.9 billion during April-June 2017. Outstanding net notes resulted in a huge influx of deposits into the forward purchases, which stood at US$ 10.8 billion banking system. This led to exceptional surplus as at end-March 2017, increased to US$ 17.1 liquidity conditions in the banking system, which billion at end-June 2017. India’s foreign exchange was managed by imposing an incremental cash reserves increased to US$ 386.54 billion as at 90FINANCIAL MARKETS AND FOREIGN EXCHANGE MANAGEMENT end-June 2017 from US$ 360.18 billion as at end- sources, will be managed by a judicious mix of the March 2016. following: (i) variable rate repo and reverse repo auctions with a preference for longer tenors; (ii) V.18 During 2016-17, there was smooth operations under the MSS using CMBs, Treasury unwinding of concessional foreign exchange Bills and dated securities; and (iii) OMO sales and swaps undertaken by market participants with the purchases to manage durable liquidity and move Reserve Bank in 2013. These concessional swaps the system liquidity to a neutral level, if required. were executed against foreign currency non- resident (bank) [FCNR(B)] deposits maturing from V.21 The department will continue to conduct September 2016 onwards. Some of the outflows foreign exchange intervention operations in an also pertained to concessional swaps against effective manner to curb undue volatility in the overseas foreign currency borrowings (OFCBs) of exchange rate. banks. The Reserve Bank’s forward forex assets V.22 The department also proposes to continue were consciously matched with the FCNR(B) policy-oriented research on financial markets. and OFCB liabilities. This helped avoid a sharp FOREIGN EXCHANGE DEPARTMENT (FED) fall in the foreign exchange reserves and also neutralised the impact on liquidity which was also V.23 The FED aims at facilitating external managed by appropriately timed OMO purchase trade and payments while enhancing ease of operations. doing business. The department leveraged on information technology for effective monitoring V.19 The department also carried out a number of trade transactions. In pursuance of greater of research studies on market movements and capital account convertibility, the extant rules behaviour over the year which helped in shaping and regulations under the Foreign Exchange the policy and operational framework. Management Act (FEMA), 1999 were rationalised Agenda for 2017-18 further during 2016-17. Alongside, the reporting V.20 The department aims to carry out liquidity to the Reserve Bank was also simplified. Further, management operations effectively in line with the ADs were delegated with greater operational stance of monetary policy by absorbing excess flexibility in the areas of trade and ECBs. liquidity and maintaining system liquidity at the Agenda 2016-17: Implementation Status desired level over the year. The department will Rationalisation of Regulations continue to closely monitor evolving liquidity conditions and the impact of the narrowing of the V.24 As per FEMA, regulations on capital corridor (with effect from April 06, 2017) on money account transactions are notified in consultation markets and will modulate market operations to with the central government. In the past two years, ensure alignment of the weighted average call the Reserve Bank has rationalised a number rate (WACR) with the policy rate. The expansion of regulations in sync with evolving business of currency in circulation will drain most of the practices and models relating to, inter alia, export surplus liquidity associated with demonetisation. and import of currency; acquisition of immovable The residual surplus liquidity, coupled with property outside India by persons resident in India; evolving liquidity inflows and outflows from other realisation, repatriation and surrender of foreign 91ANNUAL REPORT exchange; foreign currency accounts by a person or equivalent per financial year either in rupees or resident in India; possession and retention of any convertible foreign currency or a combination foreign currency; insurance; remittance of assets; of both. manner of receipt and payment; establishment in Easing of Foreign Investment Regime India of a branch office or a liaison office or a project office or any other place of business; and export of V.27 The policy on foreign investment was goods and services. The regulations on acquisition oriented towards greater capital account and transfer of immovable property in India by a convertibility and facilitating flow of capital. A person resident outside India, borrowing and comprehensive regulation was issued on receipt lending between residents and non-residents, and of foreign investment by e-commerce entities inward and outward investments are being finalised which clearly defined an e-commerce entity as in consultation with the central government. also inventory based and market place models of e-commerce. Under the regulations, while foreign Import Data Processing and Monitoring System investment is permitted up to 100 per cent under V.25 A Working Group on Import Data Processing automatic route for market place model, foreign and Monitoring System (IDPMS) was constituted investment is prohibited in inventory-based model towards effective monitoring of import payments of e-commerce. and, based on its recommendations, a centralised system in the form of IDPMS went live on October V.28 Foreign investment in pension funds was 10, 2016 to facilitate efficient data processing for enabled under the automatic route up to 49 per payment of import transactions and its effective cent. The ownership and control of the Indian monitoring. The IDPMS provides end-to-end pension fund should, however, remain at all times monitoring of import transactions from shipment in the hands of resident Indian entities. to final payment, thereby doing away with current V.29 Foreign investment up to 100 per cent monitoring on a stand-alone basis by the custom was permitted under the automatic route in ‘other authorities, AD banks and the Reserve Bank. financial services’,viz., activities regulated by Startups a financial sector regulator, subject to certain V.26 Considering that startups have the potential conditions including minimum capitalisation norms. to play a significant role in economic growth and V.30 A wholly owned subsidiary in India, set up job creation, their access to foreign funds was by a non-resident entity (in a sector where 100 per eased. Startup companies were permitted to raise cent foreign investment was allowed in the automatic funds by issuing convertible notes to persons resident outside India for an amount of `2.5 route with no FDI-linked conditionalities), was million or more in a single tranche. Further, foreign permitted to issue FDI-compliant instruments to the venture capital investors (FVCIs) were permitted said non-resident entity against pre-incorporation/ to invest in (a) startups, irrespective of the sector pre-operative expenses incurred. The instruments in which the startup operated and (b) in any were permitted to be issued up to a limit of five per category-I alternative investment fund. Startups cent of its capital or US$ 0.5 million whichever was were also allowed to raise ECB up to US$ 3 million less, subject to certain conditions. 92FINANCIAL MARKETS AND FOREIGN EXCHANGE MANAGEMENT V.31 Persons resident outside India were BRICS Seminar permitted to invest in the equity of asset V.34 A BRICS seminar on ‘Investment Flows: reconstruction companies (ARCs) up to 100 per Challenges, Opportunities and Road Ahead’ was cent under the automatic route. FIIs/ FPIs were organised on October 13, 2016 in Mumbai in permitted to invest up to 100 per cent in security collaboration with the Ministry of Finance and the receipts (SRs) issued by ARCs. Securities and Exchange Board of India. Panel Liberalising External Commercial Borrowings discussions in the seminar deliberated on topics V.32 With a view to developing the market for such as loan and equity capital and investment Rupee-denominated bonds overseas as also flows in BRICS, portfolio investment and capital for providing an additional avenue to Indian flows from low tax jurisdictions. The department banks to raise capital/long term funds, Indian conducted a number of ‘Forex for You’ programmes banks were permitted, within the limit set for across the country to spread awareness and foreign investment in corporate bonds, to issue clarify issues on FEMA for AD banks and the (i) perpetual debt instruments (PDI) qualifying general public. for inclusion as additional tier 1 capital, and debt capital instruments qualifying for inclusion Agenda for 2017-18 as tier 2 capital, by way of Rupee-denominated V.35 Changing trends in global trade and bonds overseas; and (ii) long term Rupee- investment flows require calibrated responses, denominated bonds overseas for financing both from Indian companies and regulators, infrastructure and affordable housing. Further, to necessitating rapid evolution of regulations. provide a fillip to Indian entities issuing Rupee- During 2017-18, the Reserve Bank proposes to denominated bonds abroad, multilateral and put in place, in due consultation with the central regional financial institutions in which India is a government, regulations pertaining to export in member country have been permitted to invest in Rupee-denominated bonds. Certain conditions, services and succession planning through Indian pertaining to maturity period, all-in-cost ceiling trusts and cross border mergers and acquisitions. and recognised investors were added to Rupee- V.36 On-line payment gateway service provider denominated bonds in order to harmonize the (OPGSP) guidelines will be reviewed to facilitate instrument with ECBs. e-commerce business and simplify the steps V.33 To simplify procedures relating to ECBs, involved in physical fund transfer. powers have been delegated to designated V.37 The Reserve Bank will continuously AD category-I banks to deal with extension of review current regulations to sync with dynamic matured but unpaid ECB, provided that (i) no market conditions. Towards containing the costs additional cost is incurred; (ii) lender’s consent of regulatory compliance, merger of certain forms, is available; and (iii) reporting requirements are fulfilled. Further, powers were delegated to AD viz., advance remittance form (ARF) and foreign category-I banks to approve cases of conversion currency gross provisional return (FC-GPR), is of matured but unpaid ECB into equity, subject to proposed to be completed apart from introducing a certain conditions. Master form online encompassing all FDI reporting. 93REGULATION, ASNNUUALP REEPORRTVISION AND VI FINANCIAL STABILITY During 2016-17, the Indian banking sector had to cope with the concerns about deteriorating asset quality, on the one hand, and a sharp decline in credit growth, on the other, while supporting the government in its initiatives to further reach out to the public and in promoting digitalisation of the modes of payments in the economy. The branch authorisation policy was revised to harmonise the treatment of different forms of bank presence for the purpose of opening banking outlets in under-served areas. Empowered by requisite legislative provisions put in place by the government, the Reserve Bank focused on strengthening the institutional framework to address asset quality concerns by improving the recovery process and the early response mechanism. Having gained experience with the licensing of small finance and payments banks, the Reserve Bank explored the scope of introducing more differentiated banks such as ‘wholesale and long-term finance banks’ and also examined the regulatory challenges posed by innovations by Fin Tech entities in the financial landscape. Apart from focusing on the supervision of financial conglomerates and early response to asset quality deterioration, the Reserve Bank formalised a framework for taking enforcement action against banks for non-compliance with guidelines and instructions issued by it. For ensuring timely and effective redressal of customer grievances in non-banking financial companies (NBFCs), the Reserve Bank proposes to formulate an appropriate Ombudsman Scheme for NBFCs. VI.1 The banking sector continued to grapple in asset classification and provisioning from the with the challenge of rising non-performing Reserve Bank’s supervisory assessment. assets (NPAs) during 2016-17. In view of the VI.2 Keeping in view the entry of differentiated mounting stress on asset quality, the banking banks and their role in financial inclusion, the branch sector’s performance in terms of profitability and authorisation policy was revised to harmonise the return on assets came under pressure in 2016- treatment of different forms of a bank’s presence 17. To deal with stressed assets, the existing for the purpose of opening banking outlets in regulations were revised in consultation with the under-served areas. Licenses were issued to stakeholders. Subsequent to promulgation of the more players in the banking sector and some small Banking Regulation (Amendment) Ordinance, finance banks (SFBs) and payments banks (PBs) the Reserve Bank has taken several steps to began operations during the year. The Reserve expedite the process of resolution of certain large Bank also explored the scope for operations of value stressed accounts. The market perception other types of differentiated banks to cater to the of this Ordinance seems to be positive for banks sector-specific financing needs of the economy. with relatively high level of non-performing assets (NPAs) and for firms with greater capacity to meet VI.3 The Reserve Bank continued the process their interest obligations (Box VI.1). Further, in of harmonising the regulatory framework for order to bring in greater transparency, banks were cooperative banks and NBFCs with that of mandated to make suitable disclosures in the commercial banks. Apart from strengthening Notes to Accounts to Annual Financial Statements cooperative banks through mergers and licensing, for 2016-17 and onward with regard to divergences there was also a move towards reducing the tiers 94REGULATION, SUPERVISION AND FINANCIAL STABILITY Box VI.1 Market Reaction to the NPA Ordinance* The President approved the Banking Regulation The response of the market is analysed by computing (Amendment) Ordinance, 2017, on May 5, 2017. This abnormal returns (ARs), which are defined as the difference ordinance empowers the Reserve Bank to direct banking between realised returns and expected returns. Expected companies to initiate insolvency proceedings in respect returns are estimated by using the market model wherein of corporate borrowers in default, under the provisions of for each company or bank, its stock returns are regressed the Insolvency and Bankruptcy Code, 2016 (IBC). It also on market returns separately over the estimation window enables the Reserve Bank to constitute committees to starting 250 days prior to the event window and ending 30 advise banking companies on resolution of stressed assets. days before the announcement date. The equation used for estimation is given below. Following this, the Reserve Bank released a detailed action plan to implement the Ordinance on May 22, 2017. (1) An Internal Advisory Committee (IAC) constituted by the where, is the individual stock returns over the estimation Reserve Bank held its first meeting on June 12, 2017. The period, and is the NIFTY 50 index return. The coefficients IAC recommended that all accounts with an outstanding and computed over the estimation window are used amount greater than `50 billion, and with more than 60 per to compute expected returns during the event window. The cent classified as non-performing by banks as on March 31, daily abnormal return is computed as a difference between 2016 be resolved using the new IBC. Using these criteria, 12 the actual stock return and expected return calculated from accounts aggregating to around 25 per cent of the current Equation 1. gross NPAs were referred to the National Company Law Tribunal (NCLT), a statutory body responsible for judging (2) insolvency proceedings under the new IBC law1. The aggregate abnormal returns are computed by Against this backdrop, the following two events are cumulating up the abnormal returns across time during the analysed viz., (i) the manner in which the market perceived event window. the passage of the Ordinance empowering the Reserve (3) Bank, and (ii) the reaction of stakeholders to the news of The analysis focuses on the 36 scheduled commercial identification of default accounts. banks for which stock market data are available. Those With regard to the first event, the event date is defined as banks that have a non-performing asset to advances ratio the date on which the Ordinance was approved (May 5, (NPAR) above the sample median value for NPAR for all 2017). The event window around which the market response banks in 2015-16 are classified as stressed banks. The is analysed starts nine trading days before the event date remaining are classified as non-stressed banks.2 While a and ends nine trading days after the event date. However, greater proportion of public sector banks are classified as one week prior to the approval of Ordinance, the Finance stressed, almost all private sector banks are classified as Minister hinted at empowering the Reserve Bank to address non-stressed banks. The firm sample is divided into three the problem of non-performing assets (NPAs) in the Indian sets on the basis of interest coverage ratio (ICR) in 2015-16: banking system. Since, it was likely that the stock market (i) low quality (ICR < 1), (ii) intermediate quality (1 < ICR < might have reacted prior to the actual event date, hence the 2), and (iii) high quality (ICR > 2).3 principal empirical analysis here is based on the response The event study analysis for all firms and associated of the stock market from five trading days prior to the event banks is structured as follows: (i) comparison of stressed till the event date. * Based on CAFRAL research. 1 Under the IBC, once a case is admitted to the NCLT, creditors have a maximum of 270 days to agree on a restructuring plan for the debtor, failing which the NCLT can order liquidation of the debtor. 2 Bank-level data are obtained from the Database on Indian Economy (DBIE), RBI. 3 Data for fi rms are from CMIE ProwessDx. (Contd....) 95ANNUAL REPORT banks and non-stressed banks, (ii) comparison of low Finance Minister’s announcement (dashed red line at -5 quality, intermediate quality, and high quality firms, and in Chart 1, Panel A). This pattern continues till the event (iii) comparison of low and high quality firms, segregated date which is the passage of the Ordinance. In contrast, on whether their lead banks are stressed or non-stressed non-stressed banks witnessed a more modest increase banks.4 in abnormal returns. Strikingly, abnormal returns between stressed and non-stressed banks widened to almost 5 per The second event study uses June 12, 2017 - the date of cent indicating that markets perceived the amendment the IAC’s first meeting - as the event date. It examines stock would help stressed banks in resolving their NPA problem. price reactions of the twelve firms that were referred to NCLT Panel B shows that low and intermediate quality firms for resolution, and the lead banks of these firms. To study the performed worse than high quality firms. Overall, these relative market perception of these firms, all exchange listed results indicate that the recent amendment to the existing firms in the same industry as the defaulter firms are used as Banking Regulation Act is perceived by the market as being control firms.5 For the bank analysis, the thirty-six banks in more positive for stressed banks, but negative for low and the sample are divided into those that are the lead banks of intermediate quality firms. any of these twelve defaulter firms and the remaining banks. The remaining panels in Chart 1 further explore which firms Results and Inference are driving these results, based on whether the firm’s lead Figure 1 displays the market response to the President's bank is classified as stressed or non-stressed. Panel C approval of the Banking Amendment Ordinance. Abnormal and Panel D examine the market reaction of low and high returns of stressed banks increased sharply following the quality firms, separating firms that are related to stressed Chart 1: Event Study Analysis: NPA Ordinance 4 The lead bank data are from CMIE. 5 Firms with insuffi cient stock trading data are excluded from the control sample. (Contd....) 96REGULATION, SUPERVISION AND FINANCIAL STABILITY Chart 2: Event Study Analysis: Identification of Default Accounts banks vis-à-vis non-stressed banks. Low quality firms linked of their poor financial health, and it is evident that market to stressed banks performed worse than low quality firms stakeholders lost confidence in these firms. Panel B displays linked to non-stressed banks. In contrast, high quality firms how the market responded to the lead banks of defaulter linked to stressed banks performed better than high quality firms relative to other banks. In general, the abnormal firms linked to non-stressed banks at least in the days returns increased for both the sets of banks immediately immediately following the event date. It appears that the after the event. market lost confidence in low quality firms linked to stressed In summary, both event studies point to a positive market banks but high quality firms linked to stressed banks are reaction for banks but a negative market reaction for seen in a positive light. One possible explanation is that high distressed firms. Thus, based on the market reaction, the quality firms linked to stressed banks benefit from a balance Ordinance is good news for stressed banks as well as high sheet clean-up of stressed banks. The market may also be quality borrowers. It has the potential to increase efficiency reflecting long term benefits to high quality firms possibly of capital allocation in the Indian economy with significant through the reallocation of resources away from low quality positive spillover effects on healthy firms and to rejuvenate firms (Hsieh and Klenow, 2009 and Kulkarni, 2017). the banking sector. The second event study focuses on the date of the IAC’s References: first meeting on June 12, 2017 when defaulter accounts 1. Hsieh, C. and Klenow, P. (2009). “Misallocation and were identified. Chart 2 displays the response of the market manufacturing TFP in China and India.” The Quarterly to the announcement in reference to defaulter accounts. Journal of Economics, 1124(4), 1403-1448. Panel A shows that defaulter firms realised a decline in abnormal stock returns relative to other firms belonging to 2. Kulkarni N. (2017). “Creditor rights and allocative the same industry as the defaulter firm. The identification distortions: Evidence from India.” CAFRAL Working of these firms by the Reserve Bank was a clear indication Paper. in the cooperative structure with a view to bringing developing a suitable framework for supervising down the cost of borrowings for final borrowers. payment banks and small finance banks. The Keeping in view the greater role envisaged Reserve Bank also identified a revised set of 11 for asset reconstruction companies (ARCs) in financial conglomerates (FCs) for monitoring resolving stressed assets, regulatory norms for purposes. The Reserve Bank formalised a them were revised. framework for taking enforcement action against banks for non-compliance with guidelines and VI.4 With the entry of new forms of differentiated instructions issued by it. banks, the Reserve Bank began the process of 97ANNUAL REPORT FINANCIAL STABILITY UNIT (FSU) response team for the financial sector (CERT-Fin), roadmap for the National Centre for Financial VI.5 FSU is responsible for analysing the risks Education, single pension regulator for the to financial stability, undertaking macro-prudential pension sector in India, extant macro-prudential surveillance through systemic stress tests and framework in India, and framework for identification other tools, and disseminating information relating of systemically important financial institutions to the status of and challenges to financial (SIFIs). The status of the recommendations of stability through the bi-annual Financial Stability the financial stability board (FSB) peer review of Report (FSR). FSU also acts as secretariat to India and the progress of FSAP 2017 were also the sub-committee of the Financial Stability and discussed by the sub-committee. Development Council (FSDC), a coordination council of regulators for maintaining financial VI.9 Inter-Regulatory Technical Group (IRTG), stability and monitoring macro-prudential a sub-group of the FSDC sub-committee held regulation in the country. one meeting during the year and discussed the Agenda for 2016-17: Implementation Status implementation of the recommendations of Legal Entity Identifier (LEI) working group. VI.6 As planned, FSR was published in December 2016 along with the Report on Trend Agenda for 2017-18 and Progress of Banking in India (RTP) and in June VI.10 In the year ahead, FSU will continue to 2017. Towards strengthening the stress testing conduct macro-prudential surveillance, publish the framework, a methodology for estimating sectoral bi-annual FSR and conduct meetings of the FSDC probability of defaults to model the dynamics of sub-committee. The feasibility of expanding the risk weighted assets was developed and its output contagion (network) analysis to urban cooperative is being assessed. banks will also be examined. VI.7 FSU is coordinating the macro-level stress REGULATION OF FINANCIAL testing exercise of all commercial banks as part INTERMEDIARIES of the Financial Sector Assessment Programme (FSAP) conducted jointly by the International Commercial Banks: Department of Banking Monetary Fund (IMF) and the World Bank. Regulation (DBR) The Unit carried out stress tests based on the VI.11 DBR is the nodal department for regulation scenarios agreed upon under FSAP so as to of commercial banks. The regulatory measures broaden the scenario-based stress test analysis. focus on ensuring a healthy and competitive The key emerging sectoral vulnerabilities of banks banking system in the country to promote financial have also been analysed. stability, and cost effective and inclusive banking VI.8 The FSDC sub-committee held two services. meetings in 2016-17 and reviewed various issues Agenda for 2016-17: Implementation Status including establishing a statutory financial data Financial Stress and Reinforcements management centre, developing corporate bond market, minimum assured return scheme under VI.12 During 2016-17, the Reserve Bank further the National Pension System (NPS), regulation of strengthened the regulatory framework for dealing spot exchanges, setting up of computer emergency with stressed assets, inter alia, by revising its 98REGULATION, SUPERVISION AND FINANCIAL STABILITY guidelines on the resolution of stressed assets; VI.13 With a view to further strengthening banks’ viz., the strategic debt restructuring (SDR) scheme, ability to resolve their stressed assets effectively the scheme for sustainable structuring of stressed and to enhance transparency in the entire assets (S4A), flexible structuring of existing long process, the Reserve Bank issued guidelines on sale of stressed assets by banks on September term project loans to infrastructure and core 1, 2016. The guidelines require banks to identify industries; and guidelines for projects under and list internally, at least once a year, the implementation. Keeping in view the critical role of specific financial assets identified for sale to other the bankruptcy and insolvency regime in shaping institutions, including securitisation companies the business environment as well as resolution of (SCs)/reconstruction companies (RCs). debtors in distress, the government enacted the Insolvency and Bankruptcy Code, 2016 in May Branch Authorisation Policy 2016. This single law will override multiple and VI.14 The Reserve Bank issued final guidelines overlapping laws and adjudicating forums dealing on May 18, 2017, clarifying on what constitutes a with financial failures and insolvency of companies ‘banking outlet’ and harmonising the treatment of and individuals in India (Box VI.2). different forms of bank presence for the purpose Box VI.2 The Insolvency and Bankruptcy Code, 2016 The Insolvency and Bankruptcy Code (IBC), 2016 may be initiated by a financial creditor, an operational consolidates and amends the laws relating to reorganisation creditor or the corporate debtor itself. and insolvency resolution of corporate persons (excluding 5. A default-based test for entry into the insolvency financial service providers), partnership firms and individuals resolution process permits early intervention when the in a time bound manner for maximising the value of assets corporate debtor shows early signs of financial distress. of such entities. Some of the key aspects of the IBC are set out below. 6. On the distribution of proceeds from the sale of assets, first priority is accorded to the costs of insolvency 1. IBC lays down a resolution process that is time bound resolution and liquidation, and second to the secured (180 days) and is undertaken by professionals. It debt together with workmen’s dues for the preceding creates an institutional mechanism for the insolvency 24 months. Central and state governments' dues are resolution process for businesses either by coming up ranked lower in priority. with a viable survival mechanism or by ensuring their prompt liquidation. By providing an effective legal framework for timely resolution of insolvency and bankruptcy, IBC will support 2. IBC’s institutional infrastructure comprises four pillars, the development of credit and corporate bond markets, viz., insolvency professionals, information utilities, strengthen debt recovery, encourage entrepreneurship, adjudicating authorities and the Insolvency and improve ease of doing business and facilitate more Bankruptcy Board of India (IBBI). investments. The code proposes a paradigm shift from 3. While insolvency resolution for companies will be the existing ‘debtor in possession’ to a ‘creditor in control’ adjudicated by the National Company Law Tribunal regime. Moreover, the priority accorded to secured creditors (NCLT), the same for firms and individuals will be is advantageous for entities such as banks. adjudicated by the Debt Recovery Tribunals (DRTs). IBC’s success hinges to a great extent on the efficient The IBBI is the apex body for promoting transparency functioning of information utilities. An adequate number of and governance in IBC’s administration. insolvency professionals will also be needed to handle the 4. Where a corporate debtor has defaulted in paying large number of cases. More benches of NCLT may also a debt, the corporate insolvency resolution process have to be set up as the volume of references increases. 99ANNUAL REPORT of opening banking outlets in under-served areas VI.16 To encourage funding from sources other (Box VI.3). than bank credit for the corporate sector, the Reserve Bank, in August 2016, issued guidelines Diversification of Lending Base on enhancing credit supply for large borrowers VI.15 Towards aligning the exposure norms for through market mechanism, effective April 1, 2017. Indian banks with the Basel Committee of Banking VI.17 Scheduled commercial banks (SCBs) were Supervision (BCBS) standards and to further advised that housing finance companies (HFCs) diversify the banks’ lending base, on December 1, will be risk weighted in a manner similar to that of 2016, the Reserve Bank issued final guidelines on corporates to bring uniformity in the application of large exposures framework (LEF), effective April risk weights among banks on their exposures. 1, 2019. The exposure limits will consider a bank’s exposure to all its counterparties and groups of VI.18 Banks were allowed to invest in Real Estate connected counterparties. Investment Trusts (REITs) and Infrastructure Box VI.3 Rationalisation of Branch Authorisation The first bi-monthly monetary policy statement 2016-17 Conditions for opening banking outlets: At least 25 per cent announced on April 5, 2016 proposed to redefine branches of banking outlets opened during a financial year must be and permissible methods of outreach, keeping in mind the opened in unbanked rural centres. Pro-rata benefit for part- various attributes of banks and the types of services that time banking outlets will also be extended. The opening of a are sought to be provided. Accordingly, based on the report banking outlet/part-time banking outlet in a Tier 3 to 6 centre of an internal working group and public comments on the of north-eastern states, Sikkim and left wing extremism report, final guidelines clarifying what is a ‘banking outlet’ affected districts, notified by the Government of India, will be and harmonising the treatment of different forms of bank considered as equivalent to opening a banking outlet/part- presence for the purpose of opening outlets in under-served time banking outlet in a URC. A bank opening a brick and areas were issued on May 18, 2017 as under: mortar branch in a rural (Tier 5 and 6) centre which – owing to the presence of a BC outlet of another bank – is not defined Banking outlet: A banking outlet includes a branch as well as a URC, will also be eligible for the same incentive. Similar as business correspondent (BC) outlet, among others. treatment will be given for opening a banking outlet in a rural For a domestic scheduled commercial bank (DSCB), a centre which is served only by a banking outlet of a PB. small finance bank (SFB) and a payment bank (PB), it is Micro Finance Institution (MFI) structure of SFBs: Towards a fixed point service delivery unit, manned by either bank’s preserving the advantages of the MFI/NBFC structure of staff or its BC where services of acceptance of deposits, SFBs to promote financial inclusion, they have been allowed encashment of cheques/ cash withdrawal or lending of three years from the commencement date, to align their money are provided for a minimum of four hours per day banking network with the extant guidelines. Till such time, the for at least five days a week. If it provides services for less existing structure may continue and the existing branches number of hours per day and days in a week, it is considered will be treated as banking outlets though not immediately a part-time banking outlet. reckoning for the 25 per cent norm. Nevertheless, during this period of three years, the 25 per cent norm will be applicable Unbanked rural centre (URC): It is a rural (Tier 5 and 6) for all the banking outlets opened or converted from the centre that does not have a core banking solution (CBS) existing MFI branches in a year. enabled banking outlet of an SCB, a PB, an SFB or an RRB nor a branch of a local area bank or a licensed co-operative Role of board of directors: Financial inclusion being the bank for carrying out customer based banking transactions. overarching objective of the revised framework and given the Thus, the role of technological advances in banking services operational flexibility being provided to banks, the boards of is recognised as against the earlier definition based on a banks have been accorded overall responsibility to ensure brick and mortar structure. that all the guidelines are complied with, in letter and spirit. 100REGULATION, SUPERVISION AND FINANCIAL STABILITY Investment Trusts (InvITs) within the overall ceiling from over the counter derivatives transactions, of 20 per cent of net worth for direct investment exchange traded derivatives transactions, in convertible bonds/ debentures, units of equity- securities financing transactions and long oriented mutual funds and exposures to venture settlement transactions. The Reserve Bank also capital funds. issued guidelines for computing exposure for counterparty credit risk arising from derivatives Capital and Risk Management transactions. VI.19 With a view to developing the market VI.21 In line with the revised BCBS framework on for rupee-denominated bonds overseas and interest rate risk in the banking book, the Reserve providing an additional avenue for raising capital, Bank issued draft guidelines on governance, banks were permitted to issue rupee-denominated measurement and management of interest rate perpetual debt instruments (PDI) overseas as part risk in banking book on February 2, 2017 for of additional tier (AT)-1 capital and debt capital feedback/comments. instruments as part of Tier 2 capital. VI.22 In April 2015, the Reserve Bank had VI.20 The guidelines on capital requirements formulated a scheme for setting up of IFSC banking for banks’ exposures to central counterparties, units (IBUs) by banks in International Financial issued on November 10, 2016 and effective from Services Centres (IFSCs). The instructions under April 1, 2018, specified the credit risk treatment the scheme were modified in light of the feedback for exposures to central counterparties arising from stakeholders (Box VI.4). Box VI.4 Modifi cations in Permissible Activities of IFSC Banking Units (IBUs) The scheme for setting up of IFSC banking units aims at 3. An IBU can be a trading member of an exchange in enabling banks to undertake activities largely akin to those the IFSC for trading in the interest rate and currency carried out by overseas branches of Indian banks. Certain derivatives segments that banks operating in India have activities are, however, not allowed in view of the fact that been allowed to undertake. IBUs are functioning from the Indian soil and the legal and 4. An IBU can become a professional clearing member of regulatory framework is still governed by domestic laws the exchange in the IFSC for clearing and settlement in and there is no separate financial sector regulator for IFSC. any derivatives segment. Nevertheless, IBUs were allowed progressively to undertake 5. IBUs are allowed to extend the facilities of bank more activities as recently as in April 2017 as summarised guarantees and short term loans to IFSC stock broking/ below: commodity broking entities. 1. IBUs may undertake derivative transactions including 6. Any financial institution or a branch of a financial structured products that the banks operating in India institution including an IBU operating in IFSC can have been allowed. However, IBUs shall obtain the maintain special non-resident rupee (SNRR) accounts Reserve Bank’s prior approval for offering any other with a bank (authorised dealer) in the domestic sector derivatives products. for meeting its administrative expenses in Indian 2. Fixed deposits accepted by IBUs from non-banks rupee. These accounts must be funded only by foreign cannot be repaid prematurely within the first year. currency remittances through a channel appropriate for However, fixed deposits accepted as collateral from international remittances which will be subject to extant non-banks for availing credit facilities from IBUs or FEMA regulations. deposited as margin in favour of an exchange, can be A Task Force (Chairman: Minister of State for Finance) is adjusted prematurely in the event of a margin call or a monitoring the progress in the development of IFSCs. The default in repayment. Reserve Bank is a member of the task force. 101ANNUAL REPORT VI.23 After a review of the criteria for determining universities and local bodies like village customer liability in unauthorised electronic panchayats. banking transactions, the final guidelines on VI.26 The Reserve Bank issued directions to customer protection – limiting liabilities of scheduled commercial banks (excluding RRBs) customers – have been issued. to comply with Indian Accounting Standards (Ind VI.24 A regulatory framework making elements AS) for financial statements beginning April 1, of Basel III standards selectively applicable to the 2018 onwards, with comparatives for the periods All India Financial Institutions (AIFIs) is being put ending March 31, 2018 or thereafter. Banks were in place. also advised to submit proforma Ind AS financial VI.25 An Aadhaar enabled one time pin (OTP) statements for the half year ended September based e-KYC process was allowed in December 30, 2016. The Reserve Bank is in the process of 2016 for on-boarding of customers subject finalising the draft guidelines on key aspects of to certain conditions. The Reserve Bank also expected credit loss (ECL) under Ind AS to ensure prescribed a customer due diligence procedure minimum standards as also consistency in the for opening accounts of judicial persons such as application of the standards to the extent possible the government or its departments, societies, (Box VI.5). Box VI.5 Implementation of Ind AS - Guidance on the Expected Credit Loss Framework The implementation of Ind AS will mark a major shift from credit losses. The standard differentiates between the three the current accounting framework followed by banks in India stages of credit risk: which is based on a melange of accounting standards and (cid:129) The financial assets in Stage 1 are those with no regulatory guidelines, especially in certain key areas such significant increase in credit risk since initial recognition, as classification and measurement of financial instruments, or financial instruments that have low credit risk at the and impairment of financial assets. reporting date. For these assets, 12-month expected Recent developments in the banking system underscore credit losses (ECLs) are recognised in profit or loss. the continued importance of adequate provisioning, (cid:129) The financial instruments in Stage 2 are those which commensurate with the increase in credit risk. Applying have experienced a significant increase in credit risk an incurred loss provisioning framework can result in since initial recognition, but with no objective evidence impairments that are recognised after the loss event has of impairment. For such assets, lifetime ECLs are occurred, when the probability of default is close to 100 recognised. This accounting treatment is based on per cent. Provisions are not made as credit risk increases the rationale that an economic loss arises when ECLs significantly (although short of default) even where bank significantly exceed initial expectations. By recognising management has information about stress/future likely lifetime ECLs following a significant increase in credit losses. risk, this economic loss is reflected in the financial Ind AS 109 expresses the view that delinquency is a lagging statements. indicator of significant increase in credit risk. Banks are, (cid:129) The financial instruments in Stage 3 comprise those for therefore, expected to have credit risk assessment and which objective evidence indicates impairment at the measurement processes in place to ensure that credit risk reporting date. These are typically non-performing loans increases are detected ahead of exposures becoming past where the bank considers that the borrower is unlikely due or delinquent, for timely transfer to lifetime expected (Contd....) 102REGULATION, SUPERVISION AND FINANCIAL STABILITY to pay the existing debt. Lifetime ECLs are recognised shock’, by giving banks time to rebuild their capital resources for these exposures. following a potentially significant negative impact arising from the introduction of ECL accounting. The estimated overall impact of Ind AS on regulatory capital is likely to be adverse mainly due to the impairment The Reserve Bank is also considering the introduction of requirements under it. In view of the capital constraints ‘regulatory floor’ for provisioning in the regulatory capital already faced by many banks, particularly public sector calculation, i.e., when a bank makes lower accounting banks, the Reserve Bank believes that it may be appropriate provisions than the standardised regulatory floor amounts, to introduce transitional arrangements for the impact of the shortfall would be deducted from the bank’s common accounting changes on regulatory capital. The primary equity tier (CET)1 capital, which would incentivise robust objective of a transitional arrangement is to avoid a 'capital provisioning. VI.27 A discussion paper on wholesale and long- operating guidelines for these banks were issued term finance banks was released in April 2017. in October 2016. The guidelines elaborate It explores the scope of setting up more such upon the areas of prudential regulations, risk differentiated banks in a backdrop of in-principle management, ownership and control regulations, approvals and licenses issued to set up payments corporate governance, and banking operations to banks and small finance banks (Box VI.6). be adhered to by these banks. VI.28 Considering payments banks and small VI.29 As part of the efforts to promote financial finance banks’ differentiated nature of business inclusion through a greater focus on small credit and their focus on financial inclusion, separate and payment/remittance facilities, the Reserve Box VI.6 Discussion Paper on Wholesale and Long-Term Finance Banks The proposed differentiated banks – wholesale and long- of the government-backed development policy, have begun term finance (WLTF) banks – are expected to focus primarily their transition towards privatisation. on lending to infrastructure sector and small, medium The stipulations for WLTF banks, expected to be different and corporate businesses. They can mobilise liquidity for from universal banks, are mooted as: (i) higher initial banks and financial institutions directly originating priority minimum capital of `10 billion, (ii) negligible lending sector assets, through the securitisation of such assets exposure to the retail sector, no savings accounts, and a and actively dealing in them as market makers. They may higher threshold for term deposits of above `100 million, (iii) also act as market-makers in securities such as corporate exemption from Statutory Liquidity Ratio (SLR) requirements bonds, credit derivatives, warehouse receipts and take-out and some relaxation in the prudential norms on liquidity risk, financing. These banks can provide refinance to lending and (iv) exemption from a mandatory rural presence and institutions and may be present in capital markets in the form of aggregators. The primary sources of funds for these priority sector lending requirements. banks could be a combination of wholesale and long term The issues for discussion posed by the discussion paper deposits (above a large threshold), debt/equity capital raised are: (i) whether there is a need for licensing WLTF banks from primary market issues or private placement, and term when their proposed activities are currently allowed for borrowings from banks and other financial institutions. universal banks, (ii) whether the time is opportune for Financial structures in some countries support banks this, (iii) what will be the net impact of such players on the concentrating on wholesale and long-term financing. Some financial system, and (iv) whether the proposed regulatory of these institutions in the public sector, which began as part framework is appropriate. 103ANNUAL REPORT Bank issued licenses to eight SFBs and six PBs VI.34 In the context of Ind AS implementation, during the year taking the number of licensees to the Bank will issue guidelines on regulatory floors 10 in case of SFBs and seven in case of PBs. Eight for asset provisioning. Guidelines on mechanics SFBs and four PBs have commenced operations. of the transitional arrangements will also be issued. VI.30 The Depositors' Education and Awareness VI.35 The Reserve Bank will analyse the Ind (DEA) Fund, started in February 2014, had AS financial statements submitted by banks for accumulated a corpus of `124 billion at end- the quarter ended June 30, 2017 as part of the March, 2017, and a total of 2,145 banks were regulatory reporting. It will review other extant registered for transfer of unclaimed amounts to instructions in the light of Ind AS implementation. the DEA Fund. VI.36 A discussion paper on margin requirements VI.31 The fields of specialisation for the directors for non-centrally cleared derivatives was issued on the boards of commercial banks (excluding in May 2016. The final guidelines on margin RRBs) were broadened in May 2017 to include requirements for non-centrally cleared derivatives (i) information technology, (ii) payment and will be issued, after a review of the developments settlement systems, (iii) human resources, (iv) risk globally, as also the availability of infrastructure management, and (v) business management to required for exchange of such margins in India. bring in persons with professional knowledge and experience in these fields to the banks’ boards. VI.37 The revised framework for securitisation, the minimum capital for market risk and the VI.32 An inter-regulatory working group guidelines on corporate governance as per Basel (Chairman: Shri Sudarshan Sen, Executive standards shall also be issued. Director) was set up in July 2016 with members VI.38 The Basel III norms prescribe two minimum drawn from the Reserve Bank, SEBI, IRDA, standards for banks – the liquidity coverage ratio PFRDA, IDRBT, select banks and rating agencies (LCR) and the net stable funding ratio (NSFR) – to examine the granular aspects of Fin Tech, for promoting short-term resilience of banks to particularly from the perspective of reorienting the potential liquidity disruptions and resilience over regulatory framework. The report of the working a longer-term time horizon, respectively. The LCR group was submitted to the Reserve Bank in guidelines are effective in India since January 1, February 2017 for consideration. 2015. The draft guidelines on NSFR were issued Agenda for 2017-18 in May 2015. The final guidelines will be issued during 2017-18. VI.33 The Reserve Bank will continue to focus on improving the institutional framework for a VI.39 The revised regulatory framework for the sound banking system in the country, particularly AIFIs, including extension of various elements of addressing asset quality issues. Implementation Basel III standards relevant to these institutions, of Ind AS and the Basel III framework will be the will be issued after due consultations with areas of focus during 2017-18. stakeholders. 104REGULATION, SUPERVISION AND FINANCIAL STABILITY Cooperative Banks: Department of terminals and issuance of prepaid instruments by Cooperative Bank Regulation (DCBR) all cooperative banks. VI.40 The Reserve Bank continues to play Revival and Licensing of Unlicensed DCCBs a key role in the revival and strengthening of VI.42 The government launched a scheme for the cooperative banking sector by fortifying the revival of 23 unlicensed DCCBs (Uttar Pradesh regulatory and supervisory framework. In this -16, Maharashtra - 3, Jammu and Kashmir - context, DCBR, in charge of prudential regulations 3 and West Bengal - 1) in November 2014. of cooperative banks, took the following initiatives Accordingly, a tripartite agreement in the form in 2016-17. of a memorandum of understanding was signed Agenda for 2016-17: Implementation Status between the central government, the concerned state government and NABARD. With the release Harmonisation of Regulatory Policies of funds by the government, the concerned state VI.41 Taking the process of harmonisation of government and NABARD, banking licenses were regulations forward, cooperative banks fulfilling issued to the unlicensed DCCBs in Uttar Pradesh, certain criteria were allowed to issue/ redeem Maharashtra and West Bengal, bringing down long term (subordinated) deposits (LTDs) without the number of unlicensed DCCBs to three by the prior approval of the Reserve Bank provided September 30, 2016. Licensing of the remaining mandatory disclosure requirements were made. DCCBs has been taken up with the state of The guidelines on non-SLR investments by rural Jammu & Kashmir. There is also a move towards cooperative banks were aligned with those for reducing the tiers in the cooperative structure urban cooperative banks (UCBs). Guidelines with a view to reducing the cost of borrowings for were issued for deployment of point of sale (POS) final borrowers (Box VI.7). Box VI.7 Two-tier Rural Cooperative Structure in Jharkhand The short term cooperative credit structure (STCCS) of a matter of concern. In a 3-tier credit structure, each tier the country primarily meets the crop and working capital adds to cost and margins leading to an escalation in the requirements of farmers and rural artisans. The pyramid of cost of borrowings for the ultimate borrowers. The interest STCCS is primarily 3-tier and is federal in nature within a rate structure also varies from one state to another. Since state. The apex level is the state cooperative bank (StCB), STCCS deals with relatively larger number of small value at the district level there are district central cooperative loan accounts as compared with commercial banks and banks (DCCBs) and at the village level, there are primary RRBs, the transaction cost also tends to be high. agricultural credit societies (PACS). Across India, there are The relevance of the three-tier credit structure has been more than 93,000 PACS having a membership base of 120 examined by several committees in the past (notably, those million. The structure of STCCS is not uniform across the headed by Professor V. S. Vyas, Shri Jagdish Capoor, states with a 3-tier structure in 16 states and 2-tier structure Professor Vaidyanathan and Dr. Prakash Bakshi). The Vyas in 13 smaller states and union territories where PACS are Committee argued for the elimination of one of the tiers to directly affiliated to StCBs. There is a mixed structure in bring down costs for ultimate borrowers. The NABARD Act, three states – 2-tier in some districts and 3-tier in others. 1981 was amended in 2003 to provide for direct refinance Notwithstanding the phenomenal outreach and volume to DCCBs but no concrete action has been initiated towards of operations, the financial health of STCCS has been reducing tiers in STCCS. (Contd...) 105ANNUAL REPORT In 2013, the Jharkhand State Cooperative Bank (JStCB) NABARD carried out a snap scrutiny of the amalgamated took a path breaking initiative and approached the Reserve entity in March 2017 following an infusion of a `500 million Bank to approve establishment of a 2-tier rural cooperative grant by the state that enabled JStCB to achieve CRAR of structure in the state to replace the age-old 3-tier structure. more than 9 per cent. It was observed that the amalgamation The state proposed to merge all the DCCBs with JStCB. of STCCS entailed a stronger structure in terms of Considering the merits of the request, ‘in-principle’ approval improvements in operational, managerial and governance was given for the amalgamation of all eight DCCBs with efficiency. Consequently, the Reserve Bank conveyed its JStCB in October 2013. However, since the Dhanbad DCCB final approval to the amalgamation proposal on March 30, went to court against the state’s decision of amalgamation, 2017 and the state government issued a notification for the state came up with a revised proposal to amalgamate amalgamation of seven DCCBs with JStCB on March 31, seven DCCBs with JStCB. The Reserve Bank accorded 2017. The new entity started functioning from April 1, 2017, ‘in-principle’ approval to the revised proposal in November ushering an era of 2-tier cooperative credit structure in the 2014. state, barring the pending court case of the Dhanbad DCCB. Scheduling, Licensing, Mergers and Voluntary Agenda for 2017-18 Conversions VI.45 Further harmonisation of the guidelines for VI.43 During the year, one state cooperative rural and urban cooperative banks will continue to bank – the Telangana State Cooperative Apex be an agenda for 2017-18. The Reserve Bank will Bank Ltd. – was included in the second schedule pursue the process of recapitalisation and licensing to the RBI Act, 1934. Five merger proposals of the remaining three DCCBs in Jammu & Kashmir received from UCBs were approved, out of which under the rehabilitation scheme approved by the two proposals were implemented, two proposals government to create an environment where only are under process while one proposal was licensed rural cooperative banks operate in the withdrawn by the target bank. Further, three UCBs banking space. The supervisory action framework voluntarily converted themselves into non-banking for UCBs, framed in 2014, will be reviewed with a institutions under Section 36A (2) of the Banking view to engaging with the concerned banks at an Regulation Act, 1949. early stage for corrective action. Implementation of CBS under the scheme of financial assistance Other Developments to UCBs will be taken forward during the year. The VI.44 A scheme of financial assistance to UCBs Reserve Bank will formulate certain standards for implementing the core banking solution (CBS) and benchmarks for CBS in UCBs in consultation was announced on April 13, 2016 in consultation with IDRBT in order to make it more robust. with IDRBT/Indian Financial Technology and Allied Non-Banking Financial Companies (NBFCs): Services (IFTAS) (a subsidiary of IDRBT). Under Department of Non-Banking Regulation the scheme, the initial setup cost of `0.4 million (DNBR) is paid by the Reserve Bank to IFTAS. During the year, 23 UCBs implemented CBS under the VI.46 NBFCs play a vital role in providing credit scheme taking the number of CBS-compliant by complementing commercial banks and also UCBs to 1,301 out of a total of 1,561 UCBs. cater to some niche sectors. DNBR is entrusted 106REGULATION, SUPERVISION AND FINANCIAL STABILITY with the regulation of the NBFC sector with a VI.49 Keeping in view the role of asset view to providing a conducive environment for reconstruction companies (ARCs) in resolving orderly growth of the sector as also protecting the stressed assets as also the recent regulatory interests of depositors and customers. changes governing the sale of stressed assets by banks to ARCs, the minimum net owned fund Agenda for 2016-17: Implementation Status requirement for ARCs was fixed at `1 billion VI.47 During the year, the Reserve Bank issued on an on-going basis, effective April 28, 2017 guidelines on NBFC-account aggregators (NBFC- (Box VI.8). In terms of Section 30A, 30B and AAs). Subsequently, the process of registering 30C of the SARFAESI Act, 2002, the Reserve NBFC-AAs has been initiated. The guidelines Bank has designated Adjudicating Authority for to banks for relief measures in areas affected imposing penalty on ARCs for non-compliance by natural calamities, were extended mutatis of any direction issued by the Reserve Bank. mutandis to NBFCs. Further, the Reserve Bank has designated the VI.48 The guidelines on pricing of credit were Appellate Authority for deciding on an appeal issued for NBFC-microfinance institutions (NBFC- filed by the aggrieved party. These guidelines will MFIs) to ensure that the average interest rate on come into force after its notification by the central loans sanctioned during a quarter does not exceed government. the average borrowing cost during the preceding quarter plus the margin, within the prescribed cap. VI.50 The NBFC sector has evolved over a Guidelines in respect of disbursal of loans in cash period of time resulting in a variety of categories of by NBFCs were amended to align these with the NBFCs. The different categories were envisaged requirements under the Income Tax Act, 1961. to promote specific sector/ asset classes and Box VI.8 Asset Reconstruction Companies: Progress and the Way Forward During the late 1990s, in view of the rising level of bank to regulate and supervise ARCs. An ARC can acquire and NPAs, the Narasimham Committee II and Andhyarujina keep the financial asset – NPAs – in its own balance sheet or Committee were constituted to examine the scope for transfer it to one or more trust(s) (set up under Section 7 of banking sector reforms and the need for changes in the the Act) at a price at which the asset was acquired from the legal system to resolve NPAs. These committees suggested originator (secured lender). Most of the deals are structured a new legislation for securitisation, empowering banks with a 15 per cent upfront payment to the seller banks/ and financial institutions (FIs) to take possession of the FIs and issue of security receipts (SRs) for the remaining securities and sell them without the intervention of the court. amount with a defined cash-flow waterfall. Management Accordingly, the SARFAESI Act (the Act) was enacted in 2002 fee, a primary source of income for ARCs, has priority to provide an enabling environment for resolution of NPAs (after netting the expenses) over redemption of SRs. The and for strengthening the financial sector. It provides three trusteeship of such trusts vests with the ARC. alternative methods for recovery of NPAs – securitisation, The net owned fund requirement for ARCs was raised from asset reconstruction and enforcement of security interests. It `20 million to `1 billion effective April 28, 2017 with a view envisaged the formation of asset reconstruction companies to attract serious players to the business. Other recent (ARCs) under Section 3 of the Act. measures for encouraging the sector include 100 per cent ARC’s primary goal is to acquire, manage and recover the foreign direct investment (FDI) under the automatic route, financial assets which have been classified as NPAs by the removal of the limit on shareholding by a sponsor, and banks/FIs. Presently, there are 24 ARCs in the country. The inclusion of additional qualified buyers for investments in Reserve Bank has been assigned powers under the Act SRs. 107ANNUAL REPORT hence different sets of regulatory prescriptions existing legal and regulatory framework, based were put in place. There are NBFCs catering on supervisory inputs received through off-site to asset financing, infrastructure financing, monitoring and on-site inspections. microfinance, lending, etc. At present, there are Agenda for 2016-17: Implementation Status eleven categories of NBFCs – Asset Finance VI.53 During 2016-17, all SCBs operating in India Company (AFC), Loan Company (LC), Investment (excluding RRBs and LABs) were brought under Company (IC), Core Investment Company (CIC), risk based supervision – Supervisory Programme NBFC-Factor, IDF-NBFC, Infrastructure Finance for Assessment of Risk and Capital (SPARC). Company (IFC), NBFC-MFI, NOFHC, NBFC-AA and Mortgage Guarantee Company (MGC). In The Reserve Bank also started the process of line with the Reserve Bank’s medium term goal developing a suitable framework for supervising of moving toward activity-based regulation rather PBs and SFBs. The supervisory process is than entity-based regulation, the rationalisation of being strengthened by incorporating elements multiple categories of NBFCs into fewer categories of continuous supervision in off-site monitoring is under way. (Box VI.9). Agenda for 2017-18 VI.54 The inter-regulatory forum for monitoring financial conglomerates (IRF-FC) identified a VI.51 Going forward, the Reserve Bank will revised set of 11 FCs in the Indian financial rationalise the NBFCs into fewer categories. The sector including five bank-led FCs, four insurance Bank will oversee the time-bound implementation company-led FCs and two securities company-led of Ind AS, converged with IFRS, by NBFCs. FCs, based on their significant presence in two or SUPERVISION OF FINANCIAL more segments of the financial sector. INTERMEDIARIES VI.55 A revised prompt corrective action Commercial Bank: Department of Banking (PCA) framework for banks was rolled out for Supervision (DBS) implementation from 2017-18 based on the VI.52 DBS supervises all SCBs (excluding financials of banks for the year ended March 31, RRBs), local area banks (LABs), payment 2017. The PCA matrix notified under the revised banks, small finance banks and AIFIs within the framework specifies indicators and risk thresholds Box VI.9 Asset Quality Review (AQR) in Perspective – Lessons Learnt The Asset Quality Review (AQR), undertaken in 2015- was extensively based on off-site data from the Central 16 for all major banks together, was aimed at making Repository for Information on Large Credits (CRILC). banks recognise their asset quality realistically. It provided The exercise clearly brought out the importance of valuable insights on asset quality at the individual bank/ data analysis for effective supervision. In particular, it system level and ensured uniformity in identification of emphasised the importance of collecting relevant data, non-performing assets (NPAs) at the system level. Further, ensuring robust data quality and integrity and the use of IT the early finalisation and communication of divergences infrastructure for carrying out an incisive off-site analysis in provisioning gave banks more time for effecting the which, in conjunction with on-site assessment, ensures an additional provisioning over subsequent quarters. AQR effectively continuous supervisory assessment. 108REGULATION, SUPERVISION AND FINANCIAL STABILITY Box VI.10 Revised Prompt Corrective Action Framework for Banks The prompt corrective action (PCA) framework for banks the provisions of the revised PCA framework with effect from was introduced by the Reserve Bank in December 2002 as April 1, 2017, based on the financials for March 31, 2017. an early intervention mechanism. The sub-committee of the Capital, asset quality and profitability continue to be the Financial Stability and Development Council (FSDC-SC) in key areas for monitoring under the revised framework. its meeting held in December 2014 decided to introduce the However, common equity Tier-1(CET 1) ratio will constitute PCA framework for all regulated entities. Subsequently, the an additional trigger and leverage will also be monitored. Reserve Bank reviewed the existing PCA framework keeping The revised PCA defines certain risk thresholds, breach of in view the recommendations of the working group on which would lead to invocation of PCA and invite certain resolution regimes for financial institutions in India (January mandatory and discretionary actions. The PCA framework 2014), the Financial Sector Legislative Reforms Commission will apply to all banks operating in India including small (FSLRC, March 2013) and international best practices. The banks and foreign banks operating through branches or Board for Financial Supervision (BFS) decided to implement subsidiaries. under four areas – capital (breach of either CRAR in the wake of certain cyber security incidents of or common equity tier (CET) 1 ratio), asset quality, significant concern. The Reserve Bank conducted profitability and leverage (Box VI.10). trainings on cyber security with hands-on sessions for its IT examiners to build skills in cyber security VI.56 In line with BCBS principles on cross- assessment. border supervisory cooperation, the Reserve Bank has set up supervisory colleges for Indian VI.58 In order to improve data quality, a banks with considerable overseas presence, working group was set up with members from major public sector, private and foreign banks viz., State Bank of India (SBI), ICICI Bank Ltd., to rationalise existing off-site returns. The group Bank of Baroda, Bank of India, Punjab National submitted its report in September 2016. The Bank and Axis Bank Ltd. The major objectives of various recommendations of the group, after supervisory colleges are to enhance information due consideration and approval, are being exchange and cooperation among supervisors to implemented in a phased manner. improve understanding of the risk profile of the VI.59 Towards enhancing supervisory focus, the banking group, thereby facilitating more effective department conducted some thematic studies supervision of the internationally active banks. The during the year relating to derivatives portfolio Reserve Bank held meetings of all the supervisory and custodial services offered by foreign banks; colleges during 2016-17. non-credit related facilities and trade finance; and VI.57 With a view to assessing banks’ cyber real estate exposure/housing finance. The studies security preparedness, the Reserve Bank were shared with the concerned departments for mandated a baseline cyber security and policy action. resilience framework and conducted IT/cyber VI.60 Migration of supervisory returns, other security examinations/ vulnerability assessments than off-site monitoring and surveillance to evaluate their responses to cyber security (OSMOS) returns, to the eXtensible business incidents. It also conducted targeted inspections reporting language (XBRL) reporting platform is 109ANNUAL REPORT under progress. Returns relating to fraud reporting Agenda for 2017-18 and monitoring have been migrated to the XBRL VI.63 A joint working group of regulators reporting platform. constituted by IRF-FC will develop a format and structure for a data template for capturing systemic VI.61 Taking the process of cross-border risks arising out of FC activities. supervisory cooperation and exchange of supervisory information further, the Reserve VI.64 As part of capacity building on SPARC, the Reserve Bank will continue to conduct focused Bank signed memoranda of understanding workshops and orientation sessions for internal and (MoUs) with seven overseas banking supervisory external stakeholders. Further, specific sessions authorities during the year, viz., the Central for board members and top managements of the Bank of Myanmar, the Banking Regulation banks as also for other external stakeholders will and Supervision Agency of Turkey, the Central be on the agenda for 2017-18. Bank of Nigeria, the Bank of Zambia, the Bank VI.65 A suitable supervisory framework for of Guyana, the Bank of Thailand and the Royal small finance banks and payment banks will be Monetary Authority of Bhutan. Further, a letter developed and implemented. Further, in view of of cooperation was executed with the Czech the implementation of Ind AS by banks, its impact National Bank. With this, the Reserve Bank has on their quantitative and qualitative reporting signed 40 MoUs, two letters of cooperation and will be reviewed, aligned and integrated with the one statement of cooperation. supervisory framework. VI.62 The Reserve Bank launched a Central VI.66 Taking into account concerns arising from Fraud Registry (CFR), a web-based online examination of IT risks in banks, thematic studies searchable database in January 2016. However, and assessments will be undertaken on specific usage of CFR by banks, especially PSBs, is yet to domains for appropriate policy and supervisory pick up on expected lines. interventions (Box VI.11). Based on the off-site Box VI.11 Standing Committee on Cyber Security In the wake of exponential growth of digitalisation in banks, will be set up to conduct an ongoing review of the cyber cyber risks have emerged as a major area of concern. security landscape and emerging threats. Conscious of the rising threats to the cyber infrastructure The remit of the committee, inter alia, includes reviewing the in its regulated entities, the Reserve Bank has taken a threats inherent in existing/emerging technology; studying number of measures, particularly over the last two years. adoption of various security standards/protocols; interfacing Based on the recommendations of the Expert Panel on with stakeholders; and suggesting appropriate policy Cyber Security and Information Technology Examination interventions to strengthen cyber security and resilience. (Chairperson: Smt. Meena Hemchandra), guidelines were The committee was constituted on February 28, 2017 issued to banks in June 2016, mandating cyber security (Chairperson: Smt. Meena Hemchandra, Executive Director). preparedness. Banks’ progress in strengthening their cyber Members of the committee include experts on cyber security resilience and response is being monitored. Recognising in the Reserve Bank as well as from outside. The committee the increasing frequency and complexity of cyber security is meeting regularly and, as per its recommendations, sub- incidents, the monetary policy statement of February 8, 2017 groups have been formed on certain focus areas for an in- announced that an Inter-disciplinary Standing Committee depth examination. 110REGULATION, SUPERVISION AND FINANCIAL STABILITY assessment of the key risk indicators in cyber functioning. In addition, the Department will take security, IT examinations with a risk based initiatives for capacity building for both supervisors approach will be conducted in 2017-18. The and supervised entities – UCBs – in the coming findings will be factored in the overall assessment year. In this direction, conferences on cooperative of risks in banks. Assessment of IT risks in other banking as organised last year will be conducted. regulated entities such as major urban cooperative As the development of software package for DCBS banks will be covered in a phased manner. A returns has been completed under XBRL-based reporting platform, the Department will focus on back office support system (BOSS) has been stabilising the package and ensuring submission established for this. With a view to enabling a more of timely and reliable data through the platform by efficient supervisory assessment of banks, BOSS all UCBs. will develop standard data templates on major concern areas under various risk categories. NBFCs: Department of Non-Banking Supervision (DNBS) Cooperative Banks: Department of Cooperative Bank Supervision (DCBS) VI.70 DNBS supervises the NBFC sector in the country, which is a fast growing sector with VI.67 DCBS is entrusted with the supervisory significant diversity in terms of size and operational responsibility of primary (urban) cooperative dimensions. The department supervises more banks (UCBs) to ensure a safe and well managed than 11,500 NBFCs of which 222 are non-deposit cooperative banking sector. The department taking systemically important ones. undertakes supervision of these banks on an on- going basis through periodic on-site inspections Agenda for 2016-17: Implementation Status and continuous off-site monitoring. VI.71 The role of statutory auditors in the certification process was enhanced by enabling Agenda for 2016-17: Implementation Status on-line filing of statutory auditors certificate (SAC). VI.68 The Reserve Bank began focused Further, the Institute of Chartered Accountants of attention on select weak UCBs by way of intensive India (ICAI) agreed to digitally authenticate the hand-holding and periodic training in the identified returns of small NBFCs on the XBRL platform, areas of weakness. It organised a conference on which will be operationalised soon. The Reserve ‘Building Banks Co-operatively - Professionalise Bank focused on improving adherence to the fair and Progress’ in Ahmedabad inviting participation practices code by NBFCs through levy of penalties. from the state government, other stakeholders and The Bank is in the final stages of incorporating the top management of the Reserve Bank. During risk factors in the existing CAMELS model of the year, several training programmes for capacity inspection of NBFCs. The project for automation building were conducted by regional offices for of all regulatory approvals of NBFCs has been CEOs/directors/officials of UCBs and auditors of initiated and this will be operationalised in 2017- UCBs. 18. The Reserve Bank also operationalised a formal PCA framework for NBFCs. Agenda for 2017-18 Agenda for 2017-18 VI.69 The department will continue to identify select UCBs for hand-holding and impart focused VI.72 The department will put in place a training to them for all round improvement in their supervisory rating system for ARCs. The Sachet 111ANNUAL REPORT Box VI.12 Sachet Portal The Reserve Bank launched a mobile friendly portal unauthorised deposit collection and financial activities. It will Sachet (sachet.rbi.org.in) on August 4, 2016 to help the help in enhancing coordination among regulators and state public as well as regulators to ensure that only regulated government agencies and will serve as a useful source of entities accept deposits from the public. The portal can be information for early detection and curbing of unauthorised used by the public to share information including through acceptance of deposits. The portal is designed to place the uploading photographs of advertisements/publicity material, entire proceedings of SLCCs on an IT platform. It facilitates raise queries on any fund raising/investment schemes that comprehensive MIS with respect to complaints received, they come across and lodge and track complaints. The referred to regulators / law enforcement agencies and for portal has links to all regulators and the public can easily monitoring the progress in redressal of such complaints. access information on lists of regulated entities. The portal Complaints relating to unauthorised deposit collection and has a section for a closed user group – the state level financial activities that have been lodged in Sachet have coordination committees (SLCCs), inter-regulatory forums been taken up expeditiously with respective regulators for for exchange of information and coordinated action on resolution. portal on NBFCs will be refurbished by improving within the Reserve Bank with effect from April 3, readability and functionalities (Box VI.12). A 2017 (Box VI.13). detailed standard operating procedure for non- VI.74 The core function of the department is to compliant and/or inactive small NBFCs will also enforce regulations with the objective of ensuring be operationalised. financial system stability and promoting public Enforcement Department (EFD) interest and consumer protection. The department will, inter alia, (i) develop a sound policy framework VI.73 Taking note of the changes in the global and domestic financial sector environment, with a for enforcement consistent with international best view to separate the function of identification of practices; (ii) identify actionable violations on contravention of respective statutes/guidelines the basis of inspections/supervisory reports and and directives by the regulated entities from market intelligence reports received/generated imposition of punitive action and to make this by it, conduct further investigations/verifications, process endogenous, formal and structured, a if required, on the actionable violations thus separate Enforcement Department was created identified and enforce them in an objective, Box VI.13 Supervisory Enforcement Framework An effective system of banking supervision, inter alia, bi-monthly monetary policy statement of February 2017, a depends on effective enforcement of supervisory policies separate Enforcement Department was established in April which, in turn, needs a unified and well-articulated 2017. supervisory enforcement policy and institutional Over time, the framework is expected to make the Reserve framework. Taking cognisance of such a need, the Bank’s enforcement actions more transparent, predictable, Board for Financial Supervision approved a Supervisory standardised, consistent and timely, leading to improvement Enforcement Framework for action against non-compliant in the banks’ overall compliance with the regulatory banks. Following a subsequent announcement in the 6th framework. 112REGULATION, SUPERVISION AND FINANCIAL STABILITY consistent and non-partisan manner; (iii) deal VI.78 The Reserve Bank's Banking Ombudsman with the complaints referred to it by the Bank's top (BO) Scheme – a dispute redressal mechanism management for possible enforcement action, and notified under Section 35(A) of the Banking (iv) act as a secretariat to the Executive Directors’ Regulation Act, 1949 – has been in existence Committee constituted for adjudication. since 1995. The scheme has been reviewed periodically and its latest comprehensive VI.75 To begin with, the department will focus review was undertaken in 2015-16 covering on the enforcement of penalty provisions under pecuniary jurisdiction of the BO, compensation the Banking Regulation Act. In the medium-term, and grounds of complaint and rationalisation of the entire enforcement function of the Reserve certain clauses of the scheme. The scheme was Bank will be migrated to EFD. In 2017-18, the amended accordingly. The government, during the department will develop a policy framework for year, conveyed its concurrence to the amended enforcement; put in place detailed protocols for Banking Ombudsman Scheme. The amended information sharing with other regulatory and scheme came into effect from July 1, 2017. The supervisory departments of the Reserve Bank, Reserve Bank also opened and operationalised other regulators and the government; create five new offices of the BO in Dehradun, Jammu, channels for generating actionable market Ranchi, Raipur and an additional office in New intelligence; and initiate enforcement action. Delhi. At present, the total number of BO offices CONSUMER EDUCATION AND PROTECTION has reached 20. Consumer Education and Protection VI.79 The Reserve Bank in consultation with Department (CEPD) the Indian Banks' Association (IBA) reviewed the forms commonly used by customers in banks VI.76 The Reserve Bank has always recognised and suggested standardisation of these forms. protection of consumers’ interests as a key area Accordingly, IBA released modified and user and has accorded high priority to providing safe friendly specimens of ten commonly used forms and efficient services to the customers of banks. during the year to banks for implementation. CEPD is the nodal department in the Bank for monitoring the function of protection of consumer VI.80 Aspects and modalities of setting up interests. of an Ombudsman Scheme (OBS) for NBFCs were examined and discussed with concerned Agenda for 2016-17: Implementation Status regulatory and supervisory departments VI.77 The Reserve Bank operationalised the (Box VI.14). Charter of Customer Rights in 2014-15 for Agenda for 2017-18 strengthening customer protection in banks. During the year, the Reserve Bank advised the VI.81 The Reserve Bank will formulate an banks to furnish a certificate in the specified appropriate OBS for NBFCs and operationalise proforma under the signature of the MD or CEO it by establishing the offices of the ombudsman certifying that their customer service policy was for NBFCs at select centres. It will also conduct fine-tuned to incorporate the principles of the surveys on: (i) charges levied by banks for basic Charter of Customer Rights. All the banks have banking services; (ii) KYC compliance; and submitted the certificate. (iii) mis-selling by banks. With a view to creating 113ANNUAL REPORT Box VI.14 The Ombudsman Scheme for Non-Banking Financial Companies A pressing need has been felt for setting up a cost effective, The proposed scheme will initially cover all deposit taking expeditious and easily accessible alternative dispute NBFCs and those with customer interface and an asset resolution mechanism in the form of the ombudsman size of `1 billion and above. However, asset reconstruction scheme (OBS) for customers of NBFCs. companies, infrastructure finance companies, infrastructure debt funds, core investment companies, and NBFC factors As compared to banks, the NBFCs are relatively larger in will not be covered under the scheme for the time being. The number and vary substantially in terms of their activities and coverage of the OBS may be reviewed over time, based on size. These aspects need to be weighed carefully before experience. setting up an OBS for the NBFCs. Complaints relating to non-adherence to the Fair Practices NBFCs are regulated under Chapter III-B of the RBI Act, Code, infringement of customer rights, deficiencies in 1934. Section 45 L of the RBI Act empowers the Reserve services, use of coercive measures, mis-selling, violation Bank to, inter alia, give directions to Financial Institutions. of regulatory guidelines, non-repayment/delayed repayment The OBS for NBFCs is proposed to be operationalised by of deposits and/or interest are some of the categories of the Reserve Bank under Section 45 L of the RBI Act. complaints that will be covered under the scheme. awareness about fictitious offers of money, the VI.83 The Reserve Bank also redresses the Reserve Bank will undertake advertisement and complaints received against regulated entities from publicity campaigns through print and electronic their customers through Consumer Education and media during 2017-18. Protection Cells (CEPCs) set up in every office of the Bank. Customers can also approach the VI.82 All the public sector banks and select private and foreign banks had appointed Internal offices of the BOs to lodge their complaints against Ombudsman (IO) in 2015-16 to examine the banks on the grounds of complaints listed in the grievances that are not resolved by the respective revised BO scheme. During 2017-18, the Reserve bank’s internal grievance redressal mechanism. Bank will deploy a complaint management system During 2017-18, the Reserve Bank will conduct a (CMS) to streamline the processing of complaints review of the IO scheme to make it more effective. (Box VI.15). Box VI.15 Complaint Management System The Reserve Bank has initiated the work for setting up the offices of Banking Ombudsman, as well as CEPCs and a complaint management system (CMS) with a view to banks on the CMS platform for facilitating better coordination harnessing the benefits of information technology (IT) and effectiveness. The new system will also facilitate data for managing the increasing volume of complaints being analytics and will help to study the patterns of complaints received by it. and, where feasible, pre-empt complaints by addressing The web-based CMS will replace the existing complaint the root causes. It will also support the efforts to proactively tracking system (CTS) which has served for over a decade. pursue the complaint-prone areas in banking services to CMS will help the Reserve Bank not only to manage the bring about a qualitative change in the resolution process. complaints more efficiently but also provide a robust CMS will also help to monitor the performance of the management information system. CMS will also integrate regulated entities in the area of management and redressal the grievance redressal mechanism in the Bank by bringing of complaints. 114REGULATION, SUPERVISION AND FINANCIAL STABILITY Deposit Insurance and Credit Guarantee the appointment of liquidators. The Corporation will Corporation (DICGC) continue to focus on adherence to core principles on effective deposit insurance systems in VI.84 Deposit insurance contributes to the 2017-18. stability of the financial system and protects depositors’ interests. In India, DICGC – a wholly- Resolution Corporation owned subsidiary of the Reserve Bank – provides VI.87 The Financial Resolution and Deposit insurance cover to deposits in all commercial Insurance Bill, 2017, which was introduced in the banks including LABs, payment banks, small Lok Sabha on August 10, 2017, prescribes setting finance banks, RRBs and cooperative banks. With up of a Resolution Corporation (RC) to ensure the present limit of `0.1 million, the number of fully observance of the Financial Stability Board’s protected accounts (1,737 million) as on March Key Attributes on resolution of financial firms by 31, 2017 constituted 92.1 per cent of the total addressing the gaps in the current resolution number of accounts (1,885 million) as against the mechanism in India in terms of legal framework, international benchmark of 80 per cent. In terms resolution tools, liquidation, coverage of entities, of amount, the total insured deposits at `30.5 cross-border cooperation and the oversight trillion at end-March 2017 constituted 29.5 per framework. The proposed RC will subsume DICGC cent of the assessable deposits at `103.5 trillion which at present performs the ‘pay box’ function, as compared with the international benchmark of that is, reimbursement of insured amounts to the 20-30 per cent. depositors of failed banks. DICGC also participates in merger schemes approved by the Reserve Bank VI.85 The Corporation builds its Deposit involving payment to the depositors of transferee Insurance Fund (DIF) through transfer of surplus, bank. RC is being established for protection of that is, excess of income (mainly comprising consumers of specified service providers and of premia received from the insured banks, coupon public funds for ensuring stability and resilience of income from investments and cash recovery out of the financial system. assets of failed banks) over expenditure (payment of depositors’ claims and related expenses) net National Housing Bank (NHB) of taxes. DIF stood at `701.5 billion as on March VI.88 The primary function of NHB – the apex 31, 2017, yielding a higher reserve ratio (DIF to institution for housing finance – is to register, insured deposits) of 2.3 per cent vis-à-vis 2.1 per regulate and supervise housing finance cent at end-March 2016. During 2016-17, the companies (HFCs). It also provides refinance corporation sanctioned total claims of `0.6 billion to HFCs, SCBs, RRBs and cooperative sector as against `0.5 billion during the preceding year. institutions for housing loans and directly lends (project finance) to borrowers in the public and VI.86 The Corporation has improved the quality private sectors for extending financial support to of information disseminated through its website by the housing programmes for the unserved and updating FAQs and guidelines for liquidators. It has under-served segments of the population. The also published a primer on deposit insurances and entire capital of `14.5 billion of NHB is subscribed placed on the website. With a view to accelerating by the Reserve Bank. the resolution of outstanding issues, DICGC held several meetings with liquidators and also VI.89 As on June 30, 2017, 85 HFCs were requested chief secretaries of states to expedite registered with NHB, out of which 18 HFCs were 115ANNUAL REPORT eligible for accepting public deposits. Out of the VI.90 It had also disbursed `459 million for total disbursement made under refinance (`226.8 helping renovation of 1,111 dwelling units through billion) in 2016-17 (July-June), 20.1 per cent primary lending institutions under the Refinance (`45.6 billion) was made under the Rural Housing Assistance for Flood Affected Areas of Tamil Nadu Fund (RHF) and 9.8 per cent (`22.3 billion) was upto June 30, 2017. made under the Urban Housing Fund (UHF). As a VI.91 NHB managed the Credit Risk Guarantee nodal agency for implementing the Credit Linked Fund Trust for Low Income Housing with the Subsidy Scheme (CLSS) under the ‘Housing for objective of providing guarantees with respect to All by 2022’ mission of the government, NHB low-income housing loans. As at end-June 2017, had released total subsidy claim (net of refunds) 79 PLIs had signed MoUs with the trust under the under Pradhan Mantri Awas Yojana (PMAY) CLSS scheme. As on June 30, 2017, the trust has issued (including economically weaker section (EWS)/ guarantee cover for 1,972 loan accounts of 14 low income group (LIG) Old, EWS/LIG New and member lending institutions (MLIs) involving total middle income group (MIG)) amounting to `7.5 loan amount of `561 million provided to EWS/LIG billion to 96 primary lending institutions till June households and guarantee cover of `476 million 30, 2017, benefitting 39,629 households. to 14 institutions. 116PUBLIC DEBT MANAGEMENT VII PUBLIC DEBT MANAGEMENT The Reserve Bank successfully managed the market borrowing requirements of the central and state governments during 2016-17 in an orderly manner in the face of multiple challenges such as glide path for reduction in Held to Maturity(HTM) category and Statutory Liquidity Ratio(SLR), supply concerns over increased state government issuances, issuances of UDAY bonds and global uncertainties. The borrowing programme was conducted in line with the debt management strategy of low cost, risk mitigation and market development while factoring in domestic as well as global economic and financial conditions. The maturity profile of dated securities was elongated to contain rollover risk while lowering overall borrowing cost, keeping risk at prudent levels. Despite volatility triggered by both domestic and global factors during the year, G-sec yields witnessed significant softening, particularly after demonetisation in November 2016 and the consequent surplus liquidity of the banking system. However, the yields hardened in February 2017 in response to shift in the monetary policy stance from accommodative to neutral. The agenda for 2017-18 includes elongation of maturity profile of government debt and widening the bouquet of products for diverse investors. VII.1 The Internal Debt Management by state governments, including Ujwal DISCOM Department of the Reserve Bank manages Assurance Yojana (UDAY) bonds. The borrowing the domestic debt of the central government by programme of the central government in 2016-17, statute vide Sections 20 and 21 of the RBI Act, was conducted in accordance with the overall debt 1934 and that of 29 state governments and the management strategy of low cost, risk mitigation Union Territory of Puducherry in accordance with and market development, while factoring in bilateral agreements, as provided in Section 21A domestic and global economic and financial of the said Act. The Reserve Bank also provides conditions. In line with the above objectives, a short-term credit up to three months to both strategy of active consolidation through buyback/ central and state governments in the form of Ways switches was adopted and debt to the extent of and Means Advances (WMA) to bridge temporary `641.33 billion and `405.10 billion was bought back mismatches in their cash flows in terms of Section and switched, respectively. This had a salutary 17(5) of the Act. effect on the weighted average maturity of central Agenda for 2016-17: Implementation Status government debt. To widen retail investments, access was given to individuals under the non- VII.2 During the year, the Reserve Bank successfully managed the borrowing programme competitive bidding in the primary auction of of the central government and state governments, Treasury Bills (T-Bills). Following the deliberations notwithstanding multiple challenges in the form of by the Cash Co-ordination Committee comprising the glide path for reduction in HTM category of officials of the Reserve Bank and the Government banks’ investment portfolio and SLR requirements of India (GoI), GoI issued guidelines towards better and supply concerns over increased issuances information sharing and cash flow forecasting. 117ANNUAL REPORT VII.3 With a view to increasing acceptability Table VII.1: Net Market Borrowings of the Central Government of the Sovereign Gold Bond (SGB) scheme and (` billion) widening the investor base of SGBs, the scheme Item 2014-15 2015-16 2016-17 2017-18* was modified suitably. The minimum subscription 1 2 3 4 5 amount was reduced to one gram of gold, a Net Borrowings 4635 4559 4268 2517 discount of `50 offered on the face value of the (i) Dated Securities 4,532 4,406 4,082 1312 (ii) 91-day T-Bills 32 39 245 885 security and the number of receiving agencies (iii) 182-day T-Bills 9 5 57 26 increased to include stock exchanges. (iv) 364-day T-Bills 62 109 -115 5 VII.4 As part of the ongoing endeavour to *: Up to June 30, 2017. consolidate the debt in State Development Loans per cent and financing 76.4 per cent of the gross (SDLs) through buyback, the state of Maharashtra fiscal deficit (GFD), as against 82.0 per cent in repurchased its high cost debt. Further, the the previous year. On the other hand, net short states that do not maintain reserves in the form term market borrowings through T-Bills increased of consolidated sinking fund (CSF) and guarantee to `186 billion during 2016-17 from `152 billion in redemption fund (GRF) were encouraged to do so 2015-16 mainly due to higher issuances in H1 of as a prudent risk management measure. 2016-17. In the aggregate, however, net market VII.5 Government securities (G-sec) yields borrowing through dated securities and T-Bills witnessed significant softening during the declined by `291 billion to `4,268 billion in year, particularly after demonetisation and the 2016-17 (Table VII.1). consequent surplus liquidity in the banking system. Debt Management Operations The yields, however, hardened in February 2017 VII.7 The weighted average yield (WAY) of in response to the shift in monetary policy stance dated securities of central government issued from accommodative to neutral. The benchmark during the year declined by 73 bps to 7.16 per yield softened thereafter on lower inflation data, cent in 2016-17 while the weighted average FPI buying and expectations of normal monsoon. coupon (WAC) on the outstanding stock of Debt Management of the Central Government dated securities declined by 9 bps to 7.99 per VII.6 The Reserve Bank in consultation with GoI cent as on March 31, 2017. The declining trend followed a strategy of front loading of issuances, in yield continued in 2017-18 so far (upto June but modulated its market borrowings from the 30) reflecting benign market conditions and budget estimates during the fourth quarter, increased liquidity (Chart VII.1). reducing thereby, the supply of sovereign paper in VII.8 The weighted average maturity (WAM) the market. As against gross market borrowings of of the outstanding stock increased marginally to `6,000 billion through dated securities proposed 10.65 years as at end-March 2017 (Table VII.2). in the Union Budget 2016-17, the actual amount However, the WAM of issuances during 2016-17 mobilised was modulated to `5,820 billion on declined by 1.27 years to 14.76 years, reflecting the back of higher surplus cash balances of relatively larger issuances in the maturity buckets the central government. Net market borrowings below 19 years. The Reserve Bank continued through dated securities amounted to `4,082 its policy of passive consolidation by way of billion in 2016-17, registering a decline of 7.4 reissuances and active consolidation through 118PUBLIC DEBT MANAGEMENT with 66 per cent during the previous year, mirroring an increase in the share of maturities less than 10 years (Table VII.3). With the objective of catering to the demand for long term investors such as insurance companies and pension funds, 30 and 35-year tenor bonds were issued during the year. Primary Dealers and Devolvement VII.10 The elevated supply of SDLs, including UDAY bonds during 2016-17 resulted in devolvement of central government securities on Primary Dealers (PDs) on four instances for an aggregate amount of `53 billion, as compared with devolvement of `110 billion during the previous year. The share of the PDs in the subscription to primary auctions of central government securities stood at 47.6 per cent in 2016-17, down from 54.2 buyback/switches. Out of 164 auctions, 156 per cent in 2015-16. The underwriting commission were reissuances during the year. Buyback/ paid to PDs during 2016-17 declined to `0.357 switches amounted to `1,046 billion in 2016-17 billion from `0.471 billion during 2015-16, mainly as compared to `611 billion in the previous year. on account of ample liquidity conditions. There was Furthermore, the share of issuances in the two only a single instance of devolvement amounting long maturity buckets declined from 38 per cent to `32 billion in Q1 of 2017-18. All the standalone in 2015-16 to 29 per cent in 2016-17, mirroring PDs complied with their target commitments the relatively muted demand for long bonds. in auction bidding, secondary market turnover VII.9 During 2016-17, the residual maturity of 59 targets and continued to maintain capital to risk per cent of the market borrowings through dated weighted assets ratio (CRAR) above the minimum securities was 10 years and beyond, as compared requirement of 15 per cent. Table VII.2: Market Loans of Central Government – A Profi le* (Yield in per cent /Maturity in years) Years Range of YTMs at Primary Issues Issued during the Year Outstanding stock Under 5 years 5-10 years Over 10 years Weighted Range of Weighted Weighted Weighted Average Maturities of Average Average Average Yield New Loans Maturity Maturity Coupon 1 2 3 4 5 6 7 8 9 2012-13 8.21-8. 82 7.86-8.76 7.91-8.06 8.36 5-30 13.50 9.66 7.97 2013-14 7.22-9.00 7.16-9.40 7.36-9.40 8.41 6-30 14.23 10.00 7.98 2014-15 - 7.66-9.28 7.65-9.42 8.51 6-30 14.66 10.23 8.08 2015-16 - 7.54-8.10 7.59-8.27 7.89 6-40 16.03 10.50 8.08 2016-17 - 6.13-7.61 6.46-7.87 7.16 5-40 14.76 10.65 7.99 2017-18# - 6.52-6.95 6.74-7.53 7.01 6-39 14.99 10.67 7.95 Note: YTM: Yield to Maturity; #: Up to June 30, 2017; -: No issues; *: excluding buyback/switch in GoI securities and special securities. 119ANNUAL REPORT Table VII.3: Issuance of Government of India Dated Securities – Maturity Pattern (Amount in ` billion) Residual Maturity 2014-15 2015-16 2016-17 2017-18* Amount Percentage Amount Percentage Amount Percentage Amount Percentage raised to total raised to total raised to total raised to total 1 2 3 4 5 6 7 8 9 Less than 5 years - - - - 180 3.1 - - 5 -9.99 years 2,350 39.7 2,000 34.2 2,220 38.1 880 44.7 10-15.99 years 1,510 25.5 1,600 27.4 1,710 29.4 519 26.4 16 -19.99 years 960 16.2 1,120 19.1 820 14.1 250 12.7 20 years & above 1,100 18.6 1,130 19.3 890 15.3 320 16.3 Total 5,920 100.0 5,850 100.0 5,820 100.0 1,969 100.0 *: As on June 30, 2017; -: No Issues. Ownership of Securities three broad pillars: low cost, risk mitigation and market development. The MTDS, which is in line VII.11 The outstanding dated securities of central with international best practices, calibrates certain government registered 8.4 per cent year-on-year benchmarks on the composition of debt in terms growth in 2016-17. Commercial banks, including of short and long term, floating and fixed rate, and the PD segment remained the largest holder with maturity of debt. It also stipulates stress tests and 40 per cent share as at end-March 2017, followed scenario analysis in relation to costs, maturity and by insurance companies with a share of 22.9 per potential risks. The debt of the central government cent. The Reserve Bank held 14.7 per cent while has been reviewed against the MTDS benchmarks provident funds held 6.3 per cent. and found to be stable and sustainable. Sovereign Gold Bond Scheme Treasury Bills VII.12 The Reserve Bank successfully managed VII.14 With a view to encouraging wider the issuances of SGBs during 2016-17. participation and retail holding of T-Bills and in Four tranches of SGBs for an aggregate amount line with the first bi-monthly monetary policy of `34.69 billion (11.44 ton) were issued during statement of 2015-16, the central government in the year. Since the inception of the scheme in consultation with the Reserve Bank, extended November 2015, a total of `60.29 billion (20.73 the non-competitive bidding facility in T-Bills to ton) has been mobilised and SGBs have been retail investors up to a ceiling of 5 per cent of the allotted to approximately 1.4 million retail investors notified amount. As mentioned earlier, net market including the issuances of two tranches in (May borrowings through T-Bills increased during 2016- and July) 2017-18. 17. The yields on T-Bills largely mimicked the declining trend in the yields of dated securities Medium Term Debt Management Strategy (MTDS) in 2016-17. Reflecting the increase in appetite VII.13 The MTDS was formulated as a debt for T-Bills from market participants, the Primary management framework in 2015, in consultation Dealers’ share in T-Bills auctions declined to 74.4 with the Government of India, for a period of three per cent from 75.4 per cent during 2015-16. The years and rolled over each year. It is premised on PDs individually achieved the stipulated minimum 120PUBLIC DEBT MANAGEMENT success ratio of 40 per cent in bidding while the success ratio of the PD system as a whole was 58.8 per cent and 60.0 per cent during H1 and H2, respectively, of 2016-17. Market Stabilisation Scheme (MSS) VII.15 With a view to absorbing excess liquidity in the banking system following demonetisation in November 2016, the limit for the MSS was increased. Under MSS, the total amount of cash management bills (CMBs) issued, for tenors ranging from 14 to 63 days, amounted to `10,115 billion, with associated interest outgo of `57 billion. During 2017-18 (up to June 30), T-Bills issued under MSS for tenors ranging from 312 to 329 days amounted to `1,000 billion. Pradhan Mantri Garib Kalyan Deposit Scheme 2016. The government’s cash position improved (PMGKDS) subsequently, mainly on account of increased VII.16 In the wake of demonetisation, the central tax flows and higher investments in intermediate/ government launched the PMGKDS on December auction treasury bills (ITBs/ATBs) by state 17, 2016, as a tax amnesty scheme available from governments (Chart VII.2). December 17, 2016 to March 31, 2017. Under VII.18 With the advancement of budget this scheme, the deposits are held at the credit of presentation this year, the government units have the declarant of tax in the bonds ledger account started to frontload expenditure, unlike in the (BLA) maintained with the Reserve Bank and a previous years. This combined with low net tax certificate of holding is issued to the declarant. receipts and large redemption pressure in the first Deposits mobilised under this scheme amounted quarter of 2017-18, caused the cash balances of to `12.4 billion. the central government to move into prolonged Cash Management of the Central Government periods of deficit, warranting issue of CMBs of VII.17 The WMA limits for the central government `1,300 billion during the Q1 of 2017-18. The switch for the first and the second halves of 2016-17 operations undertaken in January, March and were increased each by `50 billion to `500 billion June 2017 helped in easing the stress in the cash and `250 billion, respectively. The government balances to a certain extent. The WMA limit for was in WMA for 26 days during 2016-17 the first quarter of 2017-18 was set at `600 billion vis-à-vis 15 days during the previous year. while the same for the second quarter would be The accommodation to the central government `700 billion. under WMA was `1,567 billion during 2016-17 Debt Management of State Governments as compared with `838 billion in 2015-16. The government resorted to overdraft (amounting to VII.19 The gross market borrowings of the `68 billion) only once during the year on July 5, state governments amounted to `3,820 billion in 121ANNUAL REPORT Table VII.4: Market Borrowings of States through SDLs (` billion) Item 2014-15 2015-16 2016-17 2017-18* 1 2 3 4 5 Maturities during the year 334 352 393 74 Gross sanction under article 293(3) 2,435 3,060 4,000 2,980 Gross amount raised during the year 2,408 2,946 3,820 650 Net amount raised during the year 2,075 2,594 3,427 576 Amount raised during the year to total sanctions ( per cent) 99 96 96 22 Outstanding liabilities ( at the end period)# 12,757 16,389 20,896 21,472 # Including UDAY and other special securities; *: Up to June 30, 2017. 2016-17 as compared with `2,946 billion in the VII.22 In 2016-17, five states including previous year (Table VII.4). Puducherry issued SDLs with tenors above 10 years and many states issued non-standard VII.20 The WAY of state government securities securities of tenors ranging from 2 to 20 years. As issued during 2016-17 stood lower at 7.48 per a strategic response to higher spreads, four states cent than that of 8.28 per cent in the previous year. rejected all the bids in some auctions. Furthermore, Despite softening of yield across securities, the the Reserve Bank has been working closely with weighted average spread of SDL issuances over state governments to facilitate efficient cash and the comparable central government securities liability management operations of states, with the increased to 60 bps from 50 bps in 2015-16. objective of consolidation through elongation of The inter-state spread which was on an average debt, reissuances and buyback of high cost debt, in the range of 7 bps in 2016-17 same as in the while keeping an eye on redemption capacities previous year though higher than 4 bps in 2014- of states. As part of the ongoing endeavour to 15, however, does not reflect the fiscal strength of consolidate the debt in SDLs through buybacks, the states in the pricing of SDLs. the state of Maharashtra repurchased `10.83 billion of its debt. VII.21 During 2016-17, thirteen states issued Cash Management of State Governments UDAY bonds for `1,091 billion as against `990 billion raised by eight states in the previous year. VII.23 The aggregate WMA limit for 28 states The spreads of UDAY bonds during 2016-17 and the Union Territory of Puducherry was declined to 35-75 bps over the corresponding revised from `154 billion to `322 billion with effect tenor/10-year FIMMDA G-Sec yield as compared from February 1, 2016. Eleven states resorted with a fixed spread of 75 bps in 2015-16. to WMA in 2016-17, the same number as in the previous year. Consequent to the increase in Approximately 45 per cent of the total UDAY bond WMA limits, only 4 states resorted to overdrafts in issuances in 2016-17 were concentrated in Q4. 2016-17 as against 9 states in 2015-16. The large volume of SDL issuances including UDAY, was one of the major factors that resulted VII.24 Outstanding investment of states in ITBs in weighted average spread to widen from 54 bps increased further to `1,561 billion as at end-March in Q1 to 83 bps in Q4 of 2016-17. 2017, while that in ATBs declined for the third year 122PUBLIC DEBT MANAGEMENT Table VII.5: Investments in ITBs and ATBs by per cent of the GFD in 2017-18 as compared State Governments/UT with 79.6 per cent in 2016-17. In line with the (` billion) policy of front-loading of issuances, 64 per cent Item Outstanding as on March 31 (i.e., `3,720 billion) of the gross market 2013 2014 2015 2016 2017 As on borrowings is slated to be raised in the first half of June 30, 2017 2017-18. This, in turn, would also help to 1 2 3 4 5 6 7 manage the redemption pressure during H1 of 14-Day (ITBs) 1,181 862 842 1,206 1,561 1,179 2017-18 when 90 per cent (i.e., `1,566 billion) of ATBs 286 463 394 383 366 1,025 the total redemptions would fall due. The borrowing Total 1,466 1,325 1,236 1,589 1,927 2,204 programme of the centre and state governments would continue to be guided by the pillars of low in succession to `366 billion (Table VII.5). With cost, risk mitigation and market development by the objective of dynamically aligning the interest adopting the following strategic measures : rate on ITBs with market levels, effective January i. Issuance/re-issuance of longer tenor bonds to 30, 2017, the discount rate on 14 days ITBs was help elongate the weighted average maturity re-fixed at the reverse repo rate minus 200 bps, of debt. subject to an upper ceiling of 5 per cent. The ii. Host a single web link on the Reserve Bank rediscount rate has, consequently, also been re- website for public debt through consolidation fixed at reverse repo rate minus 150 bps, subject of various links pertaining to internal and to an upper ceiling of 5.5 per cent. external public debt information. Investments in Consolidated Sinking Fund (CSF)/ iii. Preparation of draft compendium for state Guarantee Redemption Fund (GRF) governments on best practices in cash management and a model cash flow VII.25 Outstanding investment by states in the statement on pilot basis. CSF and the GRF as at end-March 2017 stood at `884 billion and `49 billion, respectively. During iv. Capacity building programmes for the year, total investment in CSF and GRF was Finance Departments/AG Offi ces of state `176 billion (including fresh investment of `57 governments/other central banks. billion and reinvestments of `119 billion) as v. Keeping in view the fi duciary risk for state compared to `134 billion during 2015-16. governments, a Working Group on Monitoring and Reporting of Contingent Liabilities at Agenda for 2017-18 the state level has been constituted under VII.26 The Union Budget 2017-18 projected the aegis of 29th State Finance Secretaries gross market borrowings of `5,800 billion through Conference. The thrust of the Working Group dated securities, a marginal decline of `20 billion is towards identifying contingent liabilities from that in the previous year. Net short term and standardising risk management and borrowings (i.e., through T-Bills) is budgeted at mitigation measures, while bringing in `20 billion, substantially lower than that of `186 uniformity in disclosure across states for billion in the previous year. Net market borrowings better peer group analysis. The Working via dated securities and T-Bills would finance 77.8 Group is expected to submit its report shortly. 123ANNUAL REPORT VIII CURRENCY MANAGEMENT Currency management during 2016-17 was geared towards managing the process of demonetisation of specified bank notes effected in early November 2016 and the subsequent remonetisation by making available adequate quantity of banknotes to meet the legitimate demand of the public in the shortest possible time. Sustained efforts continued to be made towards indigenisation of banknotes production with sophisticated security features. VIII.1 The volume of notes in circulation 31, 2017 increased close to 74 per cent of the NiC continued to increase till November 8, 2016 prevailing on November 4, 2016. Sustained efforts when the Government of India notifi ed that were made towards indigenisation of banknotes banknotes of `500 and `1000 denominations production along with enhanced security features of the existing series issued by the Reserve during the year. The Bank Note Paper Mill at Bank of India till then (henceforth, specifi ed Mysuru started commercial production. Efforts bank notes), shall cease to be legal tender with towards a greenfi eld project for production of effect from November 9, 2016 (also termed as security inks were also undertaken. demonetisation). Simultaneously, a new series TRENDS IN CURRENCY (Mahatma Gandhi New Series) of banknotes of a Banknotes in Circulation different size and design, highlighting the cultural heritage and scientifi c achievements of the VIII.2 The value of banknotes in circulation country, was introduced. In view of the withdrawal declined by 20.2 per cent over the year to `13,102 of legal tender character of nearly 86 per cent of billion as at end-March 2017. The volume of value of notes in circulation on November 8, 2016, banknotes, however, increased by 11.1 per cent, the focus of the Reserve Bank subsequently mainly due to higher infusion of banknotes of shifted to making available banknotes generated lower denomination in circulation following the from printing presses to currency chests and from demonetisation. In value terms, the share of there to bank branches and ATMs in the shortest `500 and above banknotes, which had together possible time. This process was facilitated by air accounted for 86.4 per cent of the total value of lifting of notes as also direct remittances from the banknotes in circulation at end-March 2016, stood presses to currency chests wherever feasible and at 73.4 per cent at end-March 2017. The share adopting a hub and spoke model of distribution. of newly introduced `2000 banknotes in the total As a result, during a short span from November 9 value of banknotes in circulation was 50.2 per to December 31, 2016, the Reserve Bank pumped cent at end-March 2017. In volume terms, `10 and in 23.8 billion pieces of bank notes into circulation `100 banknotes constituted 62.0 per cent of total aggregating `5,540 billion in value. The pace of banknotes in circulation at end-March 2017 as remonetisation continued ceaselessly thereafter compared with 53.0 per cent at end-March 2016 also and the notes in circulation (NiC) as on March (Table VIII.1). 124CURRENCY MANAGEMENT Table VIII.1: Banknotes in Circulation Table VIII.2: Coins in Circulation Denomina- Volume Value Denomina- Volume (million pieces) Value (` billion) tion (million pieces) (` billion) tion (`) (`) Mar-15 Mar-16 Mar-17 Mar-15 Mar-16 Mar-17 Mar-15 Mar-16 Mar-17 Mar-15 Mar-16 Mar-17 1 2 3 4 5 6 7 1 2 3 4 5 6 7 Small coins 14,788 14,788 14,788 7 7 7 2 and 5 11,672 11,626 11,557 46 45 45 (14.9) (13.8) (12.7) (3.6) (3.2) (2.8) (13.9) (12.9) (11.5) (0.3) (0.3) (0.3) 1 41,627 44,876 48,347 42 45 48 10 30,304 32,015 36,929 303 320 369 (42.2) (41.9) (41.6) (21.7) (20.6) (19.2) (36.3) (35.5) (36.8) (2.1) (1.9) (2.8) 2 27,038 29,632 32,059 54 59 64 (27.3) (27.7) (27.6) (27.8) (27.1) (25.6) 20 4,350 4,924 10,158 87 98 203 5 12,761 14,089 15,783 64 70 79 (5.2) (5.4) (10.2) (0.6) (0.6) (1.5) (12.9) (13.2) (13.6) (33.0) (32.1) (31.6) 50 3,487 3,890 7,113 174 194 356 10 2,750 3,703 5,205 27 37 52 (4.2) (4.3) (7.1) (1.2) (1.2) (2.7) (2.7) (3.4) (4.5) (13.9) (17.0) (20.8) Total 98,964 107,088 116,182 194 218 250 100 15,026 15,778 25,280 1,503 1,578 2,528 (18.0) (17.5) (25.2) (10.5) (9.6) (19.3) Note: Figures in parentheses represent the percentage share in 500 13,128 15,707 5,882 6,564 7,854 2,941 total volume/value. (15.7) (17.4) (5.9) (46.0) (47.8) (22.5) 1,000 5,612 6,326 89 5,612 6,326 89 cooperative and regional rural banks (RRBs) (6.7) (7.0) (0.0) (39.3) (38.6) (0.7) spread across the country (Table VIII.3). 2,000 - - 3,285 - - 6,571 - - (3.3) - - (50.2) VIII.5 In order to improve the currency Total 83,579 90,266 100,293 14,289 16,415 13,102 distribution system by leveraging on technology, Note: Figures in parentheses represent the percentage share in the Reserve Bank adopted a hub and spoke total volume/value. model for distribution of banknotes across the country. Fresh note remittances were sent to larger Coins in Circulation currency chests, which meet the currency needs VIII.3 Coins in circulation witnessed a sustained of a designated area (such as a district), identifi ed increase in demand during the year. The total value as hub chests and these, in turn, supplied notes of coins in circulation increased by 14.7 per cent in to smaller currency chests in their vicinity which acted like spokes in the distribution model. Fresh 2016-17 as against 12.4 per cent last year, while the total volume of coins in circulation increased Table VIII.3: Currency Chests and Small Coin by 8.5 per cent as compared with 8.2 per cent in Depots as at end-March 2017 the previous year. Coins of `1 and `2 together Category No. of Currency No. of Small constituted 69.2 per cent of the total volume of Chest Coin Depot coins in circulation, while in value terms, these 1 2 3 accounted for 44.8 per cent (Table VIII.2). State Bank of India (SBI) 1,893 1,793 SBI Associate Banks 754 722 CURRENCY MANAGEMENT INFRASTRUCTURE Nationalised Banks 1,198 1,014 Private Sector Banks 168 164 VIII.4 The currency management infrastructure Co-operative Banks 4 4 consists of a network of 19 issue offi ces, 4,034 Foreign Banks 4 4 Regional Rural Banks 5 5 currency chests (including sub-treasury offi ces State Treasury Offi ces (STOs) 7 0 and a currency chest of the Reserve Bank at RBI 1 1 Total 4,034 3,707 Kochi) and 3,707 small coin depots of commercial, 125ANNUAL REPORT Table VIII.4: Indent and Supply of Banknotes by BRBNMPL and SPMCIL (April-March) (Million pieces) Denomination (`) 2014-15 2015-16 2016-17 Indent Supply Indent Supply Indent Supply 1 2 3 4 5 6 7 5 0 0 0 0 0 0 10 6,000 9,417 4,000 5,857 3,000 2,785 20 4,000 1,086 5,000 3,252 6,000 4,118 50 2,100 1,615 2,050 1,908 2,125 2,700 100 5,200 5,464 5,350 4,910 5,500 5,738 500 (MG series) 5,400 5,018 5,600 4,291 5,725 2,013 500 (New design) - - - - - 7,260 1,000 1,500 1,052 1,900 977 2,200 925 2,000 - - - - 3,500 3,504 Total@ 24,200 23,652 23,900 21,195 28,050 29,043 -: Not Applicable. BRBNMPL: Bharatiya Reserve Bank Note Mudran Private Limited. SPMCIL: Security Printing and Minting Corporation of India Limited. @: Total excludes `1. notes were distributed to every issue offi ce of the total number of banknotes supplied was higher at Reserve Bank as per a planned allocation. 29.0 billion pieces in 2016-17 as compared with 21.2 billion pieces in 2015-16. The total supply CLEAN NOTE POLICY of notes was 3.5 per cent higher than the indent Demand Estimation and Supply of Currency placed with the printing presses for 2016-17, while VIII.6 The Reserve Bank estimates the demand the indent itself was higher by around 17.4 per for currency using an econometric model which cent than that of the previous year (Table VIII.4). factor in, inter alia, expected real GDP growth, rate VIII.7 Demand for coins have increased over of infl ation and denomination-wise disposal rate of the years as refl ected in rising indents as well as soiled notes. However, 2016-17 was an exceptional supply (Table VIII.5). During the past three years, year on account of the demonetisation and the on an average, Mints have, however, been able to gradual replenishment of withdrawn notes by new supply 62.3 per cent of the indented quantity due notes of different denominations. Accordingly, the to capacity constraints. Table VIII.5: Indent & Supply of Coins by Mints (April-March) (Million pieces) Denomination 2014-15 2015-16 2016-17 Indent Supply Indent Supply Indent Supply 1 2 3 4 5 6 7 50 Paise 40 20 40 30 30 30 `1 6,000 3,247 6,100 3,753 6,300 3,548 `2 4,000 2,367 4,000 2,899 4,200 2,461 `5 2,000 1,091 2,100 1,492 2,270 2,429 `10 1,800 1,187 2,000 1,084 2,200 1,223 Total 13,840 7,912 14,240 9,258 15,000 9,691 126CURRENCY MANAGEMENT Table VIII.6: Disposal of Soiled Banknotes Table VIII.7: Number of Counterfeit Notes (April-March) Detected (April to March) (Million pieces) (No. of pieces) Denomination (`) 2014-15 2015-16 2016-17 Year Detection at Other Banks Total Reserve Bank 1 2 3 4 1 2 3 4 1,000 663 625 1,514 2014-15 26,128 568,318 594,446 500 2,847 2,800 3,506 (4.4) (95.6) (100.0) 100 5,173 5,169 2,586 2015-16 31, 765 601,161 632,926 50 1,271 1,349 778 (5.0) (95.0) (100.0) 20 801 849 546 2016-17 32,432 729,640 762,072 (4.3) (95.7) (100.0) 10 4,338 5,530 3,540 Up to 5 44 46 34 Note: 1. Figures in parentheses represent the percentage share Total 15,137 16,368 12,503 in total. 2. Does not include counterfeit notes seized by the police and other enforcement agencies. Disposal of Soiled Notes VIII.8 During 2016-17, 12.5 billion pieces of law enforcement agencies. The Reserve Bank soiled notes were disposed as against 16.4 billion is facilitating implementation of the system pieces last year; the reduction was evident across in collaboration with NCRB. A survey-based denominations of `100 and below, in contrast to estimation of FICN carried out by the Reserve the previous year (Table VIII.6). Bank is presented in Box VIII.1. COUNTERFEIT NOTES AND VIII.11 The trail of deposits of SBNs into bank SECURITY PRINTING accounts may provide valuable information to the revenue authorities in tracing unaccounted Trends in Counterfeit Notes Detected in the money. During 2016-17, the number of Banking System suspicious transaction reports fi led by banks VIII.9 During 2016-17, 762,072 pieces of and other fi nancial intermediaries with the counterfeit notes were detected in the banking system, of which 95.7 per cent were detected Table VIII.8: Denomination-wise Counterfeit Notes Detected in the Banking System by commercial banks (Table VIII.7). Detection of (April to March) counterfeit notes was 20.4 per cent higher than (No. of pieces) the previous year. Barring `100, the detection of Denomination (`) 2014-15 2015-16 2016-17 counterfeit notes increased across denominations 1 2 3 4 – notably, `500 and `1,000 - during 2016-17 2 and 5 0 2 80 (Table VIII.8). 10 268 134 523 20 106 96 324 VIII.10 During 2016-17, the National Crime 50 7,160 6,453 9,222 Records Bureau (NCRB), Ministry of Home Affairs 100 181,799 221,447 177,195 500 (MG series) 273,923 261,695 317,567 designed a uniform proforma for collection of 500 (New design) 0 0 199 Fake Indian Currency Note (FICN) data. It 1,000 131,190 143,099 256,324 also developed a web-enabled software for 2,000 0 0 638 Total 594,446 632, 926 762,072 uploading data on FICN detected by banks and 127ANNUAL REPORT Box VIII.1 Survey-Based Estimation of Fake Indian Currency Notes (FICNs) Coincident with the announcement of the withdrawal of legal Bank were classifi ed on the basis of four population groups, tender status of specifi ed bank notes (SBNs) on November viz., rural; semi-urban; urban; and metro. Out of the total 76 8, 2016, the Reserve Bank launched a nation-wide exercise clusters (19 issue offi ces x 4 population groups), 61 clusters to estimate the density of fake Indian currency notes (FICNs) were considered for sampling, excluding the 15 clusters with detected during the counting and verifi cation of notes. no currency chests (Table 1). A two-stage cluster sampling technique was adopted to Samples were drawn from each of these clusters in two obtain the best estimate of FICNs detected at currency chests stages: in the fi rst stage, CCs were selected randomly1 (CCs) and at the Reserve Bank in the post-demonetisation from each cluster; in the second stage, SBNs were chosen period, given the constraints, including time lags inherent randomly from the selected CCs2. As the currency verifi cation in the verifi cation processes. The currency chests located for fake notes in the bundle is carried out at the currency under the jurisdiction of the 19 issue offi ces of the Reserve chest level as well as at the Reserve Bank, the sampling Table 1: Population and Sample: Distribution of CCs (`500) Number of CCs in Population* Number of CCs selected in Sample Row Labels Metro Rural Semi Urban Grand RBI Office Metro Rural Semi Urban Grand Urban Total Urban Total Ahmedabad 59 2 130 48 239 Ahmedabad 30 No Sample 8 15 53 Belapur 30 No CC 78 82 190 Belapur 15 No CC 23 25 63 Bengaluru 36 No CC 155 75 266 Bengaluru 18 No CC 16 27 61 Bhopal 43 7 128 50 228 Bhopal 27 2 21 7 57 Bhubneswar No CC 6 66 48 120 Bhubneswar No CC 4 33 32 69 Chandigarh No CC 9 167 159 335 Chandigarh No CC 1 8 27 36 Chennai 46 12 141 68 267 Chennai 17 1 28 22 68 Delhi 58 No CC No CC No CC 58 Delhi 22 No CC No CC No CC 22 Guwahati No CC 58 79 39 176 Guwahati No CC 7 15 21 43 Hyderabad 246 8 69 37 360 Hyderabad 81 2 4 8 95 Jaipur 63 No CC 180 54 297 Jaipur 29 No CC 23 15 67 Jammu No CC 5 18 14 37 Jammu No CC 1 4 7 12 Kanpur 71 27 87 76 261 Kanpur 21 2 17 20 60 Kolkata 63 17 56 81 217 Kolkata 33 8 18 29 88 Lucknow 41 No CC 98 87 226 Lucknow 17 No CC 13 23 53 Mumbai 61 No CC No CC No CC 61 Mumbai 30 No CC No CC No CC 30 Nagpur 31 1 150 53 235 Nagpur 12 No Sample 25 9 46 Patna 7 13 93 105 218 Patna 2 3 18 32 55 Thiruvananthapuram No CC 7 135 68 210 Thiruvananthapuram No CC 4 40 29 73 Grand Total 855 172 1830 1144 4001 Grand Total 354 35 314 348 1051 *: Relates to CCs dealing with `500 banknotes and may not tally with the number mentioned elsewhere. 1 Instead of probability proportion to size (PPS) sampling to select CCs where weights are assigned according to the rate of FICNs detected at CCs, simple random sampling was adopted as no FICN was detected in nearly 40 per cent of CCs in 2015-16. In the fi rst stage, n number of i CCs out of the total of N CCs from the ith cluster were selected using simple random sampling without replacement. i 2 In the second stage, m samples of SBNs were selected using simple random sampling without replacement pertaining to the jth CC (if that j CC is selected in the fi rst stage) which has total M SBNs. In the next stage, the proportion of FICNs in the selected sample or p was calculated. j j The following notations are used to describe the sampling design for SBNs: Notations Descriptions Notations Descriptions i Cluster number, i.e., i=1,…,61 j currency chests number j=1,..,4009 N Number of CCs in ith cluster n Number of sample CCs drawn from ith cluster which has i i total N CCs i M Number of SBNs in the jth currency chest j=1,…,4009 m Number of sample SBNs checked pertaining to jth CC which j j have total M SBNs j p Proportion of FICN detected in the sample of jth CC q 1 – p j j j 128CURRENCY MANAGEMENT Chart 1. Estimation of FICN at CCs and RBI: Flow Chart Unprocessed (a) Processed and NOT sent to RBI (b) Processed and sent to RBI (c) (d)=FICN out of (b) + (c) (e) Net Shortage out of (b) + (c ) exercise was done separately at both levels3 to arrive at the At the Reserve Bank’s currency verifi cation and processing total FICNs (Chart 1). system, during 2015-16, there were 2.4 pieces of FICNs Based on this approach, overall, 25 per cent of CCs (1,051 of `500 denomination and 5.8 pieces of FICNs of `1000 CCs for `500 and 1,018 CCs for `1000) and 9.2 per cent denomination for every million pieces notes processed; (2.2 billion pieces) SBNs were selected in the sample and which rose to 5.5 pieces and 12.4 pieces, respectively, during subjected to statistical tests to ensure the accuracy of the the post-demonetisation period. As compared to 2015-16, estimates derived from the sample. 12 clusters for `500 denomination and 14 clusters for `1000 The result showed the rate of FICN detected per million denomination showed statistically signifi cant higher rate of pieces of notes processed at the CC level at 7.1 pieces for FICN detection during the post-demonetisation period. This `500 denomination and 19.1 pieces for `1000 denomination, implies a signifi cant pick-up in the rate of FICN detection at which were higher than the rate of detection at the Reserve the Reserve Bank level in the post-demonetisation period as Bank (5.5 pieces for ` 500 and 12.4 pieces for `1000). compared to a year ago. Financial Intelligence Unit, Government of India, during 2015-16. The upsurge in expenditure during witnessed a quantum jump (Table VIII.9). the year was on account of change in the production plan of printing presses due to the introduction Expenditure on Security Printing and Distribution of new design notes in higher denominations as VIII.12 The total expenditure incurred on security well as the requirement of larger volume of notes printing stood at `79.65 billion for the current year for replacement of the demonetised currency. (July 2016 – June 2017) as against `34.2 billion Furthermore, in order to ensure availability of 3 Population : 23.9 billion pieces of SBNs in 4009 CCs across 19 RBI issue offi ces; Sample size at CC: 100 per cent of CCs and at least 90 per cent of SBNs in all clusters (as all CCs have already processed 90 per cent of their SBNs); Sample size at the RBI: at least 10 per cent of CCs and at least 2.5 per cent of SBNs per CC in all clusters. 129ANNUAL REPORT Table VIII.9: Number of Suspicious of the tasks already identifi ed in the previous Transaction Reports Filed year as part of ongoing currency management Reporting Entity 2014-15 2015-16 2016-17 operations, and (ii) new tasks that emerged 1 2 3 4 following the demonetisation and the subsequent Banks 45,858 61,361 361,214 remonetisation. Financial Institutions* 10,649 40,333 94,836 Intermediaries ** 2,139 4,579 16,953 (i) Accomplishment of Tasks Identifi ed in the *: Includes RBI-regulated eight All-India Financial Institutions Previous Year (AIFIs), insurance companies, housing fi nance institutions, non- banking fi nancial companies, chit funds, etc. Introduction of New Series of Banknotes **: Includes intermediaries registered with SEBI, viz., stock brokers, merchant bankers, portfolio managers, foreign institutional VIII.15 As a standard international practice, the investors, venture capital funds, etc. design and security features of banknotes are Source: Financial Intelligence Unit, Ministry of Finance, Government of India. reviewed periodically. In line with this practice, a new series (Mahatma Gandhi New Series) banknotes across the country at the shortest of banknotes in new design, dimensions and possible time subsequent to the demonetisation, denominations, highlighting the cultural heritage banknotes had to be frequently air-lifted from the and scientifi c achievements of the country, was presses to the Issue Offi ces of the Reserve Bank introduced during the year. As part of this process, as well as directly to currency chests wherever banknotes in the denominations of `500 and feasible, which partly contributed to the increase `2000 were introduced on November 8, 2016. in the cost of distribution of banknotes. New design notes in other denominations are due for phased introduction. DEPARTMENT OF CURRENCY MANAGEMENT Customer Service VIII.13 Currency management is a core function of the Reserve Bank of India. The Department of VIII.16 In order to enhance customer service, the Currency Management plays a key role in meeting scheme of incentives and penalties for banks for the legitimate demand of the public for banknotes provision of banknotes and coin related services and coins by ensuring continuous supply has been rationalised. In this regard, a revised and circulation of notes and coins of various scheme of incentives titled Currency Distribution denominations across the country. Another and Exchange Scheme (CDES) was formulated major thrust during the year was to prudently and issued to banks. The process of amending manage the transition towards remonetisation Note Refund Rules, 2009 to include the new following the demonetisation, through increased Mahatma Gandhi series of `500 and `2000 supply of new notes as well as proper distribution denomination banknotes has also been initiated. of those notes across the country in a prompt Indigenisation of Security Features for Indian manner. Banknotes Agenda for 2016-17: Implementation Status VIII.17 The Reserve Bank continued with its VIII.14 The implementation of the agenda for medium/long term objective of indigenisation of 2016-17 comprised (i) the accomplishment security features for Indian banknotes during the 130CURRENCY MANAGEMENT year. In this regard, the report of the High Level (ii) Accomplishment of New Tasks Following Steering Committee on indigenisation of security the Demonetisation features of banknotes under the Chairmanship Withdrawal of Legal Tender Character of `500 and of former Deputy Governor, Shri R. Gandhi, has `1000 Old Series Banknotes and Subsequent been submitted to the Government of India. In Demonetisation thereof order to make India self-reliant in banknote paper VIII.21 Following the withdrawal of Specifi ed Bank production, indigenous production of Cylinder Notes (SBNs), a scheme for exchange/deposit of Mould Vat Made Watermarked Bank Note (CWBN) the SBNs was formulated by the Reserve Bank paper at the Bank Note Paper Mill India Private whereby members of public were advised to Limited (BNPMIPL), Mysuru, started during the deposit SBNs till December 30, 2016 in their bank year. A proposal to set up a security ink factory at account or exchange these for other legal tender Mysuru was accorded in-principle approval. notes up to specifi ed limits across the country. The Mechanisation of Vaults offi ces of the Reserve Bank, bank branches and post offi ces offered the exchange/deposit facility VIII.18 With the objective of introducing to the general public. mechanised vaults, a greenfi eld project at the Reserve Bank, Naya Raipur, and a brownfi eld Exchange/Deposit and Cash Withdrawal Limits project at the Reserve Bank, Belapur, have been VIII.22 The exchange of SBNs for legal tender taken up on a pilot basis by the Reserve Bank. notes was allowed at commercial bank branches High Level Committee on Currency Storage (barring branches of district central co-operative banks, except for four days from November 10-14, and Movement (HLCCSM) and Committee on 2016) till November 25, 2016. Subsequently, the Currency Movement (CCM) exchange facility was restricted to the Reserve VIII.19 Two committees, i.e., High Level Bank Offi ces. Limits on withdrawal from bank Committee on Currency Storage and Movement counters and ATMs were also imposed to gradually (HLCCSM) (Chairman: Shri N. S. Vishwanathan) meet the demand for new currency following and Committee on Currency Movement (CCM) the demonetisation. However, these limits were (Chairman: Shri Deepak Mohanty), have been set modifi ed and relaxed from time to time, enabling up to review the security aspects of the storage higher withdrawals for essential purposes in line and movement of treasure in transit up to currency with the evolving situation. To ensure availability chest level and further downstream. of currency for people in remote/unbanked areas various measures, viz., deployment of Micro Counterfeit Notes ATMs near village panchayat offi ces and at VIII.20 Smuggling and circulation of high quality military outposts, use of mobile vans, etc. were counterfeit notes has been brought under the undertaken. ambit of the Unlawful Activities (Prevention) Act Special Measures for Agrarian/Rural Requirements (UAPA), 1967 and the Government has framed High Quality Counterfeit Currency (Offences) VIII.23 In order to address agricultural Rules, 2013 as part of UAPA, 1967. requirements during the rabi crop season, SBNs 131ANNUAL REPORT were allowed to be used for purchase of seeds. Evacuation of SBNs Collected Additional withdrawal limit for farmers and traders VIII.26 In order to decongest the accumulation registered with Agricultural Produce Market of SBNs at bank branches, a Guarantee Scheme Committee (APMC) markets/mandis were put in was re-initiated at Reserve Bank offi ces and a place. Banks were also advised to open accounts new scheme at the district level was introduced, (in a camp mode) for workers, while currency whereunder bank branches (other than those of chests were advised to ensure adequate cash DCCBs) not linked to any currency chest were supply to the district central co-operative banks advised to deposit the SBNs with them in any (DCCBs)/regional rural banks (RRBs). Issue Offi ce of the Reserve Bank or a currency Allocation and Distribution of Banknotes-Special chest on or before December 31, 2016. Measures Remonetisation VIII.24 In view of the logistical diffi culties in VIII.27 Keeping in view the urgent need for making supplying banknotes to all currency chests in a available adequate cash to all parts of the country short span, the Hub and Spoke model was adopted at the shortest possible time, concerted efforts for distribution of notes across the country. Fresh were made by the Reserve Bank and the printing notes were distributed to every Issue Offi ce in presses to augment the production and supply of accordance with a planned allocation. The Regional bank notes. Refl ecting these measures, total NiC Offi ce-wise allocation of notes was revised during increased rapidly to `15.06 trillion as on June 30, the last quarter of 2016-17 based on the SBNs 2017, which was about 85 per cent of the NiC as deposited and cash supplied in issue circles during on November 4, 2016. Remonetisation continues the demonetisation period. The annual indent and to progress at a steady pace with enhanced focus projections for demand of banknotes and coins on printing and distribution to meet the currency were also revised accordingly. demand. VIII.25 In order to improve availability, direct Closure of the Scheme and Facility to Deposit remittances were increasingly sent to various SBNs during the Grace Period currency chests from the printing presses. More VIII.28 The Government of India notifi ed the than 100 direct remittances were sent to currency Specifi ed Bank Notes (Cessation of Liabilities) chests in various issue circles. Keeping in view Act 2017 on February 27, 2017. In terms of the the necessity for urgent and timely supply of notes provisions of the Act, the SBNs ceased to be the across the country, notes were also air lifted from liabilities of the Reserve Bank of India and ceased presses/regional offi ces of the Reserve Bank to to have the guarantee of the Central Government. various centres as well as directly to currency However, a grace period was provided during which chests, wherever possible. Banks managing the the SBNs could be deposited by Indian citizens currency chests were allowed to make inter-circle who were outside India between November 9 diversions at their discretion to even out cash and December 30, 2016; in this context, as per availability. Government of India notifi cation dated December 132CURRENCY MANAGEMENT 30, 2016, the last date for Resident Indians was which could not deposit the SBNs at the Reserve March 31, 2017, while that for Non-Resident Bank/currency chests before December 30, 2016 Indians (NRIs) was June 30, 2017. were allowed. VIII.29 While there was no monetary limit for BHARATIYA RESERVE BANK NOTE MUDRAN deposit of SBNs for eligible resident Indians, the PRIVATE LIMITED (BRBNMPL) limit for NRIs was fi xed at `25,000 in line with the VIII.31 BRBNMPL is a wholly owned subsidiary relevant regulation under the Foreign Exchange of the Reserve Bank, which is playing a crucial Management Act (FEMA). The facility was role in the indigenisation of security features of provided at fi ve Reserve Bank offi ces (Mumbai, banknotes in India. The Reserve Bank infused `10 New Delhi, Chennai, Kolkata, and Nagpur) subject billion of capital into BRBNMPL during 2016-17 to verifi cation of documents including customs for setting up of a security ink factory at Mysuru, certifi cation evidencing import of the SBNs (for upgradation/acquisition of machines, etc. NRIs) and copies of bank account statements. Agenda for 2017-18 VIII.30 The Government of India subsequently VIII.32 The processing and destruction of SBNs issued two Gazette notifi cations, viz., Specifi ed deposited/exchanged by the public and kept in Bank Notes (Deposit of Confi scated Notes) Rules, various currency chests and regional offi ces of the 2017 dated May 12, 2017 and Specifi ed Bank Reserve Bank pose a challenge. In this regard, Notes (Deposit by Banks, Post Offi ces and District the agenda for 2017-18 includes the procurement Central Co-operative Banks) Rules, 2017 dated of Currency Verifi cation and Processing System June 20, 2017. Accordingly, deposit of SBNs (CVPS)/Shredding and Briquetting Systems confi scated / seized by law enforcement agencies (SBS); introduction of new series banknotes in before December 30, 2016 and deposits by banks, other denominations; procurement of security post offi ces and district central co-operative banks features; and introduction of varnished banknotes. 133IX PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY The Reserve Bank’s continued efforts towards migrating to a less-cash society gained momentum during the year with the introduction of newer digital modes of payment. With the rapid advancement of technology and the advent of new developments and innovations in the payment landscape, the Bank enhanced its focus on the safety and security of the payment systems. Further, the Bank targeted on making technology infrastructure robust to ensure smooth running of the critical and systemically important payment and settlement systems in India. DEPARTMENT OF PAYMENT AND handled 1.6 billion transactions valued at `120 SETTLEMENT SYSTEMS (DPSS) trillion, up from around 1.3 billion transactions for `83 trillion in the previous year. At end-March IX.1 The push to a less-cash society received 2017, the NEFT facility was available through an impetus facilitated by quick policy measures 130,013 branches of 172 banks, in addition to and initiatives by the Reserve Bank following the business correspondent (BC) outlets. withdrawal of high denomination specifi ed bank notes (SBNs). The initiatives taken by the Bank, IX.4 During 2016-17, 1.1 billion transactions, along with enhancement in infrastructure and valued at around `3.3 trillion and another 2.4 addition of innovative products in the payment billion transactions, valued at `3.3 trillion were space enabled the spread of electronic payments carried out through credit cards and debit cards, to a larger customer base across the country. respectively. Prepaid Payment Instruments (PPIs) Trend and Progress in Payment Systems recorded around 2.0 billion transactions, valued at `838 billion. Mobile banking service witnessed IX.2 The payment and settlement systems strong growth of 151 per cent and 224 per cent continued its robust growth during 2016-17, with in volume and value terms, respectively while volume and value growing at 55.7 per cent and the number of registered customers rose to 163 24.8 per cent, respectively on top of an increase of million at end-March 2017 from 105 million at end- 49.4 per cent and 9 per cent in 2015-16. The share March 2016. of electronic transactions moved up to 89.0 per cent in total volume of non-cash payments from Authorisation of Payment Systems 84.4 per cent in the previous year (Table IX.1). IX.5 The digital mode of payments was Electronic Payments facilitated through 87 authorised payment system operators, as on end-June 2017, comprising PPI IX.3 From amongst electronic modes of issuers, cross-border money transfer service payments, Real Time Gross Settlement (RTGS) handled 108 million transactions, valued at providers, white label ATM (WLA) operators, around `982 trillion in 2016-17, up from 98 million Trade Receivables Discounting System (TReDS) transactions valued at `825 trillion in the previous operators, ATM networks, instant money transfer year. At end-March 2017, the RTGS facility was service providers and card payment networks, available through 198 banks. During 2016- besides the Clearing Corporation of India Limited 17, National Electronic Funds Transfer (NEFT) (CCIL) and the National Payments Corporation 134PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY Table IX.1: Payment System Indicators – Annual Turnover Item Volume (million) Value (` billion) 2014-15 2015-16 2016-17 2014-15 2015-16 2016-17 1 2 3 4 5 6 7 Systemically Important Financial Market infrastructures (SIFMIs) 1. RTGS 92.8 98.3 107.8 754,032 824,578 981,904 Total Financial Markets Clearing (2+3+4) 3.0 3.1 3.7 752,000 807,370 1,056,173 2. CBLO 0.2 0.2 0.2 167,646 178,335 229,528 3. Government Securities Clearing 1.1 1.0 1.5 258,917 269,778 404,389 4. Forex Clearing 1.7 1.9 1.9 325,438 359,257 422,256 Total SIFMIs (1 to 4) 95.8 101.4 111.5 1,506,033 1,631,948 2,038,077 Retail Payments Total Paper Clearing (5+6+7) 1,196.5 1,096.4 1,206.7 85,434 81,861 80,958 5. CTS 964.9 958.4 1,111.9 66,770 69,889 74,035 6. MICR Clearing 22.4 0.0 0.0 1,850 0 0 7. Non-MICR Clearing 209.2 138.0 94.8 16,814 11,972 6,923 Total Retail Electronic Clearing (8+9+10+11+12) 1,687.4 3,141.5 4,205.0 65,366 91,408 132,255 8. ECS DR 226.0 224.8 8.8 1,740 1,652 39 9. ECS CR 115.3 39.0 10.1 2,019 1,059 144 10. NEFT 927.5 1,252.9 1,622.1 59,804 83,273 120,040 11. Immediate Payment Service (IMPS) 78.4 220.8 506.7 582 1,622 4,116 12. National Automated Clearing House (NACH) 340.2 1,404.1 2,057.3 1,221 3,802 7,916 Total Card Payments (13+14+15) 1,737.7 2,707.3 5,450.1 3,326 4,483 7,421 13. Credit Cards 615.1 785.7 1,087.1 1,899 2,407 3,284 14. Debit Cards 808.1 1,173.6 2,399.3 1,213 1,589 3,299 15. Prepaid Payment Instruments (PPIs) 314.5 748.0 1,963.7 213 488 838 Total Retail Payments (5 to 15) 4,621.6 6,945.2 10,861.7 154,126 177,752 220,634 Grand Total (1 to 15) 4,717.4 7,046.6 10,973.2 1,660,158 1,809,701 2,258,711 Note: 1. Real Time Gross Settlement (RTGS) system includes customer and inter-bank transactions only. 2. Settlement of Collateralised Borrowing and Lending Obligation (CBLO), Government securities clearing and forex transactions are through the Clearing Corporation of India Ltd. (CCIL). Government Securities includes Outright trades and both legs of Repo transactions. 3. Consequent to total cheque volume migrating to the cheque truncation system (CTS), there is no Magnetic Ink Character Recognition (MICR) Cheque Processing Centre (CPC) location in the country as of now. 4. The fi gures for cards are for transactions at point of sale (POS) terminals only. 5. The National Automated Clearing House (NACH) system was started by the National Payments Corporation of India (NPCI) on December 29, 2012, to facilitate inter-bank, high volume, electronic transactions which are repetitive and periodic in nature. 6. Figures in the columns might not add up to the total due to rounding off of numbers. of India (NPCI). The number of non-bank entities were permitted to provide mobile banking services authorised for operating PPIs increased to 55 with up to end-June 2017. Eight entities, authorised to 18 authorised during 2016-17. While 54 banks operate WLAs, deployed 14,121 WLAs by end- were granted approval to issue PPIs, 289 banks March 2017. 135ANNUAL REPORT Agenda for 2016-17: Implementation Status component should have sound fi nancials, particularly in terms of suffi cient shareholders’ IX.6 In the Payment and Settlement Systems in funds to cover potential business losses in India: Vision 2018, the department had identifi ed order to continue providing services as a going four strategic pillars for achieving its vision. The concern. The Bank is, therefore, in the process developments in each of the areas are detailed of issuing more specifi c directions on (i) net below. worth requirement for CCPs, (ii) broad principles Responsive Regulation underlying governance of CCPs and (iii) more clarity on foreign-regulated CCPs desirous of Framework for Imposition of Penalty operating in India. IX.7 Non-adherence to guidelines and Payment System Advisory Council (PSAC) standards for payment and settlement systems under the Payment and Settlement Systems IX.10 PSAC was to be constituted as an advisory (PSS) Act, 2007 can attract penal provisions. The body to the Board for Regulation and Supervision Bank has since notifi ed, under Section 18 of the of Payment and Settlement Systems (BPSS). Since the Payments Regulatory Board (PRB) is said Act, a framework for imposition of penalty envisaged to replace the BPSS as per the Finance on authorised payment systems operators / Bill, 2017, no further action is being taken on the banks to cover offences such as (i) contravention formation of PSAC. of provisions of the Act, (ii) non-compliance of directions or orders made there under, and (iii) Legal Entity Identifi er (LEI) violations of terms and conditions of authorisation. IX.11 The Bank decided to implement the LEI Review of PPI Guidelines system for all participants in the Over-the-Counter (OTC) markets for Rupee interest rate derivatives, IX.8 The growing usage of PPIs has led to foreign currency derivatives and credit derivatives requests from stakeholders for relaxations in in India. certain areas while strengthening the norms for Settlement of Funds Leg of Financial Transactions safety and security, risk mitigation and customer protection. Accordingly, PPI guidelines were IX.12 The clearing corporations currently settle comprehensively reviewed and draft Master funds-leg of trades executed on stock exchanges Directions on issuance and operation of PPIs in accounts with various designated commercial were placed on the Bank’s website on March 20, banks which are their clearing banks. The 2017 for public comments by April 15, 2017. Final RBI-SEBI Working Group on ‘Replacement of circular would be issued in the coming year after Commercial Bank Settlement Model with Central examination of the feedback. Bank Settlement Model for Securities Market’ recommended that funds leg involving commercial Policy Framework for CCPs banks and clearing corporations could be settled in IX.9 The Bank has adopted the Principles central bank money. Steps have been undertaken for Financial Market Infrastructures (PFMIs) for to implement funds settlement of all such securities regulation and supervision of FMIs. Accordingly, and commodity market transactions in central Central Counterparties (CCPs) being a critical bank money. 136PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY Robust Infrastructure Effective Supervision Bharat Bill Payments System (BBPS) and Trade RTGS Assessment against PFMI Receivables Discounting System (TReDS) IX.16 The Bank’s policy document, “Regulation IX.13 In-principle authorisation was granted and Supervision of FMI regulated by RBI” states to NPCI to function as a Bharat Bill Payment that the Bank would assess/ review the FMIs Central Unit (BBPCU) of the BBPS, a pan-India operated by it against the international standards inter-operable bill payment system. Up to end- with the same rigour as other FMIs. Guided by this June 2017, a total of 70 entities, both banks and policy, a detailed assessment of RTGS against the non-banks were granted in-principle approval to PFMIs was carried out during the year. operate as Bharat Bill Payment Operating Units Other Developments (BBPOUs). Pilot operations of BBPS have been launched in August 2016 and 37 billers under the Measures to Encourage Digitisation current scope of BBPS related to electricity, gas, IX.17 Apart from the initiatives already telecom, DTH and water are participating. TReDS mentioned, the following policy measures is an institutional mechanism for facilitating the were initiated during the year to promote digital fi nancing of trade receivables of Micro, Small and transactions in the country: Medium Enterprises (MSMEs) from corporate buyers through multiple fi nanciers. All the three a. Unifi ed Payments Interface (UPI) entities that had received in-principle approval NPCI was given approval to go live for to set up and operate TReDS have been issued UPI during the year. Further, NPCI was Certifi cate of Authorisation. allowed to launch BHIM (Bharat Interface for Merchant Discount Rate (MDR) Money), which is a common app with some functionalities, thus providing an additional IX.14 With a view to encouraging a wider interface to customers to connect to UPI segment of merchants to accept card payments, a besides banks’ own apps. merchant turnover-based MDR structure for debit card transactions has been proposed in place of b. National Unifi ed USSD Platform (*99# NUUP the existing slab-rate MDR based on transaction Data) value. Accordingly, a draft circular was placed NPCI was permitted to introduce Unstructured on the Bank’s website on February 16, 2017 for Supplementary Service Data (USSD) 2.0 public comments by February 28, 2017. Final (*99#) version which was also integrated with circular would be issued in the coming year after the UPI, so as to provide a better customer examination of the public feedback. experience for funds transfers. Electronifi cation of Toll Collection c. BHIM-Aadhaar Pay Mechanism for Merchant IX.15 Towards electronifi cation of toll collection Payments systems on pan-India basis in an inter-operable environment, in-principle approval was granted To provide a channel for customers to make to NPCI for setting up and operating a National digital payments using their Aadhaar-seeded Electronic Toll Collection (NETC) system. The fi nal bank accounts at merchant locations, in- approval to NPCI for the NETC project is envisaged principle approval was accorded to NPCI to be accorded in the coming year, based on to launch a pilot on BHIM-Aadhaar Pay. results of the pilot project being undertaken. BHIM-Aadhaar Pay is a smart phone- 137ANNUAL REPORT based application with a dongle attached Card Not Present Transactions – Rationalisation to it for capture of customer’s biometric of Additional Factor of Authentication data. The customer will authenticate the IX.20 Customer convenience was enhanced payment transaction by providing biometric through rationalisation of the mandate for an identifi cation on the merchant device. These additional factor of authentication for card not transactions are processed as part of the present transactions using network provided existing Aadhaar Enabled Payment System solutions for payments up to `2,000. (AEPS) with a separate transaction type assigned to them. Security and Risk Mitigation Measure - Technical Audit of PPI Issuers d. Inter-operability of ATMs IX.21 Towards enhanced security of the PPIs, The Department of Post (DoP) was granted following the rapid growth, post withdrawal of approval for enabling two-way inter- SBNs, the entities issuing PPIs were advised to operability of ATMs installed by it with ATMs carry out a special audit by empaneled auditors of connected to the National Financial Switch the Indian Computer Emergency Response Team subject to certain conditions such as setting (CERT-In). The audit would cover compliance as up of a separate vertical within the DoP for per security best practices, change management handling this work, with subsequent transfer aspects for the system authorised and adherence of infrastructure to the India Post Payments to the process fl ow approved by the Bank. Bank (IPPB), and adherence to regulatory instructions of the Bank. Bharat QR Code e. Tokenised Contactless Card Payments IX.22 One of the major objectives of the Approval was given to the authorised card Vision-2018 for the payment and settlement networks to introduce tokenised contactless systems in India is to ensure inter-operability card payments such as ‘Samsung Pay’. among the different service providers of a payment system. Accordingly, all authorised card networks Publication of Daily Data on Select Electronic were advised in September 2016 to standardise Payment Systems the QR code, enabling inter-operability of IX.18 With the use of digital payment channels transactions. The inter-operable QR code (Bharat under focus, the Bank started collating daily data of QR) was launched in February 2017. select electronic payment systems, representative Financial Market Infrastructure data on credit/debit card usage, PPI and mobile banking, and disseminating them on its website CPMI-IOSCO Level 3 Assessment on a weekly basis. IX.23 The Committee on Payments and Market Master Directions on Access Criteria for Payment Infrastructures-International Organisation of Systems Securities Commissions (CPMI-IOSCO) published IX.19 The Bank reviewed the access criteria for a report on the fi nancial risk management and payment system and issued a master direction on recovery practices of ten derivatives CCPs in it taking into account the developments following August 2016, presenting level-3 assessment the earlier instructions issued in September 2011. of consistency in the outcomes of CCPs’ 138PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY implementation of the PFMI. CCIL was one of a. Towards meeting the currency requirements the ten CCPs reviewed as part of the level-3 of the public through ATMs, a Task Force for assessment. Recalibration of ATMs was set up under the Chairmanship of Shri S. S. Mundra, Deputy CCIL Compliance Audit Governor, comprising representatives IX.24 As a qualifi ed CCP, CCIL is assessed on from the Ministry of Finance, Ministry of an on-going basis against PFMIs. During the year, Home Affairs, four banks with the largest a compliance audit of CCIL was carried out to ATM networks and NPCI. As decided by assess its compliance with the observations in the the Task Force, coordinated efforts of the Bank’s inspection undertaken in the previous year. ATM manufacturers, cash replenishment As a measure of enhanced transparency, CCIL agencies and service providers were made continued to disclose its self-assessment on its to recalibrate and replenish the ATMs for compliance with the PFMIs on an annual basis, as dispensing new series of high denomination per the ‘Disclosure Framework and Assessment bank notes. By end-December 2016, with Methodology’, prescribed in the PFMIs. CCIL also over 1.90 lakh ATMs recalibrated, the Task publishes its quantitative disclosures on a quarterly Force was wound up. basis as per the public disclosure standards for b. ATM charges for all transactions by savings CCPs. bank customers were waived for both on-us Equivalence Recognition of CCIL under EMIR and off-us transactions from November 10, IX.25 The European Commission has 2016 till December 30, 2016. observed that India has regulatory regimes for c. Cash withdrawal limits at POS were enhanced the CCPs equivalent to the European Union. up to `2000 per day across all centres Consequent to the European Commission’s (Tier I to VI) and customer charges were equivalence decision under the European Market waived on all such transactions from Infrastructure Regulation (EMIR), a Memorandum November 18, 2016 till December 30, 2016. of Understanding (MoU) was executed as part d. The participating banks and PPI issuers of of cooperation between the Reserve Bank and IMPS, UPI and USSD were advised not to the European Securities and Market Authority levy charges on transactions up to `1000 (ESMA). The ESMA has included CCIL in its list of from January 01, 2017 till March 31, 2017. recognised CCPs and also advised CCIL as a third country CCP. e. For debit card transactions during January- March 2017, MDR was capped at 0.25 per Oversight of Payment Systems – Retail cent for transactions up to `1000 and 0.5 IX.26 During the year, onsite inspection of 13 per cent for transactions above `1000 and PPIs and three White Label ATM Operators was up to `2000. The timeline was subsequently carried out. extended till completion of review of the MDR Special Measures post Withdrawal of SBNs guidelines. IX.27 Following the withdrawal of SBNs, several f. The limit for semi-closed PPIs issued with measures were undertaken by the Bank as under: minimum customer details was enhanced 139ANNUAL REPORT Box IX.1 Distributed Ledger Technology (DLT) The Committee on Payments and Market Infrastructures sharing data across key entities may lead to greater market (CPMI) in February 2017 published a report, “Distributed transparency and more effective risk management across ledger technology in payment, clearing and settlement systems, wherein the interconnectedness is larger. With in- - An analytical framework”. The report states that DLT is built tools of confi guration on assessing macro-economic viewed by many as having the potential to disrupt payment, factors, automatic triggering of margin calls across FMIs in clearing, settlement and related activities. DLT, including the system simultaneously may pose challenges on liquidity block chain technology, draws upon both well established demand and its management in the system. and newer technologies to operate a set of synchronised A number of fi nancial market participants are assessing the ledgers managed by one or more entities. DLT may possibility of using DLT for specifi c post-trade processes, provide an alternative to the traditional centralisation of from maintaining basic records to clearing and settling database management, as is the case with fi nancial market fi nancial transactions. Their inclination towards DLT is infrastructures (FMIs). driven by factoring effi ciency gains from cost savings, faster The report highlights how DLT could enhance effi ciency settlement, greater resiliency and quicker reconciliation from by radically changing the processes of maintaining and the use of an automatically updated source of consistent storing of assets, how obligations are discharged, contracts information along the value chain. Market participants are enforced, and risks are managed. The features of DLT involved in post-trade processes are exploring the could transform fi nancial services and markets by reducing realisation of effi ciencies through collectively maintaining a complexity, improving end-to-end processing speed, common, decentralised record of data, eliminating the need increasing transparency and improving immutability in to reconcile different databases, which could be possible transaction record keeping and network resilience, reducing through DLT. operational and fi nancial risks. This could largely reduce In the Indian context, a Proof-of-Concept (PoC) was the need for reconciliation across multiple record-keeping structured and customised by the IDRBT to facilitate the infrastructures. feasibility analysis of blockchain technology for Indian However, DLT may pose new or different risks concomitant banking and fi nance sector with two use cases that highlight to operational and security issues arising from the banking and consumer interaction: domestic trade fi nance technology, lack of inter-operability with existing processes with a sight letter of credit and Enhanced Information and infrastructures and issues related to data integrity, Payments (EIP). Overall, the PoC provided a good immutability and privacy. As DLT is an evolving technology demonstration of the use-cases and helped to broaden the that has not yet been proven suffi ciently robust for wide scale understanding of the technology and its potential to other implementation, implementing across jurisdictions draws its real-life applications, but scalability and security aspects own challenges on legal aspects. need to be studied in detail. Having a well-founded, clear, transparent and enforceable References: legal basis is a core element of payment, clearing, and settlement arrangements. DLT can increase legal risks if 1. Bank for International Settlements (2017), Report of the there is ambiguity or lack of certainty about an arrangement’s Committee on Payments and Market Infrastructures on legal basis. For transactions taking place across borders or in “Distributed Ledger Technology in Payment, Clearing and multiple jurisdictions, the law underpinning the activity would Settlement”, February. need to be confi rmed or adopted in multiple jurisdictions in 2. Institute for Development and Research in Banking ways that are mutually compatible. Technology (2017), White Paper on “Applications of A DLT arrangement could have implications for broader Blockchain Technology to Banking and Financial Sector in fi nancial market risks even though the benefi t of DLT on India”, January. from `10,000 to `20,000; special category special measures, introduced on November of PPIs for merchants was introduced with 22, 2016, were extended till the completion of higher limits on funds transfers. These review of PPI guidelines. Further, issuance of 140PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY PPIs by banks was allowed to various entities inter-operability among PPIs, in a phased manner, including unlisted corporates/partnership would be issued after the fi nalisation of the PPI fi rms/sole proprietorship /public organisations guidelines. like municipal corporations and urban local Robust Infrastructure bodies for onward issuance of PPIs to their Migration of Cheques to Cheque Truncation staff/employees/contract workers. System (CTS)-2010 Standards g. White Label ATM Operators (WLAOs) were allowed to source cash from retail outlets, IX.31 Cheque issuing banks are required to make provided that the quality and genuineness of all efforts to withdraw non-CTS 2010 standard currency notes, thus sourced, would be the cheques in circulation by creating awareness responsibility of WLAOs. among customers. Accordingly, the volume of non- CTS-2010 cheques to total inward volume was Agenda for 2017-18 brought down to below 1 per cent in 2016 from 4 Responsive Regulation per cent in 2014. The requirement of paper to follow Review of WLA Guidelines for cheques issued by the central government was also discontinued. Further measures would IX.28 The scope of activities of WLAO, introduced in June 2012, were reviewed from time to time, be undertaken to facilitate migration of cheques inter alia, enabling the acceptance of international to CTS-2010 standards. Banks were also advised cards at WLAs, facilitating use of dynamic currency not to accept fresh /additional post-dated cheques conversion for international cards, delinking and to convert the existing post-dated cheques to cash supply from sponsor banks, and sourcing the National Automated Clearing House (NACH). of cash from retail outlets. Nonetheless, WLAOs Effective Supervision have not been able to meet the stipulated targets Oversight Framework for Authorised Payment under the schemes chosen by them. Hence, it has been decided to review the WLA guidelines Systems comprehensively, particularly from the perspective IX.32 The framework for oversight of both retail of WLA deployment targets. and large value payment systems would be Policy for Mobile Banking Services developed with a focus on off-site surveillance, regular self-assessment and need-based IX.29 A review of the policy for granting inspection of retail payments. The framework permission to banks for mobile banking and would draw from the principle that the intensity of prescribing minimum security standards would be oversight should be proportionate to the systemic undertaken. risks or system-wide risks posed by a payment Guidance for Inter-operability amongst PPIs system or operator or participant. IX.30 In view of the thrust on digital payments, Data Reporting by PSOs in XBRL Format the draft Master Directions on issuance and operation of PPIs in India of March 20, 2017 IX.33 The Bank is in the process of migrating envisaged inter-operability among PPIs in line with to the XBRL reporting format. In this connection, the Vision-2018. Instructions on implementation of the templates to collect data from entities would 141ANNUAL REPORT be enhanced to include more granular details Agenda for 2016-17: Implementation Status and new reporting templates would be added to e-Kuber for Currency Management facilitate the collection of detailed information from IX.38 The Integrated Computerised Currency regulated entities. Operations Management System (ICCOMS), used Customer Centricity by the Reserve Bank for currency management Harmonisation of Customer Grievance Redressal is being brought under the Bank’s CBS, e-Kuber. Mechanism The enhancement to e-Kuber would enable the Bank to have a near real-time view of the balances IX.34 In the present scenario, different payment in the currency chests and facilitate effi cient systems have different processes in place for management of currency. A granular view of the customer grievance redressals. The Bank would currency chest transactions would also help to undertake measures for their harmonisation to optimise the holdings of the currency chests. The ensure uniformity in processes and timeframe for system is being designed to facilitate automation resolution. of processes and integration with machines like Disclosure Framework for PSOs currency verifi cation processing system, note counting machines and kiosks. The system would IX.35 Towards further transparency in the also have linkage with Note Presses and provision payments space, the Bank would initiate measures to track currency in transit. to ensure that the PSOs clearly disclose the fees and terms and conditions of their services to the e-Kuber for Roll-out of GST customers. IX.39 The Reserve Bank’s e-Kuber system has Confi rmation of Payment in RTGS/NEFT been assigned the responsibility of functioning as the ‘aggregator’ for all-India collections under IX.36 Currently, originating banks for NEFT, Goods and Services Tax (GST) regime. It would after receiving a positive confi rmation from the also be a one stop source of data reporting benefi ciary bank, initiate an SMS or e-mail to the to GST Network (GSTN), state governments originator to convey the fate of the transaction. With and the Central Board of Excise and Customs the increasing volume of transactions in NEFT, (CBEC), the nodal government department for this feature needs to be strengthened across all its implementation. As GST will be a pan-India participating banks as envisaged in Vision-2018. taxation system, large quantum of transaction The Bank would incorporate a similar feature of data will be handled by e-Kuber. The system positive confi rmation for RTGS transactions. follows ISO 20022 secured messaging protocols DEPARTMENT OF INFORMATION for interaction among agency banks, nodal TECHNOLOGY (DIT) government departments and GSTN, thereby IX.37 The main focus of DIT continued on facilitating exchange of information between CBS providing robust technology infrastructure of banks and e-Kuber of the Reserve Bank. The to ensure smooth running of the critical and system also provides for automatic reconciliation systemically important payment and settlement of differences among stakeholders using systems in the country as also of the other IT Memorandum of Errors using ISO messaging systems for use by the Reserve Bank. protocols. 142PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY e-Kuber for Government e-Receipts and network links, middleware and applications based e-Payments on pre-set threshold values. The system generates alerts when thresholds are breached. The tools IX.40 The standardised e-receipt and e-payment also facilitate service call logging, call escalation, model was rolled out for various state and central incident reporting and monitoring. In addition, it government departments. This standardised builds knowledge base of the service tickets and model envisages integration of governments enforcement of all processes related to change and banks’ systems with e-Kuber for online management, incident management, etc. transaction-wise reporting of receipts/ payments on behalf of government departments by bank Review of the Bank’s Information Security Policy branches. The e-scrolls and account statements IX.43 Information security policy of the Reserve are delivered electronically to governments in a Bank is revised periodically to ensure continued straight-through-processing (STP) manner in ISO protection against the changing contours of security format for consumption by their treasuries. The threats. With the emerging threat landscape, e-receipt system has been adopted by 14 state where organised cybercrime and cyber warfare governments till end-June 2017. The e-payment are taking prominence, the information security model envisages integration of government and cyber security policy of the Reserve Bank for departments with the e-Kuber system for making its own information systems is being reviewed. direct payments to benefi ciaries through NEFT. The emphasis will be placed on recognising the The payment e-scrolls and the account statements growing use of mobile devices and also the new in ISO formats are sent to the treasuries for further forms of attacks reported worldwide and to provide use at their end. The e-payment model has been protection against these risks. adopted by eight state governments till end-June Enhanced Security at Data Centres 2017. IX.44 The Reserve Bank has deployed Electronic Document Management System Information Technology (IT) products, applications (EDMS) Implementation and services hosted in its Data Centres. However, IX.41 The EDMS has been envisioned to with advanced, persistent and innovative threats manage and monitor the life cycle of documents. surfacing every day, the security of IT infrastructure The objective is to ensure digitisation of the entire has to be monitored in a holistic manner. In this work fl ow processes so as to enhance effi ciency direction, as part of the Bank’s cyber security through business process re-engineering (BPR), reinforcement measures, an Information Security monitoring of work fl ow and also reducing storage Operation Centre (iSOC) has been made and retrieval time for documents. operational to monitor, detect, prevent and mitigate various types of information and cyber security Enterprise Management System (EMS) for risks. Alerts received from various sources are Enhanced Operational Effi ciency promptly taken cognisance of and suitable action IX.42 In order to have a holistic approach is initiated. towards monitoring the performance of high Wireless Local Area Network (WLAN) quality services in support of IT applications, the EMS solution is being implemented at the Data IX.45 As part of the efforts aimed at accessibility Centres for enhancing operational effi ciency. The of the information systems and to enable improved tools constantly monitor health of the servers, responsiveness to electronic communication, the 143ANNUAL REPORT Wireless Local Area Network (WLAN) systems 2017. A roadmap to integrate other internal with the Wireless Intrusion Prevention System communication systems with the EDMS has been (WIPS) were successfully installed and made worked out and will be taken up after the initial operational initially at some of the major offi ce modules are fully rolled out. buildings and in training establishments. Facilitation for GST rollout Agenda for 2017-18 IX.48 A smooth roll-out of GST in collaboration Currency Management System with commercial banks has been completed in tandem with the introduction of GST from July 1, IX.46 The currency management modules in 2017. e-Kuber are expected to be made operational by March 2018. Reserve Bank Information Technology Pvt. Ltd. Full Roll-out of EDMS (ReBIT) IX.47 EDMS is being rolled out in a phased IX.49 ReBIT will commence its full-fl edged manner in all the offi ces of the Reserve Bank and operations and assist the Reserve Bank in cyber is expected to be fully functional by December security related areas during 2017-18. 144GOVERNAGNOVCERENA,N CHE, HUUMMAN ARESNOU RRCEES ASNDO URCES X ORGANISATIONAL MANAGEMENT AND ORGANISATIONAL MANAGEMENT During the year, the pace of activities relating to human resource development, communication processes, economic policy research, information management, international relations, corporate risk management, corporate strategy, promotion of Rajbhasha, legal processes and development of physical infrastructure, was sustained. In fact, the Reserve Bank earned accolades and international recognition in the areas of corporate risk management, sports welfare and construction of infrastructure even as sustained efforts were made to firm up India’s position in international relations. X.1 This chapter discusses the achievements as a ‘best practice’. Similarly, the Indian Green of a number of departments of the Reserve Bank Building Council (IGBC) awarded ‘Platinum’ rating during 2016-17 and their priorities and agendas to all the new constructions and select residential set for 2017-18. Major achievements with respect constructions in recognition of the Bank's efforts to to communication processes during the year introduce green building concepts in construction included the launch of a mobile application projects. version of the Bank’s website and more intensive X.2 During the year, more state governments use of the social media besides a slew of public were integrated with the Reserve Bank’s Core awareness and fi nancial literacy campaigns. In Banking Solutions (e-Kuber) and all (25) agency the area of human resource initiatives, notable banks were integrated with e-Kuber for processing developments include the introduction of structured Goods and Services Tax (GST) transactions e-learning courses targeted at larger groups of seamlessly. Building upon the formulation of staff members, the launching of the RBI Academy a business continuity plan, a business impact and adoption of a vision document for sports. The analysis was carried out even as a medium- Reserve Bank was the recipient of the Rashtriya term corporate strategy and action plan for the Khel Protsahan Puruskar - 2016, announced by Bank is being fi nalised. As part of the continuing the Government of India in recognition of the thrust on promoting the use of Hindi, a number Bank’s contribution in the fi eld of ‘Employment of of offi cers were deputed and successfully cleared Sports persons and Sports Welfare Measures’. the newly-introduced examination of profi ciency in As part of the Enterprise-Wide Risk Management Hindi. Furthermore, several important legislations (ERM) Framework that was adopted by the Bank relating to the fi nancial sector such as the in 2012, a Risk Tolerance Framework is being Insolvency and Bankruptcy Code, Specifi ed Bank fi nalised and the incident reporting system has Notes (SBNs), and Payment and Settlement been modifi ed by widening the reporters’ universe Systems were introduced/amended. to secure greater involvement of staff members in the risk-reporting process. A notable achievement X.3 A number of studies on a variety of during the year was the International Operational topical issues were prepared and published in Risk Working Group (IORWG) recognising the the area of economic and policy research, even Reserve Bank’s strategy for enhancing risk culture, as the pace of activities relating to statutory and 145ANNUAL REPORT non-statutory publications, data dissemination the central government, one from each of the and organisation of events that were marked four Local Boards as constituted under Section by intellectual contributions from the highest 9 of the Act; ten Directors nominated by the echelons of the fi eld, sustained their momentum. central government and two government offi cials As far as statistics and information management is nominated by the central government. concerned, the coverage of the SAARCFINANCE X.5 The Central Board is assisted by three database that has been developed in-house, committees: the Committee of the Central Board was enhanced, while the formats of eXtensible (CCB), the Board for Financial Supervision (BFS) Business Reporting Language (XBRL)-based and the Board for Regulation and Supervision returns for submissions by banks were streamlined of Payment and Settlement Systems (BPSS). and a technical guidance note on these returns These committees are chaired by the Governor. was issued for ensuing quality and uniformity. In In addition, the Central Board has four sub- addition, a nowcasting exercise was undertaken committees, viz., the Audit and Risk Management incorporating sentiments captured from news Sub-Committee (ARMS); the Human Resource articles with the application of latest technological Management Sub-Committee (HRM-SC); innovations like web-scrapping. In the international the Building Sub-Committee (BSC) and the arena, Bank's notable achievements include Information Technology Sub-Committee (IT-SC). effective coordination of the Financial Sector These sub-committees are typically headed by an Assessment Program (FSAP). Besides, as Chair external Director. of BRICS and as co-chair of the G-20 Framework Meetings of the Central Board and CCB Working Group (FWG), several related events were organised even as the country position on X.6 The Central Board held seven meetings a range of international fi nancial architecture during the accounting year 2016-17 in Bengaluru, (IFA) issues in the G-20 IFA Working Group, was Mumbai, Kanpur, Kolkata, New Delhi (twice) and mooted. Chennai. The Finance Minister of India addressed the post-Budget meeting held in New Delhi on GOVERNANCE STRUCTURE February 11, 2017. X.4 The Central Board of Directors is the apex X.7 CCB held 46 meetings during the year, 34 body in the governance structure of the Reserve of which were held through electronic mode. CCB Bank. There are also four Local Boards for the attended to the current business of the Reserve Northern, Southern, Eastern and Western areas Bank, including approval of its Weekly Statement of the country which take care of local interests. of Affairs. External Directors were invited to CCB The central government appoints/nominates meetings by rotation. Directors to the Central Board and Members to the Local Boards in accordance with the Reserve X.8 No meeting of the Local Boards could be Bank of India (RBI) Act. The composition of the held in 2016 due to lack of quorum. Two meetings Central Board is enshrined under Section 8(1) of of the Local Boards pertaining to Eastern and the RBI Act, 1934. It comprises of the Governor, Western areas were held on April 25 and June 02, who is the Chair, and four Deputy Governors of 2017 subsequent to the induction of new members the Reserve Bank; four Directors nominated by in the respective Boards. 146GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT X.9 A Standing Committee of the Central of his term on May 15, 2017. The term of Shri Board set up in 2014-15 to look into important Shaktikanta Das, Director on the Central Board concerns pertaining to UCBs, NBFCs, currency nominated under Section 8(1)(d) of the RBI Act, management, etc. in regions where Local Boards ended on May 31, 2017. Shri Subhash Chandra were not able to function, held meetings in each Garg, Secretary, Department of Economic Affairs, of the four regions (fi ve meetings in all after Ministry of Finance, Government of India, was July 2016) to discuss region-specifi c issues and nominated as a Director on the Central Board concerns. under Section 8(1)(d) of the RBI Act, 1934 with effect from July 12, 2017 vice Shri Shaktikanta Attendance of Directors Das. X.10 The details of participation of Directors in X.13 Dr. Rajiv Kumar, Dr. Ashok Gulati and Shri the meetings of the Central Board, its committees Manish Sabharwal were nominated as Directors and sub-committees are given in the Annex. on the Central Board of Directors of the Reserve Central Board/ Local Boards – Changes Bank under Section 8(1)(c) of the RBI Act, 1934 X.11 Dr. Raghuram G. Rajan relinquished for a period of four years each with effect from charge as Governor on completion of his tenure. February 09, 2017. Dr. Urjit R. Patel who was holding the charge of X.14 Shri Vallabh Roopchand Bhanshali and Deputy Governor was appointed Governor for a Shri Dilip S. Shanghvi were appointed as Members period of three years with effect from September on the Western Area Local Board under Section 04, 2016. Earlier, Shri N. S. Vishwanathan was 9(1) of the RBI Act, 1934, for a period of four years appointed Deputy Governor for a period of three with effect from February 09, 2017 and March 11, years from July 04, 2016 vice Shri Harun R. Khan. 2017, respectively. Dr. Prasanna Kumar Mohanty Dr. Viral V. Acharya was appointed as Deputy was appointed as Member on the Southern Area Governor for a period of three years from January Local Board under Section 9 (1) of the RBI Act, 23, 2017 vice Dr. Urjit R. Patel. Shri R. Gandhi 1934 for a period of four years with effect from relinquished charge as Deputy Governor on the February 09, 2017. Shri Sunil Mitra was appointed forenoon of April 03, 2017. Shri B.P. Kanungo was as Member on the Eastern Area Local Board appointed Deputy Governor for a period of three under Section 9(1) of the RBI Act, 1934 for a years from April 03, 2017 vice Shri R. Gandhi. period of four years with effect from February 09, Shri S. S. Mundra relinquished charge as Deputy 2017. Dr. Nachiket Mor nominated under Section Governor on the forenoon of July 31, 2017. 9(1) of the RBI Act, 1934 ceased to be a Member X.12 Shri Y. C. Deveshwar and Professor on the Eastern Area Local Board on expiry of his Damodar Acharya, Directors on the Central Board term on May 15, 2017. nominated under Section 8(1)(c) of the RBI Act, Executive Directors – Changes 1934 vacated their positions on the expiry of their terms on September 02, 2016 and October 11, X.15 During the year, Shri U. S. Paliwal, 2016, respectively. Dr. Nachiket Mor nominated Executive Director, superannuated and two under Section 8(1)(b) of the RBI Act, ceased Executive Directors - Shri G. Mahalingam and to be a Director of the Central Board on expiry Shri Chandan Sinha - took voluntary retirement. 147ANNUAL REPORT Against consequential vacancies Shri Sudarshan 'Reserve Bank of India'. To start with, the most Sen, Shri M. Rajeshwar Rao, Smt. Surekha accessed sections of the website (www.rbi.org. Marandi, Smt. Malvika Sinha and Shri S. Ganesh in), namely, press releases, IFSC/MICR codes, Kumar were promoted as Executive Directors. bank holidays and current rates including policy rates and reference rates of four major currencies Agenda for 2016-17: Implementation Status have been made available on the app. There is a X.16 E-meetings for the CCB introduced in 2014 dynamic window on the top of the landing page continued to be held on e-mode every Wednesday of the app which displays public awareness except on the last Wednesday of the month, which messages released by the Reserve Bank. was held as a face-to-face meeting. The agenda notes for various meetings of the Central Board Social Media and its committees/sub-committees were provided X.20 The website of the Reserve Bank is also to the participants in soft form. integrated with two social media sites – Twitter Agenda for 2017-18 to send alerts for press releases and YouTube for speeches, media interviews and press X.17 The Reserve Bank will examine the conferences of the top management including feasibility of publishing minutes of the Board post-policy press conferences and fi nancial meetings as a step towards greater transparency. education fi lms produced by the Reserve Bank. COMMUNICATION PROCESSES As at end-June 2017, the Reserve Bank’s Twitter X.18 Transparency, timeliness and credibility account had over 2.5 lakh followers and YouTube continue to be the mainstay of the Reserve had over 11,000 subscribers. Bank’s communication strategy. The Reserve Monetary Policy Communication Bank endeavours to strike a chord with the public through communication that is dynamic, evolving X.21 Under the new Monetary Policy Framework and responsive to domestic and international introduced in October 2016, the Reserve Bank developments. The Department of Communication has been communicating the resolutions of the (DoC) is the nodal department that formulates the Monetary Policy Committee (MPC) through communication policy and maintains a two-way press releases followed by a press conference. communication between the Reserve Bank and The Governor’s post-policy conferences on the public. the bi-monthly statements on monetary policy were disseminated through YouTube along with Agenda for 2016-17: Implementation Status live streaming on the Reserve Bank’s website The Website and business television channels. The audio X.19 To make its website (www.rbi.org.in) more and transcripts of the press conferences were user-friendly, the Reserve Bank launched a mobile uploaded on the Bank's website. The minutes application (app) version of the Bank's website on of MPC meetings were uploaded on the website March 09, 2017. The app is available for download of the Reserve Bank on the 14th day after every on Android as well as iOS platforms from the Play meeting of the MPC as provided under Section Store/App Store, respectively, using the keyword 45ZL of the RBI Act, 1934. 148GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT Awareness Campaigns and Advertisements DoC disseminated information on the same on a timely basis and in a manner that was easy X.22 During 2016-17, the Reserve Bank to understand. All the communications issued to undertook a pan-India mass media public banks on the withdrawal of SBNs were promptly awareness and fi nancial literacy campaign. posted on the Bank’s website under a separate Using the tagline RBI Kehta Hai and mnemonic heading titled ‘All You Wanted to Know from RBI ‘Moneykumar’ the awareness campaign created about Withdrawal of Legal Tender Status of `500 an identity for better recall. and `1000 Notes’ with notifi cations to banks, press releases, data releases and Frequently Asked Mann ki Baat Questions (FAQs) clearly segregated for ease X.23 The campaign began with Prime Minister of reference. The Department also responded to Shri Narendra Modi urging people, in his Mann Ki more than 2500 queries on SBNs from the public Baat of July 31, 2016 that was broadcast on All received through emails and as many telephone India Radio, to be alert and watchful of fi ctitious calls during the period from November 8, 2016 to emails/calls/SMS scams. The message aimed to June 30, 2017. The queries were answered with alert the public about fraudulent offers of cheap reference to the FAQs published on the website funds through lottery wins and job offers while which were amended simultaneously with the seeking account and card details. The campaign instructions that followed subsequently. also focused on educating the common man on Know Your Customer (KYC) various banking facilities that are available. X.26 Under the Depositors Education and Currency Matters Awareness (DEA) Fund Scheme, the Reserve Bank released an advertisement for creating X.24 Following demonetisation in November awareness on KYC updation in bank accounts 2016, the Reserve Bank in conjunction with in 114 newspapers in 14 languages between the Ministry of Finance, issued two rounds of September 02 and September 04, 2016. advertisements to create awareness about the Rural Sensitisation security features of the new design of currency notes of `500 and `2000 denominations, X.27 A pilot programme was conducted in apart from the government’s decision on rural areas to create awareness on select topics demonetisation. These advertisements were like Business Correspondents, insurance, issued in 660 newspapers on November 09, 2016. responsible borrowing, nomination, investment in unscrupulous entities, Banking Ombudsman In the second round, a combined advertisement and KYC. The 10-day campaign was conducted on the security features of `500 and `2000 notes in four districts of Maharashtra and Uttar Pradesh, was published in Hindi and vernacular languages covering about 200 villages. The main takeaways in 420 newspapers on November 14, 2016. One from the campaign included continued supply- more round of advertisements on currency was side constraints in the form of server downtime, issued on November 12, 2016. inadequate ATMs, printers, etc.; need for more X.25 The announcement of withdrawal of awareness programmes and sensitisation of Specifi ed Bank Notes (SBNs) in November ground-level bank staff and the imperative of real- was a challenge to communication function time mid-course correction of such awareness programmes for better customisation. as it touched millions of people in the country. 149ANNUAL REPORT Awareness through BEST Buses and Digital and Database on Indian Economy and other RBI Campaigns publications. X.28 One more pilot project for public awareness Agenda for 2017-18 was done through displays on 30 BEST buses in X.31 DoC will continue to conduct workshops/ Mumbai for one month. The messages included sessions for the media on important regulatory awareness on KYC updation as well as cautioning and banking related issues. The Reserve Bank the public against fi ctitious mails. has been focusing on increasing consumer Media Workshops awareness on banking services, regulations and consumer protection matters. As part of these X.29 During the year, DoC held a workshop at efforts, DoC, in coordination with other stakeholder the College of Agricultural and Banking (CAB), departments of the Bank, will extend the pan-India Pune from March 06 - 08, 2017 with the objective mass media public awareness campaign across of familiarising mediapersons with the major all media to cover more segments of the public. functional areas of the Reserve Bank and their The department is expecting to make substantial nuances. The workshop was also attended by progress in setting up the museum-cum-fi nancial Hindi and Marathi mediapersons. literacy centre in Kolkata. In line with international X.30 Two more workshops were held to experience, efforts will be made to integrate the familiarise mediapersons in Delhi on Demystifying RBI website with more social media platforms the Revised Prompt Corrective Action Framework, during the year (Box X.1). Box X.1 Social Media and Central Bank Communication: An Overview Central banks around the world have been traditionally - Barring a few, most of them do not respond to tweets cautious and conservative in communicating their policy posted by general public. matters to the general public. The speed with which messages - YouTube is the third most popular social media used, can go viral on social media has made them virtually with 18 of the 24 central banks using it primarily for impossible to be ignored as a medium of communication consumer awareness and education. even for central banks. Central banks are, therefore, opening - Facebook is also popular media used to connect with up gradually and cautiously and increasingly using social people with 15 of the 24 central banks using the same. media to connect with the public and making their presence felt in public domain. - To connect with the youth, some of the central banks use LinkedIn, Instagram and Flickr. Around 1/3rd of the To understand the role of social media in central bank 24 central banks use LinkedIn for recruitment purposes communication and the present trend in its usage, a quick and sharing ideas and experiences among the central study of 24 major central banks and their use of social media bankers and Flickr for updating photos of the events and for communicating with the public was undertaken. The meetings of the central banks and offi cials. study revealed that to start with, - Central banks in Europe use a wide variety of social - Central banks prefer to disseminate the information media platforms, including Facebook, Flickr and available on their websites in the form of a really simple Instagram. In particular, select central banks used syndication (RSS) feed or an e-mail alert. Facebook to directly interact with students. The Swiss - Most of the central banks (22 of the 24) use Twitter National Bank uses Facebook to seek feedback on its to send alerts for information already disseminated monetary policy and uses it as an input for formulating through the website. (Contd....) 150GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT monetary policy. The Bank of England has a presence YouTube for dissemination of educational videos and on relatively less popular platforms like Pinterest clippings. (personalised social platform), Podcast (for broadcasting - Some central banks, including the Reserve Bank, use news and announcements on ipods) and Soundcloud MobileApp to stay engaged with the public. The Bank (medium for distributing audio content), apart from its of England uses the App guide for checking banknotes. active presence in most of the popular social media. It provides an interactive guide on security features of Further, the Bank of England also carries out various the current Bank of England currency notes. Federal public awareness programmes and quizzes for students Reserve’s App provides users latest insights into the on social media like Facebook; and participants are state of the economy and provides information, such rewarded with attractive prizes and gifts. On the contrary, as, press releases and notifi cations. ECBstatsApp is the Bank of Japan has a minimal social media presence an App that allows one access to the statistics compiled (only on Twitter). by the European Central Bank (ECB) assisted by various national central banks. The Czech National - YouTube is more popular among developing countries Bank's offi cial App informs users about all valid Czech to create awareness and clarify concepts about the banknotes and coins and the protective elements they functioning of the central banks. In particular, African contain. The offi cial Bank Negara Malaysia mobile App countries have shown remarkable presence on social disseminates the central bank’s latest news and media. South-East Asian central banks are the new announcements, foreign exchange rates, fraud alerts, entrants to social media space and mostly Facebook watch lists and many other user friendly features for the and Twitter. Some of them also have a presence on benefi t of the public. HUMAN RESOURCE INITIATIVES skills of its human resource. It also helps the employees in attaining personal growth and in X.32 The Human Resource Management improving their effectiveness at work. The six Department (HRMD) endeavours to facilitate training establishments of the Bank, viz., Reserve the Reserve Bank’s central banking activities by Bank Staff College (RBSC), Chennai; College of enhancing staff effi ciency, drawing out the best Agricultural Banking (CAB), Pune; and four Zonal from them and creating an atmosphere of trust Training Centres in Mumbai, New Delhi, Kolkata and teamwork. and Chennai, cater to its training requirements In-house Training (Table X.1). Training at External Institutions X.33 The Reserve Bank strives to impart necessary knowledge and skill upgradation X.34 During 2016-17, 816 offi cers were deputed for development of technical and behavioural by the Bank to participate in training programmes, Table X.1: Reserve Bank Training Establishments - Programmes Conducted (July-June) Training Establishment 2014-15 2015-16 2016-17 Number of Number of Number of Number of Number of Number of Programmes Participants Programmes Participants Programmes Participants 1 2 3 4 5 6 7 RBSC, Chennai 141 2626 (30) 125 2741 (50) 129 3346 (172) CAB, Pune 215 7183 (63) 198 7580 (69) 173 5788 (56) ZTCs (Class I) 105 2241 97 2055 101 1934 ZTCs (Class III) 98 2036 102 2247 104 2130 ZTCs (Class IV) 53 1041 38 807 33 758 Note: Figures in brackets pertain to foreign participants. 151ANNUAL REPORT Table X.2 Number of Offi cers Trained in (other than the Bank’s Golden Jubilee Scheme), External Training Institutions in India and during the year. A total of 479 employees pursued Abroad during 2014-15 to 2016-17 select part-time/distance education courses up Year Trained in Trained abroad to June 30, 2017 under the Bank’s incentive India (external scheme. Under the Golden Jubilee Scholarship institutions) 1 2 3 Scheme, seven offi cers were selected during 2014 - 15 906 562 the year to pursue higher studies in reputed 2015 - 16 905 599 universities abroad. 2016 - 17 816 506 Other Initiatives seminars and conferences organised by external Structured e-learning management or banking institutions in India. Class X.36 The Reserve Bank has introduced III and Class IV employees were also deputed for structured e-learning courses targeted at larger trainings in external institutions in India during groups of staff members. This will be an ongoing the year. Further, the Bank deputed 506 offi cers process with newer modules being prepared and to attend various training courses, seminars, hosted on the Learning Management System of conferences and workshops conducted by the Bank. At present nine e-learning modules are banking and fi nancial institutions and multilateral being offered by the RBSC on the Bank’s intranet. institutions in different countries (Table X.2). X.37 During the course of the year, 129 students Study Leave Schemes and Golden Jubilee were selected and provided internship in the Bank Scholarship as part of the summer internship scheme. X.35 Eight offi cers of the Bank availed of the X.38 The year also saw the setting up of the RBI schemes for pursuing higher studies overseas Academy (Box X.2). Box X.2 The RBI Academy The RBI Academy was launched on September 26, The Academic Advisory Council (AAC) of the Academy 2016 with a specialised programme on corporate finance comprises eminent persons and academicians. The council conducted in collaboration with IIM, Ahmedabad. Thereafter, meets every six months to assess the progress of the it has conducted basic programmes on macroeconomics, Academy and to guide the future course of action. It has microeconomics, faculty development programme, two been advising on the programmes to be conducted, their programmes each on fundamentals and advance courses content, faculty and mode of delivery. of IS audit and assurance, and a programme on Big Data. Going forward, it is proposed to conduct about 15 The participants were from the Reserve Bank, commercial programmes in the next 12 months on topics such as big banks and SEBI. data, forensic audit, dynamic stochastic general equilibrium The long-term goal of the Academy is to become an (DSGE) modelling, supervisory legal framework, risk institution catering to the training needs of officers from assessment and cyber security. central banks, commercial banks and financial institutions in areas of regulatory concern so as to increase awareness The brick and mortar Academy is proposed to come up at about central banking issues and allied areas. Navi Mumbai. 152GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT Grants and Endowments Table X.3: Recruitments by the Reserve Bank in 2016 * X.39 Towards promoting research, training and consultancy in the banking and fi nancial sector, Category of Recruitment Category-wise strength the Reserve Bank provided fi nancial support Total of which Per cent of total amounting to `320 million to the Indira Gandhi SC ST SC ST Institute of Development Research (IGIDR), 1 2 3 4 5 6 Mumbai; `75 million to the Centre for Advanced Class I 159 18 11 11.32 6.92 Financial Research and Learning (CAFRAL), Class III 486 82 38 16.87 7.82 Class IV Mumbai; `15.3 million to the National Institute of (a) Maintenance Attendant 1 0 0 0 0 Bank Management (NIBM), Pune; `10.9 million to (b) Others 20 2 6 10.00 30.00 the Indian Institute of Bank Management (IIBM), Total 666 102 55 15.32 8.26 Guwahati; and `6.14 million to the London School *January to December of Economics (LSE) India observatory and the IG Recruitments and Staff Strength Patel Chair. X.43 During 2016 (January-December), the Industrial Relations Reserve Bank recruited 666 employees. Of X.40 Industrial relations in the Bank remained these, 102 belonged to Scheduled Castes by and large cordial during the year. The Bank (SCs) and 55 to Scheduled Tribes (STs), continued to hold periodic meetings with recognised together constituting 23.58 per cent of the total associations/federations of offi cers and employees/ recruitments (Table X.3). workmen on various matters related to service X.44 The total staff strength of the Reserve conditions and welfare measures for employees. Bank as on December 31, 2016 was 15,461 Superannuation Benefi ts as compared to 15,854 a year ago. Of the total X.41 The demand from pensioners and retirees staff strength, 19.41 per cent belonged to the SC related to improvement in pension remains category and 6.53 per cent belonged to the ST unresolved and the Bank is still engaged with the category (Table X.4). Government of India for an early resolution of the X.45 During 2016 (January-December), four same. meetings were held between the management The RBI Policy Challenge and representatives of the All India Reserve Bank X.42 The second edition of the RBI Policy Table X.4: Staff Strength of the Reserve Bank* Challenge, a national level competition, got underway in October 2016. The competition, Category Category-wise Per cent to strength total strength aimed at enhancing knowledge regarding Total Strength SC ST SC ST monetary policy making amongst undergraduate 2015 2016 2015 2016 2015 2016 2016 2016 and post graduate students, was well received. 1 2 3 4 5 6 7 8 9 The Challenge was organised in three rounds, Class I 7,233 6,781 1,062 993 434 408 14.64 6.02 viz., at the Regional, Zonal and National levels. In Class III 3,756 4,017 552 620 212 234 15.43 5.83 the National Finals held at Central Offi ce, Mumbai Class IV 4,865 4,663 1,486 1,388 405 368 29.76 7.89 Total 15,854 15,461 3,100 3,001 1,051 1,010 19.41 6.53 on March 30, 2017, the team from the Madras *: End December School of Economics emerged as winners. 153ANNUAL REPORT Scheduled Castes/Scheduled Tribes and the 1998, was further strengthened with the issue of Buddhist Federation to discuss issues relating a new comprehensive set of guidelines in 2014- to the implementation of the Reserve Bank’s 15 in accordance with the Sexual Harassment of reservation policy. Women at Workplace (Prohibition, Prevention and Redressal) Act and Rules, 2013. One complaint X.46 In accordance with the central was received and resolved during January to government’s policy, the Reserve Bank is December 2016. providing reservations to Other Backward Classes (OBCs) effective from September 08, X.50 During the year, a number of awareness 1993. The representation of OBCs in the Reserve programmes were organised for employees at Bank as on December 31, 2016 stood at 2,133. various Regional Offi ces for creating awareness Of these, 650 were in Class I, 848 in Class III and about the mechanisms in place at the Bank and also 635 in Class IV. for sensitising the staff regarding these matters. Likewise, workshops on awareness on prevention X.47 The total strength of ex-servicemen in the Reserve Bank, as at end December 2016, stood of sexual harassment were also organised to at 939. Out of these 161 were in Class I, 188 in create awareness among newly recruited Offi cers Class III and 590 in Class IV. The total number of and Assistants. RBSC, Chennai has also been physically challenged employees in Class I, Class conducting gender sensitisation programmes III and Class IV cadres in the Reserve Bank stood for members of complaints committees. The at 196, 72 and 86 respectively, as on December training establishments also held sessions during 31, 2016 (Table X.5). induction programme for newly recruited offi cers / staff that focused on gender sensitisation. X.48 As on June 30, 2017, the number of full time employees in the Bank stood at 14,684. Of Right to Information (RTI) these, 6,744 were in Class I, 3,618 in Class III and X.51 The Bank received 14,542 requests for 4,322 in Class IV. information and 1,412 fi rst appeals under the RTI Prevention of Sexual Harassment of Women at Act during 2016-17, all of which were attended the Workplace to. During the year, four training programmes/ workshops were conducted on the RTI Act for staff X.49 The formal grievance redressal mechanism at the Bank’s training centres. for prevention of sexual harassment of women at the workplace, which has been in place since Rashtriya Khel Protsahan Puruskar Table X.5: Total Strength of OBCs, X.52 The Reserve Bank was the recipient of Ex-servicemen and PWD* the Rashtriya Khel Protsahan Puruskar - 2016 announced by the Ministry of Youth Affairs and Category Total OBC Ex- PWD strength servicemen Sports, Government of India. The award was 1 2 3 4 5 handed over by the Hon’ble President of India in a Class I 6,781 650 161 196 ceremony held at Rashtrapati Bhawan on August Class III 4,017 848 188 72 29, 2016. The accompanying citation recognised Class IV 4,663 635 590 86 Total 15,461 2,133 939 354 the contribution made by the Bank in the fi eld *: end December 2016. of ‘Employment of Sportspersons and Sports PWD : Persons with Disability. Welfare Measures’. 154GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT Agenda for 2016-17: Implementation Status of the Unit during the year. Besides the regular surveillance and market intelligence related work, X.53 The Manpower Planning Committee the Unit also conducted a number of mid-term constituted to look into the manpower needs projects that looked into issues related to urban co- of the Bank over the next fi ve years (2016 – operative banks, India’s equilibrium exchange rate, 2020) submitted its report during the year. The export elasticity, forex interventions, adequacy of Committee endeavoured to make a realistic forex reserves and household fi nance. In addition and futuristic assessment of staff requirement to the above, SRU was involved in cutting edge by taking into account the impact of changes in research projects that delved into the areas of food the activities and processes that are already security, public infrastructure, fi scal consolidation, underway or are expected to take place over the and infl ation dynamics. Several of these studies next fi ve years, areas which are likely to expand in have already been published or accepted for near future, activities that are expected to shrink publication in notable journals. or become redundant over the next fi ve years because of various initiatives, etc. Implementation X.57 SRU is also collaborating with the of the Committee’s recommendations is presently CAFRAL in organising joint seminars. Several underway. such seminars were organised during the year wherein eminent professors, experts and Agenda for 2017-18 market participants from fi nance and economics X.54 Review of extant guidelines on recruitment; delivered lectures or presented their research review of training policy; formulation of a policy for fi ndings. A separate lecture series has also been succession planning in the Bank; policy on use started to encourage the presentation of in-house of social media and implementation of the vision research. document for sports, are some of the main items in Agenda for 2017-18 the agenda of the department for the year 2017-18. X.58 Going forward, the Unit is envisaged to be STRATEGIC RESEARCH UNIT (SRU) the hub at the Reserve Bank with a concentrated X.55 SRU was established in February 2016 with talent pool of employees trained with a doctorate an objective to undertake research and analysis of degree for doing cutting-edge research in topics across various verticals within the Reserve economics and fi nance. The Unit will continue Bank. As part of its operation, SRU delivers high its monitoring and market intelligence work and quality policy papers and economic monitor that present the same as inputs to policy making. It reviews key macroeconomic and fi nancial sector would undertake research in areas of strategic developments, and also features research on and contemporary interest across various verticals special themes of contemporary relevance. of the Reserve Bank. It would also continue to disseminate research inputs through seminars Agenda for 2016-17: Implementation Status and publications. X.56 During 2016-17, the Unit initiated several ENTERPRISE-WIDE RISK MANAGEMENT IN policy notes in varied areas including real sector, THE RESERVE BANK fi nancial markets, investment situation, fi scal position and the external sector. The monthly X.59 The Enterprise-wide Risk Management economic monitor has been a regular feature (ERM) framework was adopted by the Reserve 155ANNUAL REPORT Bank in February 2012 to develop an integrated reserve management and risk tolerance level for assessment and management of its risk operational risk; while the former has been set exposures. A three-phase roll out of the ERM in motion with the building up of the requisite framework was envisaged. The fi rst phase database since July 01, 2013 and adoption of the included the development of methodologies and Basic Indicator Approach (BIA) for quantifi cation tools for identifi cation, assessment and reporting of OR, the latter has been initiated with the rollout of fi nancial and non-fi nancial risks as well as of the Risk Tolerance Framework (RTF) in the building an institutional memory of ‘Incidents’1 Bank (Box X.3). Two important goals for the third and ‘Near Misses’2, which have since been and fi nal phase are an increased involvement of accomplished. The second phase envisages the risk monitoring function in the assessment a quantitative assessment of operational risk and management of policy risk as well as the (OR) and articulation of Bank’s risk appetite for review of the bifurcation of risk taking and risk Box X.3 Risk Tolerance Framework of the Reserve Bank The global financial crisis (GFC) triggered the strengthening would integrate risk management into the organisational of risk management systems across the financial world, strategy, thus enabling prioritised risk management of key with one of the key developments in this regard being the risks. strengthening of the risk oversight function by the Boards RTF, as being implemented in the Reserve Bank, has the of the financial entities. Central banks were no exception to following four components: this trend, as some of the leading ones from the advanced economies had acquired considerable financial risk on i. Risk Tolerance Statement: which is a formal articulation their balance sheets due to the qualitative and quantitative of the organisation’s risk philosophy and attitude to risk. easing operations. While the Reserve Bank did not see a The Reserve Bank is now seen to be among select slippage in the quality of its balance sheet due to the GFC, central banks, which have formally articulated their ‘risk it proactively strengthened its internal risk control framework philosophy’; by implementing a phased rollout of the ERM framework ii. Risk Tolerance Limits (RTLs): which are a series of limits in 2012. As a part of this phased approach, the Reserve meant to ensure that the Bank’s operations are carried Bank is in the process of putting in place a RTF whereby its governance structure will formally articulate its attitude out in conformity with its articulated risk tolerances; to risk, and the nature and extent of risk that it is willing to iii. Risk Reporting Framework: which seeks to monitor accept in pursuit of its mission, vision, business objectives and report to the governance structure the ongoing and overall strategic goals. conformity with the defined RTLs; and Strategically, this is a key framework given that while the iv. Definition of Roles and Responsibilities: of the various Reserve Bank is a risk-sensitive institution, it also recognises stakeholders in this framework, to obviate any gaps or that it is exposed to various types of risks including policy, overlaps in it. strategic, reputational, financial, and operational, in the pursuit of its core objectives (particularly those of fostering While the latter three of the foregoing four components monetary and financial stability), which need to be managed already exist in the Reserve Bank in various forms, the effectively. Going forward, RTF is expected to be the implementation of RTF will facilitate creation of a consistent, cornerstone of a broader risk framework, which, inter alia, comprehensive and integrated framework. 1 Incident is an occurrence that is not covered by or violates extant instructions/policies/procedures. It includes events that cause loss to the Bank or hinder the achievement of the Bank’s objectives or raise the scope of such loss/hindrance. Incidents also encompass ‘Near Miss’ events. 2 Near Misses is an incident which was not prevented by internal controls but did not result in actual or adverse impact either due to chance or other external factors. 156GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT management in the Bank. The Risk Monitoring Agenda for 2016-17: Implementation Status Department (RMD) is the nodal department for X.61 RMD has taken several measures for the formulation and operationalisation of ERM in strengthening the risk culture in the Bank. These the Reserve Bank. include conducting seminars, conferences, Strengthening the Risk Culture classroom discussions in training establishments, outreach to Regional Offi ces (ROs) across the X.60 Fostering a risk culture in the organisation country as well as development and dissemination by, inter alia, sensitising the staff at all levels, of case studies based on real-life Incidents, which is considered crucial for achieving a shared have scope for organisational learning. The incident understanding of the Bank’s attitude to risk and reporting system has also been modifi ed by for creating an enabling environment for viewing errors as a learning experience, even as risk widening the reporters’ universe to secure greater reporting facilitates timely mitigating interventions involvement of staff in the risk-reporting process to avert losses. (Box X.4). Thus, while almost all Senior Offi cers of Box X. 4 Developments in the Incident Reporting System The adoption of ERM framework by the Reserve Bank ineffectiveness) of requisite controls can be included as in February 2012, inter alia, envisaged the building up of audit observations; institutional memory of Incidents and Near Misses. In pursuit (iii) Unreported risk events, identified during the audit, are of this vision of the Bank, the Incident Reporting Framework included as audit observations, which consequently, (IRF) was developed specifying the principles and guidelines also have an impact on the overall risk profile of the as well as a template for reporting of Incidents by the in- auditee; charges of the respective business units (BUs)3 to the RMD. In order to facilitate the development of the ‘loss’ database, (iv) Fostering risk culture: Since the willingness to share which is also a prerequisite for the quantification of the Incidents by BUs is, inter alia, a function of the risk Bank’s operational risk, a user-friendly software has been awareness in the Bank, several steps have been taken implemented for the reporting of Incidents by BUs. by RMD to strengthen the risk culture in the organisation. These include conducting a number of seminars to Given the importance of sharing of the Incidents across sensitise the officers on ERM; designating two Risk the BUs for strengthening risk management in the Bank, a structure of incentives for reporting and dis-incentives for Officers (over 100 in all) in each BU to help foster a non-reporting of risk events has been developed, which risk culture in their respective units; and developing includes the following: case studies of unique Incidents for placing them on the Bank’s intranet and making these available to the TEs; (i) As part of the principles enunciated in IRF, Incidents and reported to RMD do not trigger the initiation of administrative action (since the objective of reporting of (v) The universe of the reporters has been widened on a Incidents to RMD is only to build up a loss database and pilot basis for a few CODs and ROs to permit any officer wherever possible, facilitate organisational learning with of these BUs to intimate an incident, directly to the RMD a view to introducing appropriate controls to obviate the through a simplified reporting template that has been recurrence of similar risk events); placed on the Bank’s intranet portal. The framework also provides for ensuring the confidentiality of the reporter’s (ii) Incidents reported by a BU to RMD are not to be identity. reckoned as an audit finding. However, the controls implemented by BU to prevent the recurrence of the risk The foregoing measures have helped in enhancing risk event/s are assessed during audit and the absence (or awareness and improving risk reporting in the Bank. 3 Business Unit refers to the reporting Central Offi ce Department, Regional Offi ce or Training Establishment of the RBI. 157ANNUAL REPORT the Bank have been provided exposure to the ERM Agenda for 2017-18 framework, over 100 designated Risk Offi cers Move towards Convergence of Risk Ratings spread across all the Central Offi ce Departments X.64 RMD has launched a project along with (CODs), ROs and Training Establishments (TEs) the Inspection Department for developing a web- have also been intensively trained. The seminars/ enabled risk reporting and analysis platform, conferences have benefi tted from the ‘tone from viz., Audit Management and Risk Monitoring the top’ provided by the involvement of the top System (AMRMS). This project in the form of management in reinforcing the risk culture in the software, once operationalised, will, inter alia, organisation. enable greater convergence of risk assessment RBI’s Practice Internationally Recognised by the internal audit function with that of the risk monitoring function through its Risk Assessment X.62 The International Operational Risk Working Methodology for Operational Risk (RAM-OR), by Group (IORWG), a forum of 69 central banks and providing an on-screen comparison of risk ratings the BIS, has a well-defi ned process for identifying under the two methodologies. This is expected best practices in various aspects of operational to bring about a higher degree of objectivity risk management in central banks. In 2016-17, and consistency in the risk assessment process the IORWG (of which the RBI is a member) has within the Bank through a harmonised risk-rating recognised the Bank’s strategy for enhancing risk framework. culture as a ‘best practice’ that may be emulated Holistic Risk Assessment of the Bank by the other member central banks. X.65 The Risk Register (RR) is a comprehensive Central Bank Risk Managers’ Conference inventory of all the processes/sub-processes (CBRMC), 2016 inherent in the functioning of a Business Area (BA) X.63 The Reserve Bank hosted the 12th edition as well as of all their identifi able risks. RRs have of the CBRMC on November 17-18, 2016 in been prepared for each BA of the Bank and upon fi nalisation of all of them, a composite view of the Mumbai. CBRMC was launched under the aegis operational risk profi le for the entire Bank will be of the BIS in 2004 and has since been hosted available. As regards the measurement of fi nancial by various central banks around the world. This risk exposures of the Bank, the Economic Capital edition of the conference was attended by senior Framework, already in place, provides an ongoing risk offi cials from 31 central banks and the BIS, balance-sheet-wide monitoring mechanism and focused on the economic capital framework therefor, and enables an informed decision on as its central theme. The Reserve Bank has, at the building up the requisite level of fi nancial buffers invitation of the BIS, joined the steering group of the against such exposures. forum. Immediately following the CBRMC, a two- INTERNAL AUDIT/INSPECTION IN THE day European Central Bank (ECB)-RBI technical RESERVE BANK cooperation workshop on risk management was also organised on November 21-22, 2016 in X.66 Internal audit/inspection undertaken by Mumbai, as per the MoU signed between the ECB the Inspection Department of the Reserve Bank and the Reserve Bank in January 2015. provides risk assurance to the top management. 158GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT The inspections are conducted under the Risk AMRMS application will be rolled out in 2017- Based Internal Audit (RBIA) framework wherein 18. The scope of AMRMS includes automating internal control and governance processes are RBIA and other audit modules such as vertical examined by a team consisting of Principal audit, control self-assessment audit (CSAA), Inspecting Offi cer, Inspecting Offi cers and scrutinies and technology audit along with other information systems (IS) Auditors. The Inspection supplementary audit functions. A host of benefi ts Department also provides support to the Audit and will accrue due to AMRMS being a centralised Risk Management Sub-Committee (ARMS) of the web-based application accessible from any RBI Central Board as also to the Executive Directors’ offi ce. The endeavour will usher in a less-paper Committee (EDC) overseeing the internal audit environment along with standardisation and function. uniformity in the conduct of inspections by using standardised checklists in accordance with the Agenda for 2016-17: Implementation Status best international practices. X.67 The implementation of Audit Management X.69 VA-PT/technology audit of select critical IT and Risk Monitoring System (AMRMS) is in an applications would also be carried out. advanced stage. A parallel run of the RBIA module was underway and was to go live by July 2017. INTERNATIONAL RELATIONS The process of preparation of request for proposal X.70 The International Department has the (RFP)/scope of vulnerability assessment and mandate of monitoring global developments, penetration testing (VA-PT) for identifi ed critical conducting international policy analysis and IT applications was completed and the modalities fostering international cooperation at various for conducting the technology audit/VA-PT for international fora such as G-20, BRICS, SAARC, these critical IT applications were issued to the BIS, FSB and IMF. empanelled external audit fi rm. During the year, the Agenda 2016-17: Implementation Status compliance processing of VA-PT/technology audit of data centres and CBS application (including X.71 The apogee of the department’s work e-Treasury module) was undertaken and the during the year was the effective coordination of action taken by business owner departments with the Financial Sector Assessment Program (FSAP) regard to the vulnerabilities of VA-PT fi ndings for India. The IMF’s Article IV consultations, were closely monitored. VA-PT of the video conducted every year, were also coordinated. conferencing (VC) system was undertaken and X.72 Being Chair of BRICS, India hosted several the audit report has been submitted. In addition, BRICS events during 2016, including the Eighth VA-PT/technology audit of the Next Generation BRICS summit in Goa in October. On the eve of Real Time Gross Settlement (NG-RTGS) system the summit, the Reserve Bank co-hosted the fi rst was also undertaken and the draft audit report has BRICS Economic Forum Seminar and the BRICS been submitted. Finance Ministers’ and Central Bank Governors’ Agenda for 2017-18 (FM&CBG) Meeting. The Reserve Bank as X.68 In the fi rst phase of AMRMS the Chair of the BRICS Contingent Reserve implementation, the module on RBIA has Arrangement (CRA) maintained readiness to meet gone live in July 2017. The other modules of any request for drawal. It also worked with other 159ANNUAL REPORT members to set up a system of macroeconomic fi nance, external sector and monetary policy, which information exchange. were endorsed at the G-20 FM&CBG meeting. X.73 With India co-chairing the G-20 Framework X.74 On a range of international fi nancial Working Group (FWG), its meeting at Varanasi architecture (IFA) issues being discussed in the was successfully co-hosted with the Ministry G-20 IFA Working Group, a sustainable approach of Finance during March 28-29, 2017. The to capital account liberalisation was mooted (see department worked in close collaboration with the Box X.5). government for shaping India’s growth strategy for X.75 The Bank contributed to the fi nalisation the G-20 Hangzhou Action Plan in 2016 and the Hamburg Action Plan in 2017. Under the German of the FX Global Code, a set of global principles Presidency, India played a lead role in shaping up of good practices in the forex market. A notable a set of resilience principles in the area of private achievement has been inclusion of the Indian Box X.5 Approaches to Capital Account Liberalisation: OECD and IMF Capital flows can be viewed as trade in assets that allows measures (MPMs), were deemed as a legitimate policy international risk sharing. As future consumption can for emerging markets to exercise. The IMF’s Independent be bought through such trade by postponing current Evaluation Office (IEO) also noted in 2015 that empirical consumption or vice versa, it allows economic entities to literature was unable to establish a robust positive smooth consumption inter-temporally (Lewis and Liu 2015). relationship between CAL and growth. Cross-border spill- However, capital flows are prone to sudden surges, stops overs of capital flows have since increased and the G-20 and even reversals and, therefore, are not an unmitigated countries were urged to take them on board while dealing blessing. Bhagwati (1998) argued that claims of enormous with national policies. benefits from free capital mobility across borders were not persuasive. In this backdrop, it would be of interest to look at From an emerging market perspective, the IMF’s approach the approaches of the two main international organisations appears prudent and pragmatic. It also stands vindicated dealing with capital account liberalisation (CAL), viz., the in the wake of the global financial crisis. While the OECD OECD and the IMF. Code may have served the advanced economies, emerging markets have demanded more flexibility in the codes as OECD’s views are reflected in its two codes introduced in they do not sufficiently provide for CFMs or MPMs. India has 1961, viz., the Code on Liberalisation of Capital Movements been of the view that adherence to the OECD code should (generally known as the OECD Code) and the Code of remain a voluntary process, enabling members to decide Liberalisation of Current Invisible Operations. The codes aim on its appropriateness in the context of evolving macro- at encouraging members to progressively remove barriers financial conditions. While the OECD codes are currently to capital movements in quest for faster growth. In 1992, under revision, G-20 has asked the IMF and the OECD to short-term capital movements were covered under the code, thus limiting the scope for capital flow management converge their views, especially with respect to MPMs. measures (CFMs). In 2002, restrictions on overseas portfolio Ref erences: investment were made untenable under the code. Bhagwati, J. (1998), “The Capital Myth: The Difference The IMF’s approach to CAL has evolved over a period of Between Trade in Goods and in Dollars”, Foreign Affairs, time. Before the onset of the Asian financial crisis, there May/June. were moves to recognise capital account convertibility as an explicit goal. However, the overwhelming evidence from the Lewis, K. K. and E. X. Liu (2015), “Evaluating International Asian financial crisis forced IMF to backtrack. Accordingly, Consumption Risk Sharing Gains: An Asset Return View”, gradualism, with some CFMs and macroprudential Journal of Monetary Economics, 71: 84-98. 160GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT experience on macroprudential policies in the regulatory reforms. While the Reserve Bank Committee on Global Financial Systems' (CGFS) generally supported this framework as a kind of report. incentive for member nations to develop stronger database and assessment methodologies at X.76 India took part in almost all the surveys, their country level for better self-evaluation, due thematic reviews and peer reviews conducted concerns were expressed on the likely possibility by the FSB during 2016-17. The G-20 fi nancial of missing out the unintended consequences regulatory agenda during 2016-17 focused on on the plea of lack of materiality (of evidence) assessment of effects of reforms with the FSB and feasibility (of data), particularly in case of working on a structured framework for post emerging market economies (EMEs) (Box X.6). A implementation evaluation of effects of G-20 follow up on the FSB peer review of India, August Box X.6 Effects of G-20 Regulatory Reforms on India G-20 in 2008 initiated comprehensive financial regulatory reforms to address the fault lines that led to the global financial crisis. Currently, Financial Stability Board (FSB) under the aegis of G-20 is focussing on the effects of reforms and presented its findings, predominantly for advanced economies (AEs), in its second Annual Report, 2016. A key finding of FSB has been that bulk of adjustment to higher capital has taken place through accumulation of retained earnings rather than sharp adjustment through lending or asset growth, although some decline in risky lending for EU banks is observed. In the Indian context, along with enhanced capital requirements, there has been an added issue of increase in non-performing assets (NPAs) since 2013. Notwithstanding this, banks’ capital to risk weighted assets ratio (CRAR) wise variations to this trend. Further, a bank-wise analysis remained above the stipulated levels (Chart 1). Unlike AE shows that banks with higher CRAR also have higher banks, however, higher CRAR has not led to a significant return on assets (RoA) although the degree of this positive reduction in asset size or risky lending for Indian banks as a relationship has slightly flattened in 2015 in the post Basel whole (Cohen, 2013). There are, nevertheless, bank group- III phase (Chart 2). On the market liquidity impact of the liquidity coverage ratio (LCR) since January 2015, the FSB report concludes lack of any broad deterioration in market liquidity conditions. In the Indian context, the existence of SLR and the gradual carve- outs from it for LCR have enabled a frictionless transition to LCR relative to the cross-country experience. However, some banks which were very close to the prescribed LCR appeared to have been impacted at the margin as reflected in call money rates, although not in volumes (Pattanaik et al. 2017). Total loss absorbing capacity (TLAC) is another regulatory measure imposed on global systemically important banks (Contd...) 161ANNUAL REPORT hit due to a decline in correspondent banking in countries like South Africa. While India remains insulated from such an impact, higher capital standards for GSIBs has had implications for trade finance. Though the market share of foreign banks in India’s international trade finance is on an average about 30 per cent, it has seen a declining trend in recent years (Chart 3). References: Cohen B. (2013), “How have Banks Adjusted to Higher Capital Requirements?” BIS Quarterly Review, September. Financial Stability Board (2016), 2nd Annual Report, Implementation and Effects of G-20 Financial Regulatory Reforms. (GSIBs) to address the 'too-big-to-fail' problem. One of the consequences of this regulatory measure, as per the FSB is Pattanaik S., R. Kavediya and A. Hait (2017), “The an attempt by many of the GSIBs to reduce their presence Unintended Side Effects of Basel III Liquidity Regulations and activities and at times close down their businesses in on the Operating Target of Monetary Policy’’, RBI Working EMEs. Remittances are one such area which has been Paper, February. 2016 was underway during the year. The FSB liquidity support in US dollars was provided to the meeting on Analytical Group on Vulnerabilities central banks of Sri Lanka and Maldives, and to was hosted in January 2017. Bhutan in Indian rupees under the SAARC swap arrangement. X.77 The department hosted a senior-level X.79 Under the aegis of the Joint Technical conference with Banque de France on challenges Coordination Committee with the Nepal Rastra related to cyber threats and operational risks. As Bank (NRB), measures were initiated to address regards green fi nance, the Bank engaged itself their concerns on several bilateral banking issues. with the G-20 Green Finance Study Group. Besides, the South Asia Regional Training and X.78 A working group of the SAARC Technical Assistance Centre (SARTTAC) was set countries was formed to enhance coverage and up in New Delhi by the IMF with cooperation of standardisation of the SAARCFINANCE database. Government of India and the Reserve Bank. The third seminar on the SAARCFINANCE X.80 Technical assistance programmes and database and the fi rst meeting of the working staff exchange visits were organised for various group on SAARCFINANCE database were SAARC central banks in several areas. In organised during November 17-18, 2016 at the addition, during 2016-17, the department also College of Agriculture Banking (CAB), Pune. In organised 35 exposure visits by leading global October 2016, the SAARCFINANCE central bank universities, offi cials from central banks and Governors agreed on a road map on the areas of international standard setting bodies. Mimamsa - cooperation such as the cost of remittances within the International Department’s discussion forum the region, banking regulation and supervision, was also started during the year and talks by fi nancial inclusion, regional database, research national and international experts were organised studies, and capacity building. During the year, under the forum. 162GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT Agenda for 2017-18 e-payments. A standard operating procedure for imposition of penalties on agency banks has also X.81 The department will continue to work along been put in place. with the government to shape the national growth strategy and preserve India’s stance under the G-20 X.86 A Working Group on Business Process Argentina Presidency and the 15th General Review Reengineering (BPR) is examining the changes of Quotas (GRQ) during 2017-18. It will also work required for government banking in the context towards completion of FSAP, currently underway of implementation of CBS in the Reserve Bank and provide country responses. The department’s and agency banks, IT induction in government, work-streams relating to the FSB will cover, inter more effi cient payment systems, wider coverage alia, shadow banking, asset management, cyber of Aadhaar, greater fi nancial inclusion and vastly security FinTech and Resolution Steering Group’s enhanced mobile connectivity. A Committee work. on Cost of Government Banking, comprising members from both government and agency X.82 Efforts are currently underway to establish a banks, was also constituted which will make network of fi nancial institutions in BRICS including recommendations on the rates at which plans to strengthen the BRICS institutions of commission could be paid to agency banks for CRA and National Development Bank (NDB). A carrying out government banking on behalf of the proposal for establishment of the BRICS Bond Reserve Bank. Both the committees are expected Fund (BBF) is also being examined. to submit their reports soon. X.83 The department will host the second X.87 The Empowered Committee of State meeting of the Working Group on the Finance Ministers on Goods and Services Tax SAARCFINANCE database along with a seminar (GST) had fi nalised banking arrangements for on the SAARCFINANCE database, with a view to GST, wherein the Reserve Bank will be the expanding coverage and improving data quality. aggregator for the funds. The government is GOVERNMENT AND BANK ACCOUNTS putting in place the required operational and accounting guidelines. The systems of agency X.84 The Department of Government and banks are also being integrated with the Reserve Bank Accounts (DGBA) oversees the functions Bank’s CBS (e-Kuber). All agency banks have of the Reserve Bank of India as banker to banks been integrated with the Reserve Bank’s CBS and banker to government, besides formulating in a testing environment for processing of GST internal accounting policies of the Bank. transactions seamlessly. Agenda for 2016-17: Implementation Status Agenda for 2017-18 X.85 During the year, DGBA pursued with X.88 After successful commencement of GST, various state governments through its Regional DGBA, in consultation with DIT, will continue Offi ces (ROs) for further integration of their to monitor the progress of full implementation receipts and payments with the Reserve Bank’s of GST framework. Further, integration of the CBS (e-Kuber). As at the end of June 2017, 14 remaining state governments with the Reserve states had gone live for e-receipts and eight for Bank’s e-Kuber will be taken forward. The practice 163ANNUAL REPORT of Paper-to-Follow (P2F) for state government Economic and Policy Research (DEPR) of the cheques under the cheque truncation scheme Reserve Bank is entrusted with the task of is proposed to be discontinued in consultation providing research inputs and management with DPSS. The report of the Working Group on information system (MIS) services for policy- BPR for government business will be examined related decision making. The department’s for implementation towards improving the overall contributions are multi-dimensional – apart from conduct of government business. being a source of important primary national level data, DEPR is also responsible for the Reserve MANAGING FOREIGN EXCHANGE RESERVES Bank’s headline and research publications as also X.89 The Department of External Investments the Bank’s collaboration with external experts on and Operations (DEIO) manages the country’s policy-oriented research. foreign exchange reserves (FER). The increasing Agenda for 2016-17: Implementation Status volume of FER warrants strengthening the X.93 During the year, the department brought reserves management structure in terms of out the fl agship publications of the Reserve Bank valuation methods, risk management practices, – the Annual Report, the Report on Trend and accounting framework and IT infrastructure Progress of Banking in India, State Finances: including disaster management. A Study of Budgets, the Reserve Bank of India Agenda for 2016-17: Implementation Status Bulletin, and the second edition of the Handbook of Statistics on Indian States. The department X.90 Diversifi cation of India’s foreign currency compiled and disseminated primary statistics assets (FCA) continued during the year by way on monetary aggregates, balance of payments, of investment in new markets and asset classes external debt, combined government fi nances, within the framework of safety, liquidity and household fi nancial savings and fl ow of funds. returns. A number of proactive and preventive measures were taken to ensure the effi cacy of the X.94 During 2016-17, twenty two research extant IT security system. The hot standby dealing papers were completed, of which 18 were room and back offi ce is fully operationalised at a published outside the Bank in domestic and different location to mitigate the impact of disaster foreign journals. In addition, 11 working papers induced disruptions. were brought out during the year. Together, the research areas covered were: regional study on Agenda for 2017-18 the availability of clean notes, regional study on X.91 The agenda for 2017-18 includes further impact of MGNREGA, equilibrium exchange rate, diversifi cation of FCA, active management credit and production linkages in agriculture, call of the gold portfolio, strengthening of the risk money rate spread in India, corporate leverage management framework relating to portfolio in EMEs, interaction of asset prices with bank management as well as IT systems and further credit and monetary policy, and bank lending and enhancement of staff capacities. loan quality in India. Several initiatives were also undertaken for promoting research in collaboration ECONOMIC AND POLICY RESEARCH with external experts. Two working papers were X.92 A knowledge centre for macroeconomic brought out in collaboration with the International policy oriented research, the Department of Monetary Fund (IMF), viz., Quarterly Projection 164GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT Model for India; and Infl ation Forecast Targeting Agenda for 2017-18 for India. A Development Research Group (DRG) X.96 Going forward, apart from the usual study on Shocks and Infl ation was completed statutory and non-statutory publications and during the year. compilation and dissemination of data, some policy- X.95 The department organised a number of oriented macroeconomic and monetary policy events during the year, including the 16th C. D. issues have been identifi ed for focused analysis Deshmukh Memorial Lecture that was delivered and research during 2017-18. They include: by Prof. Willem H. Buiter, ‘The Good and the Bad inter-relationship between credit and output to delve into the apparent disconnect between the Fiscal Theory of the Price Level', in April 2017. two evolving in recent years; fi scal policy and Eminent professors, viz., Prof. Kenneth Kletzer, growth in the context of the on-going debate on University of California, Santa Cruz and Prof. the effi cacy of fi scal policy vis-à-vis other policies Rajesh Singh, Iowa State University visited the in reviving economic activity in EMEs; quality of Reserve Bank during the year. Apart from intensive state government fi nances, which will specifi cally interactions, Prof. Kletzer delivered a talk on 'Fiscal analyse the effi ciency of expenditures; micro Interdependence, Fiscal Insurance and Sovereign aspects of remittances that will study details such Debt' while Prof. Singh deliberated upon 'Money, as modes and frequency of transfers, transaction Interest Rates and Exchange Rates in Segmented cost at receivers’ end, and speed of delivery and Asset Markets' and 'Monetary Policy Under utilisation of remittances; and volatility spill-overs Financial Exclusion'. The DEPR Study Circle, across money, bond and forex markets that will an in-house forum, organised 15 presentations examine dynamic conditional correlation between on diverse themes. Besides, external experts, the markets from the viewpoint of appropriate including Prof. Barry Eichengreen, University of policy responses. Furthermore, in keeping California, Berkeley; and Dr. Naoyuki Yashino, with the frequency of release of many other Asian Development Bank Institute, Tokyo were macroeconomic statistics as also the practices invited to make presentations. The Department of advanced economies, generation of quarterly coordinated the SEACEN training course on estimates of household fi nancial savings and fl ow 'Financial Cycles and Crises' hosted by the Bank of funds will be attempted. The department will in December 2016 wherein 32 participants from continue to organise a number of seminars and 10 SEACEN member central banks attended the lectures during 2017-18. The release of ‘History of course. The annual research conference of the the Reserve Bank’ Volume-V by the History Cell department was held in Kochi in June 2017 and will also be taken up once the draft is fi nalised. included a keynote address by Prof. V. V. Chari, STATISTICS AND INFORMATION University of Minnesota (on the role of economic MANAGEMENT policy adviser) and a panel discussion (on de- globalisation and protectionism) by academic and X.97 The Department of Statistics and policy experts, apart from staff deliberations on Information Management (DSIM) provides high evolving organisational issues. The second edition quality statistical services, including compilation, of the Handbook of Statistics on Indian States, analysis and dissemination of macro-fi nancial that provides a wealth of data on the regional statistics to the public, and statistical support economy, was also released at the conference. and analytical inputs for meeting the policy and 165ANNUAL REPORT operational needs of the Reserve Bank. DSIM fi nancial companies were brought under the XBRL maintains multi-dimensional statistical systems reporting in a phased manner. related to banking, corporate and external X.101 In a major step towards harmonisation sectors; undertakes structured surveys relating to of banking statistics, a technical guidance note enterprises and households as inputs for monetary on XBRL returns was issued for ensuing quality policy formulation; manages the centralised and uniformity of the inputs received through the submission of returns through XBRL system and returns prescribed by the Reserve Bank, as part dissemination through the Reserve Bank’s data of statutory, regulatory, supervisory, policy and warehouse; and provides statistical analyses and research requirements. This will ensure uniform forecasts. application of the aggregation rules for compiling Agenda for 2016-17: Implementation Status reporting-line items by different banks. X.98 During 2016-17, DSIM released core X.102 During the year, monetary policy surveys statistics relating to banking, corporate and were conducted as per calendar, to support policy external sectors in a timely manner and in decisions. The Technical Advisory Committee on several areas, with reduced time lags. With the Surveys (TACS) provided guidance on related help of the SAARC countries, a database on key technical issues, which were further examined macroeconomic and fi nancial variables since in collaboration with the Indian Statistical 2001 was established in May 2016 and its Institute, Kolkata for refi nement of estimates. The coverage was enhanced during the year. The department also completed exploratory work advance release calendar for 2017 for India as towards fi ne-tuning of the computation of capacity well as for fi ve other SAARC countries was placed utilisation at aggregate level from the Order Books, on the website. Inventories and Capacity Utilisation Survey. X.99 With new data requirements, the X.103 During 2016-17, a number of studies were rationalisation of two existing annual returns on undertaken in the areas of risk and vulnerability in deposits is being implemented with fully automated the private corporate sector; and nowcasting for submission and processing. A project on web- short-term forecasts of manufacturing sales growth based reporting and maintenance of detailed incorporating sentiments captured from news information on banking entities with wider scope articles with application of latest technological was launched under the guidance of a Technical innovations like web-scrapping. Advisory Group (TAG). Agenda for 2017-18 X.100 The coverage of XBRL-based return submission by banks was extended to X.104 The representativeness of the household accommodate more diverse returns and users. surveys will be further improved under the Around 30 additional returns pertaining to different guidance of the TACS by extending it to smaller departments of the Bank were completed and will cities/rural areas. The coverage of the Consumer go live soon on the XBRL platform. The formats of Confi dence Survey will be enhanced to cover returns were streamlined under the aegis of the seven more cities and the survey design of the inter-departmental Returns Governance Group Infl ation Expectations Survey of Households will (RGG). Regional rural banks and non-banking be refi ned. 166GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT X.105 An innovative use of existing information providing harmonised defi nitions of additional bases will be attempted to aid policy making. data-elements. Payment system data will be used to generate X.109 A need is felt to enhance the extant an Employment Index. As part of half-yearly statistical and supervisory information systems surveillance, stress tests will be conducted to on credit in the Reserve Bank. This could be in assess the private corporate sector’s risk profi le the form of setting up of a Public Credit Register using an industry-level sensitivity analysis under (PCR), an extensive database of credit information suitably chosen stress scenarios in macroeconomic for India that is accessible to all stakeholders. The variables and corporate performance parameters. PCR would help in improving effi ciency of the X.106 The department will initiate a project credit market besides helping the central bank in on revamping the data warehouse system. The supervision as well as the policy making. DSIM next generation warehouse, i.e., 'Centralised would be working in coordination with other Information Management System' will include a departments and outside experts in rolling out the big-data platform. PCR and enhancing its scope and coverage in a phased manner. X.107 For the purpose of facilitating research and LEGAL ISSUES generation of leading indicators, the department will work on building databases comprising national X.110 The Legal Department is an advisory electronic funds transfer (NEFT) and national department established for examining and automated clearing house (NACH) transaction-level advising on legal issues and for facilitating the payment system data in the Hadoop System4. A new management of litigation on behalf of the Reserve web-based, self-validating system of collecting and Bank. It vets the circulars, directions, regulations maintaining branch information will be developed and agreements for various departments of the into which the Geographical Information System Reserve Bank with a view to ensuring that the will be integrated. The web-based banking assets decisions of the Reserve Bank are legally sound. and liabilities (Nostro/Vostro balances) reporting The Legal Department also extends support and system will be implemented. advice to DICGC and other RBI subsidiaries on legal issues, litigation and court matters. X.108 Further centralisation and standardisation Agenda for 2016-17: Implementation Status of reporting will involve more returns prescribed by the Reserve Bank being brought under the X.111 Several important legislations concerning XBRL-based submission and the existing XBRL the fi nancial sector were brought in/amended system will be migrated to a new IT infrastructural during the year. The Insolvency and Bankruptcy setup (virtual server) to handle the increased Code, 2016 sought to consolidate and amend the reporting load and to improve effi ciency of the laws relating to reorganisation and the insolvency system. Measures will be taken to reduce the resolution of corporate persons, partnership fi rms reporting burden for banks by standardisation of and individuals in a time bound manner. The Code items under the aegis of the RGG. This will include has provided for the establishment of the Insolvency 4 A programming framework that supports the processing and storage of extremely large data sets. 167ANNUAL REPORT and Bankruptcy Board of India for regulation of the powers to require a company to transit from the insolvency professionals, insolvency professional business of residuary non-banking companies agencies and information utilities. (RNBC). X.112 The Aadhaar (Targeted Delivery of Agenda for 2017-18 Financial and Other Subsidies, Benefi ts and X.117 In 2017-18, the department will continue to Services) Act, 2016 provides for the targeted advise various departments on legal matters and delivery of subsidies and services to individuals furnish specifi c legal opinions whenever sought. It residing in India by assigning them unique identity will also continue its efforts at managing litigation numbers, called Aadhaar numbers. on behalf of the Reserve Bank and function as X.113 The Finance Act, 2017 amended Section a secretariat to the Appellate Authority under 31 of the Reserve Bank of India Act, 1934 relating the Right to Information Act. Amendments to to the issue of demand bills and notes, providing various Acts administered by the Reserve Bank for the central government to authorise any will be pursued during the year in order to meet scheduled bank to issue electoral bonds. international commitments and standards and to clarify relevant provisions. X.114 The Finance Act, 2017 also amended certain provisions of the Payment and Settlement CORPORATE STRATEGY AND BUDGET Systems Act, 2007. The amendment provides MANAGEMENT that instead of the existing Board for Regulation X.118 The Corporate Strategy and Budget and Supervision of Payments and Settlement, the Department (CSBD) formulates the annual budget Payments Regulatory Board will exercise functions of the Reserve Bank by adopting activity based relating to the regulation and supervision of budgeting which emanates from annual action payments and settlement systems under the Act. plans drawn by the Bank’s offi ces, departments The new Board shall consist of the Governor of the and training establishments. Action plans of the Reserve Bank as Chairperson and the following business units are analysed in the context of Members: Deputy Governor of the Reserve Bank priorities, timelines and achievable milestones in charge of Payment and Settlement Systems, vis-à-vis constraints and implementable corrective one offi cer of the Reserve Bank to be nominated measures in order to make the goals realistic and by the Central Board of the Reserve Bank; and sensible. three persons to be nominated by the central X.119 The department has the responsibility of government. rolling out an active and comprehensive business X.115 The Specifi ed Bank Notes (Cessation of continuity management (BCM) framework for the Liabilities) Act, 2017 provided for the cessation Bank. The department aims at putting in place of liabilities on specifi ed bank notes5 in public a robust and resilient framework that manages interest. business disruption smoothly keeping in view the X.116 The Calcutta High Court vide its decision satisfaction and interest of all stakeholders and dated March 03, 2017 upheld the Reserve Bank’s befi tting the image of the Bank. 5 The term “specifi ed bank note” means a bank note of the denominational value of fi ve hundred rupees or one thousand rupees of the series existing on or before the 8th day of November, 2016. 168GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT Agenda for 2016-17: Implementation Status establishment of State Government (SG) Cells, and Department of Non-Banking Supervision and X.120 Execution of activity-driven budgets of all Department of Cooperative Bank Supervision accounting units was scrupulously monitored. Cells were granted to select Tier III offi ces. The department had prepared the BCM policy for the Bank. A business impact analysis (BIA) Agenda for 2017-18 was carried out at all Central Offi ce Departments X.121 The department’s agenda for 2017-18 (CODs) and select Regional Offi ces (ROs)/ includes the implementation of a full-fl edged Training Establishments (TEs). Time-sensitive BCM framework which is dynamic and vibrant, critical activities of the Bank were determined setting up a Crisis Command and Control Centre, by the department. The department, besides formulating a cohesive strategic plan for the overseeing the smooth conduct of meetings of the governing board and its sub-committees, Bank which is inclusive and in sync with elevated was actively engaged in the reconstitution of the aspirations of all stakeholders (Box X.7), reducing Governing Council of CAFRAL and appointment and rationalising expenditure by fi ne-tuning the of Directors of CAFRAL and NIBM. Approvals for process of budget formulation, internalising the Box X.7 Corporate Strategy in the Reserve Bank Background values and vision statement. Implementation status thereon is monitored on a quarterly basis. In an endeavour to benchmark the Reserve Bank alongside the best central banks in the world, a medium-term strategy Linking Action Plan to Budget of the Bank and action plan framework has been established wherein It is important to facilitate efforts to align the deliverable granular action plans of all Central Office Departments action plans with the budget of the Bank, leading to adequate of the Reserve Bank have been aggregated into broad and efficient allocation of resources in line with the Bank’s strategies and linked to the core purpose, values and priorities. A well-articulated strategic plan will help business vision statement. The intent is to clearly communicate units (Central Office Departments /Regional Offices/ the manner in which strategy can be operationalised Training Establishments) prioritise the activities that they and its implementation measured and evaluated. This is plan to carry out during the year and budget accordingly. expected to demonstrate clarity of purpose and sharpen Resource allocation would thereby get closely aligned with the effectiveness of strategy. the strategic and operational plan. The corporate strategy Strategy and Action Plan framework, in the long run, will help bring about greater efficiency and accountability in the Bank’s functioning. A well-defined strategic planning and monitoring process provides the framework for identifying priorities and Objectives of the Framework developing actions in order to deliver optimal results. An Specifically, the framework seeks to: overarching strategy framework helps to clearly bring out the manner in which various business units contribute to (cid:129) Provide the top management with a bird’s eye view of how the actualisation of the Bank’s vision and mission through the agenda set by them is translating into strategies and their strategies and action plans. Therefore, articulation action plans on the ground and how budgetary resources and translation of the organisation’s vision, mission and are being allocated as per organisational priorities. culture into operational terms is critical for the successful (cid:129) Sensitise the staff at all levels that departmental goals implementation of strategy. The strategies and the serve strategic objectives and help them realise how corresponding action plans of the Reserve Bank are listed each of them is instrumental directly or indirectly in in the strategy document and linked to the core purpose, (Contd...) 169ANNUAL REPORT helping the Bank to achieve its core purpose, values and mechanism puts in place a framework for monitoring their vision. effective implementation. To enable measurement of the (cid:129) Generate a strong enterprise-wide commitment for implementation of action plans with clear timelines and carrying out the organisation’s strategy by linking milestones, templates enumerating their strategies and organisational structure to the strategy framework. action plans are prepared by each department quarterly. These templates enable various departments to self-monitor (cid:129) Monitor implementation of action plans. the status with respect to the achievement of the action (cid:129) Achieve optimum allocation of resources by determining plans that they have set for themselves and their plans the Bank’s strategic priorities and devoting resources for the following quarters in terms of (i) clear timelines; to them while at the same time rationalising resources (ii) milestones; (iii) barriers; and (iv) initiating timely corrective elsewhere by establishing a clear link between strategic measures to plug the gap between the envisaged goals and planning, operational plan and the budget. their actual achievement. The status received from various Measurement departments is compiled, analysed and submitted to the top The strategy and action plan framework helps align action management to review the agenda set by them and also the plans with strategic objectives, while a measurement associated strategies and priorities. use of technology for ease of operations, and processes in an evolving business environment. initiating holistic measures to revamp capacity The handbooks on functions related to and deliverable capability of external funded procurement and rate contract, protocol and event institutions. management are being fi nalised. The department also carried out an impact analysis on a quarterly CORPORATE SERVICES basis to assess the benefi ts of the common and X.122 The Department of Corporate Services centralised rate contracts and remedial measures (DCS) coordinates and facilitates internal corporate were taken accordingly, wherever required. services such as tendering and awarding contract Agenda for 2017-18 for printing of the Bank’s publications, entering into X.124 During 2017-18, the department will assist rate contract for procurement of major stationary the Department of Information Technology (DIT) in items, facilitating conduct of seminars and the implementation of the Electronic Documents conferences, entering into corporate tie-up with Management System (EDMS) and simultaneously major airlines and hotel chains and empaneling of encourage the stakeholder departments to travel agents to meet the requirements of various reinforce the best practices for managing records regional offi ces and central offi ce departments of in the Bank. the Reserve Bank. RAJBHASHA Agenda for 2016-17: Implementation Status X.125 During 2016-17, the Reserve Bank X.123 Presently, an interdepartmental working continued its efforts to ensure compliance with group is reviewing the current policy on records the statutory provisions of the Offi cial Languages management to suggest modifi cations in current Act with a view to promoting the use of Hindi in instructions as well as the inclusion of best its working. The Rajbhasha Department of the practices on records management which will suit Reserve Bank is entrusted with this responsibility. 170GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT Agenda for 2016-17: Implementation Status technology in Hindi was organised at Hyderabad on March 10, 2017. A Rajbhasha conference for X.126 During the year, 111 staff members passed all Rajbhasha offi cers was organised at CAB, the Pragya6 examination of the Government of Pune during April 07-08, 2017. Apart from these, India. As per the new scheme of the Rajbhasha an administrative glossary (English-Hindi) has Department, Government of India, a number of been brought out by the Bank for the use of banks staff members were nominated for Parangat7 and fi nancial institutions. also and 192 passed this examination. To create a conducive environment among staff members Training to use Hindi on computers, staff members were X.128 Towards implementation of the Offi cial trained in Hindi typing and were nominated for a Language policy in an effective manner, Rajbhasha typing examination conducted by Hindi Teaching offi cers were imparted training in the management Scheme of the Government of India. To increase development programme to enhance their skills. the use of Hindi in noting and correspondence, A translation workshop was conducted at the 144 workshops were conducted across the Bank. Reserve Bank Staff College, Chennai regarding A ‘Hindi Fortnight’ was also celebrated in all translation of legal documents, fi nancial and Regional Offi ces and Central Offi ce Departments banking terminologies. by conducting several competitions in Hindi in X.129 A book in Hindi titled Bankon Mein Grahak innovative ways. Seva was published which contained articles on X.127 For learning Hindi through a regional customer service. Bank’s Hindi journal Banking language, teaching material was prepared in Chintan Anuchintan received a Gold award from Assamese and Konkani. Such material has the Association of Business Communicators of already been prepared in six other languages India. The statutory publications of the Bank - the (Tamil, Malayalam, Kannada, Telugu, Oriya Annual Report and Report on Trend and Progress and Bangla) of Region ‘C’. Besides, teaching of Banking in India continued to be prepared in a material for learning regional languages (Bangla, bilingual form. In addition, the Financial Stability Kannada, Oriya, Tamil, Telugu and Malayalam) Report, Weekly Statistical Supplement and the through the Hindi medium was also prepared monthly Bulletin were also published in a bilingual for the offi cers on transfer to region ‘C’ in order form and the same were placed on Bank’s website. to help them communicate in local languages. In Rajbhasha Samachar was published along with order to sensitise senior offi cers and Heads of its e-version which covers in-house activities and Central Offi ce Departments on the requirements events of the Bank to promote the use of Hindi. The of the Offi cial Language Policy, a workshop was Rajbhasha Department also prepared the Annual conducted at Bhubaneswar during December 16- Rajbhasha Report regarding the progressive use 17, 2016. A seminar based on the role of information of Hindi in the Bank. 6 The examination is conducted for those who do not have working knowledge of Hindi. 7 Examination of profi ciency in Hindi. 171ANNUAL REPORT Incentives Agenda for 2016-17: Implementation Status X.130 An incentive scheme for writing outstanding X.134 During the year, the Premises Department books in Hindi on the subject matter of banking acquired land for constructing new offi ce buildings was introduced during the year, with an award of in centres where the Reserve Bank was functioning `125,000. During the year, an all-India Hindi essay from rented premises, viz., Agartala (Tripura), writing competition as well as a Hindi and Bilingual Ranchi (Jharkhand) and Imphal (Manipur). On House Magazine competition were held for public the construction front, offi cers’ quarters along with sector banks and fi nancial institutions. common amenities at Anna Nagar (Chennai) and Dadar-Parel (Mumbai) are nearing completion. Visit of Parliamentary Committee Work for construction of infrastructural facilities X.131 The Committee of Parliament on Offi cial for the Centre for Advanced Financial Research Language (the Third Sub-Committee) visited the and Learning (CAFRAL) at Mumbai, and Central Offi ce of the Reserve Bank in Mumbai reconstruction work of the residential quarters at on January 23, 2017 to inspect and review the Hauz Khas (New Delhi), Chembur (Mumbai) and status of implementation of the Rajbhasha policy. Kharghar (Navi Mumbai) have commenced. The sub-committee suggested further measures X.135 The Indian Green Building Council for promoting the usage of Hindi in the Bank and (IGBC) awarded a ‘Platinum’ rating to all the new also instructed that intensive efforts be made for constructions by the Bank [viz., RBSC (Chennai) the implementation of the offi cial language in all and IGIDR (Mumbai) hostels, Ameerpet Senior spheres of the Bank. Offi cers’ fl ats (Hyderabad) and the on-going Anna Agenda for 2017-18 Nagar complex], as also the existing residential X.132 An annual work plan for 2017-18 is being complex at Ameerpet (Hyderabad) in recognition of prepared keeping in view the requirements of the the efforts to introduce green building concepts in annual programme published by the Government construction projects. of India and the issues raised by the Committee X.136 Another major thrust area of the of Parliament on Offi cial Language. Developing department’s function has been conservation of a new Rajbhasha Reporting System is another water and energy and their effi cient use. Along with agenda for 2017-18. In addition, a booklet on rain water harvesting, the Bank has installed grid statutory provisions on offi cial language will interactive solar power generators for enhancing be brought out for dissemination among staff capacity in various premises. members of the Bank. X.137 E-tendering has been introduced for PREMISES DEPARTMENT procurement (beyond the threshold limit of `1 X.133 The responsibilities of the Premises million and sale of goods/scrap, etc. beyond Department encompass creating, maintaining `0.5 million) with the objective of ensuring faster and upgrading the Reserve Bank’s physical processing, better price discovery and greater infrastructure. In 2016-17, signifi cant developments transparency in procurement processes. A portal have taken place in this direction including the for this purpose has been launched in coordination initiation of new activities. with MSTC Ltd, a public sector undertaking. 172GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT X.138 The Department continued its focus during 2017-18. An offi ce building at Imphal on strengthening perimeter security by is presently on the drawing board. Residential operationalising an internet protocol based colonies in Mumbai (Andheri and Malad), Jaipur CCTV (IPCCTV) system in 20 offi ce buildings. (Malviya Nagar), Chandigarh and Ahmedabad Installation of integrated security system in (Vasna) are also being planned. Steps have already the Central Offi ce building is expected to be been initiated for construction of a Holiday Home completed soon. at Lonavala and reconstruction of the residential colony at Guwahati (Zoo Narangi Road). Agenda for 2017-18 X.140 During 2017-18, concrete steps for further X.139 Construction of offi ce buildings at Naya conservation of water and electricity across all Raipur and Dehradun and residential colonies at premises have been envisaged as part of the Trikuta Nagar, Jammu is expected to commence green initiative. 173ANNUAL REPORT Annex Table 1: Attendance in the Meeting of the Central Board of Directors during July 01, 2016 - June 30, 2017 Name of the Member Appointed/Nominated No. of No. of under RBI Act, 1934 Meetings Held Meetings Attended 1 2 3 4 Raghuram G. Rajan 8 (1) (a) 2 2 Urjit R. Patel 8 (1) (a) 7 7 R. Gandhi 8 (1) (a) 6 6 S. S. Mundra 8 (1) (a) 7 7 N.S. Vishwanathan 8(1) (a) 7 6 Viral V. Acharya 8(1) (a) 2 2 B.P. Kanungo 8(1) (a) 1 1 Nachiket M. Mor 8 (1) (b) 7 4 Y. C. Deveshwar 8 (1) (c) 2 0 Damodar Acharya 8 (1) (c) 2 2 Natarajan Chandrasekaran 8 (1) (c) 7 5 Bharat N. Doshi 8 (1) (c) 7 7 Sudhir Mankad 8 (1) (c) 7 7 Rajiv Kumar 8 (1) (c) 2 2 Ashok Gulati 8 (1) (c) 2 2 Manish Sabharwal 8 (1) (c) 2 2 Anjuly Chib Duggal 8 (1) (d) 7 4 Shaktikanta Das 8 (1) (d) 7 4 174GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT Table 2: Attendance in the Meeting of the Committees of the Central Board during July 01, 2016 - June 30, 2017 Name of the Member Appointed/Nominated No. of Meetings Held No. of Meetings Attended under RBI Act, 1934 1 2 3 4 I. Committee of the Central Board (CCB) Raghuram G. Rajan 8 (1) (a) 7 7 Urjit R. Patel 8 (1) (a) 46 32 R. Gandhi 8 (1) (a) 34 23 S. S. Mundra 8 (1) (a) 46 16 N. S. Vishwanathan 8 (1) (a) 46 28 Viral V. Acharya 8 (1) (a) 21 17 B. P. Kanungo 8 (1) (a) 12 7 Nachiket M. Mor 8 (1) (b) 26 10 Y. C. Deveshwar 8 (1) (c) 04 0 Damodar Acharya 8 (1) (c) 08 7 Natarajan Chandrasekaran 8 (1) (c) 28 13 Bharat N. Doshi 8 (1) (c) 32 25 Sudhir Mankad 8 (1) (c) 30 24 Rajiv Kumar 8 (1) (c) 6 3 Ashok Gulati 8 (1) (c) 7 7 Manish Sabharwal 8 (1) (c) 7 6 II. Board for Financial Supervision (BFS) Raghuram G. Rajan Chairman 2 2 Urjit R. Patel # Chairman 9 8 Urjit R. Patel Member 2 2 R. Gandhi Member 9 8 S. S. Mundra Vice-Chairman 11 11 N.S. Vishwanathan Member 11 11 Viral V. Acharya Member 4 3 B.P.Kanungo Member 2 1 Nachiket M. Mor Member 10 9 Bharat N. Doshi Member 11 10 Sudhir Mankad Member 11 11 Ashok Gulati Member 4 3 III. Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) Raghuram G. Rajan Chairman 1 1 Urjit R. Patel# Chairman 2 2 Urjit R. Patel Member 1 1 R. Gandhi Vice-Chairman 3 3 S. S. Mundra Member 3 2 N.S. Vishwanathan Member 3 3 Viral V. Acharya Member 1 1 Damodar Acharya Member 1 1 Natarajan Chandrasekaran Member 3 0 Bharat N. Doshi Member 3 3 # w.e.f. September 4, 2016 175ANNUAL REPORT Table 3: Attendance in the Meeting of the Sub-Committees of the Board during July 01, 2016 - June 30, 2017 Name of the Member Appointed/Nominated under No. of Meetings Held No. of Meetings Attended RBI Act, 1934 1 2 3 4 I. Audit & Risk Management Sub-Committee (ARMS) Bharat N. Doshi Chairman 6 6 R. Gandhi Invitee 6 4 S. S. Mundra Invitee 6 4 N. S. Vishwanathan Member 6 6 Viral V. Acharya Invitee 3 2 B.P. Kanungo Invitee 2 2 Nachiket M. Mor Member 6 5 Sudhir Mankad Member 6 5 Deepak Mohanty Member 6 4 Deepak Singhal Member 6 5 II. Building Sub-Committee (BSC) Sudhir Mankad Chairman 1 1 Rajiv Kumar@ Chairman 1 1 Y. C. Deveshwar Member 1 0 @ w.e.f. February 27, 2017 III. Human Resource Management Sub-Committee (HRM-SC) Damodar Acharya@ Chairman 2 2 Natarajan Chandrasekaran* Chairman 1 1 Manish Sabharwal# Chairman 1 1 S. S. Mundra Member 4 4 @Up to October 11, 2016 * w.e.f. October 24, 2016 till February 23, 2017 # w.e.f. February 27, 2017 IV. Information Technology Sub-Committee (IT-SC) Natarajan Chandrasekaran Chairman NIL NIL Rajiv Kumar Member NIL NIL 176GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT Table 4: Attendance in the Meeting of Standing Committee of the Central Board of Directors during July 01, 2016 - June 30, 2017 Name of the Member No. of Meetings Held No. of Meetings Attended 1 2 3 R. Gandhi 4 4 B.P. Kanungo 1 1 Damodar Acharya 3 3 Y.C. Deveshwar 2 0 Bharat N. Doshi 4 2 Dr. Rajiv Kumar 1 1 Table 5: Attendance in the Meetings of Local Boards during July 01, 2016 - June 30, 2017 Name of the Member Appointed / Nominated No. of Meetings held No. of under RBI Act, 1934 Meetings Attended 1 2 3 4 Nachiket Mor, EALB Section 9(1) 1 1 Sunil Mitra, EALB Section 9(1) 1 1 V.R. Bhanshali, WALB Section 9(1) 1 1 Dliip S. Shanghvi, WALB Section 9(1) 1 1 EALB: Eastern Area Local Board WALB: Western Area Local Board 177XI THE RESERVE BANK’S ACCOUNTS FOR 2016-17 The balance sheet size of the Reserve Bank increased marginally by 1.88 per cent for the year ended June 30, 2017. While income for the year 2016-17 decreased by 23.56 per cent, the expenditure increased by 107.84 per cent. The year ended with an overall surplus of `306.59 billion as against `658.76 billion in the previous year, representing a decline of 53.46 per cent. XI.1 The balance sheet of the Reserve Bank 2016-17. The balance sheet increased by `610.83 reflects its role in the functioning of the country’s billion, i.e., 1.88 per cent from `32,430.11 billion economy largely in terms of the activities carried as on June 30, 2016 to `33,040.94 billion as on out in pursuance of its currency issue function as June 30, 2017. The increase on the asset side was due to increase in foreign investments and well as monetary policy and reserve management domestic investments by 2.70 per cent and 7.45 objectives. The key financial results of the Reserve per cent, respectively, and capital contribution Bank’s operations during the year 2016-17 (July – to the subsidiaries of the Reserve Bank. On the June) are set out in the following paragraphs. liability side, the increase was mainly due to XI.2 There was a marginal increase in increase in Deposits by 76.96 per cent. Domestic the size of the Bank’s balance sheet during assets constituted 24.32 per cent while the foreign Table XI 1: Trends in Income, Expenditure and Net Disposable Income (` billion) Item 2012-13 2013-14 2014-15 2015-16 2016-17 1 2 3 4 5 6 a) Income 743.58 646.17 792.56 808.70 618.18 b) Transfers to CF and ADF (i+ii) 287.94 0.00 0.00 0.00 0.00 (i) Contingency Fund (CF) 262.47 0.00 0.00 0.00 0.00 (ii) Asset Development Fund (ADF)1 25.47 0.00 0.00 0.00 0.00 c) Net Income (a-b) 455.63 646.17 792.56 808.70 618.18 d) Total Expenditure 125.49 119.34 133.562 149.903 311.554 e) Net Disposable Income (c-d) 330.14 526.83 659.00 658.80 306.63 f) Transfer to funds5 0.04 0.04 0.04 0.04 0.04 g) Surplus transferred to the Government (e-f) 330.10 526.79 658.96 658.76 306.59 Transfer of Surplus to Government as per cent of Gross Income less Total Expenditure 53.4 99.99 99.99 99.99 99.99 Note: 1. Since June 30, 2015, transfers to CF and ADF are not reduced from income. Instead provisions are made, if considered necessary, and then transferred to CF/ADF. 2. Includes a provision of `10 billion towards additional capital contribution in NHB. 3. Includes a provision of `10 billion towards additional capital contribution in BRBNMPL. 4. Includes a provision of `0.50 billion towards capital contribution in newly formed subsidiary ReBIT and a provision of `131.40 billion towards transfer to CF. 5. An amount of `10 million each has been transferred to the National Industrial Credit (Long Term Operations) Fund, the National Rural Credit (Long Term Operation Fund), the National Rural Credit (Stabilisation) Fund and the National Housing Credit (Long Term Operations) Fund during each of the five years. 178THE RESERVE BANK’S ACCOUNTS FOR 2016-17 currency assets and gold (including gold held in changed from yearly to monthly pro-rata basis; India) constituted 75.68 per cent of total assets as (ii) Bank started keeping gold as deposits with on June 30, 2017 as against 24.59 per cent and other central banks and an additional item in this 75.41 per cent, respectively, as on June 30, 2016. regard had been added in Schedule 6 – Gold Coin and Bullion forming part of balance sheet; and XI.3 Provisions of `131.40 billion and `0.50 (iii) Repo borrowing and lending in foreign billion were made and transferred to Contingency securities was started. These are reflected in Fund (CF) and Asset Development Fund (ADF) respectively, and surplus of `306.59 billion was Schedule 2 – Deposits and Schedule 9 – Loans transferred to the central government. The trends and Advances, respectively. in income, expenditure, net disposable income XI. 5 The balance sheet and the income and the surplus transferred to the Government is statement prepared for the year 2016-17 along given in Table XI.1. with the schedules, statement of significant XI.4 During the year (i) the depreciation policy accounting policies and supporting notes to the on fixed assets, other than land and building, was accounts are furnished below: 179ANNUAL REPORT RESERVE BANK OF INDIA BALANCE SHEET AS ON JUNE 30, 2017 (Amount in ` billion) Liabilities Schedule 2015-16 2016-17 Assets Schedule 2015-16 2016-17 Capital 0.05 0.05 Assets of Banking Department (BD) Reserve Fund 65.00 65.00 Notes, Rupee Coin, Small Coin 5 0.14 0.12 Other Reserves 1 2.24 2.26 Gold Coin and Bullion 6 662.23 627.02 Deposits 2 5,065.28 8,963.48 Investments-Foreign-BD 7 6,727.84 9,319.94 Other Liabilities and Provisions 3 10,220.38 8,946.84 Investments-Domestic-BD 8 7,022.85 7,557.50 Bills Purchased and Discounted 0.00 0.00 Loans and Advances 9 520.41 172.56 Investment in Subsidiaries 10 23.20 33.70 Other Assets 11 396.28 266.79 Liabilities of Issue Department Assets of Issue Department (ID) Notes Issued 4 17,077.16 15,063.31 Gold Coin and Bullion (as 6 729.07 690.30 backing for Note issue) Rupee coin 1.71 6.12 Investment-Foreign-ID 7 16,335.92 14,366.89 Investment-Domestic-ID 8 10.46 0.00 Domestic Bills of Exchange and 0.00 0.00 other Commercial Papers Total Liabilities 32,430.11 33,040.94 Total Assets 32,430.11 33,040.94 180THE RESERVE BANK’S ACCOUNTS FOR 2016-17 RESERVE BANK OF INDIA INCOME STATEMENT FOR THE YEAR ENDED JUNE 2017 (Amount in ` billion) INCOME Schedule 2015-16 2016-17 Interest 12 735.43 660.51 Others 13 73.27 -42.33 Total 808.70 618.18 EXPENDITURE Printing of Notes 34.21 79.65 Expense on Remittance of Currency 1.09 1.47 Agency Charges 14 47.56 40.52 Interest 0.01 0.01 Employee Cost 44.77 46.21 Postage and Telecommunication Charges 0.78 1.02 Printing and Stationery 0.33 0.36 Rent, Taxes, Insurance, Lighting, etc. 1.40 1.23 Repairs and Maintenance 1.01 1.02 Directors’ and Local Board Members’ Fees and Expenses 0.02 0.02 Auditors’ Fees and Expenses 0.03 0.04 Law Charges 0.07 0.06 Miscellaneous Expenses 6.42 6.96 Depreciation 2.20 1.08 Provisions 10.00 131.90 Total 149.90 311.55 Available Balance 658.80 306.63 Less: a) Contribution to: i) National Industrial Credit (Long Term Operations) Fund 0.01 0.01 ii) National Housing Credit (Long Term Operations) Fund 0.01 0.01 b) Transferable to NABARD: i) National Rural Credit (Long Term Operations) Fund 1 0.01 0.01 ii) National Rural Credit (Stabilisation) Fund1 0.01 0.01 Surplus payable to the Central Government 658.76 306.59 1. These funds are maintained by the National Bank for Agriculture and Rural Development (NABARD). S. Ramaswamy B.P. Kanungo Viral V. Acharya N. S. Vishwanathan Urjit R. Patel Principal Chief General Manager Deputy Governor Deputy Governor Deputy Governor Governor 181ANNUAL REPORT SCHEDULES FORMING PART OF BALANCE SHEET AND INCOME STATEMENT (Amount in ` billion) 2015-16 2016-17 Schedule 1: Other Reserves (i) National Industrial Credit (Long Term Operations) Fund 0.25 0.26 (ii) National Housing Credit (Long Term Operations) Fund 1.99 2.00 Total 2.24 2.26 Schedule 2: Deposits (a) Government (i) Central Government 1.00 947.74 (ii) State Governments 0.42 0.43 Sub total 1.42 948.17 (b) Banks (i) Scheduled Commercial Banks 4,031.02 4,729.90 (ii) Scheduled State Co-operative Banks 33.85 36.36 (iii) Other Scheduled Co-operative Banks 75.97 84.08 (iv) Non-Scheduled State Co-operative Banks 13.20 15.30 (v) Other Banks 140.00 175.86 Sub total 4,294.04 5,041.50 (c) Financial Institutions Outside India (i) Repo borrowing – Foreign 0.00 0.00 (ii) Reverse Repo Margin – Foreign 0.00 0.00 Sub total 0.00 0.00 (d) Others (i) Administrators of RBI Employee PF A/c 43.80 50.17 (ii) Depositors’ Education and Awareness Fund 105.85 146.97 (iii) Balances of Foreign Central Banks 15.21 19.22 (iv) Balances of Indian Financial Institutions 11.43 5.90 (v) Balances of international Financial Institutions 3.20 3.05 (vi) Mutual Fund 0.01 0.01 (vii) Others 590.32 2,748.49 Sub total 769.82 2,973.81 Total 5,065.28 8,963.48 Schedule 3: Other Liabilities and Provisions (i) Contingency Fund (CF) 2,201.83 2,282.07 (ii) Asset Development Fund (ADF) 227.61 228.11 (iii) Currency and Gold Revaluation Account (CGRA) 6,374.78 5,299.45 (iv) Investment Revaluation Account-Foreign Securities (IRA-FS) 132.66 0.00 (v) Investment Revaluation Account-Rupee Securities (IRA-RS) 391.46 570.90 (vi) Foreign Exchange Forward Contracts Valuation Account (FCVA) 0.00 0.00 (vii) Provision for Forward Contracts Valuation Account (PFCVA) 14.69 29.63 (viii) Provision for payables 32.33 39.17 (ix) Gratuity and Superannuation Fund 157.66 172.06 (x) Surplus Transferable to the Government of India 658.76 306.59 (xi) Bills Payable 0.20 0.12 (xii) Miscellaneous 28.40 18.74 Total 10,220.38 8,946.84 182THE RESERVE BANK’S ACCOUNTS FOR 2016-17 2015-16 2016-17 Schedule 4: Notes Issued (i) Notes held in the Banking Department 0.14 0.12 (ii) Notes in circulation 17,077.02 15,063.19 Total 17,077.16 15,063.31 Schedule 5: Notes, Rupee Coin, Small Coin (with RBI) (i) Notes 0.14 0.12 (ii) Rupee coin 0.00 0.00 (iii) Small coin 0.00 0.00 Total 0.14 0.12 Schedule 6: Gold Coin and Bullion (a) Banking Department (i) Gold coin and bullion 662.23 627.02 (ii) Gold deposit 0.00 0.00 Sub total 662.23 627.02 (b) Issue Department (as backing for Note issue) 729.07 690.30 Total 1,391.30 1,317.32 Schedule 7: Investments-Foreign (i) Investments – Foreign-BD 6,727.84 9,319.94 (ii) Investments – Foreign-ID 16,335.92 14,366.89 Total 23,063.76 23,686.83 Schedule 8: Investments-Domestic (i) Investments – Domestic-BD 7,022.85 7,557.50 (ii) Investments – Domestic-ID 10.46 0.00 Total 7,033.31 7,557.50 Schedule 9: Loans and Advances (a) Loans and Advances to : (i) Central Government 0.00 25.50 (ii) State Governments 19.86 24.18 Sub total 19.86 49.68 (b) Loans and Advances to: (i) Scheduled Commercial Banks 450.92 80.25 (ii) Scheduled State Co-operative Banks 0.00 0.00 (iii) Other Scheduled Co-operative Banks 0.00 0.00 (iv) Non-Scheduled State Co-operative Banks 0.00 0.00 (v) NABARD 0.00 0.00 (vi) Others 49.63 42.63 Sub total 500.55 122.88 (c) Loans and Advances to Financial Institutions outside India: (i) Repo Lending – Foreign 0.00 0.00 (ii) Repo Margin – Foreign 0.00 0.00 Sub total 0.00 0.00 Total 520.41 172.56 Schedule 10: Investment in subsidiaries/Associates (i) Deposit Insurance and Credit Guarantee Corporation 0.50 0.50 (ii) National Housing Bank 14.50 14.50 (iii) National Bank for Agriculture and Rural Development 0.20 0.20 (iv) Bharatiya Reserve Bank Note Mudran (P) Ltd. 8.00 18.00 (v) Reserve Bank Information Technology (P) Ltd. 0.00 0.50 Total 23.20 33.70 183ANNUAL REPORT 2015-16 2016-17 Schedule 11: Other Assets (i) Fixed Assets (net of accumulated depreciation) 3.49 4.08 (ii) Accrued income (a + b) 228.91 232.46 a. on loans to employees 3.15 3.10 b. on other items 225.76 229.36 (iii) Swap Amortisation Account 154.97 18.48 (iv) Revaluation of Forward Contracts Account 0.00 0.00 (v) Miscellaneous 8.91 11.77 Total 396.28 266.79 Schedule 12: Interest (a) Domestic Sources (i) Interest on holding of Rupee Securities 430.79 542.17 (ii) Net Interest on LAF Operations 5.06 -174.26 (iii) Interest on MSF Operations 1.32 0.60 (iv) Interest on Loans and Advances 3.98 6.89 Sub total 441.15 375.40 (b) Foreign Sources (i) Interest Income from Foreign Securities 187.61 192.96 (ii) Net Interest on Repo/Reverse Repo transaction 0.00 0.00 (ii) Interest on Deposits 106.67 92.15 Sub total 294.28 285.11 Total 735.43 660.51 Schedule 13: Income Others (a) Domestic Sources a. Exchange 0.00 0.00 b. Discount 0.00 0.00 c. Commission 15.31 18.41 d. Rent Realised 0.05 0.06 e. Profi t/Loss on sale and redemption of Rupee Securities 21.68 4.62 f. Amortisation of premium/discount of Rupee Securities 42.58 35.47 g. Profi t/loss on sale of Bank's property 0.02 0.03 h. Provision no longer required and miscellaneous income 0.78 -1.67 Sub total 80.42 56.92 (b) Foreign Sources a. Amortisation of premium/discount of Foreign Securities -59.50 -52.92 b. Profi t/Loss on sale and redemption of Foreign Securities 13.99 4.83 c. Exchange gain/loss from Foreign Exchange transactions 38.36 -51.16 Sub total -7.15 -99.25 Total 73.27 -42.33 Schedule 14: Agency Charges (i) Agency Commission on Government Transactions 46.93 39.70 (ii) Underwriting Commission paid to the Primary Dealers 0.35 0.53 (iii) Sundries (Handling charges paid to banks for Relief/Savings Bonds subscriptions) 0.01 0.04 (iv) Fees paid to the External Asset Managers, Custodians, etc. 0.27 0.25 Total 47.56 40.52 184THE RESERVE BANK’S ACCOUNTS FOR 2016-17 INDEPENDENT AUDITORS’ REPORT TO THE PRESIDENT OF INDIA Report on the Financial Statements We, the undersigned Auditors of the Reserve Bank of India (hereinafter referred to as the “Bank”), do hereby report to the Central Government upon the Balance Sheet of the Bank as at June 30, 2017 and the Income Statement for the year ended on that date (hereinafter referred to as “financial statements”), which have been audited by us. Management’s Responsibility for the Financial Statements Management is responsible for the preparation of these financial statements that give a true and correct view of the state of affairs and results of operations of the Bank in accordance with the requirements of the provisions of the Reserve Bank of India Act, 1934 and Regulations framed thereunder and the accounting policies and practices followed by the Bank. This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of the financial statements that give a true and correct view and are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Standards on Auditing issued by the Institute of Chartered Accountants of India. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the Bank’s preparation and correct presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of the accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion and to the best of our information and according to explanations given to us and as shown by the books of account of the Bank, the Balance Sheet read with Significant Accounting Policies is a full and fair Balance Sheet containing all necessary particulars and is properly drawn up in accordance with the requirements of the provisions of the Reserve Bank of India Act, 1934 and Regulations framed there under so as to exhibit true and correct view of the state of affairs of the Bank. Other Matters We report that we have called for information and explanation from the Bank which was necessary for the purpose of our audit and such information and explanation have been given to our satisfaction. We refer to para no. XI.6.2 of Notes to Accounts to the financial statements wherein the final accounting impact of Specified Bank Notes (SBNs) which have ceased to be Notes in Circulation shall be passed by the Bank on the outcome of possible events described in the said para and on completion of verification of SBNs received. We also report that the fi nancial statements include the accounts of eighteen accounting units of the Bank which have been audited by Statutory Branch Auditors and we have relied on their report in this regard. For Borkar & Muzumdar For Khandelwal Jain & Co Chartered Accountants Chartered Accountants (ICAI Firm Registration No. 101569W) (ICAI Firm Registration No. 105049W) Devang Vaghani I. C. Jain Partner Partner Membership No. 109386 Membership No. 08791 Place: Mumbai Date: August 10, 2017 185ANNUAL REPORT STATEMENT OF SIGNIFICANT ACCOUNTING the assets of the Issue Department shall not be POLICIES FOR THE YEAR ENDED JUNE 30, subject to any liability other than the liabilities of 2017 the Issue Department. The Act requires that the assets of the Issue Department shall consist of (a) General gold coins, gold bullion, foreign securities, rupee 1.1 The Reserve Bank of India was established coins and rupee securities to such aggregate under the Reserve Bank of India Act, 1934 (the amount as is not less than the total of the liabilities Act) “to regulate the issue of Bank notes and of the Issue Department. The Act requires that the keeping of reserves with a view to securing the liabilities of the Issue Department shall be monetary stability in India and generally to operate an amount equal to the total of the amount of the the currency and credit system of the country to its currency notes of the Government of India and advantage”. Bank notes for the time being in circulation. 1.2 The main functions of the Bank are:- (b) Significant Accounting Policies a) Issue of Bank notes. 2.1 Convention b) Management of the monetary system. The financial statements are prepared in c) Regulation and supervision of banks accordance with the Reserve Bank of India Act, and Non-Banking Finance Companies 1934 and the notifications issued thereunder and (NBFCs). in the form prescribed by the Reserve Bank of India General Regulations, 1949. These are based on d) Acting as the lender of last resort. historical cost except where it is modified to reflect e) Regulation and supervision of the revaluation. The accounting policies followed in Payment and Settlement Systems. preparing the financial statements are consistent f) Maintaining and managing the country’s with those followed in the previous year unless Foreign Exchange Reserves. otherwise stated. g) Acting as the banker to banks and the 2.2 Revenue Recognition Governments (a) Income and expenditure are recognised on h) Acting as the debt manager of the accrual basis except penal interest which is Governments. accounted for only when there is certainty of realisation. Dividend income on shares is i) Regulation and development of foreign recognised on accrual basis when the right to exchange market. receive the same is established. j) Developmental functions including in (b) Balances unclaimed and outstanding the areas of rural credit and financial for more than three clear consecutive inclusion. accounting years in certain transit accounts 1.3. The Act requires that the issue of Bank notes including Drafts Payable Account, Payment should be conducted by the Bank in an Issue Orders Account, Sundry Deposits Account, Department which shall be separate and kept Remittance Clearance Account and Earnest wholly distinct from the Banking Department and Money Deposit Account are reviewed and 186THE RESERVE BANK’S ACCOUNTS FOR 2016-17 written back to income. Claims, if any, are maturity” securities (such as investments in considered and charged against income in notes issued by the International Monetary the year of payment. Fund and bonds issued by India Infrastructure Finance Company (IIFC), UK which are valued (c) Income and expenditure in foreign currency at cost) are marked to market (MTM) as on the are recorded at the exchange rates prevailing last business day of each month. Unrealised on the last business day of the week/month/ gains/losses on revaluation is recorded in the year as applicable. Investment Revaluation Account – Foreign 2.3 Gold & Foreign Currency Assets and Securities (IRA-FS). Credit balance in IRA- Liabilities FS is carried forward to the subsequent year. Transactions in gold and foreign currency assets Debit balance, if any, at the end of the year in and liabilities are accounted for on settlement date IRA-FS is charged to the Contingency Fund basis. and the same is reversed on the first working day of the following financial year. a) Gold Foreign treasury bills and commercial papers Gold, including the Gold Deposits placed are carried at cost as adjusted by amortisation abroad, is revalued on the last business of discount. Premium or discount on foreign day of the month at 90 per cent of the daily securities is amortised daily. Profit/loss on average price quoted by London Bullion sale of foreign currency assets is recognised Market Association for the month. The rupee with respect to the book value. On sale/ equivalent is determined on the basis of the redemption of foreign dated securities, exchange rate prevailing on the last business valuation gain/loss in relation to the securities day of the month. Unrealised gains/losses sold, lying in IRA-FS, is transferred to Income on revaluation are credited/debited to the Account. Currency and Gold Revaluation Account (CGRA). c) Forward/Swap Contracts b) Foreign Currency Assets and Liabilities Forward contracts entered into by the Bank as part of its intervention operations are All foreign currency assets and liabilities revalued on a yearly basis on June 30. (excluding foreign currency received under While mark to market gain is credited to the swaps that are in the nature of repos the ‘Foreign Exchange Forward Contracts and contracts where the rates are fixed Valuation Account’ (FCVA) with contra debit contractually) are translated at the exchange to ‘Revaluation of Forward Contracts Account’ rates prevailing on the last business day of the (RFCA), mark to market loss is debited to week/month/year as applicable. Unrealised FCVA with contra credit to the ‘Provision gains and losses arising from such translation for Forward Contracts Valuation Account’ of foreign currency assets and liabilities are (PFCVA). Debit balance in FCVA, if any, on accounted for in CGRA. June 30, is required to be charged to the Foreign securities, other than Treasury Bills, Contingency Fund and reversed on the first Commercial Papers and certain “held to working day of the following year. On maturity 187ANNUAL REPORT of the contract, the actual gain or loss is IRA-RS is charged to the Contingency Fund required to be recognised in the Income and the same is reversed on the first working Account and the unrealised gains/losses day of the following financial year. On sale/ previously recorded in the FCVA, RFCA redemption of rupee securities, valuation and PFCVA would be reversed. The balance gain/loss, in respect of securities sold/ in the RFCA and PFCVA represent the net redeemed, lying in IRA-RS, is transferred unrealised gains and losses respectively on to Income Account. Rupee securities are valuation of such forward contracts. subjected to daily amortisation. In the case of swaps at off-market rates (b) Treasury Bills are valued at cost. that are in the nature of repo, the difference (c) Investments in shares of subsidiaries are between the future contract rate and the valued at cost. rate at which the contract is entered into is amortised over the period of the contract and (d) Oil bonds and rupee securities earmarked recorded in the Income account with contra for various staff funds like Gratuity and in ‘Swap Amortisation Account’ (SAA). The Superannuation, Provident Fund, Leave amounts recorded in the SAA are reversed on Encashment, Medical Assistance Fund, maturity of the underlying contracts. Further, Depositors’ Education and Awareness Fund the amounts received under these swaps are (DEA Fund) are treated as ‘Held to Maturity’ not subject to periodic revaluation. and are held at amortised cost. While FCVA and PFCVA form part of ‘Other (e) Transactions in domestic investment are Liabilities’, RFCA and SAA form part of ‘Other accounted for on settlement date basis. Assets’. 2.6 Liquidity Adjustment Facility (LAF) Repo/ 2.4 Transactions in Exchange Traded Reverse Repo and Marginal Standing Currency Derivatives (ETCD) Facility (MSF) The ETCD transactions undertaken by the Bank Repo transactions under LAF and Marginal as part of its intervention operations are marked to Standing Facility (MSF) are treated as lending market on daily basis and the resultant gain/loss is and accordingly being shown under ‘Loans and booked in income account. Advances’ whereas ‘Reverse Repo’ transactions 2.5 Domestic Investments under LAF are being treated as deposits and shown under ‘Deposit-Others’. (a) Rupee securities except those mentioned below in (d) are marked to market as on the 2.7 Fixed Assets last business day of each month with effect (a) Fixed Assets are stated at cost less from 2015-16. The unrealised gains/losses depreciation. on revaluation are booked in ‘Investment Revaluation Account–Rupee Securities (b) Depreciation on computers, microprocessors, (IRA-RS)’. Credit balance in IRA-RS is software (costing `0.10 million and above), carried forward to the following financial year. motor vehicles, furniture, etc. is provided on Debit balance, if any, at the end of the year in straight-line basis at the following rates. 188THE RESERVE BANK’S ACCOUNTS FOR 2016-17 (g) Land and building: The significant accounting Asset Category Rate of depreciation policy in respect of depreciation on land and Electrical installations, UPS, Motor vehicles, 20 per cent building was revised with effect from July furniture, fi xture, CVPS/SBS Machines, etc. Computers, Servers, micro-processors, 33.33 per cent 2015 as follows: printers, Software, laptops, e-book reader/i- pad, etc. Land i. Land acquired for lease periods of more (c) Fixed Assets, costing less than `0.10 million than 99 years are treated as if they are (except easily portable electronic assets) are on perpetual lease basis. Such leases charged to income in the year of acquisition. are considered as freehold properties Easily portable electronic assets, such as, and accordingly not subjected to laptops, etc. costing more than `10,000 are amortisation. capitalised and depreciation is calculated at the applicable rate. ii. Land acquired on short-term lease (i.e., up to 99 years) is amortised over the (d) Individual items of computer software costing period of the lease. `0.10 million and above are capitalised and depreciation is calculated at the applicable Buildings rates. i. The life of all buildings is assumed as (e) Depreciation is provided on year-end thirty years and depreciation is charged balances of the Fixed Assets on monthly on a ‘Straight-line’ basis over a period pro rata basis. In case of additions/deletions of thirty years. In respect of buildings of assets other than land and building, constructed on lease hold land (where depreciation is provided on monthly pro-rata the lease period is less than 30 years) basis including the month of addition/deletion depreciation is charged on a ‘Straight- of such assets. line’ basis over the lease period of the (f) Depreciation on subsequent expenditure land. i. Subsequent expenditure incurred on ii. In the case of existing buildings, existing asset which has not been fully where only the Written Down Value depreciated in the books of accounts, is (WDV) is available and original cost depreciated over the remaining useful and accumulated depreciation are not life of the principal asset; available separately, it is assumed that ii. Subsequent expenditure incurred on such buildings have completed half of modernisation/addition/overhauling of their useful life (i.e., 15 years) and there the existing asset, which has already is a residual life of 15 years. The WDV been fully depreciated in the books as on June 30, 2015 will be considered of accounts, is first capitalised and as cost of such existing buildings and thereafter depreciated fully in the year in will be amortised on a straight line basis which the expenditure is incurred. over the residual life of the building. 189ANNUAL REPORT iii. If the completed life of the building is NOTES TO THE ACCOUNTS known and if it was less than 30 years XI.6 LIABILITIES AND ASSETS OF THE BANK as on June 30, 2015, then the WDV of XI.6.1 LIABILITIES OF BANKING DEPARTMENT the building as on June 30, 2015 is being amortised over the remaining useful life i) Capital of the building, i.e., 30 years less number The Reserve Bank was constituted as a of years completed as on June 30, 2015. private shareholders’ bank in 1935 with an (h) Impairment of buildings: For assessment initial paid-up capital of `0.05 billion. The Bank of impairment, buildings are required to be was nationalised with effect from January 1, classified into two categories, as under: 1949 and its entire ownership remains vested with the Government of India. The paid-up i. Buildings which are in use but have capital continues to be `0.05 billion as per been identified for demolition in future/ section 4 of the RBI Act, 1934. will be discarded in future: The value in use of such buildings is the aggregate of ii) Reserve Fund depreciation for the future period up to The original Reserve Fund of `0.05 billion the date it is expected to be discarded/ was created in terms of section 46 of the RBI demolished. The difference between the Act, 1934 as contribution from the Central book value and aggregate of depreciation Government for the currency liability of the so arrived at is required to be charged as then sovereign government taken over by depreciation. the Reserve Bank. Thereafter, an amount of ii. Buildings which have been discarded/ `64.95 billion was credited to this Fund from vacated: These buildings are to be out of gains on periodic revaluation of gold up shown at realisable value (net selling to October 1990, taking it to `65 billion. The price – if the asset is likely to be sold in fund has been static since then and unrealised future)/scrap value less demolition cost gain/loss on account of valuation of gold and (if it is to be demolished). If the amount is foreign currency is booked in the Currency negative, then the carrying value of such and Gold Revaluation Account (CGRA) buildings have to be shown at `1. The which appears under ‘Other Liabilities and difference between the book value and Provisions’. realisable value (net selling price)/scrap iii) Other Reserves value less demolition cost is required to be charged as depreciation. The asset This includes National Industrial Credit (Long is required to be shown under the head Term Operations) Fund and National Housing ‘Other assets’ – ‘Miscellaneous’. Credit (Long Term Operations) Fund. 2.8 Employee Benefits a) National Industrial Credit (Long Term Operations) Fund The liability on account of long term employee benefits is provided based on an actuarial This fund was created in July 1964, under valuation under the ‘Projected Unit Credit’ method. section 46C of the RBI Act, 1934 with an 190THE RESERVE BANK’S ACCOUNTS FOR 2016-17 initial corpus of `100 million. The fund Institutions, such as, Export Import Bank witnessed annual contributions from the (EXIM Bank), NABARD etc., foreign central Reserve Bank for financial assistance to banks, international financial institutions, eligible financial institutions. Since 1992- balances in Employees’ Provident Fund, 93, a token amount of `10 million is Depositors’ Education and Awareness being contributed each year to the Fund (DEA) Fund and amount outstanding against from the Bank’s income. The balance in Reverse Repo. the fund stood at `0.26 billion as on June Total deposits increased by 76.96 per cent 30, 2017. from `5,065.28 billion as on June 30, 2016, b) National Housing Credit (Long Term to `8,963.48 billion as on June 30, 2017. Operations) Fund a. Deposits – Government This fund was set up in January 1989 The Reserve Bank acts as banker under section 46D of the RBI Act, 1934 to the Central Government in terms for extending financial accommodation of sections 20 and 21 and as banker to the National Housing Bank. The to the State Governments by mutual initial corpus of `500 million has been agreement in terms of section 21(A) enhanced by annual contributions from of the RBI Act, 1934. Accordingly, the the Reserve Bank thereafter. From the Central and the State Governments year 1992-93, only a token amount of maintain deposits with the Reserve `10 million is being contributed each year Bank. The balances held by the Central from the Bank’s income. The balance in and State Governments was `947.74 the fund stood at `2.00 billion as on June billion and `0.43 billion, respectively, 30, 2017. as on June 30, 2017, totalling `948.17 Note: Contribution to other Funds billion as compared to `1.00 billion and There are two other Funds constituted `0.42 billion respectively and totalling to under section 46A of the RBI Act, `1.42 billion as on June 30, 2016. The 1934 viz., National Rural Credit (Long increase in Central Government deposit Term Operations) Fund and National is on account of outstanding Market Rural Credit (Stabilisation) Fund which Stabilisation Scheme (MSS). are maintained by National Bank for b. Deposits – Banks Agriculture and Rural Development Banks maintain balances in their current (NABARD) for which a token amount accounts with the Reserve Bank to of `10 million each is set aside and provide for the Cash Reserve Ratio transferred to NABARD every year. (CRR) requirements and for working iv) Deposits funds to meet payment and settlement These represent the balances maintained obligations. The deposits held by banks with the Reserve Bank by banks, the Central was `5,041.50 billion as on June 30, and State Governments, All India Financial 2017 as compared to `4,294.04 billion as 191ANNUAL REPORT on June 30, 2016. The increase in bank expenditure and investment in subsidiaries, deposits may be attributed to withdrawal respectively, the remaining components of of Specified Bank Notes (SBN). ‘Other Liabilities and Provisions’, such as, Currency and Gold revaluation account c. Deposits – Others (CGRA), Investment Revaluation Account- ‘Deposits- Others’ consists of balances Foreign Securities (IRA-FS), Investment of Administrator of RBI Employees Revaluation Account-Rupee Securities (IRA- Provident Fund, balance in DEA Fund RS), Foreign Exchange Forward Contracts balances of foreign central banks, Indian Valuation Account (FCVA) and Provisions and International Financial Institutions for Forward Contracts Valuation Accounts and amount outstanding under Reverse (PFCVA), represent unrealised MTM gains/ Repo. DEA Fund was created in the year losses. ‘Other Liabilities and Provisions’ 2013-14 for promotion of depositors’ decreased by 12.46 per cent from `10,220.38 interest and for such other related billion as on June 30, 2016 to `8,946.84 purposes. The balance in the DEA billion as on June 30, 2017, primarily due to Fund was `146.97 billion as on June decrease in CGRA and IRA- FS. 30, 2017. The amount under Deposits- a. Contingency Fund (CF) Others increased by 286.30 per cent Contingency Fund represents the from `769.82 billion as on June 30, 2016 amount set aside on a year-to-year basis to `2,973.81 billion as on June 30, 2017 for meeting unexpected and unforeseen primarily due to increase in reverse repo contingencies, including depreciation deposits post withdrawal of Specified in the value of securities, risks arising Bank Notes (SBN). out of monetary/exchange rate policy v) Other Liabilities and Provisions operations, systemic risks and any The major components of ‘Other Liabilities and risk arising on account of the special Provisions’ consist of Contingency Fund (CF), responsibilities enjoined upon the Bank. Asset Development Fund (ADF), Gratuity As on June 30, 2017, an amount of and Superannuation Funds, Balances in `131.40 billion was transferred to CF and an amount of `65.85 billion was Revaluation Accounts viz., Currency and Gold charged to CF on account of (i) MTM loss Revaluation Account (CGRA), Investment of `29.63 billion on valuation of forward Revaluation Account-Foreign securities (IRA- contracts and (ii) debit balance of `36.22 FS), Investment Revaluation Account –Rupee billion in the IRA-FS. The charge to CF is Securities (IRA-RS), Foreign Exchange reversed on the first working day of the Forward Contracts Valuation Account (FCVA) following year. and Provision for Forward Contract Valuation Account (PFCVA). While Contingency Fund Based on the above, the balance in CF (CF) and Asset Development Fund (ADF) as on June 30, 2017 was `2,282.07 represent provisions made for unforeseen billion as compared to `2,201.83 billion contingencies, and internal capital as on June 30, 2016. 192THE RESERVE BANK’S ACCOUNTS FOR 2016-17 b. Asset Development Fund (ADF) out of valuation of FCA and Gold and, therefore, its balance varies with the The Asset Development Fund created size of the asset base, movement in the in 1997-98, represents the amounts set exchange rate and price of gold. During aside each year to meet internal capital 2016-17, the balance in CGRA decreased expenditure and make investments in by 16.87 per cent from `6,374.78 billion subsidiaries and associated institutions. as on June 30, 2016 to `5,299.45 billion A provision of `0.50 billion was made as on June 30, 2017 mainly due to for capital contribution in Reserve Bank appreciation of rupee against US dollar Information Technology Pvt. Ltd. (ReBIT) and fall in the international price of gold. and transferred to Asset Development Fund (ADF). The balance in ADF d. Investment Revaluation Account-Foreign accordingly increased from `227.61 securities (IRA-FS) billion as on June 30, 2016 to `228.11 The foreign dated securities are marked billion as on June 30, 2017 (Table XI.2). to market on the last business day of c Currency and Gold Revaluation Account each month and the unrealised gains/ (CGRA) losses arising therefrom are transferred Unrealised gains/losses on valuation to the IRA-FS. The balance in IRA- of Foreign Currency Assets (FCA) FS decreased from credit balance of and Gold are not taken to the Income `132.66 billion to a debit balance of Account, instead recorded in the `36.22 billion as on June 30, 2017. As Currency and Gold Revaluation Account per the extant policy, the debit balance (CGRA). CGRA represents accumulated of `36.22 billion in IRA-FS was adjusted net balance of unrealised gains arising against the Contingency Fund on June 30, 2017 which is reversed on the Table XI.2: Balances in Contingency Fund and Asset Development Fund first working day of the following year. Accordingly, the balance of IRA-FS as (` billion) on June 30, 2017 was nil. As on June 30 Balance in Balance in Total CF and CF ADF ADF e. Investment Revaluation Account–Rupee as per centage Securities (IRA-RS) to total assets From July 2015, the Rupee securities 1 2 3 4=(2+3) 5 (with exception as mentioned under 2013 2216.52 207.61 2424.13 10.1 significant accounting policy) held as 2014 2216.52 207.61 2424.13 9.2 2015 2216.14* 217.61 2433.75 8.4 assets of Banking Department are 2016 2201.83* 227.61 2429.44 7.5 marked to market on the last business 2017 2282.07# 228.11 2510.18 7.6 day of the month and the unrealised * The decline in the CF is due to charging of the debit balance in the gains/losses arising therefrom are Forward Contract Valuation Account on account of MTM loss on forward contract as on June 30, 2015 and 2016. booked in the Investment Revaluation # Increase in CF is net impact of transfer of `131.40 billion and Account–Rupee Securities (IRA-RS). charging of debit balance of IRA-FS and FCVA amounting to `65.85 billion. The balance in IRA-RS as on June 30, 193ANNUAL REPORT 2017 was `570.90 billion as compared g. Provision for payables to `391.46 billion as on June 30, 2016. This represents the year end provisions f. Foreign Exchange Forward Contracts made for expenditure incurred but Valuation Account (FCVA) & Provision not defrayed and income received in for Forward Contracts Valuation Account advance/payable, if any. Provision for (PFCVA) payables increased from `32.33 billion as on June 30, 2016 to `39.17 billion as on Marking to market of outstanding forward June 30, 2017 due to higher provisions contracts as on June 30, 2017 resulted on outstanding expenditure for printing in a net loss of `29.63 billion, which was of notes. debited to the FCVA with contra credit to the PFCVA. As per the extant policy, the h. Surplus transferable to the Government debit balance of `29.63 billion in FCVA of India was adjusted against the Contingency Under Section 47 of the Reserve Fund on June 30, 2017 and reversed Bank of India Act, 1934 after making on the first working day of the following provisions for bad and doubtful debts, year. Accordingly, the balance in FCVA depreciation in assets, contribution to became nil and the balance in PFCVA Staff and Superannuation Fund and for as on June 30, 2017 was `29.63 billion, all matters for which provisions are to as against a balance of `14.69 billion on be made by or under the Act or that are June 30, 2016. usually provided by bankers, the balance The balances in CGRA, IRA-FS, FCVA, of the profits of the Bank is required to PFCVA and IRA-RS for the last five years be paid to the Central Government. are given in Table XI.3. Under Section 48 of the Reserve Bank of India Act, 1934, the Bank is not liable Table XI.3: Balances in Currency and Gold to pay income tax or super tax or any Revaluation Account (CGRA), Foreign other tax on any of its income, profits or Exchange Forward Contracts Valuation gains and is also exempt from payment Account (FCVA), Provision for Forward of wealth tax. Accordingly, after adjusting Contracts Valuation Account (PFCVA), Investment Revaluation Account-Foreign the expenditure, transfer to ADF and CF Securities (IRA-FS) and Investment Revaluation and contribution of `0.04 billion to the Account-Rupee Securities (IRA-RS) statutory funds, the surplus transferable (` billion) to the Government of India for the year As on CGRA FCVA PFCVA* IRA-FS IRA-RS# June 30 2016-17 amounted to `306.59 billion, 1 2 3 4 5 6 (including `9.93 billion as against `10.35 2013 5,201.13 16.99 - 24.85 - billion in the previous year payable 2014 5,721.63 42.98 0.00 37.91 - towards the difference in interest 2015 5,591.93 0.00 0.39 32.14 - 2016 6,374.78 0.00 14.69 132.66 391.46 expenditure borne by the Government 2017 5,299.45 0.00 29.63 0.00 570.90 consequent on conversion of special *: Started in 2013-14. #: Started in 2015-16 securities into marketable securities). 194THE RESERVE BANK’S ACCOUNTS FOR 2016-17 i. Bills Payable (ii) The legal tender character of banknotes in the denominations of `500 and `1,000, The Reserve Bank provides remittance referred to as Specified Bank Notes (SBNs), facilities for its constituents through was withdrawn by Government of India vide issue of Demand Drafts (DDs) and Gazette Notification No. 3407 (E) of November Payment Orders (POs) (besides 8, 2016. An ordinance on Specified Bank Notes electronic payment mechanism). The (Cessation of Liabilities) was promulgated on balance under this head represents December 30, 2016 (subsequently made into the unclaimed DDs/POs. The amount an Act) stipulating that SBNs shall cease to outstanding under this head decreased be liabilities of Reserve Bank under Section from `0.20 billion as on June 30, 2016 to 34 of RBI Act and shall cease to have the `0.12 billion as on June 30, 2017. guarantee of Central Government under sub- j. Miscellaneous section (1) of Section 26 of the Act with effect This is a residual head representing items from December 31, 2016. However, grace such as interest earned on earmarked periods were provided vide various Gazette securities, amounts payable on account notifications, to persons/entities specified in of leave encashment, medical provisions these notifications and subject to conditions for employees, etc. The balance under specified therein to exchange SBNs. this head decreased from `28.40 billion Until June 30, 2017, SBNs were received by as on June 30, 2016 to `18.74 billion as the Reserve Bank either directly or from bank on June 30, 2017. branches/post offices through the currency XI.6.2 Liabilities of Issue Department- Notes chest mechanism. Some of these SBNs are Issued still lying in the currency chests. The value (i) The liabilities of Issue Department reflect of the SBNs received by the currency chests the quantum of currency notes in circulation. has been credited to the banks’ account on Section 34 (1) of the Reserve Bank of India “said to contain basis”. Till such time these Act, 1934 requires that all banknotes issued notes are processed by the Reserve Bank by the Reserve Bank since April 1, 1935 and for their numerical accuracy and authenticity, the currency notes issued by the Government only an estimation of SBNs received back is of India before the commencement of possible. Subject to future corrections based operations of the Reserve Bank, be part of on verification process when completed, the liabilities of the Issue Department. The the estimated value of SBNs received as on notes issued decreased by 11.79 per cent June 30, 2017 is `15.28 trillion. Moreover, from `17,077.16 billion as on June 30, 2016 vide notification no G.S.R. 611 (E) dated to `15,063.31 billion as on June 30, 2017. June 20, 2017, Government of India allowed The decrease is the net impact of withdrawal District Central Cooperative Banks (DCCBs) from circulation of the old `500 and `1000 to deposit SBNs accepted by them from their notes issued till November 08, 2016 and customers within the period of 10th November subsequent remonetisation efforts made by to 14th November, 2016. Further, in terms the Reserve Bank. of AP (DIR series) circular no. 45/2015-16 195ANNUAL REPORT dated February 04, 2016, rules governing iii) Bills purchased and discounted import and export of Indian currency notes Though the Reserve Bank can undertake to, inter alia, Nepal are different vis-à-vis purchase and discounting of commercial bills other countries. As such, Reserve Bank is under the RBI Act, 1934, no such activity in discussion with Government of India with was undertaken in 2016-17; consequently, regard to the acceptance or otherwise of there was no such asset in the books of the SBNs held by citizens/Financial Institutions in Reserve Bank as on June 30, 2017. Nepal. iv) Investments Foreign-Banking Department Therefore, the value of notes in circulation is (BD) subject to adjustments to be made after the completion of the verification process of the The Foreign Currency Assets (FCA) of the SBNs received as also for the notes to be Reserve Bank are reflected under two heads received from DCCBs and Nepalese citizens/ in the Balance Sheet: (a) ‘Investments- Financial Institutions. Foreign-BD’ shown as asset of Banking Department and (b) ‘Investments-Foreign-ID’ XI.7 ASSETS shown as asset of Issue Department. XI.7.1 ASSETS OF BANKING DEPARTMENT Investments-Foreign-BD include (i) deposits i) Notes, Rupee Coin and Small Coin with other central banks, (ii) deposits with the This head represents the balances of Bank for International Settlements (BIS), (iii) banknotes, one rupee notes, rupee coins of balances with foreign branches of commercial `1, 2, 5 and 10 and small coins kept in the banks, (iv) investments in foreign treasury vaults of the Banking Department to meet bills and securities, and (v) Special Drawing the day to day requirements of the banking Rights (SDR) acquired from the Government functions conducted by the Reserve Bank. of India (GoI). The balance as on June 30, 2017 was `0.12 Investments-Foreign-ID comprises Deposits, billion as against `0.14 billion as on June 30, T-bills and dated securities. 2016. The position of FCA for the last two years is ii) Gold Coin and Bullion given in Table XI.4. Bank holds 557.77 metric tonnes of gold, of v) Investments- Domestic-Banking which 292.28 metric tonnes is held as backing Department (BD) for notes issued and shown separately as an asset of Issue Department. The balance Investments comprise dated government 265.49 metric tonnes is treated as an asset of rupee securities, treasury bills and special Banking Department. The value of gold held oil bonds. However, as on June 30, 2017, as asset of Banking Department decreased the Reserve Bank did not hold any domestic by 5.32 per cent from `662.23 billion as on treasury bill. The Reserve Bank’s holding of June 30, 2016 to `627.02 billion as on June domestic securities increased by 7.61 per 30, 2017 primarily on account of decline in cent, from `7,022.85 billion as on June 30, international gold prices and appreciation of 2016 to `7,557.50 billion as on June 30, INR vis-à-vis USD. 2017. The increase was on account of (a) 196THE RESERVE BANK’S ACCOUNTS FOR 2016-17 Table XI.4: Details of Foreign Currency Assets vi) Loans and Advances (` billion) a) Central and State Governments Particulars As on June 30 2016 2017 These loans are extended in the form of 1 3 Ways and Means Advances (WMA) in I Investment Foreign –ID 16,335.92 14,366.89 terms of Section 17(5) of the RBI Act, II Investment Foreign –BD* 6,727.84 9,319.94 1934 and the limit in case of Central Total 23,063.76 23,686.83 Government is fixed from time to time * : includes Shares in BIS and SWIFT and SDRs transferred from in consultation with the GoI and in case GoI valued at `98.47 billion. of State Governments, the limits are Notes: 1. The Reserve Bank has agreed to make resources available fixed based on the recommendations of under the IMF’s New Arrangements to Borrow (NAB). Currently Advisory Committee/Group constituted India’s commitment under NAB stands at SDR 4.44 billion (`399.80 billion/US$ 6.18 billion). As on June 30, 2017, for this purpose. Loans and advances investments amounting to SDR 0.57 billion (`51.36 billion/US$ to the Central Government outstanding 0.76 billion) have been made under the NAB. as on June 30, 2017 was `25.50 billion. 2. The Reserve Bank has agreed to invest up to an amount, the aggregate of which shall not exceed US$ 5 billion (`323.69 No loans and advances to the Central billion), in the bonds issued by India Infrastructure Finance Government were outstanding as on Company (UK) Limited. As on June 30, 2017, the Reserve Bank has invested US$ 2.10 billion (`135.95 billion) in such June 30, 2016. Loans and advances to bonds. the State Governments as on June 30, 3. In terms of the Note Purchase Agreement 2012 entered into by RBI with IMF, RBI would purchase SDR denominated Notes 2017 stood at `24.18 billion as compared of IMF for an amount up to the equivalent of US$ 10 billion with `19.86 billion as on June 30, 2016. (`647.38 billion). 4. During the year 2013-14, the Reserve Bank and Government b) Loans and advances to Commercial, of India (GoI) entered into a MoU for transfer of SDR holdings from GoI to RBI in a phased manner. As on June 30, 2017, Co-operative Banks, NABARD and SDR1.06 billion (`95.80 billion; US $1.48 billion) were held by others the Bank. 5. With a view to strengthening regional financial and economic cooperation, the Reserve Bank of India has agreed to offer an   Loans and advances to Commercial amount of US$ 2 billion both in foreign currency and Indian and Co-operative Banks: These rupee under the SAARC Swap Arrangement to SAARC member countries. As on June 30, 2017, there are no outstanding swaps mainly include amounts outstanding with any of the SAARC countries. against repo under Liquidity Adjustment Facility (LAF) and liquidity management operations conducted Marginal Standing Facility (MSF). by way of net Open Market Operation The amount outstanding decreased (OMO) purchases of government securities by 82.20 per cent from `450.92 amounting to `299.70 billion (face value) and billion as on June 30, 2016 to (b) valuation gains on account of lower level `80.25 billion as on June 30, 2017 of G-sec yields on June 30, 2017 compared primarily due to reduction in amount to last year. outstanding against repo to banks. 197ANNUAL REPORT   Loans and advances to NABARD: Table XI.5: Holdings in Subsidiaries/ The Reserve Bank can extend loans Associates (Amount in ` billion) to NABARD under section 17 (4E) of the RBI Act, 1934. No loans were Cost Per cent holding outstanding as on June 30, 2017. 1 2 3    Loans and advances to others a) Deposit Insurance and Credit 0.50 100 Guarantee Corporation (DICGC) The balance under this head b) National Bank for Agriculture and Rural 0.20 0.40 Development (NABARD) represents loans and advances c) National Housing Bank (NHB) 14.50 100 to National Housing Bank (NHB), d) Bharatiya Reserve Bank Note Mudran 18.00 100 liquidity support provided to Primary Pvt. Ltd. (BRBNMPL) e) Reserve Bank Information Technology 0.50 100 Dealers (PDs) and outstanding Pvt. Ltd. (ReBIT) repo/term repo conducted with the Total 33.70 PDs. The balance under this head decreased by 14.10 per cent from and foreign investments, accrued income `49.63 billion as on June 30, 2016 on loans and advances to the employees, to `42.63 billion as on June 30, balances held in (i) Swap Amortisation 2017 primarily due to decrease in Account (SAA) (ii) Revaluation of Forward amount outstanding against repo to Contracts Account (RFCA) and miscellaneous PDs. assets. Miscellaneous assets comprise mainly vii) Investment in Subsidiaries/Associates loans and advances to staff, amount spent on projects pending completion, security deposit During the year, a new subsidiary of the paid etc. The amount outstanding under Reserve Bank viz. Reserve Bank Information Technology Pvt. Ltd. (ReBIT) was set up to ‘Other Assets’ decreased by 32.68 per cent take care of the Information Technology from `396.28 billion as on June 30, 2016 to (IT) requirements including cyber security `266.79 billion as on June 30, 2017 primarily needs of the Bank as also the other entities on account of decrease in swap amortisation. regulated by it. a. Swap Amortisation Account (SAA) The details of investment in subsidiaries/ In the case of swaps that are in the associate institutions as on June 30, 2017 nature of repo at off-market rates, the are given in table XI.5. The total holding difference between the future contract increased from `23.20 billion as on June rate and the rate at which the contract is 30, 2016 to `33.70 billion on account of entered into is amortised over the period additional capital contribution of `10 billion of the contract and held in the SAA. The to Bharatiya Reserve Bank Note Mudran Pvt. balance held in this account is to be Ltd. (BRBNMPL) and capital contribution of reversed on maturity of the outstanding `0.50 billion to ReBIT. contracts. The amount outstanding in viii) Other Assets SAA declined by 88.08 per cent from ‘Other Assets’ comprise fi xed assets (net of `154.97 billion as on June 30, 2016 to depreciation), accrued income on domestic `18.48 billion as on June 30, 2017 due 198THE RESERVE BANK’S ACCOUNTS FOR 2016-17 to maturities of such contracts during billion as on June 30, 2016 to `14,366.89 billion 2016-17. as on June 30, 2017. The balance of Rupee coins held by the Issue Department increased by b. Revaluation of Forward Contracts 257.89 per cent from `1.71 billion as on June 30, Account (RFCA) 2016 to `6.12 billion as on June 30, 2017. The Forward contracts that are entered into non-interest bearing rupee securities held as as part of intervention operations are assets of Issue Department and valued at `10.46 marked to market on June 30. The net billion have redeemed during the year and thus gain, if any, is recorded in FCVA with the balance as on June 30, 2017 is nil. contra entry in the RFCA. There was no FOREIGN EXCHANGE RESERVE balance in RFCA as on June 30, 2017 as there was marked to market loss on XI.8 The Foreign Exchange Reserves (FER) forward contracts. predominantly comprise FCA, beside Gold, Special Drawing Rights (SDRs) and Reserve XI.7.2 ASSETS OF ISSUE DEPARTMENT Tranche Position (RTP). The Special Drawing The eligible assets of the Issue Department held Rights, (other than the amount acquired from GoI as backing for notes issued consist of gold coin and bullion, rupee coin, Investment – Foreign Table XI.7(a): Foreign Exchange ID, Government of India rupee securities and Reserves in Rupee (` billion) domestic bills of exchange. The Reserve Bank holds 557.77 metric tonnes of gold, of which As on June 30 Variation 292.28 metric tonnes are held as backing for 2016 2017 Absolute Per Cent notes issued (Table XI.6). The value of gold held 1 2 3 4 5 as backing for notes issued decreased by 5.32 Foreign Currency 22,787.43^ 23,455.08# 667.65 2.93 per cent from `729.07 billion as on June 30, Assets (FCA) Gold 1,391.30@ 1,317.32* (-) 73.98 (-) 5.32 2016 to `690.30 billion as on June 30, 2017, on Special Drawing 100.58 95.80 (-) 4.78 (-) 4.75 account of decline in international gold prices and Rights (SDR) appreciation of INR vis-à-vis USD. Consequent Reserve Position 162.27 150.30 (-) 11.97 (-) 7.38 in the IMF upon the decrease in notes issued, Investment- Foreign 24,441.58 25,018.50 576.92 2.36 Foreign-ID held as backing for notes issued Exchange Reserves (FER) decreased by 12.05 per cent from `16,335.92 ^ : Excludes (a) SDR Holdings of the Reserve Bank amounting to `100.58 billion, which is included under the SDR holdings, Table XI.6: Physical Holding of Gold (b) Investment of `141.99 billion in bonds issued by IIFC (UK), (c) `27.04 billion lent to Sri Lanka and `6.72 billion lent to As on June As on June Bhutan under a Currency Swap arrangement made available 30, 2016 30, 2017 for SAARC countries. Volume in Volume in # : Excludes (a) SDR Holdings of the Reserve Bank amounting to metric tonnes metric tonnes `95.80 billion, which is included under the SDR holdings, (b) 1 2 3 Investment of `135.95 billion in bonds issued by IIFC (UK). @ : Of this, Gold valued at `729.07 billion is held as an asset of Gold held for backing note issue 292.28 292.28 Issue Department and Gold valued at `662.23 billion is held (held in India) under asset of Banking Department. Gold held as asset of Banking 265.49 265.49 * : Of this, Gold valued at `690.30 billion is held as an asset of Department (held abroad) Issue Department and Gold valued at `627.02 billion is held Total 557.77 557.77 under asset of Banking Department. 199ANNUAL REPORT Table XI.7(b): Foreign Exchange Redemption of Foreign and Rupee Securities, (vi) Reserves in USD Rent Realised, (vii) Profit or loss on sale of Bank’s (US$ billion) property, and (viii) Provisions no longer required As on June 30 Variation and miscellaneous income. Interest receipts forms 2016 2017 Absolute Per Cent the major portion. Certain items of income such as interest on LAF repo, Repo in foreign security, 1 2 3 4 5 Foreign Currency 339.04* 362.39** 23.35 6.89 exchange gain are reported on net basis. Assets (FCA) Till 2015-16, the items in (iv) and (v) were grouped Gold 20.58 20.35 (-) 0.23 (-) 1.12 Special Drawing 1.49 1.48 (-) 0.01 (-) 0.67 under the head ‘Interest’. However, from the year Rights (SDR) 2016-17, re-grouping of income items has been Reserve Position 2.40 2.32 (-) 0.08 (-) 3.33 in the IMF done and accordingly, the income in nature of Foreign 363.51 386.54 23.03 6.34 ‘interest’ has been included under the head ‘Interest Exchange ‘and other income types have been grouped under Reserves (FER) ‘Others’. The change can be seen in the Income * : Excludes (a) SDR Holdings of the Reserve Bank amounting to US$ 1.49 billion, which is included under the SDR holdings, Statement and the related schedules. (b) US$ 2.1 billion invested in bonds of IIFC (UK), and (c) LKR equivalent of US$ 0.4 million lent to Sri Lanka & BTN Earnings from Foreign Sources equivalent to US$ 0.1 billion equivalent of INR currency lent to Bhutan under a Currency Swap arrangement made available for XI.10 The income from foreign sources, SAARC countries. ** : Excludes (a) SDR Holdings of the Reserve Bank amounting decreased by 35.27 per cent from `287.13 billion to US$ 1.48 billion, which is included under the SDR holdings, (b) US$ 2.1 billion invested in bonds of IIFC (UK). in 2015-16 to `185.86 billion in 2016-17 mainly on account of the appreciation of the rupee and reduced premium income on the swaps that are in and included under Foreign Investment–BD) does the nature of repo. Therefore, the rate of earnings not form part of Reserve Bank’s balance sheet. on foreign currency assets was lower at 0.80 per Similarly, the RTP, which represents India’s quota cent in 2016-17 as compared with 1.29 per cent in contribution to IMF in foreign currency is not part 2015-16 (Table XI. 8). of Reserve Bank’s balance sheet. The position of foreign exchange reserves as on June 30, 2016 Earnings from Domestic Sources and June 30, 2017 in Indian rupees and the US XI.11 The net income from domestic sources dollar, which is the numeraire currency for our decreased by 17.11 per cent from `521.57 billion foreign exchange reserves, are furnished in Tables in 2015-16 to `432.32 billion in 2016-17 mainly XI.7 (a) and (b). due to higher net expenditure on interest under ANALYSIS OF INCOME AND EXPENDITURE LAF on account of absorption of surplus liquidity INCOME in the banking system post withdrawal of Specified Bank Notes (SBNs) (Table XI. 9). XI.9 The main components of Reserve Bank’s income are Interest Receipts and ‘Others’ including XI.12 Interest on holding of rupee securities (i) Discount, (ii) Exchange, (iii) Commission, (iv) increased by 25.85 per cent from `430.79 billion in Amortisation of Premium/Discount on Foreign 2015-16 to `542.17 billion in 2016-17. The coupon and Rupee Securities, (v) Profit/Loss on Sale and income increased on account of increase in the 200THE RESERVE BANK’S ACCOUNTS FOR 2016-17 Table XI.8: Earnings from Foreign Sources (` billion) Item As on June 30 Variation 2016 2017 Absolute Per Cent 1 2 3 4 5 Foreign Currency Assets (FCA) 23,063.76 23,686.83 623.07 2.70 Average FCA 22,229.65 23,110.09 880.44 3.96 Earnings from FCA (interest, discount, exchange 287.13 185.86 (-) 101.27 (-) 35.27 gain/loss, capital gain/loss on securities) Earnings from FCA as per cent of average FCA 1.29 0.80 (-) 0.49 (-) 37.98 Reserve Bank’s holding of Government securities income on LAF/MSF operations was on account as a result of OMO purchases of around `1.10 of higher expenditure on interest payment under trillion between April 2016 and June 2017. reverse repo in 2016-17 due to absorption of surplus liquidity in the banking system post XI.13 The net interest income from Liquidity withdrawal of Specified Bank Notes (SBNs). Adjustment Facility (LAF)/Marginal Standing Facility (MSF) operations decreased by `180.04 XI.14 Profit on sale of securities decreased billion from `6.38 billion in 2015-16 to `(-)173.66 to `4.62 billion in 2016-17 from `21.68 billion in billion in 2016-17. The decrease in net interest 2015-16. Table XI 9: Earnings from Domestic Sources (` billion) Item 2015-16 2016-17 Variation Absolute Per cent 1 2 3 4 5 Earnings (I + II+III) 521.57 432.32 -89.25 -17.11 I. Earnings from domestic securities i) Interest on holding of domestic securities 430.79 542.17 111.38 25.85 ii) Profi t on Sale and redemption of Securities 21.68 4.62 -17.06 -78.69 iii) Premium/discount on amortisation of domestic securities 42.58 35.47 -7.11 -16.70 iv) Net Interest on LAF Operations 5.06 -174.26 -179.32 -3543.87 v) Interest on MSF operations 1.32 0.60 -0.72 -54.55 Sub total (i+ii+iii+iv+v) 501.43 408.60 -92.83 -18.51 II. Interest on Loans and Advances i) Government (Central & States) 1.99 5.37 3.38 169.85 ii) Banks & Financial Institutions 1.58 1.06 -0.52 -32.91 iii) Employees 0.41 0.46 0.05 12.20 Sub total (i+ii+iii) 3.98 6.89 2.91 73.12 III. Other Earnings i) Discount 0.00 0.00 0.00 0.00 ii) Exchange 0.00 0.00 0.00 0.00 iii) Commission 15.31 18.41 3.10 20.25 iv) Rent realised, Profi t or Loss on sale of Bank’s Property, Provisions no longer 0.85 -1.58 -2.43 -285.88 required and miscellaneous Sub total (i+ii+iii+iv) 16.16 16.83 0.67 4.15 201ANNUAL REPORT XI.15 Premium/Discount on amortisation of c. Employees: domestic securities: As per the extant accounting Interest on loans and advances to employees policy, the rupee securities held by the Bank are increased marginally from `0.41 billion in amortised on daily basis during the period of 2015-16 to `0.46 billion in 2016-17. residual maturity and the premium/discount is XI.17 Commission: The commission income credited to ‘Amortisation of Premium/Discount on increased from `15.31 billion in 2015-16 to Rupee Securities’ account. The income booked `18.41 billion in 2016-17 primarily on account under ‘Amortisation of Premium/Discount on of (i) increase in floatation charges due to Amortisation of Rupee Securities’ was `35.47 increased market borrowing of states including billion for 2016-17 as compared to `42.58 billion UDAY issuances during 2016-17, and (ii) during 2015-16. increase in management commission received XI.16 Interest on loans and advances for outstanding amount on central and state government loans; which includes savings a. Central and State Government bonds, G-secs and T-bills (including increased Interest income on Ways and Means MSS issuances after withdrawal of SBNs). Advances (WMA)/Overdraft (OD) received XI.18 Rent realised, Profit or Loss on sale of from the Centre and States increased by Bank’s Property, Provisions no longer required 169.85 per cent from `1.99 billion during and miscellaneous income: Earnings form these 2015-16 to `5.37 billion in 2016-17. income heads declined from `0.85 billion in 2015-16 to `(-)1.58 billion in 2016-17. Interest income received from the Centre on account of WMA/OD increased from EXPENDITURE `0.81 billion during 2015-16 to `3.98 billion XI.19 The Reserve Bank incurs expenditure in 2016-17. The increased earnings was in the course of performing its statutory functions on account of increased WMA/OD facility by way of agency charges/commission, printing availed by GoI in 2016-17 due to the stress of notes, expenses on remittance of treasure in its cash balance. besides staff related and other expenses. The total expenditure of the Reserve Bank increased Interest income received from the States by 107.84 per cent from `149.90 billion in 2015- on account of WMA/OD/Special Drawing 16 to `311.55 billion in 2016-17 primarily due to Facility (SDF) increased from `1.18 billion increase in expenditure on printing of new notes during 2015-16 to `1.39 billion in 2016-17. as a part of remonetisation of currency and The increased earnings were on account of provisions. higher utilisation of these facilities. i) Interest b. Banks & Financial institutions: During 2016-17, an amount of `0.01 billion Interest on loans and advances to banks and was credited as interest to Dr B.R. Ambedkar financial institutions decreased from `1.58 Fund (set up for giving scholarship to wards billion in 2015-16 to `1.06 billion in 2016-17. of staff) and Employees Benevolent Fund. 202THE RESERVE BANK’S ACCOUNTS FOR 2016-17 Table XI.10: Expenditure made in 2015-16 for an amount of (` in billion) `10.64 billion for reimbursing service tax Item 2012-13 2013-14 2014-15 2015-16 2016-17 on agency commission paid to banks for 1 2 3 4 5 6 2012-13, 2013-14 and 2014-15. i. Interest 0.03 0.04 0.01 0.01 0.01 b. Underwriting Commission paid to Payment Primary Dealers ii. Employees 58.59 43.24 40.58 44.77 46.21 Cost Reserve Bank paid total underwriting iii.Agency 28.07 33.25 30.45 47.56 40.52 commission of `0.53 billion during 2016- charges/ commission 17 as compared to `0.35 billion during iv. Printing of 28.72 32.14 37.62 34.21 79.65 2015-16. The increase was mainly on notes account of persistent phase of market v. Provisions 0.00 0.00 10.00 10.00 131.90 volatility picking up post demonetisation vi.Others 10.08 10.67 14.90 13.35 13.26 from mid November 2016 and becoming Total 125.49 119.34 133.56 149.90 311.55 more marked from February to April 2017 (i+ii+iii+iv+v+vi) as a reaction to the shift in monetary policy stance. ii) Employee cost c. Fees paid to the External Asset The employee cost increased by 3.22 per Managers, custodians etc. cent from `44.77 billion in 2015-16 to `46.21 Fees paid for overseas custodial billion in 2016-17. The increase is mainly services during 2016-17 amounted to on account of wage revision and revision in `0.25 billion as compared to `0.27 billion Gratuity limits. in 2015-16. iii) Agency Charges iv) Printing of notes a. Agency Commission on Government Expenditure incurred on printing of notes Transactions during 2016-17 was `79.65 billion as The Reserve Bank discharges the compared to `34.21 billion in 2015-16. function of banker to the government The increase was mainly on account of through a large network of agency bank following reasons: branches that serve as retail outlets for government transactions. The Reserve a. Supply of notes during the year at 29,043 Bank pays commission to these agency million pieces was 37 per cent higher than the total supply during previous banks at prescribed rates which were year (21,195 million pieces). Supply of last revised with effect from July 01, higher denomination notes during 2016- 2012. The agency charges on account 17 was 13,702 million pieces as against of government business for 2016-17 was 5,268 million pieces supplied in 2015- `39.70 billion as compared with `46.93 16, higher by 160 per cent. billion for the year 2015-16, reflecting a decrease of 15.40 per cent. The agency b. In the wake of withdrawal of SBNs, charges in 2015-16 were higher on there was an increase in the number of account of the cumulative provision remittances in our remonetisation efforts 203ANNUAL REPORT resulting in higher freight and forwarding components of which are (a) `1,105.79 billion expenses. For urgent supply of notes towards the exposure of Bank in forwards and across the country, notes were also swaps; and (b) the Bank holds partly paid shares, remitted by air resulting in increased denominated in SDR, of Bank of International expense on freight charges. Settlements (BIS). The uncalled liability on partly c. Reimbursement of cost for finished paid shares of the BIS as on June 30, 2017 was banknotes, work in progress, raw `1.08 billion as compared to `1.14 billion in the materials, etc. as the printing presses previous year. The balances are callable at three had to discontinue printing of `500 and months’ notice by a decision of the BIS Board of `1000 denomination banknotes which Directors. were withdrawn in November 2016. PRIOR PERIOD TRANSACTIONS v) Others XI.21 For the purpose of disclosure, prior period Other expenses consisting of expenditure transactions of `0.10 million and above only have on remittance of treasure, printing and been considered. The prior period transactions stationery, audit fees and related expenses, under expenditure and income amounted to `0.42 depreciation, miscellaneous expenses, etc. billion and `0.03 billion respectively. decreased marginally by 0.67 per cent from PREVIOUS YEAR’S FIGURES `13.35 billion in 2015-16 to `13.26 billion in 2016-17. This is primarily because of fall in XI.22 Figures for the previous year have been depreciation expense due to introduction of rearranged, wherever necessary, to make them monthly pro-rata depreciation from 2016-17. comparable with the current year. vi) Provisions AUDITORS In 2016-17, a provision of `0.50 billion was XI.23 The statutory auditors of the Bank are made for capital contribution in Reserve Bank appointed by the Central Government in terms Information Technology Pvt. Ltd. (ReBIT) of section 50 of the RBI Act, 1934. The accounts and transferred to Asset Development Fund of the Reserve Bank for the year 2016-17 were (ADF) and a provision of `131.40 billion was audited by M/s Borkar & Muzumdar, Mumbai made for transfer to Contingency Fund (CF). and M/s Khandelwal Jain & Co., as the Statutory CONTINGENT LIABILITIES Central Auditors and M/s M C Bhandari & Co., M/s XI.20 The total contingent liabilities of the Brahmayya & Co. and M/s Mehra Goel & Co. as Bank amounted to `1,107.05 billion, the main Statutory Branch Auditors. 204CHRONOLOGY OCF MHAJRORO PNOLOICYL AONNGOUYNC OEMFEN TS ANNEX MAJOR POLICY ANNOUNCEMENTS: JULY 2016 TO JUNE 2017* Date of Policy Initiative Announcement Monetary Policy Department August 5, 2016 Infl ation target was notifi ed for the period from August 5, 2016 to March 31, 2021. September 29 The constitution of the Monetary Policy Committee was notifi ed. October 4 The policy repo rate was reduced by 25 bps to 6.25 per cent. November 26 An incremental CRR (ICRR) of 100 per cent on the increase in NDTL between September 16, 2016 and November 11, 2016 was introduced from the fortnight beginning November 26, 2016. December 7 The ICRR was withdrawn from the fortnight beginning December 10, 2016. February 8, 2017 The stance of monetary policy was changed from accommodative to neutral while the policy rate was kept on hold. April 6 The LAF corridor was narrowed from 100 bps to 50 bps. Accordingly, the reverse repo rate was changed from 5.75 per cent to 6.0 per cent, and the marginal standing facility (MSF) rate from 6.75 per cent to 6.50 per cent. June 7 The SLR was reduced from 20.5 per cent of NDTL to 20.0 per cent of NDTL from the fortnight beginning June 24, 2017. Financial Inclusion and Development Department July 28, 2016 The limit of bank loans of less than 24 months to MFIs for on-lending under the priority sector lending was raised to `30,000 from `15,000. August 4 Banks were advised that the Government approved the implementation of the interest subvention scheme for 2016-17 for short term crop loans up to `3 lakh. August 11 Factoring transactions ‘with recourse’ basis including through TReDS upon its operationalisation were classifi ed as part of the priority sector lending. August 25 Banks were communicated to implement the revised guidelines on interest subvention scheme under the Deendayal Antyodaya Yojana -National Rural Livelihoods Mission for 2016-17. Banks were advised to instruct their branches to feed the relevant data including land and crop details of all loanee and non-loanee farmers, availing crop insurance through their branches in the unifi ed portal for crop insurance. Banks were advised about the revised reporting format for furnishing details on Financial Literacy Centres. September 1 Banks were advised that the applicable system-wide average fi gure of lending to non-corporate farmers for computing achievement under the priority sector lending for 2016-17 would be 11.70 per cent. September 29 Banks were advised about the government strategy, as announced in the Union Budget 2016-17, to achieve the goal of doubling the income of farmers by 2022. Instructions on submission of data on credit assistance provided to the members of minority communities were issued to banks. October 6 Banks were advised about the modifi ed quarterly/annual reporting formats for reporting priority sector lending. October 13 Banks were issued the modifi ed instructions on asset/accident/health insurance under the revised KCC scheme. December 26 Banks were advised about the decision of the Government to provide an additional grace period of 60 days, for prompt repayment incentive of 3 per cent, to those farmers whose crop loan dues were falling due during November- December, 2016. *: Indicative in nature and details available on the Reserve Bank’s website. 205ANNUAL REPORT Date of Policy Initiative Announcement December 29 Banks were advised to use the facility of providing ‘additional working capital limit’ (approved by their Boards) to their MSE borrowers up to March 31, 2017, in view of the withdrawal of legal tender status of Specifi ed Bank Notes (SBNs). February 16, 2017 Lead bank responsibility in respect of 21 new districts created in Telangana was assigned to various banks. March 2 The policy on conduct of camps by FLCs and rural branches of banks was revised with a focus on going digital. March 9 Lead bank responsibility in respect of seven new districts created in Manipur was assigned to various banks. March 30 Following the merger of associate banks with the State Bank of India (SBI), effective April 1, 2017, SLBC convenorship of Telangana was assigned to SBI. Lead bank responsibility of districts was also assigned to SBI. April 13 Banks were advised to observe June 5-9, 2017 as fi nancial literacy week with focus on four broad themes, viz. KYC, Exercising Credit Discipline, Grievance Redressal and Going Digital (UPI and *99#). April 27 Lead bank responsibility of a new district created in Haryana was assigned to Punjab National Bank. May 25 Lead Bank responsibility of the three newly created districts in Arunachal Pradesh was assigned to SBI. Interest subvention scheme on short term crop loans upto `3 lakh extended on the interim basis for 2017-18. June 8 Banks were advised to align the roadmap for unbanked villages having population more than 5000 with the revised guidelines on Branch Authorisation Policy issued by Department of Banking Regulation, Reserve Bank. June 15 Lead Bank responsibility of one new district created in West Bengal was assigned to SBI. Financial Markets Regulation Department July 28, 2016 Demat account holders of NSDL and CDSL were allowed to trade in G-sec on the NDS-OM platform through their respective depository participant banks which should be SGL Account Holders and direct members of NDS-OM and CCIL. August 25 Brokers registered with SEBI and authorised as market makers in corporate bond were allowed to undertake repo/ reverse repo in corporate debt securities. Eligibility conditions and other terms of participation in market repo in G-sec were relaxed. Towards greater predictability, auction results would be published by the Reserve Bank at 1.30 pm for T-bills and 2 pm for G-sec. Otherwise, they would be announced at half hourly intervals thereafter. September 30 The limits for investment by FPIs in central G-sec for the next half year were proposed to be increased in two tranches, each of `100 billion from October 3, 2016 and January 2, 2017 respectively. The limits for SDLs would also be increased in two tranches, each of `35 billion, over the same period. October 20 FPIs would be allowed to trade G-sec in the secondary market through the primary members of NDS-OM including the web-module, effective December 1, 2016. October 28 Money market futures based on any money market instrument/interest rate, over and above 91-day T-Bill futures which have already been allowed, were permitted. November 17 The investment basket of eligible instruments by FPIs under the corporate bond route was expanded to include (i) unlisted corporate debt securities in the form of non-convertible debentures/bonds and (ii) certain specifi ed securitised debt instruments. December 27 FPIs were allowed to transact non-convertible debentures/bonds issued by Indian companies either directly or in any manner as per the approved market practice. December 29 Interest rate options would be introduced, effective January 31, 2017. February 2, 2017 NRIs were allowed access to the exchange traded currency derivatives market to hedge the currency risk arising out of their investments in India. 206CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS Date of Policy Initiative Announcement February 16 Banks were advised to stop sending the hardcopy of the fortnightly return on FRA/IRS to the Reserve Bank. The existing procedure for reporting OTC foreign exchange and interest rate derivative transactions to the trade repository of CCIL would continue. March 31 The limits for investment by FPIs for Q1 2017-18 were proposed to be increased by `110 billion and `60 billion, respectively for central G-sec and SDLs. June 1 The LEI system for all participants in the OTC markets for rupee interest rate derivatives, foreign currency derivatives and credit derivatives in India was decided to be implemented in a phased manner. Accordingly, all current and future participants would be required to obtain the unique LEI code as per the indicated respective timelines. Financial Markets Operations Department November 10, 2016 The valuation of collateral under LAF was changed from face value to market value, based on FIMMDA prices, effective November 26, 2016. Re-repoing of securities received under reverse repo was introduced, effective November 26, 2016. November 25 Oil bonds issued by the government were made eligible securities for repo, reverse repo and MSF, effective November 28, 2016. The margin requirement for the securities provided by RBI in reverse repo was withdrawn effective November 28, 2016. April 12, 2017 Security substitution was introduced effective April 17, 2017, for securities placed as collateral under LAF. Foreign Exchange Department July 7, 2016 AD Banks were allowed to discontinue submission of invocation of bank guarantee for service imports, but were advised to maintain records. October 06 Category-I banks were advised that IDPMS would go live effective October 10, 2016 and they should use IDPMS for reporting and monitoring of import transactions. October 20 Three FEMA notifi cations : 14, 16 and 17 relating to the manner of receipts and payments were combined and a revised notifi cation : 14 R was issued. Designated AD category-I banks were delegated powers for extension of matured but unpaid ECB and for conversion of such ECB into equity. Payments permitted for trade transactions under the rupee drawing arrangements should not exceed `1.5 million per transaction. 100 per cent FDI was permitted under the automatic route in other fi nancial services regulated by any fi nancial sector regulator, effective September 9, 2016. Any Foreign Venture Capital Investor (FVCI) which obtained registration under the SEBI (FVCI) Regulations, 2000, would not require approval from the Reserve Bank; and was allowed to invest in any Indian start-ups. ‘Total foreign investment’ in an Indian company was to be calculated as sum total of direct and indirect foreign investments, effective February 15, 2016. 100 per cent foreign investment was permitted in limited liability partnership (LLP) for sectors where 100 per cent FDI was allowed, and foreign investment in specifi ed plantation sectors was put under automatic route. Rent income on lease of a property, not amounting to transfer, would not be considered as ‘real estate business’ for foreign investment purpose. Precise defi nition of manufacturing for purpose of foreign investment was notifi ed. Entities engaged in single brand retail trading through brick and mortar stores were permitted to undertake retail trading through e-commerce. 207ANNUAL REPORT Date of Policy Initiative Announcement October 24 A wholly owned subsidiary, set up in India by a non-resident entity, operating in a sector where 100 per cent foreign investment was allowed under the automatic route and there were no FDI linked conditionalities, might issue FDI compliant instruments to the said non-resident entity against pre-incorporation/pre-operative expenses incurred by the said non-resident entity up to a limit of fi ve per cent of its capital or US$ 500,000 whichever was less. October 27 Asset Reconstruction Companies were allowed to receive foreign investment up to 100 per cent under automatic route. The total shareholding of a single FII/FPI should be below 10 per cent of the total paid-up capital. FIIs/FPIs could invest up to 100 per cent in the security receipts issued by ARCs. Startups were allowed to raise ECBs up to US$ 3 million or equivalent per fi nancial year either in INR or in any convertible foreign currency or a combination of both. November 3 Indian banks were permitted to issue within the limit set for foreign investment in corporate bonds: (i) perpetual debt instruments qualifying as Additional Tier 1 capital and debt capital instruments qualifying as Tier 2 capital, by way of rupee denominated bonds overseas; and (ii) long term rupee-denominated bonds overseas for fi nancing infrastructure and affordable housing. November 4 49 per cent foreign investment was permitted under automatic route in pension funds. November 7 Wherever hedging was mandated by the Reserve Bank, ECB borrower was to cover principal as well as coupon through fi nancial hedges for minimum tenor of one year. Natural hedge, in lieu of fi nancial hedge, was to be considered only to the extent of offsetting projected cash fl ows/revenues in matching currency, net of all other projected outfl ows. Any other arrangements/structures, where revenues were indexed to foreign currency, would not be considered as natural hedge. November 9 Older series banknotes in the denominations of `500 and `1000 were allowed to be exchanged to the extent of `5000 until November 11, 2016 at international airports for arriving and departing passengers and for foreign tourists. November 11 Authorised persons were allowed to issue pre-paid instruments to foreign tourists in exchange of foreign exchange tendered in terms of the instructions issued by the Reserve Bank. November 17 Foreign Exchange Management (Insurance) Regulations, 2015 were rationalised and the memorandum on general/ health insurance and life insurance in India was modifi ed. November 25 Foreign tourists were permitted to exchange foreign exchange for Indian currency notes up to a limit of `5000 per week till December 15, 2016. December 07 Foreign investment limits in sectors such as agriculture and animal husbandry, manufacturing and cable networks were amended. January 10, 2017 Residents outside India (except from Pakistan or Bangladesh) were allowed to purchase convertible notes issued by an Indian startup for an amount of `2.5 million or more in a single tranche. 49 per cent foreign investment was permitted under automatic route in infrastructure companies in securities markets, viz., stock exchanges, commodity derivative exchanges, depositories and clearing corporations. January 12 The practice of submission of hardcopy of evidence of import documents was discontinued from December 1, 2016. January 25 Indian entities were prohibited from direct investment in an overseas entity (joint venture/wholly owned subsidiary/step down subsidiary) located in countries identifi ed by the Financial Action Task Force as “non-co-operative countries and territories”. February 2 Regional Offi ces were delegated powers to compound contravention/s regarding delay in fi ling the Annual Return on Foreign Liabilities and Assets by all Indian companies which had received foreign direct investment in the previous year(s) including the current year. February 16 Multilateral and regional fi nancial institutions, where India is a member country, were permitted to invest in Rupee denominated bonds. February 22 The standard operating practice for movement of cash (foreign exchange), amongst authorised dealers, full-fl edged money changers, their offi ces/branches, their customers and their franchisees during elections, was announced. 208CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS Date of Policy Initiative Announcement March 3 Foreign investment was permitted under automatic route either through capital contribution or by acquisition/transfer of profi t shares in the capital structure of an LLP operating in sectors/activities where 100 per cent FDI was allowed through automatic route and there were no FDI-linked performance conditions. March 9 100 per cent foreign investment was permitted under automatic route in B2B e-commerce activities and market place model of e-commerce. March 30 Limits operating prior to November 8, 2016 for purchase of foreign exchange from foreign citizens, were restored. May 15 Reporting mechanism was introduced for issuance and transfer of convertible notes (CNs) by start ups to a person resident outside India. May 19 Prior permission of the Reserve Bank was not required for closure of vostro accounts and remitting back funds (in foreign currency), if any, under the rupee drawing arrangement. June 7 The framework for issuance of masala bonds was revised in respect of maturity period, all-in-cost ceiling and recognised lenders. June 23 Retention of duplicate copies of exchange control copies of the shipping bills at authorised dealer bank was discontinued. Department of Banking Regulation July 8, 2016 All regulated entities (REs) including SCBs were advised to upload the KYC data with CERSAI on new individual accounts opened on or after July 15, 2016 for the live run of the Central KYC Records Registry. REs which were not ready to join CKYCR were advised to prepare their systems in a time bound manner. KYC norms for FPIs were revised. July 21 Banks were permitted to reckon G-secs held by them up to another 1 per cent of their NDTL under the facility to avail liquidity for the liquidity coverage ratio (LCR) within the mandatory SLR requirement as level 1 HQLA for the purpose of computing their LCR. With this, the total carve-out from SLR amounted to 11 per cent of banks’ NDTL. August 4 Banks were advised to have an appropriate and transparent policy on dishonour of cheques approved by the boards or committees. All-India Term Lending and Refi nancing Institutions - Exim Bank, NABARD, NHB and SIDBI - were advised to follow the Indian Accounting Standards as notifi ed under the Companies (Indian Accounting Standards) Rules, 2015 for fi nancial statements beginning April 01, 2018. August 11 Banks were advised to prepare a comprehensive policy for implementation of the recommendations of the Committee on Capacity Building in respect of certifi cation of staff by end-December 2016 and the same be implemented under the guidance and monitoring of the board. August 25 The aggregate exposure limit towards partial credit enhancement for a given bond issue from the banking system was increased to 50 per cent from 20 per cent of the bond issue size, with a limit up to 20 per cent of the bond issue size for an individual bank. Cash settlement of only the change in mark-to-market value of the restructured derivative contract was clarifi ed as a requirement. All unrated claims on corporates, Asset Financing Companies (AFCs), and NBFC-IFCs having aggregate exposure of more than `2 billion from the banking system would attract a risk weight of 150 per cent, effective June 30, 2017. However, such claims on these entities having aggregate exposure of more than `1 billion from the banking system, which were rated earlier and turned unrated subsequently would attract a risk weight of 150 per cent with immediate effect. Guidelines were issued on enhancing credit supply for large borrowers through market mechanism, allowing banks to subscribe to bonds issued by specifi ed borrowers over and above normally permitted lending limit in 2017-18. September 01 An improved framework governing sale of stressed assets by banks to SCs/RCs/other banks/NBFCs/fi nancial institutions was put in place to strengthen banks’ ability to resolve such assets effectively. 209ANNUAL REPORT Date of Policy Initiative Announcement Credit Information Companies were advised to provide access in electronic format, upon request and after due authentication of the requester, to one free full credit report including credit score, once in a calendar year, to individuals whose credit history was available with them. September 08 Banks were advised to invariably accept cash, irrespective of amount, over the counters from all declarants who desired to deposit cash at the counters, including deposits under the Income Declaration Scheme, 2016 through challan ITNS- 286, while ensuring compliance with the KYC requirements. September 29 New ‘Certifi cate of Registration’ for carrying on the business of credit information was granted to the Credit Information Bureau (India) Limited which changed its name to Transunion CIBIL Limited. September 29 Lending institutions were advised to consider publication of the photographs of only those borrowers, including proprietors/partners/directors/guarantors of borrower fi rms/companies, who were declared as wilful defaulters following the mechanism set out by the Reserve Bank. October 04 Bank rate was reduced by 25 bps to 6.75 per cent, effective October 04, 2016. October 06 Operating guidelines for Payments Banks and Small Finance Banks were issued. Their prudential regulatory framework was drawn largely from the Basel standards incorporating suitable calibrations. October 13 SLR securities acquired from the Reserve Bank under LAF were made eligible assets for SLR maintenance from October 3, 2016. October 20 New ‘Certifi cate of Registration’ was granted to the Experian Credit Information Company of India Private Ltd. for carrying on the business of credit information. Exposure to HFCs was advised to be risk weighted as per the rating assigned by the rating agencies registered with SEBI and accredited by the Reserve Bank, in a manner similar to that of corporates, AFCs, NBFC-IFCs and NBFC- IDFs as prescribed. November 03 Banks were allowed to raise funds through issuance of rupee denominated bonds overseas for the specifi ed purposes. November 10 Changes were made in various regulatory measures to deal with stressed assets. The asset classifi cation norms were revised for loans under the Scheme for Sustainable Structuring of Stressed Assets where there was no change of promoters. Guidelines in line with the BCBS were issued, effective April 1, 2018, for measuring exposure for counterparty credit risk arising from derivatives transaction which would replace the current exposure method being used by banks. Final guidelines on capital requirements for banks’ exposures to central counter parties was issued, effective April 1, 2018. IBUs were permitted to undertake certain activities/transactions with resident and non-resident entities other than individuals including HNIs/retail customers. November 21 Consequent upon withdrawal of Specifi ed Bank Notes, it was decided to provide an additional 60 days for a regulated entity concerned for recognition of a loan account as substandard in select cases. November 24 It was decided to broaden the fi elds of specialisation to include (i) information technology, (ii) payment & settlement systems, (iii) human resources, (iv) risk management and (v) business management, for appointment of director in banks’ boards (excluding RRBs). December 01 Banks and select All India Term-Lending and Refi nancing Institutions were advised to follow the defi nition of ‘infrastructure lending’ as published by the government in Gazette Notifi cations. After examining the feedback on draft large exposure framework, fi nal guidelines were issued, effective April 1, 2019, December 06 Regulated entities were advised to take steps for preserving the customer account information, including preservation of records pertaining to the identifi cation of the customers and their addresses obtained while opening the account, for at least fi ve years after the business relationship ended. 210CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS Date of Policy Initiative Announcement December 08 It was decided to allow One Time Pin (OTP) based e-KYC subject to certain restrictions. SCBs were advised to invariably upload the KYC data pertaining to all new individual accounts opened on or after January 1, 2017, with the Central KYC Records Registry. The KYC Directions 2016 were amended in terms of the defi nition of non-profi t organisation and the KYC procedure. December 15 Regulated entities were advised to strictly comply with the requirement of KYC verifi cation by concurrent/internal audit system and conditions for operating small accounts. BSBD accounts, which are not KYC compliant were to be treated as ‘small accounts’ and subjected to the limitations applicable to such accounts. December 28 It was decided to provide 30 days in addition to 60 days for recognition of certain categories of loans as substandard by the regulated entities. February 02, 2017 The extant instructions for coupon payment on perpetual debt instruments eligible for AT 1 capital were modifi ed to permit payment of coupons out of statutory/available reserves subject to certain conditions. February 16 It was decided to increase the quantum of gold loan with bullet repayment plan that could be granted by RRBs from `0.1 million to `0.2 million subject to certain conditions. April 06 Bank rate was reduced by 25 bps to 6.50 per cent, effective April 06, 2017. April 10 The list of permissible activities for IFSC Banking Units (IBUs) was amended. April 18 Repatriation of accumulated profi ts should not be considered by banks as disposal or partial disposal of interest in non-integral foreign operations as per AS 11 [The Effects of Changes in Foreign Exchange Rates]. Ban ks were allowed to participate in Real Estate Investment Trusts and Infrastructure Investment Trusts subject to conditions. Banks were advised to make suitable disclosures in the notes to accounts to the annual fi nancial statements as per the prescribed format, wherever either (a) the additional provisioning requirements assessed by the Reserve Bank exceeded 15 per cent of the published net profi ts after tax for the reference period or (b) the additional gross NPAs identifi ed by the Reserve Bank exceeded 15 per cent of the published incremental gross NPAs for the reference period, or both. Banks were advised to put in place a board-approved policy for making additional provisions for standard assets at rates higher than the regulatory minimum, based on the evaluation of risk and stress in various sectors. Board of Directors might review the telecom sector latest by June 30, 2017. April 27 Banks were advised to lay down a board-approved policy clearly defi ning the role and responsibilities of the chief risk offi cer. May 05 To facilitate timely decision making, banks were advised that the decisions agreed upon by a minimum of 60 per cent of creditors by value and 50 per cent of creditors by number in the JLF would be the basis for deciding the corrective action plan. May 11 RRBs were advised to submit Form-VIII returns in Extensible Business Reporting Language (XBRL) from April 2017. May 18 SCBs (excluding RRBs) were advised to stipulate minimum qualifi cations and experience for the posts of chief fi nancial offi cer and chief technology offi cer, while inviting applications for the posts. In the books of partial credit enhancement provider, capital requirement might be recalculated without reference to the constraints of capital fl oor and difference in notches, if the reassessed standalone credit rating at any time during the life of the bond showed improvement over the corresponding rating at the time of bond issuance. Corporate bonds were to be rated by a minimum of two external credit rating agencies at all times and rating reports, both initial and subsequent, should disclose both standalone credit rating as well as the enhanced credit rating. Guidelines were revised on branch authorization, clarifying on banking outlet and harmonising the treatment of different forms of banking presence for the purpose of opening outlets in underserved areas. 211ANNUAL REPORT Date of Policy Initiative Announcement May 22 The Reserve Bank outlined the action plan to implement the Banking Regulation (Amendment) Ordinance, 2017, which empowered the Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC). June 7 As a countercyclical measure, LTV ratios, risk weights and standard asset provisioning rate for individual housing loans were revised. June 13 Banks were permitted to use the ratings assigned by the INFOMERICS Valuation and Rating Pvt. Ltd., in addition to the existing six credit rating agencies for assigning risk weights to credit exposures for capital adequacy assessment under the Basel framework. The Internal Advisory Committee, constituted pursuant to the promulgation of the Banking Regulation (Amendment) Ordinance, 2017 to advise cases that might be considered for reference for resolution under the Insolvency and Bankruptcy Code, 2016 (IBC), held its fi rst meeting on June 12, 2017. The committee agreed to focus on large stressed accounts at this stage and also arrived at an objective, non-discretionary criterion for referring accounts for resolution under the IBC. June 22 Banks were advised to provide adequate relevant details of transactions in the passbooks and/or statements of accounts and also incorporate information about ‘deposit insurance cover’ along with the limit of coverage, subject to change from time to time, upfront in the passbooks. The Overseeing Committee (OC), constituted by IBA, was brought under the aegis of the Reserve Bank and the membership of the same was enlarged to fi ve pursuant to the Banking Regulation (Amendment) Ordinance, 2017. The reconstituted OC would work with an expanded mandate to review resolution of cases where the aggregate exposure of the banking sector to the borrowing entity was greater than `5 billion. June 29 Instructions were issued on limits on balances in customer accounts with payment banks under sweep out arrangements with other banks wherein payment banks were allowed to act as Business Correspondents. Department of Cooperative Bank Regulation July 07, 2016 Co-operative banks fulfi lling certain criteria were allowed to issue/redeem Long Term (Subordinated) Deposits without prior approval of the Reserve Bank. July 14 State/Central co-operative banks were permitted to invest in non-SLR instruments. September 01 Salary earners’ UCBs were permitted to grant advances against term deposits of non-members. April 28, 2017 Guidelines were issued on merchant acquisition for card transactions. May 25 Regulatory requirements for issuance of prepaid payment instrument were issued. Department of Non-Banking Regulation July 28, 2016 Guidelines for relief measures by banks in the areas affected by natural calamities were extended, mutatis mutandis, to NBFCs. September 02 Master Directions for NBFC-Account Aggregator were issued. February 02, 2017 NBFC-MFIs were advised to ensure that the average interest rate on loans sanctioned during a quarter did not exceed the average borrowing cost during the preceding quarter plus the margin, within the prescribed cap. March 02 For the purpose of defi nition of ‘infrastructure lending’, NBFCs were advised to go by the Gazette Notifi cations issued by the government from time to time. March 09 NBFCs were advised that for disbursal of loan in cash, the requirements, under the Income Tax Act, 1961, as amended from time to time, would be applicable. 212CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS Date of Policy Initiative Announcement April 28 Minimum net owned fund requirement for ARCs was fi xed at ` 1 billion on an ongoing basis, effective April 28, 2017. Department of Banking Supervision July 01, 2016 Master Directions on frauds – classifi cation and reporting by commercial banks and select FIs consolidated and updated all the instructions issued on the subject up to June 30, 2016. July 28 Reporting formats of half yearly/quarterly review of accounts of PSBs were revised. August 25 Banks were permitted to engage the services of their retired offi cials for assisting in internal audit subject to conditions. April 13, 2017 The existing PCA framework for banks was revised and set to be implemented from April 1, 2017, based on the fi nancials of banks for the year ended March 31, 2017. The framework would be reviewed after three years. April 13 PSBs were advised to formulate a fair and transparent policy and procedure in the matter of selection and appointment of statutory branch auditors and host the same on their websites. April 20 Banks were advised that while implementation of the Ghosh Committee recommendations need not be reviewed by the Audit Committee of the Board (ACB), they may ensure that it is complete, sustained and appropriately factored for internal inspection/audit purposes. Department of Non-Banking Supervision June 08, 2017 Master Direction was issued on information technology framework for the NBFC Sector, focussing on IT governance/ policy/operations/services outsourcing, information and cyber security, IS audit and business continuity planning. Consumer Education and Protection Department June 16, 2017 The Banking Ombudsman Scheme 2006 was amended, effective July 1, 2017. Internal Debt Management Department Dec 17, 2016 The government launched a tax amnesty scheme, ‘Pradhan Mantri Garib Kalyan Deposit Scheme, 2016’, which would be available from December 17, 2016 to March 31, 2017. Jan 30, 2017 The discount rate on 14 day ITBs was re-fi xed at reverse repo rate minus 200 bps with a ceiling of 5 per cent and the rediscount rate at reverse repo rate minus 150 bps with a ceiling of 5.5 per cent. Department of Currency Management July 20, 2016 A scheme of penalties for bank branches based on performance in rendering customer service to the members of public was introduced. September 15 The Reserve Bank would issue banknotes of `20 with numerals in ascending size in number panels and without intaglio printing September 23 The Reserve Bank would issue banknotes of `50 with numerals in ascending size in number panels and without intaglio printing. November 08 The legal tender status for banknotes of the Mahatma Gandhi Series in the denominations of `500 and `1000 was withdrawn from November 9, 2017. Banknotes in the denominations of `500 and `2000 in Mahatma Gandhi (New) Series were introduced. November 14 The Reserve Bank clarifi ed that the scheme of exchange/deposit of Specifi ed Bank Notes (SBNs) was not allowed by DCCBs. December 31 Facility for exchange of SBNs within a grace period was introduced for NRIs and citizens, who were abroad during November 9, 2016 to December 30, 2016. 213ANNUAL REPORT Date of Policy Initiative Announcement January 30, 2017 Limits imposed earlier on cash withdrawals from bank accounts and ATMs stand completely withdrawn and status quo ante restored. February 08 Removal of limits on withdrawal of cash from saving bank account effected in phases and all limits to be withdrawn effective March 13, 2017. Department of Payment and Settlement Systems September 01, In order to enhance transparency in Merchant Discount Rates (MDR) applicable at merchant level, acquiring banks 2016 were advised to ensure that MDR are clearly unbundled for different categories of cards and also to educate the merchants regarding this at the time of acquisition. September 29 Banks were advised to ensure that all new card acceptance infrastructure deployed with effect from January 1, 2017 are enabled for processing payment transactions using Aadhaar-based biometric authentication also. October 20 Framework was released for imposition of penalty on authorised payment systems operators/banks to cover offenses such as (i) contravention of provisions of the Act, (ii) non-compliance of directions or order made there under and (iii) violations of terms and conditions of authorisation. November 22 As part of special measures to incentivise electronic payments, the limit of semi-closed Prepaid Payment Instruments (PPIs) issued with minimum details was enhanced from `10000 to `20000, and dispensation given for higher ceiling for funds transfers from PPIs to bank account for PPIs issued to small merchants. December 02 Extension of timeline for Aadhaar-based authentication for all new card acceptance infrastructure for processing payment transactions till June 30, 2017. December 06 Relaxation in Additional Factor of Authentication for payments up to `2000 for card network solutions. December 09 To maintain a robust and fully secure digital ecosystem, the technical audit of PPI issuers was introduced. December 16 Following the withdrawal of legal tender characteristics of existing `500 and `1000 Bank Notes (Specifi ed Bank Notes – SBN), in order to facilitate wider acceptance of card payments, rationalisation of Merchant Discount Rate (MDR) for transactions upto `2000 was introduced. December 27 To facilitate greater adoption of digital payments, the instructions contained in paragraph 7.9 of Master Circular on Issuance and Operations of Prepaid Payment Instruments was modifi ed, permitting Banks to issue PPIs to entities for onward issuance to their staff/employees/contract workers etc. December 30 White Label ATM Operators (WLAOs) were allowed to source cash from retail outlets subject to certain conditions. May 08, 2017 To enhance the effi ciency of the payment system and add to customer convenience, half hourly settlement of National Electronic Funds Transfer (NEFT) was introduced. Department of Information Technology July 4, 2016 The Bank’s IT Subsidiary - Reserve Bank Information Technology Pvt Ltd. (ReBIT) was incorporated on July 4, 2016 to take care of the IT requirements including cyber security needs of the Reserve Bank and its regulated entities. 214APPENDIX TABLES APPENDIX TABLE 1: MACROECONOMIC AND FINANCIAL INDICATORS Item Average Average 2014-15 2015-16 2016-17 2003-04 2009-10 to to 2007-08 2013-14 (5 years) (5 years) 1 2 3 4 5 6 I. Real Economy I.1 Real GDP at market prices (% change)* 8.8 7.4 7.5 8.0 7.1 I.2 Real GVA at basic prices (% change)* 8.7 7.1 7.2 7.9 6.6 I.3 Foodgrains Production (Million tonnes) 213.6 248.8 252.0 251.6 275.7 I.4 a) Food Stocks (Million tonnes at end-March) 18.6 50.0 41.3 43.6 38.0 b) Procurement 39.4 61.3 59.6 62.2 60.2 c) Off-take 41.5 56.9 55.9 63.7 67.4 I.5 Index of Industrial Production (% change)** 11.0 3.5 4.1 3.4 4.4 I.6 Index of Eight Core Industries (% change)** 5.9 5.8 4.9 3.0 4.8 I.7 Gross Domestic Saving Rate (% of GNDI at current prices)*** 32.5 32.8 32.3 31.6 … I.8 Gross Domestic Investment Rate (% of GDP at current prices)*** 33.6 36.9 34.2 33.2 … II. Prices II.1 Consumer Price Index (CPI) Combined (average % change) … … 5.8 4.9 4.5 II.2 CPI- Industrial Workers (average % change) 5.0 10.3 6.3 5.6 4.1 II.3 Wholesale Price Index (average % change)# 5.5 7.1 1.3 -3.7 1.7 III. Money and Credit III.1 Reserve Money (% change) 20.4 12.1 11.3 13.1 -12.9 III.2 Broad Money (M) (% change) 18.6 14.7 10.9 10.1 7.3 3 III.3 a) Aggregate Deposits of Scheduled Commercial Banks (% change) 20.2 15.0 10.7 9.3 11.8 b) Bank Credit of Scheduled Commercial Banks (% change) 26.7 16.7 9.0 10.9 5.1 IV. Financial Markets IV.1 Interest rates (%) a) Call/Notice Money rate 5.6 7.2 8.0 7.0 6.2 b) 10 year G-Sec yield 7.0 8.0 8.3 7.8 7.0 c) 91-Days T-bill yield … … 8.5 7.4 6.4 d) Weighted Average cost of Central Government Borrowings … … 8.5 7.9 7.2 e) Commercial Paper 7.7 8.4 8.8 8.1 7.4 f) Certificate of Deposits## 8.9 8.2 8.7 7.8 6.9 IV.2 Liquidity (` billion) a) LAF Outstanding~ … … -1,938.8 -2,995.2 3,140.7 b) MSS Outstanding~~ … … 0.0 0.0 0.0 c) Average Daily Call Money Market Turnover 184.9 255.3 255.7 269.5 305.8 d) Average Daily G-Sec Market Turnover### 77.1 241.4 501.2 474.9 829.9 e) Variable Rate Repo$ … … 1,628.7 2,635.7 129.9 f) Variable Rate Reverse Repo$ … … … … 2,032.0 g) MSF$ … … 416.4 600.5 19.3 V. Government Finances& V.1 Central Government Finances (% of GDP) a) Revenue Receipts 9.8 9.1 8.9 8.7 9.1 b) Capital Outlay 1.2 1.5 1.3 1.7 1.7 c) Total Expenditure 14.4 14.8 13.4 13.1 13.0 d) Gross Fiscal Deficit 3.6 5.3 4.1 3.9 3.5 V.2 State Government Finances&& a) Revenue Deficit (% of GDP) 0.4 0.0 0.4 0.1 0.3 b) Gross Fiscal Deficit (% of GDP) 2.7 2.2 2.6 2.5 2.9 c) Primary Deficit (% of GDP) 0.3 0.6 1.1 1.2 1.5 215APPENDIX TABLES APPENDIX TABLE 1: MACROECONOMIC AND FINANCIAL INDICATORS (Concld.) Item Average Average 2014-15 2015-16 2016-17 2003-04 2009-10 to to 2007-08 2013-14 (5 years) (5 years) 1 2 3 4 5 6 VI. External Sector VI.1 Balance of Payments a) Merchandise Exports (% change) 25.3 12.2 -0.6 -15.9 5.2 b) Merchandise Imports (% change) 32.3 9.7 -1.0 -14.1 -1.0 c) Trade Balance/GDP (%) -5.4 -9.0 -7.1 -6.2 -5.0 d) Invisible Balance/GDP (%) 5.1 5.7 5.8 5.2 4.3 e) Current Account Balance/GDP (%) -0.3 -3.3 -1.3 -1.1 -0.7 f) Net Capital Flows/GDP (%) 4.6 3.7 4.4 2.0 1.6 g) Reserve Changes [(BoP basis) (US $ billion) [(Increase -40.3 -6.6 -61.4 -17.9 -21.6 (-)/Decrease (+)] VI.2 External Debt Indicators a) External Debt Stock (US$ billion) 156.5 359.0 474.7 485.0 471.9 b) Debt-GDP Ratio (%) 17.7 20.7 23.9 23.5 20.2 c) Import cover of Reserves (in Months) 14.0 8.5 8.9 10.9 11.3 d) Short-term Debt to Total Debt (%) 13.6 21.3 18.0 17.2 18.6 e) Debt Service Ratio (%) 8.3 5.6 7.6 8.8 8.3 f) Reserves to Debt (%) 113.7 84.8 72.0 74.3 78.4 VI.3 Openness Indicators (%) a) Export plus Imports of Goods/GDP 30.4 40.7 38.2 31.7 29.7 b) Export plus Imports of Goods & Services/GDP 40.8 52.8 50.0 43.1 41.1 c) Current Receipts plus Current Payments/GDP 46.6 59.0 56.2 49.0 46.7 d) Gross Capital Inflows plus Outflows/GDP 36.8 50.0 49.7 46.8 47.0 e) Current Receipts & Payments plus Capital Receipts & Payments/GDP 83.5 109.0 105.9 95.9 93.8 VI.4 Exchange Rate Indicators a) Exchange Rate (Rupee/US Dollar) End of Period 43.1 51.1 62.6 66.3 64.8 Average 44.1 51.2 61.1 65.5 67.1 b) 36 - Currency REER (% change) 3.1^ 0.8 5.5 2.9 2.2 c) 36 - Currency NEER (% change) 1.7^ -4.9 2.4 0.9 -0.1 d) 6 - Currency REER (% change) 4.4^ 1.9 6.3 2.3 2.7 e) 6 - Currency NEER (% change) 1.6^ -5.4 1.2 -1.6 -0.5 … : Not Available. * : Data from 2003-04 to 2011-12 are at 2004-05 base, while those from 2012-13 onwards are at 2011-12 base. ** : Data for average 2003-04 to 2007-08 and 2009-10 to 2013-14 are based on 2004-05 base year series. For 2014-15, 2015-16 and 2016-17, data are based on the new series with base year 2011-12. *** : Data from 2003-04 to 2010-11 are at 2004-05 base, while those from 2011-12 onwards are at 2011-12 base. # : Base year for WPI is 2011-12=100 for annual data and 2004-05=100 for average of 5 years inflation. ## : Data for column 2 pertains to April 13, 2007 to March 28, 2008. ### : Outright trading turnover in central government dated securities (based on calendar days). ~ : LAF outstanding as on March 31 (negative means injection). ~~ : Outstanding as on last Friday of the financial year. $ : Outstanding as on March 31. & : Data for 2015-16 are actuals and for 2016-17 are provisional estimates. && : Data for 2015-16 onwards are provisional and pertain to budgets of 26 states. ^ : Average of period 2005-06 to 2007-08. Note : Real Effective Exchange Rate (REER) are based on CPI (combined). 216APPENDIX TABLES APPENDIX TABLE 2 : GROWTH RATES AND COMPOSITION OF REAL GROSS DOMESTIC PRODUCT (At 2011-12 Prices) (Per cent) Sector Growth Rate Share Average 2014-15 2015-16 2016-17 2014-15 2015-16 2016-17 2013-14 to 2016-17 1 2 3 4 5 6 7 8 Expenditure Side GDP 1. Private Final Consumption Expenditure 7.1 6.2 6.1 8.7 56.0 55.0 55.8 2. Government Final Consumption Expenditure 8.6 9.6 3.3 20.8 10.2 9.8 11.0 3. Gross Fixed Capital Formation 3.5 3.4 6.5 2.4 31.3 30.9 29.5 4. Change in Stocks 20.1 108.6 1.4 6.1 2.6 2.4 2.4 5. Valuables -9.5 26.2 -4.1 -17.5 1.8 1.6 1.2 6. Net Exports 33.6 11.8 15.1 37.4 -1.5 -1.2 -0.7 a) Exports 2.2 1.8 -5.3 4.5 23.8 20.9 20.4 b) Less Imports -2.7 0.9 -5.9 2.3 25.3 22.1 21.1 7. Discrepancies -167.8 34.8 -476.6 -50.0 -0.4 1.5 0.7 8. GDP 7.3 7.5 8.0 7.1 100.0 100.0 100.0 GVA at Basic Prices (Supply Side) 1. Agriculture, forestry and fishing 2.7 -0.2 0.7 4.9 16.5 15.4 15.2 2. Industry 7.5 8.6 10.2 7.0 22.6 23.1 23.2 of which : a) Mining and quarrying 6.0 11.7 10.5 1.8 3.0 3.1 3.0 b) Manufacturing 8.0 8.3 10.8 7.9 17.4 17.8 18.1 c) Electricity, gas, water supply & other utility services 5.9 7.1 5.0 7.2 2.2 2.1 2.2 3. Services 7.9 8.9 9.1 6.9 60.9 61.5 61.7 of which : a) Construction 3.5 4.7 5.0 1.7 8.6 8.4 8.0 b) Trade, hotels, transport, communication and 8.4 9.0 10.5 7.8 18.5 19.0 19.2 services related to broadcasting c) Financial, real estate & professional services 9.7 11.1 10.8 5.7 21.4 21.9 21.7 d) Public Administration, defence and other services 7.6 8.1 6.9 11.3 12.4 12.2 12.8 4. GVA at basic prices 7.0 7.2 7.9 6.6 100.0 100.0 100.0 Source: Central Statistics Office (CSO). 217APPENDIX TABLES APPENDIX TABLE 3: GROSS SAVINGS (Per cent of GNDI) Item 2012-13 2013-14 2014-15 2015-16 1 2 3 4 5 I. Gross Savings 33.1 31.4 32.3 31.6 1.1 Non-financial corporations 9.7 10.5 11.1 11.8 1.1.1 Public non-financial corporations 1.2 1.1 1.0 1.0 1.1.2 Private non-financial corporations 8.5 9.4 10.1 10.8 1.2 Financial corporations 3.0 2.5 2.7 2.1 1.2.1 Public financial corporations 1.7 1.4 1.3 1.3 1.2.2 Private financial corporations 1.2 1.1 1.3 0.8 1.3 General Government -1.6 -1.5 -1.5 -1.0 1.4 Household sector 21.9 19.8 20.0 18.7 1.4.1 Net financial saving 7.2 7.2 7.2 7.8 Memo: Gross financial saving 10.5 10.4 10.1 10.9 1.4.2 Saving in physical assets 14.4 12.3 12.4 10.7 1.4.3 Saving in the form of valuables 0.4 0.3 0.4 0.3 Note: Net financial saving of the household sector is obtained as the difference between gross financial savings and financial liabilities during the year. Source: CSO. 218APPENDIX TABLES APPENDIX TABLE 4: INFLATION, MONEY AND CREDIT (Per cent) Inflation Consumer Price Index (All India)# Rural Urban Combined 2014-15 2015-16 2016-17 2014-15 2015-16 2016-17 2014-15 2015-16 2016-17 1 2 3 4 5 6 7 8 9 10 General Index (All Groups) 6.2 5.6 5.0 5.5 4.1 4.0 5.8 4.9 4.5 Food and beverages 6.6 5.4 4.7 6.4 4.6 3.9 6.5 5.1 4.4 Housing … … … 5.9 4.9 5.2 5.9 4.9 5.2 Fuel and light 5.1 6.8 4.6 2.7 2.7 1.0 4.2 5.3 3.3 Miscellaneous 4.9 4.7 5.1 4.2 2.8 3.7 4.6 3.7 4.5 Excluding Food and Fuel 5.8 5.5 5.5 5.1 3.9 4.3 5.4 4.6 4.8 Other Price Indices 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 1. Wholesale Price Index (2011-12=100)* All Commodities 8.1 3.8 9.6 8.9 7.4 5.2 1.3 -3.7 1.7 Primary Articles 11.0 12.7 17.7 9.8 9.8 9.8 2.2 -0.4 3.4 of which : Food Articles 9.1 15.3 15.6 7.3 9.9 12.3 5.6 2.6 4.0 Fuel and Power 11.6 -2.1 12.3 14.0 10.3 7.1 -6.1 -19.7 -0.3 Manufactured Products 6.2 2.2 5.7 7.3 5.4 3.0 2.6 -1.8 1.3 Non-Food Manufactured Products 5.7 0.2 6.1 7.3 4.9 2.7 2.7 -1.8 -0.1 2. CPI- Industrial Workers (IW) (2001=100) 9.1 12.4 10.4 8.4 10.4 9.7 6.3 5.6 4.1 of which : CPI- IW Food 12.3 15.2 9.9 6.3 11.9 12.3 6.5 6.1 4.4 3. CPI- Agricultural Labourers (1986-87=100) 10.2 13.9 10.0 8.2 10.0 11.6 6.6 4.4 4.2 4. CPI- Rural Labourers (1986-87=100) 10.2 13.8 10.0 8.3 10.2 11.5 6.9 4.6 4.2 Money and Credit 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17^ Reserve Money (RM) 6.4 17.0 19.1 3.6 6.2 14.4 11.3 13.1 -12.9 Currency in Circulation 17.0 15.7 18.8 12.4 11.6 9.2 11.3 14.9 -19.7 Bankers’ Deposits with RBI -11.3 21.0 20.2 -15.9 -10.0 34.0 8.3 7.8 8.4 Currency-GDP Ratio$ 12.3 12.3 12.2 12.2 12.0 11.6 11.6 12.2 8.8 Narrow Money (M1) 9.0 18.2 10.0 6.0 9.2 8.5 11.3 13.5 -3.4 Broad Money (M3) 19.3 16.9 16.1 13.5 13.6 13.4 10.9 10.1 7.3 Currency-Deposit Ratio 16.1 15.9 16.3 16.1 15.7 15.1 15.2 16.0 10.9 Money Multiplier 4.9 4.8 4.7 5.2 5.5 5.5 5.5 5.3 6.8 GDP/M**$ 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 3 Scheduled Commercial Banks Aggregate Deposits 19.9 17.2 15.9 13.5 14.2 14.1 10.7 9.3 11.8 Bank Credit 17.5 16.9 21.5 17.0 14.1 13.9 9.0 10.9 5.1 Non-food Credit 17.8 17.1 21.3 16.8 14.0 14.2 9.3 10.9 5.8 Credit-Deposit Ratio 72.4 72.2 75.7 78.0 77.9 77.8 76.6 77.7 72.9 Credit-GDP Ratio$ 49.3 50.1 50.6 52.8 52.9 53.4 52.5 53.0 51.9 # : Base for Consumer Price Index (All India) is 2012=100; ^ : March 31, 2017 over April 1, 2016 barring RM and its components. … : CPI Rural for Housing is not compiled. * : Base for WPI is 2004-05=100 for the period 2008-09 to 2012-13 and 2011-12=100 for the period 2013-14 to 2016-17. **: Ratio. $ : GDP data from 2011-12 onwards are based on new series i.e., base: 2011-12. Note: Data refer to y-o-y change in per cent unless specified otherwise. 219APPENDIX TABLES APPENDIX TABLE 5: CAPITAL MARKET - PRIMARY AND SECONDARY (Amount in ` billion) Item 2015-16 2016-17 Number Amount Number Amount 1 2 3 4 5 I. PRIMARY MARKET A. Prospectus and Rights Issues 1. Private Sector (a+b) 96 267.2 132 599.0 a) Financial 12 29.4 26 454.4 b) Non-Financial 84 237.8 106 144.6 2. Public Sector (a+b+c) 11 311.0 2 21.6 a) Public Sector Undertakings 1 7.0 1 10.4 b) Government Companies 2 133.0 … … c) Banks/Financial Institutions 8 171.0 1 11.2 3. Total (1+2, i+ii, a+b) 107 578.2 134 620.7 Instrument Type (i) Equity 87 240.0 118 325.2 (ii) Debt 20 338.2 16 295.5 Issuer Type (a) IPOs 73 142.6 105 291.0 (b) Listed 34 435.7 29 329.7 B. Euro Issues (ADRs and GDRs) … … … … C. Private Placement& 1. Private Sector (a+b) 2,493 2,620.1 3,189 4,201.7 a) Financial 1,993 1,844.2 2,588 3,083.4 b) Non-Financial 500 775.9 601 1,118.3 2. Public Sector (a+b) 185 1,505.9 247 2,471.3 a) Financial 111 1,146.7 155 1,586.2 b) Non-Financial 74 359.2 92 885.0 3. Total (1+2, i+ii) 2,678 4,126.0 3,436 6,672.9 (i) Equity 21 194.2 24 137.4 (ii) Debt 2,657 3,931.8 3,412 6,535.5 D. Qualified Institutional Placement 24 145.9 20 84.6 E. Mutual Funds Mobilisation (Net)# 1,341.8 3,430.5 1. Private Sector 913.9 2,793.9 2. Public Sector 427.9 636.6 II. SECONDARY MARKET BSE BSE Sensex: End-Period 25,341.9 29,620.5 Period Average 26,322.1 27,338.2 Price Earning Ratio 19.3 22.6 Market Capitalisation to GDP ratio (%) 69.3 80.0 Turnover Cash Segment 7,400.9 9,982.6 Turnover Derivatives Segment 44,750.1 69.4 NSE S&P CNX Nifty: End-Period 7,738.4 9,173.8 Period Average 7,983.8 8,421.2 Price Earning Ratio 20.9 23.3 Market Capitalisation to GDP ratio (%) 68.0 78.9 Turnover Cash Segment 42,369.8 50,559.1 Turnover Derivatives Segment 648,258 943,703 …: Nil &: Provisional (for 2016-17). #: Net of redemptions. Source: SEBI, NSE, BSE, CSO and various merchant bankers. 220APPENDIX TABLES APPENDIX TABLE 6: KEY FISCAL INDICATORS (As per cent to GDP) Year Primary Deficit Revenue Deficit Primary Revenue Gross Fiscal Outstanding Outstanding Deficit Deficit Liabilities@ Liabilities$ 1 2 3 4 5 6 7 Centre 1990-91 3.9 3.2 -0.5 7.6 53.7 59.6 1995-96 0.8 2.4 -1.7 4.9 49.4 57.3 2000-01 0.9 3.9 -0.6 5.5 53.9 59.6 2008-09 2.6 4.5 1.1 6.0 56.1 58.6 2009-10 3.2 5.2 1.9 6.5 54.5 56.3 2010-11 1.8 3.2 0.2 4.8 50.6 52.2 2011-12 2.8 4.5 1.4 5.9 51.7 53.5 2012-13 1.8 3.7 0.5 4.9 51.0 52.5 2013-14 1.1 3.2 -0.2 4.5 50.5 52.2 2014-15 0.9 2.9 -0.3 4.1 50.2 51.5 2015-16 0.7 2.5 -0.7 3.9 50.5 51.9 2016-17 (RE) 0.3 2.0 -1.1 3.5 49.0 50.3 2016-17 (PA) 0.4 2.0 -1.1 3.5 … … 2017-18 (BE) 0.1 1.9 -1.2 3.2 47.3 48.4 States* 1990-91 1.7 0.9 -0.6 3.2 21.9 21.9 1995-96 0.7 0.7 -1.1 2.5 20.3 20.3 2000-01 1.7 2.5 0.2 4.0 27.4 27.4 2008-09 0.6 -0.2 -2.1 2.4 26.1 26.1 2009-10 1.2 0.5 -1.3 2.9 25.5 25.5 2010-11 0.5 0.0 -1.6 2.1 23.5 23.5 2011-12 0.4 -0.3 -1.8 1.9 22.8 22.8 2012-13 0.5 -0.2 -1.7 2.0 22.2 22.2 2013-14 0.7 0.1 -1.4 2.2 22.0 22.0 2014-15 1.1 0.4 -1.2 2.6 21.7 21.7 2015-16 1.2 0.1 -1.2 2.5 19.0 19.0 2016-17 (RE) 1.5 0.3 -1.1 2.9 19.8 19.8 2017-18 (BE) 0.9 -0.1 -1.5 2.3 20.1 20.1 Combined 1990-91 4.9 4.1 -0.2 9.1 62.9 68.9 1995-96 1.5 3.1 -1.7 6.3 59.4 67.3 2000-01 3.5 6.4 0.6 9.2 68.3 74.0 2008-09 3.3 4.3 -0.8 8.3 69.7 72.2 2009-10 4.5 5.7 0.9 9.3 68.8 70.6 2010-11 2.4 3.2 -1.3 6.9 64.0 65.6 2011-12 3.3 4.2 -0.3 7.8 65.6 67.4 2012-13 2.3 3.5 -1.1 6.9 65.1 66.7 2013-14 1.9 3.3 -1.5 6.7 65.4 67.1 2014-15 2.0 3.3 -1.4 6.7 65.3 66.7 2015-16 1.9 2.6 -1.9 6.4 63.0 64.5 2016-17 (RE) 1.8 2.4 -2.2 6.4 62.6 63.9 2017-18 (BE) 1.0 1.9 -2.6 5.5 61.6 62.7 … : Not Available RE: Revised Estimates PA: Provisional Accounts BE: Budget Estimates @ : Includes external liabilities of the centre calculated at historical exchange rates. $ : Includes external liabilities of the centre calculated at current exchange rates. Columns 6 and 7 are outstanding figures as at end-March of respective years. * : Data from 2015-16 onwards are provisional and pertain to budgets of 26 states. Note: 1. Data on combined deficit/liabilities indicators are net of inter-governmental transactions between the Centre and the State governments viz., (a) NSSF investment in State governments special securities (b) Loans and advance by the Centre to States and (c) State governments’ investment in Centre’s treasury bills. 2. Negative sign (-) indicates surplus in deficit indicators. 3. GDP data from 2011-12 onwards are based on new base 2011-12. Source: Budget documents of the central and state governments. 221APPENDIX TABLES APPENDIX TABLE 7: COMBINED RECEIPTS AND DISBURSEMENTS OF THE CENTRAL AND STATE GOVERNMENTS (Amount in ` billion) Item 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 (RE) (BE) 1 2 3 4 5 6 7 1 Total Disbursements 26,949.3 30,003.0 32,852.1 33,782.6 40,599.7 43,958.0 1.1 Developmental 15,741.6 17,142.2 18,720.6 19,429.4 24,271.1 26,194.5 1.1.1 Revenue 12,807.1 13,944.3 14,830.2 14,971.4 18,457.9 19,701.6 1.1.2 Capital 2,446.1 2,785.1 3,322.6 3,400.5 4,471.0 5,515.0 1.1.3 Loans 488.4 412.9 567.8 1,057.5 1,342.2 977.9 1.2 Non-Developmental 10,850.5 12,427.8 13,667.7 13,984.1 15,870.2 17,261.8 1.2.1 Revenue 9,991.4 11,413.7 12,695.2 12,739.1 15,031.9 16,430.7 1.2.1.1 Interest Payments 4,543.1 5,342.3 5,845.4 6,134.7 6,881.7 7,536.9 1.2.2 Capital 837.1 990.4 946.9 1,207.7 816.4 807.2 1.2.3 Loans 21.9 23.8 25.6 37.3 21.9 23.9 1.3 Others 357.2 432.9 463.8 369.0 458.3 501.6 2 Total Receipts 27,690.3 30,013.7 31,897.4 34,487.6 39,810.1 42,551.1 2.1 Revenue Receipts 19,716.2 22,114.8 23,876.9 24,504.6 30,356.6 33,511.4 2.1.1 Tax Receipts 16,879.6 18,465.5 20,207.3 20,754.4 23,917.5 27,066.7 2.1.1.1 Taxes on commodities and services 10,385.9 11,257.8 12,123.5 12,912.5 15,168.5 16,914.5 2.1.1.2 Taxes on Income and Property 6,462.7 7,176.3 8,051.8 7,803.2 8,706.2 10,105.3 2.1.1.3 Taxes of Union Territories 30.9 31.3 32.0 38.8 42.8 46.8 (Without Legislature) 2.1.2 Non-Tax Receipts 2,836.6 3,649.3 3,669.7 3,750.2 6,439.1 6,444.7 2.1.2.1 Interest Receipts 355.4 401.6 396.2 347.4 322.1 275.3 2.2 Non-debt Capital Receipts 389.2 391.1 609.5 588.5 595.3 1,246.0 2.2.1 Recovery of Loans & Advances 129.3 93.8 220.7 155.9 136.0 519.1 2.2.2 Disinvestment proceeds 259.9 297.3 388.8 432.7 459.3 726.8 3 Gross Fiscal Deficit [ 1 - ( 2.1 + 2.2 ) ] 6,844.0 7,497.1 8,365.6 8,689.5 9,647.8 9,200.6 3A Sources of Financing: Institution-wise 3A.1 Domestic Financing 6,771.9 7,424.2 8,236.3 8,562.0 9,499.0 9,042.7 3A.1.1 Net Bank Credit to Government 3,352.8 3,358.6 -374.8 2,310.9 6,306.1 ... 3A.1.1.1 Net RBI Credit to Government 548.4 1,081.3 -3,341.9 604.7 1,958.2 ... 3A.1.2 Non-Bank Credit to Government 3,419.1 4,065.6 8,611.1 6,251.1 3,193.0 ... 3A.2 External Financing 72.0 72.9 129.3 127.5 148.7 157.9 3B Sources of Financing: Instrument-wise 3B.1 Domestic Financing 6,771.9 7,424.2 8,236.3 8,562.0 9,499.0 9,042.7 3B.1.1 Market Borrowings (net) 6,536.9 6,392.0 6,640.6 6,354.2 6,472.7 6,970.1 3B.1.2 Small Savings (net) -85.7 -142.8 -565.8 -785.1 -1,091.8 -941.2 3B.1.3 State Provident Funds (net) 329.9 312.9 343.4 298.8 326.2 332.0 3B.1.4 Reserve Funds -4.1 34.6 51.1 -33.2 -82.4 -10.4 3B.1.5 Deposits and Advances 27.2 255.4 275.5 134.7 387.0 502.1 3B.1.6 Cash Balances -741.0 -10.7 954.7 -705.0 789.6 1,406.9 3B.1.7 Others 708.6 582.8 536.8 3,297.7 2,697.7 783.1 3B.2 External Financing 72.0 72.9 129.3 127.5 148.7 157.9 4 Total Disbursements as per cent of GDP 27.1 26.7 26.4 24.7 26.7 26.1 5 Total Receipts as per cent of GDP 27.8 26.7 25.6 25.2 26.2 25.3 6 Revenue Receipts as per cent of GDP 19.8 19.7 19.2 17.9 20.0 19.9 7 Tax Receipts as per cent of GDP 17.0 16.4 16.2 15.2 15.8 16.1 8 Gross Fiscal Deficit as per cent of GDP 6.9 6.7 6.7 6.4 6.4 5.5 …: Not available. RE: Revised Estimates. BE: Budget Estimates. Note: GDP data from 2011-12 onwards including 2014-15 are based on new base 2011-12. Data from year 2015-16 pertains to 26 states. Source: Budget documents of the central and state governments. 222APPENDIX TABLES APPENDIX TABLE 8: INDIA’S OVERALL BALANCE OF PAYMENTS (US $ million) 2012-13 2013-14 2014-15 2015-16 2016-17 P 1 2 3 4 5 6 A. CURRENT ACCOUNT 1 Exports, f.o.b. 3,06,581 3,18,607 3,16,545 2,66,365 2,80,138 2 Imports, c.i.f. 5,02,237 4,66,216 4,61,484 3,96,444 3,92,580 3 Trade Balance -195,656 -147,609 -144,940 -130,079 -112,442 4 Invisibles, Net 107,493 115,313 118,081 107,928 97,147 a) ‘Non-Factor’ Services of which : 64,915 73,066 76,529 69,676 67,455 Software Services 63,504 67,002 70,400 71,454 70,064 b) Income -21,455 -23,028 -24,140 -24,375 -26,291 c) Private Transfers 64,342 65,481 66,264 63,139 56,573 5 Current Account Balance -88,163 -32,296 -26,859 -22,151 -15,296 B. CAPITAL ACCOUNT 1 Foreign Investment, Net (a+b) 46,711 26,386 73,456 31,891 43,224 a) Direct Investment 19,819 21,564 31,251 36,021 35,612 b) Portfolio Investment 26,891 4,822 42,205 -4,130 7,612 2 External Assistance, Net 982 1,032 1,725 1,505 2,013 3 Commercial Borrowings, Net 8,485 11,777 1,570 -4,529 -6,102 4 Short Term Credit, Net 21,657 -5,044 -111 -1,610 6,467 5 Banking Capital of which : 16,570 25,449 11,618 10,630 -16,616 NRI Deposits, Net 14,842 38,892 14,057 16,052 -12,367 6 Rupee Debt Service -58 -52 -81 -73 -99 7 Other Capital, Net$ -5,047 -10,761 1,109 3,315 7,594 8 Total Capital Account 89,300 48,787 89,286 41,128 36,482 C. Errors & Omissions 2,689 -983 -1,021 -1,073 364 D. Overall Balance [A(5)+B(8)+C] 3,826 15,508 61,406 17,905 21,550 E. Monetary Movements (F+G) -3,826 -15,508 -61,406 -17,905 -21,550 F. IMF, Net G. Reserves and Monetary Gold (Increase -, Decrease +) -3,826 -15,508 -61,406 -17,905 -21,550 of which : SDR allocation Memo: As a ratio to GDP 1 Trade Balance -10.7 -7.9 -7.1 -6.2 -5.0 2 Net Services 3.6 3.9 3.8 3.3 3.0 3 Net Income -1.2 -1.2 -1.2 -1.2 -1.2 4 Current Account Balance -4.8 -1.7 -1.3 -1.1 -0.7 5 Capital Net (Excld. changes in reserves) 4.9 2.6 4.4 2.0 1.6 6 Foreign Investment, Net 2.6 1.4 3.6 1.5 1.9 P : Provisional. $ : Includes delayed export receipts, advance payments against imports, net funds held abroad and advances received pending issue of shares under FDI. Note: 1. Gold and silver brought by returning Indians have been included under imports, with a contra entry in private transfer receipts. 2. Data on exports and imports differ from those given by DGCI&S on account of differences in coverage, valuation and timing. 223APPENDIX TABLES APPENDIX TABLE 9: FOREIGN DIRECT INVESTMENT FLOWS TO INDIA: COUNTRY-WISE AND INDUSTRY-WISE (US $ million) Source/Industry 2012-13 2013-14 2014-15 2015-16 2016-17 P 1 2 3 4 5 6 Total FDI 18,286 16,054 24,748 36,068 36,317 Country-wise Inflows Mauritius 8,059 3,695 5,878 7,452 13,383 Singapore 1,605 4,415 5,137 12,479 6,529 Japan 1,340 1,795 2,019 1,818 4,237 Netherlands 1,700 1,157 2,154 2,330 3,234 U.S.A. 478 617 1,981 4,124 2,138 United Kingdom 1,022 111 1,891 842 1,301 Germany 467 650 942 927 845 U.A.E. 173 239 327 961 645 Switzerland 268 356 292 195 502 France 547 229 347 392 487 South Korea 224 189 138 241 466 Italy 63 185 167 279 364 Cyprus 415 546 737 488 282 Spain 348 181 401 141 213 British Virgin Islands 3 0 30 203 212 China 148 121 505 461 198 Belgium 33 66 47 57 172 Others 1,394 1,501 1,754 2,677 1,109 Sector-wise Inflows Manufacturing 6,528 6,381 9,613 8,439 11,972 Communication Services 92 1,256 1,075 2,638 5,876 Financial Services 2,760 1,026 3,075 3,547 3,732 Retail & Wholesale Trade 551 1,139 2,551 3,998 2,771 Business Services 643 521 680 3,031 2,684 Computer Services 247 934 2,154 4,319 1,937 Miscellaneous Services 552 941 586 1,022 1,816 Electricity and other Energy Generation, Distribution & Transmission 1,653 1,284 1,284 1,364 1,722 Construction 1,319 1,276 1,640 4,141 1,564 Transport 213 311 482 1,363 891 Restaurants and Hotels 3,129 361 686 889 430 Education, Research & Development 150 107 131 394 205 Mining 69 24 129 596 141 Real Estate Activities 197 201 202 112 105 Trading 140 0 228 0 0 Others 43 292 232 215 470 P: Provisional. Note: Includes FDI through SIA/FIPB and RBI routes only. 224