Annual Report of the RBI for the Year 2019-20

Report of the Central Board of Directors on the working of the Reserve Bank of India for the year ended June 30, 2020 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 2019-20CENTRAL BOARD / LOCAL BOARDS GOVERNOR Shaktikanta Das DEPUTY GOVERNORS MEMBERS OF LOCAL BOARDS B. P. Kanungo Mahesh Kumar Jain WESTERN AREA Michael Debabrata Patra Dilip S. Shanghvi DIRECTORS NOMINATED UNDER Vallabh Roopchand Bhanshali SECTION 8 (1) (b) OF THE RBI ACT, 1934 Prasanna Kumar Mohanty Dilip S. Shanghvi Revathy Iyer EASTERN AREA Sachin Chaturvedi Sachin Chaturvedi Sunil Mitra DIRECTORS NOMINATED UNDER SECTION 8 (1) (c) OF THE RBI ACT, 1934 Natarajan Chandrasekaran NORTHERN AREA Ashok Gulati Manish Sabharwal Revathy Iyer Satish Kashinath Marathe Raghvendra Narayan Dubey Swaminathan Gurumurthy DIRECTORS NOMINATED UNDER SOUTHERN AREA SECTION 8 (1) (d) OF THE RBI ACT, 1934 Prasanna Kumar Mohanty Debasish Panda Tarun Bajaj (Position as on August 17, 2020)PRINCIPAL OFFICERS (As on August 17, 2020) EXECUTIVE DIRECTORS ....................................................................... M. Rajeshwar Rao ....................................................................... Lily Vadera ....................................................................... Rabi N. Mishra ....................................................................... Nanda S. Dave ....................................................................... Anil K. Sharma ....................................................................... S. C. Murmu ....................................................................... T. Rabi Sankar ....................................................................... P. Vijaya Kumar ....................................................................... Indrani Banerjee ....................................................................... O. P. Mall ....................................................................... Mridul K. Saggar ....................................................................... Sudha Balakrishnan (Chief Financial Officer) CENTRAL OFFICE Central Vigilance Cell ............................................................................... Sadhana Varma, Chief General Manager & CVO Consumer Education and Protection Department .................................... Ranjana Sahajwala, Chief General Manager Corporate Strategy and Budget Department ............................................ H. N. Panda, Chief General Manager Department of Communication ................................................................. Yogesh K. Dayal, Chief General Manager Department of Currency Management ..................................................... Ishan Shukla, Chief General Manager Department of Economic and Policy Research ........................................ Deba Prasad Rath, Officer-in-Charge Department of External Investments and Operations ............................... Usha Janakiraman, Chief General Manager-in-Charge Department of Government and Bank Accounts ...................................... Nirmal Chand, Chief General Manager-in-Charge Department of Information Technology ..................................................... Deepak Kumar, Chief General Manager-in-Charge Department of Payment and Settlement Systems .................................... P. Vasudevan, Chief General Manager Department of Regulation ........................................................................ Saurav Sinha, Chief General Manager-in-Charge Department of Statistics and Information Management ........................... A. R. Joshi, Officer-in-Charge Department of Supervision ....................................................................... J. K. Dash, Chief General Manager-in-Charge Enforcement Department ......................................................................... R. Subramanian, Chief General Manager-in-Charge Financial Inclusion and Development Department ................................... G. P. Borah, Chief General Manager-in-Charge Financial Markets Operations Department ............................................... R. S. Ratho, Chief General Manager Financial Markets Regulation Department ............................................... Dimple Bhandia, General Manager-in-Charge Financial Stability Unit .............................................................................. R. Gurumurthy, Chief General Manager Foreign Exchange Department ................................................................. Ajay Kumar Misra, Chief General Manager-in-Charge Human Resource Management Department ............................................ Vivek Deep, Chief General Manager-in-Charge Inspection Department ............................................................................. R. L. Sharma, Chief General Manager Internal Debt Management Department ................................................... T. K. Rajan, Chief General Manager International Department .......................................................................... Mohua Roy, Adviser Legal Department ..................................................................................... A. Unnikrishnan, Legal Adviser & Officer-in-Charge Monetary Policy Department .................................................................... Rajiv Ranjan, Adviser-in-Charge Premises Department ............................................................................... Ashok Kumar, Chief General Manager Rajbhasha Department ............................................................................ Sadhana Varma, Chief General Manager Risk Monitoring Department ..................................................................... Gunveer Singh, Chief General Manager Secretary’s Department ............................................................................ Aviral Jain, Chief General Manager & Secretary COLLEGES PRINCIPALS College of Agricultural Banking, Pune ...................................................... M. Sarkar Deb Reserve Bank Staff College, Chennai ...................................................... R. Kesavan OFFICES REGIONAL DIRECTORS Chennai .................................................................................................... S. M. Narasimha Swamy Kolkata ...................................................................................................... Susobhan Sinha Mumbai ..................................................................................................... Ajay Michyari New Delhi ................................................................................................. Ajay Kumar BRANCHES Ahmedabad .............................................................................................. S. K. Panigrahy Bengaluru ................................................................................................. Jose J. Kattoor Bhopal ...................................................................................................... Vivek Aggarwal Bhubaneswar ............................................................................................ M. K. Mall Chandigarh ............................................................................................... J. K. Pandey Dehradun .................................................................................................. Rajesh Kumar Guwahati .................................................................................................. Manoranjan Dash Hyderabad ................................................................................................ Subrata Das Jaipur ........................................................................................................ Arun Kumar Singh Jammu ...................................................................................................... Thomas Mathew Kanpur ...................................................................................................... Tuli Roy Lucknow ................................................................................................... R. L. K. Rao Patna ........................................................................................................ Devesh Lal Raipur ....................................................................................................... A. Sivagami Thiruvananthapuram ................................................................................ Reeny Ajith OFFICERS-IN-CHARGE Agartala .................................................................................................... Tamal Biswas, General Manager (O-i-C) Aizawl ....................................................................................................... Mary Lianlunkim Deng, General Manager (O-i-C) Belapur ..................................................................................................... K. Nikhila, Chief General Manager Gangtok .................................................................................................... R. V. Sangvai, General Manager (O-i-C) Imphal ....................................................................................................... Mary Lawm Ngaih Ching Gwite, General Manager (O-i-C) Kochi ......................................................................................................... K. P. Patnaik, Chief General Manager Nagpur ...................................................................................................... P. S. Venkateswaran, General Manager-in-Charge Panaji ........................................................................................................ N. J. Nampoothiri, General Manager (O-i-C) Ranchi ...................................................................................................... Sanjiv Dayal, General Manager (O-i-C) Shillong ..................................................................................................... Anurag Asthana, General Manager (O-i-C) Shimla ....................................................................................................... K. C. Anand, General Manager (O-i-C) Srinagar .................................................................................................... Ashok Kumar, ManagerCONTENTS Page No. PART ONE: THE ECONOMY- REVIEW AND PROSPECTS ................................................ 1 I. ASSESSMENT AND PROSPECTS .......................................................................... 1 Assessment of the 2019-20 Experience ..................................................................... 2 Prospects for 2020-21 ................................................................................................ 7 II. ECONOMIC REVIEW ................................................................................................ 20 The Real Economy ..................................................................................................... 20 Price Situation ............................................................................................................ 39 Money and Credit ....................................................................................................... 49 Financial Markets ....................................................................................................... 61 Government Finances ................................................................................................ 73 External Sector ........................................................................................................... 76 PART TWO: THE WORKING AND OPERATIONS OF THE RESERVE BANK OF INDIA .. 93 III. MONETARY POLICY OPERATIONS ....................................................................... 93 Monetary Policy .......................................................................................................... 94 The Operating Framework: Liquidity Management ..................................................... 98 Monetary Policy Transmission ................................................................................... 103 Sectoral Lending Rates .............................................................................................. 105 IV. CREDIT DELIVERY AND FINANCIAL INCLUSION ................................................. 108 Credit Delivery ............................................................................................................ 109 Financial Inclusion ...................................................................................................... 113 Financial Literacy ....................................................................................................... 115 V. FINANCIAL MARKETS AND FOREIGN EXCHANGE MANAGEMENT .................. 118 Financial Markets Regulation Department ................................................................. 118 Financial Markets Operations Department ................................................................. 122 Foreign Exchange Department .................................................................................. 125 VI. REGULATION, SUPERVISION AND FINANCIAL STABILITY ................................ 130 Financial Stability Unit ................................................................................................ 131 iCONTENTS Page No. Department of Regulation Commercial Banks ............................................................................................. 132 Cooperative Banks ............................................................................................. 141 Non-Banking Financial Companies .................................................................... 144 Department of Supervision Commercial Banks .............................................................................................. 148 Urban Cooperative Banks ................................................................................... 152 Non-Banking Financial Companies .................................................................... 153 All Supervised Entities ....................................................................................... 155 Enforcement Department ........................................................................................... 159 Consumer Education and Protection Department ...................................................... 160 Deposit Insurance and Credit Guarantee Corporation ............................................... 165 VII. PUBLIC DEBT MANAGEMENT ................................................................................ 168 Debt Management of the Central Government .......................................................... 170 Debt Management of State Governments .................................................................. 173 VIII. CURRENCY MANAGEMENT .................................................................................... 179 Developments in Currency in Circulation ................................................................... 179 Currency Management Infrastructure ........................................................................ 181 Expenditure on Security Printing ................................................................................ 182 Bharatiya Reserve Bank Note Mudran Private Limited .............................................. 185 IX. PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY 187 Department of Payment and Settlement Systems ..................................................... 187 Department of Information Technology ...................................................................... 198 X. COMMUNICATION, INTERNATIONAL RELATIONS, RESEARCH ......................... AND STATISTICS ..................................................................................................... 201 Communication Processes ........................................................................................ 201 International Relations ............................................................................................... 202 Government and Bank Accounts ............................................................................... 208 Managing Foreign Exchange Reserves ..................................................................... 210 iiCONTENTS Page No. Economic and Policy Research ................................................................................. 212 Statistics and Information Management ..................................................................... 214 Strategic Research Unit ............................................................................................. 216 Legal Issues ............................................................................................................... 217 XI. GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT ......................................................................................................... 220 Governance Structure ................................................................................................ 221 Human Resource Development Initiatives ................................................................. 223 Enterprise-Wide Risk Management ........................................................................... 228 Internal Audit/Inspection ............................................................................................. 229 Corporate Strategy and Budget Management ........................................................... 231 Rajbhasha .................................................................................................................. 234 Premises Department ................................................................................................ 236 Annex ......................................................................................................................... 239 XII. THE RESERVE BANK’S ACCOUNTS FOR 2019-20 ............................................... 244 Balance Sheet ............................................................................................................ 248 Statement of Significant Accounting Policies for the year ended June 30, 2020 ....... 253 Income ....................................................................................................................... 266 Expenditure ................................................................................................................ 269 Annex I: Chronology of Major Policy Announcements: July 2019 to June 2020 ........... 272 Annex II: Chronology of Major Policy Announcements to Mitigate the Impact of COVID-19 ................................................................................................................... 287 Appendix Tables ................................................................................................................... 299 iiiCONTENTS Page No. BOXES II.1.1 : Macroeconomic Impact of COVID-19 ..................................................................... 23 II.1.2 : Climate Change - The Challenges for Indian Agriculture ........................................ 29 II.3.1 : Impact of COVID-19 on Monetary and Credit Aggregates ...................................... 58 II.4.1 : Impact of Special Operations by the Reserve Bank on Financial Markets ............. 64 II.4.2 : India’s Financial Markets: Impact of COVID-19 ...................................................... 69 II.6.1 : Global Value Chains in Pandemic Times ................................................................ 81 II.6.2 : Capital Flows and Foreign Exchange Reserves: An Analytical Perspective on ....... Absorptive Capacity of the Domestic Economy ...................................................... 86 III.1 : Voting Diary of the Monetary Policy Committee, 2016-20 ...................................... 97 IV.1 : Report of the Internal Working Group to Review Agricultural Credit and Implications for Agriculture Sector .......................................................................... 111 V.1 : Foreign Exchange Market: Improving Access, Transparency and Pricing .............. 119 V.2 : Unconventional Tools of Liquidity Management: The Recent RBI Experience ....... 123 VI.1 : Secondary Market for Corporate Loans .................................................................. 134 VI.2 : Governance in Primary (Urban) Cooperative Banks (UCBs) .................................. 142 VI.3 : Core Investment Companies (CICs) ....................................................................... 147 VI.4 : Environment, Social and Governance (ESG) Policy ............................................... 151 VI.5 : Benchmarking to G20 High Level Principles on Financial Consumer Protection .... 161 VI.6 : Survey of Customer Satisfaction from the Offices of Banking Ombudsmen (OBOs) 164 VI.7 : The Significance of Reserve Ratio in Deposit Insurance (DI): A Cross-Country Perspective ............................................................................................................. 166 VII.1 : Consolidated Sinking Fund (CSF) and Guarantee Redemption Fund (GRF) Schemes of States: Relevance in Current Scenario ............................................... 175 VIII.1 : Mobile Aided Note Identifier (MANI) for the Visually Impaired ................................ 185 IX.1 : COVID-19 Crisis: Implications for Payment Systems ............................................. 189 IX.2 : NEFT 24X7 ............................................................................................................. 200 X.1 : Public Awareness Campaign through SMS ............................................................ 203 X.2 : Framework on Currency Swap Arrangement for SAARC Countries, 2019-22 ........ 207 X.3 : e-Kuber and Tax Information System (TIN) 2.0: Integration for Direct Taxes ......... 211 ivCONTENTS Page No. XI.1 : Progress on Implementation of Strategy Framework – Utkarsh 2022 .................... 232 XI.2 : Reserve Bank’s Business Continuity Plan (BCP) for COVID-19 Pandemic ............ 233 APPENDIX TABLES 1. Macroeconomic and Financial Indicators ................................................................ 299 2. Growth Rates and Composition of Real Gross Domestic Product (At 2011-12 Prices) ................................................................................................. 301 3. Gross Savings ......................................................................................................... 302 4. Inflation, Money and Credit ..................................................................................... 303 5. Capital Market - Primary and Secondary ................................................................ 304 6. Key Fiscal Indicators ............................................................................................... 305 7. Combined Receipts and Disbursements of the Central and State Governments ... 306 8. India’s Overall Balance of Payments ...................................................................... 307 9. Foreign Direct Investment Flows to India: Country-wise and Industry-wise ............. 308 vSELECT ABBREVIATIONS ADEPT - Automated Data Extraction Project CCIL - Clearing Corporation of India Limited AePS - Aadhar Enabled Payment System CCM - Committee on Currency Movement ALM - Asset-Liability Management CCO - Chief Compliance Officer AMRMS - Audit Management and Risk CDDP - Committee on Deepening of Digital Monitoring System Payments AQI - Asset Quality Index CDS - Credit Default Swaps ARCs - Asset Reconstruction Companies CFL - Centre for Financial Literacy ARMS - Audit and Risk Management Sub- CFR - Central Fraud Registry Committee CGFMU - Credit Guarantee Fund for Micro Units BBPOUs - Bharat Bill Payment Operating Units CGFS - Committee on the Global Financial BBPS - Bharat Bill Payment System System BCBS - Basel Committee on Banking CICs - Core Investment Companies Supervision CIMS - Centralised Information Management BCP - Business Continuity Plan System BCSBI - Banking Codes and Standards Board CMBs - Cash Management Bills of India CoCR - Charter of Customer Rights BFS - Board for Financial Supervision CRAR - Capital to Risk Weighted Assets Ratio BHIM - Bharat Interface for Money CRE - Commercial Real Estate BIS - Bank for International Settlements CRILC - Central Repository of Information on Large Credits BNII - Bank-NBFC Intermediation Index CSAA - Control Self-Assessment Audit BPSS - Board for Regulation and Supervision of Payment and Settlement Systems CSF - Consolidated Sinking Fund BRBNMPL - Bharatiya Reserve Bank Note Mudran CSRC - China Securities Regulatory Private Limited Commission BSBDAs - Basic Savings Bank Deposit Accounts CTS - Cheque Truncation System BSC - Building Sub-Committee CVPS - Currency Verification and Processing System CA - Concurrent Audit CWBN - Cylinder Watermarked Bank Note CAD - Current Account Deficit DFIs - Development Finance Institutions CBDT - Central Board of Direct Taxes DIAs - Deposit Insurance Agencies CBIC - Central Board of Indirect Taxes and Customs DIF - Deposit Insurance Fund CCB - Committee of the Central Board DPI - Digital Payments Index viSELECT ABBREVIATIONS ECCS - Express Cheque Clearing System GEM - Government e-Marketplace EDPMS - Export Data Processing and GFC - Global Financial Crisis Monitoring System GFCE - Government Final Consumption ESG - Environment, Social and Governance Expenditure ESTER - Euro Short-Term Rate GFD - Gross Fiscal Deficit ETCD - Exchange Traded Currency GFXC - Global Foreign Exchange Committee Derivatives GNDI - Gross National Disposable Income EWS - Early Warning Signals GRF - Guarantee Redemption Fund FAR - Fully Accessible Route GRIHA - Green Rating for Integrated Habitat FCI - Financial Conditions Index Assessment FCP - Financial Consumer Protection GRQ - General Review of Quotas FEDAI - Foreign Exchange Dealers’ G-sec - Government Securities Association of India GVCs - Global Value Chains FEMA - Foreign Exchange Management Act HFCs - Housing Finance Companies FFMCs - Full-Fledged Money Changers HLCCSM - High Level Committee on Currency FIAC - Financial Inclusion Advisory Storage and Movement Committee HRM-SC - Human Resource Management Sub- FinTech - Financial Technology Committee FLCs - Financial Literacy Centres IBA - Indian Banks' Association FLW - Financial Literacy Week IBBI - Insolvency and Bankruptcy Board of FMCBG - Finance Ministers and Central Bank India Governors IBC - Insolvency and Bankruptcy Code FPC - Fair Practices Code IBORs - Inter-Bank Offered Rate FPI - Foreign Portfolio Investment ICCOMS - Integrated Computerised Currency FPO - Farmer Producer Organization Operations and Management System FPOs - Follow-on Public Offers ICEGATE - Indian Customs Electronic Gateway FSB - Financial Stability Board ICMTS - Integrated Compliance Management FSDC - Financial Stability and Development and Tracking System Council ICSDs - International Central Securities FSPs - Financial Service Providers Depositories GAHs - Gilt Account Holders ICT - Information and Communication GDAL - Granular Data Access Lab Technology viiSELECT ABBREVIATIONS IDPMS - Import Data Processing and MIS - Management Information System Monitoring System MPC - Monetary Policy Committee IFA - International Financial Architecture MSMEs - Micro, Small and Medium Enterprises IFSC - International Financial Services NACH - National Automated Clearing House Centres NBFC - Non-Banking Financial Company IGBC - Indian Green Building Council NBFI - Non-Bank Financial Intermediation IIFCL - India Infrastructure Finance Company NDDCs - Non-Deliverable Derivative Contracts Limited NEFT - National Electronic Funds Transfer IIP - Index of Industrial Production NETC - National Electronic Toll Collection IMFC - International Monetary and Financial Committee NGFS - Network for Greening the Financial System IMPS - Immediate Payment Service NIIF - National Investment and Infrastructure IMSS - Integrated Market Surveillance Fund System NOC - Network Operation Centre Ind AS - Indian Accounting Standards NPCI - National Payments Corporation of InvITS - Infrastructure Investment Trusts India IOS - Industrial Outlook Survey NSFI - National Strategy for Financial IPPB - India Post Payment Bank Inclusion IRRS - Integrated Rajbhasha Reporting NSFR - Net Stable Funding Ratio System OBO - Office of Banking Ombudsmen IT-SC - Information Technology Sub- OLTAS - Online Tax Accounting System Committee OTC - Over The Counter LAF - Liquidity Adjustment Facility PADO - Public Administration, Defence and LBS - Lead Bank Scheme Other Services LDOs - Lead District Officers PDIs - Perpetual Debt Instruments LEF - Large Exposures Framework PFCE - Private Final Consumption LEI - Legal Entity Identifier Expenditure LIBOR - London Inter-Bank Offered Rate PIDF - Payments Infrastructure Development Fund LTROs - Long Term Repo Operations PoS - Point of Sale MANI - Mobile Aided Note Identifier PPIs - Prepaid Payment Instruments MCLR - Marginal Cost of Funds-based Lending Rate PSLCs - Priority Sector Lending Certificates viiiSELECT ABBREVIATIONS PSOs - Payment System Operators SRB - Self-Regulatory Body QPM - Quarterly Projection Model SRO - Self-Regulatory Organisation RAM-OR - Risk Assessment Methodology for SupTech - Supervisory Technology Operational Risk SWIFT - Society for Worldwide Interbank RBIA - Risk Based Internal Audit Financial Telecommunication RDBs - Rupee Denominated Bonds TAT - Turn Around Time ReBIT - Reserve Bank Information Technology T-Bills - Treasury Bills Private Limited TCFD - Task Force on Climate-related RegTech - Regulatory Technology Financial Disclosures ReITS - Real Estate Investment Trusts TIN - Tax Information System RIDF - Rural Infrastructure Development TLTROs - Targeted Long Term Repo Operations Fund TOLIC - Town Official Language RTGS - Real Time Gross Settlement Implementation Committee SAs - Statutory Auditors TReDS - Trade Receivables Discounting System SDLs - State Development Loans UPI - Unified Payment Interface SDMX - Statistical Data and Metadata eXchange V-CIP - Video-based Customer Identification Process SEs - Supervised Entities VRR - Voluntary Retention Route SFBs - Small Finance Banks WACR - Weighted Average Call Rate SFMS - Structured Financial Messaging System WALR - Weighted Average Lending Rate SGBs - Sovereign Gold Bonds WAM - Weighted Average Maturity SNRR - Special Non-Resident Rupee WAS - Weighted Average Spread SOFR - Secured Overnight Financing Rate WAY - Weighted Average Yield SONIA - Sterling Overnight Index Average WLA - White Label ATM SPDs - Standalone Primary Dealers WMA - Ways and Means Advances SPMCIL - Security Printing and Minting XBRL - eXtensible Business Reporting Corporation of India Limited Language This Report can be accessed on Internet URL : www.rbi.org.in ixTHE ANNUAL REPORT ONAS TSHEESS WMEONRTK AINNDG P ROOFS TPHECET SRESERVE BANK OF INDIA FFoorr tthhee YYeeaarr JJuullyy 11,, 22001196 ttoo JJuunnee 3300,, 22002107** PART ONE: THE ECONOMY - REVIEW AND PROSPECTS I ASSESSMENT AND PROSPECTS I.1 Well into the second quarter of 2020-21 of nation-wide lockdown starting March 25. From (April-March), COVID-19 continues to stalk the the first case reported on January 30 and the first earth, imprisoning close to 210 countries in its death on March 12, the movement was relatively deadly embrace. In its wake, the pandemic leaves moderate to a little less than 1000 confirmed cases a trail of destruction – at the time of release of and 19 deaths three days after the lockdown. By this Report, it had claimed 7.90 lakh lives, 73.59 mid-May, the pandemic had taken hold; confirmed lakh active infections and counting out of 2.25 cases crossed 85,000 surpassing China. At crore confirmed cases worldwide (as on August the end of July when Unlock 3.0 was about to 20, 2020), driven human societies into unfamiliar begin, confirmed cases were nudging 16.50 lakh, isolation, halted economic activity globally and with 35,747 deaths, which have subsequently extinguished jobs and incomes. At the first tentative increased to 28.36 lakh and 53,866 deaths, signs of relief – ‘green shoots’ being the operative respectively (as on August 20, 2020). term – people fatigued by asphyxiating social I.3 India’s experience has also yielded distancing/masks/sanitisers and the ‘lockdown hope and an innate belief in the unconquerable syndrome’ have unlocked in varying degrees, character of humanity and the institutions that desperate to regain control over their lives and serve it. Notwithstanding large gaps in health livelihood. In several countries, a renewed surge infrastructure, the death rate in India is one of the of infections and deaths has triggered re-clamping lowest in the world (1.9 per cent as against the down of containment procedures. It is difficult to world average of 3.5 per cent as on August 20, distinguish whether the first wave of virus has 2020). Testing, clinical management and hospital intensified or if a second wave has hit. support are being ramped up. The recovery rate I.2 COVID-19 has also hit India hard. Until has crossed 70 per cent and is climbing. The recently, six cities – Mumbai; Delhi; Ahmedabad; challenges that face the country are to flatten Chennai; Pune; and Kolkata – accounted for half the curve, restore employment, especially to of all reported cases. Over recent weeks, however, displaced migrants, rebuild supply chains, repair the curve has arched upwards in lower tier cities/ and revive the stricken economy and return life to towns and the virus is penetrating even further normalcy. There is a widespread recognition that into the interior regions. Unlike peers, India had only in close coordination among all stakeholders responded quickly and forcefully, with two months will the people of India be able to determine the * While the Reserve Bank of India’s accounting year is July-June, data on a number of variables are available on a financial year basis, i.e., April-March, and hence, the data are analysed on the basis of the financial year. Where available, the data have been updated beyond March 2020. 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 shape of the recovery. While the path ahead is still out. With the easing of monetary policy continuing shrouded with high uncertainty, sifting through the into the second half of 2019, bolstered by fiscal experience of the year gone by could fortify this stimulus in some countries, expectations that resolve and marshal the grit and resources to deal global activity could recover in early 2020 rose. with the challenges that confront us in 2020-21 In fact, high frequency indicators for the fourth and beyond over the medium-term. quarter (October-December 2019) suggested that momentum was stabilising at a sluggish Assessment of the 2019-20 Experience pace. One-off factors that had impacted global I.4 Looking back, global developments in manufacturing - new emission standards for the 2019 offer several pensive reflections that have auto sector; inventory accumulation - appeared implications for the prospects for India, as for all to fade. Business sentiment and manufacturing other economies. It is now clear that the global purchasing managers’ indices (PMIs) ceased economy recoupled in its downturn in 2019, deteriorating, world trade growth seemed to be dispelling the fissiparous movements that seemed bottoming out, and service sector PMIs remained to suggest differentiation in growth profiles of in expansionary territory. constituents in the year before. Notably, the I.6 The finance channel was also at work slowdown was more pronounced across emerging and, intertwined with the confidence channel, market economies (EMEs) relative to advanced amplified global spillovers. Positive impulses, economies (AEs). Over the course of the year, the weakening of the growth momentum became transmitted through real sector channels increasingly broad-based geographically from described in the foregoing, initially boosted which individual countries, including India, had financial markets, and diminished fears of trade no escape. The global slowdown was marked by war and a hard Brexit supported investors’ risk a close co-movement in the slumps in industrial appetite. Equity prices appeared to regain poise, production, trade and investment at national sovereign bond yields declined, and portfolio levels, given that investment is concentrated in flows returned to EMEs. Currency movements intermediate and capital goods that are heavily between September 2019 and early January traded. In addition, trade tensions dented 2020 reflected the general strengthening of risk business sentiment in the manufacturing sector. sentiment. Financial conditions had thus turned The weakening of global imports was significantly broadly accommodative across AEs and EMEs influenced by the downturn in EMEs. In turn, these and conducive to a modest recovery before the forces reduced export growth, which is intensive pandemic broke out. in imports, and relies heavily on the state of global I.7 The finance and confidence channels supply chains. For a while, as manufacturing abruptly reversed transmission at the end of 2019 lost steam, services held firm and helped to with the onset of COVID-19. Financial markets support consumer confidence, but eventually the froze, financial institutions started bracing up for inexorability of the global downturn took over. a brutal onslaught of balance sheet impairment, I.5 Despite these headwinds, some extreme risk aversion set in and as incomes indications emerged toward the closing months stopped flowing, especially to the defenceless, of the year that the slowdown may be bottoming households and businesses alike made a dash for 2ASSESSMENT AND PROSPECTS cash. COVID-19 was bringing to bear the dark side I.9 Thus, until the onset of COVID-19, the of global integration. In the event, global growth at moderation in India’s growth trajectory reflected 2.9 per cent in 2019 was the lowest since 2009. cyclical forces, both global and domestic. The global The year 2019-20 (April-March) also marked drivers included softer external demand, new India’s lowest gross domestic product (GDP) automobile emission standards in several parts growth since the global financial crisis (GFC). of the world, weaker macroeconomic conditions Amidst the influential global developments referred because of idiosyncratic factors in a group of to earlier, the Indian economy was hit by specific systemic EMEs, trade tensions and broader global domestic factors from the second quarter of 2019 trade policy uncertainty, the possibility of a no-deal onwards, including downturn in its automobile and Brexit and the slowdown in China. The domestic real estate sectors and pangs of distress among factors took the form of inventory overhang in micro, small and medium enterprises (MSMEs). the real estate sector, followed by unfavourable terms of trade sapping rural demand, a slump I.8 Turning to domestic developments, the in gross fixed capital formation from Q4:2018- previous year’s Annual Report posed an existential 19 and contraction in merchandise exports from question: are we dealing with a soft patch, or a Q1:2019-20 and imports from Q2:2019-20. The cyclical downswing, or a structural slowdown? deceleration phase (Q4:2018-19 to Q4:2019-20) Even as data were being awaited to disentangle was accentuated by idiosyncratic events such as the nature of the slowdown, a soft patch was auto emission norms/axle norms for commercial ruled out as the loss of pace became entrenched vehicles and credit events in the NBFC space. sequentially with each ensuing quarter. Going back in time, the Indian economy had experienced I.10 Pre-emptively reading the underlying cyclical nature of the growth slowdown, monetary a V-shaped recovery from the GFC, but this policy committee undertook a series of policy rate stimulus-driven upturn failed to sustain: average reductions, starting as early as February 2019 GDP growth slumped from 8.2 per cent in 2009- and cumulating to 135 basis points by February 11 to 5.3 per cent in 2011-13. From 2013-14, a 2020; switched the stance of policy from calibrated cyclical upswing took hold and it turned to be one tightening to neutral to accommodative; and of the longest in the post-independence period, infused the system with abundant liquidity from reaching 8.3 per cent in 2016-17. Ahead of the Q2:2019-20. Monetary transmission, typically cyclical global downturn which commenced in lagged and incomplete in India, improved 2018, however, India’s real GDP growth showed significantly in the second half of the year under signs of slowdown during 2017. Favourable comfortable liquidity conditions and the mandated statistical base effects delayed the onset of the linking of the interest rates on new floating rate cyclical downturn during the second half of 2017- loans to select sectors to external benchmarks in 18 in spite of slowing momentum. Eventually, October. Illustratively, the weighted average lending however, India joined the global slowdown from rate (WALR) on fresh bank loans declined by 71 Q1:2018-19 and lost speed continuously over the basis points (bps) during February 2019-February next 8 quarters, reaching 3.1 per cent in Q4:2019- 2020, of which 31 bps occurred during October 20, the lowest in the national accounts series 2019-February 2020. The counter-cyclical shift based to 2011-12. in the monetary policy stance to support growth 3ANNUAL REPORT was enabled by inflation turning benign in the first share of 57 per cent of GDP, withstood the overall half of the year; in spite of a spike in food prices loss of pace and started decelerating only from that caused headline inflation to rise beyond 6 Q4:2019-20. The main drivers of the slowdown in per cent during December 2019-February 2020, 2019-20 were investment and exports. it averaged 4.8 per cent for the year as a whole, a I.13 A slowdown in fixed investment set in from little above the target of 4 per cent. 2011-12 and became entrenched from Q4:2018- I.11 Fiscal policy had also turned counter- 19, slumping into contraction from Q2:2019-20. cyclical from Q4: 2016-17, with government final A combination of stress in balance sheets of consumption expenditure in the form of the 7th corporates and banks, defaults in the NBFC sector, pay commission award and one rank one pension slowing income growth of households leading to providing steady support to GDP. From Q2:2019- a large inventory overhang of unsold homes, and 20, the fiscal policy stance became expansionary, the global slowdown weighed heavily on animal with a momentous corporate tax regime change spirits. that made India comparable with Asian peers. I.14 Underlying the contraction of 5.1 per cent This fiscal impulse, together with the cyclically in exports in US dollar terms during the year was induced shortfall in revenues, eventually produced a drop in export prices by 4.7 per cent. Sectoral a sizeable deviation in the central government’s analysis throws up valuable insights. For instance, gross fiscal deficit (GFD) from the target for a group of exports – electronic goods; drugs and the year – 4.6 per cent of GDP as against 3.3 pharmaceuticals; iron ore – held firm in the face per cent budgeted – warranting the usage of of a combination of weakening external demand the escape clause under the revised Fiscal and country-specific impediments. Each of Responsibility and Budget Management (FRBM) these sectors has considerable export potential, Act. Subnational fiscal policy remained within the especially in the fast-changing dynamics of the Fiscal Responsibility Legislation (FRL) thresholds, international environment. primarily via expenditure cuts in the face of large I.15 As regards the evolution of aggregate scale revenue shortfalls, a feature observed in supply conditions in 2019-20, agriculture and previous years as well. Automatic stabilisers, allied activities provided a silver lining, with particularly on the tax front, however, would have record foodgrains and horticulture production and played a counter-cyclical role. On the whole, both favourable terms of trade for the farm economy. the centre and states had much less fiscal space The challenge of managing supply gluts in cereals to deal with COVID-19 than during the GFC. exposed the shortcomings of policy interventions I.12 Circling back to the formation of domestic in the form of price support and buffer stocking. demand during 2019-20, consumption turned out Paradoxically, disruptions in agricultural supply to be relatively resilient. Government consumption chains and restrictions affecting transportation put a floor underneath the downturn as discussed of agri-produce from farms to markets produced earlier - without it, real GDP growth would have demand-supply mismatches that fuelled price fallen from the headline of 4.2 per cent to barely flares in the second half of the year. The recent 3.3 per cent in 2019-20. Private consumption, spate of reforms to agricultural marketing and which is the bedrock of domestic demand with a infrastructure could open up new opportunities 4ASSESSMENT AND PROSPECTS for agriculture if they could be complemented by investments towards automation and efficiency trade policies that are predictable, expose the gains from cloud computing and digitalisation, as farm sector to international terms of trade and well as new alliances with global companies. shift emphasis to processing and value addition. I.18 During the year, several initiatives were I.16 A perceptible slowdown in the industrial undertaken to develop various segments of the sector has set in after 2015-16, with its epicentre financial market spectrum that are under the in manufacturing. Structural rigidities in labour, jurisdiction of the Reserve Bank. In the foreign land, and product markets have made Indian exchange market, the focus turned to incentivising manufacturing uncompetitive in global markets access, bridging the segmentation between and unable to reap the demographic dividend on shore and off shore activity, simplifying the embodied in a young but under-skilled labour force. hedging regime within an overall rationalisation Large gaps in the physical infrastructure have of regulations, and enhancing the ease of also impacted productivity and overall efficiency. doing business in a principles-based regulatory More recently, high leverage and solvency framework. In the debt market, specified securities concerns have produced stressed balance sheets, issued by the Government of India were opened which appear to have overwhelmed bankruptcy to non-residents under the fully accessible route processes. In addition, some of the past issues (FAR), among other initiatives to liberalise foreign remain formidable drags such as delay in land portfolio investments. The market borrowing acquisition, environmental concerns and various programmes of the central and state governments impediments in MSMEs sector. were conducted in alignment with the objectives of minimising cost and mitigation of risks. The I.17 The services sector has remained the development of the debt market was carried prime mover of the Indian economy over the last forward through liquidity enhancement, expanding three decades. Until 2019-20, it had exhibited the investor base and improving debt management resilience and productivity; however, idiosyncratic strategies. In the money market, a revised liquidity developments, both domestic and global - management framework was put in place to grounding of an airline; financial sector stress; empower the Reserve Bank to actively manage stalled construction projects; revenue-related liquidity conditions with the use of conventional issues in telecom; port activity impeded by muted and unconventional instruments. Notably, longer foreign trade; coal production losses impacting term repo operations and special open market railway freight traffic - operated in conjunction with operations (OMOs), on top of currency swaps the slowdown in aggregate demand to pull the that were launched in 2018-19, were added to the sector’s output to its lowest growth in two decades. Reserve Bank’s arsenal of liquidity management The performance of the services sector in the tools. year gone by reflects the emergence of structural impediments specific to each sub-sector. Services I.19 In the regulatory and supervisory domain, exports have, however, outperformed goods several steps were taken during the year to exports and maintained global share in 2019- strengthen financial intermediaries and preserve 20, with software providing the cutting edge. financial stability. These initiatives were presented Indian IT majors could benefit from re-prioritising in the Bi-annual Financial Stability Report which 5ANNUAL REPORT monitors the financial system by assessing risks was strengthened, including revisions in liquidity to financial stability through systemic stress risk management to align it with that of the tests, financial network analysis and appraisal banking sector. Regulation of housing finance of the overall regulatory framework. With regard companies (HFCs) and wider supervisory powers to the banking system, the ongoing efforts to over NBFCs were vested with the Reserve Bank. align the prudential regulatory framework with Technology-enabled customer services, customer global standards were carried forward. Alongside protection and strengthening of fraud detection improvements in corporate governance, risk were concurrent pursuits. management and credit delivery, cyber security I.22 Financial inclusion was taken forward was strengthened while leveraging on technology. with the release of the National Strategy for Past efforts for resolution of stressed assets Financial Inclusion, 2019-24 and measures were seemed to start showing results: after reaching a undertaken for deepening the digital payment peak of 11.5 per cent at end-March 2018, a decline ecosystem. Further, efforts towards enhancing in the gross non-performing assets (GNPA) ratio financial literacy were also intensified. Under of scheduled commercial banks (SCBs) set in, the roadmap for providing banking services in taking it down to 8.5 per cent by end-March 2020. villages, as on September 30, 2019, 99.2 per cent The provision coverage ratio of SCBs improved of the identified villages across the country with significantly for the third consecutive year to reach population less than 2,000 had been provided 65.4 per cent in March 2020. with banking services, while 94.4 per cent of the I.20 The capital to risk-weighted assets ratio identified villages with population more than 5,000 (CRAR) of SCBs improved to 14.8 per cent in were provided access to banking services. March 2020 (14.3 per cent a year ago). Initiatives I.23 Driven by the Payment and Settlement were taken to strengthen the regulatory and Systems Vision 2019-21, efforts were made towards supervisory framework of the cooperative banking developing efficient and secure payment and sector through review of trigger-based supervisory settlement systems with focus on the availability action, constitution of boards of management for of user-friendly platforms at affordable costs. The urban cooperative banks (UCBs) with deposits of Reserve Bank worked towards expanding the `100 crore or above, rationalisation of exposure reach of Unified Payments Interface (UPI) and norms for single and group borrowers of UCBs RuPay cards globally. Incentives were designed to and amalgamation of district central cooperative promote digital payment usage. Improvements in banks in Kerala and development of Central Fraud customer service included availability of National Registry (CFR) for UCBs. Further, the regulatory Electronic Funds Transfer (NEFT) on 24x7x365 powers of the Reserve Bank were strengthened basis, increase in operating hours of Real Time by the amendments in certain sections of the Gross Settlement (RTGS), e-mandates on cards, Banking Regulation Act 1949, thereby bringing Prepaid Payment Instruments (PPIs) and UPI, additional areas of functioning of cooperative expansion of biller categories under the Bharat banks under its regulatory purview. Bill Payment System (BBPS) and enhancing I.21 The asset-liability management framework the usage of National Electronic Toll Collection for non-banking financial companies (NBFCs) (NETC) system. The share of digital transactions 6ASSESSMENT AND PROSPECTS in the total volume of non-cash retail payments those of metals, are reflecting the supply shock. increased to 97.0 per cent during 2019-20, up The bigger impact of the pandemic has been on from 95.4 per cent in the previous year. Currency demand. The prices of non-discretionary essential management was strengthened by replacement of items have surged even as many discretionary currency verification and processing systems and items have gone out of transactions. Precautionary integration of currency management functions with saving instincts have gripped businesses and the core banking solution of the Reserve Bank. households amidst heightened risk aversion, while the appetite for investment has evaporated. I.24 Turning the page back to the existential The pandemic has also exposed new inequities - question, the available evidence did seem to converge on detecting a cyclical downturn in India white collar employees can work from home while – synchronised globally – through 2018-19 and essential workers have to work on site, exposed to 2019-20, following one of the longest expansions the risk of getting infected. In some areas of work in recent history. Just as the decelerating phase such as hospitality, hotels and restaurants, airlines of the cycle appeared to be troughing towards the and tourism, employment losses are more severe close of 2019-20, COVID-19 arrived and wrenched than in other areas. The poorest have been hit the the narrative asunder. Today, the jury is out on a hardest. wide array of possibilities that can characterise I.26 A defining feature of the COVID-19 the future. They span from a V-shaped rebound experience has been the unprecedented policy due to a volcanic eruption of pent-up, unlocked response. According to the IMF, the total stimulus demand that sets the stage for a rising trajectory package (liquidity and fiscal measures) for G20 of renewed expansion, through a diversity of countries averaged 12.1 per cent of GDP (5.1 intermediate iterations; to a structural stagnation per cent of GDP for EMEs and 19.8 per cent of brought about by behavioural and demographic GDP for AEs). The policy fight back has calmed changes. On this sombre note, it is appropriate to financial markets and even produced asset gaze at what lies ahead in 2020-21 and beyond. price inflation out of sync with the underlying Prospects for 2020-21 state of economic activity, prevented financial institutions and corporations from collapsing, I.25 After plunging off a precipice in March and and provided some protection to household undergoing a contraction in the first half of 2020 that is widely regarded as deeper and more destructive incomes. Fiscal rules have been set aside. The than the Great Depression and the GFC, the global unparalleled expansion of central bank balance economy is starting to break out of the free fall. sheets, unbridled by conscience-keeping inflation, Activity is beginning to bottom out in Q3:2020 as has implied that they may be tacitly financing unlocking of economies begins in varying degrees the stimulus, including by keeping interest and pent-up demand is released. The easing of rates unusually low while debt, both public and containment and social distancing has, however, private, swells in the virtual absence of servicing been hesitant, and has stalled in various countries constraints. The outcome is that governments and due to fresh waves of infections and mortality. All central banks are increasingly taking on the role around, supply chains and production structures of resource allocation that has traditionally been are in disarray and commodity prices, especially performed by markets. This can inevitably bring in 7ANNUAL REPORT political consequences unless these authorities averaged at $42.8 per barrel in July 2020, up from fashion timely and credible exits after the virus a low of $23.3 per barrel in April 2020. Gold prices has been overcome and the vaccine found. In the had a remarkable performance, increasing by 25 rain shadow of these developments, the role of per cent in July 2020 over December 2019, with banks and non-banking financial entities as primal the ultra-high level of uncertainty spurring flights to financial intermediaries has waned while capital safety. Apart from metals, food prices have surged and bond markets have taken over. In all this, the since May, reflecting supply disruptions. These usual risks are relegated to the background where factors have also moved inflation outcomes. In they may be sinisterly mutating – fiscal dominance; AEs, sizeable slack in demand has kept inflation inflation; leverage; market failure. Meanwhile, the muted, whereas in several EMEs, spikes in food crisis presents opportunities and the shape of the prices have shown up in headline inflation firming future will depend on how well they are exploited. up relative to recent history. I.27 Global economic activity is well below pre- I.28 In its latest update (June 2020), the IMF COVID levels. In Q1:2020, GDP contracted in the has projected global growth at (-) 4.9 per cent for range of 1.2-13.6 per cent among AEs; among 2020, with a steeply negative impact on economic EMEs, growth varied between 4.5 per cent and activity in H1 and more gradual recovery than (-) 6.8 per cent. Early GDP releases and high expected earlier. India’s growth is projected at (-) frequency indicators suggest that contractions 4.5 per cent for 2020-21. The projections set out by have been severe in Q2, while for Q3 the near- the OECD on June 10, 2020 present two scenarios term outlook remains clouded with available – single hit and double hit1 - the latter being one high-frequency indicators presenting a mixed in which a second wave of rapid contagion erupts picture. The global manufacturing PMI emerged later in 2020. Global growth is projected at (-) 6.0 out of a 5-month contraction and rose to 50.3 in per cent in the single hit scenario and (-) 7.6 per July. The global services PMI also posted a rise cent in the double hit scenario [India’s growth is into expansion at 50.5 in July. According to the projected at (-) 3.7 per cent and (-) 7.3 per cent, World Trade Organisation (WTO), the volume of respectively, in 2020-21]. In the Global Economic merchandise trade shrank by 3.0 per cent year- Prospects, the World Bank has projected the on-year in Q1, but early estimates suggest a fall deepest global recession in eight decades in of 18.5 per cent in Q2. Global primary commodity 2020, almost three times as steep as the global prices (released by the IMF) contracted in the first recession of 2009, despite unprecedented policy half of the year, going down by 13.4 per cent in support. Some developments suggest that the July 2020 over December 2019. Crude oil prices shrinkage of world trade may be bottoming out have recovered after sharp falls in March and April in the third quarter of 2020. Global commercial on continuing supply cuts by OPEC plus countries flights, which carry a substantial amount of and improved demand prospects on gradual easing international air cargo, had slumped by (-) 74.0 of lockdown restrictions - Brent crude oil prices per cent between January and April, but they rose 1 Under a single hit scenario, the current containment measures are assumed to be sufficient to overcome the outbreak. In the double-hit scenario, a second wave of virus outbreak hits before the year end (October/November) requiring return to another general lockdown. 8ASSESSMENT AND PROSPECTS 58.0 per cent through mid-June. Container port was around 60.0 per cent and transit activity was throughput also appears to have staged a partial 40.0 per cent lower than that of February 2020 recovery in June, along with new export orders in levels. In July, however, moderation set in, with PMIs. In April 2020, the WTO set out a relatively retail and recreation mobility stagnant, and some optimistic scenario in which the volume of world slide in people’s movement around groceries and merchandise trade in 2020 would contract by 13.0 pharmacies. per cent in 2020 and a pessimistic scenario in I.30 Going forward, government consumption which trade would fall by 32.0 per cent. Given the is expected to continue pandemic-proofing of contractions in global trade in Q1 and Q2, meeting demand, and private consumption is expected the optimistic projection for the year would require to lead the recovery when it takes hold, with 2.5 per cent growth per quarter for the rest of the non-discretionary spending leading the way year. until a durable increase in disposable incomes I.29 Turning to India, the NSO’s estimates of enables discretionary spending to catch up. An GDP for Q1:2020-21 are slated to be released on assessment of aggregate demand during the year August 31. Meanwhile, high frequency indicators so far suggests that the shock to consumption that have arrived so far point to a retrenchment in is severe, and it will take quite some time to activity that is unprecedented in history. Moreover, mend and regain the pre-COVID-19 momentum. the upticks that became visible in May and June Private consumption has lost its discretionary after the lockdown was eased in several parts elements across the board, particularly transport of the country, appear to have lost strength in services, hospitality, recreation and cultural July and August, mainly due to reimposition or activities. Behavioural restraints may prevent stricter imposition of lockdowns, suggesting that the normalisation of demand for these activities. contraction in economic activity will likely prolong The Reserve Bank’s survey for the month of July into Q2. The total e-way bills issuance, an indicator indicates that consumer confidence fell to an all- of domestic trading activity, increased by 70.3 per time low, with a majority of respondents reporting cent in June 2020 on a month-on-month (m-o-m) pessimism relating to the general economic basis; in July, however, it increased by only 11.4 situation, employment, inflation and income; per cent m-o-m and remained 7.3 per cent lower however, respondents indicated expectations of than a year ago. During June 2020, inter-state recovery for the year ahead. Urban consumption e-way bills had increased by 91.3 per cent, but in demand has suffered a bigger blow - passenger July they rose only by 15.3 per cent. Similarly, intra- vehicle sales and supply of consumer durables in state e-way bills, which had risen by 60.1 per cent Q1: 2020-21 have dropped to a fifth and one third, (m-o-m) in June, increased only by 9.1 per cent respectively, of their level a year ago; air passenger in July. The Google mobility trend, which tracks traffic has ground to a halt. Rural demand, by movement of people as a reflection of underlying contrast, has fared better. Among underlying economic activity, picked up in June 2020 from its indicators, tractor sales picked up by 38.5 per cent levels in April and May. Mobility around groceries in July, spurred by the robust pace of kharif sowing, and pharmacies reached pre-COVID-19 levels, while the contraction in motorcycle sales eased in while mobility relating to retail and recreation July (from 35.2 per cent in June to 4.9 per cent in 9ANNUAL REPORT July). The decline in production of consumer non- of returns and procedures, including automatic durables turned positive in June. A fuller recovery invoice matching, intelligence, enforcement, in rural demand is, however, being held back by inspection and audit. It is worthwhile to consider muted wage growth which is still hostage to the an evaluation of the experience with GST by an migrant crisis and associated employment losses. independent committee which can draw on the Initiative under the Pradhan Mantri Garib Kalyan lessons gained so far to recommend the way Rojgar Abhiyaan is likely to generate employment forward. Fiscal incentives for industry can be re- in rural areas. Along with increased wages under aligned in favour of productive labour-intensive the Mahatma Gandhi National Rural Employment companies so as to generate employment. Guarantee Act (MGNREGA), they should provide I.32 Indicators of investment demand – the a fillip to rural incomes. production of capital goods contracted by 36.9 I.31 Government consumption spending per cent in June 2020 (-64.4 per cent in April-June has provided a measure of relief, with central 2020) and import of capital goods contracted by government’s revenue expenditure, net of interest 24.7 per cent in July 2020 (-46.7 per cent in April- payments and major subsidies, having risen by June 2020). The construction sector exhibited a 33.7 per cent in the first quarter of the year. Public sharp downturn, as reflected in consumption of finances have, however, been stretched by the steel in July 2020 (-29.1 per cent and -57.9 per imperative to mitigate the impact of COVID-19 cent in April-June 2020) and production of cement and headroom for continuing support to aggregate which contracted by 6.9 per cent in June 2020 (-38.8 demand may be severely diminished. In the case per cent in April-June 2020). Declining capacity of state finances, space is likely to be squeezed utilisation, the weakening of consumption demand and the overhang of stressed balance sheets are so much that cuts in growth-giving capital restraining new investment. The corporate tax expenditure seem quite probable. The future path cut of September 2019 has been utilised in debt of fiscal policy is likely to be heavily conditioned servicing, build-up of cash balances and other by the large overhang of debt and contingent current assets rather than restarting the capex liabilities incurred during the pandemic. A credible cycle. These underlying developments suggest consolidation plan, specifying actionables for that the appetite for investment is anaemic and in reduction of debt and deficit levels, will earn need of more reforms. confidence and acceptability, rather than just extending the path of touch-down. As the wind- I.33 Targeted public investment funded by down begins and consolidation resumes, it is monetisation of assets in steel, coal, power, land, prudent to expect lower contributions of GFCE to railways and privatisation of major ports by central overall demand. In order to boost fiscal revenues and state governments under an independent and mitigate the pains of this transition, big data regulator can be the way forward to revive and technology can be leveraged to track and and crowd in private investment. In fact, goods identify tax defaulters, increase the tax payer base and services tax (GST) Council type of apex by tracking their income and wealth parameters, authorities can be set up in respect of land, labour and by addressing the challenges confronting the and power to drive structural reforms. They could GST regime through rationalisation, simplification include speedier implementation of the national 10ASSESSMENT AND PROSPECTS infrastructure pipeline, a north-south and east- 2015 is a major strategic policy response in this west road corridor together with a high-speed direction. Promotion of the corporate bond market, rail project that build on the successes of the securitisation to enhance market-based solutions golden quadrilateral, alongside steps to improve to the problem of stressed assets, and appropriate business sentiment and the environment for pricing and collection of user charges should investment. States can be encouraged to publicise continue to receive priority in policy attention. the availability of litigation-free land in their There is also a need for expanded footprints for jurisdictions with access to modern infrastructure. specialised NBFCs classified as Infrastructure In the power sector, the opportunity has arrived Finance Companies. to leapfrog India into becoming the world leader I.35 The progress made on building a modern in renewable energy by incentivising the domestic physical infrastructure in the country over the production of solar panels and connecting last five years has been noteworthy in the areas dispersed transmission links with remote areas. of roads, civil aviation and airport connectivity, For the sector as a whole, elimination of cross- telecommunication (including internet and subsidisation through the tariff structure and broadband penetration), and ports. India has also provision of subsidy, if any, through direct benefit recorded an impressive growth in metro rail projects transfer (DBT) should be a priority, along with for urban mass transportation. Nonetheless, the due consideration to the privatisation of electricity infrastructure gap remains large, needing around distribution companies (DISCOMS). With regard to US $4.5 trillion of investment by 2040, as per the railways, there is a strong case for manufacturing Economic Survey 2017-18, with emphasis on units to be corporatised. The growth potential upgrading the poor quality of infrastructure. India of land banks can be exploited, particularly in is currently ranked 70 out of 140 countries for metropolitan areas, by long-term leasing to infrastructure quality in the Global Competitiveness the private sector, including for development of Index and logistics performance. India’s ranking commercial real estate. FDI into railways can be in the World Bank’s Logistics Performance Index encouraged by removing bottlenecks in the access (LPI) is also low at 44 among 160 countries. Non- to infrastructure - land; procurement rules; project performing assets (NPAs) relating to infrastructure risk-sharing mechanisms. A comprehensive lending by banks has also remained at elevated policy is needed with regard to building adequate levels. In the context of COVID-19, a big push to reserves of strategic materials, including the certain targeted mega infrastructure projects can initiatives undertaken for crude oil. reignite the economy. I.34 There is clearly a need for diversifying I.36 It is also time to turn to the unlocking of financing options. Alternatives to bank finance entrepreneurial energies and risk appetite by have to be assiduously cultivated - capital markets improving the business environment. Faster and FDI offer opportunities to bring in investors enforcement of contracts, including through with a relatively longer-term view that is conducive expansion of judicial and insolvency capacities, to attracting durable capital as well as embedded would be a game changer. Property registrations technology. The setting up of the National can be speeded up from the current 58 days, Investment and Infrastructure Fund (NIIF) in and a centralised website can provide real 11ANNUAL REPORT time information on all regulatory compliance creative destruction is an integral feature of a requirements. In general, the compliance burden robust dynamic economy. The IT sector is best can be streamlined substantially. The COVID-19 placed to drive this process and also manage its crisis can be converted into an opportunity by consequences. Promoting young firms and start- using online provision of education and training to ups and ensuring their survival will be critical implement reforms in the social infrastructure by for greater employment generation and higher skill development and reskilling so as to prepare productivity-led economic growth in India. It will a labour force equipped to keep pace with a big be essential to reorient resources and policy thrust on infrastructure. focus in this direction. Dynamic entrepreneurship, innovation and the ability to nurture ideas to I.37 Information and communication actualisation embodied in start-ups are the technology (ICT) has been an engine of India’s hallmarks of success in ICT. economic progress for more than two decades now. Leveraging on ICT has to be a key element I.38 Exports hold the key to a viable balance of of the future development strategy by reducing payments and a dynamic manufacturing sector. transaction and communication costs and by The pandemic has transformed the international improving the quality of capital. This could generate environment for global value chains, with productivity gains all around, with competent, implications for the choice of product-destination reliable, and low-cost supply of knowledge-based mix underlying a dynamic export strategy. Rather solutions in India and overseas. Indian IT firms are than spreading resources thinly and widely, at the forefront of developing applications using it is time to identify sunrise export categories artificial intelligence (AI), machine learning (ML), that are reaping productivity gains and have robotics, and blockchain technology. This niche dynamic linkages, both horizontal and vertical, advantage needs to be leveraged to strengthen that strengthen footholds in emerging global India’s position as an innovation hub, coupled with value chains. For electronic goods for instance, India’s ‘Start-up India’ campaign which recognises the ongoing diversification of production bases the potential of young entrepreneurs of the presents opportunities, provided India is able to country and aims at providing them a conducive leverage on FDI into high-end segments in order ecosystem. While HealthTech and FinTech are to compete with currently preferred destinations the leading segments, Indian entrepreneurs can for companies on the look out for new locations capitalise on opportunities across other sectors for their manufacturing facilities. India has always and markets, and increase the depth and breadth enjoyed a comparative advantage in generic of this ecosystem, especially in serving small drugs and pharmaceuticals exports, being the and medium businesses, and low and middle- largest supplier in the world. India needs to income groups. Even before COVID-19, a global regain its market share in active pharmaceutical technological churn was underway, with rapid ingredients (APIs) by developing cost-effective advances in digital technologies and state-of- and high-quality manufacturing processes the-art computing/analytical capabilities. While compliant with global standards. Another group non-tariff barriers and issues relating to data of exports in which India’s competitive edge privacy and data security may pose challenges, is progressively being lost to new competition 12ASSESSMENT AND PROSPECTS - readymade garments; gems and jewellery of foodgrains reached a record 2,966.5 lakh - is traditionally labour-intensive; regaining tonnes in 2019-20, while total horticulture competitiveness hinges around labour reforms production - accounting for about 40 per cent of that unfetter scale economies. GVA in the farm sector - also reached an all-time high of 3,204.8 lakh tonnes. India is now among I.39 Foreign trade policy should increasingly the leading producers of milk, cereals, pulses, focus on leveraging exports via free/preferential vegetables, fruits, cotton, sugarcane, fish, poultry trade arrangements. In this context, completion and livestock in the world. These achievements of the India-EU free trade agreement and a stand out in the overcast of gloom on the outlook. post-Brexit free trade agreement/ preferential They have provided the confidence to enact and arrangement with the UK may confer early mover continue with the historic National Food Security Act advantages. India also needs to tie up special (NFSA) which converts food security programmes trade arrangements with countries supplying into legal entitlements of subsidised foodgrains to rare materials that are essential to new export two-thirds of the population. Moreover, in the wake products which are gaining ascendency in the of the nationwide lockdown, the Government of competitiveness ladder. Designing a robust India announced the world’s largest food security framework for promoting already identified scheme, the Pradhan Mantri Garib Kalyan Anna sectors - auto parts; drugs and pharmaceuticals; Yojana, for 80 crore ration card holders. For non- electronics; textiles; food processing - to enhance ration card holders - particularly migrant labourers, their productivity should be a central feature of stranded and the needy families - a provision of 8 the export strategy, alongside exploitation of lakh tonnes of foodgrains has been made under productivity gains from sectors such as ICT, finance the Atmanirbhar Bharat Abhiyan package. and business services. The strategy will also require I.41 Going forward, shifting the terms of trade more efficient logistics through achievement of the in favour of agriculture is the key to sustaining this targets set under the National Trade Facilitation dynamic change and generating positive supply Plan, which aims to transform the trade ecosystem responses in agricultural production. Experience by reducing the time and cost of doing business. shows that in periods when the terms of trade For many of India’s traditional exports, especially remained favourable to agriculture, annual average agricultural and allied products, stability in trade growth in agricultural gross value added (GVA) policy is critical, alongside a better alignment with exceeded 3 per cent. Hitherto, the main instrument the goal of doubling farm incomes. In the context of incentive has been minimum support prices, of exports of manufactures, a renewed focus on but the experience has been that price incentives special economic zone (SEZ) type cluster-based have been costly, inefficient and even distortive. manufacturing export launching pads may be India has now reached a stage in which surplus apposite to establish centres of manufacturing management has become a major challenge. excellence which also leverage on the natural link The priority is to move to policy strategies that between exports and FDI. ensure a sustained increase in farmers’ income I.40 Turning to production activity, Indian alongside reasonable food prices for consumers. agriculture is undergoing a distinct transformation, An efficient domestic supply chain becomes notwithstanding headwinds. The total production critical here. Accordingly, the focus must now turn 13ANNUAL REPORT to the major reforms that are underway to facilitate excessive dependence on bank-based system, free trade in agriculture. First, the amendment of particularly for infrastructure financing. The need the Essential Commodities Act (ECA) is intended for a workable public-private partnership model to encourage private investment in supply chain specific to India cannot be over emphasised. infrastructure, including warehouses, cold Legacy issues of the Indian economy, viz., lengthy storages and marketplaces. Second, the Farmers’ processes of land acquisition and payment Produce Trade and Commerce (Promotion of compensation, environmental clearances, and Facilitation) Ordinance, 2020 is aimed and time and cost overruns due to delays in at facilitating barrier-free trade in agriculture project implementation, need to be resolved produce. Third, the Farmers (Empowerment and with urgency. Reforming labour regulations and Protection) Agreement on Price Assurance and increasing female participation in the work force Farm Services Ordinance, 2020 will empower through affirmative actions will bring down cost of farmers to engage with processors, aggregators, production and improve productivity. wholesalers, large retailers, and exporters in I.43 The MSME sector has the potential an effective and transparent manner. With this to become the engine of growth, but it has enabling legislative framework, the focus must been underperforming for too long owing to turn to (a) crop diversification, de-emphasising various structural reasons. This sector has been water guzzlers, however politically difficult it may constrained by high cost of credit due to lack of be; (b) food processing that enhances shelf life adequate information, lack of modern technology, of farm produce and minimises post-harvest no research and innovations, insufficient training wastes; (c) agricultural exports which expose and skill development, and complex labour laws. the Indian farmer to international terms of trade Key reforms relating to MSMEs, viz., removal of and technology; and (d) public and private capital definitional difference between manufacturing formation in the farm sector. and service-based MSMEs, increased threshold limit to define an enterprise as an MSME, and I.42 Indian manufacturing has been locked adding turnover as another criteria to define in a structural slowdown for quite some time. MSMEs, besides investment scale, could turn out Reversing this decline warrants a complete to be harbingers of far reaching changes that can rethink. The quality and efficiency of the physical transform manufacturing in India. infrastructure, which still significantly lags behind the global median, has to be enhanced to help I.44 Over the last two decades, the Indian manufacturing take off. Benchmarking systems economy has been driven by the services sector, and procedures with the best in the world could which comprises a heterogenous group of galvanise growth in the sector, aided by cleaning economic activities with varying degree of skill up of stressed balance sheets of corporates and organisational requirements across banking by raising the efficiency of bankruptcy and and finance, education, healthcare, information solvency procedures. Large Indian firms need to technology, tourism, transport, telecom, trade diversify their financing needs and reduce their including e-commerce and space. After a peak 2 Services sector inclusive of construction. 14ASSESSMENT AND PROSPECTS in 2014-15, however, the services sector has conditions, and has kept the lifeblood of finance undergone a sustained moderation. Apart from flowing. generating productivity gains that boost output, I.47 In its early August 2020 meeting, the MPC the role of services in India assumes importance noted the heightened uncertainty surrounding from the point of view of employment generation the macroeconomic outlook on account of supply as it is the biggest employer with a share of 44.4 chain disruptions and cost push pressures. It per cent2 in measured employment. expected headline inflation to remain elevated I.45 During the last three decades, the in Q2:2020-21, but likely to ease in H2:2020-21, successes achieved in ICT need to be expanded aided by favourable base effects. As regards the in other sectors, particularly in healthcare and outlook for growth, the MPC expected real GDP tourism, where India has an inherent advantage. growth for the year 2020-21 as a whole to be There is also an urgent need to nurture talent negative. The MPC was of the view that an early which can exploit emerging opportunities in space containment of the COVID-19 pandemic may technology, internet of things (IoT) and cyber impart an upside to the outlook. A more protracted security as well. It would be essential to reorient spread of the pandemic, deviations of the monsoon resources and policy focus in this direction. from the forecast of a normal and global financial Innovation and the ability to nurture ideas into market volatility are the key downside risks. In this reality would be the key challenge. In this context, environment, the MPC observed that supporting private enterprise and investment have the major recovery of the economy assumes primacy in the role. conduct of monetary policy. While space for further monetary policy action is available, it is important I.46 Under the flexible inflation targeting to use it judiciously to maximise the beneficial framework adopted in 2016, headline CPI inflation effects for underlying economic activity. has averaged 3.9 per cent up to 2019-20, closely I.48 At the same time, the MPC was conscious aligned with the target of 4 per cent. This has of the upside risks to its medium-term inflation imparted credibility to the conduct of monetary target. With headline inflation ruling above the policy, instilled investor confidence and anchored upper tolerance band around the target, but with inflation expectations. It has also enabled the re- economic activity and the outlook remaining weak orientation of monetary policy to support growth and uncertain, the MPC noted that the cumulative which has been decelerating continuously for reduction of 250 basis points was working its way eight consecutive quarters. Accordingly, the repo through the economy, lowering interest rates in rate has been reduced by a cumulative 250 basis money, bond and credit markets, and narrowing points since February 2019, supported by liquidity down spreads. Accordingly, the MPC decided to injections of close to 5.0 per cent of GDP. The stay on hold, while awaiting a durable reduction level of the repo rate is at its lowest ever. This in inflation to use available space to support the coordinated strategy has kept financial markets revival of the economy. and financial institutions functioning normally, alleviated liquidity stress due to the outbreak of I.49 Turning to the financial sector, Indian COVID-19, provided households and businesses banking has to be liberated from the risk aversion with confidence by substantially easing financial that is impeding the flow of credit to the productive 15ANNUAL REPORT sectors of the economy and undermining the role be contingent on the governance standards in of banks as the principal financial intermediaries banks, particularly on strength of risk governance in the economy. The deterioration in the framework. In this regard, the Reserve Bank has macroeconomic and financial environment is released a discussion paper on “Governance in impinging on asset quality, capital adequacy and Commercial Banks in India” with the objective of profitability of banks. Regulatory dispensations aligning the regulatory framework with global best that the pandemic has necessitated in terms of practices while being mindful of the context of the the moratorium on loan instalments, deferment domestic financial system. The main emphasis of of interest payments and restructuring may also the discussion paper is to empower the Board of have implications for the financial health of banks, Directors. The Board, on its part, should set the unless they are closely monitored and judiciously culture and values of the organisation; recognise used. Although gross and net non-performing and manage conflicts of interest; set the appetite asset ratios had come down in March 2020 along for risk and manage risks within that appetite; with receding slippage ratios, the economic fallout exercise oversight of senior management; and of the pandemic is likely to test this resilience, empower the oversight and assurance functions especially since the regulatory accommodations through various interventions. In tandem with the announced in the wake of the outbreak have evolving regulations, the supervisory approach masked the consequent build-up of stress. Macro of the Reserve Bank will have to be two-pronged stress tests reported in the July 2020 Financial - first, strengthening the internal defences of Stability Report suggest that non-performing regulated entities; and second, greater focus on assets may surge 1.5 times above their March identifying the early warning signals and initiating 2020 levels under the baseline scenario and by corrective action. Greater emphasis will need 1.7 times in a very severely stressed scenario. The to be placed on the assessment of business system level CRAR can drop to 13.3 per cent in models, governance and assurance functions March 2021 from its March 2020 level under the (compliance, risk management, internal audit and baseline scenario and to 11.8 per cent under the vigilance functions). It is important to reiterate that very severe stress scenario. post-containment of COVID-19, a very careful trajectory has to be followed in orderly unwinding I.50 Against this backdrop, a recapitalisation of regulatory measures and the financial sector plan for public and private sector banks assumes should return to normal functioning without relying critical importance. The minimum capital on the regulatory relaxations as the new norm. requirements, which are calibrated on the basis of historical loss events, may no longer suffice to I.51 Coming to the NBFC sector, non-traditional absorb post-pandemic losses. The Reserve Bank and digital players are entering this space to deliver has already advised banks and NBFCs to carry financial services by way of innovative methods out COVID-19 stress tests and take necessary involving digital platforms. The goal of the Reserve remedial measures proactively. The ability to Bank is to strengthen the sector, maintain stability raise capital as well as build resilience to ensure and reduce the scope for regulatory arbitrage. financial stability in anticipation of more frequent, An optimal level of regulation and supervision is varied and bigger risk events than in the past shall sought to be achieved so that the NBFC sector 16ASSESSMENT AND PROSPECTS is financially resilient and robust, catering to to innovation and competition in the payments financial needs of a wide variety of customers and landscape and minimise concentration risk in niche sectors, and providing complementarity and retail payment systems.The establishment of self- competition to banks. The NBFC sector largely regulatory organisation(s) will be encouraged to depends on market and bank borrowings, thereby increase industry participation in the regulatory creating a web of inter-linkages with banks and and supervisory process. Other initiatives include financial markets. As Housing Finance Companies encouraging authorised payment system operators (HFCs) now fall under the regulatory purview of to put in place Online Dispute Resolution (ODR) the Reserve Bank, the process of harmonising system for failed transactions. regulations for HFCs with those applicable for I.53 Several initiatives are underway to NBFCs assumes priority. A robust liquidity risk transform the payments landscape in the country. management framework is in place for NBFCs Centralised payment systems, viz., the RTGS and should, in time, apply to HFCs as well, with system is available for customer transactions the objective of ensuring proper governance and from 7 am to 6 pm; and since December 2019, risk management structures, including functionally the NEFT system operates round the clock - independent chief risk officer (CRO) with clearly 24x7x365. Another objective has been to drive specified role and responsibilities. Due recognition down the cost of digital transactions. Accordingly, of the systemic importance of NBFCs/HFCs and processing charges for NEFT/RTGS applicable their inter-linkages with the financial system to member banks have been waived and they, and ensuring higher credit flow by appropriately in turn, have been advised to extend this benefit modulating exposure limits, enabling commercial to their customers. The path ahead will involve bank lending to NBFCs and co-financing, and establishing an Innovation Hub for the financial fostering active engagement with stakeholders sector for innovative idea generation, licensing of are the hallmarks of the evolving engagement with National Payments Corporation of India (NPCI)- the sector. like umbrella organisation(s) to foster competition and the development of payment systems. I.52 In the wake of COVID-19, lockdowns and the requirement of social distancing are providing I.54 Under ‘Utkarsh 2022’, which sets out an impetus to the wider adoption of digital the medium-term strategy of the Reserve Bank payments. The operationalisation of the Payments consistent with its core purpose, mission and Infrastructure Development Fund (PIDF) is vision, the major deliverables adopted for the expected to provide the impetus to deployment of year ahead in various functional areas cover acceptance infrastructure across the country, more a wide canvas. A dashboard will be developed so in underserved areas, and facilitate digitisation for monitoring strategy execution. In the area of payment transactions. The Reserve Bank will of regulation and supervision, a specialised promote development of offline payment solutions cadre will be developed with the requisite to further deepen the digital payments across skills and expertise, and it will be backed up the country. The recently released framework for by a comprehensive supervisory database by authorisation of new pan-India Umbrella Entity linking up existing databases. Guidelines on for retail payment systems will provide a fillip securitisation and operational risk will be set out 17ANNUAL REPORT in conformity with Basel III standards. Financial System (CIMS) covering data acquisition to inclusion will be taken forward by developing dissemination and analytics spread across online financial literacy modules targeting specific most business areas of the Reserve Bank. A sections of society. Consumer protection will be separate testing environment (sandbox) has bolstered by the financial education framework been set up for simulating new technologies in a for creating awareness among members of public secure manner. It will be used for testing system- and by implementing the recommendations of the to-system integration of banks’ Management in-house Committee for integrating three existing Information System (MIS) servers with the CIMS. Ombudsman Schemes3 into one Scheme. Financial The Central Information System for Banking market development will include developing a Infrastructure (CISBI), which supports banking credit derivative market, introduction of separate network and financial inclusion policies, will be trading of registered interest and principal of expanded by including co-operative banks, ATMs securities (STRIPS) in State Development and fixed-location business correspondents Loans (SDLs) and the rationalisation of FEMA (BCs). The Central Fraud Registry (CFR) portal regulations for overseas direct investment. These of SCBs, augmented with new features is at an initiatives would be supported by technological advanced stage of development. The Reserve developments in the form of upgrading Structured Bank’s Data Science Lab (DSL) will work towards Financial Messaging Solution (SFMS), improving improving data quality, forecasting, surveillance, penetration of acceptance infrastructure and early warning detection abilities, and employing the facilitation of point of sale (PoS) in smaller big data analytics to provide inputs for policy centres. Training policies to upgrade the skill set of formulation and monitoring. The DSL will be the Reserve Bank’s personnel will focus on issues expanded to consist of an interdisciplinary team related to supply (courses offered for training), of experts comprising data scientists, statisticians, delivery (who delivers which courses, where and economists and IT personnel, who would use how) and assessment (of institutions, trainers and various techniques encompassing programming, trainees). In the context of developing the physical statistical methods, text and data mining and infrastructure, the goal will be to obtain relevant machine learning in various areas of interest ratings from Indian Green Building Council (IGBC)/ to the Reserve Bank. A Granular Data Access Green Rating for Integrated Habitat Assessment Lab (GDAL) has been planned in the CIMS (GRIHA) for at least one existing office and five environment in which techniques of data masking existing residential buildings. and other access restrictions are envisaged to protect confidentiality of granular data. I.55 These future strategies will also require the Reserve Bank to be logistically empowered. I.56 The pandemic will inflict deep disfigurations The Reserve Bank is in the process of revamping on the world economy. The shape of the future is its data warehouse system into a new state-of- heavily contingent upon the evolving intensity, the-art Centralised Information Management spread and duration of COVID-19 and the 3 Includes Banking Ombudsman Scheme, 2006; Ombudsman Scheme for NBFCs, 2018; and Ombudsman Scheme for Digital Transactions, 2019. 18ASSESSMENT AND PROSPECTS discovery of the elusive vaccine. Post-COVID-19, ramifications across real and financial sectors. the overwhelming sense is that the world will So far, policy authorities have responded with an not be the same again and a new normal could unprecedented defence, involving conventional emerge. As in the rest of the world, India’s potential and unconventional measures in order to mitigate output can undergo a structural downshift as the unconscionable human and economic the recovery driven by stimulus and regulatory casualties. As stimulus is unwound in a calibrated easing gets unwound in a post-pandemic and non-disruptive manner in a post-pandemic scenario. Moreover, this recovery is likely to be scenario, deep-seated and wide-ranging structural different – the GFC occurred after years of robust reforms in factor and product markets, the financial growth with macroeconomic stability; by contrast, sector, legal architecture, and in international COVID-19 has hit the economy after consecutive competitiveness would be needed to regain quarters of slowdown. Furthermore, the GFC potential output losses and return the economy was essentially a financial meltdown whereas the to a path of strong and sustainable growth with pandemic is a health crisis, which have deleterious macroeconomic and financial stability. 19ANNUAL REPORT II ECONOMIC REVIEW Economic activity in India slowed down in 2019-20 as a synchronised global downturn amplified by drags on aggregate demand took a costly toll. After remaining benign in the first half, headline inflation picked up subsequently on spikes in food price inflation. Monetary and credit conditions reflected deceleration in underlying activity in the economy. Financial markets turned volatile in the later part of the year in sync with global markets, reflecting the impact of the pandemic. Public finances recorded deviations from budgetary targets due to shortfalls in tax revenue and disinvestment collections. On the external front, the current account deficit narrowed with net capital flows remaining robust; foreign exchange reserves rose during the year. II.1 THE REAL ECONOMY economic activity to lose speed over eight consecutive quarters to touch a low in Q4:2019-20 II.1.1 Amidst a loss of momentum across that has not been seen in the history of the 2011- geographies, escalation of trade tensions between 12 base series. All components of domestic China and the US, uncertainty over Brexit, and demand were driven down, except government heightened geo-political risks, the global economy final consumption expenditure (GFCE), which grew at its slowest pace in 2019 post global provided sustained support to aggregate demand. financial crisis. Just as these retarding forces On the supply side, activity in manufacturing, appeared to be easing their grip towards the close construction and transportation was pulled down of the year, the novel coronavirus (COVID-19) by sector-specific impediments1. Agriculture and broke out and rapidly exploded into a pandemic, allied activities provided a silver lining, on the back darkening global economic prospects and of record foodgrains and horticulture production, imparting extreme uncertainty about the outlook. coupled with resilient allied activities and an II.1.2 As contagion was spreading to over 200 outlook brightened by expectations of a normal economies across the world, claiming over 59 south west monsoon (SWM) in 2020. lakh infections and 3,67,166 deaths worldwide by II.1.3 Against this backdrop, this chapeau is May 2020, the release of provisional estimates followed by component-wise analysis of aggregate (PE) of national income by the National Statistical demand. Developments in aggregate supply Office (NSO) at the end of the month revealed that conditions are analysed in sub-section 3. The last the growth of India’s real gross domestic product sub-section covers analysis of employment based (GDP) had slumped to 4.2 per cent in 2019-20 on high frequency indicators and includes an (6.1 per cent a year ago), the lowest since 2009- assessment of the impact of the COVID-19 10. A downturn that set in during the last quarter pandemic and major policy responses. Policy of 2016-17, abstracting from ephemeral base perspectives are set out in the concluding effects in the second half of 2017-18, caused paragraph. 1 BS VI or Bharat Stage VI, which impacted automobiles and transportation sector, denotes the new emission standard that needs to be complied by all light and heavy vehicles, including two and three wheelers, manufactured on or after April 1, 2020. 20ECONOMIC REVIEW 2. Unravelling the Demand Slowdown Chart II.1.1: GDP Growth: Y-o-Y and 3-Quarter MA-SAAR II.1.4 The May 2020 release of PE for 2019-20 offered a first glimpse at how the economy fared in Q4:2019-20 and, therefore, in the year as a whole; it also brought to bear revisions to estimates for the preceding quarters. The new release confirmed a 2.8 percentage points reduction in the growth of aggregate demand below its decennial trend rate of 7.0 per cent, and a sequential deceleration from a recent peak of 7.9 per cent in H2:2017-18. Real GDP growth in H2:2019-20 at 3.6 per cent was also the lowest registered in the 2011-12 base series (Appendix Table 1). The disruption caused by the imposed lockdown brought economic MA-SAAR: Moving Average of Seasonally Adjusted Annualised Growth Rates activity to a near standstill during the last week of Source: NSO and RBI staff calculations. Q4:2019-20 (Table II.1.1). Consequently, the negative output gap (i.e., II.1.5 The three-quarter moving average of deviation of actual output from its potential level) seasonally adjusted annualised growth rates (MA-SAAR) corroborated the weakening widened in 2019-20, pointing to the substantial of the momentum of demand (Chart II.1.1). slack in resource utilisation. Table II.1.1: Underlying Drivers of Growth Growth (per cent) Contribution to Growth (per cent) Components 2008-09 2009-11 2011-14 2014-18 2018-20 2008-09 2009-11 2011-14 2014-18 2018-20 1 2 3 4 5 6 7 8 9 10 11 I. Total Consumption Expenditure 5.5 6.5 6.1 7.5 7.0 118.2 53.5 71.5 64.6 91.8 Private 4.5 5.9 6.7 7.4 6.2 81.9 40.4 66.2 53.8 68.5 Government 11.4 9.7 2.6 8.2 10.9 36.3 13.1 5.3 10.8 23.3 II. Gross Capital Formation -2.6 14.5 2.0 6.5 3.7 -31.3 64.1 16.6 30.1 17.9 Fixed investment 3.2 9.4 6.2 6.2 3.5 32.6 35.9 37.9 25.0 13.9 Change in stocks -51.4 56.2 -27.4 31.5 12.2 -75.4 17.9 -16.7 3.5 3.4 Valuables 26.9 45.0 -11.1 8.5 0.8 11.4 10.3 -4.6 1.6 0.5 III. Net exports -72.4 -4.1 8.9 -8.5 14.0 Exports 14.8 7.3 10.0 1.4 4.4 99.0 16.2 42.3 3.7 10.9 Imports 22.4 6.9 6.1 4.2 0.9 171.4 20.3 33.4 12.3 -3.0 IV. GDP 3.1 8.2 5.7 7.7 5.2 100.0 100.0 100.0 100.0 100.0 Source: NSO and RBI staff calculations. 21ANNUAL REPORT II.1.6 Compositional shifts in demand conditions the brunt of an exogenous shock due to the reflect the anatomy of the persistent slowdown grounding of a major airline. extending into 2019-20 (Chart II.1.2 and Appendix II.1.8 Among indicators of rural demand, tractor Table 2). sales had contracted until the beginning of the rabi sowing season, but record sowing along with Consumption improvement in terms of trade for the farm sector II.1.7 Private final consumption expenditure revived demand and catalysed a spurt in tractor (PFCE), constituting 57.2 per cent of aggregate sales between December 2019 and February demand, recorded its lowest growth in a decade. 2020 and stayed robust even during the pandemic Nonetheless, at 5.3 per cent in 2019-20, PFCE period. Motorcycle sales, however, have remained growth exhibited resilience in the face of the in the contraction zone starting from January prolonged weakening of income and financial 2019. The weakness in rural demand was also conditions. High frequency indicators of aggravated by moderation in rural wages and consumption demand either contracted or grew at dwindling employment avenues, and the a rate far below their long-run averages. Petroleum slowdown in alternative sources of livelihood such consumption remained flat, while non-oil non-gold as manufacturing and construction. GFCE imports remained in contraction all through the compensated for the slowdown in private consumption, registering double-digit growth for year. Among indicators of urban demand, the third consecutive year in 2019-20. Excluding passenger car sales contracted throughout 2019- GFCE growth of 11.8 per cent, GDP growth for 20, exacerbated by idiosyncratic factors such as 2019-20 would have decelerated by 0.9 rising insurance costs and tighter emission norms. percentage points from the headline GDP growth Other indicators of urban demand, viz., consumer estimated by the NSO. The COVID-19 pandemic durables and air passenger traffic also remained delivered an unprecedented shock to the depressed during the year, with the latter bearing economy. It remains to be seen whether the recovery from the pandemic will be V-shaped or Chart II.1.2: Contribution to GDP Growth by Components U-shaped (Box II.1.1). Investment and Saving II.1.9 The rate of gross domestic investment in the Indian economy, measured by the ratio of gross capital formation (GCF) to GDP at current prices, had declined to 32.2 per cent in 2018-19. Although data on GCF are not yet available for 2019-20, underlying indicators point to investment having weakened further. The ratio of real gross fixed capital formation (GFCF) to GDP declined to 29.8 per cent in 2019-20 from 31.9 per PFCE: Private Final Consumption Expenditure; GFCE: Government cent in 2018-19 on account of waning business Final Consumption Expenditure; GFCF: Gross Fixed Capital confidence. The corporate tax regime reform of Formation; GDP: Gross Domestic Product. Note: Component-wise contributions do not add up to 100 as change September 2019 has not yet gained traction in in stocks, valuables and statistical discrepancies are not included. Source: NSO. boosting capital expenditure. 22ECONOMIC REVIEW Box II.1.1 Macroeconomic Impact of COVID-19 COVID-19’s epidemiological dynamics are still rapidly evolving in and the output gap widens to about (-) 12 per cent of potential India, rendering difficult an accurate assessment of its full output when the economy is worst hit. Two scenarios are envisaged: macroeconomic effects. In this scenario, an approach employing a the first, i.e., lockdown I, impacts the supply side of the economy by dynamic stochastic general equilibrium (DSGE) model built on New decreasing the labour supply and its productivity. The second Keynesian foundations provides a tentative and proximate scenario, i.e., lockdown II, additionally considers the increase in assessment of the likely impact of COVID-19 and the subsequent marginal cost. lockdown on the Indian economy. Inflation falls under both scenarios mainly because of a fall in The model has three main economic agents, viz., households, firms demand; under lockdown II, however, the decline in inflation is less and the government. COVID-19 and the lockdown can impact the steep and short-lived. Firms respond to the squeeze in profits, due economy through multiple channels (Eichenbaum et al., 2020; to higher marginal costs, by curtailing production and labour Faria-e-Castro, 2020; Yang et al., 2020). Because of lockdown, demand. Wages see a lower rise and economy goes through a households have to stay at home and therefore, reduce labour large contraction. However, the recovery from the pandemic is supply to firms; consumption falls due to non-availability of non- faster in this scenario on account of fewer opportunities for people- essential items and fall in income; and restricted people-to-people to-people interactions. Under scenario I by contrast, production contact stalls the momentum of the pandemic. retrenchment is less severe, but demand contraction is more The model is calibrated2 so that infections peak around the second pronounced due to a rise in infections. Thus, the economy half of August 2020 [based on the predictions of a generalised undergoes a deeper contraction under lockdown II, but recovery Susceptible-Exposed-Infectious-Recovered (SEIR) model for India] from the pandemic is faster (Chart 1). Chart 1: Combined Macroeconomic Impact of COVID-19 and Lockdown Scenarios Note: Each time period in the above chart denotes a fortnight. Period 1 corresponds to the first half of April 2020. The green line depicts the lockdown I while the red line depicts the lockdown II scenario. Source: RBI staff estimates. 2 The model is based on both qualitative and quantitative assumptions. The qualitative assumptions are: (a) Households derive utility from consumption and health, and supply labour to the firms and their health deteriorates in proportion to the spread of the pandemic; (b) The spread of pandemic depends on consumption and labour supply decisions of the households; (c) Government declares a lockdown in response to the pandemic that restricts people-to-people contact and hence affects labour supply and consumption demand adversely, but stalls the momentum of pandemic. The main quantitative assumptions used to calibrate the model are: (a) The economy is categorised into contact intensive and non-contact intensive sectors, based on factor shares data of KLEMS – [Capital (K); Labour (L); Energy (E); Materials (M); and Services (S)]; (b) Economic activity is worst hit in the month of April 2020, as suggested by various high frequency economic indicators; (c) The output gap drops to (-) 12 per cent of the potential for this period, based on semi-structural time series analysis; (d) Infections peak in second-half of August 2020, as indicated by the generalised SEIR epidemiological model (updated in June); and (e) The employment during lockdown drops to around (-) 32 per cent of its pre-lockdown level, based on the combined insight from Centre for Monitoring Indian Economy (CMIE) and KLEMS employment estimates. A general equilibrium model which is consistent internally as well with these inputs is then used to generate dynamic scenarios. 23ANNUAL REPORT In order to evaluate the macroeconomic implications of scenarios I and II, it is worthwhile to simulate a third scenario in which the government does not impose a lockdown (Chart 2). This results in a more widespread pandemic, which peaks in the second half of January 2021 with a very slow recovery. This causes a persistent labour shortage and the supply shock produces a lasting impact on inflation and the output gap, which corresponds to a permanent upward shift in inflation and a downward shift in potential output, respectively. Chart 2: Combined Macroeconomic Impact of COVID-19 and Lockdown Scenarios Note: Each time period in the above chart denotes a fortnight. Period 1 corresponds to the first half of April 2020. The green line depicts the scenario without lockdown while the blue dashed line depicts the scenario with lockdown. Source: RBI staff estimates. In scenario II, which envisages a second lockdown, the decline in economic activity is expected to reach its trough in Q1:2020-21 and growth turns positive from Q4:2020-213 (Chart 3a). Inflation, which was high at 6.7 per cent in Q4:2019-20, is projected to ease till Q4:2020-21(Chart 3b). Chart 3: Growth and Inflation Projections under Different Scenarios a: GDP Growth (y-o-y) b: CPI Inflation (y-o-y) Source: RBI staff estimates. In sum, COVID-19 without the associated lockdown acts like a supply shock which causes a persistent rise in inflation and a permanent loss of output. As per Scenario II, which looks closer to the reality, the decline in economic activity reaches its trough in Q1:2020-21 and recovers thereafter, albeit at a gradual pace, with growth turning positive from Q4:2020-21. References: 1. Eichenbaum, M. S., S. Rebelo, and M. Traband (2020), ‘The Macroeconomics of Epidemics’, National Bureau of Economic Research, Working Paper No. 26882. 2. Faria-e-Castro, M. (2020), ‘Fiscal Policy during a Pandemic’, Federal Reserve Bank of St. Louis, Working Paper Series No. 06. 3. Yang, Y., H. Zhang, and X. Chen (2020), ‘Coronavirus Pandemic and Tourism: Dynamic Stochastic General Equilibrium Modeling of Infectious Disease Outbreak’, Annals of Tourism Research. 3 The scenario analysis does not include the effect of various stimulus packages announced by the Reserve Bank and the government, which may lead to a relatively smoother recovery. 24ECONOMIC REVIEW II.1.10 Another constituent of GFCF, viz., Chart II.1.3: Indicators of Investment Demand construction activity remained subdued in 2019- 20 as a large inventory overhang coupled with stressed liquidity conditions restrained new launches. This was also reflected in growth of steel consumption, which plunged to a decadal low of 0.9 per cent in 2019-20 and cement production which registered a contraction of 0.9 per cent (Chart II.1.3). Driving the contraction in GFCF during 2019-20 was the collapse in investment in machinery and equipment, as evident in both imports and production of capital goods. II.1.11 As per the Order Books, Inventories and Capacity Utilisation Survey (OBICUS) of the Source: Joint Plant Committee, Office of Economic Adviser, NSO and DGCI&S. Reserve Bank, capacity utilisation (CU) in manufacturing sector picked up from 68.6 per cent had moderated to 29.7 per cent in 2018-19, is in Q3:2019-20 to 69.9 per cent in Q4:2019-20. On expected to gather pace during 2019-20 on the a seasonally adjusted basis, CU remained stable back of an uptick in household financial savings at 68.3 per cent in Q4:2019-20 as against 68.4 per (Appendix Table 3). As per the preliminary cent in Q3:2019-20. estimates, household financial saving has II.1.12 The rate of gross domestic saving, improved to 7.6 per cent of GNDI in 2019-20, after measured as a ratio of gross domestic saving to touching the 2011-12 series low of 6.4 per cent in gross national disposable income (GNDI), which 2018-19 (Table II.1.2). This improvement has Table II.1.2: Financial Saving of the Household Sector (Per cent of GNDI) Item 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20# 1 2 3 4 5 6 7 8 9 10 A. Gross financial saving 10.4 10.5 10.4 9.9 10.7 10.4 11.9 10.4 10.5 of which: 1. Currency 1.2 1.1 0.9 1.0 1.4 -2.1 2.8 1.5 1.4 2. Deposits 6.0 6.0 5.8 4.8 4.6 6.3 3.1 4.1 3.6 3. Shares and Debentures 0.2 0.2 0.2 0.2 0.2 1.1 1.0 0.4 0.4 4. Claims on Government -0.2 -0.1 0.2 0.0 0.5 0.7 0.9 1.0 0.0 5. Insurance Funds 2.2 1.8 1.8 2.4 1.9 2.3 2.0 1.3 1.7 6. Provident and Pension funds 1.1 1.5 1.5 1.5 2.1 2.1 2.1 2.1 2.1 B. Financial Liabilities 3.2 3.2 3.1 3.0 2.7 3.0 4.3 4.0 2.9 C. Net Financial Saving (A-B) 7.2 7.2 7.2 6.9 7.9 7.3 7.6 6.4 7.6 GNDI: Gross National Disposable Income. #: As per the preliminary estimate of the Reserve Bank. The NSO will release the financial saving of the household sector on January 29, 2021 based on the latest information, as part of the ‘First Revised Estimate of National Income, Consumption Expenditure, Saving and Capital Formation for 2019-20’. Note: Figures may not add up to total due to rounding off. Source: NSO. 25ANNUAL REPORT occurred on account of sharper moderation in Chart II.1.4: GVA Growth: Y-o-Y and 3-Quarter MA-SAAR household financial liabilities than that in financial assets. COVID-19 related economic disruptions, however, caused a sharper decline in household financial assets in Q4:2019-20. 3. Aggregate Supply II.1.13 Aggregate supply, measured by gross value added (GVA) at basic prices, slowed to 3.9 per cent in 2019-20, 2.1 percentage points lower than a year ago and 2.8 percentage points below its decennial rate of 6.7 per cent. GVA’s momentum measured by three quarter moving average (MA) of quarter-on-quarter (q-o-q) seasonally adjusted annualised growth rates (SAAR) appears to have Source: NSO and RBI staff calculations. troughed in Q3:2019-20 and a modest uptick affected by the lockdown, while industrial GVA seems to have commenced in Q4:2019-20 went into an accentuated contraction in 2019-20 (Chart II.1.4). (Table II.1.3). These negative tendencies were II.1.14 On the supply side, the main locomotive of cushioned by the agriculture sector, as discussed growth – the services sector – has been severely below. Table II.1.3: Real GVA Growth Sectors Growth (per cent) Contribution to Growth (per cent) 2008 2009 2011 2014 2018 2008 2009 2011 2014 2018 -09 -11 -14 -18 -20 -09 -11 -14 -18 -20 1 2 3 4 5 6 7 8 9 10 11 I. Agriculture, Forestry and Fishing -0.2 4.0 4.5 3.3 3.2 -1.2 8.7 14.6 6.9 10.6 II. Industry 3.4 9.1 2.9 8.8 2.6 18.6 29.2 11.8 26.8 11.1 2. Mining and Quarrying -2.5 9.7 -5.6 8.7 -1.4 -2.4 5.0 -4.4 3.4 -0.4 3. Manufacturing 4.7 9.3 4.5 8.9 2.9 18.5 22.2 14.1 20.9 8.7 4. Electricity, Gas, Water Supply and Other Utility 4.9 6.5 5.1 8.3 6.2 2.5 2.0 2.1 2.5 2.8 Services III. Services 6.4 8.0 7.0 8.1 6.3 82.6 62.1 73.6 66.3 78.3 5. Construction 5.6 6.4 5.4 4.7 3.7 11.6 7.9 9.0 5.3 5.3 6. Trade, Hotels, Transport, Communication and 2.4 9.0 7.5 8.7 5.7 9.6 19.8 24.0 22.0 21.3 Services related to Broadcasting 7. Financial, Real Estate and Professional Services 5.2 5.6 8.5 8.7 5.7 23.5 15.0 28.8 24.9 25.1 8. Public Administration, Defence and Other Services 15.8 11.8 5.1 8.4 9.7 37.8 19.4 11.7 14.1 26.6 IV. GVA at basic prices 4.3 7.4 5.6 7.4 5.0 100.0 100.0 100.0 100.0 100.0 Source: NSO and RBI staff calculations. 26ECONOMIC REVIEW II.1.15 Agriculture and allied activities, with a real season (September 30, 2019) turned out to be 10 GVA growth of 4.0 per cent in 2019-20 (PE), per cent above the long period average (LPA) benefitted from record production of foodgrains as [9 per cent below LPA during previous year]. well as commercial and horticultural crops. The Kharif sowing also gained momentum and ended contribution of agriculture to overall economic the season with marginally higher acreage than in growth (15.2 per cent) surpassed that of the the previous year. Accordingly, kharif foodgrains industrial sector (4.7 per cent) for the first time production in 2019-20 is placed 1.3 per cent higher since 2013-14. Although agriculture accounts for than the final estimates (FE) for 2018-19 only 14.6 per cent share in overall GVA, the (Table II.1.4). increased contribution in overall growth is expected to have positive impact on 48.3 per cent II.1.17 The incidence of cyclonic storms (mainly of total households who are employed in Vayu and Bulbul) and spells of unseasonal rains agriculture. in October and mid-November (Chart II.1.5) resulted in damage to standing crops in many II.1.16 The SWM started off on a sluggish note on June 8, 2019 with a delay of about one week from states. The maximum loss was in respect of urad, its normal onset. After a rainfall deficit of 33 per and production estimates were revised downward cent in June, the SWM gathered momentum from by 29.2 per cent (2nd AE over 1st AE) due to crop mid-July and cumulative rainfall at the end of the losses. Table II.1.4: Agricultural Production 2019-20 (Lakh Tonnes) Crop 2018-19 2019-20 2019-20 Variation (Per cent) Season 4th AE Final Target 4th AE Over 2018-19 Over 2019-20 4th AE Final Target 1 2 3 4 5 6 7 8 9 Foodgrains Kharif 1,417.1 1415.2 1,479.0 1,433.8 1.2 1.3 -3.1 Rabi 1,432.4 1437.0 1,432.0 1,532.7 7.0 6.7 7.0 Total 2,849.5 2852.1 2,911.0 2,966.5 4.1 4.0 1.9 Rice Kharif 1,021.3 1020.4 1,020.0 1,019.8 -0.1 -0.1 0.0 Rabi 142.9 144.4 140.0 164.5 15.1 13.9 17.5 Total 1,164.2 1164.8 1,160.0 1,184.3 1.7 1.7 2.1 Wheat Rabi 1,021.9 1036.0 1,005.0 1,075.9 5.3 3.9 7.1 Coarse Cereals Kharif 309.9 313.8 358.0 336.9 8.7 7.4 -5.9 Rabi 119.6 116.7 125.0 137.9 15.3 18.2 10.3 Total 429.5 430.6 483.0 474.8 10.5 10.3 -1.7 Pulses Kharif 85.9 80.9 101.0 77.2 -10.1 -4.6 -23.6 Rabi 148.0 139.8 162.0 154.4 4.3 10.4 -4.7 Total 234.0 220.8 263.0 231.5 -1.1 4.8 -12.0 Oilseeds Kharif 212.8 206.8 258.0 223.2 4.9 7.9 -13.5 Rabi 109.8 108.5 103.0 111.1 1.2 2.4 7.8 Total 322.6 315.2 361.0 334.2 3.6 6.0 -7.4 Sugarcane Total 4,001.6 4,054.2 3,855.0 3,557.0 -11.1 -12.3 -7.7 Cotton # Total 287.1 280.4 358.0 354.9 23.6 26.6 -0.8 Jute & Mesta ## Total 97.7 98.2 112.0 99.1 1.5 0.9 -11.5 #: Lakh bales of 170 kg each. ##: Lakh bales of 180 kg each. AE: Advance Estimate. Source: Ministry of Agriculture and Farmers Welfare, GoI. 27ANNUAL REPORT Chart II.1.5: Weekly Rainfall (2019-20) a: South-West Monsoon b: North-East Monsoon Source: India Meteorological Department. II.1.18 Overall foodgrains production is estimated production contracted by 12.3 per cent over the at 2,966.5 lakh tonnes in 2019-20 – a record for previous year. the third successive year. Foodgrains production II.1.19 As per the 2nd AE, the production of is estimated to have grown by 4.0 per cent in horticultural crops reached a record level of 2019-20, driven mainly by record production of 3,204.8 lakh tonnes during 2019-20, driven mainly rice and wheat. Among commercial crops, by production of vegetables and fruits oilseeds, cotton, and jute and mesta are estimated (Table II.1.5). All the three key vegetables – to have grown by 6.0 per cent, 26.6 per cent and onions, tomatoes and potatoes – registered 0.9 per cent, respectively, while sugarcane increased production. Table II.1.5: Horticulture Production (Lakh Tonnes ) Crops 2017-18 2018-19 2019-20 Variation (Per cent) Final Estimate 2nd AE Final Estimate 2nd AE 2018-19 FE 2019-20 2nd AE 2019-20 2nd AE (FE) (FE) over 2017-18 over 2018-19 2nd over the FE AE 2018-19 FE 1 2 3 4 5 6 7 8 Total Fruits 973.6 973.8 979.7 990.7 0.6 1.7 1.1 Banana 308.1 312.2 304.6 315.0 -1.1 0.9 3.4 Citrus 125.5 131.5 134.0 139.7 6.8 6.2 4.3 Mango 218.2 209.6 213.8 204.4 -2.0 -2.5 -4.4 Total Vegetables 1,844.0 1,873.7 1,831.7 1,917.7 -0.7 2.3 4.7 Onion 232.6 232.8 228.2 267.4 -1.9 14.8 17.2 Potato 513.1 529.6 501.9 513.0 -2.2 -3.1 2.2 Tomato 197.6 196.6 190.1 205.7 -3.8 4.6 8.2 Plantation Crops 180.8 176.6 163.5 162.4 -9.6 -8.0 -0.7 Total Spices 81.2 86.1 94.3 94.2 16.1 9.4 -0.1 Aromatics and 8.7 8.5 8.0 8.0 3.9 -6.6 -0.4 Medicinal Total Flowers 27.9 28.9 29.1 30.6 4.1 5.8 5.5 Total 3,117.4 3,148.7 3,107.4 3,204.8 -0.3 1.8 3.1 FE: Final Estimate. AE: Advance Estimate. Source: Ministry of Agriculture and Farmers Welfare, GoI. 28ECONOMIC REVIEW II.1.20 In recent years, the impact of climate change in terms of volatile rainfall intensity, increase in extreme events and rising temperature has implications for the outlook of agriculture (Box II.1.2). II.1.21 As in the previous two years, minimum support prices (MSPs) announced in 2019-20 for both rabi and kharif crops ensured a minimum return of 50 per cent over the cost of production. Box II.1.2 Climate Change - The Challenges for Indian Agriculture As in many parts of the world, drastic changes in climatic conditions have also been observed in India and these include impact on onset and withdrawal dates of monsoon and the incidence of extreme events (IPCC, 2019 and GoI, 2020). Consistent with models of climate change, the number of dry days as well as days with extremely high levels of rainfall have increased in India - more intense droughts; downward shifts in average rainfall by 59 mm since 2000 (Chart 1a); higher frequency of cyclones - India was hit by 8 cyclones in 2019 which is the highest since 1976 (Chart 1b); high variation in the number of subdivisions receiving excess/normal and deficient/scanty monsoon rains (Chart 1c); and an increase in the extent of crop area damaged due to unseasonal rains and heavy floods (Chart 1d). 1300 Chart 1a. Rainfall Pattern Chart 1b. Frequency of Cyclonic Storms over North Indian Ocean 1280 1260 1240 1220 1200 1180 1160 Chart 1c: Distribution of SWM Rainfall across Subdivisions Chart 1d. Crop Area Damage due to Heavy rains and Floods Source: Ministry of Statistics and Programme Implementation (MOSPI); Central Water Commission and Fertiliser Association of India. (contd....) 29 )mm(egarevAgnivoMraey-05 1591 5591 9591 3691 7691 1791 5791 9791 3891 7891 1991 5991 9991 3002 7002 1102 5102 9102 10 9 8 7 6 5 4 3 2 1 0 renmuN 3591 6591 9591 2691 5691 8691 1791 4791 7791 0891 3891 6891 9891 2991 5991 8991 1002 4002 7002 0102 3102 6102 9102 35 30 25 20 15 10 5 0 snoisividbuSforebmuN 1002 2002 3002 4002 5002 6002 7002 8002 9002 0102 1102 2102 3102 4102 5102 6102 7102 8102 9102 140 120 100 80 60 40 20 0 Excess/Normal Rainfall Deficient/Scanty Rainfall )eratceh hkal(aerA 3591 6591 9591 2691 5691 8691 1791 4791 7791 0891 3891 6891 9891 2991 5991 8991 1002 4002 7002 0102 3102 6102 II.1.22 In the Union Budget 2020-21, the government had proposed to operationalise Kisan Rail for transporting perishable goods (including milk, meat and fish) to improve the efficiency of agricultural supply chains, reduce post-harvest losses and moderate price fluctuations. Further, Krishi Udaan scheme was proposed to help farmers to transport their produce by air on both national and international routes. The Budget has also given a major thrust to development ofANNUAL REPORT Global warming has also led to a sharp rise in the annual average temperature in India by 1.8°C between 1997 and 2019 as compared to a 0.5°C increase between 1901 and 2000 (Chart 2a). This has likely caused a decline in crop yields, undermining farm income (Chart 2b). 28 Chart 2a. Rise in Average Temperature 11 Chart 2b. Correlation between Temperature and Crop Yield (1967-2019) 26 10 24 9 22 8 Source: MOSPI and Ministry of Agriculture and Farmers Welfare, GoI. Global warming has also led to a sharp rise in the annual average temperature in India by 1.8°C between 1997 and 2019 as compared to a 0.5°C increase between 1901 and 2000 (Chart 2a). This has likely caused a decline in crop yields, undermining farm income (Chart 2b). Water tables have depleted at an alarming rate, with around 52 per cent of the wells in India recording decline in water levels between the years 2008 and 2018 (Chart 3a). This imparts urgency to move from flood irrigation to micro irrigation methods like drip or hose reel, which can save up to 60 per cent of the water used and also help in preventing pest incidence. At present, the coverage of micro irrigation is much lower in states which have recorded higher declines in water tables (Chart 3b). Alongside, there is a need to adopt crop cycles, credit cycles and procurement patterns to monsoonal shifts. References: 1. Government of India, (2020), ‘Observed Monsoon Rainfall Variability and Changes during Recent 30 years (1989-2018)’, Climate Research and Services Division, Ministry of Earth Sciences, India Meteorological Department. 2. Intergovernmental Panel on Climate Change (IPCC) (2019), ‘ Climate Change and Land’, World Meterological Organisation and United Nations Environment Programme. warehousing infrastructure as well as village level storage facilities in the country by involving various stakeholders such as NABARD, Warehouse Development and Regulatory Authority (WDRA), FCI, Central Warehousing Corporation (CWC) and self-help groups (SHGs). Pradhan Mantri Kisan Urja Suraksha evam Utthan Mahabhiyan 30 suisleC eergeD 1091 7091 3191 9191 5291 1391 7391 3491 9491 5591 1691 7691 3791 9791 5891 1991 7991 3002 9002 5102 suisleC eergeD AnnualMean Temperature DifferencebetweenMaximum andMinimum Temperature (RHS) Chart 3a. Decline in Water Table Chart 3b. Average Area brought under Micro Irrigation (2008-2018) (2015-18) Source: Central Water Commission and Ministry of Agriculture and Farmers Welfare, GoI. scheme was launched enabling the farmers to set up solar power generation capacity on their fallow/ barren lands and to sell it to the grid. The government has proposed cluster-based 'One Product One District ' approach to tap the potential of horticulture sector in enhancing farmers’ income. Minimum support pricesECONOMIC REVIEW announced for kharif 2020-21 are higher by 2.9 component5 of industrial GVA growth moved per cent to 12.7 per cent vis-à-vis last year, deeper into contraction (Chart II.1.6). ensuring a minimum return of 50 per cent over all II.1.25 The deceleration was broad-based with India weighted average cost of production. headwinds from subdued demand – both domestic II.1.23 Under Atmanirbhar Bharat Abhiyan and international. With dwindling confidence and Package, government has announced measures imposition of lockdown, the demand for non- to strengthen infrastructure, logistics, capacity essential items plummeted. The index of industrial building, governance and administrative reforms production (IIP) shrank by 0.8 per cent during for agriculture, animal husbandry, fisheries and 2019-20 from 3.8 per cent growth a year ago food processing. These measures include eight (Chart II.1.7a & 7b). development schemes4 with fund allocation of II.1.26 In the manufacturing sector, which `1.6 lakh crore which is much higher as compared constitutes three-fourths of industry, 17 of 23 to funds allocated to the relevant schemes for the industry groups recorded contraction. The motor Union Budget 2020-21. In addition to the above vehicles segment was the largest negative schemes, the government has also announced contributor to manufacturing IIP, while basic three governance and administrative reforms to metals, largely comprising mild steel slabs, attract investments in agriculture sector and make provided a positive impetus. it competitive, namely, delisting of various II.1.27 The mining sector decelerated largely on agricultural commodities from the Essential account of disruptions caused by extended Commodities Act to develop seamless marketing and promote storage infrastructure in agriculture; ‘The Farmers’ Produce Trade and Commerce II.1.6 : Growth, Trend and De-trended Growth (Promotion and Facilitation) Ordinance 2020’ to ensure barrier free trade of agriculture produce; and ‘The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance 2020’ to empower the farmers to engage with processors, aggregators, wholesalers, large retailers, and exporters in a fair and transparent manner (Annex II). Industrial Sector II.1.24 Industrial GVA decelerated sharply in 2019-20 to 0.8 per cent from 4.5 per cent last year. The print for 2019-20 was the lowest in the 2011- 12 series, marking the fourth consecutive year of Source: NSO and RBI. deceleration since 2015-16. The cyclical 4 Agri Infrastructure Fund, Promotion of Herbal Cultivation, Extension of Operation Greens to all fruits and vegetables (currently, it is only for tomato, onion and potato), Formalisation of Micro Food Enterprises, Pradhan Mantri Matasya Sampada Yojana, National Animal Disease Control Programme, National Animal Husbandry Infrastructure Development Fund and Scheme on Beekeeping. 5 Estimated through a univariate approach using Hodrick-Prescott filter. 31ANNUAL REPORT Chart II.1.7: Growth in Industrial Production a. GVA b. IIP Source: NSO and RBI staff calculations. monsoon. Crude oil and natural gas production electricity closely co-moved, indicating that a pick- declined due to depletion in reserves, flood repairs up in manufacturing activities is essential for and industrial strikes, in addition to sluggish electricity demand to improve. Hydro electricity demand. There was some recovery in mining generation registered double digit growth during the year even as the share of renewables activity during H2 as unfavourable weather increased in the total electricity generation mix. conditions waned and economic activity picked up in January-February 2020. Electricity generation II.1.28 In terms of use-based classification, much decelerated due to contraction in thermal power of the deceleration in IIP was caused by a sharp generation, lean industrial demand and the contraction in capital goods and consumer extended monsoon. IIP manufacturing and durables production (Table II.1.6). Table II.1.6: Index of Industrial Production (2011-12 = 100) (Per cent) Growth Rate Industry Group Weight 2015-16 2016-17 2017-18 2018-19 2019-20 2019-20 2020-21 in IIP (April-June) (April-June) 1 2 3 4 5 6 7 8 9 Overall IIP 100 3.3 4.6 4.4 3.8 -0.8 3.0 -35.9 Mining 14.4 4.3 5.3 2.3 2.9 1.6 3.0 -22.4 Manufacturing 77.6 2.8 4.4 4.6 3.9 -1.4 2.4 -40.7 Electricity 8.0 5.7 5.8 5.4 5.2 1.0 7.3 -15.8 Use-Based Primary goods 34.0 5.0 4.9 3.7 3.5 0.7 2.6 -20.3 Capital goods 8.2 3.0 3.2 4.0 2.7 -13.9 -3.5 -64.4 Intermediate goods 17.2 1.5 3.3 2.3 0.9 9.1 9.2 -43.0 Infrastructure/ construction goods 12.3 2.8 3.9 5.6 7.3 -3.6 0.4 -48.3 Consumer durables 12.8 3.4 2.9 0.8 5.5 -8.7 -2.7 -67.6 Consumer non-durables 15.3 2.6 7.9 10.6 4.0 -0.1 7.0 -15.3 Source: NSO. 32ECONOMIC REVIEW II.1.29 In terms of weighted contributions to IIP, Chart II.1.9: Manufacturing Capacity Utilisation the shares of capital goods, construction/ infrastructure goods, consumer durables and consumer non-durables declined, while that of intermediate goods increased (Chart II.1.8). II.1.30 Even as the persisting weakness in capital goods production, and the decline in capacity utilisation have raised concerns in the context of investment slowdown, demand for consumer non- durables has also slumped, suggesting overall weakening of demand conditions (Chart II.1.9). II.1.31 The deceleration in manufacturing activity is aggravated by decline in trade due to trade disruptions with the onset of COVID-19 and Source: RBI. declining demand. The import intensity of India’s II.1.32 Import intensity differs across product manufacturing products6, on an average, stood at groups, with the electronics industry having the 35.6 per cent during the period 2015-17 highest import dependence, followed by machinery (Table II.1.7). and equipment, reflecting disproportionate impact Table II.1.7: Select Industry-wise Import Chart II.1.8: IIP- Use based: Weighted Contributions Dependence (Average of 2015-2017) (Per cent) Industry Import Import Share in Intensity of Intensity of Manufacturing Intermediate Output GVA Inputs 1 2 3 4 Electronics 60.7 42.8 4.6 Machinery 48.5 37.3 8.1 Transport 5.3 3.4 11.5 Equipment Chemicals 29.4 21.0 9.0 Pharmaceuticals 2.7 1.3 6.5 Total 35.6 25.1 100.0 Manufacturing Source: RBI staff estimates. Source: NSO. 6 Import intensity = Σn i=1 QIi where = sectors inn ec onomy; = intermediate inputs used for production in domestic economy; = imported intermediate inputs. Σi=1Qi i Q QI 33ANNUAL REPORT of trade restrictions on industries. Accordingly, an Table II.1.9: Impact on Manufacturing and Mining GVA - Alternate Scenarios import disruption, ceteris paribus, would lead to non-availability of crucial components, resulting in Sectors Disruptions Factor Income Loss Estimated in Constant Prices (` lakh crore) contraction in manufacturing GVA by as much as 2.5 per cent (Table II.1.8). Phase Phase Cumulative I & II: III & IV: Effect II.1.33 The impact due to factor income loss Lockdown Lockdown (68 days) (40 days) (28 days) (capital and labour) of 68 days of lockdown on the 1 2 3 4 5 manufacturing and mining sectors could be as high as `2.7 lakh crore (Table II.1.9). Mining & Partial 0.389 0.109 0.498 Quarrying Services Sector Manufacturing Partial 1.664 0.576 2.240 II.1.34 In tandem with the slowdown in the Manufacturing 2.053 0.685 2.738 & Mining GVA industrial sector, services sector growth decelerated to 5.0 per cent in 2019-20 – the lowest Note: 1. The sectoral proportion of labour income shares are taken from India KLEMS database. in the last three decades. All sub-sectors except 2. All values to be read as negative. 3. The Q1:2020-21 impact on manufacturing GVA considers public administration, defence and other services 33 days in Phase I & II, 28 days in Phase III & IV and 61 (PADO) decelerated, the latter cushioning overall days in cumulative effect. Source: RBI staff estimates. services sector growth, despite revenue shortfalls. Excluding PADO, services sector GVA growth decelerated to 3.7 per cent from 7.0 per cent in 2018-19 (Chart II.1.10). Table II.1.8: Impact of Trade Disruption in II.1.35 Deceleration in construction and trade, India’s Manufacturing Sector (Per cent) hotels, transport, communication and services . India’s Main Imports Global Import Scenario I: Scenario II: Scenario III: Chart II.1.10: Services Sub-Sector GVA Growth Import Import < 50 Import < 25 Freezes per cent per cent 1 2 3 4 Capital Goods 0.84 0.42 0.21 (Machinery) Electronics and 0.83 0.41 0.21 Electricals Pharmaceuticals 0.05 0.01 0.01 Chemicals 0.70 0.18 0.18 Transport Equipment 0.16 0.02 0.04 Combined Effect on 2.58 1.04 0.64 GVA of the Above Sectors Total Manufacturing 9.90 4.95 2.48 GVA Note: All values should be read as negative. Source: RBI staff estimates Source: NSO and RBI staff calculations. 34ECONOMIC REVIEW related to broadcasting drove the slowdown in construction, trade, transport and finance and is a overall services activity (Chart II.1.11). coincident indicator of GVA growth in the services excluding PADO, declined in 2019-20 II.1.36 The sluggishness in the road transport (Chart II.1.12). sector was reflected in a contraction in commercial vehicle sales that began since H2:2018-19 and 4. Employment intensified through the year. The air transport II.1.38 In June 2020, the NSO released the segment remained stagnant, with contraction in Periodic Labour Force Survey (PLFS) of both passenger and cargo traffic. Foreign tourist employment for 2018-19. The labour force arrivals fell sharply from February 2020 pointing to participation rate was estimated at 37.5 per cent in difficult times ahead for the hospitality industry in 2018-19, an increase of 0.6 percentage points the wake of COVID-19. The hospitality industry is from 2017-18. The unemployment rate according likely to be the worst affected sector globally. Even to usual status declined to 5.8 per cent in 2018-19 rail transport decelerated during 2019-20. The (6.0 per cent for male and 5.2 per cent for female) construction sector registered its sharpest from 6.1 per cent in 2017-18 (6.2 per cent for male deceleration – from 6.1 per cent in 2018-19 to 1.3 and 5.7 per cent for female). Worker population per cent during 2019-20. Private sector estimates rate, an indicator of employment, increased to indicates that in the housing sector, new launches 35.3 per cent in 2018-19 as compared to 34.7 per and sales declined in Q4:2019-20. cent in 2017-18. In terms of distribution of workers II.1.37 The Reserve Bank’s services sector by broad status in employment, the share of composite index (SSCI)7, which tracks activity in regular wage/salaried workers increased from Chart II.1.11: Services GVA Sub-Sectors Contributions Chart II.1.12: Growth in Services Sector (excluding PADO) and Services Sector Composite Index PADO: Public Administration, Defence and Other Services. Source: NSO and RBI staff calculations. Source: NSO and RBI staff estimates. 7 SSCI is constructed by suitably extracting and combining the information collated from high frequency indicators, namely, steel production, cement production, cargo handled at major ports, production of commercial vehicles, railway freight traffic, non-oil imports, tourist arrivals, real bank credit and insurance premium. 35ANNUAL REPORT 22.8 per cent in 2017-18 to 23.8 per cent in 2018- Chart II.1.13: Jobs in Organised Sector - Payroll 19, with a corresponding fall in the proportion of Employment Indicator casual workers from 24.9 per cent to 24.1 per cent during the same period, indicating enhanced formalisation of the economy. II.1.39 More updated organised sector employment, measured in terms of payroll8 data from the Employees’ Provident Fund Organisation (EPFO), Employees’ State Insurance Corporation (ESIC) and National Pension System (NPS), indicated a mixed picture with regard to job creation in 2019-20 (Chart II.1.13). Net subscribers added to EPFO per month averaged 6.5 lakh during April-March 2019-20, up from 5.6 lakh a Source: Government of India. year ago. On the other hand, the average number of members who paid their contribution to ESIC quarter. Hiring activity measured by online contracted by 4.1 lakh during 2019-20, in contrast recruitment, showed a mixed pattern. While Naukri to an addition of 0.6 lakh during 2018-19. New Job Speak Index contracted sharply, Monster subscribers to NPS increased marginally during Employment Index registered growth during the same period. Q4:2019-20 (Chart II.1.14a). Both the Industrial II.1.40 For Q4:2019-20, PMI employment index Outlook Survey (IOS) and Consumer Confidence showed payroll hiring in manufacturing gained Survey (CCS) pointed to the sentiments on momentum whereas, for services, the rate of job employment conditions remaining pessimistic creation moderated as compared to previous during Q4:2019-20 (Chart II.1.14b). Chart II.1.14 Employment Scenario a: Alternate Employment Indicators 100 b: RBI Surveys on Employment 50 0 -50 -100 Source: RBI, IHS Markit, Monster.com and Naukri.com. 8 EPFO, ESIC and NPS series are not additive due to overlaps in the data. 36 )tnecreP(esnopseRteN 81-7102:1Q 81-7102:2Q 81-7102:3Q 81-7102:4Q 91-8102:1Q 91-8102:2Q 91-8102:3Q 91-8102:4Q 02-9102:1Q 02-9102:2Q 02-9102:3Q 02-9102:4Q 12-0202:1Q Current Perception-CCS Assessment IOS Expectation (One yearahead) -CCSECONOMIC REVIEW II.1.41 Considering the small farm size in India, opportunities such as strategic promotion of the self-employed in agriculture can be assumed labour-intensive manufacturing, increasing public to be relatively unscathed by the pandemic. On expenditure on MGNREGA, Prime Minister’s the other hand, 40 per cent of casual labourers in Employment Generation Programme (PMEGP), rural areas are employed in the construction Pandit Deen Dayal Upadhyaya Grameen sector, which has come to a complete halt during Kaushalya Yojana (DDU-GKY) and Deen Dayal the lockdown (Table II.1.10). Self-employed and Antodaya Yojana – National Urban Livelihoods casual labourers together account for 51.3 per Mission (DAY-NULM). For skill development, a cent of the urban workforce, and hence, the target to train over 69.03 lakh during 2016-17 to pandemic has disproportionate impact on urban 2019-20 has been set to help them earn a areas. livelihood through Pradhan Mantri Kaushal Vikas II.1.42 Several policy initiatives were undertaken Yojana. As a part of legislative reforms, 44 labour by the government during the year for addressing laws have been simplified, amalgamated and structural bottlenecks in the economy. These rationalised into 4 labour codes in accordance policies are aimed at generating employment with the recommendations of the 2nd National Table: II.1.10: Sector and Area-wise Type of Workforce (Percentage Share in respective Employment Category) Sectors Rural Urban Rural+ Urban Self Regular Casual Self Regular/ Casual Self Regular/ Casual employed /Salaried employed Salaried employed Salaried 1 2 3 4 5 6 7 8 9 10 Agriculture 73.9 4.7 49.9 10.5 0.5 9.3 60.4 2.1 43.6 Mining & Quarrying 0.1 1.1 0.8 0.1 0.8 0.4 0.1 0.9 0.6 Manufacturing 6.5 20.0 4.7 22.8 23.6 17.1 10.0 22.2 6.7 Electricity & Water Supply 0.1 1.8 0.1 0.7 1.7 0.2 0.2 1.9 0.1 Construction 1.9 3.2 40.0 4.7 2.5 51.7 2.5 2.8 42.0 Trade, Hotel & Restaurant 10.9 13.3 1.0 34.6 17.9 7.6 16.0 16.1 1.7 Transport, Storage & 3.0 12.7 2.3 12.3 9.8 8.1 4.9 10.7 3.3 Communication Other Services 3.5 43.3 1.2 14.3 43.2 5.6 5.8 43.3 1.9 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: RBI staff calculations. 37ANNUAL REPORT Commission on Labour. The Code on Wages, expand without losing benefits and also improve 2019, passed in both the Houses of Parliament, is ease of doing business by aligning them with GST. expected to bring greater formalisation of the The structural reforms introduced as part of fourth labour market and safeguard interests of workers, tranche of stimulus is expected to bring in private while facilitating employment creation and ease of investments across eight critical sectors9. The doing business. proposed change in public sector enterprise policy, where all sectors will be opened to private II.I.43 A package of measures was announced in sectors, and public-sector enterprises will operate May 2020 under Atmanirbhar Bharat Abhiyan in only in notified strategic sectors, will bring in far- five tranches cover, among others, rural reaching changes in India’s industrial sector. The employment generation, infrastructure, MSMEs, Atmanirbhar Bharat Abhiyan Package aims to NBFCs, migrant workers and ease of doing provide immediate relief to sections of the business. These measures aggregate around `20 economy most impacted by the pandemic and to lakh crore or 10 per cent of GDP and aim to revive economic activity along with creating new address the difficulties faced by various categories opportunities for employment and growth. In the including MSMEs, NBFCs, power distribution manufacturing sector, 100 per cent FDI in contract companies and infrastructure projects. The manufacturing and commercial coal mining measures, both short-term and long-term in through the automatic route is expected to bring in nature, also endeavour to make India self-reliant more private investments. by boosting private participation in numerous II.1.45 To sum up, consumption demand slumped sectors with global quality and competitiveness. during 2019-20. Gross fixed capital formation The growth of India’s personal protective could not sustain its past momentum and equipment (PPE) sector from scratch before contracted. On the supply side, agriculture and March 2020 to making 1,50,000 pieces a day by allied activities accelerated with record foodgrains beginning of May 2020 shows the potential of and horticulture production supported by allied India in meeting the challenges. activities, which remained robust. Industrial sector II.I.44 MSMEs which are badly hit by the activity plummeted during 2019-20, driven down pandemic are expected to benefit from various mostly by the manufacturing sub-sector. With policies of the government such as collateral free services sector growth also decelerating, the loan of `3 lakh crore, subordinate debt provision outlook for the economy is clouded by uncertainty of `20,000 crore and equity infusion via mother- and testing challenges, mainly the intensity, fund-daughter fund model. Further, the change in spread and duration of COVID-19. The priority is definition of classification of MSMEs by including to revive growth as the Indian economy heals from turnover as basis of definition will allow MSMEs to the scars of COVID-19. 9 Coal, minerals, defence production, airspace management, power distribution companies, social infrastructure projects, space sectors and atomic energy. 38ECONOMIC REVIEW II.2 PRICE SITUATION Table II.2.1: Headline Inflation – Key Summary Statistics II.2.1 The global inflation environment remained (Per cent) benign through 2019 and the early part of 2020, 2012-13 2013-14 2014-152015-162016-172017-182018-192019-20 engendered by soft commodity prices and massive 1 2 3 4 5 6 7 8 9 monetary policy accommodation. In India too, Mean 10.0 9.4 5.8 4.9 4.5 3.6 3.4 4.8 headline inflation10 was benign in the first half of Standard 0.5 1.3 1.5 0.7 1.0 1.2 1.1 1.8 2019-20, but firmed up in the second half due to a Deviation Skewness 0.2 -0.2 -0.1 -0.9 0.2 -0.2 0.1 0.5 sharp spike in food inflation on a combination of Kurtosis -0.2 -0.5 -1.0 -0.1 -1.6 -1.0 -1.5 -1.4 adverse developments, i.e., the late withdrawal of Median 10.1 9.5 5.5 5.0 4.3 3.4 3.5 4.3 the monsoon, unseasonal rains and supply Maximum 10.9 11.5 7.9 5.7 6.1 5.2 4.9 7.6 disruptions. During December 2019-February Minimum 9.3 7.3 3.3 3.7 3.2 1.5 2.0 3.0 2020, headline inflation breached the upper Note: Skewness and Kurtosis are unit-free. tolerance band for inflation mandated for the Source: NSO and RBI staff estimates. monetary policy committee (MPC) [Chart II.2.1]. in food inflation during the second half of the year. II.2.2 In the event, annual average inflation Furthermore, kurtosis turned slightly less negative crossed 4 per cent for the first time since the than it was a year ago, suggesting a few instances adoption of flexible inflation targeting (FIT) of large deviations from mean inflation, which was framework in 2016, amidst accentuated volatility also reflected in the wide gap between maximum (Table II.2.1). The intra-year distribution of inflation and minimum inflation during the year. also had a high positive skew, reflecting the spikes II.2.3 Against this backdrop, sub-section 2 assesses developments in global commodity Chart II.2.1: Inflation across Major Components prices and inflation. Sub-section 3 discusses movements in headline inflation and major turning points, followed by a detailed analysis of the major constituents of inflation in sub-section 4. Sub- section 5 discusses other indicators of prices and costs, followed by concluding observations. 2. Global Inflation Developments II.2.4 International food prices were range- bound during H1:2019-20, but they firmed up from October 2019, primarily led by wheat (due to strong international demand), maize (supply Note: Figures in parentheses indicate weight in CPI-Combined. April uncertainty in the US and Argentina), palm oil and May 2020 data are imputed by NSO. Source: NSO and RBI staff estimates. (lower supply and rising demand for biodiesel in 10 Headline inflation is measured by year-on-year changes in the all-India CPI-Combined (Rural + Urban) with base year: 2012=100 released by the National Statistical Office (NSO), Ministry of Statistics and Programme Implementation, Government of India. 39ANNUAL REPORT producing countries), meat (demand from China) which accounts for more than 60 per cent of oil and fish prices (Chart II.2.2). Beginning December demand. This led to a fall in crude oil prices during 2019, prices of rice (drought conditions in January-February 2020 to a level of US$ 5311 per Thailand), sugar (lower than expected world barrel in February 2020. Subsequently, crude oil production) and other edible oils also hardened. In prices plunged even lower to US$ 32.2 per barrel the non-food category, metal prices remained in March 2020 as the OPEC+ failed to reach an weak due to US-China trade tensions and subdued agreement on production cuts. The price of the global demand. Prices of precious metals, Indian basket of crude oil touched US$ 33.4 per however, registered a sharp increase on safe barrel in March 2020, the lowest since February haven demand amidst global uncertainties. Crude 2016. As the COVID-19 pandemic spread across oil prices generally declined during May-August the globe, all commodity prices dipped. The 2019, despite production cuts by the organisation shutdown of industries in China in February 2020 of the petroleum exporting countries (OPEC) and and later in Europe and the US led to a fall in ongoing geopolitical tensions. A supply disruption demand for metals, easing their prices. Prices of in Saudi Arabia in September 2019 caused prices food items like palm oil, soy oil, sugar and corn to increase temporarily before falling in October also declined with retrenchment in demand for 2019. Prices picked up during November- ethanol and bio-diesel as crude oil prices declined. December 2019 on hopes of positive US-China Prices of some food items like rice and wheat trade talks and deepening of production cuts by were, however, supported by stockpiling by OPEC+ from 1.2 million barrels per day (mbpd) to consumers in regions affected by COVID-19. 1.7 mbpd. In January 2020, however, the Despite OPEC+ reaching an agreement to cut oil COVID-19 pandemic hit the transportation sector, production by about 10 mbpd (about 10 per cent of global supply) in early April, crude oil prices Chart II.2.2: International Commodity Prices continued to fall on COVID-19 induced slump in demand and exhaustion of storage capacity. Brent crude oil prices fell to a low of US$ 23.3 per barrel in April 2020. Subsequently, crude prices did recover to around US$ 42.8 per barrel in July 2020, but remained far below pre-COVID-19 levels. II.2.5 Reflecting these global commodity price developments and weak demand conditions, consumer price inflation remained benign during 2019 and early 2020 in a number of economies. Core consumer price inflation was low in advanced economies (AEs), despite robust job growth. Many emerging market and developing economies SSoouurrccee:: WWoorrlldd BBaannkk cPoimnkm Sohdeietyt Dpraitcaeb daaseta. (The Pink Sheet). (EMDEs) also experienced easing of inflation due 11 World Bank Commodity Price Data (The Pink Sheet). 40ECONOMIC REVIEW to subdued economic activity, although some before bouncing back during December 2019- pressures from rising food prices were visible. March 2020 on the pressures from international With the outbreak of COVID-19 and consequential prices of LPG and kerosene. Inflation excluding lockdown bringing global economic activity to near food and fuel remained generally moderate during standstill, many economies resorted to monetary the year, with a historic low in October 2019, and fiscal measures to ward off recessionary before gradually picking up again till January tendencies and provide support to growth. 2020. 3. Inflation in India II.2.8 For the year as a whole, inflation picked up to average 4.8 per cent in 2019-20, 136 basis II.2.6 After trending below the target of 4 per points (bps) higher than a year ago (Appendix cent during the first half of 2019-20, headline Table 4). With the uptick in headline inflation from inflation spiked during the second half and reached September 2019, households’ median inflation a multi-year peak of 7.6 per cent in January 2020 expectations hardened during the second half of (highest in 68 months) [Chart II.2.3]. An atypically 2019-20 by 103 bps three months ahead and by prolonged south west monsoon (SWM) along with 133 bps a year ahead. This upturn in expectations unseasonal rains during the kharif harvest period is also corroborated by more forward-looking led to crop damages and supply disruptions which assessments of professional forecasters and by pushed up food prices, especially those of surveys of consumer confidence. vegetables, from September to December 2019. Thereafter, with the fading of these pressures and 4. Constituents of CPI Inflation encouraging prospects for the rabi crop, food II.2.9 Constituents of CPI headline inflation inflation started easing from January 2020. exhibited distinct shifts during 2019-20 II.2.7 Fuel prices recorded five consecutive (Chart II.2.4). During the first half of the year, food months of deflation during July-November 2019, inflation trailed below headline inflation, whereas Chart II.2.3: Movements in Headline Inflation Chart II.2.4: Drivers of Inflation (Y-o-Y) Note: April and May 2020 data are imputed by NSO. *: Includes Recreation & Amusement and Personal Care & Effects. Source: NSO and RBI staff estimates. Source: NSO and RBI staff estimates. 41ANNUAL REPORT inflation excluding food and fuel ruled above it. eggs, meat and fish, and spices. The delayed The dynamics reversed during the second half, winter easing of vegetables prices brought some with food inflation remaining significantly above relief during January-March 2020. the headline and inflation excluding food and fuel II.2.11 Drilling down into specific pressure points, pacing below it. Inflation in fuel prices had eased prices of vegetables (weight: 13 per cent in CPI- below headline inflation from February 2019 to Food and beverages) shaped the overall food February 2020, but rose above it in March 2020. inflation trajectory during 2019-20. Excluding Food vegetables, food inflation would have averaged 236 bps lower in 2019-20 (6.0 per cent including II.2.10 Inflation in prices of food and beverages vegetables). The crop damage, mentioned earlier, (weight: 45.9 per cent in CPI) leaped from 1.4 per resulted in a historically high build-up of cent in April 2019 to 12.2 per cent in December momentum; consequently, vegetables price 2019. Consequently, its contribution to overall inflation rose to an all-time high of 60.5 per cent in inflation surged to 57.8 per cent in 2019-20 from December 2019 (Chart II.2.6a). 9.6 per cent a year ago. The delay in the onset of the southwest monsoon (SWM) by around a week, II.2.12 Within vegetables, onion prices dominated followed by a considerably longer delay in the build-up in upside pressures (Chart II.2.6b) withdrawal (by 39 days), led to the persistence of right from June 2019 in the wake of a slump in high momentum in food prices. Additionally, mandi arrivals due to reduced rabi onion acreage cyclonic storms and unseasonal rains resulted in in Maharashtra in drought-like conditions. In supply disruptions and damage to kharif crops, addition, unseasonal rains during September- primarily vegetables and pulses, during December- October 2019 damaged the kharif onion crop in January 2019-20 (Chart II.2.5). Price pressures major producing states of Maharashtra, Madhya soon became broad-based and were also Pradesh, Karnataka and Andhra Pradesh, observed across items such as cereals, milk, escalating prices from September 2019. Chart II.2.5: Drivers of Food Inflation (Y-o-Y) *: Includes meat and fish, egg, and milk and products. #: Includes sugar and confectionery, spices, non-alcoholic beverages, and prepared meals. Note: Meat and Fish index for April 2020 and Prepared Meals, Snacks, Sweets, etc. indices for April and May 2020 are imputed by NSO. Source: NSO and RBI staff estimates. 42ECONOMIC REVIEW Chart II.2.6: CPI-Vegetables: Seasonality in Prices and Drivers of Price Build-Up a: CPI-Vegetables (Cumulative Momentum) b: Cumulative CPI-Vegetables Price Build-up - Contributions Note: Item level CPI data are not released by NSO for the months of March, April and May 2020. Source: NSO and RBI staff estimates. Furthermore, the rains also impacted the harvesting in Maharashtra and fungus-damaged transplantation of the late kharif onion crop. Onion crops in Karnataka, coupled with the supply price inflation skyrocketed to 327.4 per cent in disruptions referred to earlier in key supplier states December 2019. Supply side measures, including – Karnataka, Maharashtra and Himachal Pradesh. imposing a minimum export price (MEP) of Tomato prices, however, moderated during US$ 850 per tonne, banning export of onions, November 2019 - February 2020, in line with the imposing stock holding limits on wholesale traders usual seasonal pattern. and retailers in September 2019, and II.2.14 Prices of cereals and products (weight of announcement of import of 1.2 lakh tonnes of 21 per cent in the CPI-Food and beverages) also onions from Turkey, Afghanistan and Egypt during witnessed a build-up in upside pressures during November-December 2019 did not, however, fully alleviate price pressures. With the arrival of the 2019-20 (Chart II.2.7), rising almost continuously delayed kharif crop and on the back of a better Chart II.2.7: CPI-Cereals and Products Momentum rabi crop, which boosted the production of onions, as per the 2nd Advance Estimates (AE) of the Ministry of Agriculture, onion prices started easing from January 2020. II.2.13 Potato prices also picked up throughout the year (barring September 2019 and February 2020), primarily due to untimely and excess rains, which damaged crops ready for harvest and disrupted supplies to mandis. Consequently, potato price inflation reached an all-time high of 63 per cent in January 2020, after emerging out of 7 months of continuous deflation in November 2019. In the case of tomato prices, inflation peaked at 70 per cent in May 2019 and remained in high Source: NSO and RBI staff estimates. double digits till December 2019, due to delayed 43ANNUAL REPORT from 1.2 per cent in April 2019 to around 5.3 per of reduced availability of fodder also contributed to cent during January-March 2020. In the case of an upward revision in procurement prices and, wheat, inflation averaged around 6.5 per cent subsequently, in retail prices. Higher global prices during the year, capped by higher procurement for skimmed milk products also supported milk which also economised on imports (31.4 per cent prices. Milk price inflation peaked during the year lower in 2019-20). Non-PDS rice prices emerged at 6.5 per cent in March 2020. out of 11 months of deflation in October 2019 on II.2.16 In the case of pulses (weight: 5.2 per cent account of positive price pressures and in CPI-Food and beverages), 2019-20 began with unfavourable base effects to reach an inflation the end of a prolonged deflation of 29 months in level of 4.2 per cent in January 2020, in the wake May 2019. Ahead of this development, a of higher procurement and damages to the kharif substantial fall (by 54 per cent) in imports during crop, but they moderated to 3.9 per cent in 2018-19 had helped in rebalancing the demand- February 2020. supply situation. Additionally, a decline in kharif pulses production (by 4.6 per cent as per 4th II.2.15 Milk and products prices (weight of 14.4 Advance Estimates for 2019-20 over 2018-19 per cent in the CPI-Food and beverages) were Final Estimates), especially urad production another pressure point during the year (by 44.9 per cent), added to inflation persistence (Chart II.2.8). Increase in procurement prices of (Chart II.2.9), despite imports being higher by milk led to major milk co-operatives like Amul and around 14.6 per cent during 2019-20. Mother Dairy raising retail milk prices by `2-3 per litre twice – during May and again in December II.2.17 Inflation in protein-rich items such as eggs 2019. This was followed by similar hikes by milk and meat and fish (weight: 8.8 per cent in CPI- co-operatives in other states, elevating the Food and beverages) averaged 4.5 per cent and momentum of milk and products prices during the 9.3 per cent, respectively – the highest in the last year. Increases in the cost of production because six years – and together, they contributed 13.7 per Chart II.2.8: CPI-Milk and Products Momentum 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 Source: NSO and RBI staff estimates. 44 tnecreP rpA yaM nuJ luJ guA peS tcO voN ceD naJ beF raM Chart II.2.9: Component-wise Contribution in CPI-Pulses Inflation *: Includes moong, masur, peas, khesari, besan and other pulses products. Note: 1. Figures in parentheses indicate weight in CPI-Pulses and products. Avg (2011-17) 2017-18 2018-19 2019-20 2020-21 2. Item level CPI data are not released by NSO for the months of March, April and May 2020. Source: NSO and RBI staff estimates.ECONOMIC REVIEW cent of overall food inflation during the year. Meat Chart II.2.10: Drivers of Fuel Inflation and fish prices reflected higher feed prices, especially of maize and soybean. Along similar lines, egg prices witnessed heightened prices during September-January 2019-20. With the outbreak and spread of COVID-19, however, the consumption of poultry slumped and prices moderated during February-March 2020. II.2.18 Among other major food items, sugar and confectionery, and oils and fats also contributed positively to overall food inflation, reflecting a decline in domestic production in the case of the former and higher international prices in respect of *: Includes kerosene PDS and kerosene other sources. **: Includes diesel, coke, coal, charcoal, and other fuel. the latter. Note: 1. Figures in parentheses indicate weight in CPI-Fuel and light. 2. Item level CPI data are not released by NSO for the months of March, April and May 2020. II.2.19 Prices of fruits (weight of 6.3 per cent in Source: NSO and RBI staff estimates. the CPI-food and beverages group) emerged out prices continued to rise throughout 2019-20 as oil of nine months of deflation in September 2019 but marketing companies (OMCs) raised prices in a prices generally remained soft in the rest of the calibrated manner to eventually phase out the year. Prices of spices, especially of dry chillies kerosene subsidy. Electricity inflation, which had and turmeric, registered significant pressures due largely remained in negative territory during April- to a reduction in the area under production. August 2019, also recorded an uptick in H2:2019- Fuel 20. Reflecting these developments and strong unfavourable base effects, fuel inflation turned II.2.20 The contribution of the fuel group (weight positive in December 2019 and reached an intra- of 6.8 per cent in CPI) to headline inflation decreased to 1.9 per cent in 2019-20 from 11.3 Chart II.2.11: Movements in LPG Retail Prices per cent in the previous year. Fuel inflation eased sequentially from April to June 2019 and moved into deflation during July-November 2019, pulled down by favourable base effects and muted price pressures in major fuel items (Chart II.2.10). Domestic LPG prices, which rose during April- June 2019, sank into deflation in July 2019, tracking the collapse in international LPG prices with a lag (Chart II.2.11). Firewood and chips inflation picked up during December 2019 to February 2020 on the back of strong price pressures on winter demand. Domestic LPG prices also moved out of deflation in January 2020, in line with the upward movement in Source: Petroleum Planning and Analysis Cell (PPAC), and Bloomberg. international LPG prices. Administered kerosene 45ANNUAL REPORT year peak of 6.6 per cent in March 2020. 2020. Within the miscellaneous group, price pressures remained generally contained in Inflation Excluding Food and Fuel respect of household goods and services, health, II.2.21 Inflation excluding food and fuel moderated recreation and amusement, and education. from 2018-19 levels to an average of 4.0 per cent II.2.23 Housing inflation moderated to 4.5 per in 2019-20 (Appendix Table 4) with a historic low cent in 2019-20 (6.7 per cent in 2018-19), reflecting of 3.4 per cent in October 2019 (Chart II.2.12). the waning of the impact of the increase in house Some hardening occurred during November rent allowance (HRA) for central government 2019-January 2020 due to prices of personal care employees under the 7th Pay Commission award. and effects and transport and communication sub- A historic low of 3.7 per cent was recorded in groups, reflecting increase in gold prices, hikes in March 2020. Net of housing, inflation excluding mobile telecom tariffs, and the rise in petrol and food and fuel averaged 3.9 per cent in 2019-20, diesel prices (Chart II.2.13). Subsequently, a down from 5.6 per cent a year ago. sharp fall in transport and communication prices in II.2.24 Clothing and footwear inflation eased to a February and March 2020 on the back of easing trough of 1.0 per cent in September 2019, largely international crude oil prices and falling domestic reflecting muted input costs. International prices air passenger traffic led to moderation during of cotton, a major input into clothing production, as February-March 2020. measured by the Cotton A Index, fell during May II.2.22 Among the major constituents of this to August 2019, followed by a recovery during group, inflation in prices of the miscellaneous September 2019-January 2020. The outbreak of category moderated during April-October 2019 COVID-19 also rattled international cotton reaching 3.4 per cent in October 2019 (lowest markets, with the Cotton A Index registering a fall since July 2017) and again during February-March in February and March 2020. Chart II.2.12: Drivers of CPI Excluding Food and Fuel Inflation *: Includes Recreation and Amusement and Personal Care and Effects. Source: NSO and RBI staff estimates. 46ECONOMIC REVIEW Chart II.2.13: Domestic Oil Price Trends Note: International crude oil price represents the average price of WTI, Brent and Dubai Fateh. Source: World Bank Pink Sheet Database, Indian Oil Corporation Limited, and Petroleum Planning and Analysis Cell (PPAC). II.2.25 Overall, headline inflation was subjected that seasonal behaviour has changed in the case to higher volatility in 2019-20 relative to the of prices of many food items such as, onions, previous four years, underpinned by high flux in ginger, brinjals, cauliflowers, okras and green food prices (Charts II.2.14a & b). Within the food peas. Interestingly, despite being the most volatile group, price spikes for different items occurred at item, seasonality in onion prices has declined different time points. Empirical analysis for the significantly over the years, partly reflecting period January 2011 and February 2020 suggests improvement in cold storage facilities. Volatility Chart II.2.14: Volatility in Prices a: CPI Headline b: Food and Beverages Note: Volatility has been estimated using GARCH model taking into account the imputed price indices published by the NSO for April-May 2020. Source: NSO and RBI staff estimates. 47ANNUAL REPORT estimated from asymmetric GARCH12 models 0.4 per cent in March 2020 due to softening in the suggest volatility in onion prices is likely to persist prices of all three major groups, i.e., primary in the near term, while tomato price volatility may articles, fuel & power and manufactured products. be short-lived. Inflation is persistent in the case of On an annual average basis, WPI inflation protein items and dry fruits, more than that for softened to 1.7 per cent in 2019-20 from 4.3 per prices of vegetables. There is no evidence of cent in 2018-19. A similar easing was also visible persistence of volatility in prices of items such as in the GDP deflator to 2.9 per cent in 2019-20 from petrol, diesel and precious metals, although these 4.6 per cent in 2018-19. items also contribute to volatility in headline II.2.28 After major increases in minimum support inflation. prices (MSPs) during 2018-19 for kharif and rabi 5. Other Indicators of Inflation crops, MSPs witnessed a moderate hike in 2019- 20. The extent of MSP increases varied across II.2.26 During 2019-20, sectoral CPI inflation crops, ranging from 1.1 per cent in the case of based on the consumer price index of industrial moong and nigerseed to 9.1 per cent for yellow workers (CPI-IW) remained elevated and reached soybean. MSPs of rice and wheat were increased 9.6 per cent in December 2019 (highest in 73 by 3.7 per cent and 4.6 per cent, respectively. months), primarily due to housing and food prices. With the impact of HRA revision of the 7th central II.2.29 Wage growth for agricultural and non- pay commission (CPC) completely waning in agricultural labourers generally remained subdued January 2020 and food prices easing along with during the year, averaging around 3.4 per cent, favourable base effects, CPI-IW inflation softened and reflecting the slowdown in the construction to 5.5 per cent in March 2020. Inflation based on sector. In the corporate sector, pressures from the consumer price index of agricultural labourers staff costs remained moderate during the year. (CPI-AL) and the consumer price index of rural II.2.30 In sum, headline inflation picked up labourers (CPI-RL), which do not have housing strongly during the closing months of 2019-20 and components, also increased during the year and the short-term outlook for food inflation has turned reached 11.1 per cent and 10.6 per cent, uncertain. Global crude oil prices have started respectively, in December 2019 (highest in 72 firming modestly in more recent weeks. Disruptions months) before easing thereafter, on softening of in food and manufactured items’ supply chains food prices and favourable base effects. could amplify sectoral price pressures, thus posing II.2.27 Inflation, measured by the wholesale price an upside risk to headline inflation. Heightened index (WPI), remained subdued during 2019-20. It volatility in financial markets could also have a reached an intra-year low of zero per cent in bearing on inflation. All of these may influence October 2019 (lowest in 40 months) due to inflation expectations of households, which are deflation in prices of non-food manufactured adaptive in nature, and show significant sensitivity products and fuel and power. It picked up during to shocks to food and fuel prices. Monetary policy, November 2019-January 2020, however, driven therefore, has to keep a constant vigil on price by a sharp uptick in prices of primary articles and movements, especially as they can translate into unfavourable base effects, before moderating to generalised inflation. 12 The volatility has been estimated through asymmetric threshold GARCH model proposed by Glosten, Jagannathan and Runkle (1993). 48ECONOMIC REVIEW II.3 MONEY AND CREDIT supply in terms of its components and sources, throwing light on the behaviour of assets and II.3.1 Monetary and credit conditions moderated liabilities of the banking sector. The underpinnings through 2019-20 reflecting the weakening of of bank credit evolution during the year have been underlying economic activity, with inflation covered in sub-section 4. This is followed by remaining benign in the first half of the year before concluding observations and some policy spiking on food price pressures in the later months. perspectives. The rate of money supply (M3) slackened as deposit growth moderated. Towards the close of 2. Reserve Money the year, the slowing of deposit growth became II.3.3 Reserve money – a stylised depiction of accentuated as COVID-19 impelled a flight to the Reserve Bank’s balance sheet that focuses on cash. In terms of the sources of money supply, its ‘moneyness’13 comprising currency in credit growth slumped to half its rate a year ago, circulation, bankers’ deposits and other deposits reflecting weak demand and risk aversion among with the Reserve Bank – increased by 9.4 per cent banks. Contra-cyclically, reserve money (RM) in 2019-20, lower than 14.5 per cent a year ago as expansion, adjusted for first round effects of cash well as its decennial trend rate of 11.4 per cent reserve ratio (CRR) changes, was broadly (2010-19) [Chart II.3.1; Appendix Table 4]. maintained at the preceding year’s rate, bolstered Adjusted for the reduction in the CRR by 100 basis by a build-up of net foreign assets (NFA) of the points (bps), effective March 28, 2020 – which Reserve Bank and its monetary policy operations reduced RM statistically by around `1,37,000 in consonance with the accommodative policy stance adopted since June 2019 – open market purchases; reduction in the CRR; special market Chart II.3.1: Reserve Money Growth operations (in the form of long-term repo operations 35 31 and targeted long-term repo operations); and 30 27.3 USD/INR swaps. These developments 25 23.9 19.1 20 17 engendered abundant liquidity in the system 15 14.4 13.1 14.5 13.7 which eased liquidity premia in the midst of strong 11.3 9.4 10 6.4 6.2 discrimination by financial markets on credit risk 3.6 5 concerns. -12.9 0 II.3.2 Against this backdrop, sub-section 2 -5 -10 delves into the dynamics underlying movements -15 in RM and, thereby, into the role of the Reserve -20 Bank’s balance sheet in the larger context of the state of the economy. This section also analyses the impact of COVID-19 on currency in circulation. *: RM adjusted for CRR reduction. Source: RBI. Sub-section 3 examines developments in money 13 ‘Moneyness’ refers to the characteristics of an asset to convert readily into liquidity at a low or zero transaction cost. 49 tnecreP 7002 8002 9002 0102 1102 2102 3102 4102 5102 6102 7102 8102 9102 0202 *0202 End-MarchANNUAL REPORT crore – RM grew by 13.7 per cent during the year, spurt in currency demand in Q1 associated with as against 13.9 per cent in 2018-19. summer holidays, weddings, rabi procurement and kharif sowing. In the following quarter, CiC II.3.4 Drilling into the unravelling of reserve contracted due to seasonal slack of economic money changes during the year reveals interesting activity in cash-intensive sectors such as behavioural shifts. Among components, the construction and agriculture. Thereafter, CiC expansion in RM was driven by currency in expanded, reflecting rise in currency demand for circulation (CiC) – 120 per cent of the RM kharif harvest and festivals in Q3 and the harvest expansion during the year. At the end of March of rabi crops during Q4. The year ended with a 2020, CiC constituted around 81 per cent of RM. surge in pandemic-related rush to cash. Overall, II.3.5 The demand for CiC normally follows a CiC growth of 14.5 per cent was slightly lower vis- defined intra-month pattern – expansion during a-vis 16.8 per cent a year ago (Chart II.3.3); the first fortnight due to transactions by households, however, the currency-GDP ratio increased to its followed by a contraction in the second fortnight pre-demonetisation level of 12.0 per cent in 2019- due to flow back of currency from households to 20 from 11.3 per cent a year ago, indicating the the banking system (Chart II.3.2). rise in cash-intensity in the economy in response II.3.6 CiC also exhibits seasonality across to the pandemic (Chart II.3.4). months/quarters – expanding in Q1, followed by II.3.7 There was an unusual rise in month-over- contraction in Q2, with more than three-fourths of month (M-o-M) CiC variation during March-June its annual variation occurring during Q3 and Q4. 2020 vis-à-vis the corresponding period in The year 2019-20 began with the usual seasonal previous years14 (Chart II.3.5 and Chart II.3.6). Chart II.3.2: Weekly Variation in Currency in Circulation Chart II.3.3: Quarterly Variation in Currency in Circulation 50,000 40,000 30,000 20,000 10,000 0 -10,000 -20,000 Source: RBI. Source: RBI. 14 The unusual increase in CiC during January-June 2017 was on account of the remonetisation process, post-demonetisation. 50 erorc` raM-72 rpA-71 yaM-8 yaM-92 nuJ-91 luJ-01 luJ-13 guA-12 peS-11 tcO-2 tcO-32 voN-31 ceD-4 ceD-52 naJ-51 beF-5 beF-62 raM-91 2,50,000 2,00,000 1,50,000 1,00,000 50,000 0 -50,000 Q1 Q2 Q3 Q4 2018-19 2019-20 2020-21 erorc` 2018-19 2019-20 2020-21ECONOMIC REVIEW Chart II.3.4: India’s Currency-GDP Ratio Chart II.3.6: Total Number of Confirmed COVID-19 Cases in India 12.5 12.0 11.5 11.0 10.5 10.0 9.5 9.0 8.5 8.0 Source: RBI. Source: Ministry of Health and Family Welfare, GoI. II.3.8 Bankers’ deposits with the Reserve Bank II.3.9 Amongst sources of RM, net domestic decreased by 9.6 per cent in 2019-20 as against assets (NDA) and NFA have alternated in an increase of 6.4 per cent in the previous year, determining RM growth (Chart II.3.8). During mirroring subdued deposit mobilisation and the 2019-20, the main driver was NFA, with net reduction in CRR to 3.0 per cent for a period of a purchases from Authorised Dealers at `3,12,005 year, effective March 28, 2020 (Chart II.3.7). crore vis-à-vis net sales at `1,11,945 crore in the Chart II.3.5: Impact of COVID-19 on CiC Chart II.3.7: Bankers’ Deposits with the Reserve Bank Source: RBI. Source: RBI. 51 tnecreP 21-1102 31-2102 41-3102 51-4102 61-5102 71-6102 81-7102 91-8102 02-9102 1,60,000 1,40,000 1,20,000 1,00,000 80,000 60,000 40,000 20,000 0 -20,000 -40,000 2015 2016 2017 2018 2019 2020 )erorc`( CiC ninoitairavM-o-M 6,00,000 5,00,000 4,00,000 3,00,000 2,00,000 1,00,000 0 Feb-20 Mar-20 Apr-20 May-20 Jun-20 January February March April May June rebmuNevitalumuC 6,20,000 5,70,000 5,20,000 4,70,000 4,20,000 erorc` rpA-3 rpA-42 yaM-51 nuJ-5 nuJ-62 luJ-71 guA-7 guA-82 peS-81 tcO-9 tcO-03 voN-02 ceD-11 naJ-1 naJ-22 beF-21 raM-5 raM-62 2018-19 2019-20 2020-21ANNUAL REPORT previous year. Consistent with the accommodative repo mode for the remainder of the financial year stance of monetary policy set out in June 2019, (Chart II.3.10a and Chart II.3.10b). the Reserve Bank ensured comfortable liquidity 3. Money Supply conditions, augmenting its liquidity management II.3.12 M3, comprising currency with the public toolkit with unconventional instruments. (CwP), aggregate deposits (AD) and other II.3.10 Net open market purchases of `1.1 lakh deposits with the Reserve Bank, averaged 10.2 crore resulted in an increase in net Reserve Bank per cent for the first three quarters of 2019-20 credit to the government by `1.9 lakh crore, which (10.1 per cent a year ago), before dropping off became the main driver of NDA in 2019-20. sharply in February and March 2020 to end the Among other constituents of NDA, net claims on year at 8.9 per cent (Chart II.3.11). banks15 and the commercial sector (mainly PDs), II.3.13 From the components side, M3 expansion reflected mainly net LAF absorption aimed at was contributed by AD, its largest constituent (86 sterilising forex operations and managing the per cent), led mainly by time deposits – AD large overhang of liquidity in the system accounted for 78 per cent of the increase in M3 (Chart II.3.9). during the year. On a year-on-year basis, however, II.3.11 The net LAF position was in repo mode there was a moderation in time deposit growth during April-May 2019, but turned into reverse due to the decline in interest rates and the general Chart II.3.8: Variation in Domestic and Foreign Chart II.3.9: Net Domestic Assets (Y-o-Y Variation) Assets of the Reserve Bank 8,00,000 6,00,000 4,00,000 2,00,000 0 -2,00,000 -4,00,000 -6,00,000 Source: RBI. Source: RBI. 15 Durable liquidity of `1,25,000 crore was injected into the banking system through five long-term repo operations (LTROs) for one-year and three-year tenors. The Reserve Bank had also conducted four simultaneous purchase and sales of securities under Special OMOs (or Operation Twist) between December 23, 2019 and January 23, 2020, which augmented net banking system liquidity by `11,724 crore. 52 )erorc`(egnahcY-o-Y 60-5002 70-6002 80-7002 90-8002 01-9002 11-0102 21-1102 31-2102 41-3102 51-4102 61-5102 71-6102 81-7102 91-8102 02-9102 NFA NDAECONOMIC REVIEW Chart II.3.10: Liquidity Injection/Absorption 2.3.10a a: 2018-19 4,00,000 1,50,000 3,00,000 1,00,000 2,00,000 50,000 1,00,000 0 0 -50,000 -1,00,000 -1,00,000 -2,00,000 -1,50,000 -3,00,000 -2,00,000 Source: RBI. II.3.14 Bank credit to the commercial sector, slowdown in economic activity (Chart II.3.12). As followed by net bank credit to the government and usual, demand deposits remained volatile, net foreign exchange assets of the banking sector, mirroring largely the variations in CwP (Chart led the expansion in M3. Nonetheless, bank credit II.3.13), which grew at a lower rate of 14.5 per to the commercial sector grew at a lower rate than cent vis-à-vis 16.6 per cent in the previous year. a year ago, reflecting lower bank credit offtake in The flight towards cash and a concomitant the economy (Chart II.3.14 and Table II.3.1). With drawdown on demand deposits was particularly non-SLR investments of banks also decelerating, visible in the last quarter of 2019-20, in the wake commercial banks augmented their SLR portfolios, of uncertainities related to COVID-19 pandemic. which was reflected in net bank credit to Chart II.3.11: Aggregate Deposits and M3 Chart II.3.12: Time Deposits: Y-o-Y Growth and Interest Rate Source: RBI. Source: RBI. 53 erorc` 81 ,60rpA 81 ,40 yaM 81 ,10nuJ 81 ,92 nuJ 81 ,72luJ 81,42guA 81 ,12peS 81 ,91 tcO 81 ,61voN 81 ,41 ceD 91 ,11 naJ 91,80 beF 91 ,80raM 91 ,13raM erorc` 4,00,000 5,00,000 3,50,000 4,00,000 3,00,000 3,00,000 2,50,000 2,00,000 2,00,000 1,00,000 1,50,000 1,00,000 0 50,000 -1,00,000 0 -2,00,000 Purchase from Authorised Dealers (Net) Net ReverseRepo(RHS) OMO Purchase (Net) erorc` 91 ,50rpA 91 ,30 yaM 91 ,13 yaM 91 ,82nuJ 91 ,62luJ 91,32guA 91 ,02peS 91 ,81 tcO 91 ,51voN 91 ,31 ceD 02 ,01 naJ 02,70 beF 02 ,60raM 02 ,13raM erorc` Purchase from Authorised Dealers (Net) Net ReverseRepo(RHS) OMO Purchase (Net) 25 20 15 10 5 0 tnecreP 80-7002 90-8002 01-9002 11-0102 21-1102 31-2102 41-3102 51-4102 61-5102 71-6102 81-7102 91-8102 02-9102 12 7.0 11 6.8 10 6.6 9 6.4 8 6.2 7 6.0 6 5.8 5 5.6 4 5.4 AD(Y-o-YGrowth) M3(Y-o-Y Growth) 91,21rpA 91,01 yaM 91,70nuJ 91,50 luJ 91,20guA 91,03guA 91,72peS 91,52 tcO 91,22voN 91,02 ceD 02,71 naJ 02,41 beF 02,31raM 02,13raM 02,42rpA 02,22 yaM 02,91nuJ TimeDepositGrowth TimeDepositInterest Rate (RHS) tnecreP tnecreP b: 2019-20ANNUAL REPORT Chart II.3.13: Currency with the Public and Demand Deposits: Fortnightly Variation 2,00,000 1,50,000 1,00,000 50,000 0 -50,000 -1,00,000 -1,50,000 -2,00,000 Source: RBI. government increasing by 11.8 per cent as towards its decennial average level (2010-19) of compared with 9.7 per cent a year ago. Growth of 5.5. Adjusted for reverse repo, however, analytically akin to banks’ deposits with the central NFA of the banking sector mirrored NFA in RM. bank – the money multiplier turned out to be lower Key Monetary Ratios at 4.8 by end-March 2020, reflecting the deceleration in the rate of money supply below its II.3.15 The money multiplier declined to 5.5 by secular trend (Chart II.3.15). end-March 2020 from 5.6 a year ago, converging 54 erorc` 91,62rpA 91,42 yaM 91,12nuJ 91,91luJ 91,61guA 91,31peS 91,11 tcO 91,80voN 91,60 ceD 02,30 naJ 02,13 naJ 02,82 beF 02,72raM 02,42rpA 02,22 yaM 02,91nuJ Chart II.3.14: Broad Money (M3): Components and Sources Currency with thePublic Demand Deposits Source: RBI. Table II.3.1: Monetary Aggregates Item Outstanding as Year-on-year growth rate (in per cent) on March 31, 2020 2018-19 2019-20 2020-21 (` Crore) (as on June 19, 2020) 1 2 3 4 5 I. Reserve Money (RM) 30,29,674 14.5 9.4 11.8 II. Money Supply (M3) 167,99,930 10.5 8.9 12.3 III. Major Components of M3 III.1. Currency with the Public 23,49,715 16.6 14.5 21.3 III.2. Aggregate Deposits 144,11,708 9.6 8.0 10.9 IV. Major Sources of M3 IV.1. Net Bank Credit to Government 49,06,583 9.7 11.8 19.8 IV.2. Bank credit to Commercial Sector 110,38,644 12.7 6.3 6.3 IV.3. Net Foreign Assets of the Banking Sector 38,01,036 5.1 23.8 27.4 V. M3 net of FCNR(B) 166,18,480 10.5 8.8 12.5 VI. Money Multiplier 5.5 Note: 1. Data are provisional. 2. The data for RM pertain to June 26, 2020. Source: RBI.ECONOMIC REVIEW Chart II.3.15: M3 Growth Chart II.3.16: Monetary Ratios 20 8 7 15 6 5 10 4 3 5 2 1 0 0 2015 2016 2017 2018 2019 2020 Source: RBI. Source: RBI. II.3.16 Linking this phenomenon of money deposit ratio was 3.8 per cent (4.5 per cent last creation process to the dynamics of economic year), reflecting the impact of the CRR reduction activity, empirical analysis16 considering data from (Chart II.3.16). Q1:2010 to Q4:2019 suggests that the money II.3.18 With the statutory requirements for CRR multiplier adjusted for reverse repo could be a and statutory liquidity ratio (SLR), at 3 per cent lead indicator for gauging the movement of and 18 per cent, respectively, around 79 per cent economic activity. Also, the money multiplier of deposits were available with the banking system adjusted for reverse repo appears to be a better as on end-March 2020 for credit expansion. The indicator, capturing the recent dynamics of moderation in the credit-deposit ratio to 76.4 per economic activity more closely than the unadjusted cent as at end-March 2020 from 77.7 per cent a money multiplier. year ago was largely a reflection of subdued II.3.17 The currency-deposit ratio at 16.3 per cent demand conditions in the economy due to several at end-March 2020 moved above its decennial factors examined subsequently. average (2010-19) of 15.1 per cent. During the II.3.19 The credit-deposit ratio, which measures year, the pace of expansion in currency and a rise the demand for credit relative to funding available of the currency-deposit ratio pointed to a shift in in the banking system, underwent four distinct public’s preference towards holding cash in phases since independence. It varied with the response to the uncertainty caused by the evolution of the economy – from the pre- pandemic. As at end-March 2020, the reserve- 16 Based on Granger Causality under Vector Autoregression (VAR) Framework. 55 tnecreP Currency-Deposit Ratio Money Multiplier (RHS) Reserve-Deposit Ratio Adjusted Money Multiplier(RHS)ANNUAL REPORT nationalisation phase to the post-nationalisation and from a recent peak of 15.0 per cent in phase, and subsequently, the reform phase starting December 2018. from early 1990s followed by movements dictated II.3.21 Credit demand has been ebbing away by upturns and downturns in growth cycles. across all sectors, despite the post-IL&FS shift These movements also reflected changes in among large borrowers, including non-banking statutory requirements for CRR and SLR. The financial companies (NBFCs) and housing finance average credit-deposit ratio of 72 per cent during companies (HFCs), away from non-bank sources the first two post-independence decades fell to 69 and towards the banking system for meeting per cent during the next two decades as deposit funding requirements. The unabated weakening growth gained momentum with the geographic of economic activity, coupled with deleveraging of spread of banking services, and further to 55 per corporate balance sheets and risk aversion by cent during 1990-2004 due to phases of subdued banks due to asset quality concerns, was credit demand. Subsequently, the average credit- accentuated towards the close of the year by the deposit ratio increased to 75 per cent during 2005- 20 on the back of a credit boom (2005-14), and pandemic woes (Chart II.3.18), producing a supportive economic growth conditions reduction in the incremental credit-deposit ratio (Chart II.3.17). (Chart II.3.19). The credit-to-GDP gap remained wide during 2019, reflecting the slack in credit 4. Credit demand (Chart II.3.20). II.3.20 Credit offtake from SCBs was muted II.3.22 The COVID-19 outbreak has affected during 2019-20, growing at 6.1 per cent y-o-y in a more than 200 countries across the globe, bringing sharp loss of pace from 13.3 per cent a year ago global economic activity to a near standstill, Chart II.3.17: Credit-Deposit Ratio Chart II.3.18: SCBs Credit Growth: Momentum and Base Effect 20 15 10 5 0 -5 Source: RBI. Source: RBI. 56 tnecreP 81,22nuJ 81,30guA 81,41peS 81,62 tcO 81,70 ceD 91,81 naJ 91,10raM 91,21rpA 91,42 yaM 91,50luJ 91,61guA 91,72peS 91,80voN 91,02 ceD 02,13 naJ 02,31raM 02,42rpA 02,50 nuJ Momentum Effect BaseEffect SCBsY-o-Y Credit GrowthECONOMIC REVIEW sync with other countries to mitigate the Chart II.3.19: Incremental Credit-Deposit Ratio macroeconomic impact caused by the pandemic 20,00,000 1.5 (Annex II). With a nation-wide lockdown and people mostly remaining indoors, amidst fear and 15,00,000 uncertainty, the usage of cash witnessed an 1.0 abnormal rise (Chart II.3.21). The Reserve Bank 10,00,000 undertook expansionary monetary policy measures to ensure the availability of adequate 0.5 liquidity in the system. COVID-19 has imparted 5,00,000 scars on monetary and credit aggregates towards the end of the year (Box II.3.1). 0 0.0 II.3.23 Data on sectoral deployment of bank credit17 for March 2020 point to a broad-based slowdown. Credit growth to agriculture and allied activities, and industry – mainly large and medium Source: RBI. units – decelerated in 2019-20. However, credit through lockdown and social distancing norms growth to micro and small industries accelerated. necessary for the safety and health concerns of Within industry, credit growth to beverage and the human beings. Several fiscal and monetary tobacco, mining and quarrying, petroleum, coal policy measures were also undertaken in India in products and nuclear fuels and rubber, plastic and Chart II.3.20: Credit-to-GDP Gap Chart II.3.21: Monthly Variation in Currency with the Public (CwP) and India’s COVID-19 Curve Source: RBI. Source: RBI. 57 erorc(cid:31) 20-1002 40-3002 60-5002 80-7002 01-9002 21-1102 41-3102 61-5102 81-7102 02-9102 Incremental Credit-Deposit Ratio(RHS) Incremental Credit Incremental Deposit 70 15 60 10 50 5 40 0 30 -5 20 -10 10 0 -15 tnecreP 29,13 ceD 49 ,03nuJ 59,13 ceD 79 ,03nuJ 89,13 ceD 00 ,03nuJ 10 ,13 ceD 30 ,03nuJ 40 ,13 ceD 60 ,03nuJ 70 ,13 ceD 90 ,03nuJ 01 ,13 ceD 21 ,03nuJ 31 ,13 ceD 51 ,03nuJ 61 ,13 ceD 81 ,03nuJ 91,03 ceD stniopegatnecreP Credit-to-GDPGap(RHS) Credit-to-GDPActual Credit-to-GDPTrend 17 Data on sectoral deployment of bank credit is collected on a monthly basis from select scheduled commercial banks (33 banks), which accounts for about 90 per cent of the total non-food credit deployed by all scheduled commercial banks.ANNUAL REPORT Box II.3.1 Impact of COVID-19 on Monetary and Credit Aggregates Many economies, especially in the emerging world, where the virus has spread rapidly, experienced the phenomenon of rising cash in circulation. Cross-country monetary statistics (IMF, 2020) indicate that the increase in currency in circulation was particularly sharp in Brazil, Chile, India, Russia and Turkey, as also in advanced economies such as the US, Spain, Italy, Germany and France, where the use of cash is less (Chart 1). The rise in currency in circulation in these countries occurred concomitantly with liquidity injecting measures undertaken by their central banks. They were also impacted by the COVID-19 build-up of precautionary balances. Chart 1: Month-over-Month Variation in Currency in Circulation in Select Economies (January – June 2020) 12,00,000 10,00,000 8,00,000 6,00,000 4,00,000 2,00,000 0 -2,00,000 -4,00,000 -6,00,000 United States Chile India Russia Source: International Financial Statistics, IMF. Concurrently, the World Uncertainty Index (WUI) and the deposit growth that had commenced from February 2020, World Pandemic Uncertainty Index (WPUI) of the economies essentially reflecting a ‘dash to cash’ under extreme mentioned above remained high during Q1:2020 (Chart 2 uncertainty (Chart 4). Concomitantly, the y-o-y growth in and 3). Rising uncertainty reduces the willingness of currency with the public (CwP) accelerated from 11.3 per businesses to invest money and generate employment cent as on February 28, 2020 to 14.5 per cent at end-March opportunities whereas, on the other hand, it reduces 2020 and to 21.3 per cent by June 19. By contrast, bank consumer spending (Ahir, et al. 2020). credit, which had decelerated continuously during the year, has remained largely stable through the COVID-19 outbreak A spurt in the number of confirmed COVID-19 cases in India despite sharp contraction in activity levels. after March 13, 2020 accentuated the deceleration of Chart 2: World Uncertainty Index Chart 3: World Pandemic Uncertainty Index Source: Data accessed through https://worlduncertaintyindex.com/ Source: Data accessed through https://worlduncertaintyindex.com/ data/. data/. (contd.) 58 noilliM )ycnerruc citsemod evitcepserni( January February March April May JuneECONOMIC REVIEW Chart 4: Impact of COVID-19 on Monetary Aggregates Chart 5: Impact of COVID-19 on Monetary Aggregates Source: RBI and Ministry of Health and Family Welfare, GoI. Source: RBI and Ministry of Health and Family Welfare, GoI. Reflecting these developments, the credit-deposit (C-D) to save in response to the uncertainty caused by COVID-19 ratio increased from 75.8 per cent at end-January 2020 to (Chart 5). 76.4 per cent at end-March 2020, led by the increased Reference: demand for cash for transactions as digital payments declined. Post-March 2020, the easing was primarily due to Ahir, H., Bloom, N. and Furceri, D. (2020). ‘60 Years of a sharp rise in deposits, driven by a heightened propensity Uncertainty’, Finance and Development, March. their products accelerated whereas flows to II.3.25 As on March 27, 2020, non-food credit chemicals and chemical products, cement and (NFC) growth decelerated to 6.7 per cent from cement products and construction decelerated. 12.3 per cent last year. Among bank groups, credit Credit growth to food processing, basic metal and growth by public sector banks (PSBs) decelerated metal products and infrastructure contracted sharply to 3.4 per cent in March 2020 from 10.2 (Table II.3.2 & Chart II.3.22a). per cent a year ago, reflecting stress from impaired II.3.24 Credit growth to infrastructure contracted balance sheets. Credit growth by private sector during 2019-20, mainly due to reduction in offtake banks also decelerated to 13.9 per cent in March by the power segment and deceleration in credit 2020 from 17.5 per cent a year ago, mainly flows to the roads and telecommunications attributable to deceleration in credit growth to the segments. Credit to the services sector decelerated services sector (Chart II.3.22a and Chart II.3.22b). sharply, primarily driven down by slowdown in II.3.26 To sum up, even as monetary and credit credit growth to NBFCs, on account of concerns conditions moderated through 2019-20, COVID-19 relating to the health of the sector. There was also led to an unusual surge in currency demand, along a sharp deceleration in credit to the trade segment. with deceleration in aggregate deposits. Credit Personal loan growth decelerated moderately. growth weakened during the year, with deceleration Housing loans, which constitute the largest in all major sectors. The Reserve Bank pro- segment of personal loans, witnessed a moderate actively managed liquidity conditions through deceleration, along with credit cards outstanding. conventional and unconventional measures to However, there was an acceleration in growth of augment system-level liquidity. Going forward, vehicle loans during the year. surplus liquidity conditions, coupled with policy 59 )tnecrep( htworgY-o-Y 91,92raM 91,62rpA 91,42 yaM 91,12 nuJ 91,91 luJ 91,61 guA 91,31 peS 91,11 tcO 91,80 voN 91,60 ceD 02,30 naJ 02,13 naJ 02,82 beF 02,72raM 02,42rpA 02,22yaM 02,91 nuJ )hkaL(rebmuN evitalumuC 26 5 21 4 3 16 2 11 1 6 0 Total Confirmed COVID-19 Cases(RHS) CwP Aggregate Deposits M3 Bank CreditANNUAL REPORT Table II.3.2: Credit Deployment to Select Sectors Sectors Outstanding as on Year-on-Year Growth (Per cent) March 27, 2020 (` Crore) 2018-19* 2019-20# 2020-21## 1 2 3 4 5 Non-food Credit (1 to 4) 92,11,544 12.3 6.7 6.7 (11.1) 1. Agriculture & Allied Activities 11,57,795 7.9 4.2 2.4 (8.7) 2. Industry (Micro & Small, Medium and Large) 29,05,151 6.9 0.7 2.2 (6.4) 2.1. Micro & Small 3,81,825 0.7 1.7 -3.7 (0.6) 2.2. Medium 1,05,598 2.6 -0.7 -9.0 (2.2) 2.3. Large 24,17,728 8.2 0.6 3.7 (7.6) (i) Infrastructure 10,53,913 18.5 -0.2 4.2 (15.2) of which: (a) Power 5,59,774 9.5 -1.6 0.9 (9.7) (b) Telecommunications 1,43,760 36.7 24.4 36.8 (20.9) (c) Roads 1,90,676 12.2 2.0 4.7 (14.6) (ii) Chemicals & Chemical Products 2,02,949 17.5 6.0 3.1 (11.1) (iii) Basic Metal & Metal Product 3,50,325 -10.7 -5.7 -0.5 (-10.3) (iv) Food Processing 1,54,146 1.1 -1.9 4.2 (1.2) 3. Services 25,94,945 17.8 7.4 10.7 (13.0) 4. Personal Loans 25,53,652 16.4 15.0 10.5 (16.6) 5. Priority Sector 28,97,461 7.3 5.8 1.9 (10.2) *: March 2019 over March 2018. #: March 2020 over March 2019. ##: June 2020 over June 2019. Note: 1. Data are provisional. 2. Figures in parentheses indicate growth rates in June 2019 over June 2018. Source: RBI. Chart II.3.22: Sectoral Deployment of Non-Food Bank Credit Growth a: Y-o-Y Credit Growth - Sector-wise (per cent) 25 b: Y-o-Y Credit Growth - Bank Group-wise (per cent) 20 15 10 5 0 -5 -10 Note: Data are provisional. Source: RBI. 60 61-raM 61-nuJ 61-peS 61-ceD 71-raM 71-nuJ 71-peS 71-ceD 81-raM 81-nuJ 81-peS 81-ceD 91-raM 91-nuJ 91-peS 91-ceD 02-raM 02-nuJ rate reductions, are expected to instill confidence, investment and lay the foundations of strong easing financial conditions and incentivising the sustainable growth as the COVID-19 curve flattens flow of funds at affordable rates so as to rekindle and the economy repairs and revives. All Banks Public Sector Banks Private Sector BanksECONOMIC REVIEW II.4 FINANCIAL MARKETS yields softened significantly during 2019-20 as discussed in sub-section 3, aided initially during II.4.1 Global financial markets, which traded on H1:2019-20 by positive sentiments from the a buoyant note during most part of 2019 and early general election results, policy rate cuts, infusion 2020, experienced panic sell-offs across asset of liquidity by the Reserve Bank and the possibility classes, triggered by the outbreak of COVID-19. of the fiscal deficit slippage being contained. Volatility soared to extraordinarily high levels, During H2:2019-20, yields softened further on the reminiscent of the turbulence seen during the back of auction of special OMOs, softening of US global financial crisis (GFC). As investors treasury yields, easing crude oil prices and scrambled into US dollar positions to seek safe announcement of comprehensive liquidity haven, depreciations set in upon almost all other measures on March 27, 2020 to mitigate the currencies. Bond yields firmed up on massive sell- adverse impact of COVID-19. Sub-section 4 offs, but speedy central bank actions with profiles developments in the corporate bond widespread policy rate cuts and large amounts of market wherein yields softened during 2019-20, liquidity injection along with fiscal measures reflecting policy rate cuts by the MPC and injection appeared to have calmed sentiment. of systemic liquidity, especially through the special II.4.2 In India, equity market also fell sharply in OMOs and Long-term Repo Operations (LTRO) sync with global markets with the outbreak of conducted during the latter part of the year. Sub- COVID-19. After the announcement of the section 5 presents developments in the domestic corporate tax rate cut in September 2019, it made equity market, followed by a discussion on handsome gains and rose to record new highs in movements in the Indian rupee in the foreign January 2020 on the back of positive sentiments exchange market in sub-section 6. The section on US-China trade talks and the likelihood of an concludes with some forward-looking perspectives. orderly Brexit. However, this positive momentum 2. Money Market was interrupted by the escalation of geo-political II.4.3 The money market remained generally tensions between the US and Iran, weakening stable during 2019-20, especially in H1. In the domestic growth prospects and higher inflation second half of the year, bouts of volatility, mainly expectations. COVID-19 brought an abrupt in March 2020 on account of the spread of change in sentiments in March 2020. After COVID-19, dispelled the calm. exhibiting range-bound two-way movements with weakening bias during first three quarters, Indian II.4.4 Beginning June 2019, liquidity conditions rupee depreciated to an all-time low during transited gradually out of deficit conditions during Q4:2019-20 on large capital outflows from both Q1:2019-20. The Reserve Bank proactively the equity and debt markets. In the money market, managed frictional liquidity conditions with a slew as detailed in sub-section 2, overnight money of conventional liquidity measures, viz., reduction market rates (call money, triparty repo, and market in the CRR and easing of daily maintenance repo) were largely aligned with the policy rates requirements, variable and fixed rate repos/ albeit with a downward bias, and were insulated reverse repos of various tenors and access to the from adverse global developments by proactive Marginal Standing Facility (MSF) as well as liquidity management by the Reserve Bank. Bond several unconventional measures, including long- 61ANNUAL REPORT term repo operations (LTRO), targeted long-term II.4.7 Average daily volume in the money market repo operations (TLTRO), line of credit to financial (call money, triparty repo and market repo taken institutions, and a special liquidity facility for together) increased by 16 per cent to `2,42,658 mutual funds (MFs). crore during 2019-20 from `2,09,152 crore in 2018-19. Volumes in the triparty repo and market II.4.5 The weighted average call rate (WACR) in repo segments increased by 24 per cent and 9 per the unsecured inter-bank call money market cent, respectively. The share of triparty repo and remained aligned with the policy repo rate during market repo segments were 68 per cent and 25 the year with a downward bias (Chart II.4.1). The per cent, respectively, of the total money market average absolute spread of the WACR over the volume during 2019-20 as compared with 64 per policy rate increased to 11 basis points (bps) in cent and 27 per cent, respectively, in 2018-19. In 2019-20 from 9 bps in 2018-19, as surplus liquidity the call money segment, average daily volumes conditions prevailed in the banking system for decreased by 17 per cent during the year to most of the year. `16,558 crore, reducing its market share to 7 per cent from 9 per cent in the previous year. The II.4.6 Volatility in the call money segment, traded volumes in both secured and unsecured measured by the coefficient of variation18 of the money market segments increased in recent WACR, increased to 7.55 in 2019-20 from 3.40 a months, in spite of COVID-19. year ago, reflecting the swings in liquidity conditions. The triparty repo and market repo II.4.8 Interest rates on longer tenor money rates remained below the WACR, on average, by market instruments, viz., 91-day Treasury Bills (T-bills), certificates of deposit (CDs) and 22 bps each. commercial papers (CPs) generally moved in sync with the policy repo rate during 2019-20. The Chart II.4.1: Key Policy and Money Market Rates spread of CD rates over T-bill rates narrowed in Q3:2019-20 to 21 bps from 39 bps in Q2; however, it widened to 48 bps in Q4 following the outbreak of COVID-19 and the usual year-end balance sheet phenomenon (Chart II.4.2). II.4.9 In the primary market, fresh issuances of CDs decreased to `3.88 lakh crore during 2019- 20 as compared with `5.65 lakh crore in the previous year. New issuances of CPs in the primary market declined to `21.95 lakh crore in 2019-20 from `25.96 lakh crore in 2018-19. The weighted average discount rates in the primary CP market hardened from September 2019 until Source: RBI, Bloomberg, CCIL-Ftrac, FBIL and RBI staff calculations. mid-October 2019 on increased risk perceptions 18 Coefficient of variation is measured as a ratio of standard deviation to the mean and has no unit. 62ECONOMIC REVIEW from neutral to accommodative. The yield on the Chart II.4.2: Spread of 3-Month CP and CD Rate 10-year benchmark security softened from 7.35 over 3-Month T-Bill Rate per cent at end-March 2019 to 6.88 per cent on June 29, 2019 with some intermittent upswings. II.4.11 The softening of G-sec yields continued with a decline in yield by 20 bps in Q2:2019-20, barring some hardening in August and September 2019. Notwithstanding a larger than expected policy rate cut of 35 bps by the Reserve Bank, rollback of surcharge on foreign portfolio investments (FPIs) and higher than expected surplus transfer by the Reserve Bank, market participants remained wary in August and September with the yield hardening by 19 and 14 bps, respectively, on concerns over fiscal slippage Source: FBIL, CCIL-Ftrac and RBI staff calculations. and geo-political tensions following the attack on resulting from defaults and rating downgrades of a Saudi oil refineries. few NBFCs. However, it softened by 10 bps to II.4.12 In Q3:2019-20, G-sec yields moved in a 5.78 per cent by end-February 2020, as risks narrow range during October-November 2019, subsided, before hardening marginally to stand at before hardening in the first fortnight of December 6.15 per cent at end-March 2020. 2019. Initially, the yield on the new 10-year 3. G-sec Market benchmark (6.45% GS 2029), issued on October 7, 2019, hardened by 34 bps from 6.46 per cent II.4.10 G-sec yields hardened in April 2019 in (opening yield) on the day of the monetary policy response to the Reserve Bank maintaining a announcement on December 5 (MPC decided to neutral monetary policy stance contrary to market leave the policy repo rate unchanged) to 6.80 per expectation, sustained higher crude oil prices cent on December 16, 2019 as market sentiment following the US announcement of stopping of turned jittery over the central government's fiscal imports from Iran and supply disruptions in Libya position and rising US treasury yields. However, and Venezuela, and depreciation of the Indian the Reserve Bank’s decision to conduct special rupee (INR). In the rest of Q1:2019-20, the OMOs on December 19 resulted in a decline in benchmark G-sec yield softened by 47 bps, taking the benchmark yield by 5 bps (as compared to positive cues from the general election results, December 16, 2019). Overall, the G-sec yield infusion of liquidity by the Reserve Bank and lower declined by 11 bps in Q3:2019-20 (Chart II.4.3). crude oil prices. Market sentiment was buoyed further by the MPC’s decision to reduce the policy II.4.13 During Q4:2019-20, yields traded with a repo rate by 25 bps to 5.75 per cent on June 6, softening bias, supported by special OMO 2019 coupled with the change in policy stance purchases by the Reserve Bank, opening of select 63ANNUAL REPORT securities fully for FPIs, no additional borrowing by Chart II.4.3: G-sec Yield Curve Based on Zero Coupon the government and announcement of LTRO by the Reserve Bank. Yields continued to trade with a downward bias on account of fall in global bond yields due to risk aversion in the aftermath of the COVID-19 outbreak and lower crude prices. However, yields hardened during the latter part of Q4:2019-20 due to sustained FPI selling amidst flight to safety. Subsequently, G-sec yields resumed easing, following a slew of policy measures announced by the Reserve Bank to alleviate COVID-19 induced financial stress. The yield on benchmark 10-year G-sec closed at 6.14 per cent at the end of 2019-20, reflecting the Source: FBIL. impact of Reserve Bank’s operations (Box II.4.1). Box II.4.1 Impact of Special Operations by the Reserve Bank on Financial Markets Following Swanson, et al., (2011), a high frequency event the corresponding rate changes over similarly sized windows study analysis was conducted around the announcement over a period of one year preceding the month of these day of the Reserve Bank’s special OMOs in the nature of announcements (Table 1). The results indicate that there “Operation Twist (OT)”. One-day change in G-sec yields was a statistically significant negative impact of the Reserve between the announcement day and the next trading day is Bank’s OT announcements in December 2019 on 10-Year calculated because the press releases of these G-sec yields. announcements were posted on the Reserve Bank website The dynamic impact of OT on the 10-year G-Sec yield is after the close of financial markets. Statistical significance is obtained by applying a Local Linear Projection (LLP) model measured relative to the unconditional standard deviation of which forecasts the path of the yield in response to the Table 1: Impact of Operation Twist Announcements on G-sec December 5, 2019 monetary policy announcement. The Yields on the Day of Announcement LLP model uses the overnight index swap (OIS) rates and 1-day Change 10-Year Benchmark the strategy expounded by Lloyd (2018) and Das et al. (2020), to filter ‘large surprise’ in monetary policy 1 2 announcements between 2014 and 2019, and provides the December 19, 2019 - December 20, 2019 -13** impulse response of the yields to such ‘large surprises.’ December 26, 2019 - December 27, 2019 -8* Overall, twenty such ‘large surprise’ policies are identified January 2, 2020 - January 3, 2020 0 between 2014 and 2019, including the policy announcement January 16, 2020 - January 17, 2020 0 of December 5, 2019. The forecasted path is then compared April 23, 2020 - April 24, 2020 0 with the observed path of the yield (Chart 1). The result June 29, 2020 - June 30, 2020 -2 suggests that the 10-year G-sec yield would have been Cumulative, all announcements (in bps) -23** higher without the two OT announcements in December *: significant at 10 per cent **: significant at 5 per cent level. 2019. Source: RBI staff estimates. (contd....) 64ECONOMIC REVIEW Table 2: Impact of LTRO on G-sec Yield Chart 1: Actual vs. Model Predicted Yields Estimated Responses to Announcements 3-Year 1-Year (in bps) G-sec G-sec 1 2 3 3-day change, Feb 5, 2020 - Feb 10, 2020 -27.9* -8.5 1-day change, Feb 25, 2020 - Feb 26, 2020 -5.3 -1.9 1-day change, Mar 16, 2020 - March 17, 2020 6.8 11.1* 2-day change, Mar 26, 2020-Mar 30, 2020# -25.3* -19.0* Source: RBI staff estimates. 1-day change, Mar 30, 2020-Mar 31, 2020# -0.4 -14.4* 1-day change, Apr 3, 2020 - Apr 7, 2020# 8.2 -3.5 The Reserve Bank first announced its intention to carry out 1-day change, Apr 15, 2020 - Apr 16, 2020# -9.0 -2.0 LTRO in its Statement on Developmental and Regulatory Policies (February 6, 2020). 2-day change, Apr 16, 2020 - Apr 20, 2020# -37.6* -23.8* Cumulative, all announcements (in bps) -90.5* -62.0* The Reserve Bank made a total of eight announcements of LTRO till June 2020 out of which five were targeted LTRO *: significant 1 per cent level. #: Targeted LTRO dates. announcements. The change in the yield of the securities Source: RBI staff estimates. selected under LTRO are analysed (Table 2). The results 2. Swanson, E. T., Reichlin, L., & Wright, J. H. (2011), show that the cumulative impact of LTRO announcements 'Let’s Twist Again: A High-Frequency Event-Study was a reduction in 3-Year and 1-Year G-sec yields. Analysis of Operation Twist and Its Implications for QE2' [with Comments and Discussion], Brookings Papers on References: Economic Activity, 151-207. 1. Lloyd, S. P. (2018), 'Overnight Index Swap Market- 3. Das, S., Ghosh, S., & Kamate, V. (2020), 'Monetary based Measures of Monetary Policy Expectations', Bank Policy and Financial Markets: Twist and Tango', Reserve of England Staff Working Paper No. 709. Bank of India Bulletin, Volume LXXIV (8), 41-50. II.4.14 FPI limits are revised on a half yearly as on October 1, 2019. During April-December basis under the medium-term framework (MTF)19, 2019, FPIs made investment in G-secs and SDLs with the objective of ensuring a more predictable of `23,522 crore, while they pulled out `57,348 regime for investment by the FPI. Accordingly, crore in Q4:2019-20, resulting in an overall net investment limits for FPI in G-sec including State outflow during 2019-20. The outflow was Development Loan (SDLs) were increased in a pronounced in the fourth quarter, particularly in phased manner from `3,27,900 crore as on April March 2020 that witnessed an outflow of `48,279 6, 2018 to `3,95,200 crore as on April 1, 2019. crore, in line with other emerging market The limit was increased further to `4,29,500 crore economies (EMEs) hit by the outbreak of 19 The medium-term framework (MTF) for FPI limits in debt securities were worked out in October 2015 to have more predictable regime for FPI investment. Under the MTF, the limits for FPI investment in the central government securities (G-secs) were increased in phases to reach 5 per cent of the outstanding stock by March 2018. In case of SDLs, this limit was fixed at 2 per cent of the outstanding stock by March 2018 in a phased manner. In April 2018, this limit was reviewed and the limit for FPI investment in G-secs were increased by 0.5 per cent each year to 5.5 per cent of outstanding stock of securities in 2018-19 and 6.0 per cent of outstanding stock of securities in 2019-20. The limit for FPI investment in SDLs were kept unchanged at 2.0 per cent of outstanding stock of securities. The limit for FPI investment in corporate bonds was 9 per cent of outstanding stock for 2019-20. The limits for FPI investment in G-secs and SDLs remained unchanged at 6 per cent and 2 per cent, respectively, of outstanding stocks of securities for 2020-21. Further, the limit for FPI investment in corporate bonds has been increased from 9 per cent to 15 per cent of outstanding stock for 2020-21. The actual revised limits for G-secs, SDLs and corporate bonds are now set out for half year April-September and half year October-March at the beginning of the year. 65ANNUAL REPORT COVID-19. Therefore, FPI utilisation of total II.4.16 The risk premia or spread (5-year AAA- available limit (inclusive of investments in SDL) rated bond yield over 5-year G-sec yield) on bonds declined to 37.5 per cent on March 31, 2020 from issued by public sector undertakings (PSUs), 54.1 per cent a year ago. It was announced in the financial institutions (FIs) and banks; NBFCs; and Union Budget 2020-21 that certain specified corporates fell by 58 bps, 34 bps and 14 bps, categories of G-sec would be open fully for non- respectively. The average daily turnover in the resident investors apart from being available to corporate bond market increased to `8,532 crore domestic investors. Accordingly, in consultation during 2019-20 from `7,587 crore a year ago with the government, a separate route, viz., the (Chart II.4.4). Fully Accessible Route (FAR) for investments by II.4.17 Primary corporate bond issuances non-residents, including FPIs, in G-secs was increased by 6.6 per cent to `6.9 lakh crore during introduced with effect from April 1, 2020. Five 2019-20 as softening of yields encouraged G-secs were specified as eligible for investment corporates to mobilise higher resources from the under the FAR, from the date on which the scheme corporate bond market, particularly public sector comes into effect. In addition, all new issuances of entities. Private placements remained the G-secs of 5-year, 10-year and 30-year tenors from preferred choice for corporates, accounting for the financial year 2020-21 will be eligible for 97.8 per cent of total resources mobilised through investment under the FAR as ‘specified securities’. the bond market. In order to provide an alternative 4. Corporate Debt Market source of financing for public sector entities at lower cost and help deepen bond markets by II.4.15 Corporate bond yields largely tracked diversifying investor base with increased retail G-sec yields. The yield on 5-year AAA-rated participation, the Government of India (GoI) corporate bonds softened during 2019-20, launched the Bharat Bond Exchange Traded Fund reflecting reduction in the policy repo rate, surplus systemic liquidity conditions, and the impact of Chart II.4.4: Turnover in Corporate Bond Market special OMOs and LTRO auctions conducted and Yield Spread during the latter part of the year. However, yields 25,000 200 180 registered some uptick in March 2020 with the 20,000 160 unfolding of distress in a major private bank and 140 COVID-19. During the period March 12-25, 2020, 15,000 120 100 turbulence in global financial markets and 10,000 80 worsening of financial conditions resulted in a 60 hardening of 5-year AAA-rated corporate bond 5,000 40 yield by 72 bps. This was addressed by the 20 0 0 announcement of various liquidity measures by 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 the Reserve Bank on the back of a sizeable Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- reduction in the policy rate. Overall, the 5-year AAA-rated corporate bond yield eased by 108 bps to 7.02 per cent during 2019-20. Source: SEBI and Bloomberg. 66 erorc ` DailyTurnover inCorporate Bonds Spread ofPSUs, FIs and Banks(RHS) Spread ofCorporates (RHS) Spread ofNBFCs (RHS) stniop sisaBECONOMIC REVIEW (ETF) in December 2019 – the first ETF for per cent during the GFC, before closing at 64.4 corporate bonds in India – under which `12,395 per cent on March 31, 2020 (Chart II.4.5). crore were mobilised. Outstanding corporate II.4.19 The BSE Sensex commenced the year bonds increased by 6.1 per cent y-o-y to `32.5 with modest gains before declining during early lakh crore or 16.0 per cent of GDP at end-March May 2019 on concerns over weak corporate 2020. Investments by FPIs in corporate bonds earnings and intensification of trade tensions decreased to `1.73 lakh crore at end-March 2020 between the US and China. However, prospects from `2.19 lakh crore at end-March 2019. of a stable government and expectations of further Consequently, utilisation of the approved limit by monetary easing by the Reserve Bank buoyed FPIs declined to 54.5 per cent at end-March 2020 market sentiment driving the BSE Sensex to from 75.9 per cent at end-March 2019. 40,000 levels in June 2019. However, this rally 5. Equity Market proved transient as bearish sentiment gripped II.4.18 The Indian equity market, which reached markets after a default by a housing finance an all-time high on January 14, 2020, began to company fuelled liquidity concerns in the NBFC slide thereafter and trimmed its gains during 2019- sector in June 2019. 20, especially after the outbreak of COVID-19. II.4.20 The downtrend deepened in July 2019 Volatility soared to unusually high levels. Overall, over the Budget proposals such as (i) tax on super the BSE Sensex and the Nifty 50 plummeted by 23.8 per cent and 26.0 per cent, respectively, over rich; (ii) buyback tax; and (iii) increase in minimum end-March 2019. The India VIX, which captures public shareholding in listed companies. Markets short-term volatility of the Nifty 50, surged to 83.6 remained under pressure on negative cues from per cent on March 24, 2020 compared with 85.1 global equity markets, reporting of a borrowing Chart II.4.5: Equity Market a: Movement in BSE Sensex and Nifty 50 b: India VIX 43000 13500 41000 12500 39000 37000 11500 35000 10500 33000 31000 9500 29000 8500 27000 25000 7500 Source: BSE and NSE. 67 xednI xednI 99 9 999 9 9990000 0 0 11 1 111 1 1112222 2 2 Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- BSE Sensex Nifty50(RHS)ANNUAL REPORT fraud in a public sector bank, concerns over II.4.22 Markets wilted, however, under escalating lacklustre corporate earnings results for Q1:2019- geo-political tensions between the US and Iran, a 20, slow progress of monsoon and continued FPI weak domestic GDP growth outlook along with outflows due to the proposed increase in tax downward revision of India’s growth forecast for surcharge for FPIs registered as non-corporates. 2019-20 by the International Monetary Fund (IMF) The BSE Sensex declined marginally in August and higher CPI inflation print for December 2019. 2019, unsettled by adverse domestic developments The decline intensified on February 1, 2020 with such as tepid corporate earnings results for the Sensex plunging by 988 points (2.4 per cent) Q1:2019-20, lukewarm industrial activity and auto as proposals in the Union Budget 2020-21 fell sales, and negative global cues, viz., political short of market expectations. However, markets unrest in Hong Kong, debt default in Argentina made a V-shaped recovery on February 4, 2020 and uncertainty over the US-China trade relations. on the back of a sharp fall in crude oil prices and However, the rollback of the super-rich tax on release of robust manufacturing PMI data for FPIs, front-loading of capitalisation of public sector January 2020. Subsequently, the announcement banks and deferment of a hike in registration fees of credit and liquidity enhancing measures on for automobiles provided some support to market February 6, 2020 also supported market. This sentiment. recovery, however, proved short-lived. II.4.21 The BSE Sensex rose by five per cent on II.4.23 Beginning February 20, 2020, fears over a single day on September 20, 2019 after the COVID-19 induced slowdown reverberated across announcement of a reduction in the corporate tax the globe as equity markets both in advanced and rate. Subsequently, fresh optimism over the US- EMEs, including in India, witnessed panic sell- China trade negotiations and agreement on Brexit offs. The BSE Sensex fell by 2,919 points (8.2 per deal helped the BSE Sensex to reclaim 40,000 cent) on March 12, 2020 following the declaration level on October 30, 2019. The bullish momentum of COVID-19 as pandemic by the WHO. The gathered strength on growth boosting measures market lost further ground with the BSE Sensex by the GoI, support to the Insolvency and falling over 10 per cent during early hours of Bankruptcy Code (IBC) amendment and approval trading, attracting circuit breakers and suspension for a partial credit guarantee scheme for public of trading for 45 minutes. A statement from SEBI sector banks to purchase pooled assets from indicating that the fall in the Indian stock indices NBFCs. Furthermore, global tailwinds due to the has been significantly lower than in many other US Fed’s dovish outlook, the US-China Phase-1 countries and assuring market participants of trade deal and Brexit-favouring UK election suitable and appropriate actions, if required, outcome aided the upswing. A slew of positive helped calm market nerves with the BSE Sensex macroeconomic developments thereafter, ending on March 13, 2020 with a net gain of 1,325 including fall in global crude prices, recovery in points (4.0 per cent), the largest ever recovery in industrial output in November, higher GST a single day. However, these gains could not be sustained as bearish sentiment returned on the collections and expansion in manufacturing back of continued moderation in global crude Purchasing Managers’ Index (PMI) for December, prices and growing worries over the impending drove the BSE Sensex to close at a record of recession. The Indian equity market breached the 41,953 on January 14, 2020. 68ECONOMIC REVIEW lower circuit bound for the second time in a month, of `55,595 crore, thereby largely counter- with the BSE Sensex recording its biggest fall of balancing the withdrawal by FPIs. Further, the 3,935 points (13.2 per cent) on March 23, 2020. correlation between monthly net investments of Markets regained some lost ground thereafter MFs and FPIs during 2019-20 came out as high amidst expectations of fiscal measures by the as -0.9, suggesting a strong counter balancing government, announcement of comprehensive force during the time of FPI sell-offs. monetary, liquidity and regulatory measures by II.4.24 The market capitalisation of companies the Reserve Bank including a sizeable reduction listed on BSE declined by 27 per cent to `113.5 in policy rates on March 27, 2020. Overall, the lakh crore at end-March 2020 from `155.5 lakh BSE Sensex registered a decline of 23.1 per cent crore at end-December 2019, before recovering to during March 2020. This sell-off in the equity `129.4 lakh crore at end-April 2020. Hence, market was accompanied by a surge in VIX from market capitalisation at end-March 2020 stood at 23.2 per cent at end-February 2020 to a high of 55.8 per cent of GDP as compared with 77.9 per 83.6 per cent during March 2020 before closing at cent at end-December 2019. 64.4 per cent. However, it is observed that over the last few years, domestic institutional investors II.4.25 Heightened volatility in domestic financial (DIIs) are increasingly emerging as a counter markets was caused by panic selling by FPIs balancing force to FPIs during stress situation. (Box II.4.2). To comprehend the overall financial During March 2020, when FPIs were net sellers to conditions, a Financial Conditions Index (FCI) was the tune of `62,434 crore, DIIs, led by MFs and constructed using Principal Component Analysis insurance companies, were net buyers to the tune on twelve indicators across different market Box: II.4.2 India’s Financial Markets: Impact of COVID-19 The outbreak of COVID-19 impacted global financial markets and brought an abrupt tightening of financial conditions. In India, the stock market began to fall starting mid-February 2020 and plummeted thereafter with the declaration of COVID-19 as a pandemic by the WHO on March 11, 2020. Nifty 50 slumped by 38.4 per cent by March 23, 2020 from its peak of 12,362 on January 14, 2020 before making some recovery (Chart 1). The sectors that have been hit hardest include hotels, media, construction, power, auto, metals and banks, whereas telecom, pharmaceuticals, personal care, tea and coffee, petroleum, gas and IT have outperformed the overall market (Chart 2). Chart 2: Cumulative Returns of Sectoral Indices relative to Nifty 50 Index since January 1, 2020 Chart 1: Cumulative Returns in Nifty 50 Index Human to human First case Spread WHO declared 10 transmissionin Kerala to Italy COVID-19 confirmed as a pandemic 0 -10 -20 -30 -40 -50 Source: Refinitiv. Source: Refinitiv. (contd....) 69 tnecreP 02-naJ-1 02-naJ-51 02-naJ-92 02-beF-21 02-beF-62 02-raM-11 02-raM-52 02-rpA-8 02-rpA-22 02-yaM-6 02-yaM-02 02-nuJ-3 02-nuJ-71ANNUAL REPORT Financial conditions tightened across fixed income markets due to panic sell-offs by FPIs from EMEs, coupled with liquidation of positions by MFs to meet redemption pressures from investors, particularly those invested in funds with higher credit risk. This was reflected in widening of spread of G-sec and corporate bond yields over the policy repo rate (Chart 3). However, spread of 3-year and 5-year G-sec and corporate bond yields narrowed subsequently over the policy repo rate. Credit default swaps (CDS) premium of Indian banks dropped sharply from six-year highs on expectations that recent policy support would help lenders to avoid worse damage from the pandemic (Chart 4). Chart 3: Spread over Repo Rate Chart 4: CDS Spread of Indian Banks Source: Bloomberg. Source: Refinitiv. Chart 5: Portfolio Flows vs. Currency Chart 6: Cumulative FPI Flows January 1 to June 30, 2020 Source: Bloomberg. Source: Bloomberg. As bearish sentiment gripped markets, EMEs witnessed sharp reversal of capital flows with their currencies experiencing significant depreciations. India experienced one of the highest outflows amongst emerging market peers, but its currency performed relatively better (Chart 5), with the depreciation of the rupee being lower than at the time of the GFC and taper tantrum despite large outflows (Chart 6). References: 1. IMF (2020), 'Global Financial Stability Report', April. 2. Ramelli and Wagner (2020), 'Feverish Stock Price Reactions to COVID-19', CEPR Discussion Paper, No. DP14511. 70ECONOMIC REVIEW widening of credit spreads and depreciation of the Chart II.4.6: Financial Conditions Index Indian rupee, is suggested by the FCI as well. Financial conditions eased subsequently in response to various liquidity measures undertaken by the Reserve Bank (Chart II.4.6). II.4.26 Net investment by DIIs, particularly MFs, provided support to the equity market during 2019- 20. While MFs were net buyers to the tune of `91,160 crore, FPIs were net sellers of `6,204 crore, in the Indian equity market (Chart II.4.7). FPIs made net purchases of `63,509 crore during September 2019 to February 2020, but they made net sales of `62,434 crore during March 2020 as the spread of COVID-19 triggered flight to safety. Source: RBI staff calculations. Primary Market Resource Mobilisation segments. The values of the FCI above zero II.4.27 The primary segment of the equity market indicate higher-than-average levels of financial witnessed increased activity during 2019-20. market stress/tightened financial conditions, while Resource mobilisation through initial public offers values below zero indicate lower-than-average (IPOs), follow-on public offers (FPOs) and rights levels of stress/loose financial conditions. The issues jumped more than four-fold to `76,382 significant tightening of financial conditions as crore during 2019-20. Of these, `21,323 crore manifested in sharp correction in equity markets, were mobilised through 60 IPO/ FPO issues, out Chart II.4.7: Net Investment in Equity of which 46 issues amounting to `495 crore were by Institutional Investors listed on the Small and Medium Enterprises (SME) platform of the BSE and the NSE. Resource mobilisation through rights issues amounted to `55,059 crore mostly by telecom companies. Resource mobilisation through qualified institutional placement (QIP) also increased sharply to `51,216 crore in 2019-20 from `10,289 crore in 2018-19 (Appendix Table 5). II.4.28 Net resources mobilised by mutual funds declined by 20.4 per cent to `87,301 crore in 2019-20. Net resource mobilisation through equity-oriented schemes declined to `81,597 Source: NSDL and SEBI. crore in 2019-20 from `1.1 lakh crore in 2018-19. 71ANNUAL REPORT Assets under management of equity-oriented market following the announcement of corporate mutual funds declined by 32.4 per cent to `6.0 tax cuts. The rupee continued to extend the gains lakh crore at end-March 2020 from `8.9 lakh crore heading into H2:2019-20 on positive sentiment at end-March 2019. around growth boosting measures by the government and the trade truce between the US 6. Foreign Exchange Market and China. However, the rupee came under II.4.29 In the foreign exchange market, turnover intense pressure since then, triggered by flight to in both merchant and the inter-bank segments of safety by FPIs on weakening of growth and the spot and forward market mostly remained at COVID-19 concerns. It touched an all-time intra- the previous year’s levels, while the swap segment day low of `76.29 on March 23, 2020. Although exhibited an increase in activity during the latter the Indian rupee depreciated by 8.88 per cent part of the year. against the US dollar during 2019-20, it performed II.4.30 The Indian rupee traded with a weakening better than other EME currencies. (Chart II.4.8). bias, tracking other EME currencies during 2019- II.4.31 In tandem with movements in the nominal 20, touching a then lifetime low against the US exchange rate of the rupee, the 36-currency dollar in March 2020. While the depreciation of nominal/real effective exchange rate (NEER/ rupee was modest during H1:2019-20 – it REER) remained range-bound during 2019-20, depreciated by 2.31 per cent against the US dollar barring a sharp depreciation in both 36-currency – mainly due to a sell-off in the equity market NEER and REER in August 2019 and March during July-August 2019 amidst concerns over 2020. On average, the 36-currency NEER and escalating US-China trade tensions and tepid REER appreciated by 0.9 per cent and 2.4 per global growth. Thereafter, the rupee recovered cent, respectively, during 2019-20 on a y-o-y some lost ground, tracking gains in the equity basis. II.4.32 Forward premia softened across the Chart II.4.8: Movement in Rupee, US Dollar, Crude Oil Price and EM Currency Index tenors during the year under the downward pressure exerted by the substantial increase in banking system liquidity. However, the near-term premia edged higher in the February-March period as rupee demand increased ahead of end-year closure of accounts. II.4.33 Going forward, financial market movements would hinge to a large extent on the progress made in containing the COVID-19 pandemic. Measures taken by the government and the central bank in addressing the macroeconomic and financial fallout of COVID-19 would also play an important role in shaping the behaviour of Source: Bloomberg and RBI staff calculations. financial markets. 72ECONOMIC REVIEW II.5 GOVERNMENT FINANCES Estimates for gross tax revenue in 2019-20 were brought down by `4.51 lakh crore vis-à-vis BE. On II.5.1 In 2019-20, general government finances deviated from budgetary targets. For the central a year-on-year (y-o-y) basis, direct taxes declined government, the overshoot of 1.3 percentage by 7.7 per cent in 2019-20 (PA) as against a 13.4 points in its gross fiscal deficit (GFD) was mainly per cent increase in 2018-19, whereas indirect tax due to lower than budgeted tax collections, growth decelerated to 1.7 per cent from 2.9 per reflecting the growth slowdown as well as cent a year ago. Although the shortfall in tax rationalisation of corporate tax rates. Thus, the revenues was partially compensated by an central government took recourse to the escape increase in non-tax revenues, primarily due to clause under Section 4 (3) of the revised FRBM transfer of excess reserves from the Reserve Act twice in 2019-20 – first, for its GFD being Bank21 and partial settlement of pending adjusted placed at 3.3 per cent of GDP in the budget gross revenue (AGR) dues by telecom companies, estimates (BE) (0.2 percentage points above the they fell short of the RE. Moreover, only about half glide path specified in 2018-19) on account of of the budgeted disinvestment target of `1.05 lakh GST stabilisation and second, for the GFD crore was achieved. While capital expenditure overshooting to 3.8 per cent in its revised estimates was close to the budget target, revenue (RE). As per provisional accounts (PA), however, expenditure was curtailed to 96.0 per cent of the the central government’s realised GFD reached budgeted level, primarily through rollover of food 4.6 per cent. In the case of states, the consolidated subsidy. GFD deviated from the budgeted level, again mainly on account of lower revenue collections20. 3. Central Government Finances in 2020-21 II.5.2 Against this backdrop, sub-sections 2 and II.5.4 The Union Budget 2020-21 attempts to 3 present the position of central government balance the dual imperatives of providing finances in 2019-20 and 2020-21, respectively. countercyclical support to growth and charting a Sub-sections 4 and 5 outline the developments in return to the FRBM’s prescribed fiscal deficit path state government finances during 2019-20 and (Table II.5.1). The consolidation in 2020-21 budget 2020-21, respectively. General government is to be achieved through higher non-tax revenue, finances are discussed in sub-section 6. The final led by spectrum auction and usage charges section sets out concluding remarks and some budgeted at `1.3 lakh crore. Moreover, non-debt policy perspectives. capital receipts have also been budgeted higher, 2. Central Government Finances in 2019-20 on the back of disinvestment receipts of `2.1 lakh crore, almost four times of what was realised in II.5.3 In 2019-20, the provisional accounts (PA) 2019-20 (Chart II.5.1). indicate that the central government’s GFD recorded a slippage of 1.3 percentage points from II.5.5 The implicit tax buoyancy of 2.0 in 2020- the target set in the Union Budget. 21 (BE) over 2019-20 (PA) is higher than the 20 Pertains to revised estimates of 25 states. 21 As per the recommendations of the Expert Committee to Review the Extant Economic Capital Framework (Chair: Dr. Bimal Jalan), 2019. 73ANNUAL REPORT Table II.5.1: Central Government’s Fiscal Performance* (Per cent of GDP) Item 2004-08 2008-10 2010-15 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2019-20 2020-21 (RE) (PA) (BE) 1 2 3 4 5 6 7 8 9 10 11 12 Non Debt Receipts 11.0 9.7 9.5 9.2 9.1 9.4 9.1 8.8 9.5 8.6 10.0 Gross Tax Revenue (a+b) 10.7 10.4 10.2 10.0 10.6 11.1 11.2 11.0 10.6 9.9 10.8 a) Direct Tax 5.1 6.0 5.7 5.6 5.4 5.5 5.9 6.0 5.8 5.2 5.9 b) Indirect Tax 5.6 4.4 4.5 4.4 5.2 5.6 5.4 5.0 4.9 4.7 4.9 Net Tax Revenue** 7.9 7.6 7.3 7.2 6.9 7.2 7.3 6.9 7.4 6.7 7.3 Non-tax Revenue 2.2 1.8 1.8 1.6 1.8 1.8 1.1 1.2 1.7 1.6 1.7 Non Debt Capital Receipts 0.9 0.3 0.4 0.4 0.5 0.4 0.7 0.6 0.4 0.3 1.0 Total Expenditure 14.5 16.1 14.4 13.3 13.0 12.8 12.5 12.2 13.3 13.2 13.5 Revenue Expenditure 12.1 14.4 12.6 11.8 11.2 11.0 11.0 10.6 11.6 11.6 11.7 Capital Expenditure 2.4 1.7 1.8 1.6 1.8 1.8 1.5 1.6 1.7 1.7 1.8 Revenue Deficit 2.0 5.0 3.5 2.9 2.5 2.1 2.6 2.4 2.5 3.3 2.7 Gross Fiscal Deficit 3.5 6.3 4.9 4.1 3.9 3.5 3.5 3.4 3.8 4.6 3.5 BE: Budget Estimates. RE: Revised Estimates. PA: Provisional Accounts. *: GDP figures used in this table are on 2011-12 base, which are the latest available estimates. Going by the principle of using latest available GDP data for any year, GDP used for 2019-20 (RE) is the latest available Provisional Estimate (released on May 29, 2020). In view of this, the fiscal indicators as per cent of GDP given in this Table may at times marginally vary from those reported in the Union Budget Documents. **: Net tax revenue represents gross tax revenue net of devolution to state governments. Source: Union Budget Documents. with 16.0 per cent in 2019-20 (PA) due to a sharp deceleration in the growth of revenue expenditure from 17.0 per cent in 2019-20 to 11.9 per cent in 2020-21 (BE). The freeze in dearness allowance, as announced by the Union Government, and the compression under other heads of revenue Chart II.5.1: Non-tax Revenue and Disinvestment expenditure will likely be offset by the increased 4.0 expenditure requirement to fight COVID-19, 3.5 including the increased interest expenditure due 3.0 to higher volume of borrowings. Expenditure on 2.5 major subsidies, viz., food, fuel and fertilisers, is 2.0 budgeted to decline marginally to 1.0 per cent of 1.5 GDP in 2020-21 from 1.1 per cent in 2019-20. 1.0 Capital expenditure, on the other hand, is budgeted 0.5 to grow at 22.4 per cent in 2020-21. The capital 0.0 expenditure target for communications, however, has been budgeted five times higher in the Union Budget 2020-21 than in 2019-20 (RE), again a challenging task. An important goal of the Budget Source: Union Budget Documents. is reforms in the areas of labour, investment, coal 74 erorc hkal` 51-4102 61-5102 71-6102 81-7102 91-8102 )AP( 02-9102 )EB( 12-0202 realised buoyancy of (-) 0.5 in 2019-20 (PA); this might also prove to be challenging (Chart II.5.2). II.5.6 Total expenditure is budgeted to grow at a lower rate of 13.2 per cent in 2020-21 as compared Non-tax Revenue DisinvestmentECONOMIC REVIEW Chart II.5.2: Tax Revenue Collections Chart II.5.3: Key Deficit Indicators 8 of the State Governments 7 6 5 4 3 2 1 0 Note: 1. Data from 2018-19 to 2020-21 are based on budget documents of 25 states. 2. Data before 2018-19 are for 28 states and 3 UTs. 3. For all states and UTs, ratio of GFD-GDP was budgeted at 2.6 per cent for 2019-20. Source: Union Budget Documents. Source: State Budget Documents. and mining, which could revive economic activity 5. State Finances in 2020-21 and impart buoyancy to revenues. II.5.8 For 2020-21, states budgeted a 4. State Finances in 2019-20 consolidated GFD-GDP ratio of 2.3 per cent, mainly through higher revenue and lower II.5.7 As per the information available for 25 expenditure. The increase in revenue is expected state governments, the consolidated fiscal position from higher own tax revenue and devolution of of states – in terms of the GFD-GDP ratio – tax. The reduction in expenditure is likely to be deteriorated to 2.8 per cent in 2019-20 (RE) vis-à- more under spending on education, social security vis BE of 2.3 per cent (Chart II.5.3). This deviation and welfare, relief on account of natural calamities, was mainly caused by the economic slowdown leading to lower revenue – both own and central other agricultural programmes and energy. While transfers. Under own tax revenue, the decline was higher capital spending is budgeted in education, pronounced in states’ goods and services tax medical and public health, rural and urban (SGST) and taxes on vehicles, which induced cuts development, spending on energy and transport is in capital expenditure. Under revenue expenditure, expected to be curtailed. COVID-19 poses a major allocation to development expenditure was fiscal challenge to states' budgets, especially as increased, while non-development expenditure they are also using discretionary (pro-cyclical) tax was reduced. The reduction in capital expenditure policy such as hiking duties on petrol and diesel was largely reflected in reduced spending towards and increasing sales tax/VAT on alcohol to offset rural development22,23. revenue losses. 22 The above analysis is based on budget data of 25 states. 23 As states have a tendency to cut expenditures in the last quarter, actual numbers may differ from the revised estimates. 75 erorc hkal` 51-4102 61-5102 71-6102 81-7102 91-8102 )AP( 02-9102 )EB( 12-0202 Subdued Collections Corporation Tax Income Tax GST CustomsDuties UnionExcise DutiesANNUAL REPORT 6. General Government Finances reworking the path towards fiscal rectitude in the coming years. II.5.9 Based on information of 25 states, the general government fiscal deficit increased from II.6 EXTERNAL SECTOR 5.4 per cent of GDP in 2018-19 to 6.5 per cent in II.6.1 Developments in the external sector during 2019-20 (RE). Outstanding liabilities also 2019-20 mirrored the unusual interplay of weak increased to 70.4 per cent of GDP in 2019-20 domestic and external demand, terms of trade (RE) from 67.5 per cent in 2018-19. In 2020-21, gains from falling international crude prices and fiscal deficit and outstanding liabilities are surges in net capital inflows. In the event, reserve budgeted at 5.8 per cent and 70.5 per cent of buffers were strengthened, despite portfolio GDP, respectively (Appendix Tables 6 and 7). outflows towards the close of the year on However, based on provisional accounts widespread risk aversion triggered by the spread information, the general government fiscal deficit of COVID-19. (including all states) is expected to deteriorate further to about 7.5 per cent in 2019-20. Thus, the II.6.2 Against this backdrop, sub-section 2 fiscal gains achieved in the previous two years presents a brief overview of global economic and were reversed in 2019-20. A caveat is that most of financial conditions followed by an analysis of the estimates for 2020-21 were worked out before merchandise exports and imports in sub-section the nation-wide lockdown. Given the shortfall in 3. Sub-section 4 delves into the behaviour of revenues – a direct fallout of subdued economic invisibles. Together, sub-sections 3 and 4 unravel activity and increased expenditure requirement to the movements in the current account balance fight the pandemic – the general government during the year. Sub-section 5 dwells on net fiscal deficit and debt are likely to be materially capital flows and movements in reserves. External higher than budgeted. vulnerability indicators are evaluated in sub- section 6, followed by concluding observations. II.5.10 In sum, the deterioration in major deficit indicators in 2019-20 may be attributed to tax 2. Global Economic Conditions revenue shortfall, both cyclical and structural. At II.6.3 In January 2020, the international the same time, a significant curtailment in environment began to improve with expectations expenditure was justifiably avoided in view of the of a US-China Phase 1 trade deal and an orderly economic slowdown, which got accentuated from Brexit. International organisations such as the IMF the second half of 2018-19. Meeting the fiscal and the World Bank projected a recovery in global targets budgeted in 2020-21 has become even growth and trade for 2020 and 2021. The sudden more challenging due to COVID-19, in view of outbreak of COVID-19 and swift contagion forcing containment measures and fiscal interventions the ensuing lockdown shattered this optimism. for providing health infrastructure, helping The loss of output, employment and life itself vulnerable sections of the society and sector- across 200 countries brought the global economy specific relief measures. In this scenario, it is to standstill. This triggered a wave of downward desirable to have a clear exit strategy with credible revisions to global output growth, with the IMF consolidation milestones and timelines in projecting a contraction of world GDP by 4.9 per 76ECONOMIC REVIEW cent and trade volume by 11.9 per cent24 in 2020. downside risks to global growth accentuating The contraction in advanced economies (AEs) is towards the end of 2019-20. projected to be more severe at 8.0 per cent while II.6.5 With the onset of the pandemic and for the emerging markets and developing growing fear of a deeper recession, global financial economies (EMDEs), it is milder at 3.0 per cent. conditions tightened abruptly with a sharp fall in The World Bank and the OECD also projected asset prices in EMEs as investors rushed to safety contraction in world GDP by 5.2 per cent and 6.0 and liquidity. Currencies have fallen in the range per cent, respectively. In fact, the OECD projected of 5-25 per cent in Q4:2019-20 – faster than in the a sharper contraction of 7.6 per cent, in case a early months of global financial crisis (GFC). second wave of COVID-19 hits before the year Central banks resorted to currency interventions end. The impact on trade is expected to occur and established swap lines with the US Fed and through various channels, including supply-chain the ECB. Financial markets witnessed spikes in disruptions, adoption of restrictive trade policies, risk reversals and portfolio outflows of the order of volatility in international commodity prices, after- US$ 95 billion from major EMEs between mid- effects of lockdowns and lower demand resulting January and end-March 2020 – more than thrice from the projected global recession. the amount experienced during the GFC. Several countries provided liquidity backstops to enable II.6.4 According to the WTO’s forecast of April domestic banks to offer broad loan forbearance to 2020, world merchandise trade volume may borrowers. Central banks across the world have plummet by 13 to 32 per cent during 2020. The cut policy rates and pumped massive amounts of WTO’s goods barometer index25 of May 2020 was liquidity into markets through various conventional at 87.6, its lowest value on record since the and unconventional measures, supplementing indicator was launched in July 2016. Prices of governments’ fiscal efforts to mitigate the fallout of commodities dropped precipitously, creating COVID-19. pressure on commodity-exporting countries. Crude oil prices declined sharply due to demand 3. Merchandise Trade compression caused by lockdowns coupled with a II.6.6 Global trade remained weak in 2019 due delay in production cuts by the Organisation of to trade tensions and slowing world economic Petroleum Exporting Countries (OPEC) and its growth. As per the WTO, global merchandise partners (OPEC plus). On the other hand, gold trade growth dropped to 0.1 per cent in volume prices increased, reflecting safe-haven demand terms in 2019, after growing by 2.9 per cent in by investors amidst heightened global uncertainty. 2018. India’s merchandise exports and imports Inflationary pressures faced by EMDEs eased due contracted by 5.1 per cent and 7.8 per cent, to weaker demand and the sharp decline in oil respectively, during 2019-20, after three prices. Global financial markets were buffeted by successive years of growth. Notwithstanding a bouts of volatility amid investor concerns about marginal appreciation of the rupee in real effective 24 IMF World Economic Outlook Update, June 2020. 25 It is a leading indicator that signals changes in world trade growth two to three months ahead of merchandise trade volume statistics. Its baseline value is 100, a value greater than 100 suggests above-trend growth while a value below 100 indicates below-trend growth. 77ANNUAL REPORT terms – a measure of trade competitiveness – the Chart II.6.2: World Crude Oil Demand and Supply estimated export volume remained more or less constant in 2019-20 vis-à-vis 2018-19, but falling export prices caused a decline in value terms. The deterioration in exports performance was broad-based – commodity groups constituting more than four-fifths of the export basket recorded lower values of shipments. The worsening profile of key export items, i.e., engineering products, gems and jewellery, petroleum products, rice, and cotton textiles was sector-specific, amplified by global developments (Chart II.6.1). Exports of items such as electronic goods, drugs and pharmaceutical and iron ore proved resilient and recorded expansion. Source: Reuters. II.6.7 The fall in exports of petroleum, oil and lubricants (POL) was largely driven by the and Analysis Cell (PPAC) of the Ministry of softening of international crude oil prices, which Petroleum & Natural Gas, crude oil processed by plunged by 12.9 per cent during the year following refineries witnessed a decline of 1.1 per cent the failure of the OPEC in reaching an agreement (y-o-y), reflecting the closures of domestic with Russia on production cuts and the resulting refineries to meet the International Maritime oversupply in global oil markets (Chart II.6.2). In Organisation (IMO) 2020 bunker fuel specifications volume terms, however, POL exports declined by as well as Bharat Stage (BS) VI emission norms 3.8 per cent. According to the Petroleum Planning which entailed supply of less polluting fuel across the country from April 1, 2020. Chart II.6.1: Relative Contribution of Sectors to Export Growth II.6.8 Rice exports declined due to non-basmati (2019-20) rice turning uncompetitive vis-à-vis other major exporters like China, Thailand, Vietnam and Pakistan, on account of the rise in minimum support price (MSP) of paddy. II.6.9 Gems and jewellery exports contracted by 10.8 per cent in 2019-20 on top of a decline of 3.1 per cent a year ago on account of the rise in import duty on precious stones and sluggish import demand from key destinations. Component-wise, the decline was mainly due to the slump in exports of pearl, precious and semi-precious stones. Destination-wise, Hong Kong, the UAE, the USA, Source: DGCI&S. Belgium and Israel, which account for 87 per cent 78ECONOMIC REVIEW of total gems and jewellery exports, registered a Chart II.6.3: Composition of Electronics Exports decline in demand. II.6.10 Engineering goods registered a decline of 5.9 per cent during 2019-20 as against a growth of 6.3 per cent a year ago. All major components, except electrical machinery and equipment (which accounted for around 11 per cent of total engineering goods exports), registered contraction. In particular, auto components and parts, ships, boats and floating structures, non-ferrous metals and products thereof, and industrial machinery were the key contributors to the decline. Destination-wise, the USA, which accounts for 16 per cent of India’s engineering goods exports, registered just 0.2 per cent growth. Germany, the Source: DGCI&S. UK, Nepal, Bangladesh and Mexico, which account for 17 per cent, registered a contraction in followed by Russia, the US, Netherlands, South 2019-20. Africa and China (Chart II.6.4). II.6.11 Exports of cotton textiles registered a II.6.13 Drugs and pharmaceuticals exports grew decline of 10.6 per cent during 2019-20 as against by 8.1 per cent during 2019-20. COVID-19 has a growth of 9.3 per cent a year ago. The contraction highlighted the concentration risks associated was mainly contributed by a decline of 29.1 per with China as India imports close to 70 per cent of cent in the exports of cotton yarn. Bangladesh and active pharmaceutical ingredients (APIs), i.e., bulk China, which together accounted for around 43 per cent of these exports, posted double-digit declines. Chart II.6.4: Mobile Phone Exports - Destinationwise (2019-20) II.6.12 Electronic goods exports, which account for 3.7 per cent of total exports, grew continuously for 25 straight months since February 2018, driven by a rise in exports of telephone instruments, including smartphones (Chart II.6.3), and expanded by 32.5 per cent during 2019-20. Though India is not a significant player in the global smartphone market which is dominated by China, Vietnam and Hong Kong, it has the potential to play a crucial role in this market due to huge domestic demand and the rise of its digital economy. The UAE emerged as the largest destination for Indian mobile phone exports, Source: DGCI&S. 79ANNUAL REPORT Chart II.6.5: Top Exporters and Importers of Chart II.6.6: Composition of Total Medical Goods Medical Goods in 2019 Exports in 2019 100 Germany 90 United States 80 Switzerland 70 Netherlands 60 Belgium 50 40 China 30 France 20 Italy 10 United Kingdom 0 India^ 0 50 100 150 200 US$billion Imports Exports ^: India is not among the top 10 exporters or importers of medical goods. Source: WTO and DGCI&S. Source: WTO and DGCI&S. drugs and intermediates, from China for compared with an increase of 22.8 per cent in manufacturing finished pharmaceutical products. Q2:2018-19. Contraction in imports at the rate of Notably, India is not among the top 10 exporters 11.2 per cent set in during Q3:2019-20. COVID-19 or importers of medical products, and its accentuated the decline and imports fell by 9.8 per medical exports are concentrated in medicines cent in Q4:2019-20. For the year as a whole, (pharmaceuticals) [Charts II.6.5 and II.6.6]. imports shrank by 7.8 per cent (Chart II.6.7). The II.6.14 Iron ore exports picked up during 2019-20 retrenchment in imports during the year was on the back of a sharp increase in global iron ore prices, following production outages in Brazil. Nearly 80 per cent of total iron ore exports from India are shipped to China, which is the largest steel producer in the world. II.6.15 More than two-thirds of world trade passes through global value chains (GVCs) which straddle at least one border before final assembly. COVID-19 has posed challenges to GVCs as companies across the globe have significant exposure to Chinese GVCs (Box II.6.1). II.6.16 The slowdown in India’s merchandise imports that commenced in the second half of 2018-19 deepened further in 2019-20, with imports declining by 11.3 per cent in Q2:2019-20 as 80 tnecreP ynamreG ASU dnalreztiwS sdnalrehteN muigleB anihC ecnarF ylatI KU aidnI Personal protective products Medicines Medical supplies Medical equipment Chart II.6.7: Composition of Merchandise Import Growth Source: DGCI&S.ECONOMIC REVIEW Box II.6.1 Global Value Chains in Pandemic Times World trade expanded rapidly on the back of the rise of - high labour costs in the exporting country decrease its global values chains (GVCs) after the 1990s, whose share competitiveness and thus limit its participation in GVC. in the world trade increased from around 38 per cent in 1970 Furthermore, the gains from participation in GVCs have not to 41.6 per cent in 1990 and further to 51.8 per cent in 2008. been distributed equally across and within countries. On the other hand, as the recent COVID-19 experience has shown, Advancements in transportation, information and the concentration risk of GVCs in a single country can communication technologies and lowering of trade and tariff produce large global spillovers, impacting income, trade and barriers encouraged manufacturers to extend production investment. process beyond national boundaries (World Bank, 2020). According to the OECD, India’s foreign value-added content Indian industry’s integration with top 10 trading partners of exports increased to 25.1 per cent in 2011, from 18.8 per across 15 key sectors (which account for around three- cent in 2005, although it declined to 16.1 per cent in 2016, fourths of India’s exports) can be measured through the lower than OECD and G-20 averages (25.3 per cent and Grubel-Lloyd Index (GLI)26. The following key points emerge: 16.5 per cent, respectively). The decline is likely due in part (i) India’s exposure to Chinese GVCs is somewhat limited to a shift towards local suppliers of intermediate inputs, (barring pharmaceutical and textiles) though China has a particularly in the growing services sector. Recently, strong GVC presence in sectors like precision instruments, automotive and electrical machinery; (ii) India has a higher however, COVID-19 has revealed the fragility associated level of intra-industry trade integration with the Eurozone, with GVCs, especially those associated with China, the US followed by the US, Hong Kong, the UAE and Indonesia. and Europe. Sector-wise and country-wise analysis suggests that intra- Empirical findings suggest that a one per cent increase in industry trade diversification may be strengthened with the GVC participation may boost per capita income levels by Euro area, Indonesia and USA with regard to the automotive more than one per cent (World Bank, 2020). GVCs also industry; with the Euro area, the USA, the UAE and Hong have a more positive impact on productivity than conventional Kong for electrical machinery; and with Hong Kong, the trade (IMF, 2019). Labour costs also play an important role USA, Indonesia and the UAE for precision instruments27 in GVC participation (Ignatenko, Raei and Mircheva, 2019) (Table 1). Table 1: India - Integration in GVC, by Sector, for Top 10 Major Trading Partners (Grubel-Lloyd Index) Sector China Euro USA UAE Saudi Hong Switzer- Indo- Korea Singa- Arabia Kong land nesia pore 1 2 3 4 5 6 7 8 9 10 11 Petroleum Crude & Products 0.081 0.097 0.111 0.182 0.023 0.014 0.000 0.103 0.896 0.169 Pharma Products 0.417 0.412 0.089 0.003 0.000 0.079 0.131 0.730 0.447 0.665 Chemicals excluding Pharma 0.193 0.475 0.342 0.144 0.286 0.285 0.328 0.162 0.280 0.214 Rubber/Plastics 0.103 0.541 0.444 0.135 0.061 0.217 0.055 0.154 0.043 0.071 Leather Products 0.158 0.171 0.048 0.008 0.002 0.082 0.166 0.563 0.311 0.641 Wood Products/Furniture 0.049 0.388 0.128 0.296 0.008 0.053 0.263 0.090 0.200 0.121 Paper Products/Publishing 0.085 0.161 0.128 0.115 0.044 0.089 0.025 0.057 0.016 0.167 Textiles and Apparel 0.105 0.083 0.023 0.013 0.014 0.137 0.075 0.251 0.208 0.131 Gems & Jewellery 0.019 0.462 0.527 0.419 0.008 0.288 0.005 0.004 0.021 0.528 Metals and Metal Products 0.069 0.358 0.200 0.125 0.043 0.070 0.247 0.323 0.188 0.206 Office Mach/Machinery Various 0.077 0.575 0.610 0.184 0.041 0.422 0.199 0.275 0.106 0.291 Communication Equipment 0.021 0.576 0.785 0.136 0.006 0.237 0.275 0.379 0.024 0.118 Electrical Machinery 0.055 0.597 0.530 0.466 0.016 0.331 0.256 0.306 0.076 0.188 Automotive 0.122 0.706 0.207 0.029 0.000 0.315 0.146 0.243 0.168 0.160 Precision Instruments 0.183 0.294 0.496 0.397 0.024 0.523 0.104 0.411 0.187 0.319 Source: RBI staff calculations. (contd...) (X + M) X M X M 26 GL i i i i i i GL i X + M X + M i i – |i – | | i – i| Where= X denotes export and= 1M – the import of g; o0o ≤d i. V ≤a 1lue of index increases with increase in intra-industry trade. Estimations are based on i i latest available data from UNCTAD. Aggregation at the sectoral level has been made by using bilateral trade shares (UNCTAD, 2020). 27 As per available literature, the interpretation of the traditional GL index requires caution, for instance, the values of GL index rise with the level of aggregation (i.e., they are lower when calculated at more detailed levels). 81ANNUAL REPORT spread across sectors, which constituted 95.4 per importing oil from Iran, compensating with cent of the import basket, but mainly led by stepped-up imports from other top suppliers such petroleum, oil and lubricants (POL), followed by as Iraq, Saudi Arabia, the UAE and the US (Chart pearls and precious stones, gold, coal, and II.6.9). These developments created an upward transport equipment. In volume terms, however, price risk for India, as apart from being major imports remained stable in 2019-20 while import sources of crude oil imports, Iran and Venezuela’s unit value declined by 8.6 per cent in 2019-20 as per barrel cost are lower than that of other against a growth of 4.8 per cent a year ago. A few suppliers, particularly the US. The estimated price sectors, such as cotton, pulses, pharmaceutical of oil imported from Iran, Venezuela and the US products, and fruits and vegetables weathered the was US$ 69, US$ 48 and US$ 70 per barrel, downturn and witnessed an expansion in imports respectively, in 2019-20. during 2019-20. Chart II.6.8: Crude Oil Import II.6.17 Imports of POL shrank by 7.4 per cent 40 90 during 2019-20 on the back of a decline in 35 80 international crude oil prices by 12.9 per cent 70 30 (Chart II.6.8). Low global oil demand and 60 25 expansion in production from non-OPEC countries 50 such as the US and Canada limited upsides to 20 40 international crude prices emanating from supply- 15 30 side disruptions in Saudi Arabia, falling production 10 20 of OPEC and the US sanctions on Iran and 5 10 Venezuela. From January 2020, crude oil prices 0 0 declined due to the Saudi-Russia price war and depressed demand. Venezuela and Iran, which together met 17.0 per cent of India’s crude oil imports in 2018-19, lost share in the aftermath of Source: DGCI&S and PPAC. US sanctions. From June 2019, India stopped 82 sennot noilliM 81-rpA 81-nuJ 81-guA 81-tcO 81-ceD 91-beF 91-rpA 91-nuJ 91-guA 91-tcO 91-ceD 02-beF 02-rpA 02-nuJ lbbrep$SU Since several countries are looking to diversify away from Countries Participate?' IMF Working Paper 19/18, China, this also provides a unique opportunity for India International Monetary Fund, Washington, DC. (Reynolds and Urabe, 2020; Chaudhary, 2020). 2. The World Development Report (2020), 'Trading for Strengthening the domestic manufacturing sector’s Development in the Age of Global Value Chains'. participation in global value chains, liberalising trade, 3. Global Value Chain Development Report (2019), World investments and FDI policy with regard to developing Bank. infrastructure (both hard and soft), providing reliable 4. Global Economic Prospects (2020), World Bank. intellectual property rights for the international investor and implementing labour market reforms hold the key to India’s 5. UNCTAD (2020), 'Global Trade Impact of the Coronavirus emergence as an important player in GVCs, going forward. (Covid-19) Epidemic', Division of International Trade and Commodities, UNCTAD Technical Note, March 4. References: 6. OECD (2018), 'Trade in Value Added: India'. 1. Ignatenko, A., Raei, F., & Mircheva, B. (2019), 'Global Value Chains: What are the Benefits and Why Do Volume PriceIndian Basket (RHS)ECONOMIC REVIEW announced in the Union Budget 2019-20 also contributed to the decline in the volume of gold imports. II.6.19 Non-oil non-gold imports started contracting from Q4:2018-19, and the intensity of contraction deepened further during 2019-20. Among non-oil non-gold imports, pearls and precious stones, coal and chemical were major contributors to the deterioration (Chart II.6.11). A fall in coal imports by 14.2 per cent during 2019- 20 was driven by a sharp slump of 29.2 per cent in international coal prices. In volume terms, coal imports registered a modest growth of 4.6 per cent during the year. II.6.20 Imports of transport equipment contributed to the decline in capital goods imports. These II.6.18 Gold imports at US$ 28.2 billion registered imports were mainly pulled down by sectors such a decline of 14.2 per cent (y-o-y) in 2019-20. In as ships, boats and floating structures, automobile volume terms, there was a significant contraction parts and components, and railway equipment, by 26.7 per cent in response to the rise in mirroring subdued domestic demand conditions. international gold prices by 15.8 per cent on safe China, Germany and the US accounted for about haven demand (Chart II.6.10). The increase in 42 per cent of India’s automobile parts and gold import duty from 10 per cent to 12.5 per cent component imports. Imports of pearls and precious Chart II.6.10: Gold Imports Chart II.6.11: Weighted Contribution of Major Sectors to Import Growth in 2019-20 0.3 0.0 -0.3 -0.6 -0.9 -1.2 -1.5 -1.8 -2.1 Source: DGCI&S. Source: DGCI&S. 83 stniop egatnecreP nottoC sesluP slacituecamrahP dna stiurF selbategeV selitxeT slacimehC laoC dna slraeP senotSsuoicerP dloG LOP Chart II.6.9: Sources of India’s Crude Oil Imports Source: DGCI&S. Import Growt-h: 7.8%ANNUAL REPORT stone at US$ 22.5 billion contracted by 17.1 per Chart II.6.12: Change in Merchandise Trade Flows cent in 2019-20 as imports from trading partners 100 accounting for 89.2 per cent of India’s total imports of pearls and precious stones registered negative 50 growth. Within pearls and precious stones, the decline was driven by a fall in the import of 0 diamonds by 17.7 per cent (y-o-y) in 2019-20, the -50 latter driving a decline in exports shipment of diamonds by 21.3 per cent (y-o-y) during the year. -100 II.6.21 The pharmaceutical sector is a major contributor to India’s import growth. Medicinal and pharmaceutical products imports at US$ 6.5 billion registered a growth of 1.6 per cent (y-o-y) in 2019- Note: Δ reflects a change in value over the previous year. However, for imports sign is reversed, i.e., a positive Δ imports implies lower 20. Within this segment, imports of bulk drugs, imports and vice versa; T.B: Trade Balance. Source: DGCI&S. intermediates and drug formulation together accounted for 88 per cent of pharmaceutical barring transportation, insurance and imports in 2019-20. India’s imports from China communication services (Chart II.6.13). Software were as high as 68.0 per cent of its total bulk drugs services exports expanded at a quicker pace and intermediates imports during this period. despite higher rejection rate of H-1B visa II.6.22 As the decline in imports was much larger applications filed by Indian IT services firms in the than in exports during 2019-20, the merchandise US. Major IT companies secured multi-year IT trade deficit narrowed by US$ 23.1 billion to US$ services contracts and strategic deals in overseas 160.9 billion from US$ 184.0 billion a year ago, reflecting both subdued domestic economic activity and lacklustre export performance (Chart II.6.12). 4. Invisibles II.6.23 Net receipts from invisibles, reflecting cross-border transactions of services, income and transfers, increased during 2019-20, albeit at a slower pace than a year ago (Appendix Table 8). The growth in exports of software services and remittances receipts from overseas Indians boosted net invisible receipts which financed 84 per cent of the trade deficit during 2019-20 – higher than 68 per cent a year ago. II.6.24 India’s net export of services recorded a broad-based improvement across all sub-sectors, 84 noillib$SU 61-5102 71-6102 81-7102 91-8102 02-9102 Improvement in T.B: Higher exports or lower imports Deterioration in T.B: Lower exports or higher imports ΔinExports Δin Imports ΔinTrade Balance Chart II.6.13: India’s Net Exports of Services 5 4 3 2 1 0 -1 Source: RBI. PDGfotnecreP 41-3102 51-4102 61-5102 71-6102 81-7102 91-8102 02-9102 Travel Transportation Software Business Financial Communication Others ServicesECONOMIC REVIEW markets. They also accelerated efforts towards than in the preceding year. The decline was new technologies such as artificial intelligence, attributable mainly to a lower net outgo on account machine learning, cloud computing and big data of investment income, which consists of dividends analytics to support their customers’ enterprise- and withdrawals from income of quasi- wide transformation initiatives. corporations, reinvested earnings, and interest. Notwithstanding higher payments on debt and II.6.25 Net receipts from travel recorded double non-debt liabilities of the economy on account of digit growth during 2019-20, reflecting the lower foreign investments and external commercial growth of payments on outbound travel, even borrowings, net outgo declined as interest though the tourist arrivals from high-income countries (except the US) were lower than a year earnings on foreign currency assets and dividend ago. Reflecting the impact of the global spread of earnings of Indian FDI enterprises abroad COVID-19, arrival of foreign tourists at 3.28 lakh increased over the preceding year. recorded a contraction of 66.2 per cent on y-o-y II.6.28 With the current account balance turning basis in March 2020 which led to decline in tourist from deficit to surplus in Q4, the current account arrivals during 2019-20 by 3.8 per cent.28 Sluggish deficit (CAD) for the year narrowed to 0.9 per cent domestic economic activity and travel restrictions of GDP from 2.1 per cent in 2018-19 as the due to COVID-19 impacted outbound tourists from merchandise trade deficit contracted, reflecting India, resulting in slower growth in travel payments the terms of trade gains accrued from lower (1.4 per cent) as compared with 11.2 per cent a commodity prices for crude oil, coal and fertilisers, year ago. and a contraction in import volumes (Charts II.6.14 II.6.26 Inbound remittances from Indians working and II.6.15). abroad grew for the third consecutive year in 2019-20, though at a slower pace. Subdued Chart II.6.14: Composition of India’s remittance flows largely reflected weaker growth Current Account Deficit in AEs and lower crude oil prices weighing on 8 6 incomes of oil producing Gulf countries. 4 Nevertheless, India was the largest recipient, with 2 a share of 11.3 per cent in global remittances in 0 2019. According to the World Bank estimate, the -0.9 -2 -1.3 -1.1 -0.6 average cost of sending remittances to India -1.8 -2.1 -4 decreased from 5.6 per cent in 2018-19 to 5.3 per -6 cent in 2019-20 and remained significantly lower -8 than the global average of 6.8 per cent.29 -10 II.6.27 Under the income account, net cross- border income payments associated with the Trade Deficit Services Transfers Income CAD production and ownership of financial and other Source: RBI. non-produced assets were lower during 2019-20 28 Foreign tourist arrivals during April-February 2019-20 were higher by 2.5 per cent than the corresponding period of 2018-19. 29 Remittance Prices Worldwide - World Bank, June 2020. 85 PDGfotnecreP 51-4102 61-5102 71-6102 81-7102 91-8102 02-9102ANNUAL REPORT Chart II.6.15: Sources of Incremental Chart II.6.16: Financing of Current Account Deficit Current Account Deficit 5 4 3 2 1 0 -0.6 -1 -1.1 -0.9 -1.3 -2 -1.8 -2.1 -3 FDI FPI ECBs Trade credit Banking capital Others Increase (-)/Decrease(+) CAD Note: Incremental value of CAD may not be equal to the difference of Note: ‘Others’ inicnl urdees enrevte sexternal assistance, rupee debt service and CAD in two years due to rounding off. other capital. Source: RBI. Source: RBI. 5. External Financing II.6.29 In the financial account, all major sources of foreign capital increased. Net capital inflows were more than sufficient to finance the lower CAD and, therefore, this led to a large accretion Box II.6.2 Capital Flows and Foreign Exchange Reserves: An Analytical Perspective on Absorptive Capacity of the Domestic Economy The juxtaposition of the recent slowdown in domestic growth demand; the scarcity of complementary factors of production and surge in capital inflows leading to historically high build- such as skilled labour, technology, management and up of reserves has brought into focus the question of the intermediate production inputs; and lack of institutional economy’s absorptive capacity – how much foreign capital development. Incidentally, capital flows can be associated can be effectively used by the economy for boosting growth, with higher growth only when the negative impact of their productivity and development (RBI, 2002). The issue volatility on output and consumption is controlled for (World assumes special relevance because foreign capital is Bank, 2001). generally seen to be beneficial to an economy; however, if it In the case of India, almost half of net capital flows (average is not absorbed into the real economy to finance investment, of 2.7 per cent of GDP during 2013-14 to 2019-20) were it can possibly lead to upward pressure on the exchange accumulated as reserves (1.3 per cent of GDP) on the back rate, overheating of the economy and asset price bubbles. of insufficient absorptive capacity in the domestic economy. In countries with limited absorptive capacity, net capital Even though higher CAD (due to higher trade deficit) flows greater than the funding needs of the CAD can lead to absorbed foreign capital flows during the post-GFC period large accretions in foreign exchange reserves which are (2009-10 to 2012-13), the quality of imports was deployed outside the economy without realising benefits in characterised by unproductive gold imports and higher terms of higher real consumption and investment. In other international crude oil prices rather than growth-inducing words, lack of absorptive capacity may constrain the growth- non-oil non-gold imports. In the post-taper tantrum phase of augmenting role of foreign capital. The absorptive capacity of an economy is generally constrained by lack of domestic (contd....) 86 PDGfotnecreP 51-4102 61-5102 71-6102 81-7102 91-8102 02-9102 to foreign exchange reserves in 2019-20 (Chart II.6.16). On a BoP basis (excluding valuation effect), forex reserves increased by US$ 59.5 billion in 2019-20 after a depletion of US$ 3.3 billion in 2018-19 (Box II.6.2).ECONOMIC REVIEW 2013-14 to 2019-20, net capital flows (as a ratio to GDP) Table 1: Growth inducing Impact of Imports were lower but exceeded the modest level of CAD, caused (Dependent Variable: Real GDP) by lower crude oil prices and sharp moderation in growth in Import Error correction term Long-run effect non-oil non-gold imports (i.e., average 2.4 per cent during 1 2 3 2013-14 to 2019-20 vis-à-vis 12.0 per cent during 2009-10 Oil (crude and -0.06** 1.02* to 2012-13). products) Besides structural factors, low growth in recent years mainly Non-oil non-gold# -0.04* 0.56* due to subdued domestic demand has also constrained the Capital goods# -0.02*** 0.81* capacity of the economy to absorb capital inflows. A vector Gold No long-run relationship^ error correction model using data for period 1997-98:Q1 to 2019-20:Q4 shows that oil import volume (both crude and #: Estimate based on period 2001-02: Q1 to 2019-20: Q4. ^: No cointegrating relationship found based on the Johansen test. products) has the largest growth-inducing impact, followed *, ** and ***: Indicate statistical significance at 1, 5 and 10 per cent, by capital goods and non-oil non-gold imports (Table 1). respectively. Imports with a good mix of capital goods, therefore, may not Note: 1. All variables are in log form and estimates checked for Vector only enhance the domestic absorptive capacity but will also Error Correction Residual Serial Correlation and their add to growth by ensuring productive use of foreign capital. normality. Optimal number of lags used is 4. 2. Estimates for imports of oil and gold are based on actual To sum up, absorption of foreign capital is crucial for volumes reported by DGCI&S while non-oil non-gold imports economic growth. It is the quality of CAD which matters in and capital goods imports were deflated by UVI of India’s enhancing the absorptive capacity of the economy through imports available under UNCTAD database. growth-inducing imports. Further structural reforms backed Source: RBI staff calculations. by improved quality of CAD, therefore, would help the country lift the potential and sustain growth. 2. World Bank (2001), 'International Capital Flows and References: Economic Growth', Global Development Finance 2001, Chapter 3. 1. Grenville, Stephen (2008), 'Central Banks and Capital Flows', ADBI Discussion Paper No. 87, Asian 3. Reserve Bank of India (2002), Report on Currency and Development Bank Institute: Tokyo. Finance. II.6.30 Foreign direct investment (FDI) remained position in the World Bank’s ease of doing the predominant source of external financing, as business index (2020)31, from 77th position a year in the preceding year. In both gross and net terms, FDI flows in 2019-20 were well above their Table II.6.1: Foreign Direct Investment Inflows respective levels in 2018-19 (Table II.6.1). Despite (US$ billion) a slowdown in the global economy and growing Item 2017-18 2018-19 2019-20 (P) global investment concerns due to disruptions in 1 2 3 4 supply chains, India was able to sustain the pace 1 Net FDI (1.1 - 1.2) 30.3 30.7 43.0 of FDI in 2019-20 and was the 9th largest recipient 1.1 Net Inward FDI (1.1.1 - 1.1.2) 39.4 43.3 56.0 country globally in 2019.30 Sustained business 1.1.1 Gross Inflows 61.0 62.0 74.4 reforms in the areas of starting business, 1.1.2 Repatriation/Disinvestment 21.5 18.7 18.4 construction permits and insolvency resolution 1.2 Net Outward FDI 9.1 12.6 13.0 under the Insolvency and Bankruptcy Code (IBC) P: Provisional Source: RBI. helped India gain 14 places and move to the 63rd 30 World Investment Report 2020, UNCTAD. 31 Doing Business 2020, the World Bank. 87ANNUAL REPORT ago. According to the World Bank, India was one to increased FDI flows of US$ 8.3 billion in 2019- of the world’s top 10 most improved countries in 20, triple the level a year ago. terms of doing business for the third consecutive II.6.32 Outward direct investment by Indian year. Most of FDI equity flows went to the services entities also remained robust as Indian entities sector, including communication services, retail continued to expand their overseas business and wholesale trade, financial services, computer operations. Outward FDI was mainly in the form of and business services and the manufacturing equity and loans to subsidiaries/ affiliated sector. Singapore and Mauritius remained the enterprises, primarily to Singapore, the US, the major source countries, accounting for about 50 UK, Mauritius, Switzerland and the Netherlands, per cent of total FDI flows in 2019-20, followed by which accounted for 75 per cent of total overseas the Netherlands, the Cayman Islands, the US and investments during the period. Most of these Japan (Chart II.6.17 and Appendix Table 9). investments were made in the business services, II.6.31 Apart from equity investments, there was a manufacturing and restaurants and hotels sector. substantial increase in the inter-corporate debt of II.6.33 Foreign portfolio investment (FPI) flows FDI companies, which covers the borrowing or have remained volatile since the beginning of lending between affiliated direct investment 2019-20 on account of multiple headwinds. Net enterprises. A simplification of the policy framework FPI outflows under the general route were US$ for external commercial borrowings (ECBs) since 7.1 billion in 2019-20. After robust inflows in January 2019, allowing all entities that are eligible Q1:2019-20, FPIs undertook sell-offs in the equity for FDI to raise ECBs and other relaxations such as expansion of scope of end-use of resources led segment in July 2019 on account of the domestic slowdown, particularly the auto sector, and the super-rich tax surcharge announced in the Union Chart II.6.17: Source Country-wise Inflow of FDI (Equity) Budget. Outflows reversed, however, with the rollback of the tax surcharge and the corporate tax rate cut in September 2019. Monetary easing by major central banks and the US-China Phase 1 trade deal also supported FPI inflows in Q3:2019- 20. However, an unprecedented wave of global risk aversion arising from the fear of global recession in the wake of COVID-19 and the ongoing crude oil price war between Saudi Arabia and Russia, triggered risk-off sentiments among global investors leading to net sell-offs of US$ 16.0 billion in Q4:2019-20 (Chart II.6.18). Nearly 70 per cent of the FPI outflows were from the Note: Country-wise FDI data include equity flows through approval banking and other financial services, software, oil and automatic routes only. Source: RBI. and gas, and automobiles and auto components 88ECONOMIC REVIEW however, attracted US$ 8.6 billion by end-March 2020. II.6.34 Various policy measures were undertaken during 2019-20 to expand investment opportunities and impart confidence to foreign investors: (i) increase in the statutory limit for FPI investment from 24 per cent to sectoral foreign investment limit with the option for corporates to limit it to a lower threshold; (ii) permitting FPIs to subscribe to listed debt securities issued by real estate investment trusts (ReITs) and infrastructure investment trusts (InvITs); and (iii) rationalisation of KYC norms for foreign investors. The Reserve Bank also introduced a slew of measures to encourage foreign inflows, which included (i) hike in the short-term investments by FPIs from 20 per (Chart II.6.19). Country-wise, the composition of assets under custody as at end-March 2020 cent to 30 per cent of the total FPI investment in shows continued dominance of US-based foreign central government securities (including Treasury portfolio investors, followed by those operating Bills) or state development loans (SDLs); through Mauritius, Luxembourg and Singapore. (ii) increase in investment cap under VRR scheme The Voluntary Retention Route (VRR), introduced to `1,50,000 crore from `75,000 crore; to encourage long-term FPI in the debt market, (iii) flexibility to transfer investment under the general investment limit to the VRR scheme; and, (iv) expansion of the scope of instruments for Chart II.6.19: Change in FPIs’ Exposure in Equity Market investments under VRR to include exchange 2 traded funds investing only in debt instruments. 1 For 2020-21, the FPI limit in the domestic corporate 0 bond market has been further raised from 9 per cent to 15 per cent of total outstanding stock of -1 corporate bonds. Notwithstanding several -2 confidence building measures and enhancement -3 of FPI limits, FPI activity in 2019-20 was largely -4 influenced by global developments. Utilisation of FPI limits dipped to 37.5 per cent in the government debt market (both G-sec and SDLs) and 54.5 per cent in the corporate debt market by end-March 2020 from 54.0 per cent and 75.9 per cent, Source: NSDL and SEBI. respectively, a year ago. 89 erorc hkal` secivreS laicnaniF secivreS erawtfoS &selibomotuA stnenopmoC saG dna liO sdooG latipaC slacituecamrahP gniniM dna slateM segareveB ,dooF occaboT & noitcurtsnoC slairetaM gniliateR secivreS moceleT ecnarusnI Chart II.6.18: Net Foreign Portfolio Flows to India 15 10 5 0 -5 -10 -15 -20 Source: NSDL and SEBI. 2018-19 2019-20 noillib$SU 1Q:81-7102 2Q:81-7102 3Q:81-7102 4Q:81-7102 1Q:91-8102 2Q:91-8102 3Q:91-8102 4Q:91-8102 1Q:02-9102 2Q:02-9102 3Q:02-9102 4Q:02-9102 1Q:12-0202 Debt Equity TotalANNUAL REPORT II.6.35 FPI outflows from the domestic capital Chart II.6.21: External Commercial Borrowings market tracked the reversal of portfolio flows in to India (Net) major EMEs. In fact, FPI outflows from EMEs in 25 Q4:2019-20 were the largest ever in any phase of 20 flight to safety, including the Global Financial 15 Crisis (GFC) (Chart II.6.20). 10 II.6.36 Among other forms of financial flows, 5 ECBs32 to India at US$ 21.7 billion in 2019-20 0 increased substantially from US$ 9.8 billion last -5 year (Chart II.6.21). Ample global liquidity and a -10 favourable overseas interest rate environment, along with various ECB liberalisation measures undertaken by the Reserve Bank to ease financial conditions, facilitated the access of domestic P: Provisional Source: RBI. entities to global markets. The Reserve Bank allowed (i) ECBs with a minimum maturity of 10 maturity of 10 years for non-capital expenditures; years for working capital and general corporate (iii) non-banking finance companies (NBFCs) to purposes; (ii) ECBs with a minimum maturity of 7 avail ECBs for on-lending for the same purposes years for repayment of rupee loans availed as above; and (iv) ECBs with a minimum maturity domestically for capital expenditures and minimum of 7 years for rupee loans availed domestically for capital expenditure in manufacturing and infrastructure sector if classified as Special Chart II.6.20: Cumulative Portfolio Flows in Select EMEs during Major Global Shocks Mention Accounts (SMA-2) or Non-performing Assets (NPAs) under any one-time settlement with lenders. The favourable impact of these measures was reflected in higher utilisation of ECBs – 75 per cent of approvals in 2019-20 were utilised for on-lending or sub-lending, rupee expenditure on local capital goods, refinancing of rupee loans, working capital, infrastructure development and import of capital goods (Chart II.6.22). While rupee denominated loans and rupee denominated bonds (RDBs) accounted for 7.1 per cent of the agreement amount, 56.7 per cent (other than rupee denominated bonds/loans) Note: ‘t’ refers to the starting day of FPI outflow in each shock period. Source: Institute of International Finance (IIF). was hedged in 2019-20 as compared with 45.6 32 Excluding inter-corporate borrowings of FDI companies. 90 noillib$SU 61-5102 71-6102 81-7102 91-8102 )P(02-9102 12-0202 P) n. ( u J r- p AECONOMIC REVIEW Ordinary Rupee (NRO) accounts and the Foreign Chart II.6.22: End-Use of ECBs in 2019-20 Currency Non-Resident (Banks) [FCNR (B)] accounts remained at the previous year’s level Others Refinancing 10% of Earlier On-lending/ (Table II.6.2). ECB Sub- 9% lending. 6. Vulnerability Indicators 32% Modernisation II.6.38 At end-March 2020, India’s external debt 6% increased by US$ 15.4 billion (i.e., 2.8 per cent) Importof Capital from its level at end-March 2019, primarily on Goods account of commercial borrowings. The increase 8% Infrastructure Rupee in external debt was partially offset by valuation Development Expenditure 8% Working Refinancing Loc.CG gains of US$ 16.6 billion resulting from the Capital of Rupee 10% appreciation of the US dollar against Indian rupee 8% loans 9% and major currencies (such as euro and SDR). Source: RBI. Excluding the valuation effect, the increase in external debt would have been US$ 32.0 billion instead of US$ 15.4 billion. Commercial borrowings per cent a year ago. Higher repayments relative to remained the largest component of external debt, fresh disbursals, however, led to net outflows of with a share of 39.4 per cent, followed by non- US$ 1.8 billion in RDBs as against inflows of US$ resident deposits (23.4 per cent) and short-term 0.8 billion a year ago. After marginal net inflows in trade credit (18.2 per cent). As a ratio of GDP, Q1, short-term trade credit declined in subsequent external debt increased from 19.8 per cent at end- quarters as demand for fresh disbursals, both buyers’ and suppliers’ credit, moderated with March 2019 to 20.6 per cent at end-March 2020. slowdown in merchandise trade activity. Trade Notwithstanding an increase in external debt, credit was primarily availed by domestic companies other debt- and reserve-related indicators of to finance imports of crude oil, coal, copper and external vulnerability improved. The share of gold, which together accounted for around 45 per short-term debt (on both original and residual cent of the total short-term trade credit raised during the period. Table II.6.2: Flows under Non-Resident Deposit Accounts II.6.37 Net flows into non-resident deposit account (US$ billion) declined by 17 per cent in 2019-20 as deposits 2017-18 2018-19 2019-20 under the Non-Resident (External) Rupee (NRE) 1 2 3 4 accounts, which accounted for the bulk of the 1. Non-Resident External (Rupee) 7.1 7.3 5.6 Account inflows, declined sharply. Softening of term 2. Non-Resident Ordinary Account 1.5 1.9 2.0 deposit rates and expectations of further 3. Foreign Currency Non-Resident 1.0 1.1 1.1 depreciation of rupee amidst global uncertainties (B) Account partly moderated flows into this account. Among Non-Resident Deposits (1+2+3) 9.7 10.4 8.6 the other two accounts, deposits in Non-Resident Source: RBI. 91ANNUAL REPORT maturity basis) in total debt declined. Similarly, historic high of US$ 487.2 billion as on March 6, foreign exchange reserve cover of imports and 2020. Consequent upon the 6-month US dollar short-term debt (on both original and residual sell/buy swap auction undertaken twice by the maturity basis) improved during the year, mainly Reserve Bank in March 2020 to provide liquidity to reflecting the sizeable accretion in reserves. The the foreign exchange market and valuation losses latter also led to India’s net international investment caused by a sharp appreciation of the US dollar position (NIIP) improving by US$ 57.6 billion (i.e., against major currencies, foreign exchange fall in net claims of non-residents on India) during reserves, however, dipped to US$ 477.8 billion as the same period (Table II.6.3, and Appendix at end-March 2020. Table 1). II.6.40 To sum up, India’s balance of payments in II.6.39 Robust capital inflows, particularly during 2019-20 reflected muted domestic activity, but Q1 to Q3 of 2019-20, led to an accretion to the capital flows were robust, which engendered a foreign exchange reserves, which reached a large accretion to foreign exchange reserves. Table II.6.3: External Vulnerability Indicators Improvement in major external vulnerability (End-March) indicators occurred during the year, which should (Per cent, unless indicated otherwise) help mitigate spillovers from external shocks. The ensuing year is likely to be challenging due to a Indicator 2013 2018 2019 2020 highly uncertain global trade and investment 1 2 3 4 5 environment, and extreme fear and uncertainty 1. External Debt to GDP ratio 22.4 20.1 19.8 20.6 2. Ratio of Short-term Debt 23.6 19.3 20.0 19.1 about the intensity and spread of COVID-19. (original maturity) to Total Debt While terms of trade gains may provide some 3. Ratio of Short-term Debt 42.1 42.0 43.4 42.4 (residual maturity) to Total Debt respite, the outlook is uncertain for exports, 4. Ratio of Concessional Debt to 11.1 9.1 8.7 8.6 remittance inflows and the tourism sector. While Total Debt companies may put their IT expansion plans on 5. Ratio of Reserves to Total 71.3 80.2 76.0 85.5 Debt hold and cut back their overall IT spending, there 6. Ratio of Short-term Debt 33.1 24.1 26.3 22.4 could be pockets of opportunity for software and (original maturity) to Reserves 7. Ratio of Short-term Debt 59.0 52.3 57.0 49.5 related services for Indian IT companies due to an (residual maturity) to Reserves increase in demand and usage for certain IT- 8. Reserves Cover of Imports (in 7.0 10.9 9.6 12.0 months) enabled services by consumers and companies 9. Debt Service Ratio (debt 5.9 7.5 6.4 6.5 impacted by the pandemic. The prospects for service to current receipts) capital flows face uncertainty due to their sensitivity 10. External Debt (US$ billion) 409.4 529.3 543.1 558.5 11. Net International Investment -326.7 -418.5 -436.9 -379.3 to shifts in the global macroeconomic outlook. Position (NIIP) (US$ billion) Going forward, the effectiveness of policy 12. NIIP/GDP ratio -17.8 -15.9 -15.9 -14.0 measures undertaken to address COVID-19 13. CAD/GDP ratio 4.8 1.8 2.1 0.9 related stress is also likely to play a critical role in Source: RBI and Government of India. preserving the resilience of India’s external sector. 92THE ANNUAL REPORMT OONNE TTHAER YW OPORLKIICNYG OOPFE TRHAET IROENSSERVE BANK OF INDIA PART TWO: THE WORKING AND OPERATIONS OF THE RESERVE BANK OF INDIA III MONETARY POLICY OPERATIONS With downside risks to the outlook for growth getting accentuated by COVID-19 and outweighing concerns around inflation exceeding the upper tolerance band for the target during December 2019-February 2020, the monetary policy committee reduced the policy rate by a cumulative 250 basis points (bps) during February 2019-June 2020, including a sizeable 115 bps in its off-cycle meetings in March and May 2020, and shifted the stance from neutral to accommodative in June 2019. Systemic liquidity remained in large surplus starting June 2019. The Reserve Bank undertook a series of measures to counter the effects of COVID-19. Monetary transmission improved in the second half of 2019-20. III.1 The conduct of monetary policy in 2019- III.2 During 2019-20, systemic liquidity 20 was guided by the objective of achieving the remained in surplus beginning June 2019, with the medium-term target for consumer price index overhang increasing in the subsequent months. (CPI) inflation of 4 per cent with a tolerance band The Reserve Bank employed multiple tools to of +/- 2 per cent, while supporting growth. Inflation manage both frictional and durable liquidity and remained benign during the first half of 2019-20 simplified the liquidity management framework but exceeded the upper tolerance band around with a focus on a clearer communication of the the target during December 2019-February 2020 objectives and the toolkit for liquidity management. on the back of rising food price pressures. Real III.3 In response to the COVID-19 pandemic, gross domestic product (GDP) growth, however, the Reserve Bank undertook a series of measures slowed down over the course of the year. The – long-term repo operations (LTROs); targeted COVID-19 outbreak and the nation-wide lockdown LTROs (TLTROs) for specific sectors and entities; from the final quarter of the year brought in cut in the cash reserve ratio (CRR); more flexibility unprecedented downside risks to the growth to banks in the daily maintenance of CRR; outlook. The monetary policy committee (MPC) increase in the limit under the marginal standing cut the policy repo rate by a cumulative 185 basis facility (MSF); widening of the policy corridor and points (bps) during 2019-20, including a sizeable making it asymmetric; refinance facility to all-India 75 basis points in its off-cycle meeting in March financial institutions; and special liquidity facility 2020. The MPC shifted the stance from neutral to for mutual funds. These measures were aimed accommodative in June 2019 and in March 2020, at expanding liquidity in the system sizeably to it committed on maintaining the accommodative ensure that financial markets and institutions are stance as long as necessary to revive growth and able to function normally in the face of COVID- mitigate the impact of COVID-19 on the economy. related dislocations. Monetary transmission 93ANNUAL REPORT improved especially in the second half of 2019- Implementation Status of Goals 20 after new floating rate loans were linked to an Monetary Policy external benchmark. III.6 In April 2019, in its first bi-monthly III.4 Against this backdrop, section 2 presents monetary policy meeting for the year 2019-20, the the implementation status of the agenda set for MPC reduced the policy repo rate by 25 bps on top 2019-20 while section 3 sets out the agenda for of reduction by 25 bps in February 2019. The first 2020-21. The chapter has been summarised at bi-monthly statement projected headline inflation the end. in the range 2.9-3.0 per cent for H1:2019-20 and 2. Agenda for 2019-20: Implementation Status 3.5-3.8 per cent for H2:2019-20, with risks broadly Goals Set for 2019-20 balanced. Real GDP growth was projected at 7.2 per cent for 2019-20, while noting headwinds, III.5 In last year’s Annual Report, the Department had set out the following goals: especially on the global front. The MPC voted to reduce the policy repo rate by 25 bps to 6.0 per • Refining the liquidity forecasting framework, cent, with a majority of 4 to 2; it persevered with a sharpening the estimation of currency in neutral policy stance by a vote of 5 to 1. circulation at various frequencies and an overall reviewing of operational aspects III.7 The second bi-monthly policy review of of the liquidity management framework, June 2019 was held against the backdrop of a including aspects relating to structural further weakening of domestic growth impulses. liquidity balance and distributional Although inflation had edged up, it was projected asymmetry in liquidity (Utkarsh) [Para to remain within the target of 4 per cent over the III.16 and III.38]; course of the year. Concerned over the sharp • An analysis of food inflation dynamics to slowdown in investment activity and the continuing understand the sources of volatility and moderation in consumption demand, the MPC saw to examine the relative role of cyclical scope to accommodate growth concerns while and structural factors at play to improve remaining consistent with the flexible inflation inflation forecasts (Para III.38); targeting mandate. It, therefore, unanimously • Spatial dimensions of inflation to better reduced the policy repo rate by another 25 bps understand the divergences in inflation to 5.75 per cent and also changed the stance of rates across major groups/sub-groups and monetary policy from neutral to accommodative. changes in them over time and implications III.8 At the time of the third bi-monthly monetary for aggregate inflation (Para III.38); policy review of August 2019, there was a further • An analysis of sectoral credit flows to loss of momentum in growth and forward-looking understand monetary transmission (Para surveys pointed to muted demand conditions III.38); and ahead. The inflation scenario continued to be • Implications of the asset quality/health of benign and the outlook was largely unchanged from the banking sector and NBFCs on credit the second bi-monthly review – it was projected to flows to the commercial sector (Para remain within the target over a 12-month horizon. III.38). This provided the MPC headroom for policy action 94MONETARY POLICY OPERATIONS to address growth concerns by boosting aggregate altered the near-term inflation trajectory and the demand, especially private investment. The MPC CPI inflation projections were revised upwards to unanimously decided on a rate reduction and a 5.1-4.7 per cent for H2:2019-20 and 4.0-3.8 per continuation of the accommodative monetary cent for H1:2020-21, with risks broadly balanced. policy stance. The MPC reduced the policy repo On the other hand, real GDP growth projection rate by 35 bps with a majority vote of 4 to 2 (2 for 2019-20 was further revised downwards to members voted for a cut of 25 bps). 5.0 per cent, reflecting more than anticipated loss of momentum in domestic economic activity. III.9 The MPC met for the fourth bi-monthly The MPC felt it was prudent to carefully monitor review in October 2019 against the backdrop of incoming data to gain clarity on the inflation a further weakening of economic activity, both outlook and, therefore, paused while recognising global and domestic. Real GDP growth projection that there was monetary policy space for future for 2019-20 was revised downwards by 80 bps action. The MPC reiterated its commitment to from 6.9 per cent in the third bi-monthly resolution continue with the accommodative stance as long to 6.1 per cent on the back of moderation in as necessary to revive growth, while ensuring that both investment and consumption demand. On inflation remained within the target. the inflation front, the outlook for H2:2019-20 and Q1:2020-21 was unchanged from the third III.11 In the run up to the sixth bi-monthly policy bi-monthly projections, although the near-term in February 2020, headline inflation had breached projections were revised upwards due to an uptick the upper inflation tolerance band around the in food inflation. Given the policy space and the target and surged to 7.4 per cent in December growth concerns, the MPC unanimously voted for 2019 – the highest reading since July 2014 – as a further reduction of 25 bps in the policy rate, with the unseasonal rains led to an unprecedented a majority vote of 5 to 1 (one member voted for a increase in onion prices and exacerbated price cut of 40 bps). The MPC also unanimously voted pressures in other vegetables. Kharif pulses, to continue with an accommodative stance as long cereals and milk also exhibited price pressures, as necessary to revive growth, while ensuring that along with an increase in input costs for services. inflation remained within the target. CPI inflation was projected to moderate from 6.5 III.10 The inflation trajectory underwent a per cent for Q4:2019-20 to 5.4-5.0 per cent for dramatic change when the MPC met for the fifth bi- H1:2020-21 and to 3.2 per cent for Q3:2020-21. monthly policy in December 2019. After remaining GDP growth for 2020-21 was projected at 6.0 benign for more than a year, headline inflation rose per cent; the coronavirus outbreak was seen as sharply to 4.6 per cent in October, propelled by a impacting tourist arrivals and global trade. The surge in food inflation, which spiked to a 39-month MPC noted that the trajectory of inflation excluding high in October. Vegetable prices soared due to food and fuel needed to be carefully monitored in heavy unseasonal rains and the incipient price view of the pass-through of remaining revisions pressures in other food items such as milk, pulses, in mobile phone charges, the increase in prices and sugar were expected to sustain. By contrast, of drugs and pharmaceuticals and the impact of inflation in CPI excluding food and fuel moderated new emission norms. With economic activities to a historic low in October. The sudden and remaining weak and the output gap negative, the unanticipated spike in food prices significantly MPC noted that the outlook for inflation was highly 95ANNUAL REPORT uncertain. Given the evolving growth-inflation (2 members voted for a reduction of 50 bps). All dynamics, the MPC felt it appropriate to maintain members voted unanimously to continue with the status quo while recognising policy space for accommodative stance as long as necessary to future action. revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation III.12 The COVID-19 pandemic and its remained within the target. increasingly adverse impact on both the global and domestic economy, amidst elevated volatility III.13 The subsequent releases of data indicated in financial markets necessitated an advancement that the macroeconomic impact of the pandemic in the MPC’s meeting scheduled for March 31, was more severe than initially anticipated and the April 1 and 3, 2020 to March 24, 26 and 27, 2020. MPC advanced its scheduled meeting of June Headline inflation had fallen by a full percentage 3-5, 2020 to May 20-22, 2020. On inflation, the point in February 2020 to 6.6 per cent, with the MPC noted that it had softened for the second ebbing of onion and other food prices. The MPC successive month in March as food inflation eased noted that food prices could soften even further from its earlier double-digit levels. However, supply under the beneficial effects of record foodgrains disruptions punctuated the softening and food and horticulture production. The collapse in crude prices spiked in April. The MPC expected food prices was seen as working towards easing both prices to moderate as supply lines get restored fuel and core inflation pressures, depending on with gradual relaxations in lockdown. Given the the level of the pass-through to retail prices. As forecast of a normal monsoon, the likelihood of a consequence of COVID-19, aggregate demand international crude oil prices remaining low in view could weaken and ease core inflation further. of the global demand-supply balance and deficient Heightened volatility in financial markets could demand conditions, inter alia, the MPC expected also have a bearing on inflation. On the growth headline inflation to fall below the target in Q3 and outlook, the MPC observed that most sectors of Q4 of 2020-21. The growth outlook, on the other the economy would be adversely impacted by the hand, remained sombre and various sectors of the pandemic, depending upon its spread, intensity, economy were seen as experiencing acute stress. and duration. The slump in international crude Against this backdrop, the MPC decided to reduce prices could, however, provide some relief in the the policy repo rate from 4.4 per cent to 4.0 per form of terms of trade gains. The MPC took note of cent even while maintaining headroom to back up the several measures undertaken by the Reserve the revival of activity when it takes hold. The MPC Bank to inject substantial liquidity in the system. It also voted to maintain accommodative stance as was of the view that macroeconomic risks, both on long as necessary to revive growth and mitigate the demand and supply sides, brought on by the the impact of COVID-19, while ensuring that pandemic could be severe and there was a need inflation remained within the target. Five members to do whatever necessary to shield the domestic voted for a reduction in policy repo rate by 40 bps economy from the pandemic. The MPC, therefore, and one member voted for a reduction of 25 bps. unanimously voted for a sizeable reduction in the III.14 The MPC, since its inception, has faced a policy repo rate, but with some differences in the number of challenges and uncertainties, requiring view on quantum of reduction. With a 4-2 majority, it to continuously balance growth-inflation trade- the repo rate was cut by 75 bps to 4.40 per cent offs (Box III.1). 96MONETARY POLICY OPERATIONS Box III.1 Voting Diary of the Monetary Policy Committee, 2016-20 Chart 1: Share of Inflation and Growth Discussions in MPC Members' Statements Source: RBI staff estimates. Table 1: MPC Voting Pattern Internal/ MPC Member Total Direction of Rate Change Quantum of Rate Change Compared to External Votes Compared to MPC Decision MPC Decision Same Different Same Lower Higher 1 2 3 4 5 6 7 8 Prof. Chetan Ghate 23 20 3 17 0 6 External Prof. Pami Dua 23 23 0 21 0 2 Members Prof. Ravindra H. Dholakia 23 19 4 17 6 0 Dr. Urjit R. Patel 14 14 0 14 0 0 Shri R. Gandhi 2 2 0 2 0 0 Dr. Viral V. Acharya 15 13 2 13 0 2 Internal Shri Bibhu Prasad Kanungo 3 3 0 3 0 0 Members Shri Shaktikanta Das 9 9 0 9 0 0 Dr. Michael Debabrata Patra 23 20 3 20 0 3 Dr. Janak Raj 3 3 0 3 0 0 Note: Blue highlighted names are MPC members as at end-June 2020. Source: Monetary policy minutes, RBI. 1 Dr. Michael Debabrata Patra served the MPC in two capacities: (i) as ‘an officer nominated by the Central Board’ under Section 45ZB(2)(c) of the RBI Act from October 2016 to December 2019, and (ii) as ‘Deputy Governor in charge of monetary policy’ under Section 45ZB(2)(b) thereafter. 97 71 03 51 42 8 72 8 03 11 71 51 02 81 61 53 14 62 84 42 85 02 05 12 26 91 06 42 15 12 73 93 24 03 73 33 13 53 03 63 63 54 53 15 71 82 81 90 7.0 80 6.5 70 6.0 60 5.5 50 5.0 40 30 4.5 20 4.0 10 3.5 0 3.0 tnecreP 61-tcO-40 61-ceD-70 71-beF-80 71-rpA-60 71-nuJ-70 71-guA-20 71-tcO-40 71-ceD-60 81-beF-70 81-rpA-50 81-nuJ-60 81-guA-10 81-tcO-50 81-ceD-50 91-beF-70 91-rpA-40 91-nuJ-60 91-guA-70 91-tcO-40 91-ceD-20 02-beF-30 02-raM-72 02-yaM-22 tnecreP From September 2016, when a six-member monetary around 60 per cent of the MPC discussion universe – during policy committee (MPC) was constituted to determine the August-October 2018. In the more recent period in March policy rate to achieve the inflation target, the MPC met 23 2020, discussions on growth occupied more than 50 per times till May 2020. While the three external MPC members cent of the MPC discussion space (Chart 1). have remained unchanged over this period, the internal Parsing of the voting pattern of each MPC member suggests members, being ex officio, have changed. In all, eleven that among external members there were greater differences different members1 have served on the MPC so far. over direction and quantum of policy rate change. In all The minutes of the MPC, including individual statements the meetings, the proposal of the chairman of the MPC of members, suggest that voting differences were typically (Governor) was carried through to the decision (Table 1). confined to the size of the change in the policy rate rather than contesting the overarching policy stance (Patra, 2017). This pattern remained broadly unchanged in the subsequent two years as well. Thirteen of the 23 decisions of the MPC on the repo rate have been with unanimity in terms of direction of policy rate change. Within these thirteen decisions, however, there were four decisions where the MPC differed over the quantum of interest rate cut – in two such meetings, there was one dissent vote, while in another two meetings there were two dissent votes. These reflected differences in individual members’ macroeconomic assessment and outlook, and policy preferences. MPCbi-monhtly reviews A word count analysis of MPC members’ statements Inflation Growth Policy Repo Rate (RHS) indicates that discussions on inflation were dominant – Reference: Patra, Michael Debabrata (2017), “One Year in the Life of India's Monetary Policy Committee”, Reserve Bank of India Bulletin, December.ANNUAL REPORT The Operating Framework: Liquidity Management (v) Direct participation by standalone primary dealers (SPDs) is allowed in all overnight III.15 The operating framework of monetary liquidity management operations; policy aims at aligning the operating target – the weighted average call rate (WACR) – with the policy (vi) Margin requirements under the liquidity repo rate through proactive liquidity management, adjustment facility (LAF) will be periodically consistent with the stance of monetary policy. reviewed; Amplifying reduction of 185 bps in the policy repo (vii) Greater transparency in communication rate during 2019-20, the Reserve Bank undertook will be brought through: (a) dissemination a number of liquidity measures, both conventional of both the daily flow as well as the stock and unconventional, especially to mitigate the impact of the liquidity operations; and (b) adverse impact of COVID-19 on the real economy. publication of a quantitative assessment of III.16 Based on the recommendations of an durable liquidity conditions of the banking Internal Working Group, the Reserve Bank revised system with a fortnightly lag; and the liquidity management framework to clearly (viii) Certain features of the erstwhile liquidity communicate the objectives and the toolkit for management framework such as (a) the liquidity management. The salient features of the WACR being the operating target; and (b) revised framework, operationalised on February minimum daily maintenance of 90 per cent 14, 2020, are: of the CRR requirement were retained.2 (i) A single 14-day term repo/reverse repo III.17 The revised liquidity management operation at a variable rate to coincide with framework envisaged a symmetric LAF corridor of the cash reserve ratio (CRR) maintenance 50 bps. In view of the COVID-19 pandemic and its cycle is the main liquidity management adverse impact on global and domestic financial tool for managing frictional liquidity; markets and the significant increase in the banking (ii) The main liquidity operation will be system liquidity, however, the Reserve Bank supported by fine-tuning operations, made the policy interest rate corridor asymmetric overnight and/or longer tenor up to 13- on March 27, 2020, with the reverse repo rate days; longer-term variable rate repo/ 40 bps below the policy repo rate (from 25 bps) reverse repo operations beyond 14 days and the MSF rate 25 bps above the repo rate, to be conducted, as required; thereby widening the corridor from 50 bps to 65 (iii) Daily fixed rate repo and four 14-day term bps. The reverse repo rate was cut by another 25 repos are discontinued; bps on April 17, taking it 65 bps below the repo (iv) Liquidity management instruments will rate and widening the corridor to 90 bps. This was include fixed and variable rate repo/ done to make it relatively unattractive for banks to reverse repo auctions, outright open passively park funds with the Reserve Bank and market operations (OMOs), forex swaps to encourage their deployment for on-lending to and other instruments; productive sectors of the economy. Furthermore, 2 With effect from March 28, 2020, the minimum daily CRR requirement was reduced to 80 per cent. 98MONETARY POLICY OPERATIONS taking cognisance of hardships faced by Chart III.1: Net Forex Purchases, banks in terms of social distancing of staff and GoI Balances and Net LAF consequent strains on reporting requirements, 6,00,000 2,00,000 5,00,000 1,50,000 the requirement of minimum daily CRR balance 4,00,000 1,00,000 maintenance was reduced from 90 per cent to 80 3,00,000 50,000 per cent effective from the first day of the reporting 2,00,000 0 fortnight beginning March 28, 2020 (as a one-time 1,00,000 -50,000 0 -1,00,000 dispensation initially available up to June 26, 2020 -1,00,000 -1,50,000 and subsequently extended to September 25, -2,00,000 -2,00,000 2020). III.18 Scheduled commercial banks (SCBs) were allowed exemption from the maintenance of CRR on incremental credit to retail (automobiles and residential housing) and micro, small and Note: 1. Positive value of Net LAF indicates absorption of liquidity. 2. Net forex purchases are cumulative from April 2019. medium enterprises (MSMEs) sectors disbursed Source: RBI. by them between January 31 to July 31, 2020 reverse repos of varying maturities under the LAF. to revitalise the flow of bank credit to productive With capital inflows gaining momentum during the sectors having multiplier effects on growth. second half of the year (except in the latter half of Drivers and Management of Liquidity March), forex operations largely mirrored net LAF III.19 During 2019-20, liquidity conditions positions (Chart III.1). remained in surplus mode starting from June III.21 In the first two months of Q1:2019-20, 2019. The Reserve Bank employed multiple tools i.e., April and May 2019, liquidity conditions were to manage both frictional and durable liquidity. in deficit on account of restrained government While liquidity amounting to `1.37 lakh crore was spending on the back of the model code of conduct injected through variable rate repos of maturities in the run up to the general election and high ranging from overnight to 16 days in addition to the demand for cash. The Reserve Bank conducted regular 14-day repos, surplus liquidity of `284.4 a USD/INR buy/sell swap auction of US$ 5 billion lakh crore was absorbed through reverse repos of (`34,874 crore) for a tenor of 3 years in April and maturities ranging from overnight to 63 days during two OMO purchase auctions in May amounting 2019-20. The Reserve Bank also injected durable to `25,000 crore to inject durable liquidity into liquidity of `1.1 lakh crore through purchase of the system. It also injected liquidity of `51,403 securities under OMOs during the year. crore on a daily net average basis under the LAF III.20 The Reserve Bank’s forex operations during these two months. The situation changed and drawdown of Government of India (GoI) in June – along with the shift in policy stance to cash balances were the main drivers of liquidity accommodative – when liquidity conditions turned expansion, which more than offset the leakage into surplus due to increased spending after the of liquidity due to currency demand during 2019- government formation at the Centre, net forex 20. The surplus liquidity was mopped up through purchases by the Reserve Bank and return of 99 erorc` 91-rpA-5 91-yaM-3 91-yaM-13 91-nuJ-82 91-luJ-62 91-guA-32 91-peS-02 91-tcO-81 91-voN-51 91-ceD-31 02-naJ-01 02-beF-7 02-raM-6 02-rpA-3 02-yaM-1 02-yaM-92 02-nuJ-62 erorc` Net LAF Net ForexPurchases GoI Balances (RHS)ANNUAL REPORT Chart III.2: Liquidity - Drivers and Management Chart III.3: Liquidity Management Source: RBI. Source: RBI. currency to the banking system post-elections. absorption under the LAF increased to `2.33 lakh The Reserve Bank also conducted two OMO crore in Q3:2019-20. Expecting the continuance of purchase auctions amounting to `27,500 crore surplus liquidity, the Reserve Bank conducted four during the month (Chart III.2). Surplus liquidity of longer term reverse repo auctions in November `51,710 crore (on a daily net average basis) was – two of 21 days and one each of 42 days and absorbed under the LAF in June. 35 days tenor – thereby absorbing `78,934 crore. Forex operations coupled with the drawdown of GoI III.22 Surplus liquidity conditions built up during cash balances increased systemic liquidity. The Q2:2019-20 mainly on account of (i) drawdown Reserve Bank also conducted four simultaneous of GoI cash balances; (ii) return of currency to the banking system; and (iii) the Reserve Bank’s purchase and sale of securities under OMOs net forex purchase operations, especially in (special OMOs) between December 23, 2019 and September 2019. The absorption of liquidity on January 23, 2020, which augmented net banking a daily net average basis under the LAF soared system liquidity by `11,724 crore (Chart III.3).3 to `1.31 lakh crore during Q2 in contrast to a III.24 With a view to reinforcing monetary net injection of `17,409 crore in Q1:2019-20. transmission and augmenting credit flows to Simultaneously, transient liquidity needs were met productive sectors, the Reserve Bank conducted through variable rate repos of smaller tenors (1-3 five LTROs at fixed repo rate (one of one year days) in addition to the regular 14-day term repos. and four of three years tenors) between February III.23 With the persistence of surplus liquidity 17 and March 18, 2020, providing banks with conditions, the average daily net liquidity durable liquidity of `1.25 lakh crore at reasonable 3 While long-term paper amounting to `40,000 crore was purchased through these auctions, sale of short-term securities amounted to `28,276 crore. 100 000,05,2- 000,00,2- 000,05,1- 00000,1- 000,05- 0 000,05 000,00,1 000,05,1 Q1:2020-21 Q4:2019-20 Q3:2019-20 Q2:2019-20 Q1:2019-20 `crore Liquidityabsorption(-) Liquidityinjections(+) US$/INR Buy/Sell(+) and Sell/Buy (-)Swap Excess CRRDrawdown(+)/ Build-up(-) Net LAF Injection(+)/Absorption (-) GoI Balances Drawdown(+)/Build-up(-) Net OMO Purchases (+)/Sales (-) Net ForexPurchases (+)/Sales (-) Currency Leakage (-)/Return(+)MONETARY POLICY OPERATIONS cost relative to prevailing market rates. With corporate bonds, commercial paper, and non- the government continuing to rely on ways and convertible debentures;5 (iv) reduction in the CRR means advances/overdraft (WMA/OD) almost requirement of banks by 100 bps – from 4.0 per entirely during the quarter, average absorption of cent of net demand and time liabilities (NDTL) to surplus liquidity further increased to `3.06 lakh 3.0 per cent – effective fortnight beginning March crore in Q4:2019-20. Net average absorption 28, 2020, for a period of one year ending March of surplus liquidity further soared to `4.72 lakh 26, 2021, augmenting primary liquidity in the crore in Q1:2020-21, reflecting several liquidity banking system by about `1.37 lakh crore; and augmenting measures and sustained government (v) raising banks’ limit for borrowing overnight under spending through higher average recourse to the MSF by dipping into their Statutory Liquidity WMA/OD (of `0.61 lakh crore) during this period.4 Ratio (SLR) to 3 per cent of NDTL from 2 per cent (effective up to June 30, 2020 and subsequently III.25 Following the declaration of COVID-19 extended up to September 30, 2020), allowing the as a pandemic by the World Health Organisation banking system to avail an additional `1,37,000 (WHO) on March 11, global financial markets crore of liquidity. were gripped by bearish sentiments. Heightened global turbulence resulted in a significant III.26 In order to maintain adequate liquidity tightening of financial conditions in domestic in the system and its constituents in the face of financial markets beginning March 11, 2020. The COVID-19 related dislocations, facilitate and Reserve Bank undertook several conventional incentivise bank credit flows, ease financial stress and unconventional measures in March to and enable the normal functioning of markets, unfreeze financial market activity and revitalise the Reserve Bank took further liquidity injection financial institutions to function normally in the measures on April 17, 2020 targeted at specific face of COVID-19 related dislocations. These sectors and entities. These included: (i) TLTRO measures, inter alia, included: (i) two 6-month 2.0 auctions for an initial aggregate amount of USD/INR sell/buy swap auctions on March 16 and `50,000 crore in tranches of appropriate sizes,6 March 23, 2020 to meet the increased demand with funds to be invested in investment grade for US dollars, which cumulatively provided bonds, commercial paper, and non-convertible dollar liquidity of US $ 2.7 billion; (ii) three OMO debentures of non-banking financial companies purchases on March 20, 24 and 26, 2020 to inject (NBFCs), with at least 50 per cent of the total `40,000 crore cumulatively; (iii) announcement amount availed going to small and mid-sized of TLTRO auctions of up to three years’ tenor of NBFCs and micro finance institutions (MFIs); appropriate sizes for a total amount of up to `1 (ii) special refinance facilities for a total amount of lakh crore on March 27, 2020 for investment in `50,000 crore at the policy repo rate to the National 4 In consultation with the Government of India, the limit on Centre’s WMA for H1:2020-21 was progressively raised to `2,00,000 crore from `75,000 crore in H1:2019-20. 5 A TLTRO auction of 3 years maturity was held on March 27, 2020 injecting durable liquidity amounting to `25,009 crore; three more TLTRO auctions of 3 years maturity conducted on April 3, April 9 and April 17 further augmented durable liquidity by `75,041 crore. 6 The first TLTRO 2.0 auction of 3 years maturity was conducted on April 23, 2020 augmenting durable liquidity by `12,850 crore. 101ANNUAL REPORT Bank for Agriculture and Rural Development Table III.1: Variation in Spread of Financial (NABARD), the Small Industries Development Market Instruments over Policy Repo Rate Bank of India (SIDBI) and the National Housing (Basis points) Bank (NHB). The inter se allocation of funds was Period CP-3 CD-3 AAA Corporate Bond Month Month `25,000 crore to NABARD for refinancing regional 1-Year 3-Year 5-Year rural banks (RRBs), cooperative banks and MFIs; 1 2 3 4 5 6 `15,000 crore to SIDBI for on-lending/refinancing; (i) March 10 - 26, 2020 128 272 45 55 68 and `10,000 crore to NHB for supporting housing (ii) March 26 - 106 -255 85 82 82 April 16, 2020 finance companies (HFCs). Furthermore, the (iii) April 16 - -165 -118 -61 -67 -83 Reserve Bank announced a special liquidity May 21, 2020 facility for mutual funds (SLF-MF) of `50,000 (iv) May 21 - -133 16 -50 -18 12 June 30, 2020 crore on April 27, 2020 to alleviate intensified (v) Change (ii-i) -22 -527 40 27 14 liquidity pressures faced by them. Banks availed (vi) Change (iii-ii) -271 137 -146 -150 -165 `2,430 crore under this facility. In order to enable (vii) Change (iv-iii) 32 134 11 49 95 Export-Import Bank of India (EXIM Bank) to meet Source: RBI, FBIL, Bloomberg and RBI staff estimates. its foreign currency resource requirements, the Reserve Bank extended a line of credit of `15,000 pre-emptive measure to tide over any frictional crore to the EXIM Bank on May 22, 2020 for a liquidity requirements caused by dislocations due period of 90 days (with rollover up to one year) so to COVID-19, three fine-tuning variable rate repo as to enable it to avail a US dollar swap facility. auctions of 12-16 days maturity were conducted on March 23, March 24, and March 26, 2020, III.27 Following the monetary and liquidity injecting `89,517 crore (Table III.2).7 As a special measures announced on March 27, April 17 and May 22, 2020, financial conditions eased as Chart III.4: Durable Liquidity Injections reflected in the variation in spreads on money and bond market instruments (Table III.1). Corporate bond market activity revived, with several corporates making new issuances. III.28 Overall, the Reserve Bank’s various operations (including forex purchases, OMOs, LTROs and TLTROs) injected durable liquidity of `5.76 lakh crore in 2019-20 and `3.09 lakh crore in Q1:2020-21 (Chart III.4). III.29 Given surplus liquidity conditions, fine- tuning operations through variable rate reverse repo auctions with maturities ranging from overnight to 3 days were extensively used for Source: RBI. absorbing liquidity till February 14, 2020. As a 7 Two other fine-tuning operations through variable rate repo auctions of `25,000 crore each of 7 days and 3 days maturities held on March 13 and March 31, respectively, did not elicit any response from the market. 102MONETARY POLICY OPERATIONS Table III.2: Fine-tuning Operations through Chart III.5: Policy Corridor and WACR Variable Rate Auctions during 2019-20 7.25 7.00 Maturity in Days Frequency Total Volume Average Volume 6.75 (number of (` crore) (` crore) 6.50 operations) 6.25 6.00 5.75 1 2 3 4 5.50 5.25 Repo 5.00 1-3 4 47,128 11,782 4.75 4.50 12 1 11,772 11,772 4.25 16 2 77,745 38,873 4.00 Reverse Repo 3.75 3.50 1-3 222 2,71,84,097 1,22,451 3.25 4 6 6,11,686 1,01,948 7 33 4,31,458 13,074 14 1 550 550 21 2 28,923 14,462 28 2 35,665 17,833 29 1 11,500 11,500 Source: RBI. 31 1 12,790 12,790 35 1 25,004 25,004 42 2 30,507 15,254 because of the COVID-19 induced nation-wide 63 4 65,833 16,458 lockdown. With the LAF corridor becoming Source: RBI. asymmetric and with the persistence of surplus case, SPDs were allowed to participate in these liquidity, the WACR continued to trade below the auctions along with other eligible participants. repo rate in Q1:2020-21. Furthermore, the Reserve Bank temporarily enhanced liquidity available to SPDs under the Monetary Policy Transmission Standing Liquidity Facility (SLF) from `2,800 crore III.31 Monetary transmission – changes in to `10,000 crore in order to facilitate their year-end banks’ deposit and lending rates in response to the liquidity management. changes in the policy repo rate – improved during Operating Target and Policy Rate 2019-20, especially in the second half of the year (Table III.3). This was catalysed by the mandated III.30 During 2019-20, the WACR – the linking of the interest rates on new loans to certain operating target – remained within the corridor with a downward bias (9 bps below the repo sectors such as personal and MSE loans, effective rate on an average basis), reflecting sustained October 2019, to an external benchmark, viz., the surplus liquidity (Chart III.5). The WACR spiked policy repo rate, 3-month, 6-month T-bill rates in the typical financial year-end phenomenon, or any other benchmark published by Financial accentuated by reduced market participation Benchmark India Pvt. Ltd. (FBIL).8 8 Effective April 1, 2020, interest rates on new loans to medium enterprises were also linked to an external benchmark. 103 tnecreP 81-tcO-1 81-tcO-32 81-voN-41 81-ceD-6 81-ceD-82 91-naJ-91 91-beF-01 91-raM-4 91-raM-62 91-rpA-71 91-yaM-9 91-yaM-13 91-nuJ-22 91-luJ-41 91-guA-5 91-guA-72 91-peS-81 91-tcO-01 91-voN-1 91-voN-32 91-ceD-51 02-naJ-6 02-naJ-82 02-beF-91 02-raM-21 02-rpA-3 02-rpA-52 02-yaM-71 02-nuJ-8 02-nuJ-03 WACR Repo Rate Reverse Repo Rate MSF RateANNUAL REPORT Table III.3: Transmission to Deposit and Lending Interest Rates (Basis points) Period Repo Term Deposit Rates Lending Rates Rate Median Term WADTDR 1 - Year WALR - WALR - Fresh Deposit Rate Median Outstanding Rupee Loans MCLR Rupee Loans 1 2 3 4 5 6 7 April 2018 to March 2019 25 5 22 45 0 39 April 2019 to March 2020 -185 -49 -51 -60 -25 -91 Tightening Phase: June 2018 to January 2019 50 0 20 35 2 57 Easing Phase: February 2019 to September 2019 -110 -9 -7 -30 2 -40 October 2019 to June 2020 -140 -124 -84 -80 -55 -122 February 2019 to June 2020 -250 -147 -91 -105 -53 -162 WADTDR: Weighted Average Domestic Term Deposit Rate. WALR: Weighted Average Lending Rate. MCLR: Marginal Cost of Funds based Lending Rate. Source: Special Monthly Return VIAB, RBI and banks’ websites. III.32 During the easing cycle since February III.33 The weighted average lending rate 2019, transmission has been faster in respect of (WALR) on fresh rupee loans of private sector fresh rupee loans sanctioned by private sector banks is usually higher than that of public sector banks vis-à-vis public sector banks. This was banks, reflecting higher cost of funds and, hence, similar to the experience during the tightening higher marginal cost of funds-based lending cycle of June 2018-January 2019 when the rate (MCLR) as also the higher median spread9 transmission was quicker for private sector banks (Chart III.7). The share of loans to sectors such (Chart III.6). Chart III.6: Variation in Deposit and Lending Rates of SCBs a: June 2018 to January 2019 b: February 2019 to June 2020 100 78 75 53 60 57 50 37 35 29 20 13 2 0 -32 -50 PSB PVT Foreign SCBs WALR- Outstanding Rupee Loans WALR-Fresh Rupee Loans WADTDR PSB: Public Sector Banks; PVT: Private Sector Banks; Foreign: Foreign Banks; SCBs: Scheduled Commercial Banks. Source: RBI. 9 Median spread of a bank group is arrived at from the spread (difference between WALR on fresh rupee loans and 1-year MCLR) of each bank within the group. 104 stniop sisaB 0 -50 -40 -58 -53 -100 -75 -91 -109 -150 -129 -139 -162 -200 -195 -250 -243 -238 -300 PSB PVT Foreign SCBs stniop sisaB WALR- Outstanding Rupee Loans WALR-Fresh Rupee Loans WADTDRMONETARY POLICY OPERATIONS as agriculture, MSME, vehicle and credit card in Chart III.7: Median Spread - WALR (Fresh Rupee Loans) over 1-Year MCLR total loans sanctioned by private sector banks was higher than that of public sector banks for the month of June 2020. The sectoral WALRs in respect of fresh rupee loans to these sectors were also higher than the respective WALRs of public sector banks. Sectoral Lending Rates III.34 Monetary transmission remained uneven across sectors due to idiosyncratic features. During the current easing cycle so far (February 2019-June 2020), interest rates on outstanding loans declined for majority of the sectors, including agriculture, industry (large), infrastructure, trade, Source: RBI. housing and education (Table III.4). 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 Agriculture Industry MSMEs Infrastructure Trade Professional Personal Loans Rupee (Large) Services Export Housing Vehicle Education Credit Other$ Credit Card 1 2 3 4 5 6 7 8 9 10 11 12 13 Dec-18 10.69 10.70 11.23 10.90 10.97 10.65 9.48 10.64 11.36 38.74 11.56 10.04 Jan-19 10.70 10.57 11.02 10.98 10.59 10.59 9.54 10.60 11.40 37.97 11.59 9.92 Mar-19 10.56 10.41 11.42 10.70 10.86 10.72 9.41 10.48 11.35 38.91 12.20 9.51 Jun-19 10.48 10.20 11.26 10.68 9.98 10.42 9.44 10.45 11.34 38.63 12.39 9.73 Sep-19 10.58 10.28 10.94 10.49 9.84 10.37 9.46 10.57 11.14 38.61 12.56 9.78 Dec-19 10.39 10.03 10.91 10.22 10.17 10.43 9.30 10.70 11.03 38.39 12.16 9.01 Mar-20 10.56 9.66 11.29 10.05 9.75 10.24 9.15 10.57 10.78 37.90 12.37 8.94 June-20 10.40 9.53 10.84 9.62 9.35 10.17 8.94 10.53 10.47 38.35 12.35 8.62 Variation (Percentage Points) 2019-20 0.00 -0.75 -0.13 -0.65 -1.11 -0.48 -0.26 0.09 -0.57 -1.01 0.17 -0.57 Easing Phase Feb-19 – -0.12 -0.29 -0.08 -0.49 -0.75 -0.22 -0.08 -0.03 -0.26 0.64 0.97 -0.14 Sep-19 Oct-19 – -0.18 -0.75 -0.10 -0.87 -0.49 -0.20 -0.52 -0.04 -0.67 -0.26 -0.21 -1.16 June 20 Feb-19 – -0.30 -1.04 -0.18 -1.36 -1.24 -0.42 -0.60 -0.07 -0.93 0.38 0.76 -1.30 June 20 $: Other than housing, vehicle, education and credit card loans. Source: Special Monthly Return VIAB, RBI. 105ANNUAL REPORT External Benchmark Table III.6: Loans Linked to the Policy Repo Rate - Median Spread (June 2020) III.35 Following the introduction of the external (Percentage points) benchmark-based system of the pricing of loans as mentioned earlier, 36 out of 66 banks adopted Bank Group Personal Loans Loans to the policy repo rate as the external benchmark for Housing Vehicle Education Other MSME Personal floating rate loans to the retail and MSME sectors Loans (Table III.5). Seven banks have adopted sector- 1 2 3 4 5 6 specific benchmarks. Public Sector Banks 3.3 4.6 4.2 6.7 5.8 III.36 The median spread in respect of fresh Private Sector rupee loans linked to the policy repo rate (i.e., Banks 5.0 6.7 7.0 6.7 7.0 median WALR over the repo rate) was the highest Domestic for other personal loans (Table III.6). Among the Banks 4.3 4.8 4.8 6.7 6.3 domestic bank-groups, private sector banks Source: RBI. typically charged a higher spread vis-à-vis public sector banks. loans by 115 bps and MSME loans by 198 bps (Chart III.8). III.37 The transmission to fresh rupee loans sanctioned has been better in respect of sectors, III.38 A number of studies were undertaken such as housing, other personal loans and MSME during 2019-20 to strengthen the analytical loans, where new floating rate loans have been inputs for the conduct of monetary policy and linked to an external benchmark. During October liquidity management. They included: refining the 2019-June 2020, the WALRs of domestic (public methodology of forecasting currency in circulation and private sector) banks declined in respect of (a major item of leakage of liquidity from the fresh rupee loans sanctioned for housing loans by banking system) at various frequencies for better 104 bps, vehicle loans by 102 bps, other personal Chart III.8: WALR on Personal Loans and Loans to Table III.5: External Benchmarks of MSMEs-Variation (October 2019 - June 2020) Commercial Banks - June 2020 0 Bank Group Policy CD MIBOR 3-Month Sector- Repo Rate T-Bill specific -50 34 - Rate Benchmark 9 1 2 3 4 5 6 -100 7 2 3 -7 P Bu ab nl kic s S (1e 1c )tor 11 - - - - -8 -102 -104 -109 -102 -9 -9 -104 -107 115 -150 - Private Banks (21) 18 1 - - 2 0 Foreign Banks (34)@ 7 - 2 7 5 16 - Commercial banks 36 1 2 7 7 -200 94 8 (66)@ -1 19 - @: 13 foreign banks did not have any exposure to retail loans and -250 Housing Vehicle Education Other MSME MSME loans segments. Personal Loans Note: Figures in parentheses refer to the number of banks that Loans submitted their return. Public Sector Banks PrivateBanks Domestic Banks Source: RBI. Source: RBI. 106 stniopsisaBMONETARY POLICY OPERATIONS liquidity assessment; nowcasting food inflation 4. Conclusion with high frequency data; spatial dimensions of III.40 In sum, the COVID-19 pandemic continues food inflation with special focus on transmission to have unprecedented adverse impact on output of vegetable price shocks; impact of asset quality in India as in other countries. Sizeable monetary of banks on monetary transmission through credit policy and liquidity measures since February 2020 channel; behaviour of credit cycles; updated have been taken to address growth and liquidity estimates of exchange rate pass through (ERPT), concerns. On the inflation front, going forward, a with a focus on asymmetry and non-linearity; more favourable food inflation outlook may emerge an assessment of inflation forecasts; inflation from the bumper rabi harvest, moderate increases forecast combination approaches for projections; in minimum support prices for kharif crops and transmission of international food price inflation to prospects of normal south-west monsoon, while domestic inflation; drivers of private savings; and upside pressure in food may emanate from tight impediments to monetary policy transmission. demand-supply balance in the case of pulses and 3. Agenda for 2020-21 weather related supply disruptions in the case of III.39 Against the backdrop of COVID-19 key vegetables. High taxes on petroleum products, pandemic induced volatility in domestic financial rise in telecom charges and volatility in financial markets and the output losses, the Department markets pose upside risks to non-food inflation. would undertake the following: Overall, headline inflation may remain elevated in • Strengthening nowcasting of inflation Q2:2020-21 but may moderate during H2:2020- with wider information system, including 21 aided by large favourable base effects. With commodity price monitoring (Utkarsh); significant downside risks to domestic growth remaining, monetary policy would continue, as the • Augmenting the external sector block of MPC has reiterated, to maintain accommodative the quarterly projection model (QPM) by stance as long as necessary to revive growth incorporating capital inflows dynamics and mitigate the impact of COVID-19 on the for an improved analysis of the external economy, while ensuring that inflation remains spillovers and feedback mechanisms and within the target going forward. The Reserve Bank recalibration of the QPM based on recent would continue to conduct liquidity operations to empirical estimates (Utkarsh); maintain adequate liquidity in the system to ensure • Analysis of MPC voting pattern (Utkarsh); conducive financial conditions and normalcy in the • An assessment of the efficacy of functioning of financial markets and institutions. the conventional (OMO) and the The mandated linking of interest rates on new unconventional (LTRO and TLTRO) floating rate loans to external benchmark in monetary policy instruments; and respect of personal and MSME loans is leading to • Dynamics of banks’ holdings of faster monetary transmission, although it remains government securities and credit growth to uneven across sectors. The Reserve Bank would assess the relative roles of crowding-out persevere with its initiatives to further improve and portfolio re-balancing. monetary transmission. 107ANNUAL REPORT CREDIT DELIVERY AND IV FINANCIAL INCLUSION Initiatives for improving credit delivery and expanding the reach of financial inclusion during the year were catalysed by the release of the National Strategy for Financial Inclusion (NSFI) document for the period 2019- 24, envisaging convergence of efforts of all stakeholders towards achieving the goals of financial inclusion. Efforts towards financial literacy were sustained by the development of a “Train the Trainers” module for capacity building of Business Correspondents (BCs), expanding the Centres for Financial Literacy to tribal blocks and deepening the digital payment ecosystem. IV. 1 The Reserve Bank’s mission is to improve at the grass-root level. Third, the Reserve Bank the availability of formal financial services in advised all State/Union Territory Level Bankers’ unbanked areas with the goal of ensuring access Committees (SLBCs/UTLBCs) in October 2019 to to financial services for all. Agriculture and micro, identify one district in their jurisdictions and allot it small and medium enterprises (MSMEs) are key to a member bank with a significant footprint, with sectors for which the flow of institutional credit a view to expanding and deepening of the digital remains a top priority. Efforts towards achieving this payment ecosystem in the country. The endeavour objective are guided by the recommendations of is to make the district 100 per cent digitally enabled the Expert Committee on MSMEs and an Internal within one year. Working Group (IWG) to review agricultural credit. IV. 4 Against this backdrop, the rest of the IV. 2 A National Strategy for Financial Inclusion chapter is organised into three sections. The (NSFI) document for the period 2019-24 has been implementation status of the agenda for 2019- prepared under the aegis of Financial Inclusion 20 is presented in Section 2. It also covers the Advisory Committee (FIAC). This document was performance of credit flow to priority sectors and approved by the Financial Stability Development developments with respect to financial inclusion Council (FSDC) and it was released in January and financial literacy. The Agenda for 2020-21 2020. is provided in Section 3. The chapter has been summarised at the end. IV. 3 In pursuance of the NSFI strategy, several initiatives were undertaken by the Reserve 2. Agenda for 2019-20: Implementation Status Bank during the year. First, Pilot Centres for Goals Set for 2019-20 Financial Literacy (CFLs) are being run by IV. 5 In last year’s Annual Report, the banks in collaboration with non-Government Department had set out the following goals under organisations (NGOs) to strengthen financial Utkarsh: literacy in a structured and coordinated manner. Second, a two-tier Train the Trainers programme • Extension of the Pilot Centre for Financial “Skill Upgradation for Performance of Resources- Literacy (CFL) project to 20 tribal blocks BCs” (SUPER-B) was rolled out to build the of Rajasthan, Jharkhand and Madhya capacity and skills of Business Correspondents Pradesh, and will run for a period of two (BCs), for effectively delivering financial services years (Para IV.6); 108CREDIT DELIVERY AND FINANCIAL INCLUSION • The various recommendations made by so as to provide access to credit in an integrated, the Expert Committee on MSME (Chair: timely and efficient manner to the farmers have Shri U. K. Sinha) will be examined for been implemented so far. implementation (Para IV.7); and CREDIT DELIVERY • The Reserve Bank constituted an Internal Priority Sector Working Group (IWG) in January 2019 IV. 9 The performance of scheduled commercial to review agricultural credit (Chair: banks (SCBs) in achievement of priority sector Shri M. K Jain, Deputy Governor). The lending targets shows that though a growth was recommendations of the Working Group observed in credit in absolute terms, the lending will be examined for implementation (Para to priority sector as a percentage of adjusted IV.8). net bank credit (ANBC) or credit equivalent of Implementation Status of Goals off-balance sheet exposures (CEOBE) declined across bank groups vis-à-vis last year (Table IV.1). IV. 6 The Pilot Centre for Financial Literacy (CFL), which was set up across 80 blocks in 9 IV. 10 Priority Sector Lending Certificates states as an initiative between the banks and NGOs (PSLCs) and the platform to enable trading in to strengthen financial literacy in a structured and these certificates on the core banking solution coordinated manner, was extended to 20 tribal (CBS) portal (e-Kuber), indicates an active blocks across the three states of Madhya Pradesh, participation from all the eligible entities during Jharkhand and Rajasthan to strengthen financial 2019-20. Total trading volume recorded a robust literacy in tribal areas. growth of 43.1 per cent and stood at `4.68 lakh crore, on top of the growth of 77.6 per cent in the IV. 7 The Expert Committee on MSMEs had previous year. Among the four PSLC categories, made 37 recommendations, of which 15 pertain the highest trading was observed in the case of to the Reserve Bank. Among them, video- PSLC-general and PSLC-small and marginal based Know Your Customer (KYC) norms was farmer with the transaction volumes being `1.70 implemented in January 2020. lakh crore and `1.46 lakh crore, respectively, IV. 8 The IWG made 29 recommendations, during the year. of which 10 pertain to the Reserve Bank, 13 Table IV.1: Performance in Achievement of to government, 4 to the National Bank for Priority Sector Lending Targets Agriculture and Rural Development (NABARD) (` Crore) and 2 to banks. Recommendations pertaining to End-March Public Sector Private Sector Foreign introduction of suitable management information Banks Banks Banks system (MIS) for monitoring purposes, short-term 1 2 3 4 2018-19 23,05,978 10,18,994 1,54,337 crop loans eligible for interest subvention through (42.55) (42.49) (43.41) Kisan Credit Card (KCC), financial literacy 2019-20* 23,14,242 12,72,745 1,67,108 (41.05) (40.32) (40.81) awareness drives for small and marginal farmers, *: Provisional. review of scale of finance for crop cultivation, Note: Figures in parentheses are percentage to ANBC or CEOBE, financing farmer producer organisation (FPO) and whichever is higher. Source: Priority Sector Returns submitted by SCBs. collaborations with agri-tech companies/start-ups 109ANNUAL REPORT Table IV.2: Targets and Achievements for Agricultural Credit (` Crore) Year Commercial Banks Rural Co-operative Banks RRBs Total Target Achievement Target Achievement Target Achievement Target Achievement 1 2 3 4 5 6 7 8 9 2018-19 792,000 954,823 165,000 152,340 143,000 149,667 1,100,000 1,256,830 2019-20* 972,000 1,061,215 202,500 149,694 175,500 162,857 1,350,000 1,373,766 *: Provisional. Source: National Bank for Agriculture and Rural Development (NABARD). Review of Priority Sector Guidelines co-operative banks. During 2019-20, against the target of `13.5 lakh crore, banks have achieved IV. 11 Bank credit to registered NBFCs (other `13.7 lakh crore (101.8 per cent of the target), than MFIs) for on-lending to agriculture (term loan of which commercial banks, RRBs and rural co- component) up to `10 lakh per borrower, and to operative banks achieved 109.2 per cent, 73.9 per MSME up to `20 lakh per borrower was made cent and 92.8 per cent of their respective targets eligible for classification as priority sector lending (Table IV.2). under the categories of agriculture and MSMEs. In respect of Housing Finance Companies (HFCs), IV. 14 The Kisan Credit Card (KCC) provides the limit of on-lending was increased from `10 lakh adequate and timely bank credit to farmers to `20 lakh per borrower. The above guidelines under a single window for cultivation and other came into effect from August 13, 2019. On-lending needs, including for consumption, investment and by NBFCs/HFCs is allowed up to five per cent of insurance (Table IV.3). an individual bank’s total priority sector lending on Relief Measures for Natural Calamities an average basis. These guidelines, after a review IV. 15 Currently, the National Disaster in March 2020, have been made applicable up to Management Framework of the Government of March 31, 2021 and will be reviewed thereafter. India covers 12 types of natural calamities under IV. 12 Bank credit to the export sector is eligible its ambit, viz., cyclone; drought; earthquake; fire; for priority sector classification, subject to various floods; tsunami; hailstorm; landslide; avalanche; limits. In order to provide a boost to the sector, the cloud burst; pest attack; and cold wave/frost. sanctioned limit for classification of export credit Accordingly, the Reserve Bank has mandated under priority sector lending (PSL) was increased banks to provide relief where the crop loss from `25 crore to `40 crore per borrower and the existing criteria of units having turnover of up to Table IV.3: Kisan Credit Card (KCC) Scheme `100 crore was dispensed with for all domestic (Number in Lakh, Amount in ` Crore) SCBs and small finance banks (SFBs), with effect Year Number of Outstanding Outstanding Operative Crop Loan Term Loan from September 20, 2019. KCCs 1 2 3 4 Flow of Credit to Agriculture 2018-19 236.3 4,13,670.4 41,409.0 IV. 13 The Government of India (GoI) fixes the 2019-20* 241.5 4,23,587.8 46,555.8 agricultural credit target every year for commercial *: Provisional. Source: Public Sector Banks and Private Sector Banks. banks, regional rural banks (RRBs) and rural 110CREDIT DELIVERY AND FINANCIAL INCLUSION assessed was 33 per cent or more in the areas Table IV.4: Relief Measures for affected by these natural calamities. The relief Natural Calamities (Number in Lakh, Amount in ` Crore) measures by banks, inter alia, include restructuring/ rescheduling existing loans and sanctioning Year Loans Restructured/ Fresh Finance/ Rescheduled Relending Provided fresh loans as per the emerging requirement of No. of Amount No. of Amount the eligible borrowers. During 2019-20, natural Accounts Accounts calamity/riots or disturbances was declared by 1 2 3 4 5 six states, viz., Odisha, Maharashtra, Kerala, 2018-19 3.90 10,349 5.50 10,983 2019-20* 9.04 13,296 10.06 32,639 Karnataka, Jammu and Kashmir and Rajasthan. While Kerala and Karnataka witnessed crop *: Provisional. Source: State Level Bankers Committees. losses due to floods in August 2019, Rajasthan was affected by drought during August-October crore was restructured/rescheduled by banks 2019. Maharashtra also experienced excessive during the same period (Table IV.4). rainfall/flood during July-August 2019. Cyclone Fani in May 2019 caused widespread devastation IV. 16 The IWG had recommended that in order in Odisha, while disturbance occurred in Jammu to curb the misutilisation of interest subsidy, banks and Kashmir in August 2019. The fresh loan of should provide crop loans to farmers eligible `32,639 crore was provided by banks to affected for interest subvention only through KCC mode persons during 2019-20, while loan of `13,296 (Box IV.1). Accordingly, banks were advised (in Box IV.1 Report of the Internal Working Group to Review Agricultural Credit and Implications for Agriculture Sector Agriculture plays a significant role in the development of the interest subvention scheme; increased extension of KCC to Indian economy in terms of its contribution to the overall farmers engaged in allied activities; bringing efficiencies in GDP and employment generation. There are several issues fixing scale of finance for crop cultivation, animal husbandry and challenges that impact the sector’s performance such and fisheries; strengthening farmer producer organisations as access to credit, regional disparity in availability of credit through augmenting the corpus of the government guarantee and issues related to credit culture due to loan waivers. fund; setting up a database; instituting a credit guarantee The Reserve Bank announced the setting up of an ‘Internal scheme for the agriculture sector; and addressing the Working Group to Review Agricultural Credit’ in the Sixth Bi- consumption needs of farming households. Monthly Monetary Policy Statement for 2018-19 (February Out of 29 recommendations, six recommendations pertaining 7, 2019) to address these issues. to introduction of suitable MIS for monitoring purposes, The Working Group’s report is available on the Reserve short-term crop loans eligible for interest subvention through Bank’s website. Its recommendations include digitisation of KCC mode, financial literacy awareness drives for small land records; adoption of a technology portal for improving and marginal farmers, review of scale of finance for crop credit delivery; review of priority sector lending guidelines and cultivation, FPO financing models and collaborations with the process of allocation of rural infrastructure development agri-tech companies/start-ups so as to provide access to funds (RIDF) by NABARD to address regional disparity; credit in an integrated, timely and efficient manner to the and, setting up separate targets for working capital and term farmers have been implemented during 2019-20. loan towards allied activities under ground level credit. The IWG also recommended steps to curb misutilisation of the Source: RBI 111ANNUAL REPORT consultation with the Ministry of Agriculture and of permenant account number (PAN) as unique Farmers’ Welfare, GoI) that all loans eligible identifier for non-corporate entity. Further, the for interest subvention and prompt repayment Committee had recommended for increasing credit incentive (PRI) should be converted to KCCs by guarantee cover to the extent of 75 per cent of March 31, 2020, which was extended to June 30, the amount in default (50 per cent at present), and 2020 due to COVID-19 pandemic. also increase in the limit for collateral-free loans to `20 lakh for lending to MSEs and SHGs from Bank Credit to the MSME Sector `10 lakh at present. Both these recommendations, IV. 17 Scheduled commercial banks are the major under the Scheme of Credit Guarantee Fund source of formal credit for MSMEs. Increasing for Micro Units (CGFMU), were notified on April credit flow to the MSMEs has been a policy priority 16, 2020. Furthermore, the integration of three for the Reserve Bank and Government. However, Trade Receivables Discounting System (TReDS) along with general credit deceleration, the growth platforms with Government e-Marketplace (GEM) of bank credit to MSMEs also decelerated to 2.34 portal was done since February 2020 by the per cent in 2019-20 (14.08 per cent a year ago) Government. Other recommendations are being [Table IV.5]. considered by the Government of India. Major recommendations pertaining to the Reserve Bank Progress in Implementation of Recommendations are use of priority sector shortfall funds to create of Expert Committee on MSMEs a low cost lending window for state governments IV. 18 The Expert Committee on MSMEs made for infrastructure projects in clusters, introduction 37 recommendations. The major ones requiring of additional weightage for MSMEs credit in implementation by the Government of India the aspirational districts under priority sector are introduction of comprehensive and holistic lending, introduction of MSME Lending Innovation MSME code, creation of government-sponsored Sandbox, video-based KYC, revision of limit for Distressed Asset Fund and Fund of Funds (FoF) regulatory retail to `7.5 crore from `5.0 crore, to support Venture Capital/Private Equity firms increasing the limit for non-collateralised MSE investing in the MSME sector, reporting of invoices loans to `20 lakh from `10 lakh at present. The to Information Utility set up under Insolvency recommendation relating to video-based KYC and Bankruptcy Board of India (IBBI) for close has been implemented in January 2020. Other monitoring of delayed payment cases and creation recommendations are under consideration. Table IV.5: Bank Credit to MSMEs (Number in Lakh, Amount in ` Crore) Year Micro Enterprises Small Enterprises Medium Enterprises MSMEs No. of Amount No. of Amount No. of Amount No. of Amount Accounts Outstanding Accounts Outstanding Accounts Outstanding Accounts Outstanding 1 2 3 4 5 6 7 8 9 2018-19 255.60 6,59,102.4 23.03 6,38,030.8 2.60 1,97,419.2 320.68 15,10,650.5 2019-20* 352.90 7,16,962.3 23.26 6,33,624.9 3.52 1,95,487.0 379.69 15,46,074.2 *: Provisional. Source: Priority Sector Returns submitted by SCBs. 112CREDIT DELIVERY AND FINANCIAL INCLUSION Interest Subvention Scheme for MSMEs - Scheme (LBS). As on September 30, 2019 (as Modifications in Guidelines reported by SLBCs across the country), 4,87,496 (99.2 per cent) out of 4,91,490 identified villages IV. 19 On November 2, 2018, the Government across the country with population less than of India had announced a 2 per cent interest 2,000, have been provided with banking services. subvention for MSMEs on fresh or incremental Out of the 8,687 identified villages with population loans up to `100 lakh extended by the banks more than 5,000; 8,200 (94.4 per cent) have been during 2018-19 (viz., November 2, 2018 to March provided with banking services. 31, 2019) and 2019-20. Accordingly, the Reserve Bank had issued guidelines to SCBs in February Deepening of Digital Payments Ecosystem 2019, under which, all MSMEs having valid Udyog IV. 22 With a view to expanding and deepening Aadhaar Number (UAN) and GST Number are of digital payments ecosystem in the country, eligible under the scheme. The Government of the Reserve Bank advised all SLBCs/ UTLBCs India has relaxed the guidelines for availing interest in October 2019 to identify one district in their subvention, viz., permitting trading activities respective States/UTs and allot the same to a without UAN, acceptance of claims in multiple member bank having a significant footprint. The lots, submission of statutory auditor certificate allotted bank will endeavour to make the district by June 30, 2020, settling claims based on 100 per cent digitally enabled within one year. internal/concurrent auditor certificate, dispensing SLBCs/ UTLBCs were advised in January 2020 to requirement of UAN for units eligible for GST. The devise a time-bound roadmap for all branches of revised guidelines in this regard were issued by member banks (public sector banks, private sector the Reserve Bank on February 5, 2020. banks, regional rural banks, small finance banks FINANCIAL INCLUSION and payments banks) located in the identified Assignment of Lead Bank Responsibility district(s) for on-boarding merchants/traders/ businesses/ utility service providers to facilitate IV. 20 The assignment of lead bank responsibility full digital transactions by October 2020. to a designated bank in every district is done by the Reserve Bank. As at end-June 2020, 12 public Constitution of Sub-Committee of SLBC/UTLBC sector banks and one private sector bank were on Digital Payments assigned lead bank responsibility in 726 districts IV. 23 As per the recommendation of the across the country. High-Level Committee on Deepening of Digital Penetration of Banking Services in Unbanked Payments (CDDP) constituted by the Reserve Rural Centres Bank (Chair: Shri Nandan Nilekani) in January IV. 21 The use of information technology (IT) 2019, all SLBC/UTLBC convener banks were and intermediaries in the form of Information advised in August 2019 to set up a Sub-Committee and Communication Technology (ICT) based on Digital Payments. It will endeavour to encourage models including BCs, ATMs and mobile vans has digitisation of payments and enhance financial increased outreach, scale and depth of banking inclusion through digitisation in their respective services at an affordable cost. Payments Banks States/UTs by undertaking initiatives such as: (i) have also been included under the Lead Bank mapping of financial institutions and streamlining of 113ANNUAL REPORT bank accounts for facilitating direct benefit transfer; Sub-Committee will assess levels of digitisation (ii) identification of shadow areas and realignment and find solutions to increase penetration. of banking correspondents; (iii) dedicated financial Financial Inclusion Plan literacy initiatives to promote digital payments; IV. 24 The Financial Inclusion Plans (FIPs) (iv) leveraging of reach and technical expertise of provide a structured and planned approach to payments banks to cover the gap of provision of financial inclusion with a commitment at the basic banking facilities; (v) monitoring of person highest echelons within banks in terms of Board- to person (P2P) points, debit card floats, Point of approved FIPs. The Plan captures self-set targets Sale (PoS) positioning to enhance effectiveness of the banks on parameters such as number of of digital financial architecture; (vi) ensuring outlets (branches and BCs), Basic Savings Bank availability of adequate digital infrastructure at Deposit Accounts (BSBDAs) opened by bank all wholesale grain mandis and village haats so branches and BCs, overdraft facilities availed in as to introduce digital transactions for the benefit those accounts, transactions in KCC, General of the rural customers; and (vii) monitoring of Credit Card (GCC) accounts and transactions Government to Merchant (G2M), Government to through the BC-ICT channel. The progress made Person (G2P), Person to Government (P2G) and on these parameters is reported to the Reserve Merchant to Government (M2G) transactions. The Bank by banks on a monthly basis (Table IV.6). Table IV.6: Financial Inclusion Plan: A Progress Report (End-March) Particulars 2010 2019 2020* 1 2 3 4 Banking Outlets in Villages- Branches 33,378 52,489 54,561 Banking Outlets in Villages>2000-BCs 8,390 1,30,687 1,49,106 Banking Outlets in Villages<2000-BCs 25,784 4,10,442 3,92,069 Total Banking Outlets in Villages – BCs 34,174 5,41,129 5,41,175 Banking Outlets in Villages – Other Modes 142 3,537 3,481 Banking Outlets in Villages –Total 67,694 5,97,155 5,99,217 Urban Locations Covered Through BCs 447 4,47,170 6,35,046 BSBDA - Through Branches (No. in Lakh) 600 2,547 2,616 BSBDA - Through Branches (Amt. in Crore) 4,400 87,765 95,831 BSBDA - Through BCs (No. in Lakh) 130 3,195 3,388 BSBDA - Through BCs (Amt. in Crore) 1,100 53,195 72,581 BSBDA - Total (No. in Lakh) 735 5,742 6,004 BSBDA - Total (Amt. in Crore) 5,500 1,40,960 1,68,412 OD Facility Availed in BSBDAs (No. in Lakh) 2 59 64 OD Facility Availed in BSBDAs (Amt. in Crore) 10 443 529 KCC - Total (No. in Lakh) 240 491 475 KCC - Total (Amt. in Crore) 1,24,000 6,68,044 6,39,069 GCC - Total (No. in Lakh) 10 120 202 GCC - Total (Amt. in Crore) 3,500 1,74,514 1,94,048 ICT-A/Cs-BC-Total Transactions (No. in Lakh) # 270 21,019 32,318 ICT-A/Cs-BC-Total Transactions (Amt. in Crore) # 700 5,91,347 8,70,643 * Provisional. #: Transactions during the year. Source: FIP returns submitted by banks. 114CREDIT DELIVERY AND FINANCIAL INCLUSION Monitoring of Progress of Financial Inclusion trainers, officials/faculties of the SCBs and Lead (MPFI) District Officers (LDOs) from the regional offices of the Reserve Bank were trained. Banks have been IV. 25 In order to align the Reserve Bank’s policies advised to complete the tier-II of the programme, with the vision outlined in the National Strategy for which entails training of rural branch managers Financial Inclusion (NSFI) document for the period who, in turn, will handhold and sensitise the BCs 2019-24, the FIP template has been revised and attached to their branches. As on July 31, 2020, rechristened as “Monitoring Progress of Financial nearly 39,000 rural branch managers were trained Inclusion (MPFI)” to capture more granular data in the second leg of the programme. and qualitative aspects on the ground level. Data under MPFI will be automated through Automated FINANCIAL LITERACY Data Extraction Project (ADEPT) of the Reserve IV. 28 The mid-line survey1 forming part of the Bank. impact assessment of the pilot project on CFL Recent Initiatives Undertaken for the BC Model was completed during 2019-20. The observations/ findings of the mid-line survey are as under: IV. 26 With a view to strengthening the BC framework and deepening financial inclusion, a a. The mid-line survey suggests broader framework for graded certification for BCs was reach of the CFL programme and more issued to Indian Banks’ Association (IBA) for further substantive engagement of respondents; implementation. Accordingly, domestic SCBs, b. “Active” participation, viz., face-to-face including SFBs, have been advised to complete meetings or trainings, yields better results the BC certification process being conducted by both for financial literacy and for increasing Indian Institute of Banking and Finance (IIBF) in use and uptake of products, notably a time-bound manner by December 31, 2020. savings bank accounts; and Payment banks have been advised to complete the c. The willingness to use the grievance BC certification process on a staggered timeline, redressal mechanisms and faith that these based on the number of BCs. As reported by IIBF, grievances will be quickly and satisfactorily during the year 2019-20, more than ninety-five resolved show marginal improvements, thousand BCs have been certified. and is evident more specifically with Train the Trainers Programme for Capacity Building those who have “active” exposure to the of Business Correspondents awareness programmes. IV. 27 A two-tier Train the Trainers (ToT) IV. 29 The survey has also suggested that programme titled ‘Skill Up-gradation for financial literacy can be improved by broad- Performance of Resources – Business based exposure and leveraging network-based Correspondents (SUPER-B)’ for capacity building transmission of such information and knowledge. and skill upgradation of the BCs was designed to However, encouraging product use and uptake deliver financial inclusion effectively at the grass- of financial products and services, needs more root level. In the first tier held in three phases, focused, targeted and sustained efforts with 1 Mid-line survey means data collected midway to estimate the impact of phased randomisation. 115ANNUAL REPORT handholding for greater impact. PFRDA) was approved by the Sub-Committee of the Financial Stability and Development Council Activities Conducted by Financial Literacy Centres (FSDC-SC) chaired by Governor, RBI. The NSFE (FLCs) for period 2020-25 intends to realise the vision of a IV. 30 As at the end of March 2020, 1,467 financially aware and empowered India by helping Financial Literacy Centres (FLCs) were operational the people of the country to develop adequate in the country. During 2019-20, 1,48,444 financial knowledge, skills, attitudes and behaviour which literacy related activities were conducted by the are needed to manage their money better and FLCs, up from 1,45,427 activities undertaken to plan for the future. The strategy recommends during the previous year. adoption of a multi-stakeholder approach to Observing Financial Literacy Week 2020 achieve financial well-being of Indians. The recommendations laid down in the strategy will be IV. 31 The Financial Literacy Week (FLW) is implemented by the National Centre for Financial an initiative of the Reserve Bank to promote Education (NCFE) in consultation with various awareness among masses/various sections of stakeholders and periodically monitored by the the population on key topics through a focused TGFIFL under the FSDC-SC during the period of campaign every year. During 2019-20, FLW was the strategy (2020-25). observed during February 10-14, 2020 on the theme of MSMEs. Content in the form of posters/ Impact of COVID-19 on Credit Delivery and leaflets and audio visuals on aspects relating to Financial Inclusion formalisation, collateral free loans, discounting of IV. 33 The challenges that beset progress receivables, rehabilitation of stressed units and of financial inclusion due to the outbreak of timely repayment were prepared, in order to build COVID-19 are unprecedented and necessitate awareness and disseminate financial literacy a multipronged approach from all stakeholders messages on the MSME sector. Banks were concerned. The impact of the pandemic brought advised to display the posters and content in their to the fore the crucial role played by the alternate rural bank branches, FLCs, ATMs and websites. delivery channel, particularly BC model, catering The Reserve Bank also undertook a centralised to the needs of vulnerable section of the society. mass media campaign during February 2020 Business Correspondents have been extending to disseminate essential financial awareness banking services to the last mile and with messages to MSME entrepreneurs. announcement of disbursing cash benefits to The Second National Strategy for Financial beneficiaries by Government of India under Education (NSFE: 2020-25) Pradhan Mantri Garib Kalyan Yojana, operations IV. 32 The National Strategy for Financial at BC points, particularly cash withdrawals have Education (NSFE) prepared under the aegis witnessed significant surge. Several steps were of the Technical Group on Financial Inclusion taken by banks to facilitate delivery of financial and Financial Literacy (TGFIFL) [Chair: Deputy services at BC outlets by way of enhancing Governor in charge of FIDD, RBI] with members overdraft limit in settlement accounts, providing from the Government of India and the Financial financial support to BCs for meeting cost towards Sector Regulators (RBI, SEBI, IRDAI and hygiene, transportation, insurance cover and also 116CREDIT DELIVERY AND FINANCIAL INCLUSION regularly educating BCs on the precautionary • Monitor implementation of the guidelines. recommendations of the “Expert Committee on MSMEs” and “Internal IV. 34 In order to safeguard the interest Working Group to Review Agricultural of farmers, interest subvention and prompt Credit” (Utkarsh); repayment incentive for short-term loans have been continued to the extended period of • Monitor implementation of the National moratorium. To incentivise banks, the funds Strategy for Financial Education (NSFE); availed by banks under the TLTRO 2.0 scheme and which are deployed in specified securities • Review of guidelines of priority sector issued by small and mid-size NBFCs and MFIs lending. were exempted from ANBC for the purpose of determining priority sector targets/sub-targets. 4. Conclusion Similarly, under the special liquidity facility for IV. 36 In sum, the recommendations of the mutual funds (SLF-MFs), the face value of Expert Committee on MSMEs and the Internal securities acquired under the SLF-MF and kept Working Group on agriculture credit had set under HTM category was allowed to be deducted the agenda for the year, to undertake various while computing the ANBC. measures to improve inclusiveness and also 3. Agenda for 2020-21 enhance flow of credit to these sectors. Initiatives, viz., BC Registry, BC Certification and Train the IV. 35 For the year, the Department would Trainers would strengthen the BC model in the undertake the following measures towards enhancing credit delivery and financial inclusion: long-term. Further, the implementation of the strategy adopted under the NSFI document would, • Review of Train the Trainer (TOT) inter alia, strengthen financial literacy, expand programme for capacity building of BCs and deepen digital payment system and improve and Business Correspondent Registry MIS to monitor banks’ progress in the financial (Utkarsh); inclusion sphere. Going ahead, while the focus will • Develop on-line financial literacy modules be to implement the remaining recommendations for specific target audience (Utkarsh); of the above-mentioned reports, a comprehensive • Complete the end-line impact assessment review of the extant guidelines on priority sector survey of the pilot project on CFL (Utkarsh); lending will also be taken up in the ensuing year. 117ANNUAL REPORT FINANCIAL MARKETS AND V FOREIGN EXCHANGE MANAGEMENT The Reserve Bank developed and strengthened various segments of the financial markets by broadening participation, easing access and transaction norms, improving financial market infrastructure and pursuing rigorous surveillance to maintain market integrity. Management of liquidity conditions, accordingly, became a dominant objective during the year. The Reserve Bank used several unconventional instruments such as forex swaps, long-term repo, targeted long-term repo, short-term forex swaps and variable rate reverse repo. Several measures were undertaken during the year to streamline regulations relating to the foreign exchange markets to align them with the current business and economic environment. V.1 During 2019-20, the Reserve Bank 2. FINANCIAL MARKETS REGULATION undertook several measures to develop the DEPARTMENT (FMRD) financial markets further in terms of broadening V.3 The FMRD is entrusted with the the participation base in various segments of development, regulation and surveillance of the markets, easing access and transaction money, government securities (G-secs), foreign norms, expanding the range of financial exchange and related derivatives markets. The products, simplifying procedures and improving Department undertook several measures in financial market infrastructure, while maintaining pursuance of this mandate to fulfil the objectives rigorous surveillance to ensure market integrity. set for 2019-20. The Reserve Bank’s liquidity management Agenda for 2019-20: Implementation Status operations, in rupees and forex, were stepped up and unconventional instruments were also Goals Set for 2019-20 deployed to ensure adequate liquidity, the normal V.4 The Department had set out the following functioning of markets and the stability of the goals for 2019-20: financial system in the face of the dislocation caused by COVID-19. • To develop an IT-enabled Integrated Market Surveillance System (IMSS) for V.2 Against this backdrop, section 2 covers augmenting the surveillance capacities the measures undertaken to develop the (Utkarsh) [Para V.5]; financial markets. Section 3 presents liquidity management and foreign exchange market • To implement international settlement operations. Section 4 covers various initiatives of central government securities undertaken to facilitate trade and payments while through International Central Securities promoting orderly development of the foreign Depositories (ICSDs) to permit non- exchange market. The agenda for 2020-21 has resident clients of ICSDs to transact in been covered in each section. The chapter ends central government securities offshore with conclusion. (Para V.6); and 118FINANCIAL MARKETS AND FOREIGN EXCHANGE MANAGEMENT • Review and implementation of various operational details of the ICSD scheme are being financial market timings as recommended chalked out, and will be finalised shortly. by the Internal Group set up in August V.7 As recommended by the Internal Group on 2018 (Para V.7). market timings and the feedback received from the Implementation Status of Goals market participants, the revised market timings for V.5 The Department is in the process various products have been finalised, and shall be of implementation of the Integrated Market implemented, once COVID-19 related dislocations Surveillance System. Expression of Interest (EoI) stabilise. have been obtained from the interested vendors. Easing Access, and Broadening Participation in Based on the evaluation of EoI, the Department the Foreign Exchange Market shall be issuing the Request for Proposal (RFP) by end of August 2020. V.8 For the domestic foreign exchange market, V.6 As regards the implementation of the initiatives undertaken during the year focused international settlement of Indian G-sec through on incentivising access, bridging the segmentation ICSDs, the draft scheme has been finalised in between onshore and offshore trading activity, consultation with the government. There are, and simplifying the hedging of foreign exchange however, certain tax issues which have been risks, while safeguarding the interests of less referred to the government. Meanwhile, the sophisticated participants (Box V.1) Box V.1 Foreign Exchange Market: Improving Access, Transparency and Pricing During 2019-20, major initiatives were undertaken for been permitted to offer quotes to their customers, resident improving access and pricing outcomes, especially for retail and non-resident, at all times, including beyond usual market users in the foreign exchange market. hours (9 AM - 5 PM). Simplified Regulatory Framework Efficient Hedging The Regulation1 and Direction2 governing the foreign The new framework also facilitates booking of anticipated exchange market have been revised comprehensively. The exposures and enables participants to freely cancel and revised Direction sets out a unified set of rules for accessing rebook transactions. Gains, if any, on hedging of anticipated the foreign exchange markets for both residents and non- transactions will be passed on to the client only when the residents. The rules have been made simpler and principle- cash flows are sighted. based. Removing Segmentation between Onshore and Offshore Ease of Access In order to remove segmentation between the onshore and The simplified regulatory framework, inter alia, allows offshore markets and improve efficiency of price discovery, users to enter into deliverable foreign exchange derivative banks in India which operate International Financial contracts equivalent of US$ 10 million and US$ 100 million Services Centre (IFSC) International Banking Units (IBUs) in the over-the-counter (OTC) and exchange-traded market, were permitted to offer non-deliverable derivative contracts respectively, without the need to establish the underlying (NDDCs) involving the Rupee, or otherwise, to persons not exposure. Furthermore, Authorised Dealer (AD) banks have resident in India. (Contd...) 1 Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulation, 2000 as amended from time to time. 2 Master Direction - Risk Management and Inter-bank Dealings, as amended from time to time. 119ANNUAL REPORT Transparency in Trade Information that all transactions with retail users will be executed by AD banks at the ongoing inter-bank/market rates. The time of In order to enhance the transparency in transaction execution will also be provided to the user. Applicable fees/ information along with its effective dissemination, all commissions/service charges related to the contract will be foreign exchange NDDCs (involving Rupee or otherwise) charged/indicated separately and shall not be part of the undertaken by banks in India were directed to be reported price. to CCIL’s reporting platform with effect from June 1, 2020. Similarly, IBUs were directed to report all OTC foreign Electronic Trading Platform exchange, interest rate and credit derivative transactions At the behest of the Reserve Bank, the CCIL has developed – both inter-bank and client transactions – undertaken by them to CCIL’s reporting platform with effect from June 1, an electronic trading platform for retail segment, called FX- 2020. Retail. The platform commenced live operations on August 5, 2019. After registering and obtaining limits from their Consumer Protection respective ADs, customers can access FX-Retail through A new User Classification Framework has been introduced internet and place orders which are anonymously matched under which users are classified either as retail or non- with orders of other customers or ADs on price-time priority. retail user. While AD banks are permitted to offer any plain The platform provides easy and flexible terms of registering, vanilla or structured derivative product to non-retail users accessing the market, assessing market depth, placing (which include, inter alia, regulated financial institutions, orders, obtaining deal information and getting reports. corporates with turnover of `500 crore and above and Charges levied by the ADs are transparently displayed non-residents other than individuals), they are permitted on the portal. Another important feature of this platform to offer only forwards, purchase of European call and put is aggregation wherein once the aggregated pending options, purchase of call and put spreads and swaps to retail unmatched orders attain the inter-bank segment lot size, users. The measure is aimed at protecting the interests of they are transferred to the FX-Clear platform, the inter- the unsophisticated user while at the same time promoting bank platform of CCIL, thereby ensuring sufficient liquidity. product innovation for larger market participants/more FX-Retail provides cash/tom/spot transactions in USD/INR sophisticated entities. pair. Forwards and other major currency pairs are to be Transparent and Fair Pricing introduced soon. So far, 1,895 customers have registered on the platform (as on June 30, 2020). In order to ensure fair pricing and transparency in price discovery for the retail users, the revised Directions stipulate Source: RBI. Non-Resident Investment in Domestic Debt for investment under the FAR. In addition, all new Instruments issuances of government securities of 5-year, 10-year and 30-year tenors from 2020-21 will V.9 A separate route, viz., Fully Accessible be eligible for investment under the FAR. While Route (FAR) for investment by non-residents the tenors of new securities to be designated in securities issued by the Government of India as ‘specified securities’ may be added/amended was introduced on March 30, 2020, in line with an from time to time, a security, once designated as announcement in the Union Budget 2020-213. This eligible for investment under the FAR, shall remain will be the third route, in addition to investment eligible till maturity. under the medium-term framework and the voluntary retention route (VRR) for investment by V.10 Several measures were undertaken to non-residents in the debt segment. A list of five further liberalise/facilitate the Foreign Portfolio existing securities have been notified as eligible Investors’ (FPI) investments in debt instruments: 3 The Union Budget 2020-21 announced that certain specified categories of central government securities would be opened fully for non- resident investors without any restrictions, apart from being available to domestic investors as well. 120FINANCIAL MARKETS AND FOREIGN EXCHANGE MANAGEMENT (a) the limit for investment by an FPI in short-term Improving Financial Market Infrastructure (up to one year) corporate bonds and government V.12 A regulatory framework for financial securities, including treasury bills and State benchmark administrators was introduced in Development Loans (SDLs), was revised on June 2019 to improve the governance of the January 23, 2020, to 30 per cent from the existing benchmark-setting processes in financial markets 20 per cent of the total investment by that FPI regulated by the Reserve Bank. Six benchmarks in the respective category; (b) debt instruments administered by Financial Benchmarks India Pvt. issued by Asset Reconstruction Companies (ARC) Ltd. (FBIL) were notified by the Reserve Bank as or by entities under the Corporate Insolvency ‘significant benchmarks’ on January 1, 2020. Resolution Process under the Insolvency and V.13 The Reserve Bank mandated the use of Bankruptcy Code, 2016 were exempted from the Legal Entity Identifier (LEI) for participation in short-term investment limit; and (c) the limit for non-derivative markets in November 2018. In the investment by FPIs in corporate bonds was raised context of the difficulties expressed by market to 15 per cent of outstanding stock with effect participants due to COVID-19, and with a view from April 1, 2020 (from 9 per cent), in line with an to enabling smoother implementation of the LEI announcement in the Union Budget 2020-21. system in non-derivative markets, the timeline for V.11 The investment cap under the VRR was implementation of LEI was extended from March increased to `1,50,000 crore from the existing 31 till September 30, 2020. `75,000 crore on January 23, 2020 in order to encourage long-term portfolio investment in the Agenda for 2020-21 Indian debt markets. FPIs, which were allotted V.14 For the year 2020-21, the Department investment limits under VRR, were permitted proposes to achieve the following goals: to transfer their investments made under the • As announced in the Reserve Bank’s General Investment Limit to the VRR. Under the Statement on Developmental and VRR scheme, FPIs were also allowed to invest in Regulatory Policies of February 6, 2020, Exchange-Traded Funds (ETF) that invest only in and in line with G-20 recommendations, debt instruments. Units of debt ETF were allowed a framework for exchange of initial as eligible securities for repo transactions on and variation margin for non-centrally November 28, 2019 with a view to expanding the cleared derivative contracts will be put in eligible collateral base in repo market and also place. Such exchange of margin shall be to improve liquidity. In view of the disruptions facilitated by the adoption of the legislation caused by COVID-19, FPIs that were allotted for bilateral netting of qualified financial limits under VRR between January 24, 2020 contracts as announced in the Union (the date of reopening of allotment of investment Budget 2020-21 (Utkarsh); limits) and April 30, 2020, have been given an additional time of three months to invest 75 per • Directions on Credit Default Swaps (CDS) cent of their Committed Portfolio Size (CPS). The will be reviewed with a view to broadening retention period for the investments will be reset the base of CDS writers and simplifying accordingly. operational guidelines so as to strengthen 121ANNUAL REPORT the corporate bond market in the light of the Implementation Status of Goals proposed legislation on bilateral netting of Money Market and Liquidity Management qualified financial contracts (Utkarsh); and V.17 As system liquidity shifted from deficit • Review the Directions on Interest Rate during April-May 2019 to surplus from June 2019, Derivatives with a view to easing access, the Reserve Bank actively managed evolving removing segmentation between onshore liquidity conditions through use of fine-tuning and offshore markets and improving instruments under the Liquidity Adjustment transparency. Facility (LAF), Open Market Operations (OMOs) and variable rate reverse repo operations of both 3. FINANCIAL MARKETS OPERATIONS shorter and longer tenors. DEPARTMENT (FMOD) V.18 Under the new liquidity management V.15 The Financial Markets Operations framework announced on February 6, 2020, the Department (FMOD) is entrusted with two Reserve Bank deployed several new instruments primary responsibilities: first, conduct of liquidity tailored to the India-specific situations and drawing management operations for maintaining an from the international experience (Box V.2). appropriate level of liquidity in the financial system V.19 On the basis of an assessment of the for monetary policy transmission; and second, existing liquidity conditions, the daily fixed rate ensuring orderly conditions in the forex market repo and four 14-day variable rate repos, being through operations in the spot, forward and futures conducted earlier every fortnight, were withdrawn segments. with effect from February 14, 2020. The daily Agenda for 2019-20: Implementation Status MSF and fixed rate reverse repo were retained. Furthermore, as a part of the revised liquidity Goals Set for 2019-20 management framework, two new instruments, V.16 During the year, the Department had set Long-Term Variable Rate Repo (LTR) and Long- out the following goals: Term Variable Rate Reverse Repo (LTRR), with • To monitor evolving liquidity conditions tenors of more than 14 days, were also announced. closely and to modulate operations to V.20 In view of the exceptionally high volatility ensure alignment of the WACR with the in domestic financial markets which brought in policy repo rate (Para V.17); phases of liquidity stress and to provide comfort to the banking system; on March 27, 2020, the • To conduct foreign exchange operations in borrowing limit of scheduled banks under the an effective manner to curb undue volatility Marginal Standing Facility (MSF) scheme, by in the exchange rate (Para V.23); and dipping into the prescribed Statutory Liquidity • To launch a “Public Register” in Ratio (SLR), was increased from 2 per cent to 3 collaboration with India Foreign Exchange per cent of their Net Demand and Time Liabilities Committee as part of the adoption of (NDTL) outstanding at the end of the second principles of “FX Global Code” in the preceding fortnight. This relaxation which was domestic forex market (Utkarsh) [Para available up to June 30, 2020 was extended till V.24]. September 30, 2020 on June 26, 2020. 122FINANCIAL MARKETS AND FOREIGN EXCHANGE MANAGEMENT Box V.2: Unconventional Tools of Liquidity Management: The Recent RBI Experience In the post global financial crisis period, several central bank financial companies (NBFCs) and microfinance banks introduced new policy instruments and made changes institutions (MFIs). An amount of `12,850 crore was to their monetary policy frameworks. Often labelled as taken by the banks under TLTRO 2.0. “unconventional monetary policy tools” (UMPTs), four broad • In order to deal with the liquidity strains on mutual funds categories are discernible in the cross-country experience: (MFs), and potential contagion effects therefrom, the negative interest rate policy; expanded lending operations; Reserve Bank introduced a special liquidity facility (SLF- asset purchase programmes; and forward guidance (BIS, MF) of `50,000 crore targeted towards MFs for 90 days 2019). tenor at the fixed repo rate. Out of the total amount of Another important element of unconventional monetary `50,000 crore envisaged, a total amount of `2,430 crore policy is provision of liquidity support to the banks on a was availed under SLF-MF. large scale. For instance, the ECB shifted since October • The LTRO received an overwhelming response, with 2008 towards Long-term Refinancing Operations, which are average bid-cover ratio of 4.5 for the five auctions. mainly executed on a monthly basis for maturities ranging Auctions under the TLTRO also received a positive from six months to twelve months (Pattipeilohy, et al. 2013). response from market participants, with average bid- The circumstances under which central banks resort to cover ratio of 3.3 over the first four auctions. However, unconventional monetary policy and liquidity management the first tranche of TLTRO 2.0 received lower than is a key issue. It is argued that when there is little or no room anticipated response at just 51 per cent of the notified for a reduction in nominal interest rate/policy rate (zero amount of `25,000 crore that was auctioned on April 23, lower bound), unconventional measures are to be taken in 2020 (Chart 1). The total amount injected through LTRO, order to continue the supply of liquidity in the financial and TLTRO and TLTRO 2.0 stood at `2,38,017 crore. banking system and various other sectors of the economy (IMF, 2013). Chart 1: LTRO and TLTRO : Bid-Cover Ratio In India, the Reserve Bank undertook a bouquet of unconventional liquidity management measures in 2020 to ensure normal flow of finance into the economy, and enable better transmission of monetary policy impulses in the wake of the unprecedented situation created by the COVID-19 pandemic: • From February 17, 2020 and up to March 18, 2020, the Reserve Bank conducted long-term repo operations (LTROs) of one-year and three-year tenors and allotted Source: RBI. a total amount of `1,25,117 crore at the policy repo rate. • The Reserve Bank introduced another unconventional • Public sector banks, followed by private sector banks, liquidity management tool - Targeted Long-Term Repo were the major groups of participants in the LTRO Operations (TLTROs) under which liquidity availed auctions, altogether accounting for an average share by banks was to be deployed in investment grade of 89 per cent of the total allotted amount. Barring corporate bonds, commercial paper and non-convertible the last auction of March 18, 2020, foreign banks and debentures over and above the outstanding level of cooperative banks also had a fair share in the total their investments in these bonds as on March 27, 2020. allotted amount of LTRO (Chart 2). In case of TLTROs, An amount of `1,00,050 crore was taken by the banks the average percentage share of public sector banks under TLTRO. and private sector banks hovered around 99 per cent, with the former remaining the major group of borrowers • On April 17, 2020, the Reserve Bank introduced (Chart 3). The Reserve Bank has thus used an armoury Targeted Long-Term Repo Operations (TLTRO) 2.0 at of unconventional tools to manage liquidity in the banking the policy repo rate for tenors up to three years in order to and financial system. provide liquidity to small and mid-sized corporates, non- (Contd...) 123 0202/71/2 0202/42/2 0202/2/3 0202/9/3 0202/61/3 0202/32/3 0202/03/3 0202/6/4 0202/31/4 0202/02/4 10 8 6 TLTRO 4 2.0 2 LTROs TLTROs 0 Bid-Cover Ratio Bid-Cover RatioANNUAL REPORT Chart 2: Share of Participants in LTROs Chart 3: Share of Participants in TLTROs 100 80 60 40 20 0 Feb 17-2020 Feb 24-2020 Mar 02-2020Mar 09-2020Mar 18-2020 Source: RBI staff calculations. Source: RBI staff calculations. References: IMF Policy Paper. Washington, DC: International Monetary Fund. 1. BIS (2019), ‘Unconventional Monetary Policy Tools: A Cross-country Analysis’, CGFS Papers No 63, 3. Pattipeilohy, Christiaan, Jan Willem van den End, Committee on the Global Financial System, BIS, October Mostafa Tabbae, Jon Frost and Jakob de Haan (2013), 2019. ‘Unconventional Monetary Policy of the ECB during the Financial Crisis: An Assessment and New Evidence’, 2. International Monetary Fund (2013), ‘Unconventional DNB WP No. 381, De Nederlandsche Bank, The Monetary Policies - Recent Experiences and Prospects’. Netherlands. V.21 With regard to durable liquidity, the year G-sec generic yield softened cumulatively frequency and quantum of OMOs were increased by 15 basis points (bps) between December 19, during H2:2019-20. For the year as a whole (April- 2019 and January 31, 2020. March 2019-20), the Reserve Bank conducted V.22 FX swap auctions were actively used as OMO purchases (including NDS-OM) to the tune an instrument to manage liquidity in the foreign of `1,45,690 crore, and OMO sales (including exchange market in 2019-20. The first USD/INR NDS-OM) to the tune of `32,121 crore, of which, sell/buy swap auction, amounting USD 2 billion for `92,385 crore of OMO purchases and `32,111 a period of 6 months, was conducted on March crore of OMO sales were conducted in H2 alone. 16, 2020. The Reserve Bank also conducted This included five simultaneous purchase of long- another 6-month USD/INR sell/buy swap auction term and sale of short-term government securities of amount USD 2 billion on March 23, 2020 to under OMOs (December 23 and 30, 2019, January provide liquidity in the foreign exchange market. 6 and 23, 2020, and April 27, 2020). During April- Further, in May 2020, the Reserve Bank decided May 2020, OMO purchases and sales (including to extend a line of credit of `15,000 crore to the NDS-OM) to the tune of `1,30,474 crore and Export Import (EXIM) Bank for a period of 90 days `10,000 crore were conducted respectively. from the date of availment with rollover up to a Subsequently, on July 2, 2020, the Reserve Bank maximum period of one year so as to enable it to conducted another simultaneous purchase of long- avail a US dollar swap facility to meet its foreign term and sale of short-term government securities exchange requirements in the backdrop of the under OMOs. Reflecting these operations, the 10- COVID-19 pandemic. 124 tnecreP 80 60 40 20 0 PSBs Pvt Banks Foreign Banks Coop Banks Others tnecreP Mar 27-2020 Apr 03-2020 Apr 09-2020 Apr 17-2020 PSBs Pvt Banks Foreign Banks Coop Banks OthersFINANCIAL MARKETS AND FOREIGN EXCHANGE MANAGEMENT Foreign Exchange Market • To conduct foreign exchange operations in an effective manner to curb undue volatility V.23 Orderly conditions were maintained in the in the exchange rate; and forex market during the year through operations in the OTC and Exchange Traded Currency • To continue policy-oriented research on Derivatives (ETCD) segments. financial markets. V.24 As part of the Reserve Bank’s commitment 4. FOREIGN EXCHANGE DEPARTMENT (FED) for adoption of the principles of ‘FX Global Code’ V.26 During the year, the Department engaged in the domestic forex market, the Department in carrying forward rationalisation of regulations [in coordination with India Foreign Exchange with a view to moving towards a more principles- Committee (IFXC)] launched a “Public Register”, hosted on the website of the Foreign Exchange based regulatory framework. The Department also Dealers Association of India (FEDAI). It provides undertook several steps for enhancing ease of the Statement of Commitment of all AD Category-I doing business, including aligning the regulatory banks operating in the Indian forex market as well framework to respond to needs of the current as corporates demonstrating their recognition of, business and economic environment, in order to and commitment to adopt the good practices set facilitate external trade and payments. forth in the FX Global Code. The register is already Agenda for 2019-20: Implementation Status linked with the global public register hosted by Global Foreign Exchange Committee (GFXC). The Goals Set for 2019-20 “Public Register” acts as a repository of information V.27 The Department had set out specific to facilitate market participants to publicise their deliverables for 2019-20 in pursuit of its mission: Statements of Commitment to the FX Global Code and also to assist interested parties in identifying • Creation of a detailed framework for market participants. The Reserve Bank has hosted enhancing FEMA awareness (Utkarsh) its own Statement of Commitment in the Central [Para V.28]; Bank Public Registry maintained by the Bank for • Developing internal frameworks for International Settlements (BIS). granting approvals (Utkarsh) [Para V.29]; Agenda for 2020-21 • Building a fee structure for minor violations V.25 During the year, the Department plans to of FEMA (Utkarsh) [Para V.30]; focus on the following: • Review and rationalisation of entry norms • To carry out liquidity management for being licensed as Full-Fledged Money operations effectively, including through Changers (FFMCs) [Para V.31]; additional liquidity management tools, in • Rationalisation of guidelines relating to line with the stance of monetary policy (Utkarsh); merchanting trade transactions (Para V.36); • To monitor evolving liquidity conditions closely and to modulate operations to • Enhancing the scope of Special Non- ensure alignment of the WACR with the Resident Rupee (SNRR) Account (Para policy repo rate; V.39); 125ANNUAL REPORT • Relaxing the end-use of external the provisions of the Companies Act, 2013. commercial borrowings (ECBs) [Para Companies registered under the Registration of V.40]; and Companies (Sikkim) Act, 1961 were made eligible to apply for FFMC license. • Notification of Non-Debt Rules under the FEMA (Para V.42). V.32 A comprehensive review was undertaken for simplification of reporting requirements of Implementation Status of Goals regulated entities and enhancing the role of V.28 Alongside efforts to simplify regulations, APs, with a view to reducing transaction costs. regional offices (ROs) of the Foreign Exchange An online package for FFMCs/upgraded FFMCs Department have also been active in disseminating (AD Category II) relating to licensing, renewal, information by organising various conferences, reporting, cancellation and inspection is being seminars, exhibitions and financial literacy developed by the Reserve Bank Information programmes for different target groups. ROs Technology Pvt. Ltd. (ReBIT) which will rationalise have also been an important channel of securing reporting and reduce manual handling of other constructive feedback from the actual users of work processes. foreign exchange, viz., Authorised Persons (APs) Trade Guidelines - Liberalisation and and Exporters/Importers. With the objective of Rationalisation streamlining various FEMA related events, a detailed framework was issued to the ROs for V.33 An auto-emailing feature was developed conducting such events. in the Import Data Processing and Monitoring System (IDPMS) and the Export Data Processing V.29 The Department developed internal and Monitoring System (EDPMS), with a view to frameworks for granting approvals in areas such enabling self-monitoring by importer/exporter of as Liberalised Remittance Scheme (LRS) and import/export transactions pending reconciliation. Overseas Direct Investment (ODI)-Foreign Direct System-generated e-mails are sent to all Investment (FDI) structures. importers/exporters at regular intervals, giving V.30 Late Submission Fee (LSF) was details of their shipping bills, bills of entry and introduced, in lieu of compounding process, for outward/inward remittances remaining outstanding certain reporting violations under FEMA in respect beyond prescribed due dates. of ECBs. The fees can be collected and remitted V.34 With effect from November 22, 2019, the by Authorised Dealers (ADs) for regularising such guidelines on re-export of unsold rough diamonds violations. from Special Notified Zone of Customs were Authorised Persons and Remittances modified. In terms of revised instructions, the Bill V.31 The guidelines on money changing of Entry shall be filed by the buyer for the lot(s) and merchanting activities were rationalised. of imported rough diamonds meant to be traded Definitions of categories of authorised persons by diamond mining companies. These are to be licensed by the Reserve Bank under FEMA were cleared at the centre(s), which are duly notified incorporated in the guidelines. The prescription under Customs Act, 1962/specified by the Central on age of directors of FFMCs was aligned with Board of Indirect Taxes & Customs, Department 126FINANCIAL MARKETS AND FOREIGN EXCHANGE MANAGEMENT of Revenue, Ministry of Finance, Government Asian Clearing Union (ACU) mechanism. of India. AD banks may permit such import V.38 In view of the outbreak of COVID-19, payments after being satisfied with the bonafides the period of realisation and repatriation to India of the transaction. AD banks are also required to of the amount representing the full export value maintain a record of such transactions. of goods or software or services exported up to V.35 In order to smoothen the process of July 31, 2020 was increased from nine months to obtaining permission of the Reserve Bank for fifteen months from the date of export. Similarly, re-exporting of leased aircraft/helicopter and/ the time period for completion of remittances or engines/auxiliary power units (APUs) re- against normal imports (i.e., excluding import of possessed by the overseas lessor, they were gold/diamonds and precious stones/jewellery) exempted from submission of Export Declaration was extended from six months to twelve months Form (EDF). from the date of shipment for such imports made on or before July 31, 2020 (except in cases where V.36 In January 2020, a comprehensive review amounts are withheld towards guarantee of of the Merchanting Trade Transactions (MTT) was performance). undertaken and revised guidelines were issued. The key highlights are: (i) allowing transformation Non-Resident Rupee Account - A Review of Policy of ‘state of goods’; (ii) online verification of V.39 The scope of Special Non-Resident Rupee documents on the website of the International (SNRR) Account was enhanced by permitting Maritime Bureau or respective airlines; persons resident outside India to open non- (iii) write-off of export leg receivables in certain interest-bearing SNRR accounts for transactions circumstances, which are beyond the control in INR pertaining to ECBs, trade/trade credits and of merchanting trader; (iv) payment of agency business-related transactions by International commission under certain conditions, which might Financial Service Centre (IFSC) Units at Gujarat necessitate payment of agency commission after International Finance Tec (GIFT) City. Restriction the MTT has been initiated; (v) enhancement in on the tenure of SNRR Account - 7 years at present limit of the import advance without Stand-by Letter - was also removed for the aforesaid purposes. of Credit (SBLC)/bank guarantee to USD 5 lakh; (vi) specifically prohibiting third party payments; External Commercial Borrowings Framework - (vii) prohibiting issue of Letters of Undertaking Policy and System Changes (LoU)/ Letters of Credit (LoC) for supplier’s/ V.40 The Reserve Bank, in consultation with buyer’s credit; (viii) earmarking the export advance the Government of India, relaxed the end-use received for the purpose of import leg payment; restrictions relating to ECBs for working capital and (ix) clarification on parking of export proceeds requirements, general corporate purposes and in exchange earners’ foreign currency (EEFC) repayment of rupee loans. Eligible borrowers account. are now allowed to raise ECBs for the afore- V.37 The Foreign Exchange Management mentioned purposes from recognised lenders, (Manner of Receipt and Payment) Regulations, except foreign branches/overseas subsidiaries of 2016 were amended in March 2020 to include Indian banks, subject to maintaining the defined Japanese Yen as a currency of settlement under average maturity period. Relaxations also include 127ANNUAL REPORT permitting eligible borrowers to avail ECBs for sessions for the benefit of staff attached to the repayment/assignment of rupee loans, classified Central Office and across all the ROs. The various as SMA-2 or NPA, subject to meeting certain guidelines/instructions are also disseminated conditions. by way of regular updation of master directions, training modules and frequently asked questions V.41 Work on implementing a Software Platform (FAQs). for External Commercial Borrowings and Trade Credits Reporting and Approval (SPECTRA) Agenda for 2020-21 encompassing the whole lifecycle from receipt V.44 The Department’s strategy for 2020-21 is to of application to communication of decision and focus on consolidating and carrying forward all the reporting of transactions is underway with NSEIT initiatives which were undertaken in the previous Limited being awarded the work order in November year. The emphasis will remain on ensuring 2019. that the FEMA operating framework is in sync Notification of Non-Debt Instrument Rules with the needs of the evolving macroeconomic environment. Accordingly, the Department has V.42 Amendments were made to the FEMA, formulated the following strategic action plan for 1999 through the Finance Act, 2015. In terms of 2020-21: the amended provisions of the Act, the Government of India has been given the powers • Undertaking a complete review of the to frame rules for any class or classes of reporting requirements under various capital account transactions not involving debt regulations in order to make the reporting instruments, while the powers to regulate capital aligned with specific requirements and account transactions involving debt instruments make the process simple and efficient will continue to be with the Reserve Bank. (Utkarsh); Furthermore, the government will make rules • Introduction of late submission fee for which lay down the instruments to be determined delayed reporting of Overseas Direct as debt instruments. Central government notified Investment (ODI) by Indian Parties/ the amendments vide notification dated October Resident Indians (Utkarsh); 15, 2019. Non-Debt Instrument (NDI) rules were notified with effect from October 17, 2019. • Rationalisation of ODI regulations to make them simpler and more principles-based FEMA Related Events – Dissemination of (Utkarsh); Information and Feedback • Conducting awareness programmes and V.43 The Department is continuously striving creation of digital content on an ongoing to upgrade skills and disseminate knowledge by basis (Utkarsh); and organising meetings/conferences with in-charges of the ROs with a view to resolving their queries • Rationalisation of various provisions and also gauging the grassroots requirement in on foreign exchange and currency the area of foreign exchange management in order under Foreign Exchange Management to address their issues promptly. The Department Regulations, 2015, such as export has also conducted various knowledge-sharing and import of currency; realisation, 128FINANCIAL MARKETS AND FOREIGN EXCHANGE MANAGEMENT repatriation and surrender of foreign operate in fair, efficient and transparent manner. exchange; possession; and retention of In the wake of the COVID-19, the Reserve foreign currency. These provisions, which Bank went beyond its conventional policies and are currently covered in four different introduced unconventional monetary policy tools notifications under the FEMA, would be in terms of LTRO, TLTRO, TLTRO 2.0; opening unified under a single regulation. lines of credit to all-India financial institutions to ensure sufficient liquidity in the system and in the 5. Conclusion specific sector arising because of the pandemic, V.45 In sum, during the year, the Reserve in addition to both kinds of FX swaps to inject Bank has taken several steps to develop the rupee and forex liquidity to contain volatility. In the financial markets in terms of broadening the process of rationalisation of FEMA and to make participation base, easing access and transaction them user friendly for monitoring and reporting costs, diversifying the array of products, and purposes, the scope of SNRR account has been instruments, simplifying of procedures, and enhanced, auto emailing features in IDPMS and improving financial market infrastructure and EDPMS has been added. The endeavour of the also augmented its liquidity management Reserve Bank has been to build a principle-based framework. The broad policy approach has been regulatory framework and ensuring mandate re-oriented towards a principle-based regulatory under FEMA along with orderly conditions in the framework with emphasis on market surveillance financial markets with international best practices and intelligence to ensure that financial markets and market infrastructure. 129ANNUAL REPORT REGULATION, SUPERVISION AND VI FINANCIAL STABILITY In a deteriorating macroeconomic environment during 2019-20, policy attention came to be focused on improving the supply of credit sectorally. The introduction of external benchmarks for bank lending rates strengthened the transmission of monetary policy. The banking sector went through a structural transformation with consolidation in the form of mergers and amalgamation. The regulatory and supervisory framework was unified across regulated entities and strengthened in alignment with global best practices. Harnessing technology for customer services, strengthening fraud detection, and consumer protection were concurrent objectives during the year. VI.1 The chapter discusses regulatory and while the overall liquidity risk management system supervisory measures undertaken during the year was aligned with that of the banking sector. to strengthen the financial system and preserve Regulation of Housing Finance Companies financial stability. As part of the overall objective of (HFCs) was brought under the Reserve Bank's aligning the regulatory framework with global best purview, and wider supervisory powers over practices, steps were taken in the areas of NBFCs were vested with it. corporate governance and risk management. VI.3 In the cooperative banking space, progress Operationalisation of regulatory sandbox, enabling was made in the process of establishing the video-based know-your-customer (KYC) Umbrella Organisation for Urban Cooperative processing, Regulatory Technology (RegTech)/ Banks (UCBs). The Supervisory Action Framework Supervisory Technology (SupTech) initiatives and (SAF) was reviewed and reporting of large cyber security measures marked the rising exposures to Central Repository of Information on importance of FinTech in the regulatory and Large Credits (CRILC) was implemented during supervisory functions. Steps towards development the year. Other major developments include of an active secondary market for corporate loans, issuance of guidelines on constitution of Board of lending to Infrastructure Investment Trusts (InvITs) Management (BoM) and developing a Central and linking pricing of bank loans to external Fraud Registry (CFR) as well as a comprehensive benchmarks were undertaken in order to cyber security framework for UCBs. A major policy deleverage the banks’ balance sheets and to drive during the year was towards amalgamation improve the flow of credit to critical sectors of the economy in which credit demand remained and consolidation of cooperative banks. supported. In response to the COVID-19 VI.4 The rest of this chapter is divided into six pandemic, measures were taken for mitigating the sections. Section 2 deals with the mandate and burden of debt servicing by borrowers and functions of the Financial Stability Unit (FSU). ensuring the continuity of viable businesses. Section 3 addresses various regulatory measures VI.2 In other areas, the asset-liability undertaken by the Department of Regulation management (ALM) framework of Non-Banking (DoR). Section 4 covers several supervisory Financial Companies (NBFCs) was strengthened measures undertaken by the Department of 130REGULATION, SUPERVISION AND FINANCIAL STABILITY Supervision (DoS), and enforcement actions Implementation Status of Goals carried out by the Enforcement Department during VI.7 A framework for estimation of sectoral the year. Section 5 highlights the role played by probability of default of private listed firms was the Consumer Education and Protection developed and is being tested using alternate Department (CEPD) and the Deposit Insurance data sources for incorporation in the stress testing and Credit Guarantee Corporation (DICGC) in framework of the Department. However, this work protecting consumer interests, spreading has partly been affected by disruptions caused by awareness and upholding consumer confidence. the COVID-19 pandemic. These departments have also set out agenda for VI.8 The FSRs were published in December 2020-21 in their respective sections. The chapter 2019 and July 2020. These editions reflected the ends with a conclusion. collective assessment of the Sub-Committee of 2. FINANCIAL STABILITY UNIT (FSU) FSDC on the balance of risks around financial VI.5 The mandate of the Financial Stability Unit stability. The December 2019 edition of FSR (FSU) is to monitor the stability and soundness of highlighted that the economic prospects, both the financial system by examining risks to financial global and domestic, are being weighed down by stability, undertaking macro-prudential uncertainties which are affecting consumption and surveillance through systemic stress tests, business investment. The report underscored the financial network analysis and by disseminating resilience of Indian financial institutions, even as it information and analysis through the Financial projected a rise in gross non-performing assets Stability Report (FSR). It also functions as a (GNPA) ratio driven by weakening macroeconomic secretariat to the Sub-Committee of the Financial scenario and consequent slackening of credit Stability and Development Council (FSDC), an growth as also marginal increase in slippages. institutional mechanism of regulators for The July 2020 edition of FSR highlighted the maintaining financial stability and monitoring impact of disruptions arising from the COVID-19 macro-prudential regulation in the country. pandemic-induced lockdown on near-term domestic economic prospects. The report also Agenda for 2019-20: Implementation Status underscored the policy measures adopted by the Goals Set for 2019-20 financial sector regulators and the Government of India, spanning monetary stimulus and regulatory VI.6 The Department had set out the following relief, to offset the impact of the pandemic and to goals for 2019-20: ensure normalcy of financial intermediation • To strengthen the current stress testing functions. It also examined the credit allocation framework/methodology to adopt evolving dynamics in the wake of the pandemic-induced best practices (Utkarsh) [Para VI.7]; and uncertainty. Financial sector assessment • To continue the publication of the FSR and emphasised the resilience of the Indian financial conducting meetings of the FSDC Sub- system, even though stress tests projected a rise Committee as well as to undertake macro- in scheduled commercial banks’ (SCBs’) GNPA prudential surveillance (Para VI.8 - VI.10). ratio due to the stressed macroeconomic 131ANNUAL REPORT environment. Network analysis revealed reduction conferencing during the period. However, the 21st in contagion losses to the banking system under issue of the FSR was published in July due to various scenarios, in relation to a year ago. delay in the receipt of some primary data. VI.9 The FSDC Sub-Committee held two Agenda for 2020-21 meetings in 2019-20, both of which were held VI.12 In the year ahead, FSU will focus on the under distinct economic conditions. In the meeting following: held in September 2019, the forum discussed • Strengthen the stress testing framework/ various issues impinging on financial stability, methodology by incorporating evolving including concerns regarding NBFCs, UCBs, and debt mutual funds. The regulatory framework of best practices (Utkarsh); credit rating agencies (CRAs) and creation of a • Conduct macro-prudential surveillance; Central KYC registry also engaged the Sub- • Publish the FSR; and Committee. Steps taken for resolution and prevention of contagion effect of the Infrastructure • Conduct meetings of the FSDC Sub- Leasing & Financial Services Ltd. (IL&FS) crisis, Committee. operationalising individual insolvency and 3. REGULATION OF FINANCIAL promotion of financial inclusion through insurance INTERMEDIARIES marketing firms were also discussed in the Department of Regulation (DoR) meeting. Commercial Banks VI.10 In the meeting held in June 2020, the Sub Committee reviewed the major developments in VI.13 The Department of Regulation - Banks global and domestic economy, and financial (DoR - Banks) is the nodal Department for markets that impinge upon financial stability. regulation of commercial banks for ensuring a Amongst other things, the Sub-Committee also healthy and competitive banking system, which discussed about the proposal of setting up of an provides cost effective and inclusive banking Inter Regulatory Technical Group on FinTech services. The regulatory framework is fine-tuned (IRTG-FinTech), the importance of cyber security as per the requirements of the Indian economy across the financial system and the National while adapting to international best practices. Strategy on Financial Education (NSFE) 2020-25. Agenda for 2019-20: Implementation Status It also deliberated upon the status and developments under the Insolvency and Goals Set for 2019-20 Bankruptcy Code (IBC), 2016 and the working of VI.14 The Department had set out the following CRAs. goals for regulation of commercial banks in 2019- Impact of COVID-19 Pandemic 20: VI.11 The Department’s functions have not been • To work towards aligning the prudential significantly impacted by the COVID-19 pandemic- regulatory framework with global induced disruptions. The FSDC and FSDC-Sub standards/practices including convergence Committee meetings were held through video of accounting standards for banks in India 132REGULATION, SUPERVISION AND FINANCIAL STABILITY with International Financial Reporting implementation of the Net Stable Funding Ratio Standards (IFRS) (Utkarsh) [Para VI.15]; (NSFR) has been deferred for six months, from April 1, 2020 to October 1, 2020, as also, the • To facilitate digital onboarding of deadline for meeting the last tranche of capital customers, enabling video-based KYC for conservation buffer has been extended by six individuals under the provisions of months, i.e., from March 31, 2020 to September Prevention of Money Laundering (PML) 30, 2020. Rules (Para VI.17); Development of an Active Secondary Market for • Finalisation of regulatory framework for Corporate Loans securitisation (Utkarsh) [Para VI.42]; VI.16 As part of the initiatives to develop an • Issuance of final prudential regulations for active secondary market for corporate loans in All India Financial Institutions (AIFIs) line with the international practices, a task force (Utkarsh) [Para VI.42]; constituted for this purpose has made important • Operationalisation of Regulatory Sandbox recommendations (Box VI.1). (Utkarsh) [Para VI.42]; Digital Onboarding of Customers and Video- • Synchronising the implementation of based KYC Indian Accounting Standards (Ind AS) for VI.17 A circular has been issued on January 9, AIFIs with the implementation of the same 2020 amending master direction on KYC, for the SCBs (Para VI.42); and permitting Video-based Customer Identification • Releasing a discussion paper on Process (V-CIP) and digital KYC for customer on- implementation of macro-prudential boarding. Further, equivalent e-documents, policies for addressing incipient credit risk including documents issued to the digital locker in the system (Para VI.42). account of the customer, with valid digital signature Implementation Status of Goals of the issuing authority have been allowed for Customer Due Diligence (CDD) purpose. Aligning the Prudential Regulatory Framework with Global Standards/Practices Projects under Implementation in Commercial Real Estate (CRE) Sector VI.15 With the Basel Committee on Banking Supervision (BCBS) deferring the implementation VI.18 Project loans in the CRE sector have been of Basel III reforms by one year, from January 1, permitted to be restructured without a downgrade 2022 to January 1, 2023, on account of the in the asset classification, by way of revision of COVID-19 pandemic, the milestones for issue of date of commencement of commercial operation - (i) draft guidelines on minimum capital (DCCO) up to one additional year (i.e., total 2 requirements for operational risk, and (ii) draft and years extension from the original DCCO), as in the final guidelines for standardised approach for case of projects in non-infrastructure sectors, with credit risk - have also been deferred. The adoption a view to harmonising the guidelines for projects of Ind AS was also deferred, pending necessary under implementation in non-infrastructure and legislative amendments. Further, the CRE sectors. 133ANNUAL REPORT Box VI.1 Secondary Market for Corporate Loans The Reserve Bank constituted a Task Force (Chairman: Shri • Amendments in regulations of the Securities and T. N. Manoharan) on May 29, 2019 to review the existing Exchange Board of India (SEBI), the Insurance state of development of the market for loan sale/transfer Regulatory and Development Authority of India (IRDAI) in India, and the international experience in loan trading to and the Pension Fund Regulatory and Development make recommendations for the development of a secondary Authority (PFRDA) to enable broad-basing the market market for corporate loans in India. with effective participation of non-banking entities such as Foreign Portfolio Investors (FPIs), Alternate The Task Force has made several recommendations to Investment Funds (AIFs), mutual funds, insurance firms promote the development of the secondary market for and pension funds. corporate loans in India: As a first step towards the development of the secondary • Setting up of a Self-Regulatory Body (SRB) of market for corporate loans, the Reserve Bank announced in participants which will finalise detailed modalities and its Statement on Developmental and Regulatory Policies of formulate guidelines for various market participants; December 5, 2019 that it will facilitate the setting up of the • Standardisation of documentation; SRB. Accordingly, a Core Group of select banks had been constituted to establish the SRB. The registration process of • Setting up a Central Loan Contract Registry; and SRB is underway. Source: RBI. Restructuring Scheme for Micro, Small and can be shifted from Credit Risk Mitigation (CRM) Medium (MSME) Advances provider to the original counterparty, even if the counterparty was a person resident outside India, VI.19 The scheme of restructuring of accounts, if CRM benefits like shifting of exposure/risk which was allowed for stressed MSME accounts weights are not derived. Exposures thus shifted to as on January 1, 2019, was extended to the a person resident outside India will attract a accounts that were in default but ‘standard’ as on minimum risk weight of 150 per cent. The date of January 1, 2020 and continue to be classified as a applicability of the LEF guidelines to non-centrally ‘standard asset’ till the date of implementation of cleared derivatives exposures was deferred by the restructuring. The restructuring under this one year, i.e., to April 1, 2021. On account of scheme has to be implemented by December 31, COVID-19 pandemic, with a view to facilitate 2020. The detailed guidelines were issued on greater flow of resources to corporates, as a one- February 11, 2020. time measure, the limit for bank’s exposure to a Large Exposures Framework (LEF) group of connected counterparties was increased from 25 per cent to 30 per cent of the eligible VI.20 On September 12, 2019, the exposure capital base of the bank till June 30, 2021. limit of banks to a single NBFC (excluding gold International Financial Services Centre (IFSC) loan companies) was harmonised by increasing Banking Units (IBUs) the general single counterparty limit under the LEF from 15 per cent to 20 per cent of bank’s VI.21 During 2019-20, the scheme for setting up eligible capital base. On March 23, 2020, a of IBUs was amended permitting IBUs: (a) to open clarification was issued to the banks that exposure current accounts (including escrow accounts) for 134REGULATION, SUPERVISION AND FINANCIAL STABILITY their corporate borrowers subject to compliance issued in August 2019, thereby aligning them with with provisions of Foreign Exchange Management the eligibility requirements applicable for other Act (FEMA) 1999; (b) to accept fixed deposits in directors. foreign currency of tenor less than one year from Compensation of Whole Time Directors/CEOs/ non-bank entities and also repay fixed deposits Material Risk Takers and Control Function Staff prematurely without any time restrictions, and (c) VI.25 The Reserve Bank issued revised to participate in exchange traded currency compensation guidelines for whole time directors, derivatives on Rupee (with settlement in foreign CEOs, material risk takers and control function currency) listed on stock exchanges set up at staff of all private sector banks, effective April 1, IFSCs. 2020. These guidelines are in alignment with the Regional Rural Banks (RRBs) – Perpetual Debt principles of the Financial Stability Board (FSB) Instruments (PDIs) and Merchant Acquiring for sound compensation practices. Business Merger of PSBs VI.22 During 2019-20, RRBs were permitted to VI.26 In line with the Government of India issue PDIs eligible for inclusion as Tier 1 capital, scheme of amalgamation dated March 4, 2020, thus providing them an additional option for ten PSBs were merged to form four PSBs with augmenting regulatory capital funds. They were effect from April 1, 2020 (Table VI.1). Accordingly, also allowed to act as merchant acquiring banks the bank(s) that merged into another bank ceased using Aadhaar Pay-BHIM App and POS terminals. to carry on banking business and were excluded External Benchmarking of Loans from the Second Schedule of the Reserve Bank of India (RBI) Act, 1934. VI.23 All new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans Doorstep Banking Services for Senior Citizens extended by banks to Micro and Small Enterprises and Differently Abled Persons from October 1, 2019 and floating rate loans to VI.27 Banks were advised to offer doorstep Medium Enterprises from April 1, 2020, were banking services to senior citizens and differently linked to external benchmarks with the freedom to abled persons on pan India basis, by updating the choose from any of several indicated benchmarks. list of branches offering such services on websites The banks were also free to choose their spread regularly and by giving adequate publicity on the over the benchmark rate, subject to the condition Table VI.1: Merger of Some PSBs that the credit risk premium may undergo change only when the borrower’s credit assessment Bank(s) that Merged Bank into which Merged (Transferor Banks) (Transferee Bank) undergoes a substantial change, as agreed upon 1 2 in the loan contract. Allahabad Bank Indian Bank Fit and Proper Criteria for Public Sector Banks’ Oriental Bank of Commerce and Punjab National Bank United Bank of India (PSBs’) Shareholder Directors Andhra Bank and Corporation Bank Union Bank of India Syndicate Bank Canara Bank VI.24 Revised guidelines on ‘fit and proper’ Source: Government of India. criteria for shareholder directors in the PSBs were 135ANNUAL REPORT availability of such services in their public 31, 2020, as a one-time measure, such that the awareness campaigns, including policy and margins are restored by March 31, 2021, and / or charges. review the working capital sanctioned limits up to March 31, 2021, based on a reassessment of the COVID-19 Pandemic Measures working capital cycle. VI.28 In response to COVID-19 pandemic, the VI.31 These measures will not result in asset Reserve Bank instituted a number of measures to classification downgrade of the respective facilities mitigate the burden of debt servicing by borrowers, and will not be treated as a default for supervisory ensure the continuity of viable businesses, reporting and reporting to credit information maintain adequate liquidity in the system, facilitate companies. Lending institutions were advised to and incentivise bank credit flows, ease financial frame Board-approved polici.es for providing stress and enable the normal functioning of these reliefs to all eligible borrowers with full public financial markets. disclosure. VI.29 In respect of all term loans (including VI.32 The lending institutions were advised that agricultural term loans, retail and crop loans) in respect of all accounts classified as standard as outstanding as on March 1, 2020, all lending on February 29, 2020, where moratorium or institutions [Commercial Banks including Small deferment is granted, the 90-day NPA norm shall Finance Banks (SFBs), Local Area Banks (LABs), exclude the moratorium period, i.e., there would RRBs, UCBs/ State Co-operative Banks (StCBs)/ be an asset classification standstill for all such District Central Co-operative Banks (DCCBs), accounts from March 1, 2020 to August 31, 2020. AIFIs and NBFCs including HFCs] were permitted Lending institutions were advised that in respect to grant a moratorium of six months on payment of of accounts which have availed the relief provided all instalments falling due between March 1, 2020 by the Reserve Bank on March 27, 2020, they are and August 31, 2020. Likewise, in respect of required to make general provisions of not less working capital facilities sanctioned in the form of than 10 per cent of the total outstanding of such cash credit/overdraft (CC/OD), lending institutions accounts in a phased manner in two quarters, viz., were permitted to defer the recovery of interest not less than 5 per cent each, in quarters ended applied in respect of all such facilities during March 31, 2020 and June 30, 2020. Lending March 1, 2020 to August 31, 2020. Lending institutions were also advised that: (a) they are institutions were also permitted, at their discretion, permitted to adjust these provisions against the to convert the accumulated interest in case of CC/ actual provisioning requirements for slippages OD for the deferment period up to August 31, from the accounts reckoned for such provisions; 2020, into a funded interest term loan (FITL) which (b) the residual provisions at the end of the shall be repayable not later than March 31, 2021. financial year can be written back or adjusted VI.30 In respect of working capital facilities against the provisions required for all other sanctioned in the form of CC/OD to borrowers accounts; (c) till such adjustments, these facing stress on account of the pandemic, lending provisions shall not be netted from gross advances institutions were permitted to recalculate the but are to be shown separately in the balance drawing power by reducing the margins till August sheet, as appropriate; and (d) all other provisions 136REGULATION, SUPERVISION AND FINANCIAL STABILITY required to be maintained by lending institutions, VI.35 The implementation of the last tranche of including the provisions for accounts already 0.625 per cent of Capital Conservation Buffer classified as NPA as on February 29, 2020 as well (CCB) was deferred from March 31, 2020 to as subsequent ageing in these accounts, shall September 30, 2020. The activation of Counter- continue to be made in the usual manner. cyclical Capital Buffer (CCyB) was not found to be necessary. VI.33 Under the Reserve Bank’s Prudential Framework for Resolution of Stressed Assets VI.36 At the same time, banks were advised that dated June 7, 2019, SCBs (excluding RRBs), they shall not make any further dividend payouts AIFIs, Systemically Important Non-Deposit taking from profits pertaining to the financial year ended Non-Banking Financial Companies (NBFCs-ND- March 31, 2020 to conserve capital and absorb losses in an environment of heightened SI), and Deposit taking Non-Banking Financial uncertainty. This restriction will be reviewed on Companies (NBFCs-D) are required to hold an the basis of the financial position of banks for the additional provision of 20 per cent in the case of quarter ending September 30, 2020. large accounts under default, if a resolution plan has not been implemented within 210 days from VI.37 The maximum permissible period of pre- the date of such default. Recognising the shipment and post-shipment export credit challenges to resolution of stressed assets in the sanctioned by banks has also been increased current volatile environment, the above lenders from one year to 15 months, for disbursements were advised that the period from March 1, 2020 made up to July 31, 2020, in line with the permitted to August 31, 2020 may be excluded from the increase in time period for realisation and review period or, in cases where review period is repatriation of the export proceeds to India. over, the resolution period during which resolution VI.38 As an additional measure to support the may be implemented without any additional MSME sector in these uncertain times, banks provisions. were permitted to reckon the funds infused by the VI.34 The Liquidity Coverage Ratio (LCR) promoters in their MSME units, through loans requirement for SCBs was brought down from 100 availed under the Credit Guarantee Scheme for per cent to 80 per cent, with effect from April 17, Subordinate Debt for stressed MSMEs issued by 2020, to ease the liquidity position at the level of the Credit Guarantee Fund Trust for Micro and individual institutions. The requirement shall be Small Enterprises (CGTMSE), as equity/quasi equity from the promoters for debt-equity gradually restored back in two phases – 90 per computation. cent by October 1, 2020 and 100 per cent by April 1, 2021. Further, entire SLR-eligible assets held VI.39 To mitigate the difficulties in timely by banks have now been permitted to be reckoned submission of various regulatory returns to DoR, as high-quality liquid assets (HQLAs) for meeting the Reserve Bank, due to disruptions caused by LCR. The implementation of NSFR guidelines, COVID-19 pandemic, all the regulated entities which were to come into effect from April 1, 2020 (REs) were advised that such returns (required to onwards, was deferred by six months to October be submitted up to June 30, 2020) can be 1, 2020. submitted with a delay of a maximum of 30 days 137ANNUAL REPORT from the due date. However, extension was not website on June 8, 2020, for public permitted for submission of statutory returns, i.e., comments. The draft guidelines on returns prescribed under the Banking Regulation securitisation will also take into account (BR) Act 1949, RBI Act 1934, or any other Acts the recommendations of the Committee [for instance, returns related to cash reserve ratio on Housing Finance Securitisation (CRR)/statutory liquidity ratio (SLR)]. (Chairman: Dr. Harsh Vardhan), which VI.40 Due to strains on reporting requirements submitted its Report during the year. caused by COVID-19 pandemic, the relaxation of • The guidelines on prudential regulations the minimum daily maintenance of the CRR of 80 for AIFIs covering, inter alia, Basel III per cent, effective from the fortnight beginning capital framework have been prepared March 28, 2020 till June 26, 2020, was extended and are being fine-tuned. Final guidelines for a further period of three months, i.e., up to shall be issued to the AIFIs, viz., National September 25, 2020. Bank for Agriculture and Rural VI.41 Master Direction on KYC was amended, in Development (NABARD), Small Industries alignment with PML rules of the Government of Development Bank of India (SIDBI), India, pertaining to small accounts [opened for Export-Import Bank of India (EXIM Bank) those customers who are not able to furnish and National Housing Bank (NHB). Officially Valid Document (OVDs) to the banks] • Final Enabling Framework for Regulatory that remained operational initially for a period of Sandbox was placed on the website on twelve months, which could be extended for a August 13, 2019, followed by further period of twelve months provided the announcement of “Retail Payments” as account holder applied for any of the OVDs during the theme of first cohort. Although, the test the first twelve months. Post this amendment, the design for products of applicants which small accounts shall remain operational between were selected in the preliminary scrutiny April 1, 2020 and June 30, 2020 and such other periods as may be notified by the Government of has been completed, testing in live India, notwithstanding the conditions stipulated. environment has not yet commenced due The amendment was carried out to enable the to COVID-19 pandemic, since the testing Direct Benefit Transfer (DBT) to the beneficiaries’ process requires on-boarding of merchants accounts and allow the beneficiaries to withdraw and customers through personal the amount for their needs in the current situation interaction. due to COVID-19 pandemic, without causing any • It has been decided to converge the hardships due to the KYC requirements. implementation of Ind AS for AIFIs with Other Initiatives that of SCBs. VI.42 Some of the other initiatives during 2019- • Draft discussion paper on implementation 20 were as follows: of macro-prudential policies for addressing • Draft framework for Securitisation of incipient credit risk in the system is under Standard Assets was placed on the Bank’s process. 138REGULATION, SUPERVISION AND FINANCIAL STABILITY • The risk weight for consumer credit, • In order to alleviate genuine difficulties including personal loans, but excluding being faced by exporters in their production credit card receivables, was reduced to and realisation cycles, the maximum 100 per cent from 125 per cent in view of permissible period of pre-shipment and the lower stress in banks’ consumer credit post-shipment export credit sanctioned by portfolio. banks was increased from one year to 15 months, for disbursements made up to • Banks, which have been allowed to invest July 31, 2020. This is in line with the in units of Infrastructure Investment Trusts permission already granted for increase in (InvITs), were permitted to also lend to the period of realisation and repatriation of InvITs. the export proceeds to India from nine • Certain instructions issued in the past, on months to 15 months from the date of completing the process of appointment of export in respect of exports made up to Managing Director and Chief Executive July 31, 2020. Banks were also advised Officer (MD & CEO)/CEO/Part-time regarding the extension of Interest Chairperson (PTC) in the private sector Equalisation Scheme on pre- and post- banks and foreign banks in a timely shipment Rupee export credit for one year, manner, were reviewed and the i.e., up to March 31, 2021, as per ‘Declaration and Undertaking’ to be instructions of Government of India. obtained from candidate and specimen of • On a review, the enhanced borrowing limit application by bank for amendment in its of scheduled banks under the Marginal appointment related provisions as well as Standing Facility (MSF) scheme by dipping for approval of appointment/re- into the prescribed SLR increased to 3 per appointment were revised vide guidelines cent of their net demand and time liabilities issued on March 31, 2020. Further, banks (NDTL) and available to banks till June 30, were also advised of the following two 2020, was extended till September 30, changes: (a) For re-appointment of MD & 2020 and banks were permitted to continue CEO, banks will now have to submit the to access overnight funds under the MSF application to the Reserve Bank at least against their excess SLR holding as per six months, as against currently four the extant guidelines. months, before the expiry of the term of • REs have been mandated, vide circular office of the current incumbent; and (b) issued on April 20, 2020, to carry out Proposals for appointment of a new MD & ‘Money Laundering (ML) and Terrorist CEO should invariably contain a panel of Financing (TF) Risk Assessment’ exercise at least two names, as against currently periodically to identify, assess and take three names, in the order of preference effective measures to mitigate its ML/TF and should be submitted at least four risks for clients, countries/ geographic months before the expiry of the term of areas, products, services, transactions office of the current incumbent. and delivery channels. 139ANNUAL REPORT • A circular was issued on April 23, 2020 long-term bonds, the revised definition permitting banks to issue electronic cards would include housing loans, eligible to be to natural persons having Overdraft classified under priority sector lending (as Accounts that are in the nature of personal updated from time to time) and to loan without any specific end-use individuals for acquiring dwelling units restrictions, only for domestic online/non- within the prescribed threshold under the cash transactions, subject to certain affordable housing definition in the HML. conditions. Agenda for 2020-21 • Draft Comprehensive Framework for Sale VI.43 For the year ahead, the Department will of Loan Exposures has been placed on focus on the following key deliverables in respect the Bank's website for public comments of the commercial banks under Utkarsh: on June 8, 2020. • Convergence of the Reserve Bank’s • On June 11, 2020, a Discussion Paper on regulations with Basel III Standards: Draft “Governance in Commercial Banks in guidelines on credit risk and market risk India” was released by the Reserve Bank would be issued, in conformity with Basel for public comments/suggestions, to be III standards, along with the final guidelines received latest by July 15, 2020 and final on Interest Rate Risk in Banking Book guidelines/directions will be issued after (IRRBB); draft guidelines on minimum considering the feedback received. capital requirements for operational risk • On June 21, 2020, all member lending under Basel III Standardised Approach (SA) will also be issued. However, to free institutions have been permitted to assign up banks and supervisors to respond to zero per cent risk weight on credit facilities economic impact of COVID-19 pandemic, extended under Emergency Credit Line the BCBS has deferred the implementation Guarantee Scheme. The scheme was of Basel III Standards by one year to announced by Government of India for January 1, 2023; MSME borrowers. The guarantee is provided by National Credit Guarantee • Visibility in International Banking Trustee Company Ltd. (NCGTC) and is Regulation Forums: Representation to backed by an unconditional and various Basel Working Groups would be irrevocable guarantee provided by enhanced, alongside more of their Government of India. meetings being hosted in India by March 2021; • On account of inclusion of affordable housing under the harmonised master list • Greater Engagement with Emerging (HML) for infrastructure sub-sectors by Market (EM) Central Banks and Government of India, the definition of Supervisors: India’s footprints as a large lending to affordable housing was re- EM will be expanded by way of increasing aligned with that provided in the HML. engagement with peer central banks, Accordingly, for the purpose of issue of conferences in India and participating in 140REGULATION, SUPERVISION AND FINANCIAL STABILITY events hosted by other EM central banks; • Issuance of revised guidelines on SAF for and UCBs (Para VI.47); and • RegTech Solutions for Effective and • Implementation of Board of Management Focused Regulations: RegTech being a (BoM) for UCBs (Para VI.48). specialised and an emerging FinTech Implementation Status of Goals product, the proposal is to augment the Establishment of UO for UCBs capabilities in this area with support from International Finance Corporation (IFC)/ VI.46 The National Federation of Urban World Bank Group (WBG). Engagement Cooperative Banks and Credit Societies Ltd. with stakeholders to assess the level of (NAFCUB) is setting up the UO for UCBs for which adoption of RegTech tools in the financial regulatory approval was accorded on June 6, sector is being proposed. Further, it is 2019. planned to frame and issue broad Review of SAF for UCBs to Deal with Stress at an guidelines/principles to encourage Early Stage adoption of RegTech tools by REs to automate and integrate their regulatory VI.47 Under the revised guidelines on SAF for reporting requirements using Artificial UCBs, issued on January 6, 2020, initiation of Intelligence/Machine Learning (AI/ML) corrective action by the UCBs and/or supervisory and data analytics. action by the Reserve Bank is envisaged on breach of specified thresholds (triggers) in respect Cooperative Banks of specified financial parameters/indicators. The VI.44 The Reserve Bank continues to play a key guidelines intend to make SAF more effective in role in strengthening the cooperative banking bringing about improvement in weak but viable sector by fortifying the regulatory and supervisory UCBs and resolving non-viable UCBs in an framework. In this context, the DoR - Cooperative expeditious manner. Banks, which is in charge of prudential regulations of cooperative banks, took several initiatives in Guidelines Issued to UCBs on BoM 2019-20 in pursuance of the agenda set in the VI.48 Under the extant legal framework, the beginning of the year. Board of Directors (BoD) of UCBs perform both Agenda for 2019-20: Implementation Status executive and supervisory roles, with the responsibility to oversee the functioning of the Goals Set for 2019-20 UCBs as a cooperative society as well as a bank. VI.45 The Department had set out the following UCBs with deposits of `100 crore and above have goals for cooperative banks in 2019-20: been advised to constitute BoM comprising of • Establishment of an Umbrella Organisation members with special knowledge and practical (UO) for UCBs and formulation of policy experience in banking so as to facilitate framework for promoting consolidation in professional management, improve corporate UCB sector (Utkarsh) [Para VI.46 and governance and protect the interests of depositors Para VI.56]; (Box VI.2). 141ANNUAL REPORT Box VI.2 Governance in Primary (Urban) Cooperative Banks (UCBs) Problems faced by UCBs are mainly due to weak corporate focused attention to banking related activities of UCBs by governance and management issues which stem from the making suitable amendments to their bye-laws. Although very nature of the institution, i.e., the Board of Directors UCBs with a deposit size less than `100 crore and the (BoD) where “fit and proper” criteria could not be enforced Salary Earners’ Banks are exempted from constituting BoM, under the existing statutes. Since UCBs also accept public such banks may also constitute BoM, if they so desire, for deposits, the Expert Committee on Licensing of New Urban ensuring good governance practices. Cooperative Banks, 2011 (Chairman: Shri Y. H. Malegam) The BoM will exercise oversight over the banking related had recommended, inter alia, constitution of a body of functions of the UCBs, assist the BoD on formulation of professionals in the form of Board of Management (BoM) in policy and any other matters specifically delegated to it addition to the BoD, which is an elected body in UCBs. This by the BoD. The members of BoM shall meet the ‘fit and recommendation was again reiterated by the High-Powered Committee on Urban Cooperative Banks, 2015 (Chairman: proper’ criteria prescribed by the Reserve Bank. The tenure Shri R. Gandhi). of BoM shall be co-terminus with the tenure of BoD. For the UCBs with deposit size of `100 crore and above, it will also Accordingly, UCBs with deposit size of `100 crore and be mandatory to obtain prior approval of the Reserve Bank above have been advised to constitute a BoM consisting of for appointment of their Chief Executive Officer (CEO). members with special knowledge and practical experience in banking to facilitate professional management and Source: RBI. Guidelines Issued to UCBs on Reporting of Large Exposure to Single Borrower/Party and Group of Exposures to CRILC Borrowers/Parties, Large Exposures and Priority Sector Lending VI.49 SCBs, SFBs, AIFIs, NBFCs-ND-SI, NBFCs-D and Non-Banking Financial Company in VI.51 The exposure limits for single borrower/ Factoring Services (NBFC-Factors) are currently party and group of borrowers/parties of UCBs were reduced from the existing 15 per cent and 40 required to report credit exposures of `5 crore and per cent of the capital funds to 15 per cent and 25 above on CRILC. UCBs with assets of `500 crore per cent of the tier-I capital, respectively, on March and above were brought under the CRILC 13, 2020. Moreover, 50 per cent of the loan reporting framework from the quarter ending portfolio of UCBs should comprise loans up to `25 December 31, 2019 in order to bring transparency lakh or 0.2 per cent of Tier I capital, whichever is and ensure early detection of stress in large higher, subject to a maximum of `1 crore per exposures. borrower/party. The target for lending to priority ‘In Principle’ Approval for SFB License sector was increased from the existing 40 per cent to 75 per cent of adjusted net bank credit (ANBC) VI.50 Guidelines for voluntary transition of UCBs or credit equivalent amount of off-balance sheet into SFBs were issued on September 27, 2018. exposure (CEOBSE), whichever is higher, in order Shivalik Mercantile Cooperative Bank Ltd. became to further strengthen the role of UCBs in financial the first UCB to receive ‘in-principle’ approval on inclusion. Further, UCBs will be required to January 6, 2020. 142REGULATION, SUPERVISION AND FINANCIAL STABILITY contribute to Rural Infrastructure Development license was issued to Supaul District Central Fund (RIDF) with NABARD and other funds with Cooperative Bank, Supaul, Bihar on December NABARD/NHB/SIDBI/Micro Units Development 19, 2019. and Refinance Agency (MUDRA) Bank against Amalgamation of DCCBs the shortfall in their achievement of the priority VI.54 The short-term rural cooperative credit sector lending targets with effect from March 31, structure in India consists of a three-tier structure, 2021, thereby harmonising the guidelines in this with State Co-operative Banks (StCBs) as the regard with those for SCBs. apex institution in each state, DCCBs operating at Amendments to the BR Act, 1949 (As Applicable the intermediate (district) level and Primary to Cooperative Societies) Agricultural Credit Societies (PACS) at the base VI.52 With a view to improving the quality of (village) level. The structure, however, varies from management and governance in co-operative state to state, with some states having a two-tier banks and to ensure more effective regulation, co-operative credit structure comprising only thereof, by the Reserve Bank, Government of StCBs and PACS. Based on the recommendations India has promulgated the BR (Amendment) of the Expert Committee constituted by the Ordinance, 2020 on June 26, 2020, amending Reserve Bank in 2012 (Chairman: Shri Prakash certain sections of the BR Act, 1949, thereby Bakshi), some state governments have found a bringing additional areas of functioning of two-tier structure more effective. In August 2017, cooperative banks under the regulatory purview of the government of Kerala had proposed for the Reserve Bank. The major provisions amended amalgamation of its fourteen DCCBs with Kerala through the ordinance pertain to areas such as State Cooperative Bank (KStCB) and on October non-applicability of the Act to certain types of co- 3, 2018, the Reserve Bank had accorded in- operative societies, governance/ management of principle approval for the amalgamation, cooperative banks including certain restrictions on contingent to fulfilment of conditions stipulated by whole-time directors, approval of appointment/ it and additional conditions imposed by NABARD. removal of statutory auditors (SAs), time allowed The final approval for the amalgamation (except for disposal of non-banking assets, providing Malappuram DCCB) was given by the Reserve additional avenues for raising capital, voluntary/ Bank on October 7, 2019, subject to approval by compulsory amalgamation, preparation of scheme the Hon’ble High Court of Kerala and infusion of of reconstruction and winding up by the concerned additional capital by the government of Kerala, to High Court at the instance of the Reserve Bank. ensure a capital to risk-weighted assets ratio The Ordinance has come into force presently for (CRAR) of 9 per cent on an ongoing basis. UCBs by notification in the official Gazette on Accordingly, thirteen DCCBs were amalgamated June 29, 2020. with the KStCB on November 29, 2019. Scheduling and Licensing of Cooperative Banks VI.55 ‘In-principle’ approval has also been VI.53 The Meghalaya Cooperative Apex Bank granted on June 8, 2020 to the government of Ltd. was included in the Second Schedule of the Punjab for amalgamation of DCCBs in the state RBI Act, 1934 on August 30, 2019. Banking with the Punjab State Cooperative Bank, subject 143ANNUAL REPORT to fulfilment of the conditions stipulated by the • Harmonisation of NBFC categories Reserve Bank and additional conditions, if any, (Utkarsh) [Para VI.60]; and imposed by NABARD. • Issuance of Fair Practices Code (FPC) for Other Initiatives Asset Reconstruction Companies (ARCs) [ParaVI.61]. VI.56 It is envisaged to bring out a Discussion Implementation Status of Goals Paper on Formulation of Policy Framework for promoting consolidation in the UCB sector, which Harmonisation of NBFC Categories is presently under process. VI.60 Three categories of NBFCs, viz., Asset Agenda for 2020-21 Finance Companies (AFCs), Loan Companies (LCs) and Investment Companies (ICs), were VI.57 The agenda for cooperative banks in 2020- merged into a new category called NBFC- 21 would include the following: Investment and Credit Company (NBFC-ICC). • Refinement of the regulatory framework Feasibility of merging other categories of NBFCs for cooperative banks with a view to was also examined and it was decided to continue strengthening the sector and protecting with the status quo for now. the interest of the depositors and Issuance of FPC for ARCs borrowers; VI.61 With the objective of ensuring transparency • Bringing out a discussion paper on and fairness in the operations of ARCs, FPC strengthening the regulatory framework providing minimum regulatory expectations has for capital adequacy in UCBs; been issued while allowing ARCs’ Board to enhance its scope and coverage. The FPC, inter • Putting in place a SAF for the StCBs and alia, covers transparent and non-discriminatory DCCBs; and practices for acquisition as well as sale of assets, • Faster resolution of weak UCBs which are reasonableness of fees and grievance redressal under All-Inclusive Directions. mechanism. Liquidity Risk Management Framework Non-Banking Financial Companies (NBFCs) VI.62 The Reserve Bank revised the guidelines VI.58 NBFCs play an important role in providing on liquidity risk management to strengthen the credit by complementing the efforts of commercial asset-liability management (ALM) framework of banks, providing last mile financial intermediation NBFCs, including core investment companies and catering to niche sectors. The DoR - NBFC is (CICs). The revised guidelines specify granular entrusted with the responsibility of regulating the maturity buckets and tolerance limits, and adoption NBFC sector. of liquidity risk monitoring tools. NBFCs are Agenda for 2019-20: Implementation Status required to monitor liquidity by employing the stock approach, in addition to the measurement of Goals Set for 2019-20 structural and dynamic liquidity while adopting the VI.59 The Department had set out the following principles of sound liquidity risk management, goals in respect of NBFCs in 2019-20: stress testing and measures for diversification of 144REGULATION, SUPERVISION AND FINANCIAL STABILITY funding. The framework requires maintenance of will go a long way in realising the full potential of a liquidity buffer in terms of LCR starting at 50 per the AA ecosystem. cent for all NBFCs-D and NBFCs-ND with an Review of Limits for Lenders on Non-Banking asset size of `10,000 crore and above, and 30 per Financial Company - Peer to Peer Lending cent for NBFCs-ND with an asset size of `5,000 Platform (NBFC-P2P) crore and above, but less than `10,000 crore, from December 1, 2020 to reach 100 per cent by VI.65 The aggregate exposure of a lender to all December 1, 2024. borrowers at any point of time across all Peer to Peer Lending (P2P) platforms was increased from Review of Household Income and Lending Limits `10,00,000 to `50,00,000. Escrow accounts to be for Non-Banking Financial Company – Micro operated by bank-promoted trustee(s) for transfer Finance Institutions (NBFC-MFIs) of funds need not be mandatorily maintained with VI.63 NBFC-MFIs play a key role in delivering the bank which has promoted the trustee. credit to those at the bottom of the economic pyramid. In view of their importance in a growing Temporary Relaxation of Minimum Holding Period economy, the household income limits for (MHP) Requirement borrowers of NBFC-MFIs were raised from the VI.66 MHP requirement for originating NBFCs current level of `1,00,000 for rural areas and was relaxed in November 2018 in respect of loans `1,60,000 for urban/semi urban areas to `1,25,000 of original maturity above 5 years, in order to and `2,00,000, respectively. Moreover, lending encourage NBFCs to securitise/assign their limit for NBFC-MFIs was increased from `1,00,000 eligible assets. This dispensation, given initially to `1,25,000 per eligible borrower. for a period of six months, i.e., up to May 2019, Technical Specifications for all Participants of the was extended till December 31, 2019 and further Account Aggregator (AA) Ecosystem till June 30, 2020. VI.64 The Non-Banking Financial Company - Implementation of Ind AS Account Aggregator (NBFC-AA) consolidates VI.67 Implementation guidelines on specific financial information of a customer held with prudential aspects of Ind AS for NBFCs and ARCs different financial entities spread across financial sector regulators and using different information have been issued, in order to promote a high technology (IT) systems and interfaces. A set of quality and consistent implementation as also to core technical specifications based on Application facilitate comparison and better supervision. The Programme Interface (API) framed by the Reserve implementation guidelines cover governance Bank Information Technology Private Ltd. (ReBIT) framework, prudential floor for expected credit has been prescribed for the participants of the AA losses including impairment reserve, certain ecosystem regulated by the Reserve Bank, principles for computation of regulatory capital namely NBFC-AA, financial information providers and regulatory ratios, etc. and financial information users, in order to ensure Regulation of HFCs secured, authorised and seamless movement of data. The open API based specifications framed VI.68 Under the provisions of the NHB Act, 1987, for movement of data and consent architecture HFCs have been regulated and supervised by the 145ANNUAL REPORT NHB. Over time, the mandate of the NHB widened Loans Sourced by Banks and NBFCs over Digital and it assumed the role of refinancer and lender to Lending Platforms: Adherence to FPC and the sector. Recognising the conflicting aspects of Outsourcing Guidelines the mandate, the Union Budget 2019-20 returned VI.71 It has been observed that many digital regulatory authority over the housing finance platforms have emerged in the financial sector sector to the Reserve Bank on August 9, 2019, claiming to offer hassle free loans to retail with supervision and grievance redressal individuals, small traders, and other mechanisms retained with the NHB. borrowers. Banks and NBFCs are also seen to be engaging digital platforms to provide loans to their Income Recognition, Asset Classification and customers. In addition, some NBFCs have been Provisioning Norms registered with Reserve Bank as ‘digital-only’ VI.69 On February 7, 2020, it was decided to lending entities while some NBFCs are registered harmonise the guidelines for deferment of DCCO to work both on digital and brick-mortar channels for projects of CRE sectors with those of non- of credit delivery. Thus, banks and NBFCs are infrastructure sector exposures held by SCBs observed to lend either directly through their own (excluding RRBs) and SFBs. These guidelines digital platforms or through a digital lending were extended mutatis mutandis to NBFCs. platform under an outsourcing arrangement. The lending platforms tend to portray themselves as Insolvency Resolution and Liquidation lenders without disclosing the name of the bank/ Proceedings of NBFCs NBFC at the backend, as a consequence of which, VI.70 Government of India, vide its notification customers are not able to access grievance dated November 15, 2019, has expanded the redressal avenues available under the regulatory applicability of Insolvency and Bankruptcy Code framework. In order to address the concerns emanating from non-transparency of transactions (IBC) to cover systemically important Financial and violation of extant guidelines on outsourcing Service Providers (FSPs) other than banks. This of financial services and FPC issued to banks and special framework under IBC is essentially aimed NBFCs, the Reserve Bank has reiterated the need at serving as an interim mechanism to deal with to adhere to the guidelines in this regard in letter any exigency, pending introduction of a full- and spirit. fledged enactment to deal with financial resolution Other Initiatives of banks and other systemically important FSPs. Subsequently, the Government of India, vide VI.72 Some of the other initiatives during 2019- notification dated November 18, 2019, has 20 were as follows: empowered the Reserve Bank to initiate the • The Reserve Bank clarified that NBFCs Corporate Insolvency Resolution Process (CIRP) shall not charge foreclosure charges/pre- against NBFCs including HFCs with asset size of payment penalties on any floating rate Rs.500 crore or more. In December 2019, the term loan sanctioned to individual Reserve Bank initiated CIRP against one borrowers for purposes other than problematic HFC under this framework. business, with or without co-obligant(s). 146REGULATION, SUPERVISION AND FINANCIAL STABILITY • NBFCs have been permitted to pool gold • Scale-based Approach to Regulation of jewellery from various branches in a NBFCs - with a view to identify a small set district and auction it at any location within of ‘systemically significant’ NBFCs, which the district, if the first auction has failed. can potentially impact financial stability as • Exemption granted to Housing Finance also to adopt a graded regulatory Institutions from the provisions of Chapter framework for the NBFCs; IIIB of the RBI Act (except Section 45-IA) • Issuance of Master Directions for HFCs - has been withdrawn with effect from proposals for defining the term housing November 11, 2019. finance, introduction of principal business • In order to address the concerns related to criteria, qualifying assets for HFCs and transparency in bilateral transactions and classification of HFCs as systemically also for better price discovery, ARCs have important, etc., were placed on the Bank's been advised that acquisition of financial website on June 17, 2020 for public assets from their lenders, sponsors or comments and, the revised regulations group entities should be done through will be issued after receipt of such auctions, which are conducted in a comments; and transparent manner, on arm’s length basis • Comprehensive Review of CIC Guidelines- and at prices determined by market forces. in view of the recent failure of a CIC and its Agenda for 2020-21 adverse impact on the non-banking VI.73 During 2020-21, the Department will financial sector, the Reserve Bank pursue the following goals in respect of NBFCs: constituted a Working Group (WG) to • Review of Regulatory Arbitrage between review the regulatory and supervisory Banks and NBFCs - with a view to framework of CICs, whose harmonise the regulations of NBFCs with recommendations are set to shape the those of banks (Utkarsh); overall policy approach to CICs (Box VI.3). Box VI.3 Core Investment Companies (CICs) Recent developments have focused attention on the business lines are assessed in a formal and structured organisational structure of CICs, existence of multiple CICs manner. in a group and overleveraging. The Working Group (WG) • CICs would prepare a consolidated financial statement constituted on July 3, 2019 to review the regulatory and for the group, and subject the same to a limited review supervisory framework of CICs (Chairman: Shri Tapan Ray) by statutory auditors. has made the following recommendations: • Independent directors may be appointed on the CICs’ • Capital contribution made by one CIC into any other Board for un-biased decision making; CICs should CIC is to be excluded from the calculation of adjusted net worth (ANW) of the investing CIC to address the constitute Audit Committee of the Board (ACB) and issue of over-leveraging. Nomination and Remuneration Committee (NRC). • The number of layers of CICs in a group, including the In essence, the recommendations seek to strike a balance parent CIC, could be limited to two only. between business requirements and the need for a responsible governance framework. • Setting up of a Group Risk Management Committee (GRMC) so that risks emanating across multiple Source: RBI. 147ANNUAL REPORT 4. SUPERVISION OF FINANCIAL dashboards, summary dossiers, entity-level INTERMEDIARIES reports and technological solutions are envisaged to be part of the revamped data warehouse system Department of Supervision (DoS) of the Reserve Bank – the Centralised Information Commercial Banks and Management System (CIMS). VI.74 In the banking area, a number of measures Process Audit were taken by DoS - Banks to sharpen the VI.78 As part of continuous monitoring supervisory oversight of SCBs (excluding RRBs), framework, process audit of critical processes in LABs, Payments Banks (PBs), SFBs, Credit Information Companies and AIFIs during the year. the banks has been embedded into existing systems. Agenda for 2019-20: Implementation Status Concurrent and Statutory Audit System Goals Set for 2019-20 VI.79 The guidelines on concurrent audit system VI.75 The Department had set out the following were amended giving discretion to banks to goals for supervision of SCBs during 2019-20 determine the scope and coverage of concurrent under Utkarsh: audit within the broad prescribed parameters. • Effective risk discovery and proactive off- This was necessitated considering the differing site supervision mechanism (Para VI.76 – levels of centralisation in banks, the diverse VI.77); nature of activities undertaken by banks and • Improved audit system in banks (Para commencement of operations by SFBs and PBs. VI.78 – VI.80); and VI.80 A web-based Auditor Allocation System • Enhanced fraud risk management (Para for appointment of statutory branch auditors of VI.81 – VI.84). PSBs was put in place. This application is expected to reduce the turnaround time in branch auditors’ Implementation Status of Goals appointments. Off-site Surveillance Mechanism Frauds Analysis VI.76 A system-wide analysis of the banking VI.81 The total cases of frauds (involving `1 lakh system, capturing major risk patterns, was and above) reported by banks/FIs increased by 28 strengthened during 2019-20. The Department started carrying out a detailed “Quarterly Off-site per cent by volume and 159 per cent by value Surveillance with Sharper Focus and Pro-active during 2019-20 (Table VI.2). The date of Indicators” for banks from September 2019, on occurrence of these frauds are, however, spread identification of outliers for deeper examination, over several previous years. which was replicated for other SEs too. VI.82 Frauds have been predominantly occurring VI.77 During the year, the frequency of data in the loan portfolio (advances category), both in collected as part of CRILC was increased to terms of number and value. There was a monthly from quarterly, with data on defaults being concentration of large value frauds, with the top collected on a weekly basis. Interactive fifty credit-related frauds constituting 76 per cent 148REGULATION, SUPERVISION AND FINANCIAL STABILITY Table VI.2: Fraud Cases – Bank Group-wise (Amount in ` crore) Bank Group/Institution 2018-19 2019-20 April-June 2019 April-June 2020 Number of Amount Number of Amount Number of Amount Number of Amount Frauds Involved Frauds Involved Frauds Involved Frauds Involved 1 2 3 4 5 6 7 8 9 Public Sector Banks 3,568 63,283 4,413 1,48,400 1,133 31,894 745 19,958 (52.5) (88.5) (50.7) (79.9) (56.0) (75.5) (47.8) (69.2) Private Sector Banks 2,286 6,742 3,066 34,211 601 8,593 664 8,009 (33.6) (9.4) (35.2) (18.4) (29.7) (20.3) (42.6) (27.8) Foreign Banks 762 955 1026 972 250 429 127 328 (11.2) (1.3) (11.8) (0.5) (12.4) (1.0) (8.2) (1.1) Financial Institutions 28 553 15 2,048 4 1,311 3 546 (0.4) (0.8) (0.2) (1.1) (0.2) (3.1) (0.2) (1.9) Small Finance Banks 115 8 147 11 25 1 16 2 (1.7) (0.0) (1.7) (0.0) (1.2) (0.0) (1.0) (0.0) Payments Banks 39 2 38 2 10 0 3 0 (0.6) (0.0) (0.4) (0.0) (0.5) (0.0) (0.2) (0.0) Local Area Banks 1 0.02 2 0.43 1 0 0 0 (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) Total 6,799 71,543 8,707 1,85,644 2,024 42,228 1,558 28,843 (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) Note: 1. Figures in parentheses represent shares in total (in per cent). 2. The figures reported by banks & FIs are subject to change based on revisions filed by them. 3. Amounts involved do not reflect the amount of loss incurred. Depending on recoveries, the loss incurred gets reduced. Furthermore, the entire amount involved is not necessarily diverted. Source: RBI Supervisory Returns. of the total amount reported as frauds during audit reports and lack of decision making in Joint 2019-20. Incidents relating to other areas of Lenders' meetings account for delay in detection banking, viz., off-balance sheet and forex of frauds. The EWS mechanism is getting transactions, fell in 2019-20 vis-à-vis the previous revamped alongside strengthening of the year (Table VI.3). concurrent audit function, with timely and VI.83 While the frauds framework focuses on conclusive forensic audits of borrower accounts prevention, early detection and prompt reporting, under scrutiny. the average lag in detection of frauds remains Advisory Board for Banking Frauds (ABBF) long. The average lag between the date of VI.84 The ABBF was created in consultation occurrence of frauds and their detection by banks/ with the Central Vigilance Commission (CVC). FIs was 24 months during 2019-20. In large The ABBF functions as the first level of examination frauds, i.e., `100 crore and above, however, the of all large value fraud cases before average lag was 63 months. The sanction of the credit facility in many of these accounts was much recommendations/references are made to the older. Weak implementation of Early Warning investigating agencies by PSBs. The jurisdiction Signals (EWS) by banks, non-detection of EWS of ABBF would be confined to those cases during internal audits, non-cooperation of involving the level of General Manager (GM) of borrowers during forensic audits, inconclusive banks and above. 149ANNUAL REPORT Table VI.3: Fraud Cases – Area of Operations (Amount in ` crore) Area of Operation 2018-19 2019-20 April-June 2019 April-June 2020 Number of Amount Number of Amount Number of Amount Number of Amount Frauds Involved Frauds Involved Frauds Involved Frauds Involved 1 2 3 4 5 6 7 8 9 Advances 3,604 64,548 4,610 1,82,051 1,157 40,373 787 28,545 (53.0) (90.2) (52.9) (98.1) (57.2) (95.6) (50.5) (99.0) Off-balance Sheet 33 5538 34 2445 9 1,739 4 105 (0.5) (7.7) (0.4) (1.3) (0.5) (4.1) (0.3) (0.4) Forex Transactions 13 695 8 54 0 0 1 0 (0.2) (1.0) (0.1) (0.0) (0.0) (0.0) (0.1) (0.0) Card/Internet 1,866 71 2,678 195 555 29 530 27 (27.5) (0.1) (30.8) (0.1) (27.4) (0.1) (34.0) (0.1) Deposits 593 148 530 616 127 66 115 107 (8.7) (0.2) (6.1) (0.3) (6.3) (0.2) (7.4) (0.4) Inter-Branch Accounts 3 0 2 0 0 0 2 0 (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.1) (0.0) Cash 274 56 371 63 75 4 52 15 (4.0) (0.1) (4.3) (0.0) (3.7) (0.0) (3.3) (0.0) Cheques/DDs, etc. 189 34 202 39 47 5 27 32 (2.8) (0.1) (2.3) (0.0) (2.3) (0.0) (1.7) (0.1) Clearing Accounts, etc. 24 209 22 7 11 6 0 0 (0.4) (0.3) (0.2) (0.0) (0.5) (0.0) (0.0) (0.0) Others 200 244 250 174 43 6 40 12 (2.9) (0.3) (2.9) (0.1) (2.1) (0.0) (2.6) (0.0) Total 6,799 71,543 8,707 1,85,644 2,024 42,228 1,558 28,843 (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) DDs: Demand drafts. Note: 1. Figures in parentheses represent shares in total (in per cent). 2. The above data is in respect of frauds of `1 lakh and above reported during the period. Source: RBI Supervisory Returns. Other Initiatives practices in business intelligence and data analytics for risk modelling that would VI.85 Some of the other initiatives during 2019- deliver improved inputs to supervisory 20 were as follows: managers. • A standing committee on analytics • Apart from governance, the comprising experts from eminent macroeconomic, environmental and socio- institutions such as Indian Institute of economic factors can impact the health of Technology (IIT), Indian Institute of financial system. Hence, inclusion of Management (IIM), Indian Statistical disclosures based on Environment, Social Institute (ISI) and Institute for Development and Governance (ESG) principles in the and Research in Banking Technology integrated supervisory framework would (IDRBT) was set up to engage in adopting greatly facilitate consolidated supervision industry standards in SupTech, best of financial conglomerates (Box VI.4). 150REGULATION, SUPERVISION AND FINANCIAL STABILITY Box VI.4 Environment, Social and Governance (ESG) Policy The origin of ESG policy can be traced to the United Nations disclosure norms by corporates on ESG factors, and (UN) inviting chief executive officers (CEOs) of major strengthening corporate governance. China Securities financial institutions in 2004 to participate in an initiative to Regulatory Commission (CSRC) has directed listed integrate ESG factors into capital markets. In 2006, the UN companies to assess and disclose ESG risks by 2020. launched six Principles of Responsible Investment (PRI), Initiatives in India encouraging investors to embed ESG factors in their investment practices and create a sustainable global In India, the Reserve Bank took the lead in 2007 by issuing financial system. In more recent times, ESG-based guidelines on Corporate Social Responsibility, Sustainable investment is seen as responsible investment, and ESG Development and Non-financial Reporting (Chakrabarty, principles are being factored into mainstream investment 2011). In 2009, the Ministry of Corporate Affairs (MCA) decisions. recommended that all corporates formulate a Corporate At the basic level, ESG factors ascertain the long-term Social Responsibility (CSR) policy consistent with National sustainability of firms in the face of environmental Voluntary Guidelines on Environment, Social and Economic vulnerabilities such as climate change risks that negatively responsibilities of corporates. Initiatives by the Securities impact the financial sector through two broad channels, and Exchange Board of India (SEBI) based on viz., physical risks (arising from specific weather events recommendations of the Committee on Corporate and long-term climate change) and transition risks Governance (Chairman: Shri Uday Kotak) have also (emanating from the efforts taken to address the climate contributed to fostering the culture of ESG investing in change). The fallout could include significant deterioration India. A few other initiatives include launch of Morgan of asset quality of borrowers in affected geographical Stanley Capital International (MSCI) India, the ESG Leaders zones; the impact on business models due to governmental/ societal response to climate change; increase in claims due Index in 2013 and Bombay Stock Exchange (BSE) and to natural calamities, with implications for the profitability of National Stock Exchange (NSE) becoming a part of UN insurance firms; and long-term liquidity effects. Sustainable Stock Exchanges Initiative. Governments, central banks and other regulators across The Way Forward many countries have undertaken the adoption and The lack of consistent methodologies, high cost of reporting disclosures of ESG principles for their financial and non- and complicated review procedures make it challenging for financial entities. In December 2015, the Financial Stability corporates to incorporate ESG criteria in their business Board established a Task Force on Climate-related Financial Disclosures (TCFD) with the objective of models. Given that the impact of climate change on India is developing a climate-related financial risk disclosure expected to be one of the severest globally, the need for an framework for corporates. The United Kingdom’s (UK’s) appropriate framework to identify, assess and manage Prudential Regulation Authority (PRA) has issued guidelines financial risks arising out of climate risk has become an asking financial institutions to comply with the TCFD imperative. Central banks and regulators need to provide guidelines on a voluntary basis. The ‘Central Banks and leadership in the propagation of the ESG principles through Supervisors Network for Greening the Financial System’ the standardisation of the ESG investment terminology, (NGFS) was established in December 2017. As on July 24, design of a standard disclosures format for firms, and by 2020, 69 central banks and regulators have joined the incorporating ESG principles in financial stability NGFS. Six recommendations have been made by the assessments. network for central banks, supervisors, policy makers and financial institutions to enhance their role in the greening of References: the financial system and the managing of environment and 1. NGFS (2018), 'A Call for Action – Climate Change as a climate-related risks. In 2018, the European Commission Source of Financial Risk.' came up with an action plan to promote sustainable growth 2. Chakrabarty, K. C. (2011), 'Non-financial Reporting – which included fostering sustainable finance, strengthening What, Why and How – Indian Perspective.' financial stability by embedding ESG principles in investment decision models, incorporating sustainability 3. Financial Times (2019), 'Central Banks Tune into metrics in credit ratings and research, strengthening Climate Change', October 18. 151ANNUAL REPORT Agenda for 2020-21 • Development of high frequency reports for early assessment of deficiencies and VI.86 The Department has identified the following timely supervisory action (Para VI.89); goals for supervision of SCBs in 2020-21: • Making UCBs core banking solutions • A detailed prescriptive framework will be (CBS) compliant (Para VI.90); introduced, covering the roles and authority of the Chief Compliance Officer • Implementation of CFR (Para VI.91); and (CCO) of a bank, to bring uniformity in • Strengthening the Cyber Security approach besides aligning the expectations Monitoring Mechanism and cyber security on CCO with best practices (Utkarsh); related supervision of cooperative banks • Assessment of risk and compliance culture (Para VI.92). and business strategy of SCBs to Implementation Status of Goals strengthen the health of the financial system, with special attention to the unique Early Assessments of Deficiencies and Timely risks posed by climate change and Supervisory Action implications for the supervisory framework VI.89 A model was developed for early (Utkarsh); and assessment of deficiencies in the cooperative • The Department will further strengthen the banking sector based on application of stress to process of collecting supervisory data selective financial parameters. The banks relating to KYC/anti money laundering indicating weaknesses were identified and pre- (AML), which would facilitate better risk emptive measures were taken to address the discovery, risk assessment and Risk weakness in a timely manner. Based Supervision (RBS) processes in Making UCBs CBS Compliant respect of KYC/AML supervision, and the VI.90 As on June 30, 2020, 1,529 (99.4 per cent) preparation of a model to risk profile the out of 1,538 UCBs, had implemented CBS. 3 out banks for carrying out risk-based KYC/ of the remaining 9 UCBs are under All-Inclusive AML inspection. Directions (negative net worth). Only 6 banks with Urban Cooperative Banks (UCBs) positive net worth remain, that need to complete VI.87 In the cooperative institutions space, DoS CBS implementation. - Cooperative Banks undertook periodic on-site CFR for UCBs and continuous off-site monitoring of UCBs during the year to ensure the development of a safe and VI.91 A CFR for UCBs was developed in 2019- well-managed cooperative banking sector. 20 and the User Approval Test (UAT) was completed. Workshops on Fraud Risk Agenda for 2019-20: Implementation Status Management (FRM) and reporting by banks with Goals Set for 2019-20 a focus on improving the reporting quality and VI.88 The Department had set out the following effective usage of CFR were conducted in Mumbai, goals for supervision of UCBs in 2019-20 under New Delhi, Kolkata, Chennai, Bengaluru, and Utkarsh: Thiruvananthapuram. A separate workshop for 152REGULATION, SUPERVISION AND FINANCIAL STABILITY scheduled cooperative banks on reporting issues action plans/targets which are monitored was also conducted in the College of Agricultural closely. Banking (CAB), Pune. Agenda for 2020-21 Cyber Security Related Measures VI.94 The Department has identified the following VI.92 A comprehensive Cyber Security goals for supervision of UCBs in 2020-21: Framework for UCBs was formulated in December • Introduction of a differentiated supervision 2019, based on a graded approach. The UCBs mechanism for select UCBs (Utkarsh); have been categorised into four levels, based on • Integration of CBS modules of UCBs for all their digital depth and interconnectedness in the core functions; modules to be automated payment systems landscape, digital products for effective supervision (Utkarsh); offered by them and assessment of cyber security risk. • Utilising CRILC reporting for the UCB sector for enhanced supervisory Other Initiatives examination (Utkarsh); and VI.93 Some of the other initiatives during 2019- • Adapting the inspection process of UCBs 20 were as follows: to the changing needs of the sector • The CRILC has been a key component of focusing on size and periodicity. big supervisory data in the Reserve Bank. Non-Banking Financial Companies (NBFCs) A separate CRILC platform was created to cover large-sized UCBs (with assets of VI.95 With regard to NBFCs, DoS - NBFCs `500 crore and above), effective from the monitored the entities (excluding HFCs) registered with the Reserve Bank with the objective of quarter ended December 2019. protecting the interests of depositors and • The returns submitted by UCBs through customers, while ensuring financial stability. the eXtensible Business Reporting Agenda for 2019-20: Implementation Status Language (XBRL) system were brought under centralised manner of monitoring Goals Set for 2019-20 from April 1, 2019 to enhance data analytic VI.96 The Department had set out the following assessments. goals for supervision of NBFCs for 2019-20 under • As part of the handholding exercise, the Utkarsh: Department initiated the process of holding • Integrated off-site monitoring system for meetings/interactive sessions with NBFCs (Para VI.100 - VI.101); Chairman/CEOs/Directors of weak and • Interaction with other stakeholders (Para vulnerable UCBs so as to discuss identified VI.102); and vulnerabilities/ weaknesses/ supervisory concerns and action to be initiated by the • Direct submission of Annual Reports by banks to address these issues. These SAs to the Reserve Bank’s database (Para Banks were given calibrated time-bound VI.104). 153ANNUAL REPORT Implementation Status of Goals off-site surveillance and SAs on an integrated platform. Consistent data quality enables the Strengthening On-Site Supervision identification of early warning signals of stress in VI.97 Strengthening on-site supervision of the SEs. NBFCs during the year included greater coverage VI.101 A new XBRL software has been developed of CICs and government owned companies; and to improve data quality through in-form and cross- incisive on-site supervision of smaller NBFCs with form validations, provisions for auto calculation of an event-based approach. This led to initiation of sub-totals and totals to obviate human error in enforcement action against several non-compliant reporting, and the generation of variance reports NBFCs and cancellation of Certificates of to check data consistency across time as well as Registration of 120 NBFCs during 2019-20. between returns. All returns for NBFCs have been VI.98 The top 50 NBFCs (representing 76 per revised and rationalised from the present 21 to 19 cent of the asset size of the NBFCs) are closely in order to deepen and widen the information and intensively monitored by the Reserve Bank, being obtained. The Department also developed including through deep dives into their books of on-going surveillance frameworks which accounts and avoiding slippages. extensively use data available under off-site supervision. The frequent usage of such data Supervisory Structure and Processes (Use Test) will help in improving data quality VI.99 The Reserve Bank has been empowered further. to remove the Directors of NBFCs, other than Engagement with Stakeholders government-owned entities, to supersede their boards and appoint administrators through VI.102 Engagement with stakeholders of the insertion of new sections 45-ID and 45-IE in the NBFC sector, including their SAs, CRAs, other RBI Act, 1934 and through the new section regulators, banks and mutual funds facilitated the 45MAA, to remove or debar an auditor for a early identification of emerging risks in the sector maximum period of three years with a view to to enable prompt supervisory intervention. strengthening the governance of NBFCs. The VI.103 The Sachet portal, which facilitates lodging Reserve Bank may also frame schemes for of complaints related to deposits/schemes of amalgamation, reconstruction and splitting of various companies and serves as a source of NBFCs into different units. Monitoring of related market intelligence (MI), was made available in 11 parties of NBFCs has been strengthened by regional languages, in addition to Hindi and inserting section 45 NAA in the RBI Act, 1934, English. This has widened the coverage for receipt directing group companies of NBFCs to furnish of information on Ponzi schemes and deposit financial statements. The quantum of penalties collection by unauthorised bodies. applicable on NBFCs has been raised substantially Other Initiatives too. VI.104 A template designed for SAs that enables Data Quality and Consistency them to directly upload the audited data to the VI.100 The submission of returns by NBFCs using Reserve Bank’s database through XBRL platform, the XBRL platform was formalised. This will make will be activated for submission of audited data available data received from on-site inspection, from the financial year 2020-21 onwards. The 154REGULATION, SUPERVISION AND FINANCIAL STABILITY initiative is expected to facilitate benchmarking of • Integration of supervisory departments financials of various NBFCs. and institution of a dedicated and specialised cadre of officers for ensuring a Agenda for 2020-21 state-of-the-art supervisory framework VI.105 The Department has identified the following (Para VI.108 - VI.109); goal for supervision of NBFCs in 2020-21 under • Strengthening on-site supervision, off-site Utkarsh: surveillance and MI (Para VI.111 - VI.112); • Steps will be taken to improve effectiveness of the supervision and monitoring of • Development of an Integrated Compliance NBFCs by (i) ascertaining the quality of Management and Tracking System implementation of Ind-AS and subsequent (ICMTS) [Para VI.116]; and regulatory guidance/directions; (ii) • Strengthening Cyber Security Monitoring strengthening MI on NBFCs to assess the Mechanism (Para VI.117 - VI.118). movement of financial parameters/market Implementation Status of Goals outlook of NBFCs and related parties on an ongoing basis; (iii) promoting a strong Unification of Supervisory Departments compliance and risk culture amongst VI.108 The supervision function was integrated NBFCs, and (iv) weeding out NBFCs not under a unified DoS with effect from November 1, compliant with the Reserve Bank’s 2019, by merging all supervisory departments, directions with respect to maintenance of viz., Department of Banking Supervision (DBS), adequate net owned funds (NOF) and Department of Co-operative Banking Supervision returns filing. (DCBS) and Department of Non-Banking Supervisory Measures for Supervision (DNBS), into one Department. The All Supervised Entities (SEs) objective is to develop a holistic approach for the VI.106 A unified DoS has been operationalised in supervision of REs so as to address growing which the supervision of banks, UCBs and NBFCs complexities, including size and inter- are undertaken in a holistic manner under one connectedness, as also to deal more effectively umbrella Department. This is intended to address with potential systemic risks from supervisory inter-institutional issues on regulatory/supervisory arbitrage and information asymmetry. This arbitrage, information asymmetry and redesigning will establish a graded supervisory interconnectedness. A number of measures were approach and a more effective consolidated taken to sharpen the intensity of on-site supervision of financial conglomerates. examinations while developing a proactive off-site Supervisory Structure and Processes surveillance framework for the SEs taken together. VI.109 A horizontal Risk Specialist Division was Agenda for 2019-20: Implementation Status created in the Department to create a specialised Goals Set for 2019-20 wing to support risk discovery in an SE and to VI.107 The Department had set out the following strengthen off-site supervisory bandwidth. A supervisory goals for all SEs in 2019-20 under virtual College of Supervisors (COS) was set up Utkarsh: under the aegis of the RBI Academy for capacity 155ANNUAL REPORT building among supervisory examiners. Its first group; cognition gap, if any; ‘smell distress’ early; online course was held on May 22, 2020. Areas of and take timely proactive action. focus include research and modelling for Macro-Stress Tests supervision; microdata analytics for improved VI.113 The Department has been conducting transaction testing; KYC/AML for better supervisory stress tests since 2013 to assess the compliance by the SEs; risk and compliance impact of shocks to the portfolios of banks under culture and business strategy for improved adverse scenarios, while also factoring in governance practices in the SEs; and extension of supervisory heuristics. In 2018, a revised top- the concept of a designated Senior Supervisory down stress-testing model was developed in Manager (SSM), which started from banks with collaboration with the World Bank. Further implementation of RBS, to all SEs. improvements include a revised credit-risk stress Separate Structure for KYC/AML Risk test incorporating a set of three panel-data econometric models linking the real and financial VI.110 A separate and specialised structure for sectors; reverse stress tests to assess liquidity KYC/AML risk based supervision has been risk; a new stress test to analyse large exposures created to supervise all SEs. at the system level; and a new duration-based Proactive Off-site Supervision Mechanism stress test for interest-rate risk (IRR) that incorporates stress to the loan book as well as the VI.111 The objective of an effective proactive off- trading book. site surveillance system is to be able to ‘smell distress’ early and initiate pre-emptive actions. EWS Framework This requires use of MI inputs, on-going VI.114 EWS was introduced as part of the off-site engagement with the top management of the SEs surveillance framework to streamline the process on the alerts on potential vulnerabilities and of risk discovery and capture potential selective bilateral engagements with the CEOs. In vulnerabilities by leveraging on off-site analysis of order to achieve this objective, the Department data and predictive supervisory assessments, put in place a system for identification of vulnerable based on empirical data combined with scenario- SEs for timely and proactive action to address based analysis. A pool of indicators including these vulnerabilities. This involves both direct and macro-economic variables, market indicators and balance sheet indicators is used from which indirect methodologies towards assessment of statistically significant variables are chosen as vulnerabilities in SCBs, NBFCs, SFBs and UCBs. Early Warning Indicators (EWIs) [credit growth, VI.112 Quarterly proactive off-site vulnerability deposit growth, weighted average lending rate, assessment exercises were carried out for banks, net interest margin, capital to risk-weighted assets NBFCs, SFBs and UCBs using data analytics, ratio, tier-I capital ratio and off-balance sheet early warning systems, identification of vulnerable exposure to total assets ratio]. The focus is to borrowers, stress testing, vulnerability on cyber diagnose and detect vulnerability proactively, security parameters and through different thematic identify stress in the all SEs, viz., banks, NBFCs analyses. All these together are targeted to guide and UCBs, and take corrective measures, as towards better awareness about the risks in the required. 156REGULATION, SUPERVISION AND FINANCIAL STABILITY Measuring Interconnectedness VI.118 Considering the dependency of SEs on the third-party ASPs for ATM Switch applications, VI.115 In view of the significant increase in the adherence to the baseline cyber security controls intermediation between banks and NBFCs and by the ASPs was mandated, with access allowed the stress faced by some NBFCs in the recent to the Reserve Bank for on-site/off-site supervision period, a Bank-NBFC Intermediation Index (BNII) of these entities, through contractual agreements was created to quantify inter-linkages. Similarly, with SEs. an Asset Quality Index (AQI) was created to track the changes in asset quality of a bank’s exposure Graded SAF to NBFCs. VI.119 A SAF for all SEs has been put in place Integrated Compliance Management and Tracking with a structured escalation matrix for supervisory System (ICMTS) actions which would act as a tool for early VI.116 A web-based online application, ICMTS supervisory interventions mostly prior to has been envisaged with an apt automated enforcement action. The objective is to bring approach to manage the inspection lifecycle of consistency, reasonableness and transparency in SEs, supported by robust complaints and supervisory actions and to ensure compliance compliance management system. The application with the Reserve Bank's guidelines, including will act as a centralised repository of inspection KYC/AML, and more generally to improve the reports/scrutiny reports/ instructions/guidelines/ quality and timeliness of submission of supervisory circulars/complaints and their compliance with the returns. documents/evidences submitted by SEs. The Other Initiatives application is being designed in such a way that it VI.120 Some of the other initiatives during 2019- will be capable of capturing/monitoring the end-to- 20 were as follows: end compliance life cycle. The application will help in improving the on-site/off-site monitoring process • The Department is working on a number of and response mechanism. other initiatives to further strengthen Cyber Security Measures identification of vulnerable SEs and ensure immediate follow-up on the identified VI.117 During 2019-20, thirty-nine banks were vulnerabilities. These include use of AI/ subjected to IT examinations to assess their level ML, centralised monitoring of complaints of cyber security preparedness and degree of and compliance, and measuring compliance with the circulars, advisories and interconnectedness. alerts issued by the Reserve Bank from time to time. Thematic studies on select application • Towards its endeavour to adopt new service providers (ASPs) of the banking sector technologies, the Reserve Bank will be were undertaken during the year. A joint cyber leveraging on using AI/ML backed by the security exercise was conducted by the Reserve data analytics tools for data quality check Bank and Indian Computer Emergency Response across various supervisory and statutory Team (CERT-In) on February 12, 2020 and data submissions of the SEs, capturing February 13, 2020 in which 70 select UCBs emerging risk signals to identify vulnerable participated. banks and analysis of bulk data (select 157ANNUAL REPORT business/transaction data) of the SEs to VI.122 An assessment of the relief extended by identify exceptions and enrich risk SEs so far indicated that for the system as a assessment process of the Department. whole, 48.6 per cent of total customers availed Some of the specific areas in which AI can benefit of the Reserve Bank’s COVID-19 pandemic be used by the Reserve Bank are: (a) relief measures that constitute 50.1 per cent of the communication and display of pertinent total outstanding amount up to April 2020. In the indicators through interactive dashboards; case of SCBs, 55.1 per cent of total customers (b) prediction of vulnerable sectors/ availed of the Reserve Bank’s COVID-19 borrowers on the basis of their credit pandemic relief measures and constituted nearly worthiness/fraud detection by use of ML 50.0 per cent of total outstanding amount. In case algorithms; and (c) determining of NBFCs and UCBs, 29.0 per cent and 56.5 per interconnectedness between the various cent of total customers availed the Reserve Bank’s entities by examining parameters like relief measures, which constituted nearly 49.0 per inter-bank lending, derivative exposures, cent and 64.5 per cent of the total outstanding and credit exposures by use of network amount, respectively. analysis. Agenda for 2020-21 Impact of COVID-19 Pandemic and the Mitigating Measures VI.123 The Department has identified the following supervisory goals for all SEs in 2020-21: VI.121 With the spread of COVID-19 pandemic, supervisory measures initiated by the Reserve • Under the aegis of the standing committee Bank were aimed at operational issues which on cyber security, a pro-active cyber included ensuring business continuity, cyber immunity surveillance framework will be security and unhindered operations of the financial introduced for SEs to automate data flow market infrastructure, while moderating the from the SEs to the Reserve Bank for compliance burden on banks. The Reserve Bank better analysis, cyber simulation/ not only ensured continuity of its own operations, assessment exercises in collaboration but also enhanced its supervisory monitoring to with ReBIT and the industry, prompt ensure that any threat to financial stability is supervisory/regulatory intervention, identified early and acted upon without delay. besides prescribing certain baseline Through the pandemic, the financial system of the requirements for various other critical country, including all the payment systems, is service providers (CSPs), master functioning without any hindrance. To ensure that directions on IT practices (governance resilience of SEs is not affected materially, the and related) and digital banking security Reserve Bank has also directed the SEs to assess expectations for the banking sector; the impact of the pandemic on their solvency and liquidity positions and to enhance their resilience • A study on the large value frauds with the by raising additional capital, if required. Cyber risk involvement of select banks, NBFCs, is being mitigated through issue of advisories, UCBs and domain experts will be including from CERT-IN, regulatory reporting and undertaken for recognising the causes for periodic meetings with the top management of the delay in identifying frauds by SEs and SEs. suggest measures for early detection and 158REGULATION, SUPERVISION AND FINANCIAL STABILITY timely mitigation of the risks arising out of • Designing a database management frauds; system to capture violations, record enforcement action and compliance, and • Implementation of ICMTS; and generate Management Information • The Reserve Bank is engaged in System (MIS) [Para VI.129]. interlinking various databases and Implementation Status of Goals information systems to improve fraud VI.126 During the year, in furtherance to the goal monitoring and detection. Online reporting set out in Utkarsh, the enforcement policy and of frauds by NBFCs and the CFR portal of framework was reviewed and updated to include SCBs, augmented with new features, are cooperative banks and NBFCs. In view of their likely to be operational by January 2021. relatively large number, decentralisation of Enforcement Department (EFD) enforcement work related to these entities was VI.124 The Enforcement Department (EFD) was envisaged by setting up ROs of EFD at six centres, set up in April 2017 to enforce regulations uniformly viz., Ahmedabad, Chennai, Kolkata, Mumbai, Nagpur and New Delhi, to ensure operational across banks, with the objective of engendering efficiency and facilitate focused enforcement. compliance by REs, within the overarching Pursuant to the creation of ROs of EFD, approval principles of ensuring financial stability, public for staffing them with requisite manpower was interest and consumer protection. The enforcement obtained. policy and framework approved by the Board for Financial Supervision (BFS) emphasises the need VI.127 During July 2019-June 2020, the to be objective, consistent and non-partisan in Department undertook enforcement action against undertaking enforcement. Enforcement in respect 41 REs and imposed an aggregate penalty of of cooperative banks and NBFCs was also brought `61.15 crore (Table VI.4) for non-submission of compliance to Risk Assessment Reports’ (RAR) under the scope of operations of the Department findings; non-compliance with/contravention of with effect from October 3, 2018. directions on fraud classification and reporting; Agenda for 2019-20: Implementation Status not adhering to discipline while opening current Goals Set for 2019-20 Table VI.4: Enforcement Actions VI.125 The Department had set out the following (July 2019 - June 2020) goals for 2019-20 under Utkarsh: Regulated Entity No. of Penalties Total Penalty (` Crore) 1 2 3 • Revision of Enforcement Policy and Public Sector Banks 26 38.35 Framework in the light of the extension of Private Sector Banks 8 8.55 Cooperative Banks 13 9.18 the Department’s mandate to undertake Foreign Banks 2 5.00 enforcement action against cooperative Payments Banks - - Small Finance Banks - - banks and NBFCs and accordingly, NBFCs 2 0.07 strengthening the Regional Offices (ROs) Total 51 61.15 with sufficient manpower (Para VI.126); -: Nil Source: RBI. and 159ANNUAL REPORT accounts and granting non-fund based facilities to pandemic on completion of enforcement process non-constituent borrowers; not reporting to CRILC was sought to be minimised. platform under RBS; violations of directions/ VI.129 Some impact of the disruptions due to guidelines issued by the Reserve Bank on KYC/ lockdown was also felt on the development of the Income Recognition and Asset Classification software application for automating enforcement (IRAC) norms; non-compliance with the directions process flow as per the timelines originally on cyber security framework and time-bound envisaged. implementation and strengthening of Society for Agenda for 2020-21 Worldwide Interbank Financial Telecommunication VI.130 During the year ahead, the Department (SWIFT) related operational controls. Enforcement proposes to achieve the following goals: actions were also undertaken against contravention of the directions pertaining to third party account • A formal feedback process for DoS on payee cheques; non-compliance with directions areas most prone to violations to facilitate contained in risk mitigation plan (RMP); non- effective compliance testing would be put compliance with Prudential Norms for classification, in place (Utkarsh). For this purpose, based valuation and operation of investment portfolio by on the experience gained since its inception, the Department proposes to banks; non-compliance with directions on window- carry out an analysis of the violations and dressing of balance sheet; contravention of the their modus operandi. directions on ‘Loans and Advances to Directors, Relatives and Firms/Concerns in which they are • The enforcement policy and process would interested’; non-compliance with the guidelines on be reviewed in the wake of reorganisation promoter holding contained in ‘Guidelines for of regulatory and supervisory departments, Licensing of New Banks in Private Sector’; and, including work processes at ROs to ensure failure to comply with the provisions of section consistency in enforcement action 10B of the BR Act, 1949. (Utkarsh); and • The enforcement work pertaining to Impact of COVID-19 Pandemic imposition of monetary penalties on HFCs VI.128 The substantial source material for the by the Reserve Bank, to the extent Department’s functions being available in soft provided for under the NHB Act, 1987, form, there was no significant impact of the would be brought under EFD in a phased pandemic induced lockdown on the initial manner. processing of the cases and obtaining approvals 5. CONSUMER EDUCATION AND for initiating enforcement action. The lockdown, PROTECTION however, impacted the conduct of personal hearings for the REs, which in turn caused some Consumer Education and Protection Department (CEPD) delay in bringing the cases to a logical conclusion within a reasonable time period. With the gradual VI.131 The Consumer Education and Protection withdrawal of lockdown, complemented by use of Department (CEPD) frames policy guidelines to appropriate information and communication ensure protection of the interest of customers of technology, the adverse bearing of COVID-19 REs in line with global best practices (Box VI.5), 160REGULATION, SUPERVISION AND FINANCIAL STABILITY Box VI.5 Benchmarking to G20 High Level Principles on Financial Consumer Protection The Reserve Bank and its regulated entities (REs) (FCP), adopted by the G20 Finance Ministers and Central maintain material compliance with the 10 voluntary High- Bank Governors in their meetings during October 14-15, Level Principles (HLPs) on Financial Consumer Protection 2011. Principle Status of Implementation 1. Appropriate legal, regulatory and The Reserve Bank derives powers for FCP under Section 35A of the Banking supervisory framework to be in Regulation Act, 1949, Section 45L of the RBI Act, 1934, and Section 18 of the Payment place for FCP. and Settlement Systems Act, 2007, which have been used to institute the Ombudsman Schemes for banks, NBFCs, and non-bank system participants, respectively. 2. Role of oversight bodies explicitly FCP oversight is centralised at CEPD, which monitors the functioning of the offices of responsible for FCP - cooperation Ombudsmen and Consumer Education and Protection (CEP) cells across India, which with other oversight authorities. report to CEPD through a periodic feedback mechanism. Important systemic risks are flagged through the Financial Stability Reports. 3. Equitable and fair treatment of The ‘Right to Fair Treatment’ is enshrined in the Charter of Customer Rights (CoCR) consumers - special attention issued by the Reserve Bank in December, 2014. Instructions have been issued to to be dedicated to the needs of banks for providing special assistance, including facilities at branches, door-step vulnerable groups. delivery of service, provision of braille/talking ATMs and ramps at access points to senior citizens and differently abled persons. 4. Disclosure and transparency – The ‘Right to Transparency, Fair and Honest Dealing’ is incorporated in the CoCR. REs providing consumers with key are required to provide consumers with key information relating to the most important information. terms, benefits and risks of the product/service sold. 5. Financial education and The Reserve Bank as well as the Financial Service Providers (FSPs) engage in awareness to be promoted by all financial education activities. The offices of Ombudsmen undertake ‘Town Hall’ events stakeholders. to increase awareness regarding the avenues for grievance redressal, safe banking practices, as well as extant regulations on customer service. 6. Responsible business conduct of Regulatory instructions have been issued for REs to have policies with regard to FSPs and Authorised Agents. customer service and business conduct. REs (banks and NBFCs) are permitted to deploy the services of agents and they have to remain responsible for the actions of their agents. CoCR also extends the ‘Right to Suitability’ to customers of banks. 7. Protection of consumer assets Mechanisms for protection of customer’s assets against fraud and misuse include against fraud and misuse. elaborate guidelines for service providers for ensuring security of transactions, including digital transactions. In the case of fraudulent digital transactions, the liability of customers has been limited by regulation. 8. Protection of consumer data and The ‘Right to Privacy’ is included in CoCR. Entities are required to maintain customer privacy. confidentiality and not divulge customer information to third parties, except under circumstances which are well-defined. 9. Consumers to have access to Regulatory guidelines on grievance redressal mechanism in REs have long been in adequate complaints handling place. Customers who are not satisfied with the redressal provided by the RE can and redress mechanisms that approach Ombudsmen/CEP cells of the Reserve Bank. The process of lodging a are accessible, affordable, complaint has been made smoother with the launch of the state-of-the-art Complaint independent, fair, accountable, Management System (CMS). All avenues for redressal of customer grievances are timely and efficient. free of charge for the customer as well as the RE. 10. Nationally and internationally The Indian financial sector comprises a variety of institutions, including public competitive markets to be sector banks, private sector banks, foreign banks, co-operative banks, regional rural promoted to provide consumers banks, small finance banks, payment banks, NBFCs, and non-bank payment system with greater choice in financial providers operating pre-paid cards/e-wallets. Together, the entities provide consumers services. with extensive choice in financial products and services. Source: RBI. 161ANNUAL REPORT undertakes oversight of the functioning of the • Promoting consumer awareness (Para Ombudsman Schemes of the Reserve Bank and VI.141). creates public awareness on safe banking Implementation Status of Goals practices, extant regulations on customer service and protection and avenues for redressal of Strengthening the Grievance Redressal System customer complaints. based on RCA Agenda for 2019-20: Implementation Status VI.133 RCA of the major areas of complaints received in the offices of Ombudsmen, CEP cells Goals Set for 2019-20 and select banks was undertaken. Root causes of VI.132 The Department had set out the following the complaints were identified at the level of goals for 2019-20: customers and REs, on account of gaps in • Strengthening the Grievance Redressal regulatory guidelines and from external threats. System based on Root Cause Analysis Issues relating to gaps in regulatory guidelines (RCA) of major areas of complaints have been referred to the regulatory and (Utkarsh) [Para VI.133]; supervisory departments. Issues to be addressed • Review of the Internal Ombudsman (IO) in coordination with other regulators are being Scheme for extension to NBFCs (Utkarsh) followed up. In addition, banks and offices of [Para VI.134]; Ombudsmen have been advised to intensify • Review of the Ombudsman Schemes of efforts to create awareness among bank customers the Reserve Bank for updation and and members of public for adopting safe banking effective implementation (Utkarsh) [Para practices. Going forward, RCA will be undertaken VI.135]; on a regular basis. • Review of the Consumer Education and Review of the IO Scheme for Extension to NBFCs Protection (CEP) cells to empower them VI.134 The proposal to extend the IO Scheme to on the lines of Banking Ombudsmen (Utkarsh) [Para VI.136]; all NBFCs covered under the Ombudsman Scheme for NBFCs - 2018, was examined. • Operationalise the Interactive Voice Considering the diversity in the size and business Response System (IVRS) for online profile of NBFCs, the number of complaints support to the complainant (Utkarsh) [Para received and customer interface, the VI.137]; implementation of the IO Scheme for NBFCs is • Launching the Internal Ombudsman (IO) under review for roll-out on the basis of selective Scheme for Non-Bank System Participants applicability. (Para VI.138); Review of the Ombudsman Schemes for Updation • Conducting survey of customer satisfaction and Effective Implementation from the Offices of Banking Ombudsmen (OBOs) [Para VI.139]; VI.135 An In-house Committee was set up to • Dissolution of the Banking Codes and examine, inter alia, issues relating to the Standards Board of India (BCSBI) [Para convergence of the three schemes - the Banking VI.140]; and Ombudsman Scheme, 2006 (BOS), the 162REGULATION, SUPERVISION AND FINANCIAL STABILITY Ombudsman Scheme for NBFCs, 2018 (NBFC- non-bank issuers of pre-paid payment instruments OS) and the Ombudsman Scheme for Digital (PPIs) with more than one crore outstanding PPIs Transactions, 2019 (OSDT) - into an Integrated as on March 31, 2019. Customer complaints that Ombudsman Scheme, and suggest measures for are partly or wholly rejected by the non-bank improving the effectiveness of the Ombudsman issuer of PPI must be referred to the IO, an mechanism. The Committee has submitted its internal, independent authority at the apex of the report and the proposals are being examined. internal grievance redressal mechanism, for a final decision. Review of CEP cells Satisfaction Survey of Customers VI.136 CEP cells redress complaints not covered by the Ombudsman Schemes. Amidst the VI.139 A third-party satisfaction survey of challenges that affect grievance redressal by CEP customers was undertaken by the Reserve Bank cells, in particular the lack of quasi-judicial powers, during the year (Box VI.6). The findings of the the issue of strengthening CEP cells on the lines survey are also available on the Reserve Bank’s of the Ombudsmen has been examined by an website (Annual Report on Banking Ombudsman internal working group. The recommendations of Scheme, 2018-19). the internal working group have been reviewed by Dissolution of the Banking Codes and Standards the in-house Committee studying the issues Board of India (BCSBI) relating to the convergence of the Ombudsman schemes. The Committee has included VI.140 The BCSBI was set up by the Reserve recommendations on CEP cells in its report, which Bank in February 2006 as an independent and are being examined. autonomous body, assigned to formulate codes of IVRS for Online Support to the Complainant conduct to be adopted by banks voluntarily for ensuring fair treatment of customers. The Reserve VI.137 Information on the Reserve Bank’s Bank has since set up CEPD, issued the Charter Complaint Management System (CMS) is made of Customer Rights (CoCR) and considerably available on IVRS. Any person can dial 14440 and strengthened the Ombudsman mechanism to obtain basic guidance on CMS, the Banking enhance consumer protection. It was accordingly Ombudsman Scheme, consumer protection decided to dissolve BCSBI, which is now in an regulations such as the limited liability of a advanced stage of completing its dissolution customer in fraudulent electronic banking process. transactions, etc. Going forward, the IVRS will serve as an on-tap source of information on Consumer Awareness important aspects of customer service and VI.141 During 2019-20, the Reserve Bank grievance redressal for consumers of financial conducted country-wide awareness campaigns in services. coordination with its Department of Communication Launching the IO Scheme for Non-Bank System (DoC) through print and electronic media on Participants various topics such as Ombudsman Schemes, VI.138 Launched in October 2019, the IO Scheme Basic Savings Bank Deposit Account, banking for Non-Bank System Participants is applicable to facilities for senior citizens and differently abled 163ANNUAL REPORT Box VI.6 Survey of Customer Satisfaction from the Offices of Banking Ombudsmen (OBOs) In 2019-20, the Reserve Bank conducted a third-party The survey required respondents to indicate their level survey of customers, who had lodged complaints with of satisfaction with the OBO in terms of the following various OBOs during July 1, 2017 to June 30, 2019, to parameters: i) ease of lodging a complaint; ii) time taken to assess the level of their satisfaction. resolve the complaint; iii) effort in promoting a settlement between the complainant and his/her bank; iv) escalation The survey was conducted pan-India with a sample size of of the complaint to the OBO driving the service provider to 3,010 respondents residing in 18 cities covering all sections redress the complaint immediately; and v) overall satisfaction of the society (Chart 1). with the OBO mechanism. The survey revealed that 73 per cent of the respondents were satisfied overall with the disposal of their complaints Chart 1: Profile of Respondents under the Banking Ombudsman (BO) Scheme (Charts 2 and a. Geographical Profile 3). The time taken for resolution of complaints (turnaround Chart 2: Satisfaction Levels for Parameters (Per cent) 24% 83 68 71 73 73 76% Urban Semi Urban / Rural Ease of Resolving in Promoting Effectiveness Overall Filing Reasonable Settlement inEscalating b. Age Profile Complaint Time toBO Source: Customer Satisfaction Survey for OBO, 2019. time) was considered by most of the respondents as a major issue to be addressed, going forward. Efforts by the BO in promoting a settlement between the complainant and the bank was also cited as an area for improvement. ‘Word of mouth’ and internet were the two most prominent sources of information regarding the BO Scheme. The feedback and insights from the survey are being used to identify actions required to further strengthen the Ombudsman mechanism. c. Gender Profile Chart 3: Drivers of Overall Satisfaction Level (Per cent) 7 17% 36 26 83% 31 Ease of FilingComplaint Reasonable Time Male Female Effectiveness inEscalatingto BO Promoting Settlement Source: Customer Satisfaction Survey for OBO, 2019. Source: Customer Satisfaction Survey for OBO, 2019. 164REGULATION, SUPERVISION AND FINANCIAL STABILITY persons, and safe digital banking. The Reserve • Instituting a disincentive cum incentive Bank’s SMS handle ‘RBISAY’ was also used framework to encourage banks to improve extensively for sending text messages on these their grievance redressal mechanism. issues. The IVRS further strengthened the Deposit Insurance and Credit Guarantee Reserve Bank’s awareness generation efforts. Corporation (DICGC) The offices of Ombudsmen conducted 26 town VI.144 Deposit insurance system plays an hall events and 113 awareness/outreach important role in maintaining the stability of the programs, mainly in Tier II cities to create financial system, particularly in assuring the awareness regarding the Ombudsman Schemes. protection of interests of small depositors and, Impact of COVID-19 Pandemic thereby, ensuring public confidence. Deposit Insurance and Credit Guarantee Corporation VI.142 The grievance redressal function was (DICGC) is a wholly owned subsidiary of the carried out uninterrupted amidst the COVID-19 Reserve Bank constituted under the DICGC Act, pandemic. The CMS, which brings all stakeholders 1961. The deposit insurance extended by DICGC viz., the Reserve Bank, REs and customers on a covers all commercial banks including LABs, PBs, single platform, and has a system-driven workflow SFBs, RRBs and co-operative banks. process, ensured continued and effective VI.145 The number of registered insured banks grievance redressal even during the lockdown. as on March 31, 2020 stood at 2,067 comprising REs were advised to ensure redressal of all 144 commercial banks (including 45 RRBs, 3 COVID-19 pandemic related customer complaints LABs, 6 PBs and 10 SFBs) and 1,923 co-operative on priority. banks (33 StCBs, 352 DCCBs and 1,538 UCBs). Agenda for 2020-21 The DICGC raised the limit of insurance cover for VI.143 The Department proposes the following depositors in banks to `5 lakh per depositor with agenda for 2020-21: effect from February 4, 2020 from the earlier level of `1 lakh with the approval of Government of • Strengthening financial education and India, with a view to providing a greater measure awareness for the public (Utkarsh); of protection to depositors in banks. The premium • Implementing the IO Scheme for select was also raised to 12 paise from 10 paise per NBFCs (Utkarsh); `100 of assessable deposits per annum from the half year beginning April 1, 2020, in order to • Examining, for implementation, the maintain an adequate level of the deposit recommendations of the in-house insurance fund. With the present limit of deposit Committee on convergence of the insurance in India at `5 lakh, the number of fully Ombudsman Schemes, including the role protected accounts (231 crore) as at end-March of CEP cells (Utkarsh); 2020 constituted 98.3 per cent of the total number • Using AI to enhance the efficacy of the of accounts (235 crore) as against the international CMS of the Reserve Bank; and benchmark1 of 80 per cent. In terms of amount, 1 International Association of Deposit Insurers (2013), “Enhanced Guidance for Effective Deposit Insurance Systems: Deposit Insurance Coverage”, Guidance Paper, March. 165ANNUAL REPORT the total insured deposits of `68,71,500 crore as investments and cash recovery out of assets of at end-March 2020 constituted 50.9 per cent of failed banks) over expenditure (payment of claims assessable deposits of `1,34,88,888 crore as of depositors and related expenses) each year, against the international benchmark of 20 to 30 net of taxes. This Fund is available for settlement of claims of depositors of banks taken into per cent. At the current level, the insurance cover liquidation/amalgamation. During April 2019 - works out to be 4.0 times per capita income for March 2020, the Corporation sanctioned total 2019-20. claims of `80.7 crore as against claims aggregating VI.146 DICGC builds up its Deposit Insurance `40 crore during the preceding year. The size of Fund (DIF) through transfer of its surplus, i.e., the DIF stood at `1,10,380 crore as on March 31, excess of income (mainly comprising premium 2020, resulting in a reserve ratio of 1.61 per cent received from insured banks, interest income from (Box VI.7). Box VI.7 The Significance of Reserve Ratio in Deposit Insurance (DI): A Cross-Country Perspective The principal public policy objectives of deposit insurance The reserve ratios of various DIAs ranged between 0.20 systems are to contribute to financial stability by protecting per cent in Hungary to 6.11 per cent in Philippines. In India, the financial system against bank runs and to ensure the the reserve ratio stood at 1.61 per cent on March 31, 2020 safety and liquidity of the deposits of depositors up to (Table 1). certain coverage amount. In order to fulfil this mandate, it Table 1: Reserve Ratio in Select Countries is necessary that the deposit insurer either has adequate (end-December 2018) financial resources or a funding mechanism whereby the required funds can be readily obtained. One indicator for Country Reserve Ratio assessing the sufficiency of funds for reimbursement to 1 2 depositors is the reserve ratio (RR) - also known as the target United States (September 2019) 1.41 ratio – which is defined as the ratio of deposit insurance Canada (March 2019) 0.62 fund (DIF) to insured deposits. In some jurisdictions the RR Germany 0.38 is fixed in the respective statutes. United Kingdom 0.71 France 0.35 A cross-country survey conducted in 2018 to gather Chinese Taipei 0.41 information on prevailing policies suggests that of the 69 Japan 0.35 respondents, 64 use ex ante funding arrangements, and Czech Republic 1.29 44 (69 per cent) of respondents have fund targets. While Poland- Banks 1.80 Poland- Credit Unions 0.10 there are 20 deposit insurance agencies (DIAs) that do Malaysia 0.30 not have fund targets, 19 of them have plans to set the Slovenia 0.28 target. Further, of the 44 DIAs that have a fund target, Portugal 1.16 two countries, namely, Bahamas and Japan, use a target India (end-March 2020) 1.61 amount as the fund target. The target is statutorily set (28 Italy 0.27 DIAs) or prescribed by the governing body (16 DIAs). Some Spain 0.28 jurisdictions such as Jamaica, Kosovo, Malaysia and South Bulgaria 1.18 Korea also prescribe the target ratio as a range. Sweden 2.57 Philippines (December 2017) 6.11 The factors that predominantly determine the setting of a Hungary 0.20 target fund are: structure of the financial system and its Romania 3.01 characteristics; legal framework; prudential regulation, Norway 2.75 supervision and resolution regime; macroeconomic Greece 1.43 conditions; availability and accessibility of emergency/ Source: Annual Reports and Websites of respective jurisdictions. backup funding; and, state of accounting and disclosure References: regime. There are different approaches in setting the target 1. IADI (2014), 'Core Principles for Effective Deposit fund size, viz., discretionary method, statistical method of Insurance Systems', November. estimation of the DIA’s loss distribution and combination of 2. IADI (2018), 'Deposit Insurance Fund Target Ratio', both. Research paper, January. 166REGULATION, SUPERVISION AND FINANCIAL STABILITY 6. CONCLUSION regulatory and supervisory framework of SCBs, cooperative banks and NBFCs in line with the VI.147 In sum, amidst the concerns related to global best practices, and also with an objective to COVID-19 pandemic and economic growth, bring them under uniform enforcement framework decisive measures were undertaken to remove to minimise the policy arbitrage. Measures to impediments in supply of credit to sectors such as harness technology for efficient customer services MSMEs and NBFCs. To smoothen the and effective fraud detection were also put in transmission of interest rates, linking of bank place. Promoting doorstep banking services for lending rates with external benchmarks was the needy, extending the IO Scheme for Non- introduced. Banking sector witnessed Bank System Participants and review of consolidation in the form of mergers of some Ombudsman Schemes of the Reserve Bank were PSBs and amalgamation of certain DCCBs. some of the major strides taken towards ensuring Measures were also undertaken to strengthen effective consumer protection. 167ANNUAL REPORT VII PUBLIC DEBT MANAGEMENT In the face of heightened uncertainty, both domestic and global, the market borrowing programme of the centre and the states for 2019-20 was conducted by the Reserve Bank in pursuance of the objectives of cost minimisation, risk mitigation and market development. VII.1 The Internal Debt Management through a calendar of auction based Department (IDMD) of the Reserve Bank is switches and buyback operations entrusted with managing the domestic debt of the (Utkarsh) [Para VII.5 - VII.6]; central government vide Sections 20 and 21 of • Issuance of GoI benchmark securities of the RBI Act, 1934, and of 28 state governments 2, 5, 7 and 10 year tenor (Para VII.7); and two Union Territories (UTs) in accordance with bilateral agreements as provided in Section • Expansion of investor base by greater 21A of the Act. Further, there is a provision for participation of multilateral financial providing short-term credit up to three months to institutions and multilateral development central government, state governments and UTs banks, apart from Foreign Central Banks in the form of Ways and Means Advances (WMA) (FCBs) in the G-sec market (Utkarsh) to bridge temporary mismatches in cash flows, as [Para VII.8]; laid down in Section 17(5) of the RBI Act, 1934. • Revision of retail and mid-segment VII.2 The rest of the chapter is arranged in turnover targets for Primary Dealers (PDs) three sections. The immediately following section (Para VII.9); presents the implementation status in respect of • Diversifying the investor base for State the agenda for 2019-20. Section 3 covers major Development Loans (SDLs) [Para VII.10]; initiatives to be undertaken in the agenda for 2020- 21 on debt management for central and state • Exploration of various investment avenues governments. The chapter has been summarised for state governments (Para VII.11); at the end. • Examination of the revision of the WMA 2. Agenda for 2019-20: Implementation Status limit for state governments (Para VII.12); Goals Set for 2019-20 • Organising capacity building programmes VII.3 Last year, the Department had set out the to sensitise state governments about following goals: the prudent measures of cash and debt management (Para VII.13); and • Overall liquidity enhancement in Government of India (GoI) securities • Improvement in information management (G-sec) market by consolidation of debt system (Para VII.14). 168PUBLIC DEBT MANAGEMENT Implementation Status of Goals G-sec on behalf of select FCBs and multilateral development institutions in the secondary market. VII.4 During 2019-20, the market borrowing In consultation with the central government, programme was conducted following the debt the scheme has been extended to multilateral management strategy of minimising cost, risk financial institutions and multilateral development mitigation and market development. Amidst banks. Further, Treasury Bills (T-Bills) were also heightened uncertainty characterising domestic and global economic and financial conditions, included as eligible instruments under the scheme. the Reserve Bank successfully managed the Total volumes (purchase and sell) transacted on combined gross market borrowings of the central behalf of FCBs stood at `4,500 crore (face value) and the state governments, which increased by during 2019-20, up from `1,297 crore in the 28.1 per cent to `13,44,521 crore during the year. previous year. During 2019-20, 180 Gilt Account Holders (GAHs) accessed the NDS-OM-Web and VII.5 The Reserve Bank continued its policy of undertook 93,697 trades worth `11.54 lakh crore passive consolidation by way of reissuances and as compared with 72,229 trades worth `6.97 lakh active consolidation through buyback/switches. crore in the previous year. During 2019-20, 185 out of 194 issuances of G-sec were re-issuances as compared with 206 VII.9 The guidelines for PDs are under review re-issuances out of 212 issuances in the previous to, inter alia, achieve the objectives of Market year. Making Scheme and to ensure better retailing of G-sec by PDs. VII.6 Switch auction for conversion of G-sec is generally conducted on every third Monday VII.10 Various measures have been taken to of the month, for which a specific press release, diversify the investor base for SDLs. Among them indicating the securities to be switched, is are steps taken to encourage participation of retail announced before the switch auction date. investors in SDL market, including introduction of Accordingly, switch operations of G-sec amounting non-competitive bidding in primary auctions. In this to `1,64,803 crore were completed during 2019- direction, Specified Stock Exchanges (besides 20 as against `28,059 crore in the previous year. scheduled banks and primary dealers) have been Like last year, the budget for buyback operations permitted to act as Aggregators/Facilitators to was kept zero for the year. consolidate the bids of their stockbrokers/other VII.7 Following the discontinuation of old 2-year retail participants and submit a single bid under and 5-year G-sec, issuance of new G-sec in these the non-competitive segment of the primary maturities was undertaken, including a new 7-year auction of the SDLs, following an announcement security (7.27% GS 2026). Floating Rate Bonds through circular dated November 7, 2019. A (FRBs) were also issued during the year in order stripping/reconstitution facility for SDLs, similar to broaden the investor base. The share of FRBs to the one for central government securities was in total issuances during 2019-20 was 8.5 per announced in the Reserve Bank’s Statement on cent, lower than 9.1 per cent in the previous year. Developmental and Regulatory Policies of August VII.8 Under the Foreign Central Bank (FCB) 7, 2019. This measure will be implemented in scheme, the Department invests in Indian consultation with the state governments. 169ANNUAL REPORT VII.11 A proposal to explore various investment by 12.1 per cent on account of higher borrowings avenues for state governments including the during the year. Net market borrowing through review of the Consolidated Sinking Fund (CSF) / dated G-sec financed 61.8 per cent of the centre’s Guarantee Redemption Fund (GRF) scheme is gross fiscal deficit (GFD) as against 65.1 per cent in progress. In this regard, a Discussion Paper in the previous year. The net market borrowing has already been submitted to the Executive through dated securities and T-Bills taken together Committee (EC) to State Finance Secretaries also increased in 2019-20 (Table VII.1). (SFS). Debt Management Operations VII.12 In 2016, the Advisory Committee on WMA VII.16 The weighted average yield (WAY) on GoI scheme for state governments (Chairman: Shri dated securities issued during 2019-20 declined Sumit Bose) had recommended that the WMA by 93 basis points (bps) on a year-on-year basis. limits be revised to `32,225 crore for all states/ The weighted average coupon on dated securities UTs together and Committee-based next revision on the entire debt stock also decreased albeit of WMA may be effected in 2020-21, taking into marginally. Consequent upon the decision by the account the roadmap laid by the Report of the GoI to undertake more borrowings in the maturity Fifteenth Finance Commision. Currently, a new Committee (Chairman: Shri Sudhir Shrivastava) is bucket of over 15 years, the weighted average examining these limits. The Committee is yet to maturity (WAM) of issuances increased during submit its report to the Reserve Bank. 2019-20, resulting in a marginal increase in WAM on the outstanding debt (Table VII.2). VII.13 Capacity building programmes for sensitising state governments about the prudent VII.17 During 2019-20, G-sec yields softened measures of cash and debt management were considerably with 10-year benchmark yield conducted in five states (viz., Rajasthan, Bihar, moderating by 121 basis points (bps) from 7.35 Assam, Karnataka and Odisha). Meetings per cent to 6.14 per cent, attributed to cumulative between states and investors were also facilitated reduction in repo rate by 185 bps during the year, during the year. coupled with accommodative policy stance and VII.14 In order to improve data dissemination, Table VII.1 : Net Market Borrowings of the dashboards were created and made available to Central Government the public through Database on Indian Economy (Amount in ` crore) (DBIE). It provides current information related to Item 2017-18 2018-19 2019-20 2020-21* 1 2 3 4 5 auctions, gross and net market borrowings of the Net Borrowing (i to iv) 4,98,891 4,58,337 5,11,500 5,58,381 central and state governments and secondary (i) Dated Securities@ 4,48,410 4,22,737 4,73,972 2,15,428 market yield movements. (ii) 91-day T-Bills 31,886 -46,542 -9,600 1,17,013 (iii) 182-day T-Bills 1,436 32,931 38,354 1,23,480 Debt Management of the Central Government (iv) 364-day T-Bills 17,159 49,211 8,774 1,02,460 VII.15 During 2019-20, the gross market *: Up to June 30, 2020. @: Without adjusting for buyback and switches. After adjusting for borrowings through dated G-sec were higher buyback and switches, net borrowings through dated securities during 2019-20 stood at ` 4,73,990 crore as against `4,23,269 by 24.3 per cent than a year ago. Net market crore in 2018-19. borrowing through dated G-sec also increased Source: RBI. 170PUBLIC DEBT MANAGEMENT Table VII.2: Market Loans of Central Government - A Profile* (Yield in per cent/Maturity in years) Years Range of YTMs in 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 @ Average Average Average Yield Maturity Maturity Coupon 1 2 3 4 5 6 7 8 9 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 6.85-7.46 6.13-7.61 6.46-7.87 7.16 5-38 14.76 10.65 7.99 2017-18 7.23-7.27 6.42-7.48 6.68-7.67 6.97 5-38 14.13 10.62 7.76 2018-19 6.56-8.12 6.84-8.28 7.26-8.41 7.78 1-37 14.73 10.40 7.81 2019-20 5.56-7.38 6.18-7.44 5.96-7.77 6.85 1-40 16.15 10.72 7.71 2020-21** 4.04-5.55 5.22-6.52 4.65-7.19 5.87 2-40 14.61 11.02 7.59 YTM: Yield to Maturity. -: Not applicable. @: Residual maturity of issuances and figures are rounded off. *: Excluding special securities and buyback/switch in GoI securities. **: Up to June 30, 2020. Source: RBI. OMO purchases. A new 10-year G-sec paper explained by the high liquidity premium in the 10- (6.45% GS 2029) was also issued on October year benchmark paper and also on account of the 7, 2019 with a coupon considerably lower than special OMOs conducted by the Reserve Bank, that of the previous issuance (7.26% GS 2029 which brought down yields of the 10-year paper issued on January 8, 2019). Further, the Reserve more than the adjacent tenors. The yield curve Bank announced various other monetary easing remained flat beyond 14-year G-sec papers and measures which impacted the yield curve. took a roughly parallel shift downward relative to Specifically, special OMOs of `40,000 crore the previous year (Chart VII.1). were conducted in December 2019 and January 2020, wherein the Reserve Bank bought long- Chart VII.1: FBIL Par Yield Curve term securities and sold short-term securities 8.0 simultaneously. The Reserve Bank also conducted 7.5 Long Term Repo Operations (LTROs) for 1-year 7.0 and 3-year tenors at policy repo rate for `1,25,000 6.5 crore in February and March 2020 to provide 6.0 5.5 durable liquidity to the system at reasonable 5.0 cost. Since the credit offtake in the system 4.5 remains muted, the LTROs resulted in significant 4.0 softening in G-sec yields for short-tenor papers. 3.5 These developments led to increase in spreads 3.0 between short-term and long-term G-sec yields, steepening the yield curve towards the end of March 2020. A downward kink was observed in the FBIL: Financial Benchmark India Private Ltd. Source: RBI. G-sec yield curve around the 10-year tenor, partly 171 tmecreP 0 2 4 6 7 9 11 31 41 61 81 02 12 32 52 72 82 03 23 43 53 73 93 Maturity(Years) March-19 March-20 June-20ANNUAL REPORT VII.18 During 2019-20, about 54.2 per cent of the government through T-Bills (91, 182 and 364 days) market borrowing were raised through issuance of marginally increased to `37,528 crore during dated securities with a residual maturity of 10 years 2019-20 as against `35,600 crore in the previous and above, as compared with 53.5 per cent in the year. previous year, resulting in a marginal decrease in Ownership of Securities the share of securities with maturity less than 10 VII.21 Commercial banks and cooperative banks years during the year. Further, 30-year and 40-year taken together remained the largest holders of tenor papers were issued/reissued during the year G-sec accounting for 41.9 per cent as at end- with the objective of catering to the demand for March 2020, followed by insurance companies long-term investors such as insurance companies (26.2 per cent) and provident funds (10 per cent). and pension funds (Table VII.3). The share of the Reserve Bank was 9.5 per cent Issuance of Special GoI Securities and the share of FPIs was 1.5 per cent. The other VII.19 Special GoI securties (non-transferable) holders of G-sec are pension funds, mutual funds, for the purpose of recapitalisation were issued to state governments, financial institutions (FIs) and 13 public sector banks (PSBs), EXIM Bank, IDBI corporates. Bank and Indian Infrastructure Finance Company Primary Dealers and Devolvement Ltd. (IIFCL) for a total amount of `75,847.60 crore VII.22 The number of primary dealers (PDs) in 7 tranches on a cash-neutral basis. Coupons on stood at 21 [14 Bank-PDs and 7 Standalone those securities ranged between 6.13 - 6.79 per PDs (SPDs)] at end-March 2020. All the PDs cent. maintained capital to risk-weighted assets ratio Treasury Bills (CRAR) above the minimum requirement of 15 per VII.20 Short-term cash requirements of the cent during the year. The mandate of underwriting government are met through issuance of T-Bills. primary auctions of dated G-sec has been The net short-term market borrowing of the given to PDs with a target of achieving bidding Table VII.3: Issuance of Government of India Dated Securities – Maturity Pattern (Amount in ` crore) Residual Maturity 2018-19 2019-20 2020-21* Amount Raised Percentage Amount Raised Percentage Amount Raised Percentage to Total to Total to Total 1 2 3 4 5 6 7 Less than 5 Years 1,08,899 19.1 1,46,000 20.6 86,000 24.9 5 -9.99 Years 1,57,000 27.5 1,79,000 25.2 89,000 25.7 10-14.99 Years 98,000 17.2 1,37,000 19.3 93,000 26.9 15 -19.99 Years 71,101 12.5 15,000 2.1 - - 20 Years & Above 1,36,000 23.8 2,33,000 32.8 78,000 22.5 Total 5,71,000 100.0 7,10,000 100.0 3,46,000 100.0 *: Up to June 30, 2020. -: Nil. Note: Figures in the columns might not add up to the total due to rounding off of numbers. Source: RBI. 172PUBLIC DEBT MANAGEMENT commitment/success ratio in respect of Treasury Chart VII.2: GoI Cash Balance Bills (T-Bills)/cash management bills (CMBs). The 2,00,000 PDs individually achieved the stipulated minimum 1,50,000 success ratio of 40 per cent, with an average of 1,00,000 62.78 per cent in H1: 2019-20 and 60.62 per cent 50,000 in H2. The share of PDs in auctions of T-Bills/ 0 CMBs was 71.67 per cent during 2019-20 as -50,000 compared with 71.44 per cent in the previous -1,00,000 year. The underwriting commission paid to PDs -1,50,000 during 2019-20 was `41.04 crore as compared -2,00,000 with `139.86 crore in the previous year, reflecting reduced domestic market volatility relative to -2,50,000 previous year. Sovereign Gold Bonds Scheme Source: RBI. VII.23 In consultation with the Government of India, the Reserve Bank issued 10 tranches of resorted to was `1,33,188 crore on January 4, Sovereign Gold Bonds (SGBs) for an aggregate 2020. The central government issued CMBs of amount of `2,316.37 crore (6.13 tonnes) during `3,00,000 crore, with tenors ranging between 10 2019-20. Under the SGB scheme, bonds are to 84 days to tide over short-term mismatches in denominated in units of one gram of gold and cash flows during 2019-20. The year ended with multiples thereof. The minimum annual investment central government’s cash balance at ` 55,573 is one gram with a maximum limit of 4 kg per crore (Chart VII.2). individual, 4 kg per Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified Debt Management of State Governments by the government from time to time. A total of VII.25 Following the recommendation of the 14th `9,652.78 crore (30.98 tonnes) has been raised Finance Commission (FC) to exclude states from through the scheme (37 tranches) since its the National Small Savings Fund (NSSF) financing inception in November 2015. facility (barring Delhi, Madhya Pradesh, Kerala Cash Management of the Central Government and Arunachal Pradesh), market borrowings of states have been increasing over the last few VII.24 The central government started the year years. The share of market borrowing in financing 2019-20 with a cash balance of `1,27,693 crore. GFD consequently rose to 87.9 per cent in 2019- The WMA limits for the first and second half of 20 (BE) from 84.0 per cent in 2017-18. the year were `75,000 crore and `35,000 crore, respectively. The central government resorted to VII.26 Both gross and net market borrowing of WMA for 189 days during 2019-20 vis-à-vis 173 states were higher during 2019-20 than a year days in the previous year and went into overdraft ago. Gross market borrowing increased by 32.7 (OD) for 52 days vis-à-vis 50 days during the per cent, while the net borrowing increased by same period. The highest amount of WMA/OD 39.8 per cent, reflecting lower growth (y-o-y) in 173 erorc` rpA-1 rpA-51 rpA-92 yaM-31 yaM-72 nuJ-01 nuJ-42 luJ-8 luJ-22 guA-5 guA-91 peS-2 peS-61 peS-03 tcO-41 tcO-82 voN-11 voN-52 ceD-9 ceD-32 naJ-6 naJ-02 beF-3 beF-71 raM-3 raM-71 raM-13 2018-19 2019-20 2020-21ANNUAL REPORT Table VII.4: Market Borrowing of States through SDLs (Amount in ` crore) Item 2017-18 2018-19 2019-20 2020-21* 1 2 3 4 5 Maturities during the Year 78,819 1,29,680 1,47,067 28,167 Gross Sanction under Article 293(3) 4,82,475 5,50,071 7,12,744 5,11,189 Gross Amount Raised during the Year 4,19,100 4,78,323 6,34,521 1,67,276 Net Amount Raised during the Year 3,40,281 3,48,643 4,87,454 1,39,109 Amount Raised during the Year to Total Sanctions (per cent) 86.9 87.0 89.0 32.7 Outstanding Liabilities (at the end of period) # 24,29,892 27,78,536 32,65,989 33,93,098 *: As on June 30, 2020. #: Including UDAY and other special securities. Source: RBI. redemptions during the year (Table VII.4). There Cash Management of State Governments were 636 issuances in 2019-20, of which 114 were VII.28 Following the recommendations of the re-issuances (467 issuances in 2018-19, of which Advisory Committee on WMA scheme for state 59 were re-issuances), reflecting the efforts of governments (Chairman: Shri Sumit Bose), the state governments towards debt consolidation. WMA limit was set at `32,225 crore for all states/ VII.27 The weighted average yield (WAY) of cut- UTs together until the next review in 2020-21. off yield for State Development Loans (SDLs) Currently, a new Committee (Chairman: Shri issued during 2019-20 was lower at 7.24 per Sudhir Shrivastava) is reviewing these limits. cent than 8.32 per cent in the previous year. Pending its recommendations, it was decided Accordingly, the weighted average spread (WAS) on April 1, 2020 to increase the WMA limit by 30 of SDL issuances over comparable central per cent from its existing level to enable states/ government securities was 55.02 bps in 2019- UTs to tide over COVID-19. On April 17, 2020, 20 as compared with 64.66 bps in the previous the Reserve Bank decided to further increase the year. In 2019-20, seventeen states and one WMA limit by 60 per cent over and above the level union territory issued non-standard securities of tenors ranging from 2 to 40 years. As a strategic as on March 31, 2020. This interim measure will response to higher spreads, 9 states rejected all remain valid till September 30, 2020. Relaxation the bids in some of the auctions. Following the in the overdraft (OD) scheme has been given to policy of passive consolidation, 11 states (viz., state governments/UTs to tide over mismatches Bihar, Gujarat, Haryana, Himachal Pradesh, in cash flows by increasing the number of days Karnataka, Madhya Pradesh, Maharashtra, for OD, effective April 7, 2020, till September 30, Punjab, Rajasthan, Tamil Nadu and Telangana) 2020. Sixteen states availed the Special Drawing undertook re-issuances during 2019-20, which Facility (SDF) in 2019-20. Thirteen states resorted helped in creating liquidity for their securities in to WMA and ten states availed OD. the secondary market. The average inter-state VII.29 Over the years, states have been yield spread on 10 year fresh issuance was 6 bps in 2019-20, the same as observed in 2018- accumulating a sizeable cash surplus in the form 19, reflecting their continued disconnect from the of intermediate treasury bills (ITBs) and auction fiscal health of issuing states. treasury bills (ATBs), which, however, entail 174PUBLIC DEBT MANAGEMENT a negative carry cost, i.e., there is a negative Table VII.5: Investment in ITBs and ATBs by State Governments/UT spread of 524 bps as at end-March 2020 between (Amount in ` crore) the average borrowing cost of states (7.24 per Item Outstanding as on March 31 cent) and the average rate of return on ATBs/ 2016-17 2017-18 2018-19 2019-20 2020-21* ITBs (2 per cent). The outstanding investment of 1 2 3 4 5 6 states in ITBs was `1,54,757 crore at end-March 14-Day ITBs 1,56,050 1,50,871 1,22,084 1,54,757 1,47,243 2020, while outstanding investment in ATBs was ATBs 36,603 62,108 73,927 33,504 38,297 `33,504 crore (Table VII.5). Total 1,92,653 2,12,979 1,96,011 1,88,261 1,85,540 *: As on June 30, 2020. Investments in Consolidated Sinking Fund/ Source: RBI. Guarantee Redemption Fund VII.30 The Reserve Bank manages two reserve and the Guarantee Redemption Fund (GRF) fund schemes on behalf of state governments [Box VII.1]. These reserve funds are built up from (SGs) – the Consolidated Sinking Fund (CSF) the contributions made by the SGs voluntarily and Box VII.1 Consolidated Sinking Fund (CSF) and Guarantee Redemption Fund (GRF) Schemes of States: Relevance in Current Scenario Sinking funds represent an alternative to manage 1.7 per cent of outstanding guarantees of states. Only 8 refinancing risk by setting aside money over and above those states maintain CSF to the desirable level of above 5 per required for debt service payments and these are invested cent of their outstanding liabilities and 11 states maintain in sovereign securities. IMF recommends such schemes GRF above 5 per cent of their outstanding guarantees. to manage refinancing risk of sovereigns (Jonasson and Yearly utilisation of these funds by states, vis-à-vis balances Papaioannou, 2018). Debt managers across the world also during last few years are given in Table 1. manage the risk through various methods including setting Measures Undertaken by the Reserve Bank to Make CSF/ up of sinking funds. Even though CSF/GRF schemes of GRF Attractive states in India cannot be strictly compared with sinking funds of other countries, it does have similarity in that these • Following the recommendation made by the Advisory are ultimately reserve funds which can be relied upon in Committee on WMA (2016) [Chairman: Shri Sumit case of an exigency. Countries like South Africa, Turkey, Bose], incremental investment in CSF/GRF is allowed Denmark and Spain manage the exposure of debt stock for availing SDF without any limit (i.e., not limited to by forming a natural hedge called ‘Liquidity Buffer’. Liquidity WMA limit). buffers have proved to be effective in mitigating risk relating Table 1: Utilisation of CSF and GRF by States/UT to public debt. In order to cover expected loss of the treasury guarantees, a risk account was established in 2003 at (Amount in ` crore) the central bank of the Republic of Turkey. The revenues Year Outstanding Balances Withdrawal during at end-March the Year of the account consist of guarantee/on-lent fees, interest income and repayments by beneficiary institutions related 1 2 3 CSF GRF CSF GRF to undertaken loans. In Denmark, a level of cash reserves is maintained to service one year of debt repayments (Koc, 2017-18 99,271 5,439 427 - 2014). 2018-19 1,14,701 6,514 1,201 21 2019-20 1,30,431 7,486 47 - In India, over the years, the aggregate investment in both 2020-21* 1,31,356 7,595 1,750 - the funds have been showing an increasing trend. As at end-March 2020, CSF constituted 2.6 per cent of the -: Nil. *As on June 30, 2020. Source: RBI. previous year’s outstanding liabilities and GRF constituted (Contd...) 175ANNUAL REPORT • Reserve Bank lowered the rate of interest on SDF on the borrowing cost of the SGs. In times of economic availed against the incremental investment in CSF/GRF, stress, states can drawdown from CSF which, in turn, may from 100 bps below the repo rate to 200 bps below the reduce the need for further borrowings for repayments repo rate in June 2018 to incentivise maintenance of of earlier borrowings. Any default on state government’s these funds by the SGs. borrowing/liability could have adverse market impact, and reserve funds like CSF and GRF can provide a cushion • In light of the financial stress caused to SGs due to the in times of stress. The importance of these two reserve COVID-19 pandemic, as an interim measure, it was funds in the current situation of COVID-19 cannot be over- decided on May 22, 2020 to liberalise the withdrawal emphasised when states/UT are facing difficulties with their norms of the CSF scheme. As against the extant rule finances. However, there are some drawbacks in keeping of limiting withdrawal to accrued interest, under the such reserve funds. If these funds are built up from borrowed relaxed norms, states are permitted to withdraw up to funds, maintaining reserve funds will increase states’ 75 per cent of their total balance in CSF outstanding borrowings to that extent. Currently investments under the as on March 31, 2020, with the quantum of withdrawal CSF scheme are made primarily in central government restricted to the redemption due towards market securities (more than 95 per cent) with remaining in SDLs of other states. Since, central government yields are less borrowing in the current financial year 2020-21. This compared to SDL yields of comparable tenor, there is a relaxation would make available an additional sum of negative carry on these investments. Further, the fund about `13,300 crore with the SGs for meeting their in CSF cannot be utilised before the lock-in period of 5 redemption requirements during 2020-21. Together with years. However, experience suggests that advantages of the normally permissible limit, this additional amount maintaining such buffer funds outweigh the disadvantages. will cover about 45 per cent of their redemptions for 2020-21. Eleven states would be able to cover 100 per Reference: cent of their redemption in 2020-21 as per the relaxed 1. Jonasson, Thordur and Papaioannou, Michael (2018), guidelines as against 6 states as per the extant rules. ‘A Primer on Managing Sovereign Debt-Portfolio Risks’, State governments will continue to retain a sizeable IMF Working Paper No. WP/18/74, April. corpus in their CSF even after utilising this additional 2. Koc, Fatos (2014), ‘Sovereign Asset and Liability amount released for withdrawal. Management Framework for DMOs: What Do Country Buffer funds like CSF/GRF increases investor confidence in Experiences Suggest’, United Nations Conference on state’s issuances which may, in turn, have a positive impact Trade and Development (UNCTAD), January. are being managed as per the schemes notified and it envisaged an initial contribution of at least by SGs. CSF is an amortisation fund and was 1.0 per cent of outstanding guarantees at the end introduced in 1999 to meet repayment obligations of the previous year and thereafter minimum 0.5 of the SGs. After a 5-year lock-in period, states per cent every year to achieve a minimum level are eligible to withdraw the interest accrued and of 3 per cent in next five years. Accretions in the accumulated up to the close of previous financial Fund can be utilised only towards payment of year (FY). A working group in 2012 recommended guarantees issued by the SGs and invoked by the to build up a minimum corpus of 3 to 5 per cent beneficiary. Presently, 18 states are members of of state liabilities within next 5 years. So far, 24 the GRF. States can also avail a special drawing states and one union territory, i.e., Puducherry facility (SDF) at a discounted rate from the Reserve have set up CSF. GRF is constituted by SGs Bank against their incremental annual investment for meeting their obligations arising out of the in CSF and GRF. Outstanding investment by states guarantees issued on behalf of state level entities. in the CSF and GRF at end-March 2020 was The Reserve Bank circulated the scheme of GRF `1,30,431 crore and `7,486 crore, respectively, to the SGs in August 2001 for voluntary adoption as against `1,14,701 crore and `6,513.73 crore 176PUBLIC DEBT MANAGEMENT at end-March 2019. Total investment in CSF/GRF Developmental and Regulatory Policies of was `23,464 crore in 2019-20. Total disinvestment August 7, 2019 (Utkarsh); by states from CSF and GRF was `47.40 crore • Ease of doing business in the G-sec market- during 2019-20. hiving off servicing of compensation bonds 3. Agenda for 2020-21 issued in physical forms to state treasuries VII.31 The Union Budget 2020-21 projects gross (Utkarsh); market borrowing through dated securities at • Complete the process of mirroring of `7,80,000 crore (3.5 per cent of GDP), higher by gilt accounts in e-Kuber; examine the about 9.9 per cent than `7,10,000 crore in 2019- feasibility of lien marking by banks for 20. Net market borrowing [including short-term loans against G-sec in the Reserve Bank’s debt and repayment of Post Office Life Insurance e-Kuber portal; and review guidelines Fund (POLIF)] is budgeted at `5,35,870 crore, on subsidiary general ledger (SGL)/ financing 67.3 per cent of the GFD in 2020-21 constituent subsidiary general ledger [65.1 per cent in 2019-20 (RE)]. After reviewing (CSGL); the cash position and requirements of the central government, the Government of India (GoI) in • Consolidation of debt through calendar- consultation with the Reserve Bank of India, driven, auction-based switches and decided to modify the indicative calendar for buyback operations along with reissuance issuance of G-sec for the remaining part of the first of securities to augment liquidity in G-sec half of the fiscal 2020-21 (May 11-September 30, market and facilitate fresh issuances; 2020) and revised the gross market borrowings to • Explore the possibilities for optimising `12 lakh crore for the full year 2020-21. Further, the market borrowings; develop the in order to provide additional resources to the methodology for building up of liquidity states in view of COVID-19, the borrowing limits buffer for better cash management; and of the state governments has also been increased consolidation of public debt data (including from the existing 3 per cent to 5 per cent of GSDP, data on market borrowings, valuations and subject to conditions. special securities) in the Reserve Bank’s VII.32 Given these requirements, the market data warehouse; borrowing programme is proposed to be conducted • Undertake best practices in data reporting with the following strategic milestones so as to to improve quality and veracity of data; achieve the overall goals of debt management set out in the beginning of this chapter: and • Introduction of separate trading of • Conduct capacity building programmes for registered interest and principal securities sensitising the state governments about (STRIPS) in SDLs as announced in the prudent measures of cash and debt the Reserve Bank’s Statement on management. 177ANNUAL REPORT 4. Conclusion Bank has also announced a number of interim measures to manage the stress on the finances VII.33 In sum, during 2019-20, combined gross of both centre and states in the wake of the market borrowings of centre and states were COVID-19 pandemic. Going ahead, consolidation conducted successfully in line with the guiding of government debt will be the key area of focus of principles of debt management. The Reserve the Reserve Bank. 178CURRENCY MANAGEMENT VIII CURRENCY MANAGEMENT During the year under review, the Reserve Bank ensured an adequate supply of clean banknotes of various denominations to the public. Other important developments were integration of currency management functions with the Bank’s core banking solution (e-Kuber), replacement of Currency Verification and Processing Systems (CVPS) across Regional Offices and a mobile application (MANI) to enable visually impaired persons identify denominations of banknotes. The Reserve Bank maintained adequate supply of clean banknotes to the public in the face of augmented COVID-19 related demand. VIII.1 The year 2019-20 was marked by 2. Developments in Currency in Circulation strengthening of internal work processes within the VIII.4 Currency in circulation (CiC) includes Reserve Bank’s mandate in the area of currency banknotes and coins. At present, the Reserve management. They, inter alia, involved upgradation Bank issues notes in denominations of `2, `5, of Currency Verification and Processing Systems `10, `20, `50, `100, `200, `500 and `2,000. (CVPS) across offices of the Reserve Bank and Coins in circulation comprise 50 paise and `1, replacement of the Integrated Computerised `2, `5, `10 and the recently launched coin of Currency Operations and Management System `20 denomination. In terms of value, banknotes (ICCOMS) application with an improved currency accounted for the major share of the total CiC management module (CyM) integrated with the (around 99 per cent). Reserve Bank’s Core Banking Solution (e-Kuber). Banknotes VIII.2 The demand for currency started to increase in the wake of heightened uncertainty VIII.5 The value and volume of banknotes in caused by COVID-19 pandemic. The Reserve circulation increased by 14.7 per cent and 6.6 per Bank took a series of measures in order to cent, respectively, during 2019-20. In value terms, meet the enhanced demand. In addition, note the share of `500 and `2,000 banknotes together printing presses, paper mills and banks were accounted for 83.4 per cent of the total value of also directed to put in place a business continuity banknotes in circulation at end-March 2020, with a plan/contingency plan to avoid any disruption in sharp increase in the share of `500 banknotes. In continuous supply of currency. volume terms, `10 and `100 banknotes constituted VIII.3 Against this backdrop, the rest of the 43.4 per cent of total banknotes in circulation at chapter is organised into four sections. The end-March 2020 (Table VIII.1). immediately following section 2 presents Coins the important developments in currency in circulation during the year. Section 3 covers the VIII.6 The total value of coins in circulation implementation status of the agenda for 2019-20 increased by 1.8 per cent in 2019-20 while the and section 4 sets out the agenda for 2020-21. total volume increased by only 1.2 per cent. As on The chapter ends with a conclusion. March 31, 2020, coins of `1, `2 and `5 together 179ANNUAL REPORT Table VIII.1: Banknotes in Circulation (end-March) Denomination (`) Volume (lakh pieces) Value (` crore) 2018 2019 2020 2018 2019 2020 1 2 3 4 5 6 7 2 and 5 1,14,253 1,13,025 1,12,203 4,433 4,372 4,331 (11.2) (10.4) (9.7) (0.2) (0.2) (0.2) 10 3,06,449 3,12,598 3,04,022 30,645 31,260 30,402 (29.9) (28.7) (26.2) (1.7) (1.5) (1.3) 20 1,00,160 87,127 82,994 20,032 17,425 16,599 (9.8) (8.0) (7.2) (1.1) (0.8) (0.7) 50 73,430 86,015 86,009 36,715 43,007 43,004 (7.2) (7.9) (7.4) (2.0) (2.0) (1.8) 100 2,22,150 2,00,738 1,99,021 2,22,150 2,00,738 1,99,021 (21.7) (18.5) (17.2) (12.3) (9.5) (8.2) 200 18,526 40,005 53,646 37,053 80,010 1,07,293 (1.8) (3.7) (4.6) (2.1) (3.8) (4.4) 500 1,54,690 2,15,176 2,94,475 7,73,429 10,75,881 14,72,373 (15.1) (19.8) (25.4) (42.9) (51.0) (60.8) 1,000 661 - - 6610 - - (…) - - (0.4) - - 2,000 33,632 32,910 27,398 6,72,642 6,58,199 5,47,952 (3.3) (3.0) (2.4) (37.3) (31.2) (22.6) Total 10,23,951 10,87,594 11,59,768 18,03,709 21,10,892 24,20,975 -: Not applicable. …: Negligible. Note: 1. Figures in parentheses represent the percentage share in total volume/value. 2. Figures in parentheses may not add up to 100 due to rounding-off of numbers. Source: RBI. constituted 83.7 per cent of the total volume of denominations accounted for 78.3 per cent coins in circulation, while in value terms, these (Table VIII.2). Table VIII.2: Coins in Circulation (end-March) Denomination Volume (lakh pieces) Value (` crore) (`) 2018 2019 2020 2018 2019 2020 1 2 3 4 5 6 7 Small coins 1,47,880 1,47,880 1,47,880 700 700 700 (12.4) (12.3) (12.1) (2.7) (2.7) (2.7) 1 4,96,360 5,03,260 5,08,878 4,964 5,033 5,089 (41.7) (41.8) (41.8) (19.4) (19.5) (19.3) 2 3,28,550 3,31,540 3,35,158 6,571 6,631 6,703 (27.6) (27.6) (27.5) (25.7) (25.6) (25.5) 5 1,66,500 1,71,510 1,75,992 8,325 8,575 8,800 (14.0) (14.2) (14.4) (32.5) (33.2) (33.5) 10 50,490 49,050 50,130 5,049 4,905 5,013 (4.3) (4.1) (4.1) (19.7) (19.0) (19.1) Total 11,89,780 12,03,240 12,18,038 25,609 25,844 26,305 Note: 1. Figures in parentheses represent the percentage share in total volume/value. 2. Figures in parentheses may not add up to 100 due to rounding-off of numbers. Source: RBI. 180CURRENCY MANAGEMENT Currency Management Infrastructure Table VIII.3: Currency Chests and Small Coin Depots (as at end-March 2020) VIII.7 The functions relating to issuance of currency (both banknotes and coins) and their Category No. of Currency No. of Small Chests Coin Depots management are performed by the Reserve 1 2 3 Bank through its issue offices, currency chests State Bank of India 1,962 1,689 and small coin depots spread across the country. Nationalised Banks 1,180 908 As on March 31, 2020, the State Bank of India Private Sector Banks 206 168 accounted for the highest share (58.3 per cent) of Cooperative Banks 8 7 currency chests (Table VIII.3). Foreign Banks 4 3 Regional Rural Banks 6 6 Indent and Supply of Currency Reserve Bank of India 1 1 Total 3,367 2,782 VIII.8 The indent of banknotes for 2019-20 was Source: RBI. lower by 13.1 per cent than that of a year ago. The supply of banknotes during 2019-20 was reflecting lower demand for coins in the economy also lower by 23.3 per cent than in the previous (VIII.5). year mainly due to the disruptions caused by the outbreak of COVID-19 and the ensuing lockdown Disposal of Soiled Notes (Tables VIII.4). VIII.10 The processing of soiled notes was VIII.9 The indent and supply of coins for 2019- expedited during the year through continuous 20 was lower by 44.5 per cent and 49.3 per cent, monitoring and optimal utilisation of the CVPS/ respectively, from their levels in the previous year, Shredding and Briquetting System (SBS). As a Table VIII.4: Indent and Supply of Banknotes by BRBNMPL and SPMCIL (April-March) (pieces in crore) Denomination (`) 2017-18 2018-19 2019-20 Indent Supply Indent Supply Indent Supply 1 2 3 4 5 6 7 5 - - - - - 1 10 424 431 392 429 147 147 20 246 205 5 21 125 134 50 378 279 423 404 240 234 100 807 317 633 641 330 327 200 269 283 262 273 205 196 500 (new design) 921 969 1,169 1,147 1,463 1,200 2,000 15 15 5 5 - - Total 3,060 2,500 2,888 2,919 2,510 2,239 -: Not Applicable. Note: Figures in the columns may not add up to the total due to rounding-off of the numbers. BRBNMPL: Bharatiya Reserve Bank Note Mudran Private Limited. SPMCIL: Security Printing and Minting Corporation of India Limited. Source: RBI. 181ANNUAL REPORT Table VIII.5: Indent and Supply of Coins by Mints (April-March) (pieces in crore) Denomination 2017-18 2018-19 2019-20 Indent Supply Indent Supply Indent Supply 1 2 3 4 5 6 7 `1 183 201 200 255 10 11 `2 118 154 100 129 80 80 `5 170 154 113 68 100 100 `10 300 76 200 161 120 115 `20 - - - - 30 5 Total 771 585 613 613 340 311 -: Not Applicable. Source: RBI. result, soiled notes processed increased by 18.2 Table VIII.7: Number of Counterfeit Notes per cent on a year-on-year basis (Table VIII.6). Detected (April-March) (number of pieces) Counterfeit Notes Year Detection at the Other Banks Total Reserve Bank VIII.11 During 2019-20, out of the total Fake 1 2 3 4 Indian Currency Notes (FICNs) detected in the 2017-18 1,88,693 3,34,090 5,22,783 banking sector, 4.6 per cent were detected at the (36.1) (63.9) (100.0) 2018-19 17,781 2,99,603 3,17,384 Reserve Bank and 95.4 per cent by other banks (5.6) (94.4) (100.0) (Table VIII.7). 2019-20 13,530 2,83,165 2,96,695 (4.6) (95.4) (100.0) VIII.12 Compared to the previous year, there Note: 1. Figures in parentheses represent the percentage share in total. was an increase of 144.6 per cent, 28.7 per cent, 2. Does not include counterfeit notes seized by the police and other enforcement agencies. Source: RBI. Table VIII.6: Disposal of Soiled Banknotes (April-March) (pieces in lakh) 151.2 per cent and 37.5 per cent in counterfeit Denomination (`) 2017-18 2018-19 2019-20 notes detected in the denominations of `10, `50, 1 2 3 4 `200 and `500 [Mahatma Gandhi (New) Series], 2000 1 6 1,768 respectively. Counterfeit notes detected in the 1000 68,467 22 0 denominations of `20, `100 and `2000 declined 500 2,00,237 154 1,645 200 - 1 318 by 37.7 per cent, 23.7 per cent and 22.1 per cent, 100 1,054 37,945 44,793 respectively (Table VIII.8). 50 827 8,352 19,070 20 1,137 11,626 21,948 Expenditure on Security Printing 10 4,975 65,239 55,744 Up to 5 83 591 1,244 VIII.13 The total expenditure incurred on security Total 2,76,782 1,23,935 1,46,530 printing during July 1, 2019 to June 30, 2020 was -: Not Applicable. `4,377.84 crore as against `4,810.67 crore in the Note: Figures in the columns may not add up to the total due to rounding-off of the numbers. previous year mainly due to lower indent placed Source: RBI. during the year. 182CURRENCY MANAGEMENT Table VIII.8: Denomination-wise Counterfeit • Banknote Survey of Consumers (Para Notes Detected in the Banking System VIII.21); (April-March) (number of pieces) • Issuance of Visually Impaired Series Coins Denomination (`) 2017-18 2018-19 2019-20 (Para VIII.22); and 1 2 3 4 • Other Areas of Focus (Para VIII.23). 2 and 5 1 .. 22 10 287 345 844 Implementation Status of Goals 20 437 818 510 50 23,447 36,875 47,454 Introduction of Varnished Banknotes - Field Trial 100 2,39,182 2,21,218 1,68,739 200 79 12,728 31,969 VIII.15 The Reserve Bank has undertaken several 500 (MG Series) 1,27,918 971 11 initiatives to introduce varnished banknotes in 500 [MG (New) Series] 9,892 21,865 30,054 `100 denomination on a field trial basis. However, 1,000 1,03,611 717 72 2,000 17,929 21,847 17,020 the process of printing of these notes has Total 5,22,783 3,17,384 2,96,695 been delayed due to disruptions caused by the COVID-19 pandemic and certain other .. : Nil. Source: RBI. developments. Procurement of New Security Features for Indian 3. Agenda for 2019-20: Implementation Status Banknotes Goals Set for 2019-20 VIII.16 A Global Pre-Qualification Bid Notice VIII.14 Last year, the Department had set out the was issued in July 2017 incorporating the “Make following goals: in India” clause (to the extent feasible) in terms • Introduction of Varnished Banknotes - of Government of India’s Public Procurement Field Trial (Utkarsh) [Para VIII.15]; (Preference to Make in India) Order 2017, for procurement of security features for Banknotes. • Procurement of New Security Features for The Reserve Bank is actively involved in taking Indian Banknotes (Utkarsh) [Para VIII.16]; the process forward. • Procurement of Currency Verification and Procurement of Currency Verification and Processing Systems (CVPS) (Utkarsh) Processing Systems (CVPS) [Para VIII.17]; VIII.17 The Reserve Bank procured 50 new • Implementation of the Recommendations CVPS machines through a global tender. The of Committees on Currency Management process of supply, installation and commissioning Aspects (Utkarsh) [Para VIII.18]; of these new machines in all the 19 Regional • Integration of Currency Management Offices has been completed. The Reserve Bank Functions with Core Banking Solution also undertook an exercise to upgrade the (e-Kuber) (Utkarsh) [Para VIII.19]; infrastructure of CVPS rooms to state-of-the-art/ • Aiding Visually Impaired in Identification of international norms, creating a risk-free, hygienic Denomination of Banknotes (Para VIII.20); and aesthetically designed workplace. 183ANNUAL REPORT Implementation of the Recommendations of module and were completed by June 2019. With Committees on Currency Management Aspects this new module, the accounting of currency transaction is now being carried out on T+0 basis VIII.18 Recommendations relating to as against T+1 basis under ICCOMS, the erstwhile standardisation of raw material procurement, currency management application of the Reserve quality assurance, note printing processes and Bank. Phase III of CyM module, which includes security features across all presses and paper development of user reports and certain other mills, made by a Group of Experts1 (Chairman: functionalities, is in progress. Shri C. Krishnan) were pursued for implementation during the year. Pursuant to the recommendations Aiding Visually Impaired in Identification of of the High Level Committee on Currency Storage Denomination of Banknotes and Movement (HLCCSM)2 [Chairman: Shri N. S. VIII.20 The Reserve Bank launched MANI (Mobile Vishwanathan] and the Committee on Currency Aided Note Identifier), a mobile application for Movement (CCM)3 [Chairman: Shri Deepak aiding visually impaired persons to identify the Mohanty], the Reserve Bank actively engaged denomination of Indian banknotes, which was in scaling up direct remittance of banknotes to inaugurated by the Governor on January 1, 2020 currency chests, remittance tracking system and (Box VIII.1). standardisation of container fleets for sending Banknote Survey of Consumers treasure in a safe, optimum and secure manner. Recommendations to strengthen the process of VIII.21 The Department launched a Banknote mopping up of soiled notes, last mile distribution Survey of Consumers in October 2019 with the of banknotes along with other recommendations objective of (a) assessing the demand for cash of the HLCCSM, CCM and Group of Experts are as well as denomination preferences at consumer in various stages of implementation. level; (b) measuring the awareness of people about various security features of the banknotes; Integration of Currency Management Functions and (c) gauging the level of satisfaction with the with Core Banking Solution (e-Kuber) current banknotes and coins for normal as well as VIII.19 A currency management module (CyM) visually impaired people. Fieldwork, however, had in e-Kuber is being developed to improve the to be postponed due to the lockdown. management information system for currency Issuance of Visually Impaired Series Coins operations and to ensure that accounting of currency chest transactions are reflected in the VIII.22 The new series of visually impaired friendly Reserve Bank’s book in near real time basis. coins, which was introduced in March 2019, was The functionalities of CyM module are being put into circulation over the counter at Issue Offices rolled out in 3 phases. Phases I and II involved of the Reserve Bank. This new series was also on-boarding of all 19 Regional Offices (ROs) remitted to currency chests for wider distribution and all the active currency chests (CCs) in CyM to public. 1 The Report was submitted to the Reserve Bank in 2018. 2 It was an Interim Report. 3 The Report was submitted to the Reserve Bank in 2017. 184CURRENCY MANAGEMENT Box VIII.1 Mobile Aided Note Identifier (MANI) for the Visually Impaired Indian banknotes have several features like intaglio printing, as vibration (suitable for those with vision and hearing tactile mark, variable banknote size, large numerals, impairment). variable colour, monochromatic colours and patterns, which • After installation, the mobile application does not require enable the visually impaired (colour blind, partially sighted internet and works in offline mode. and blind people) to identify them. In its Statement on • Ability to navigate the mobile application via voice Developmental and Regulatory Policies of June 6, 2018, controls for accessing the application features wherever the Reserve Bank announced its intention to explore the the underlying device and operating system combination feasibility of developing a suitable device or mechanism supports voice enabled controls. for improving further the identification of Indian banknotes • The application is free and can be downloaded from by the visually impaired. Accordingly, the Reserve Bank the Android Play Store and iOS App Store without any developed and launched a mobile application called MANI charges/payment. (Mobile Aided Note Identifier) on January 1, 2020 with the • The mobile application does not authenticate a note as following features: being either genuine or counterfeit. • Capable of identifying the denominations of Mahatma In the USA, a similar application called EyeNote was Gandhi Series and Mahatma Gandhi (New) Series developed by the Bureau of Engraving and Printing (BEP) banknote by checking front or reverse side/part of the and was put in place for public for free. note, including half folded notes at various holding References: angles and broad range of light conditions (normal light/ day light/low light/etc.). 1. RBI press releases. • Ability to identify the denomination through audio 2. Bureau of Engraving and Printing (BEP), US Department notification in Hindi/English and non-sonic mode such of the Treasury. Other Areas of Focus banknotes in the country. BRBNMPL along with Security Printing and Minting Corporation of India VIII.23 As part of the medium-term strategy Limited (SPMCIL) has set up the Bank Note Paper framework, the Reserve Bank continued to focus on Mill India Private Limited (BNPMIPL) in Mysuru, other areas of currency management like bringing an entity producing Cylinder mould VAT made improvements in the processing capabilities and Watermarked Bank Note (CWBN) paper required logistics for efficient inventory management of for banknote production, with a production capacity currency and fine-tuning the models for estimation of 12,000 metric tonnes per annum. BRBNMPL of demand for banknotes and coins. has also set up an ink factory at Mysuru with an Bharatiya Reserve Bank Note Mudran Private annual production capacity of 1,500 metric tonnes, Ltd. (BRBNMPL) which has started its commercial production from VIII.24 BRBNMPL is a wholly owned subsidiary August 2018. of the Reserve Bank, which runs two banknote 4. Agenda for 2020-21 printing presses in Mysuru and Salboni with a VIII.25 During the year, the Department will focus total capacity of printing 16 billion note pieces per on the following: year on a two-shift basis. Since its inception, the company has enabled the Reserve Bank to bridge • Automation of Banknote Handling Process the gap between the supply and demand for (Utkarsh) 185ANNUAL REPORT o Upgrade the infrastructure and o Informative materials on exchanging processes for currency management banknotes/Note Refund Rules; and by inducting modern technology. o Interactive games and posters. • Microsite for Bank notes 5. Conclusion o Continue the process of designing and VIII.26 In sum, in spite of challenges caused developing a microsite to host basic by COVID-19 pandemic, the Reserve Bank information on features of banknotes successfully managed to maintain adequate supply of clean currency notes in the economy. The and information relating to currency Reserve Bank has also made sustained efforts to management – information on combat the menace of forged notes in circulation banknotes will be presented through and to create public awareness about various various multimedia with simple and aspects of banknotes. Going ahead, strengthening efficient navigation; the currency management infrastructure, o Displaying 360-degree view of the enhancing public awareness on different features design and security features of of Indian banknotes and fine-tuning the models banknotes through explanatory videos for estimation of demand for banknotes will be the and animation; areas of focus for the Reserve Bank. 186PAYMENT AND SETTLEMENT SYSTEMS IX AND INFORMATION TECHNOLOGY During the year, the Reserve Bank continued to ensure safe, secure, quick and affordable e-payment options, with greater competition and customer confidence in the payment ecosystem of the country. Implementing round-the- clock NEFT was a significant milestone in this journey. Going forward, the Reserve Bank’s endeavour would be to reach out to the hitherto excluded sections of society with a bouquet of e-payment options, supported by an efficient regulatory environment and robust consumer protection; the focus will also now be on the next generation financial messaging system and wireless technology for banks. IX.1 The Reserve Bank’s efforts have been to a bouquet of e-payment options that is safe, geared towards developing efficient and secure secure, convenient, quick and affordable. The payment and settlement systems with focus on various initiatives undertaken by the Reserve their greater penetration through availability of Bank in the payments ecosystem during the user-friendly platforms at affordable cost. The year were oriented towards encouraging healthy Payment and Settlement Systems Vision 2019- competition, improving customer convenience 21, prepared by the Department of Payment at affordable cost and increasing customer and Settlement Systems, sets out the future confidence in the payment systems. The path in this direction. Further, the Department of overarching goal is to ensure deepening of digital Information Technology continued its endeavour payments across the country, both in terms of to build a dynamic, robust and secured digital adoption and penetration, supported by customer- platform to ensure smooth functioning of the centric measures to enhance the safety and payment and settlement systems in the country. security of payment systems. Against this backdrop, the following section Payment Systems covers developments in the areas of payment and IX.3 The payment and settlement systems settlement systems during the year and also takes recorded a robust growth during 2019-20, growing stock of the implementation status of the agenda by 44.1 per cent in terms of volume on top of for 2019-20. Section 3 provides various measures the expansion by 55.8 per cent in the previous undertaken by the DIT during the year vis-à-vis year. In terms of value, it increased by 5.4 per the agenda set for 2019-20. These departments cent on top of 14.2 per cent in the previous year, have also set out an agenda for 2020-21. The mainly due to lower growth observed in the large chapter has been summarised at the end. value system, viz., Real Time Gross Settlement 2. DEPARTMENT OF PAYMENT AND (RTGS) system. The share of digital transactions SETTLEMENT SYSTEMS (DPSS) in the total volume of non-cash retail payments IX.2 The Reserve Bank’s Payment and increased to 97.0 per cent during 2019-20, up Settlement Systems Vision 2019-21 document from 95.4 per cent in the previous year (Table envisaged empowering every Indian with access IX.1). However, the extended period of lockdown 187ANNUAL REPORT Table IX.1: Payment System Indicators – Annual Turnover (April-March) Item Volume (Lakh) Value (` Crore) 2017-18 2018-19 2019-20 2017-18 2018-19 2019-20 1 2 3 4 5 6 7 A. Settlement Systems CCIL Operated Systems 35 36 36 10,74,80,202 11,65,51,038 13,41,50,192 B. Payment Systems 1. Large Value Credit Transfers – RTGS 1,244 1,366 1,507 11,67,12,478 13,56,88,187 13,11,56,475 Retail Segment 2. Credit Transfers 58,793 1,18,750 2,06,661 1,88,14,287 2,60,97,655 2,85,72,100 2.1 AePS (Fund Transfers) 6 11 10 300 501 469 2.2 APBS 12,980 15,032 16,805 55,949 86,734 99,448 2.3 ECS Cr 61 54 18 11,864 13,235 5,145 2.4 IMPS 10,098 17,529 25,792 8,92,498 15,90,257 23,37,541 2.5 NACH Cr 7,031 9,021 11,406 5,20,992 7,36,349 10,52,187 2.6 NEFT 19,464 23,189 27,445 1,72,22,852 2,27,93,608 2,29,45,580 2.7 UPI 9,152 53,915 1,25,186 1,09,832 8,76,971 21,31,730 3. Debit Transfers and Direct Debits 3,788 6,382 8,957 3,99,300 6,56,232 8,26,036 3.1 BHIM Aadhaar Pay 20 68 91 78 815 1,303 3.2 ECS Dr 15 9 1 972 1,260 39 3.3 NACH Dr 3,738 6,299 8,768 3,98,211 6,54,138 8,24,491 3.4 NETC (Linked to Bank Account) 15 6 97 39 20 203 4. Card Payments 47,486 61,769 73,012 9,19,035 11,96,888 15,35,765 4.1 Credit Cards 14,052 17,626 21,773 4,58,965 6,03,413 7,30,895 4.2 Debit Cards 33,434 44,143 51,239 4,60,070 5,93,475 8,04,870 5. Prepaid Payment Instruments 34,591 46,072 53,318 1,41,634 2,13,323 2,15,558 6. Paper-based Instruments 11,713 11,238 10,414 81,93,493 82,46,065 78,24,821 Total – Retail Payments (2+3+4+5+6) 1,56,371 2,44,211 3,52,362 2,84,67,748 3,64,10,163 3,89,74,281 Total Payments (1+2+3+4+5+6) 1,57,615 2,45,577 3,53,869 14,51,80,226 17,20,98,350 17,01,30,756 Total Digital Payments (1+2+3+4+5) 1,45,902 2,34,339 3,43,455 13,69,86,734 16,38,52,285 16,23,05,934 Note: 1. RTGS system includes customer and inter-bank transactions only. 2. Settlements of CBLO, government securities and forex transactions are through the Clearing Corporation of India Ltd. (CCIL). Government Securities include outright trades and both legs of repo transactions and triparty repo transactions. With effect from November 5, 2018, CCIL discontinued CBLO and operationalised triparty repo under securities segment. 3. The figures for cards are for payment transactions at point of sale (POS) terminals and online. 4. Figures in the columns might not add up to the total due to rounding off of numbers. Source: RBI. arising on account of the COVID-19 pandemic cent from the previous year, mainly on account of resulted in subdued economic activity and lower decline in large value transactions of corporates discretionary payments, thereby leading to a fall in in line with slowdown in economic activity. At digital transactions (Box IX.1). the end of March 2020, the RTGS facility was available through 1,53,605 branches of 218 Digital Payments banks. Transactions in the National Electronic IX.4 Amongst the electronic modes of Funds Transfer (NEFT) system rose by 18.3 per payments, transactions under the RTGS system cent during the year. At the end of March 2020, expanded by 10.3 per cent, with their value at the NEFT facility was available through 1,53,687 `1,311.6 lakh crore, however, dipping by 3.3 per branches of 217 banks. 188PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY Box IX.1 COVID-19 Crisis: Implications for Payment Systems The COVID-19 pandemic has led to a diminution in digital Table 1: Interlinkage between Digital Transactions and transactions in India. In corroboration, the growth of currency Economic Activity (Sample: 2009Q2 to 2019Q4) with the public in India accelerated from 11.2 per cent on Null Hypothesis (Ho) F Stat Accept February 28 to 14.5 per cent as on March 31, to 21.3 per (Prob) / Reject cent as on June 19, 2020 (12.8 per cent a year ago). At Ho the same time, the cumulative value of digital transactions 1 2 3 during January-May 2020 declined by 25.5 per cent (y-o-y) Growth of total value of digital (retail) 0.83 Accept as compared with a strong growth of 20.6 per cent a year transaction does not Granger Cause growth (0.52) ago. Of this, digital retail transaction value growth contracted of nominal private consumption spending by 10.6 per cent as compared with an increase of 31.3 per Growth of nominal private consumption 6.48 Reject cent last year. However, both these indicators recovered in spending does not Granger Cause growth of (0.00) the month of May 2020. In digital payments, the retail RTGS total value of digital (retail) transaction volume, which had registered healthy growth (y-o-y) since Growth of total value of digital transaction 0.51 Accept July 2019 due to waiving of RTGS charges by the Reserve does not Granger Cause growth of nominal (0.73) Bank, declined in March (-12.3 per cent), April (-52.5 per GDP cent) and May (-27.5 per cent). While they regained traction Growth of nominal GDP does not Granger 3.42 Reject in May, transactions through Immediate Payment Service Cause growth of total value of digital (0.02) (IMPS) had started declining in February 2020 and the drop transaction became sharper in April 2020. Unified Payments Interface Source: RBI staff estimates. (UPI) transaction volume declined by 5.9 per cent in March 2020 and further by 19.8 per cent in April 2020 to slightly 2009-19 supported statistically significant unidirectional less than one billion transactions. However, it recovered as Granger causal relationship from the growth of nominal the lockdown was gradually lifted and logged a record 1.34 GDP and private final consumption expenditure (PFCE) to billion transactions in June 2020. The ratio of RuPay card the growth of digital and retail transaction value (Table 1). transactions at e-commerce portals to point-of-sale (PoS) jumped to 237 per cent in April 2020 from 76.8 per cent This analysis also reveals a long-run relationship between in February 2020, reflecting the effect of social distancing. digital retail transactions and PFCE in an auto-regressive Apart from low demand during the lockdown, the suspension distributed lag model (ARDL) framework. Digital transactions of operations by leading users of digital payments such as are expected to pick up when economic activity gathers e-commerce and BigTechs could have contributed to a momentum, with enabling conditions for uninterrupted decline in small value digital payments. growth of digital payments such as spread of seamless digital connectivity within consumers, local traders, distributors, The decline in digital transactions during the lockdown producers and other stakeholders. period is indicative of the integration of the digital economy with the real economy. Empirical analysis for the period Source: RBI. IX.5 During 2019-20, the number of card `2.2 lakh crore increased by little more than 1.0 payment transactions carried out through credit per cent. The acceptance infrastructure witnessed cards and debit cards increased by 23.5 per cent substantial growth; the number of Point of Sale and 16.1 per cent, respectively, while the value (PoS) terminals increased by 38.2 per cent to increased by 21.1 per cent and 35.6 per cent to 51.4 lakh and the number of Bharat QR codes `7.3 lakh crore and `8.0 lakh crore, respectively. deployed increased by 74.6 per cent to 20.28 lakh Prepaid Payment Instruments (PPIs) recorded a as at end-March 2020. Further, during the same volume growth of 15.7 per cent on top of the 33.2 period, the number of ATMs increased from 2.22 per cent a year ago, while transactions value at lakh to 2.34 lakh. 189ANNUAL REPORT Authorisation of Payment Systems • Leadership and facilitating roles in regional cooperation in payment systems (Para IX.6 Payments System Operators (PSOs) IX.9); comprise PPI issuers, cross-border inbound money transfer service providers, White Label • To prepare a policy paper on authorisation ATM (WLA) operators, Trade Receivables of new retail payment systems to address Discounting System (TReDS) platform operators, the concentration risk (Para IX.10); ATM networks, Instant Money Transfer service • To provide ‘on tap’ authorisation facility providers, card payment networks and Bharat to entities desirous to function/operate/ Bill Payment Operating Units (BBPOUs), besides provide platforms for BBPOU, TReDS and Clearing Corporation of India Ltd. (CCIL) and WLAs (Para IX.11); National Payments Corporation of India (NPCI) • To create Payments Infrastructure [Table IX.2.] Development Fund (PIDF) [Para IX.14]; Agenda for 2019-20: Implementation Status • To put in place a framework for harmonising Goals Set for 2019-20 Turn Around Time (TAT) for resolution of IX.7 In last year’s Annual Report, the customer complaints and compensation Department had set out the following goals under (Para IX.19); Utkarsh: • Broaden scope of information system (IS) Table IX.2: Authorisation of Payment System Audit of entities (Para IX.28); Operators (as at end-June) • To prepare a detailed framework (Number) on oversight of Financial Market Entities 2019 2020 Infrastructures (FMIs) and retail payment 1 2 3 systems (Para IX.29); and A. Non-Banks – Authorised PPI Issuers 47 43 • Creation of a Central Payments Fraud WLA Operators 8 8 Information Registry (Para IX.30). Instant Money Transfer Service Providers 1 1 BBPOUs 9 9 Implementation Status of Goals TReDS Platform Operators 3 3 Cross Border Money Transfer Service Scheme 9 9 IX.8 In the ‘Payment and Settlement Systems Operators in India: Vision 2019-21 (Vision)’, DPSS had Card Networks 5 5 ATM Networks 2 2 identified four elements, viz., competition, cost, B. Banks – Approved convenience and confidence, for achieving its PPI Issuers 61 56 Vision. BBPOUs 39 37 Mobile Banking Providers 490 547 Encouraging Healthy Competition ATM Networks 3 3 Global Outreach of Payment Systems Note: Validity period of Certificate of Authorisation (CoA) granted to two non-bank PPI issuers was not extended further, while two non- IX.9 In less than four years since its launch in bank PPI issuers voluntarily surrendered their CoA. Source: RBI. 2016, the Unified Payments Interface (UPI) has 190PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY grown in volume terms to eclipse all other payment 2019 to encourage innovation and competition modes. The UPI has unique features: open and through increased participation by new authorised interoperable platform; two factor authentication; players. facility for payment service providers to build on Payment and Settlement Systems Innovation top of existing infrastructure; linking of multiple Contest bank accounts in a single application; e-mandate; IX.12 The Reserve Bank conducted a Payment and compatibility with bank accounts and wallets, and Settlement Systems Innovation Contest in all of which gives it cross-border appeal too. collaboration with the Institute for Development Similarly, the growth of domestic card network – and Research in Banking Technology (IDRBT). RuPay – also provides an opportunity for its global The objective of the contest was to provide a expansion. The Vision envisaged enhancing the platform to encourage, recognise and promote global outreach of its payment systems, including innovations and ideas in the payment and remittance services, through active participation settlement systems arena as well as to foster new and cooperation in international and regional fora developments by entrepreneurs, start-ups and by collaborating and contributing to standard- similar entities in the payments space. The themes setting. The Reserve Bank, in close collaboration covered in the contest, inter alia, included cross- with the government and NPCI, is working in border remittances, next generation payments and the direction of expanding the reach of UPI and automated payment processing. The shortlisted RuPay globally, apart from Bhutan, Singapore and applicants were invited to present their innovations prospectively in South Korea and UAE. to an eminent jury. The outstanding innovators Concentration Risk in Retail Payment Systems were awarded prizes and all shortlisted applicants IX.10 A policy paper on Authorisation of were provided certificates of appreciation. New Retail Payment Systems was released Approval to Department of Posts (DoP) for to encourage more players to participate and Participating in Various Payment Systems promote pan-India payment platforms so as to IX.13 In July 2016, the DoP was granted give a fillip to innovation and competition in the approval for enabling two-way interoperability of sector as also to minimise the concentration risk ATMs installed by it with ATMs connected to the in retail payment systems. Subsequently, a ‘draft National Financial Switch. Taking this further, DoP framework for authorisation of a pan-India New was permitted to participate in payment systems Umbrella Entity (NUE) for retail payment systems’ such as NEFT, RTGS, Immediate Payments was placed on the Reserve Bank’s website on Service (IMPS), debit cards at PoS/e-commerce February 10, 2020 inviting public comments. The (e-com), UPI and Aadhaar Enabled Payment feedback received is being examined. System (AePS), subject to adherence to all On-tap Authorisation relevant regulatory instructions of the Reserve IX.11 ‘On tap’ authorisation to entities desirous Bank as applicable to banks, with subsequent to function/operate/provide platforms for BBPOU, transfer of these activities to India Post Payment TReDS, and WLAs was enabled on October 15, Bank (IPPB). 191ANNUAL REPORT Ensuring Affordable Costs recommendations of the Committee are being examined by the Reserve Bank. Setting up Payments Infrastructure Development Incentive for Digital Payments Usage Fund IX.17 With effect from July 1, 2019, the Reserve IX.14 As announced in the Reserve Bank’s Bank waived the charges collected by it from Statement on Developmental and Regulatory member banks towards the centralised payment Policies of October 4, 2019, and also envisaged system (processing charges in NEFT and in the Vision, an Acceptance Development Fund processing and time varying charges in RTGS). (ADF) [renamed as Payments Infrastructure The member banks were also advised to extend Development Fund (PIDF)] was created for similar benefits to their customers. Further, with increasing the acceptance infrastructure (both effect from January 1, 2020, member banks were physical and digital PoS) in the country. This mandated not to levy any charge on their savings Fund will subsidise acquirers for deploying PoS bank account holders for fund transfers in NEFT acceptance infrastructure with a focus on Tier III initiated online (viz., through internet banking and to Tier VI centres and the north-eastern part of / or mobile apps of the banks). the country and address the supply side issues, in order to pivot the ecosystem from issuance to Payment Aggregators (PA)/Payment Gateway acceptance, which is crucial for increasing the (PG) Authorisation/Regulation digital footprints. IX.18 A typical online payment transaction IX.15 The contribution to the corpus will be made requires the involvement of several intermediaries by the Reserve Bank, card issuing banks and card like banks and non-banks, which act as merchant networks operating in the country and the fund will aggregators. PAs and PGs are entities that facilitate be administered by the Reserve Bank. e-commerce sites and merchants to accept various payment instruments from the customers Revised Framework for ATM Charges and Fees for completing their payment obligations without IX.16 Consequent upon the announcement the need for merchants to create a separate made in the Reserve Bank’s Statement on payment integration system of their own. In the Developmental and Regulatory Policies of June process, while PAs handle funds, the PGs provide 6, 2019 and with a view to provide a fillip to the technical infrastructure without handling funds. ATM deployment in the country, a Committee was While banks and other PSOs are directly regulated constituted in July 2019 to review the entire gamut by the Reserve Bank, the PAs and PGs are not. of ATM charges and fees. The Committee, chaired Given the critical role of these intermediaries, by the Chief Executive, Indian Banks’ Association, guidelines on regulation of payment aggregators included representatives from NPCI, SBI, HDFC and payment gateways were issued on March 17, Bank, Confederation of ATM Industry and Tata 2020 to regulate online PAs and provide baseline Communications Payment Solutions Ltd. The technology-related recommendations to PGs. 192PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY Improving Customer’s Convenience for the first transaction. This framework was also extended later to cover UPI-based transactions. Framework for Harmonising Turn Around Time (TAT) for Resolution of Customer Complaints and Increase in Operating Hours of RTGS Compensation IX.22 The Reserve Bank manages and operates IX.19 A framework harmonising TAT and the RTGS, the systemically important large value customer compensation for failed transactions funds transfer system. As part of the initiatives in ATMs, UPI, IMPS, PPIs and card payments to aimed at increasing the time-based availability bring uniformity and discipline in reversing such of payment systems, the timings for customer failed transactions came into effect from October transactions in RTGS were enhanced. RTGS is 15, 2019. The framework prescribed TAT for failed now available for customer transactions between transactions as also a compensation framework 0700 hours and 1800 hours as against 0800 hours providing suo moto compensation to customers and 1630 hours earlier. for delay in executing the reversal of such Expansion of Biller Categories under Bharat Bill transactions. Payment System (BBPS) Availability of NEFT on a 24x7x365 Basis IX.23 In order to give impetus to digital payment IX.20 NEFT, which was operating in 23 half- of utility bills, the scope and coverage of BBPS hourly batches was made available 24x7x365, was extended in September 2019 to include with effect from December 16, 2019. The system all categories of billers who raise recurring now operates in 48 half hourly batches with the bills (except prepaid recharges) as eligible first batch of the day starting at 0030 hours and participants, on a voluntary basis. It aims at the last batch of the day ending at 00:00 hours. leveraging the availability of a standard platform NEFT 24x7 is a unique retail system in the world, and greater digitisation of cash-based repetitive which not only runs round the clock, but also has a payments. Advantages accruing to customers in settlement which is not “deferred” and prescribes the new segments are standardised bill payment no floor or ceiling on the amount that can be experience in an interoperable manner, large transferred. number of customer touch points, centralised customer grievance redressal mechanism and E-Mandates/Standing Instructions on Cards/PPIs/ pre-defined customer convenience fee. UPI Introduction of a New Type of Semi-Closed IX.21 A framework to facilitate e-mandates Prepaid Payment Instrument (PPI) on cards and PPIs was issued in August 2019 to encourage digitisation of recurring payments IX.24 A new type of PPI was introduced in like monthly subscriptions, insurance premia December 2019, which can be loaded/re-loaded payments, systematic investment plans and only from a bank account and/or a credit card and bill payments. Such a measure combines can be issued based on essential minimum details convenience with safety features like Additional sourced from the customer. It seeks to ease the Factor of Authentication (AFA) during e-mandate issuance and usage of small value PPIs. Such registration, modification and revocation, as also PPIs can be used only for purchase of goods and 193ANNUAL REPORT services and not for funds transfer. Limits were June), 192 e-BAAT (electronic Banking Awareness placed for amount loaded in such PPIs during any and Training) programmes were organised by the month and the amount outstanding at any point Regional Offices of the Reserve Bank, sharing of time. The KYC requirement of purchaser of gift various aspects of electronic payment systems, PPIs through credit cards was also made on par including benefits and cyber security concerns, with requirements for debit to bank accounts. amongst bank staff, customers, students and the common man. In addition, the Reserve Bank Enhancing the Usage of National Electronic Toll also released digital awareness material through Collection (NETC) System print, audio-visual media as also online through IX.25 In December 2019, the Reserve Bank its flagship programme, “RBI Says.” Further, in permitted all authorised payment systems and order to enhance public awareness about digital instruments (non-bank PPIs, cards and UPI) for safety, all authorised payment system operators linking with the FASTags (tags affixed on a vehicle’s and participants were advised, in June 2020, to windscreen used for identifying the vehicle). The undertake targeted multi-lingual campaigns by purpose was to further broad-base the NETC way of SMSs and advertisements in print/visual system by allowing a bouquet of payment choices media to educate their users on safe and secure for customers, as well as to foster competition use of digital payments. among the system participants. NETC system was Increasing Customer Confidence also enhanced to allow it to be used for parking fee and fuel payments, in an interoperable manner. Review of Scope and Coverage of System Audit of Authorised PSOs Cash Withdrawal Facility using PoS terminals/UPI IX.28 The scope of the System Audit Report IX.26 Facility of small value cash withdrawal at (SAR) - Authorised PSOs are required to furnish it PoS terminal was eased by doing away with the annually - was reviewed and enhanced to ensure requirement of seeking one-time approval from standardisation and comprehensive coverage of the Reserve Bank. The facility of cash withdrawal all relevant areas of information system processes at merchant locations was also extended to UPI. and applications to be covered as part of the Enhancing Customer Awareness audit. SAR now includes, inter alia, information IX.27 Digital payments penetration and security governance, access control, network and adoption needs to be supported by digital literacy. data security, IT outsourcing risk management, Several initiatives which were undertaken in this physical and environmental security, human regard include allocating nodal officers from the resource security, business continuity planning Department for co-ordinating with the Regional and management, vendor management, incident Offices of the Reserve Bank; standardising material management, change management and patch for educating various target categories such as management. To avoid conflict of interest of the students, banks and merchants; participating in auditor, it was mandated that the concerned audit media workshops; conducting payment system firm or any of its sister concern should not have related programmes in the Reserve Bank’s training been engaged for providing other services to the establishments and IDRBT. During 2019-20 (July- audited entity in the last two financial years. 194PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY Oversight Framework for Authorised Payment compounding of contraventions/offences under Systems Sections 30 and 31, respectively, of the Payment and Settlement Systems Act, 2007 (PSS Act) IX.29 The Reserve Bank had adopted the to ensure that the authorised PSOs conform to “Principles for Financial Market Infrastructures regulatory requirements. The revised framework (PFMIs)” and “Central Bank Oversight of Payment continued to centre around objectivity and and Settlement Systems” for implementation by transparency in the decision-making process. its regulated FMIs, through issuance of policy document on “Regulation and Supervision of Enhancing Security of Card Transactions FMIs regulated by RBI” in June 2013. The policy IX.32 Over the last few years, the use of cards described in detail the criteria for designating has been growing. In order to enhance the as FMI, applicability of the PFMIs to the FMIs, security of card transactions, the Reserve Bank oversight of FMIs and other related aspects. Over continuously evaluates the systems in place and a period of time, the Reserve Bank continued its to provide more safety to cardholders and the efforts in digitisation of payments which resulted in card transaction chain, the following additional continuous expansion of payment landscape not safety measures were mandated in January 2020: only in terms of growth in payment infrastructure (a) enable cards for use only at contact-based but also in terms of volume and value of digital point (ATMs, PoS) at the time of issue/reissue; payment transactions. The policy document was (b) provide a 24x7 facility to all cardholders for revised as “Oversight Framework for FMIs and switching on/off transaction rights and for setting/ Retail Payment Systems” and released on June modifying transaction limits; and (c) send alerts to 14, 2020. The framework describes the approach the cardholder as and when there is any change for oversight of the Reserve Bank’s regulated in status of the card. Given the extraordinary FMIs and Retail Payment Systems functioning situation due to the COVID-19 pandemic, the in India and broadly covers the legal framework issuers have been given time till September 30, for oversight, definition and scope of oversight, 2020 to implement the circular’s provisions. oversight activities, and cooperation with other regulatory authorities. Internal Ombudsman for PPI Issuers Creation of a Central Payments Fraud Information IX.33 An Internal Ombudsman Scheme was put Registry in place under section 18 of the PSS Act to cover large non-bank PPI issuers with more than one IX.30 A web-based reporting platform to crore outstanding PPIs to start with. Complaints of facilitate online payment fraud reporting by system customers are redressed at the level of the PSO participants was developed with registry of all itself – by the highest-level authority of its grievance payment related frauds. redressal mechanism. The Internal Ombudsman Framework for Imposing Monetary Penalty on is required to work at an arm’s length distance Authorised PSOs from the PSO. The eligible PSOs were required IX.31 The Reserve Bank reviewed the to make the scheme operational by January 20, framework for imposition of monetary penalty and 2020. 195ANNUAL REPORT Other Developments payments eco-system and evolution of new systems, products and channels to undertake digital Supervision payment transactions, the Reserve Bank reviewed IX.34 During 2019-20, onsite inspection of 27 the definition of digital payment transactions and entities, viz., CCIL, NPCI, 22 PPI issuers and 3 enhanced the scope and coverage of Payment WLA operators was carried out by the Reserve System Indicators published in the monthly RBI Bank under Section 16 of the PSS Act. Bulletin to include recent payment systems Inspection of CCIL and granular details of payment transactions. Payment transactions undertaken using different IX.35 On-site inspection of CCIL was undertaken payment channels and details of payment system during September-October 2019. The scope of infrastructure were also disseminated. The data in the inspection was confined to the activities of the revised form and structure is being published CCIL as a Central Counterparty (CCP) and a in the RBI Bulletin since January 2020, covering Trade Repository (TR) and its performance was data from November 2019 onwards. Further, in assessed against the 24 Principles for Financial order to facilitate better research and contribute Market Infrastructures (PFMIs) of the Committee on to innovations in payment systems, the Reserve Payments and Market Infrastructures-International Bank commenced dissemination of payment Organisation of Securities Commissions (CPMI- systems data on a daily frequency from June 1, IOSCO) – Assessment Methodology template. 2020. As in the previous year, CCIL was found to have ‘Observed’ 18 principles and ‘Broadly Observed’ 4 Developments in CCIL principles, while 2 principles were ‘Not Applicable’ IX.38 During the year, CCIL finalised to it. implementation of clearing member structure in Inspection of NPCI securities segment, introduced FX-Retail platform IX.36 The on-site inspection of NPCI was for providing an anonymous and order-driven conducted during November-December 2019, dealing in the USD/INR currency pair for the based on the PFMIs. The scope of the inspection customers of banks, extended forex trading beyond involved functional assessment of various retail market hours, improved its risk management by payment systems operated by NPCI, robustness implementing higher concentration margin based of risk management framework, governance on second set of thresholds on breach of the first and oversight, business impact analysis, and set. CCIL TR was notified by the government to compliance with the terms and conditions of the act as a collecting agent for the purpose of stamp Certificate of Authorisation (CoA) issued by the duty on transactions reported to it. Reserve Bank. Closure of ECS/Regional ECS/National ECS Dissemination of Granular Payment System Data Centres Operated by the Reserve Bank IX.37 The Reserve Bank has been publishing IX.39 The Electronic Clearing Service (ECS) data on transactions carried out using various was in use at a few of the Reserve Bank’s locations payment systems operated by it and the authorised with most of the other locations successfully PSOs. In view of the rapid developments in the migrating to the National Automated Clearing 196PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY House (NACH). NACH system facilitates handling working under constrained resources for extended of bulk payments towards distribution of subsidies, periods with close monitoring; the lessons learnt dividends, interest, salary and pension, and for for the payments system users and providers bulk receipts towards collection of utility payments, are many. It is a matter of pride that the payment loans, investments in mutual funds and insurance systems have functioned unhindered and were premia, with online mandate management and available round the clock for use during the nation- centralised clearing service at a pan-India level. wide lockdown. The last of the ECS centres was migrated to NACH Agenda for 2020-21 effective January 31, 2020. The shift from ECS to IX.41 The proposed action items under the goal- NACH was smooth and non-disruptive. With this, posts identified in the ‘Payment and Settlement the life of ECS and its variants (Regional-ECS Systems in India: Vision 2019-21’ are set out and National-ECS) came to an end, after having below: served the nation gloriously for 25 years. Encouraging Healthy Competition Business Continuity Plan during COVID-19 • Offline Payment Systems: Offline Lockdown payments through mobile devices and IX.40 In view of the situation arising out of stored value component on cards will be COVID-19, a host of measures were undertaken made available to boost digital payment since March 2020 to ensure continuous availability modes, and a pilot scheme will be tested of not only the payment systems operated by the to gain experience for a fuller roll-out of the Reserve Bank (RTGS and NEFT), but also payment scheme. systems operated by NPCI, CCIL and other Improving Customer Convenience PSOs. The coordinated efforts with Government, PSOs and Regulated Entities (REs), including • Online Dispute Resolution (ODR): A banks and non-banks, ensured uninterrupted phased approach to implementing an functioning of all payment and settlement systems ODR system across various payment operating across the country. The Government systems is proposed to be undertaken, Direct Benefit Transfer (DBT) payments to help beginning with implementation for failed the poor and marginalised commenced on a large transactions for all authorised payment scale in April 2020 which were smoothly facilitated systems (Utkarsh); by the NACH – Aadhaar Payment Bridge System • Self-Regulatory Organisation: A (APBS) wherein bulk transfers were made to framework for creation of a Self-Regulatory bank accounts based on the beneficiary Aadhaar Organisation (SRO) for engaging with the number. Certain relaxations were given to REs to regulator/ supervisor and also responsible allow them to cope with the restrictions in physical for setting and enforcing rules for the movements and reduced availability of support PSOs as announced in the Reserve services. This pandemic has been a litmus test Bank’s Statement on Developmental and for evaluating the robustness of the payments Regulatory Policies of February 6, 2020, infrastructure and the regulatory framework, will be formalised; 197ANNUAL REPORT • Survey for Digital Payment Awareness: A the critical and systemically important payment detailed survey will be conducted across and settlement systems in the country, along with all states/UTs to help orient policies and enhanced operational efficiency, responsiveness operations to ensure that digital footprints and customer satisfaction. During the year, there reach the remotest area and strata of the was a rapid ubiquitous digitisation of financial country, besides (a) operationalising the services in the country through facilitation of NEFT PIDF; (b) contributing to the one-district- 24x7 and securing the unsecured, if any, through adoption of globally recognised international in-a-state to be fully digital enabled standard ISO 27001: 2013 in the Reserve Bank. initiative; and (c) understanding overall The rapid growth of innovative IT solutions is digital penetration by merchants, service leading to a paradigm shift in transforming the way providers and users; and businesses are performed, and the Reserve Bank • Pan India Cheque Truncation System: All moved in tandem by quickly adopting state-of-the- Express Cheque Clearing System (ECCS) art Information and Communication Technology centres will be merged with the Cheque (ICT) in its day-to-day operations. Truncation System (CTS) grids to facilitate Business Continuity Plan (BCP) Post COVID-19 cheque collection services by banks. Pandemic Ensuring Affordable Cost IX.43 COVID-19 posed a challenge to business • Legal Entity Identifier (LEI): The use of LEI continuity, primarily arising from the need to to identify payment system participants, ensure availability of an adequate contingent of agents and distributors in respect of cross healthy, and highly skilled personnel to maintain border services, particularly for large operations. In the unprecedented pandemic value payments, including expanding the situation, the Reserve Bank under its business implementation across all the identified continuity plan (BCP) acted proactively through segments will be explored. a slew of measures to ensure uninterrupted and smooth functioning of the Reserve Bank’s Increasing Confidence critical services such as - (i) payment systems • Digital Payments Index: The Reserve – NEFT 24x7; and RTGS; (ii) core banking Bank in its Statement on Developmental solution e-Kuber; (iii) treasury operations for and Regulatory Policies of February 6, money and forex market; (iv) debt management 2020 announced that the Reserve Bank for the governments (centre and states); (v) the would construct and periodically publish a Reserve Bank’s website; (vi) e-mail and video composite “Digital Payments Index (DPI)”. conferencing services; (vii) salary, pension and HR functions; (viii) IT, network and cyber security; 3. DEPARTMENT OF INFORMATION (ix) maintenance and monitoring of network TECHNOLOGY (DIT) infrastructure at all locations of the Reserve Bank; IX.42 The Department of Information Technology (x) important business applications of business (DIT) continued its endeavour to meet the dynamic departments; and (xi) helpdesk and support to demand for developing agile, robust and secured stakeholders and constituents (Box XI.2: RBI’s digital platform to ensure smooth functioning of BCP for COVID-19 Pandemic, Chapter XI). 198PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY Agenda for 2019-20: Implementation Status a single view of organisational infrastructure across the Reserve Bank offering timely fault Goals Set for 2019-20 resolution and thereby improving efficiency of the IX.44 In last year’s Annual Report, the network. NOC proactively monitors, analyses and Department had set out the following goals under responds to incidents related to network services Utkarsh: across all offices of the Reserve Bank. • Consolidation of network and storage for Positive Confirmation for Customer RTGS easier manageability and monitoring (Para Transactions IX.45); and IX.47 The Reserve Bank introduced a • Adopting zero trust framework for IT credit notification mechanism between RTGS security (Para IX.46). participants, whereby the receiver participant of Implementation Status of Goals RTGS notifies the sender participant of the payment Consolidation of Network and Storage for Easier instruction after the successful completion of the Manageability and Monitoring transaction. IX.45 During the year, the Reserve Bank moved NEFT 24x7 towards a centralised network and implemented IX.48 The Reserve Bank implemented NEFT uniform system configuration, facilitating uninterrupted accessibility to the Reserve Bank’s system on a 24x7 basis from December 2019 as web applications hosted on Internet with services announced in its Statement on Developmental and from three different Internet Service Providers Regulatory Policies of August 7, 2019 to facilitate (ISPs) and fallback secondary paths from three a swift and round the clock retail payment systems other ISPs to make the connectivity stable. A (Box IX.2). Centralised Storage Solution to augment the Agenda for 2020-21 storage capacity and meet demand for existing IX.49 The Department’s goals for 2020-21 are as well as upcoming applications will back this set out below: endeavour. Network Administration Control (NAC) and • Next Generation Structured Financial Network Operation Centre (NOC)-Zero Trust Messaging System (NGSFMS): The Framework for IT Security proposed NGSFMS will revamp the existing Structured Financial Messaging IX.46 Network Administration Control (NAC) System (SFMS) platform and simplify solution is implemented for ensuring security the architecture, bringing in scalability hygiene of all the end points across the Reserve and flexibility and at the same time Bank by continuous security posture assessment, strengthened user authentication, authorisation to promoting enterprise framework of network and improved context visibility of all users message communication among internal and network devices. Network Operation Centre applications such as RTGS, core banking (NOC), a centralised tool for monitoring and solution (CBS) of banks and NEFT management of IT network infrastructure, provides (Utkarsh); 199ANNUAL REPORT Box IX.2 NEFT 24x7 National Electronic Funds Transfer (NEFT), an electronic It is expected to revolutionise the payment systems in funds transfer system managed by the Reserve Bank India. The facility brings India into the elite club of nations since 2005, enables bank customers in India to transfer which operate a 24x7 electronic funds transfer system funds between any two NEFT-enabled bank accounts on with settlement of funds on round-the-clock basis. The new a one-to-one basis. As of March 31, 2020, NEFT facilities facility provides enhanced menu of options, convenience were available at 1,53,311 branches/offices of 217 banks and redundancy to the end customer. Now, Indians have across the country. In April 2016, the Reserve Bank got ANYTIME payment facility to transfer money out of their reduced settlement time to half-hourly batches with 23 account balance. settlements occurring between 8:00 am and 7:00 pm on The project warranted multilevel integration between various weekdays, and the first, third and fifth saturday of a calendar applications namely SFMS-Hub, SFMS-PAD, SFMS-MI (at month. Keeping in view customer convenience and to give all 217-member banks), NEFT application and multiple increased thrust to digitisation, the High-Level Committee modules of e-Kuber. It also involved introduction of new on Deepening of Digital Payments (Chairman: Shri Nandan processes within the Reserve Bank as well as at the Nilekani) recommended the need for extending availability member banks to facilitate 24x7 operations. NEFT 24x7 of NEFT on a 24x7 basis to facilitate funds transfer beyond has increased the efficiency of the payment systems with the banking hours. Accordingly, at the stroke of midnight of 48 batch settlements a day. The volume of transactions has December 15, 2019, the Reserve Bank launched the NEFT increased from 2,194.6 lakh in November 2019 to 2,605.6 24x7x365. lakh in January 2020, and further to 2,624.0 lakh in March 2020. Source: RBI. • Augmentation and Modernisation Central Board of Direct Taxes (CBDT) is of Infrastructure Security Layer: implementing a new payment system, Consolidation, Augmentation and i.e., Tax Information Network (TIN2.0), Automation of security layers, comprising while subsuming the erstwhile OLTAS internal and perimeter Firewalls and (Online Tax Accounting System) in the Intrusion Management solution [i.e., new system. The new system in e-Kuber governance, risk management and will facilitate the Reserve Bank’s functions compliance (GRC)] will be undertaken to both as the collecting bank and as an enhance cyber resilience and strengthen aggregator for amounts received by the authorised agency banks. security of the Reserve Bank; 4. Conclusion • Next Generation Wireless Technology Wifi-6 Across the Reserve Bank: The IX.50 In sum, the Reserve Bank’s endeavour to adoption of new emerging technology develop efficient, affordable and secure payment Wifi-6 will be initiated across the and settlement systems in the country, with a Reserve Bank for upgradation of the Wi-fi focus to providing every Indian with an access to a bouquet of e-payment options, yielded results infrastructure wherein new access points during the year. The Reserve Bank would further (available with next generation wireless attempt to reach out to the hitherto excluded technology, i.e., Wifi-6) will be deployed; sections of society with state-of-the-art technology and and payment systems based on an efficient • Reserve Bank as Aggregator for Tax regulatory environment and robust consumer Information Network (TIN2.0): The protection. 200COMMUNCOIMCMUANICTATIIOON, NINT,E RINNATIOTNEAL RRELNATAIONTS, I ONAL RESEARCH AND STATISTICS X RELATIONS, RESEARCH AND STATISTICS The Reserve Bank adopted various innovations in its communication strategy, sharpened economic and statistical policy analysis and research, and strengthened information management during the year. International relations were deepened and diversified, high points being India taking the Chair of the SAARCFINANCE, co-chairing the G-20’s Framework Working Group (FWG) and planning to take the BRICS Chair in 2021. Effective cash management services on behalf of the government and sound management of foreign exchange reserves were concurrent objectives. A number of legislative initiatives/amendments were pursued during the year to ensure a robust legal framework necessary for a sound and efficient financial system in the economy. X.1 This chapter discusses the implementation Bank’s policies. The objective is to build public status of the agenda for 2019-20 in the areas of confidence and anchor expectations. For this communication, research, statistics, international purpose, it employs the Reserve Bank’s website, relations, banking services, foreign reserves media interfaces including regional, informal management, and legal services. It also outlines workshops, and social media tools for effective the agenda for 2020-21 in these functional communication and public awareness. This also areas. Section 2 presents major initiatives of the involves strategies for communicating during Reserve Bank with regard to its communication vulnerable, uncertain, complex and ambiguous strategy and processes. Section 3 discusses the (VUCA) times through closed door briefings in Reserve Bank’s international relations, including order to enhance a shared understanding of the with international organisations and multilateral Reserve Bank’s policy actions and stance. bodies. Section 4 dwells on the activities of the Agenda for 2019-20: Implementation Status Reserve Bank as a banker to governments and banks. Section 5 reviews the conduct of foreign Goals Set for 2019-20 exchange reserves management with a focus on X.3 Last year, the Department had set out the safety, liquidity and returns. Section 6 sets out following goals under Utkarsh: research activities, including statutory reports and • Expanding engagement with the multi- frontline research publications. Section 7 profiles lingual and multi-cultural society through the activities of the Department of Statistics and its public awareness campaign (Para X.7 Information Management. Section 8 covers the - X.10); and activities of the Strategic Research Unit. Section 9 presents the activities of the Legal Department. • Organise workshops for national and The chapter ends with a conclusion. regional media (Para X.11). 2. COMMUNICATION PROCESSES Implementation Status of Goals X.2 The Department of Communication X.4 The Reserve Bank strengthened the (DoC) is driven by the goals of transparent search functionality of its website to make it more communication, clear interpretation and precise user-friendly and provided direct access to its articulation in the dissemination of the Reserve Complaint Management System (CMS) portal on 201ANNUAL REPORT the home page of its website (www.rbi.org.in) to briefing sessions were also organised for media, make the grievance redressal procedure easier researchers and analysts. and faster. The ‘Mobile Aided Note Identifier’ X.6 During March 22 - May 26, 2020, due (popularly known as MANI), a mobile application to nation-wide lockdown induced by COVID-19 for aiding visually impaired persons to identify pandemic, Governor’s announcements on the denomination of Indian banknotes, was Monetary Policy and other regulatory and launched on January 1, 2020 and its link was also developmental measures were broadcast live placed on the homepage of the Reserve Bank’s from the Reserve Bank’s official YouTube channel website for ease of navigation. Digitised versions and Twitter handle for simultaneous dissemination of the Reserve Bank’s publications, namely, to all the media and general public. Annual Reports, Monthly Bulletins, Committee Public Awareness Campaigns Reports, Development Research Group (DRG) Studies, Occasional Papers, Report on Currency X.7 During the year, the Reserve Bank carried and Finance, Staff Studies, Statistical Tables out 360 degrees multi media public awareness Relating to Banks in India and Report on Trend campaigns on Risk vs Returns. Films on farmers and Progress of Banking in India, dating back to and MSMEs were broadcast on All India Radio and as early as 1930s, were made available on the Doordarshan during two financial literacy weeks. Reserve Bank’s website. Various modes of mass communication, viz., print Monetary Policy Communication media, television, radio, websites, hoardings, cinemas and SMS were used to propagate X.5 Under the Monetary Policy Framework awareness messages. Films on Safe Digital introduced in October 2016, the Reserve Bank Banking, Limited Liability, Banking Ombudsman communicates the resolutions of the Monetary and banking facilities for senior citizens were also Policy Committee (MPC) on its website immediately broadcast in popular events such as Kaun Banega after the MPC’s meeting. This is followed by Crorepati (KBC), Pro Kabaddi League and Road Governor’s post-policy press conferences, which Safety Series on television during the year. Films is also disseminated through YouTube along with on financial education and other useful areas, live streaming on the Reserve Bank’s website, featuring cricketers and badminton players, who Twitter handle and business television channels. are employees of the Reserve Bank, were also During 2019-20, this protocol was assiduously released on the Doordarshan and All India Radio followed under a pre-announced bi-monthly as a part of a year-long campaign. schedule as well as for off-cycle meetings on March 27 and May 22, 2020 necessitated by the X.8 In a special video message to the Indian unprecedented situation caused by COVID-19. citizens, Governor advocated the increased use Audio and transcripts of the press conferences of various digital modes of payment as part of were uploaded on the Reserve Bank's website. social distancing in view of COVID-19 pandemic. The minutes of the MPC’s meetings were uploaded A special campaign on “Pay Digital, Stay Safe” on the website on the 14th day after every meeting starring Shri Amitabh Bachchan, was released of the MPC as provided under Section 45ZL of in digital and social media in April 2020 as part the Reserve Bank of India Act, 1934. Post policy of COVID-19 public awareness measures. It was 202COMMUNICATION, INTERNATIONAL RELATIONS, RESEARCH AND STATISTICS followed by a relay of the message on major is the largest among the central banks of the television channels and radio channels. world. The Reserve Bank’s YouTube channel had 56,100 subscribers as on June 30, 2020. During X.9 Apart from films and print advertisements, the year, the Reserve Bank also launched its messages were also released through SMS and second Twitter handle and Facebook page under Interactive Voice Response System (IVRS) [Box the title @RBIsays to ensure wider dissemination X.1]. and circulation of public awareness messages, Social Media benefitting the public. The awareness campaign X.10 The Reserve Bank’s Twitter handle @RBI started with a message from the Reserve Bank’s with its 8,92,000 followers as on June 30, 2020, Governor on the importance of using digital Box X.1 Public Awareness Campaign through SMS The Reserve Bank’s public awareness campaign through Details of outreach through SMS campaign are set out in SMS was launched on November 10, 2017. The aim of the Table 1 below. campaign is to broaden the reach in creating awareness Table 1: SMS Campaign - Outreach among people on financial and banking matter without (As on June 30, 2020, in lakhs) meeting physically. The unique feature of the SMS campaign Details SMS 1 SMS 2 SMS 3 SMS 4 SMS 5 SMS 6 is the missed call element: upon giving a missed call to the Reserve Bank’s short code number 14440, the caller will 1 2 3 4 5 6 7 receive a call back to get more information on the subject of Total Unique 6,157 6,263 127 6,443 4,573 5,370 the SMS. The details of topic of SMSs released under this Messages Sent campaign during the year are provided below. Total Unique 4,002 4,259 115 4,511 3,441 4,154 Messages SMSs Broadcast between July 2019 and June 2020 Delivered SMS 1: Fast and high returns scheme? It may involve risk! Total SMS Parts 11,782 12,665 127 12,728 7,305 9,641 Sent Complain at www.sachet.rbi.org.in if any entity defaults in Total SMS Parts 7,296 8,377 115 8,771 5,449 7,407 repaying deposits. To know more, call on 14440. Delivered SMS 2: For identification of banknotes by visually impaired Source: RBI. persons, download RBI’s MANI app from bit.ly/RBI-MANI. To know more, call on 14440. The SMS on MANI App has a link to the App store/Play store to enable easy download of the App. The SMS on Complaint SMS 3: Would you be willing to provide feedback on RBI’s Management System (CMS) also provided a link to the public awareness messages? If yes, click on http://nmc.sg/ CMS portal, resulting in a spike in the number of complaints b2FrYT. lodged. The SMS on Risk vs Returns has a link to the SMS 4: Complaint against Bank, NBFC, system participant ‘Sachet’ portal for lodging complaints against companies not redressed? Lodge complaint on RBI’s Complaint coming out with dubious schemes to defraud the public. An Management System @https://cms.rbi.org.in. To know impact survey to gauge the feedback on the SMS campaign more, call on 14440. was carried out in February 2020. The SMS had a link to a page on the Reserve Bank’s website with five questions. The SMS 5: Repeat of the MANI App campaign. result of the survey was positive and encouraging. SMS 6: Fraudulent transaction in your bank account? Limit Source: RBI. your loss. Notify your bank immediately. For more details, give a missed call on 14440. 203ANNUAL REPORT modes of payments: ‘Pay Digital, Stay Safe’. It was 3. INTERNATIONAL RELATIONS followed by dissemination of Graphics Interchange X.14 During 2019-20, the Reserve Bank Formats (GIFs) and caricatures on social media strengthened economic and financial relations, handles conveying messages in English, Hindi especially with the international organisations and eleven regional languages. and multilateral bodies, through its International Workshops for Media Persons Department (ID). Engagements in several bilateral X.11 During the year, the Department conducted and multilateral dialogues, focusing on enhancing three workshops at Bengaluru, Patna and Jaipur cooperation among central banks fostered as part of its awareness programme for regional international relations. Several regional initiatives media. One workshop for national media was also were undertaken in terms of capacity building, conducted in Mumbai. providing technical support and strengthening The RBI Museum information dissemination through databases and surveys. X.12 The RBI Museum located at 6, Council House Street, Kolkata celebrated its first Agenda for 2019-20: Implementation Status anniversary on March 11, 2020. The Museum has Goals Set for 2019-20 interesting sections on stories of money, gold and the genesis of the Reserve Bank, explained through X.15 Last year, the Department had set out the artefacts and interactive exhibits. The mezzanine following goals: floor of the museum houses an interactive gaming • Strengthen international cooperation in zone. Since its inauguration on March 11, 2019 the area of Finance Track under G20 (Para till March 19, 20201, 8,463 people visited the X.16 - X.19); Museum. In addition to its regular exhibits, a special exhibition of rare collection of currency, • Focus on the agenda of international including banknotes and commemorative coins, financial architecture (Utkarsh) [Para X.20 was also organised at the Museum. - X.22]; Agenda for 2020-21 • Successful completion of Article IV 2019 X.13 In 2020-21, the Department will focus on discussions with the IMF (Utkarsh) [Para the following goals under Utkarsh: X.23]; • Conduct workshops/sessions for the • Provide analytical policy briefs at BIS and media on important regulatory and banking CGFS meetings (Para X.24 - X.25); related issues; • Contribute inputs for the FSB related • Deepen its engagement with the society issues (Para X.26); through public awareness programmes • Strengthen macroeconomic research and social media presence; and capacity of the BRICS CRA (Utkarsh) • In line with international experience, [Para X.27]; efforts will be made to create a ‘Social Media Command Centre’ for social media • Consider revising framework on Currency monitoring and listening. Swap Arrangement for SAARC countries 1 With restrictions imposed under the pandemic, the Museum was unavailable to visitors since March 20, 2020. 204COMMUNICATION, INTERNATIONAL RELATIONS, RESEARCH AND STATISTICS in consultation with Government of India X.18 On the financial sector related issues, the and other SAARC central banks (Utkarsh) G20 focused on transition of inter-bank offered [Para X.28]; rates (IBOR) benchmarks with the planned discontinuation of LIBOR at end-2021 besides • Carry forward the agenda under the issues relating to RegTech, SupTech and BigTech. SAARCFINANCE roadmap in terms of India’s view was that notwithstanding the steady capacity building, providing technical progress towards the adoption of overnight (near) support and undertaking collaborative risk-free rates (RFRs) [e.g., Secured Overnight studies (Utkarsh) [Para X.28]; and Financing Rate (SOFR) in the US, the European • Other initiatives (Para X.29 - X.31). Short-term Rate (ESTER) in the Euro area, and Sterling Overnight Index Average (SONIA) in the Implementation Status of Goals UK], much remained to be done for a smooth Saudi Arabia’s 2020 Presidency of G20 transition away from the LIBOR, including outreach X.16 An important engagement in 2019-20 to stakeholders. was the G20 Finance Ministers and Central Bank X.19 The Department provided inputs for Governors (FMCBG) and Finance and Central the virtual FMCBG meetings held against the Bank Deputies (FCBD) Meetings of G20 under backdrop of the COVID-19 pandemic. India, being Saudi Arabia’s Presidency in 2020, around the a co-chair of the G20’s FWG, took the lead in theme of ‘Realising Opportunities of the 21st formulating the Action Plan to tackle COVID-19 Century for All’. India supported the G20 Finance crisis. Track work program aimed at empowering IMF and IFA Related Issues people through access to opportunities for all X.20 At the Annual Fund-Bank meeting in and shaping new frontiers by reaping benefits October 2019, it was clear that requisite support of innovation, including through digital financial among the membership for a change in IMF inclusion. India supported the work program, with quotas under the 15th General Review of Quotas the Reserve Bank’s contributions in the form of (GRQ) was not coming forth as the US expressed financial inclusion initiatives such as a 24x7x365 its inability to contribute to any quota increase retail payment system based on inter-operability under the 15th GRQ. In February 2020, the Board achieved with the help of Unified Payment of Governors of the IMF formally concluded the Interface (UPI) and the use of digital technologies. 15th GRQ with no increase in quotas and decided India also supported the G20 initiative to develop that the 16th GRQ will continue beyond December a roadmap for enhancing global cross-border 15, 2020 and shall be concluded no later than payments arrangements, especially remittances. December 15, 2023. During this extended period, X.17 In coordination with the government, the the IMF would revisit the adequacy of quotas Department participated in the meetings of various and continue with the process of governance working groups of the G20 such as the Framework reforms, including a new quota formula as a Working Group (FWG), the Infrastructure Working guide, and ensure the primary role of quotas in Group (IWG) and the International Financial the IMF resources. The Board also called on the Architecture (IFA) Working Group. participants in the New Arrangements to Borrow 205ANNUAL REPORT (NAB) for doubling of the NAB, effective January X.25 The Department provided support to top 1, 2021. management for various other meetings of the BIS Committees, especially the Committee on the X.21 It has been felt that the IMF should Global Financial System (CGFS). continue to maintain its lending resources at least at the current level despite the fact that FSB Initiatives on Global Financial Regulation there was no quota increase under the 15th GRQ. X.26 The Financial Stability Board (FSB) Accordingly, India upheld support for the extension assesses vulnerabilities in the global financial of 2016 Note Purchase Agreement (NPA) by one system and promotes international financial year under 2016 Bilateral Borrowing Agreements stability by coordinating with central banks, other (BBAs) amounting to USD 10 billion, which will national financial authorities and international continue to be in effect till end-December 2020. standard-setting bodies. The Department X.22 In the virtual International Monetary prepared inputs for formulating India’s stance in and Financial Committee (IMFC) meeting on the FSB on issues relating to the global financial March 27, the Reserve Bank proposed a non- system and associated risks to financial stability. stigmatised short-term liquidity swap facility The Department also coordinated with other that could be rapidly enacted for support to the units within the Reserve Bank and the regulatory member countries. The proposal gained traction bodies on India’s input to the FSB’s annual Non- and resulted in the IMF Executive Board approving Bank Financial Intermediation (NBFI) monitoring a new “swap-like” Short-term Liquidity Line (SLL) exercise and other surveys. The Department that could be availed by countries with strong organised the FSB’s Regional Consultative Group fundamentals, sound policies and institutional (RCG) for Asia Conference call. The Department framework, facing international capital market also contributed to reporting and discussions on volatility. The Department helped articulate India’s major initiatives taken by the FSB to fight against stance on various proposals relating to the IMF. the COVID-19 crisis. X.23 The Department also facilitated the BRICS, SAARC and Bilateral Cooperation successful completion of 2019 Article IV exercise, which is held under Article IV of the IMF’s Articles X.27 During the period under review, the BRICS of Agreement. The IMF’s Staff Report was released central banks successfully conducted the second in December 2019. Contingency Reserve Arrangement (CRA) test- run. Operational aspects of the BRICS Bond Fund BIS Activities (BBF) were examined and mapped. Cooperation X.24 With the Governor of Reserve Bank and dialogue on various areas like payment and of India currently on the Board of the BIS, the settlement systems and information security, Reserve Bank played an important role in shaping among the BRICS countries, were begun under several new horizons of the BIS activities, with the BRICS Russia Chair. support and analytical inputs from the Department in Governor’s bi-monthly meetings of the BIS, X.28 The Reserve Bank took over the Chair including such virtual meetings conducted by the of the SAARCFINANCE (SF) from October BIS in response to the spread of COVID-19. 2019 for a period of one year. The Department 206COMMUNICATION, INTERNATIONAL RELATIONS, RESEARCH AND STATISTICS engaged in enhancing the cooperation among the database progressed. A SF Survey on FinTech and SAARC central banks through various initiatives. Financial Inclusion was conducted, which enabled These initiatives included work on development a stocktaking of FinTech and Financial Inclusion of SF Sync, a portal to facilitate a closed and amongst SAARC countries. Based on this survey, secure channel for intra-SAARC central banks the Reserve Bank has initiated a collaborative communication. The SF scholarship scheme for study on FinTech and Financial Inclusion with participation from all SAARC central banks, with a higher studies for officials in central banks and seminar in Udaipur in February 2020. With a new ministries of finance in SAARC countries, which Framework on Currency Swap Arrangement for was instituted in June 2013, was revised in May SAARC countries being put in place for the period 2020. Under the revised scheme, inter alia, the 2019-22 (Box X.2), a swap agreement was signed ambit of eligible courses has been expanded with Royal Monetary Authority of Bhutan (RMAB) and the scholarship amount and the number in January 2020 and swap support was extended of scholarships that may be granted in a year in February. India also extended a swap line to have been enhanced. The recipient of the first Maldives in April 2020 and Sri Lanka in July to SF scholarship in 2014 completed a Ph.D. from help bridge dollar liquidity needs on account of a Jawaharlal Nehru University in 2019. The SF collapse in tourism receipts and other disruptions scholarship for 2019 was offered to two officials in the aftermath of COVID-19. from Nepal Rastra Bank and Da Afghanistan Bank Other Activities to pursue doctorate and post-graduation degrees in India, respectively. Technical support and X.29 The Terms of Engagement (ToE) between exposure were provided to some member central the Reserve Bank and the Bank of Japan (BOJ) banks under the SF roadmap of cooperation. to foster dialogue and cooperation were signed Work towards standardising and enhancing SF on November 4, 2019. The first RBI-BOJ senior Box X.2 Framework on Currency Swap Arrangement for SAARC Countries, 2019-22 Bilateral and multilateral swap arrangements have become Drawals can be made in US dollar, Euro or Indian Rupee an integral part of the Global Financial Safety Net (GFSN). (INR) and in multiple tranches under the overall eligible limit. India, in consultation with other SAARC countries, put in A ‘Standby Swap Arrangement’ (SSA) was incorporated in the place a bilateral Currency Swap Arrangement for SAARC framework on December 20, 2018, under which, additional countries in 2012 for a period of three years, which has swap amounts aggregating up to USD 400 million could be been extended two times so far. The current Currency Swap provided to individual countries beyond their specified limits Arrangement for SAARC countries is valid for a three-year by operating on the unutilised balances available within period starting from November 14, 2019 till November 13, the overall size of the facility. There are concessions for 2022. Under this framework, the Reserve Bank will continue swap drawals in INR in terms of waiting period and second to provide liquidity support to the tune of USD 2.0 billion rollover. The RMAB and Central Bank of Sri Lanka (CBSL) under a swap facility to SAARC central banks. Within entered into a bilateral swap agreement with the Reserve this overall amount, each SAARC country is allocated a Bank under the new Framework on January 31 and July 24 maximum eligible swap amount that has been decided on of 2020, respectively. the basis of various economic parameters of that country. Source: RBI. 207ANNUAL REPORT level dialogue under this ToE was held in Mumbai • Follow up on issues relating to the on November 4, 2019. The third meeting of the international financial architecture Joint Technical Coordination Committee (JTCC) (IFA), including the 16th GRQ, Bilateral – an Executive Director level forum between the Borrowing Agreements (BBAs) and New Reserve Bank and the Nepal Rastra Bank (NRB) Arrangements to Borrow (NAB) of the IMF (Utkarsh); – to discuss and resolve issues of mutual concern, was held in Mumbai during September 5-6, 2019. • Completion of its activities as the current SAARCFINANCE Chair including swap X.30 The Department continued its close support, capacity building, and joint engagements with the Ministry of Commerce and research (Utkarsh); Industry, Government of India, and participated in • Strengthening cooperation amongst the the deliberations that culminated in India’s draft BRICS central banks through BBF, CRA report of the World Trade Organisation (WTO) and other initiatives with India taking over Secretariat for the 7th Review of the Trade Policies the BRICS Chair in 2021 (Utkarsh); and Practices of India (TPR) by the WTO. The • Article IV consultations with the IMF; Department also undertook engagements with the World Bank on issues relating to regulation, • Intensify its engagement with the G20 in the run-up to its taking over the Presidency supervision and payment systems. in 2022; X.31 The Reserve Bank continued its active • Continue to provide inputs to the various engagement with South Asia Regional Training G20 working groups; and Technical Assistance Centre (SARTTAC) and • Providing inputs to Governor for activities the South East Asian Central Banks (SEACEN) relating to the BIS Board and the Centre. It also extended support for the G24 Governors’ bi-monthly meetings; and G30. Deliberations at the South East Asia, New Zealand and Australia (SEANZA) central • Contributing inputs for other meetings such as those of Committee on the bank forum culminated in a resolution – backed Global Financial System and on FSB by a majority of the members – to wind it down, related issues, including FSB’s annual particularly keeping in view the emergence of monitoring exercise 2020 to assess global other regional fora/capacity building institutions, trends and risks from non-bank financial such as the SEACEN, IMF training institutes intermediation; and and the Executives' Meeting of East Asia-Pacific • Providing inputs on enhancing cross- Central Banks (EMEAP), while acknowledging its border payments, digital economy, FinTech immeasurable contribution towards central bank and BigTech for technology-enabled cooperation and human resource development supervisory and regulatory solutions. since the late 1950s. 4. GOVERNMENT AND BANK ACCOUNTS Agenda for 2020-21 X.33 The Department of Government and Bank X.32 In 2020-21, the Department will focus on Accounts (DGBA) oversees the functions of the the following: Reserve Bank as banker to banks and banker 208COMMUNICATION, INTERNATIONAL RELATIONS, RESEARCH AND STATISTICS to governments, besides formulating internal e-receipts and e-payments was pursued with the accounting policies of the Reserve Bank. remaining state governments, after which certain state governments have shown willingness and are Agenda for 2019-20: Implementation Status examining the technical documents for integration. Goals Set for 2019-20 In the case of the central government, the X.34 Last year, the Department had set out the Indian Customs Electronic Gateway (ICEGATE) following goals: system of Central Board of Indirect Taxes and Customs (CBIC) was integrated with e-Kuber • Integration of e-Kuber with the systems and implemented from July 1, 2019 for collection of central government as well state of indirect taxes [other than goods and services governments/UTs for direct collection of tax (GST)] by the Reserve Bank through national their e-receipts and making e-payments electronic funds transfer (NEFT)/ real-time gross (Utkarsh) [Para X.35]; settlement (RTGS). • Integrate all agency banks for e-receipts Integration of Agency Banks with e-Kuber for reporting to e-Kuber (Utkarsh) [Para X.36]; Online Reporting of Government Receipts • Strengthening the Goods and Services X.36 All agency banks are integrated with Tax (GST) framework by extending the e-Kuber for online reporting to the Reserve Bank current online Memorandum of Error of GST receipts collected by them. Banks which process of the central government to all facilitate state government transactions were also state governments (Utkarsh) [Para X.37]; on-boarded to e-Kuber for online reporting of receipts to the Reserve Bank. • Revamping the inspection process for government transactions conducted by Extension of Memorandum of Error (MoE) Process agency banks (Utkarsh) [Para X.38]; in GST Framework to All State Governments • Automation of calculating daily position X.37 During the year, while the online MoE of government balances (Utkarsh) [Para process was extended to three state governments X.39]; for reconciliation of GST transactions, three state governments have completed the testing • Discontinuing the P2F arrangement in a for the same and are expected to go live shortly. phased manner (Para X.40); and However, the COVID-19 pandemic has slowed the • Other initiatives (Para X.41 - X.43). testing process between the Reserve Bank and state governments. The Reserve Bank is actively Implementation Status of Goals pursuing the quick on-boarding of the remaining X.35 During the year, three state governments state governments. were newly on-boarded to the Reserve Bank’s Oversight of Agency Banks core banking solution portal – e-Kuber – for e-payments and three state governments X.38 A detailed check-list on issues to be were migrated to the enhanced version of the considered during inspections was prepared and e-payments portal. Integration with e-Kuber for necessary instructions were issued to the regional 209ANNUAL REPORT offices of the Reserve Bank, as part of revamping receipt is pending for remittance while submitting process of oversight on agency banks. agency commission claims with effect from August 1, 2019. Subsequently, agency banks were also Automation of Daily Position Process enabled to provide such certificate from Cost X.39 After the commencement of NEFT Accountants with effect from September 25, 2019. operations on a 24x7 basis from December 16, X.43 From February 2020, the Reserve Bank 2019 and extension of this service to government began participating in the National Automated transactions, there was a need to bring some Clearing House (NACH) system of the National changes in the operational process for calculating Payments Corporation of India (NPCI). Credit daily position of government balances. Accordingly, transactions of a state government were migrated the contours of this goal are being reviewed and to NACH system. necessary revisions are being carried out. Agenda for 2020-21 Discontinuation of Paper-to-Follow (P2F) X.44 For 2020-21, the Department proposes Arrangement for State Governments the following agenda under Utkarsh: X.40 The P2F arrangement for clearing of • Integrating the central government’s government cheques was discontinued in 13 systems with e-Kuber for direct collection states, based on the consent given by the state of their e-receipts and making e-payments governments. (Box X.3); Other Initiatives • Integrating remaining state governments’ systems (excluding Arunachal Pradesh, X.41 The agency commission rates for eligible Assam, Manipur, Meghalaya, Mizoram, government transactions were revised with effect Nagaland, Tripura) with e-Kuber; from July 1, 2019. The centralised system of • Putting in place an efficient reporting reimbursement of GST on agency commission system for Non-GST transactions; paid to agency banks was stopped and, with effect from July 1, 2019, GST at applicable rates is • Putting in place Dashboard for government transactions; and paid along with agency commission claims at the regional offices of the Reserve Bank. A framework • Integrating remaining state governments has also been put in place to have tax deducted at for online MoE resolution process for source (TDS) under GST as per applicable laws at reconciliation of GST transactions. the time of making agency commission payments. 5. MANAGING FOREIGN EXCHANGE X.42 In order to strengthen the responsibility RESERVES of the agency banks for timely reporting of X.45 The Department of External Investments government transactions and also to ensure and Operations (DEIO) manages the country’s correctness of submission of their agency foreign exchange reserves (FER), with safety, commission claims, agency banks are required liquidity and returns – in that order – as its strategic to submit certificates by the bank official and by objectives. During the year, FER increased by 17.7 Chartered Accountant certifying the correctness of per cent in June 2020 as compared with 5.9 per agency commission claim and that no government cent in the corresponding period of the previous 210COMMUNICATION, INTERNATIONAL RELATIONS, RESEARCH AND STATISTICS Box X.3 e-Kuber and Tax Information System (TIN) 2.0: Integration for Direct Taxes The existing process of collection of direct taxes through preparation and handling of physical challans. It enables Online Tax Accounting System (OLTAS) is being migrated tax payers to use various payment options such as Internet to Tax Information System (TIN) 2.0, which is hosted by the Banking of authorised banks, Over-the-Counter (OTC) Income Tax Department and Office of the Principal Chief payment through branches of authorised banks including Controller of Accounts (Pr. CCA), Central Board of Direct designated offices of the Reserve Bank, payment through Taxes (CBDT). The accounting of government transactions NEFT/RTGS through any bank directly to the Reserve Bank will now be facilitated through ‘‘PRAKALP’ (Pratayaksh and payment through approved instruments like Internet Kar Lekhankan Pranali), an application of Public Financial Banking, Debit Card, UPI/BHIM of any bank. Management System (PFMS) under Office of the Controller With the introduction of TIN 2.0, the challan generation General of Accounts (CGA). Besides CBDT and CGA, information and confirmation of taxes received will be shared authorised banks and the Reserve Bank are also part of in real-time with all concerned stakeholders. Just like in the this TIN 2.0 eco-system. The Reserve Bank will work as a case of GST, all tax payments received by agency banks will collecting bank as well as aggregator for accounting and be aggregated by the Reserve Bank so that funds received settlement of direct taxes through e-Kuber, which will be from agency banks can be credited to the respective integrated with the systems of agency banks, TIN and government accounts along with OTC/NEFT collections by PRAKALP. the Reserve Bank, as per prescribed timelines. The Reserve Bank will also provide necessary accounting and settlement TIN 2.0, which is broadly based on the Goods and Services related reports to the government systems. Tax (GST) structure, requires taxpayers to generate online challans from a centralised system, thus doing away with Source: RBI. year. As a diversification strategy similar to last of existing risk management practices was year, gold was purchased and added to the FER conducted, given the scaling up of operations in during the year. the instruments like repo and forex swap. Internal Agenda for 2019-20: Implementation Status systems were fortified to enhance cyber security. The Society for Worldwide Interbank Financial Goals Set for 2019-20 Telecommunication (SWIFT) system was X.46 Last year, the Department had set out the upgraded to the latest version of SWIFT Alliance following goals: Access in line with the recommendations of the • Efforts to be made to enhance the repo SWIFT. Security cover was enhanced with the and forex swap capabilities (Utkarsh) adoption of additional payment control services [Para X.47]; under the SWIFT. • Undertake a review of risk management Agenda for 2020-21 practices (Para X.47); and X.48 For 2020-21, the Department will focus on • Enhancement of IT infrastructure and the following goals: security measures for cyber risks (Para X.47). • An enhanced risk management framework Implementation Status of Goals (Utkarsh); X.47 During the year, a comprehensive review • Dedicated research inputs (Utkarsh); and 211ANNUAL REPORT • Effective diversification of reserves through • Compile and disseminate primary and gainful deployment without compromising secondary data (Para X.53); the safety of investments. • Deepening analysis and research on 6. ECONOMIC AND POLICY RESEARCH important areas of central banking (Utkarsh) [Para X.54]; X.49 As the knowledge centre of the Reserve Bank with a focus on issues relating to the • Explore big data applications for improving economy and the financial system, the Department inflation and growth projections (Utkarsh) of Economic and Policy Research (DEPR) strives [Para X.54]; to provide research inputs and management • Extend accessibility of digitised contents information system (MIS) services for policy of the Central Library (Para X.55); and formulation. The Department also generates • Organise events and expert talks (Para primary national level data, prepares the Reserve Bank’s statutory reports, brings out frontline X.56 - X.57). research publications, promotes collaborative Implementation Status of Goals policy-oriented research with external experts and X.52 During the year, the Department brought provides technical support to various operational out the flagship publications, viz., the Annual departments and to technical groups/committees Report, Report on Trend and Progress of Banking constituted by the Reserve Bank from time to time. in India, and State Finances: A Study of Budgets X.50 While fully adhering to the “work-from-home” of 2019-20 in a timely manner. The coverage of guidelines to ensure utmost safety of all staff, the monthly publication – Reserve Bank of India and despite certain logistic constraints during the Bulletin – was expanded during the year to include period, the Department provided all information quick research articles on issues of topical interest. and analytical inputs required for policy measures X.53 Compilation and dissemination of primary on time. Research and analysis related work statistics on monetary aggregates, balance of continued without much disruption, and all research payments, external debt, effective exchange related publications were released on time. The rates, combined government finances, household Central Library facilitated uninterrupted remote financial savings and flow of funds on established access to various databases and other reference timelines and quality standards engaged the resources required for undertaking research. The Department during the year. This year’s State Department also hosted a number of knowledge Finances report also contained an ‘e-State sharing sessions on online platforms. database’ for the benefit of users, providing Agenda for 2019-20: Implementation Status historical data from 1990-91 to 2019-20. In line with the G-20 Data Gaps Initiative, and also Goals Set for 2019-20 recognising the increasing demand from various X.51 Last year, the Department had set out the stakeholders, the Department released quarterly following goals: data on consolidated states' (23 states) finances • Release various statutory and flagship and combined finances of the centre and states publications (Para X.52); during the year. Similarly, the data on Financial 212COMMUNICATION, INTERNATIONAL RELATIONS, RESEARCH AND STATISTICS Stocks and Flows of the Indian Economy from provides research facilities to the Reserve Bank’s 2011-12 to 2017-18, a compilation of sectoral staff as well as to scholars from different parts accounts, for the first-time, included sector-wise of the country and abroad. The Archives has outstanding positions in line with the international digitised 5 lakh more pages in 2019-20, taking the standards. total digitised pages to 13 lakh. X.54 During 2019-20, the Department expanded X.56 The Department organised a number of and deepened the scope of research activities by events/expert talks during the year, including two creating two new divisions, viz., Payment Systems memorial lectures. The 17th L. K. Jha Memorial Division (PSD) and New Frontiers Unit (NFU). The Lecture was delivered by Shri N. K. Singh, Department published 54 research papers/articles Chairman, 15th Finance Commission on “Fiscal during the year, of which 17 were published outside Federalism: Ideology and Practice” on November the Reserve Bank in international and domestic 22, 2019. On January 7, 2020, the 3rd Suresh journals; and 10 working papers were posted Tendulkar Memorial Lecture was delivered by on the Reserve Bank's website. The published Mr. Tharman Shanmugaratnam, Senior Minister, studies covered a wide range of issues like Republic of Singapore on “Broad-based Prosperity: macroeconomic forecasting; big data analytics; Tackling the Fundamentals”. inflation dynamics; banking sector; financial cycle; investment behaviour; payments system and fiscal X.57 The expert talks organised by the issues. Furthermore, the DEPR Study Circle, an in- Department during the year included talks by house discussion forum, organised 46 seminars/ Professor Arvind Panagariya, Columbia University presentations during the year on diverse research on “A Reform Agenda for a New India” on July 11, themes, of which 11 were hosted online during the 2019 and Shri Amitabh Kant, CEO of NITI Aayog lockdown period. The Department also brought out on “Reaccelerating India’s Economic Growth” two issues of the RBI Occasional Papers (Volume on January 22, 2020. On November 26, 2019, 40, Number 1 & 2), a peer-reviewed research researchers of the Reserve Bank had a fruitful journal of the Reserve Bank. interactive session with the Nobel Laureate Professor Robert Engle. X.55 The Central Library and the Reserve Bank of India Archives (RBIA) are two key units of Agenda for 2020-21 DEPR that provide reference materials on various X.58 The Department’s agenda for 2020-21 will subjects for conducting research and publishing focus on the following goals: reports, including the Reserve Bank’s history. The Library has a comprehensive collection of books/ • Analysis and research – exploring e-books, including some rare books, journals/e- alternative models for improving inflation journals, and online databases on banking, and growth projections, and a study on economics and finance. The efforts during the municipal finances (Utkarsh); year were focused on providing a unified interface • Release of data on bilateral trade in for its users of online resources such as books, services (Utkarsh); journals and data. The RBIA is responsible for implementation of the Archival and Records • Studies in the areas of contemporary Management Policy in the Reserve Bank. It also relevance such as spillover effects of 213ANNUAL REPORT non-deliverable forward (NDF) market that comes from primary sources. During the on onshore forex market in India; rural- initial phases of lockdown with travel restrictions, urban inflation dynamics; determinants of instead of computer aided personal interview discretionary spending of the states; and (CAPI) method for conducting household/ relationship between volatility index (VIX) enterprise surveys, telephonic mode was used, and stock index; which resulted in considerably lower responses than the usual one. Regarding the data reported • Revival of the publication titled the Report on Currency and Finance with the theme of by regulated entities, the Reserve Bank extended “Reviewing Monetary Policy Framework”; the timeline for submission, thereby, the timeliness of data availability was compromised to some • Release of the History of the Reserve extent. In addition, the pandemic has also slowed Bank, Volume-5 for the period spanning down the work related to operationalisation of the 1997 to 2008; Centralised Information Management System • Easy access to the Central Library’s (CIMS) – a next generation data warehouse digitised contents for the public; and of the Reserve Bank. Notwithstanding these • Development of a document management difficulties, processing of data, which were already software for better management of digital submitted, was continued with full vigour and records available in the Archives. dissemination of core statistics and forwarding of data to international agencies was carried out in 7. STATISTICS AND INFORMATION accordance with schedule. MANAGEMENT Agenda for 2019-20: Implementation Status X.59 The Department of Statistics and Information Management (DSIM) provides high Goals Set for 2019-20 quality statistical services, including compilation, X.61 Last year, the Department had set out the analysis and dissemination of macro-financial following goals: statistics to the public, and statistical support and analytical inputs for meeting the policy and • Implementation of CIMS towards full operational needs of the Reserve Bank. DSIM operationalisation with Granular Data maintains multi-dimensional statistical systems Access Lab (GDAL) and regulatory related to banking, corporate and external sandbox environment (Utkarsh) [Para sectors; undertakes structured surveys relating to X.62]; enterprises and households as inputs for monetary • Development of a system for creating policy formulation; manages the centralised Public Credit Registry (PCR) (Utkarsh) submission of returns through XBRL system and [Para X.63]; dissemination through the Reserve Bank’s data warehouse; and provides statistical analysis and • Deepening research and analysis using forecasts. big data analytics (Utkarsh) [Para X.64]; X.60 The COVID-19 outbreak posed challenges • Expand the coverage of Central Information on the data collection process, which was impacted System for Banking Infrastructure (CISBI) mainly due to the non-availability of granular data (Para X.65); 214COMMUNICATION, INTERNATIONAL RELATIONS, RESEARCH AND STATISTICS • Examine the scope of extending the In this regard, the assessment of food inflation coverage of IESH to rural and semi-urban based on online retail prices was completed using areas (Para X.66); a big data approach. • Development of Central Fraud Registry X.65 The CISBI, which supports banking (CFR) portal for primary urban cooperative network and financial inclusion policies, was banks (Para X.67); and expanded during the year by including co- operative banks, ATMs and fixed-location • Release of regular publications (Para business correspondents (BCs). The database X.68). of the external commercial borrowings (ECBs) Implementation Status of Goals was shifted to the Commonwealth Secretariat’s X.62 The implementation of the Centralised MERIDIAN application for debt management to Information Management System (CIMS) was meet the new global definitions/standards. taken forward in a phased manner under the X.66 A pilot round of the Inflation Expectations guidance of Technical Advisory Group (TAG) Survey of Households (IESH) was conducted to (Chairman: Professor G. Sivakumar) towards explore the issue of extending the coverage of its operationalisation. Extensive consultations IESH to rural and semi-urban areas. were held with the stakeholders, and Control Specification Documents (CSDs), including X.67 A new XBRL web-logic environment Functional Specification Documents (FSDs) with the feature of digitally-signed return filing of stakeholder departments, were prepared. workflow was made operational. This would Also, Hardware infrastructure, Data Structure obviate paper-based submission of statutory Definitions (DSDs) for Statistical Data and returns in a phased manner. The environment Metadata Exchange (SDMX) implementation and was extended to returns relating to non-banking selection of third-party vendor for performance financial companies (NBFCs). The Central Fraud test (PT), user acceptance test (UAT) and Data Registry (CFR) portal of SCBs was augmented Migration Audit (DMA) were completed. A sandbox with new features like e-mail based login, environment was created and operationalised removing threshold-amount based processing with 16 returns from 10 banks on a pilot basis. and facilitating better user management by bank However, the applicable returns from other banks administration. The CFR portal for primary urban are also being brought under its ambit. cooperative banks is in the advanced stage of development. X.63 With a draft Public Credit Registry (PCR) of India Bill under finalisation, implementation of X.68 During the year, the Department brought PCR was initiated during the year. out its regular publications, viz., Handbook of X.64 The Department undertook research Statistics on the Indian Economy, 2018-19; and analysis using advanced forecasting and Statistical Tables Relating to Banks in India, 2018- nowcasting techniques for assessment of 19; Basic Statistical Returns of SCBs in India macroeconomic developments. The Department (BSR1, BSR2 and BSR7), Weekly Statistical also applied big data analytics, artificial intelligence Supplement (WSS) and the ‘Current Statistics’ (AI) and machine learning (ML) techniques to portion of the Reserve Bank’s Bulletin in a timely gauge media sentiments on economic indicators. manner. 215ANNUAL REPORT Agenda for 2020-21 that are relevant across various verticals of the Reserve Bank. The Unit's research agenda X.69 Going ahead, the Department will focus consists of short, medium, and long-term goals. on the following goals: Agenda for 2019-20: Implementation Status • To make CIMS fully operational and migrate the existing databases – advanced Goals Set for 2019-20 analytic environments for use in GDAL X.71 Last year, the Unit had set out the following and Data Science Lab (DSL) will be taken goals: up; and element-based repository will be • Focus on data-intensive policy research implemented in a phased manner following (Utkarsh) [Para X.72]; Statistical Data and Metadata eXchange • Address policy research questions (Para (SDMX) standards, which will lead to X.72); operationalisation of metadata driven data maintenance and dissemination system • Continue to monitor macroeconomic (Utkarsh); developments (Para X.73); and • Develop an end-to-end system for PCR • Publish research findings and conduct and roll out of the registry in a phased joint studies with other departments (Para manner (Utkarsh); X.74). • Undertake policy-related research in Implementation Status of Goals the areas of modelling, nowcasting and X.72 The Unit closely monitored different forecasting of macroeconomic indicators, sectors of the economy and provided in-depth including the use of web-crawling using AI, research inputs for bi-monthly Monetary Policy ML, and big data analytics (Utkarsh); Strategy Meetings. During the year, the major output of the Unit included a dynamic factor model- • Operationalise the Data Sciences Lab based indicator for India that nowcasts overall (DSL) (Utkarsh); GDP growth using available high-frequency data • Develop a state-of-the-art single on the Indian economy. In addition, the bi-monthly searchable CFR portal consisting of frauds presentations covered regular surveillance and reported by SCBs, UCBs and NBFCs to market intelligence. assist them in taking informed decision on X.73 The medium-term research of the Unit providing credit; and involved analysis of issues relating to monetary • Extend the consumer confidence survey policy transmission, financial market, India’s (CCS) to all the urban centres, where growth outlook and financial vulnerability. The IESH is currently being conducted. research findings were regularly presented to the top management and operational departments 8. STRATEGIC RESEARCH UNIT such as Department of Supervision (DoS) and Financial Market Regulation Department (FMRD). X.70 The Strategic Research Unit (SRU) was established in February 2016 with the objective X.74 SRU’s collaboration with other of undertaking research on contemporary issues departments included research on ‘Price 216COMMUNICATION, INTERNATIONAL RELATIONS, RESEARCH AND STATISTICS Discrimination in Over-the-Counter (OTC) departments. The Department also extends legal Currency Derivatives’; yield curve forecasting; support and advice to the Deposit Insurance and overnight index swap (OIS) surprises; and the Credit Guarantee Corporation (DICGC), CAFRAL, impact of recent policy instruments such as Long- and other RBI-owned institutions on legal issues, term Repo Operations (LTRO) and Operation litigation and court matters. Twist. As part of its long-term research agenda, Agenda for 2019-20: Implementation Status SRU regularly disseminates its research findings Goals Set for 2019-20 with the academic and policy community. X.77 Last year, the Department had set out the Agenda for 2020-21 following goals: X.75 Going ahead into 2020-21, the Unit will • Pursue the scope of amendments to continue to focus on the following: various Acts of the Reserve Bank (Para • Issues of contemporary importance – X.78 - X.80); tracking real time economic outlook/ • Manage litigation on behalf of the Reserve sentiment based on machine learning Bank (Para X.81 - X.87); and tools (Utkarsh); • Continue to advise various departments of • In-depth micro-analysis of the impact of the Reserve Bank on legal matters (Para policy reforms, e.g., green finance in India (Utkarsh); and X.81 - X.87). Implementation Status of Goals • Deepening collaborations with other operational and research departments X.78 Several important legislations/regulations within the Reserve Bank as well as outside concerning the financial sector were brought in/ scholars. amended during the year. The Finance Act (No. 2), 2019, inter alia, amended the Reserve Bank 9. LEGAL ISSUES of India (RBI) Act, 1934 and the National Housing X.76 The Legal Department is an advisory Bank Act, 1987. The amendment in the RBI department established for examining and advising Act incorporated an increase in the threshold on legal issues, and for facilitating the management of net owned funds of NBFCs and empowered of litigation on behalf of the Reserve Bank. The the Reserve Bank to (a) remove directors and Department vets circulars, directions, regulations, supersede the board of directors of NBFCs; and agreements for various departments of (b) take action against auditors of NBFCs; the Reserve Bank with a view to ensuring that (c) frame schemes for resolution of NBFCs; and the decisions of the Reserve Bank are legally (d) direct NBFCs to furnish statements relating to sound. The Department provides the secretariat group companies of NBFCs. The amendment in to the First Appellate Authority under the Right to NHB Act conferred powers to the Reserve Bank Information Act and represents the Bank in the for regulation of Housing Finance Companies hearing of cases before the Central Information (HFCs). The above amendments came into force Commission, with the assistance of operational on August 9, 2019. 217ANNUAL REPORT X.79 The Insolvency and Bankruptcy Code India has, on the ground of proportionality, set (Amendment) Ordinance, 2019 was promulgated aside the Reserve Bank's direction in dealing with on December 28, 2019. The Ordinance was virtual currencies, where entities regulated by the replaced by the Insolvency and Bankruptcy Reserve Bank were directed not to deal in virtual (Amendment) Act, 2020. The Amendment Act currencies or provide services for facilitating any introduces an additional threshold for certain person or entity in dealing with or settling virtual classes of financial creditors such as allottees currencies and to exit the relationship with such under real estate projects for initiating corporate persons or entities, if they were already providing insolvency resolution process and empowers such services to them. the resolution professional to require suppliers X.82 In another landmark decision, the Supreme to continue providing goods and services. It also Court, held vide its decision dated May 5, 2020 provides that the company will not be liable for that SARFAESI Act is applicable to cooperative any offence committed prior to the insolvency banks. resolution process, if there is a change in the management or control of the company. The X.83 On an application filed by certain banks Personal Data Protection Bill, 2019 was introduced in the case of Reserve Bank of India v. Jayantilal in Parliament on December 12, 2019. The Bill has N. Mistry & Anr, the Supreme Court directed been referred to a Joint Parliamentary Committee the Reserve Bank vide order dated December for detailed examination. The Bill seeks to bring 18, 2020 not to release Inspection Reports/Risk out (a) protection of personal data of individuals; Assessment Reports/Annual Financial Inspection (b) the role and responsibility of data fiduciaries in Reports of certain banks, including the State Bank processing personal and sensitive personal data; of India, until further orders. (c) a framework for processing such personal X.84 In a few writ petitions filed before the data; and (d) a Data Protection Authority for the High Court of Bombay challenging the directions purpose of monitoring and enforcement. issued by the Reserve Bank against Punjab and X.80 The Banking Regulation (Amendment) Maharashtra Co-operative Bank, the Court vide Ordinance, 2020 was promulgated by the President order dated December 5, 2019, declined to of India on June 26, 2020. The Ordinance amends interfere, observing that the business of banking the Banking Regulation Act, 1949 as applicable and its regulation should be left to the wisdom to cooperative banks with a view to protect the of the Reserve Bank. interests of depositors and strengthen cooperative X.85 The High Court of Kerala vide order dated banks. By this Ordinance, the regulatory and November 29, 2019, dismissed the challenge supervisory powers of the Reserve Bank over on the approval given by the Reserve Bank for cooperative banks stand substantially expanded. amalgamating thirteen District Central Cooperative The Ordinance has also brought about certain minor changes in Section 45 of the Banking Banks (DCCBs) in Kerala with the Kerala Bank. Regulation Act. X.86 Three writ petitions were filed before the X.81 The Supreme Court vide its decision Bombay High Court against the order dated April dated March 4, 2020 in the case of Internet and 28, 2020 passed by the Reserve Bank cancelling Mobile Association of India v. Reserve Bank of the banking license issued to the CKP Co- 218COMMUNICATION, INTERNATIONAL RELATIONS, RESEARCH AND STATISTICS operative Bank Limited (CKP). The interim reliefs • Manage litigation on behalf of the Reserve sought against the operation of the order of the Bank. Reserve Bank were declined by the court. 10. Conclusion X.87 As on June 30, 2020, thirty three writ X.89 In sum, the Reserve Bank adopted several petitions have been filed in various High Courts innovative channels of communication during the and the Supreme Court, either challenging the year, in order to enhance shared understanding Reserve Bank’s circulars dated March 27, 2020, of the Reserve Bank’s policy actions and April 17, 2020 and May 23, 2020 related to stance, necessary to build public confidence. COVID-19 pandemic or seeking relief under them. In the international arena, the Reserve Bank The Reserve Bank has taken necessary steps to strengthened economic and financial relations, clarify its position before various courts. especially with the international organisations, Agenda for 2020-21 multilateral bodies and other central banks, especially in the SAARC region. More state X.88 In 2020-21, the Department will continue governments were integrated with the Reserve to focus on the following: Bank’s Core Banking Solution – e-Kuber, along • Automate its workflow process and with other agency banks for processing Goods function, which in turn will enhance and Services Tax (GST) transactions. Foreign research, e-discovery and data analytics exchange reserves were managed and guided (Utkarsh); by the consideration of safety, liquidity and • Provide a guidance note for its Central returns. During the year, research activities Public Information Officers to discharge were sustained by undertaking studies on a their functions more effectively and wide range of contemporary issues. Statistics expeditiously, keeping in view the and information management system was Department’s responsibilities as a further strengthened by implementation of secretariat to the Appellate Authority under CIMS, expanding CISBI and usage of big data, the Right to Information Act (Utkarsh); among others. In order to ensure a robust legal • Proactively perform its functions in framework for the banking and financial sector, close coordination with the operational a number of financial laws/bills were introduced/ departments of the Reserve Bank; and amended during the year. 219GOVERNANCE, AHNNUUALM REAPONRT RESOURCES XI AND ORGANISATIONAL MANAGEMENT The Reserve Bank upgraded its human resources through various innovative in-house and external training programmes during the year, along with a focus on building up risk modelling and risk reporting capabilities. In response to the COVID-19 pandemic, the priorities had to shift to securing critical business processes and ensuring business continuity, especially the safety and health of the Reserve Bank’s human resources. XI.1 This chapter discusses developments in XI.3 The Reserve Bank’s first medium-term the areas of governance, human resources, risk strategy document, christened ‘Utkarsh 2022’, monitoring, and corporate strategy during 2019- articulating the Vision, Mission and Core Purpose 20 vis-à-vis the goals set at the beginning of the of the Reserve Bank was rolled out in July 2019. year, and also sets out priorities for 2020-21. With the outbreak of COVID-19, however, securing critical business processes and ensuring business XI.2 In pursuance of the goals set for 2019- continuity in the Reserve Bank assumed the 20, human resources were strengthened through highest priority, especially the safety and health of new recruitments, in-house trainings, external human resources. Human Resource Management trainings, mid-career development programmes Department (HRMD) introduced work-from- and e-Learning. Under the Enterprise-Wide Risk home (WFH) across Central Office Departments Management (ERM) framework adopted in 2012, and Regional Offices of the Reserve Bank and risk modelling and risk reporting capabilities were released a document containing standards for built up during the year under review. The Basel III efficiency and best practices protocol to be Standardised Approach and the new Standardised followed by employees for creating an effective Approach for assessing economic capital for WFH model. The Standard Operating Procedure credit risk of forex portfolio (which also covers (SOP) for handling disasters at Reserve Bank’s the off-balance sheet exposures) and operational residential colonies, which outlines the basic risk, respectively, were adopted on the basis of details for handling any disaster, was prepared by the recommendations of the Expert Committee HRMD and the SOP for Business Continuity Plan to review the Economic Capital Framework of the was prepared by Corporate Strategy and Budget Reserve Bank (Chair: Dr. Bimal Jalan). Dashboards Department (CSBD). Regional Offices (ROs) were for risk monitoring in the most important areas of advised to prepare specific SOPs for residential the Reserve Bank’s functioning were prepared. A colonies under their purview. Control Self-Assessment Audit (CSAA) module in Audit Management and Risk Monitoring System XI.4 Alongside, the Rajbhasha Department (AMRMS) was launched across all offices of the organised several training programmes, seminars Reserve Bank. The Inspection Department issued and workshops during 2019-20 to promote Project Audit Guidelines for monitoring timely the use of Hindi. The Premises Department and cost-effective implementation of high value pursued its mandate of creating, maintaining Information Technology (IT) and non-IT projects. and upgrading the Reserve Bank’s physical 220GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT infrastructure. Generation of renewable energy nominates/appoints Directors of the Central Board through solar power generation plants, rain water and Members of the Local Boards in accordance harvesting systems, sewage treatment and waste with the Reserve Bank of India Act, 1934. water treatment systems were installed at various XI.7 The Central Board is assisted by three offices and residential colonies under the Reserve Committees: the Committee of the Central Board Bank’s ‘Green Initiative’. All new building projects (CCB); the Board for Financial Supervision (BFS); of the Reserve Bank have been certified as ‘Green and the Board for Regulation and Supervision Compliant’ by the Indian Green Building Council of Payment and Settlement Systems (BPSS). (IGBC). These Committees are headed by the Governor. XI.5 The chapter is organised into nine sections. In addition, the Central Board also has five Sub- Each section evaluates the outcomes vis-à-vis the Committees: the Audit and Risk Management goals set in the respective areas of the Reserve Sub-Committee (ARMS); the Human Resource Bank’s functions, apart from setting out the agenda Management Sub-Committee (HRM-SC); the for 2020-21. The immediately following section Building Sub-Committee (BSC); the Information details developments relating to the governance Technology Sub-Committee (IT-SC) and the structure of the Reserve Bank. Section 3 sets Strategy Sub-Committee. These sub-committees out the initiatives undertaken by the HRMD are typically headed by an external Director. during the year in the areas of human resources. Meetings of the Central Board and CCB Developments relating to the risk management framework and strategy are addressed in section XI.8 The Central Board held seven meetings 4. The activities of the Inspection Department during July-June 2019-20 in New Delhi (two during the year are discussed in section 5. The meetings), Mumbai (two meetings), Chandigarh functioning of the CSBD, which coordinates and and Bhubaneswar and one meeting through video develops strategies and annual action plans for conferencing at Mumbai. The Finance Minister of the Reserve Bank, are the subject of section India addressed the post-Budget meetings held in 6. The activities and accomplishments of the New Delhi on July 8, 2019 and February 15, 2020. Rajbhasha and Premises Departments are laid XI.9 The CCB held 46 meetings during July- out in sections 7 and 8, respectively. The chapter June 2019-20, 38 of which were held through has been summarised at the end. electronic mode. The CCB attended to the current 2. GOVERNANCE STRUCTURE business of the Reserve Bank, including approval of its Weekly Statement of Affairs. XI.6 The Central Board of Directors is the apex body in the governance structure of the XI.10 The Western, Eastern and Northern Area Reserve Bank. It comprises the Governor as Local Board held four meetings each during July- the Chairperson, Deputy Governors, Directors June 2019-20. The Southern Area Local Board nominated by the Central Government and could not convene any meeting in this period due Government Directors. There are four Local to the lack of a required quorum. The Standing Boards for the northern, southern, eastern and Committee of the Central Board was set up in 2014- western regions of the country, which focus on 15 to examine issues relating to Urban Cooperative local issues. The Government of India (GoI) Banks (UCBs), Non-Banking Financial Companies 221ANNUAL REPORT (NBFCs), currency management and other issues from July 29, 2019 and until further orders vice Shri relevant to the regions where meeting of the Local Subhash Chandra Garg. Shri Atanu Chakraborty Boards could not be convened. Accordingly, the demitted office on April 30, 2020 and in his place, Standing Committee of the Central Board held two the Government of India appointed Shri Tarun meetings during July-June 2019-20 in lieu of the Bajaj, Secretary, Department of Economic Affairs Southern Area Local Board (details of participation to the Central Board of the Reserve Bank of India of Directors/Members in meetings of the Central with effect from May 5, 2020 and until further Board, its Committees and Sub-Committees, orders. Local Boards and Standing Committee of the XI.16 The Central Government nominated Central Board for the Southern Area are given in Shri Debasish Panda, Secretary, Department Annex Tables XI.1-5). of Financial Services, Ministry of Finance, Central Board/Local Boards Government of India, as a Director on the Central Board of Reserve Bank of India with effect from XI.11 Dr. Viral V. Acharya, Deputy Governor, March 11, 2020 and until further orders vice Shri demitted office on July 23, 2019. Rajiv Kumar. XI.12 On July 2, 2019, the Central Government, XI.17 The terms of two Central Board Directors, reappointed Shri N. S. Vishwanathan as Deputy namely, Shri Bharat Doshi and Shri Sudhir Mankad Governor, Reserve Bank of India till July 3, 2020 ended on March 3, 2020. On June 20, 2020, the or until further orders, whichever is earlier. Shri N. Central Government re-nominated Shri Natarajan S. Vishwanathan relinquished charge as Deputy Chandrasekaran as a part-time non-official Governor on March 31, 2020. Director on the Central Board of the Reserve Bank XI.13 On January 14, 2020, the Central of India for a further period of two years beyond Government appointed Dr. Michael Debabrata March 3, 2020, or until further orders, whichever Patra as the Deputy Governor, Reserve Bank of is earlier. India till January 14, 2023 or until further orders, Executive Directors whichever is earlier. XI.18 Among Executive Directors, demitting XI.14 On March 28, 2020, the Central office, Smt. Surekha Marandi, retired on July 31, Government reappointed Shri B. P. Kanungo as 2019, Smt. Uma Shankar on October 31, 2019, Deputy Governor, Reserve Bank of India for a Smt. Parvathy V. Sundaram on November 29, 2019, further period of one year with effect from April 3, Smt. Malvika Sinha and Shri S. Ganesh Kumar on 2020 or until further orders, whichever is earlier, February 28, 2020, Shri Deepak Mohanty on May upon completion of his existing term on April 2, 29, 2020 and Dr. Janak Raj on June 30, 2020. 2020. Smt. Nanda S. Dave was promoted as Executive XI.15 The Central Government nominated Shri Director, effective from July 1, 2019, Shri Anil K. Atanu Chakraborty, Secretary, Department of Sharma on August 1, 2019, Shri S. C. Murmu with Economic Affairs, Ministry of Finance, Government effect from November 1, 2019, Shri T. Rabi Sankar of India, as a Director on the Central Board of with effect from December 2, 2019, Dr. Janak Raj Directors of the Reserve Bank of India with effect from January 24, 2020, Shri P. Vijaya Kumar and 222GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT Smt. Indrani Banerjee with effect from March 2, in these and other areas undertaken during the 2020, Dr. O. P. Mall from June 1, 2020 and Dr. year are highlighted below. Mridul Kumar Saggar from July 1, 2020. Agenda for 2019-20: Implementation Status Developments Relating to the Central Board Goals Set for 2019-20 XI.19 The constitution of a Strategy Sub- XI.23 Last year, the Department had set out the Committee was approved by the Central Board following goals under Utkarsh: in its meeting held on July 8, 2019. The Sub- • Moving further towards a paperless, Committee shall provide control and oversight presence-less and cashless mode of over the implementation of the Reserve Bank’s comprehensive HR interface within the medium-term strategic goals laid out in the Reserve Bank (Para XI.24); ‘Utkarsh 2022’. It will also review strategic goals • Taking up base work for setting up a and milestones, and the medium-term strategy supervisory and regulatory cadre (Para document. XI.25); Agenda for 2019-20: Implementation Status • Simplified internal processes for Goal Set for 2019-20 maximising efficiency and effectiveness, without diluting checks and balances (Para XI.20 Secretary’s Department had set out the XI.26); following goal under Utkarsh: • Capacity building of Regional Offices • To have a new software solution for all to bring out more research-oriented meetings of the Board and its Committees analytical papers (Para XI.27); as well as Committees of Top Management • Training policy to enable effective (Para XI.21). implementation of the Vision Document Implementation Status of Goal (Para XI.28); and XI.21 The Department achieved the goal under • Improving skill set of officers to prepare Utkarsh by implementing a suitable software them for relevant and higher roles (Para solution. XI.29). 3. HUMAN RESOURCE DEVELOPMENT Implementation Status of Goals INITIATIVES XI.24 All modules of Samadhan went live during XI.22 The Human Resource Management the year, thereby promoting a paperless, presence- Department (HRMD) plays the role of an enabler less and cashless mode of comprehensive HR interface. and a facilitator, enhancing staff efficiency, and creating an atmosphere of teamwork by tapping XI.25 The base work to facilitate setting up of potential capabilities of employees, necessary for the specialized supervisory and regulatory cadre their effectiveness at work. As part of its mandate, it (SSRC) was initiated and officers in Grade ‘B’ and carries out various activities pertaining to training, above were advised to indicate their preference recruitment and staff welfare. Major developments for the new cadre. 223ANNUAL REPORT XI.26 A complete review of internal processes, programmes conducted by the Reserve Bank’s returns and reports was carried out as part of training establishments with minimum duration of the Business Process Re-engineering (BPR) three days and courses on public speaking were exercise conducted in December 2019 with inputs added to the list of courses eligible under the from Regional Offices (ROs) and implementation Reserve Bank’s incentive scheme. of accepted changes was taken up under the Major Developments supervision of Central Office Departments (CODs) In-house Training concerned. XI.30 The Reserve Bank’s training infrastructure XI.27 Personnel posted to DEPR/DSIM in ROs is driven by the objectives of upgradation of were deputed for trainings to enhance their skills technical and behavioural skills of employees, and thereby aiding in better quality research output on actualisation of personal growth, both of which topical issues. influence their effectiveness at work. A number of XI.28 Major initiatives undertaken for making programmes were conducted during the year by training sessions more effective and meaningful the Reserve Bank’s training establishments and included revising the training needs analysis Zonal Training Centres (ZTCs), which are at the framework, conducting impact assessment forefront of this endeavour (Table XI.1). of select programmes, launching mid-career RBI Academy mandatory training programme-level II (MCMTP) XI.31 During the year under review, the Academy for eligible officers in Grade ‘E’ and revamping the conducted workshops on ‘Conversations that induction training programme for newly recruited Count’ for select senior officers of the Reserve Grade ‘B’ (DRs). Bank. A programme for visually impaired employees XI.29 Workshops were conducted for senior in collaboration with SBI Foundation and another officers focusing on the need for continuous on employee engagement in collaboration with conversation at the work place. Sessions on Drucker Institute, USA were also organised during effective communication were included in training the year. Table XI.1: Programmes Conducted at Reserve Bank’s Training Establishments* Training Establishment 2017-18 2018-19 2019-20 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 RBI Academy 18 620 22 546 21 476 (24) (38) (2) RBSC, Chennai 147 3,583 152 3,125 110 2,826 (281) (499) (85) CAB, Pune 184 6,488 179 5,542 126 3,891 (42) (51) (37) ZTCs (Class I) 115 2,271 116 2,271 92 1,667 ZTCs (Class III) 100 2,109 76 1,877 94 2,648 ZTCs (Class IV) 36 802 46 1,158 30 604 *: July-June. RBSC: Reserve Bank Staff College. CAB: College of Agricultural Banking. Note: Figures in parentheses pertain to foreign participants and/or participants from external institutions. Source: RBI. 224GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT Training at External Institutions provides instructors with the option of customising their courses in such a way that basic concepts XI.32 The Reserve Bank deputed its officers to are taught online using LMS, while classroom attend specific training programmes, seminars teaching focuses on the application of concepts and conferences in India and abroad in order using case studies, simulation and role plays. The to tap expertise available in external institutes Reserve Bank Staff College, Chennai has already (Table XI.2). Class III and IV employees were also developed 23 e-Learning courses on different deputed for training in external institutions in India. functional areas of the Reserve Bank. The RBI Study Schemes Academy is in the process of acquiring online XI.33 Four officers of the Reserve Bank availed courses being offered by leading global and Indian of the scheme for pursuing higher studies overseas Universities/Institutes. (other than the Reserve Bank’s Golden Jubilee Internship Scheme Scheme). A total of 440 employees pursued select XI.35 During the year, 156 students were part-time/distance education courses under the provided apprenticeship in the Reserve Bank as Reserve Bank’s incentive scheme. part of its summer internship scheme. Other Initiatives Grants and Endowments e-Learning XI.36 As part of its mission to promote research, XI.34 A distinguishing feature of training initiatives training and consultancy in the banking and in 2019 was the focus on e-Learning. As part of the financial sector, the Reserve Bank provided drive to promote e-Learning and blended learning financial support amounting to `27.8 crore to approaches, the RBI Academy went live with its the Indira Gandhi Institute of Development learning management system (LMS) in February Research (IGIDR), Mumbai; `7.74 crore to the 2020. The LMS has functionalities like hosting Centre for Advanced Financial Research and courses, live webinars, discussion forums, online Learning (CAFRAL), Mumbai; `3.48 crore to assessments and reporting tools. It is designed to National Institute of Bank Management (NIBM), facilitate ‘any time, any place, any pace’ access to Pune; `1.03 crore to the Indian Institute of Bank learning content leading to improved engagement Management (IIBM), Guwahati; and `0.67 crore by participants. The blended learning approach to the London School of Economics (LSE) India Observatory and the IG Patel Chair. Table XI.2: Number of Officers Trained in External Training Institutions Industrial Relations in India and Abroad XI.37 Industrial relations in the Reserve Bank Year Trained in India Trained Abroad remained harmonious during the year. Periodic (External Institutions) meetings were held with recognised associations/ 1 2 3 federations of officers and employees/workmen on 2017 - 18 1,041 410 various matters related to service conditions and 2018 - 19 952 378 welfare measures for employees. During the year, 2019 - 20 696 139 HRMD, Central Office, held eight meetings with Source: RBI. Central Units of recognised Union Associations. 225ANNUAL REPORT Table XI. 3: Recruitments by the Reserve Bank in 2019* Category of Recruitment Category-wise Strength Total of which Per cent of Total SC ST OBC SC ST OBC 1 2 3 4 5 6 7 8 Class I 194 28 10 61 14.43 5.15 31.44 Class III 600 92 59 215 15.33 9.83 35.83 Class IV (a) Office Attendant 156 12 2 71 7.69 1.28 45.51 (b) Maintenance Attendant - - - - - - - (c) Others - - - - - - - Total 950 132 71 347 13.89 7.47 36.53 *: January to December. -: Nil. Source: RBI. As per the extant instructions, ROs also hold the National Finals to be held at Central Office, meetings with local units of recognised trade Mumbai. The winners would be given a cash prize unions at quarterly/half yearly intervals. of `1 lakh along with a trophy. They are also offered the option of an internship with the Reserve Bank The RBI Policy Challenge for a period of three months. XI.38 The fifth edition of the RBI Policy Challenge, a national level competition designed to enhance Recruitments and Staff Strength knowledge regarding monetary policy making XI.39 During 2019 (January-December), the amongst students pursuing undergraduate/post- Reserve Bank recruited a total of 950 employees graduate courses, got underway in August 2019. in various cadres (Table XI.3). More than 250 entries from educational institutions XI.40 The total staff strength of the Reserve across the country were received. Teams from the Institute of Management Technology, Ghaziabad Bank as on December 31, 2019 was 13,456, (North Zone); Indian Institute of Management, a reduction of 2.44 per cent from a year ago on Indore (West Zone); Sri Sathya Sai Institute of account of large-scale retirement and the court Higher Learning (South Zone); and Indian Institute case on feeder channel for recruitment of Class III of Management, Ranchi (East Zone) qualified for employees (Table XI.4). Table XI.4: Staff Strength of the Reserve Bank* Category Category-wise Strength Per cent to Total Strength Total Strength SC ST OBC SC ST OBC 2018 2019 2018 2019 2018 2019 2018 2019 2019 1 2 3 4 5 6 7 8 9 10 11 12 Class I 6,522 6,670 988 1,051 415 435 949 1,147 15.76 6.52 17.20 Class III 3,497 3,264 537 487 195 199 840 892 14.92 6.10 27.33 Class IV 3,774 3,522 1,027 877 321 291 635 682 24.90 8.26 19.36 Total 13,793 13,456 2,552 2,415 931 925 2,424 2,721 17.95 6.87 20.22 *: End December. Source: RBI. 226GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT Table XI.5: Total Strength of Ex-Servicemen and PWD (End-December 2019) Category Total Ex- PWD (Persons with Disabilities) Strength Servicemen (ESM) Visually Impaired (VI) Hearing Impaired (HI) Orthopedically Handicap (OH) Intellectual Disabilities* (ID) 1 2 3 4 5 6 7 Class I 6,670 212 38 3 118 - Class III 3,264 168 35 7 60 4 Class IV 3,522 567 8 3 57 - -: Nil. *: As per Rights of Persons with Disability Act, 2016, intellectual disability is a condition characterised by significant limitation both in intellectual functioning (reasoning, learning and problem solving) and in adaptive behaviour, which covers a range of every day, social and practical skills, including ‘specific learning disabilities’ and ‘autism spectrum disorder’. Source: RBI. XI.41 As of June 30, 2020, number of full-time 2019, while the total number of differently abled employees in the Reserve Bank stood at 12,811. employees stood at 333 (Table XI.5). Of these, 6,412 were in Class I, 3,145 in Class III XI.44 A total of 123 ex-servicemen and 13 and 3,254 in Class IV. persons with disabilities (PWD) were recruited during the year (Table XI. 6). XI.42 During 2019 (January-December), four meetings were held between the management Prevention of Sexual Harassment of Women at and representatives of the All India Reserve Bank the Workplace Scheduled Castes/Scheduled Tribes and the XI.45 A formal grievance redressal mechanism Buddhist Federation to discuss issues relating for prevention of sexual harassment of women to the implementation of the Reserve Bank’s at the workplace has been in place since 1998. reservation policy. Two meetings were also held It was strengthened with the issue of a new with the representatives of the Other Backward comprehensive set of guidelines in 2014-15 Class (OBC) Association. in accordance with the Sexual Harassment of Women at Workplace (Prohibition, Prevention XI.43 The total strength of ex-servicemen in and Redressal) Act and Rules, 2013. During the Reserve Bank stood at 947 at end-December January-December 2019, two complaints were received and one was resolved. During January- June 2020, one complaint was received which is Table XI.6: Recruitment of Ex-servicemen and Persons with Disabilities during 2019* under process. Several awareness programmes on the subject were organised at various ROs Category Ex- PWD (Persons with Disabilities) Service- for sensitising the staff, including those newly men Visually Hearing Orthopedically Intellectual recruited, vendors and contractual employees. The (ESM) Impaired Impaired Handicap Disabilities (VI) (HI) (OH) (ID) 8th All India Seminar on ‘Prevention, Prohibition and 1 2 3 4 5 6 Redressal of Sexual Harassment at the Workplace’ Class I - 1 - - - was organised at Indore, Madhya Pradesh during Class III 1 6 - 5 - Class IV 122 - - 1 - February 21-23, 2020 with representation from *: January to December. -: Nil. members of 35 Complaints Committees as well Source: RBI. as the Central Complaints Committee. 227ANNUAL REPORT Right to Information (RTI) • Continuing the process of providing aid for setting up of specialized supervisory and XI.46 The Reserve Bank received 17,094 regulatory cadre; and requests for information and 1,475 appeals under the RTI Act during 2019-20. Three training • Designing a competency mapping programmes on the RTI Act were also conducted framework for select category of officers. by the Reserve Bank Staff College, Chennai, and 4. ENTERPRISE-WIDE RISK MANAGEMENT Zonal Training Centre, Chennai during the year. XI.49 The Enterprise-wide Risk Management Response to COVID-19 Pandemic (ERM) framework was adopted by the Reserve XI.47 Starting March 2020, the Department Bank in February 2012 to develop an integrated undertook a series of steps as part of its efforts assessment for the management of risk exposures, to maintain business continuity and ensure staff marking a move from a ‘silo-based’ approach welfare during the pandemic. Some of the major to a ‘whole-of-business’ perspective on risk initiatives included facilitating staff engaged in management. The Risk Monitoring Department critical activities to work from offsite location; (RMD) is the nodal Department for the formulation introducing work-from-home (WFH) across CODs and operationalisation of ERM in the Reserve and ROs of the Reserve Bank alongside releasing Bank. a document containing standards for efficiency Agenda for 2019-20: Implementation Status and best practices protocol to be followed by employees for creating an effective WFH model; Goals Set for 2019-20 released a standard operating procedure to be XI.50 Last year, the Department had set out the followed by various stakeholders at CODs/ROs for following goals under Utkarsh: tackling positive cases of COVID-19; and making • Modelling Credit Risk and Operational an arrangement with M/s Apollo Hospitals for Risk in the Reserve Bank (Para XI.51); providing rooms in hotels in select cities for the and purpose of quarantine of COVID-19 related cases. The Reserve Bank’s training establishments • Preparing Risk Dashboards for Risk were advised to meet training needs of the staff Reporting (Para XI.52). through online mode. Care was taken to intensify Implementation Status of Goals sanitisation related measures and to ensure social Modelling Credit Risk and Operational Risk distancing within the office premises as also in the Reserve Bank’s residential colonies. XI.51 Under the earlier economic capital framework of the Reserve Bank, credit risk was Agenda for 2020-21 being assessed using the modified Basel II XI.48 The roadmap for the year would include the Standardised Approach whereas operational following milestones for the Department under risk was being assessed using the Basel II Utkarsh: basic indicator approach (BIA). During the year • Reviewing the performance appraisal under review, the Reserve Bank accepted the system and the current training policy; recommendation of the Expert Committee to review 228GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT the Economic Capital Framework of the Reserve • Review of the existing Risk Tolerance Bank (Chair: Dr. Bimal Jalan), for the adoption of Framework (Utkarsh); the Basel III Standardised Approach and the new • A portfolio-based Credit Value at Risk/ Standardised Approach, for assessing economic Expected Shortfall (VaR/ES) model capital for credit risk of forex portfolio (which also would be developed as an additional covers the off-balance sheet exposures) and risk monitoring/reporting tool, with operational risk, respectively. The assessment of the objective of facilitating effective economic capital for operational risk under the oversight of credit risk (Utkarsh); and New Standardised Approach would be based on • A stress testing framework would be the actual operational loss data of the Reserve developed for robust assessment of Bank. Under the newly adopted economic capital the Reserve Bank’s credit risk. framework, the credit and operational risk shall be dealt with by maintaining adequate economic 5. INTERNAL AUDIT / INSPECTION capital/risk provisions so as to absorb these risks. XI.55 The Inspection Department of the Risk Dashboards for Risk Reporting Reserve Bank evaluates the internal control and governance processes, and provides risk XI.52 With the objective of improving risk assurance reports to top management and the reporting to the top management and to facilitate Central Board under the Risk-Based Internal Audit better risk monitoring, Risk Dashboards for (RBIA) framework. It is also the Secretariat to the important operational risk areas were prepared. Audit and Risk Management Sub-Committee Major risk areas pertaining to the Reserve (ARMS) of the Central Board and to the Executive Bank’s functioning have been identified and Risk Directors’ Committee (EDC) in overseeing the Dashboards constituting different parameters internal audit function. were established for assessing the identified risks and monitoring them periodically. Agenda for 2019-20: Implementation Status Implication of COVID-19 Pandemic Goals Set for 2019-20 XI.53 Owing to larger than normal balance XI.56 Last year, the Department had set out the sheet expansion, as a result of the recent policy following goals: actions and liquidity infusion measures adopted • Focus on knowledge and capacity building by the Reserve Bank to mitigate the adverse across the Reserve Bank after successful shock induced by the COVID-19 outbreak, the risk roll out of RBIA, Concurrent Audit (CA) and provisioning required for the year (in accordance Control Self-Assessment Audit (CSAA) with the newly adopted economic capital application in Audit Management and Risk framework) was higher than the previous years. Monitoring System (AMRMS) application Agenda for 2020-21 (Utkarsh) [Para XI.57]; XI.54 For the year, the following goals for the • Endeavour to achieve 80 per cent Department have been proposed: convergence of risk-rating as per Risk 229ANNUAL REPORT Assessment Methodology for Operational convergence with the risk-rating as per RAM-OR Risk (RAM-OR) and Inspection with respect to RBIA. Department methodology with respect to Project Audit RBIA (Utkarsh) [Para XI.57]; XI.58 Project Audit has assumed significance • Introduction of Project Audit across the in recent times due to its growing adoption by Reserve Bank (Utkarsh) [Para XI.58]; and central banks. It is an independent and objective • Reviewing the risk rating and scoring project risk assessment function under which methodology adopted for RBIA (Para the performance of stakeholders, ownership, as XI.60). well as service providers, is assessed regarding Implementation Status of Goals risks related to a project in terms of cost, time and deliverables; measurement of effectiveness XI.57 In pursuit of the goals set for the year, and efficiency; fiduciary requirements such as the automation of the audit process was taken reliability of information, compliance with internal forward with the launch of the CSAA module in and external policies and rules; and adherence to AMRMS across all the offices of the Reserve international standards in project management. Bank. The AMRMS now provides a platform for Project Audit will help in pointing out the feasibility, hosting RBIA, Concurrent Audit (CA) and CSAA shortcomings/deficiencies in the implementation related functions, viz., planning and conduct of of the project and assist in course correction audit; uniformity and standardisation in audit in order to save cost and time. An important reporting; submission, processing and monitoring of compliances; data analytics and reporting development during the year was the issue of dashboards on key performance indicators Project Audit Guidelines for timely and cost- (KPIs), documentation and record management, effective implementation of high value IT and non- and alerts in an integrated manner. The AMRMS IT projects in the Reserve Bank. has also created synergy among the internal XI.59 The conduct of the RBIA and Project audit operations, risk management and risk Audit has been adversely impacted due to the assurance functions by bringing in enhanced restrictions imposed across the country due to the internal audit efficacy, operational efficiency, COVID-19 outbreak. confidentiality, evidence-based reporting, paper- XI.60 A review of RBIA risk scoring/rating less environment (reduced carbon footprint) methodology was also undertaken during the year and straight-through-processing (STP). User workshops have been conducted, covering all to have a more realistic and objective assessment of the Central Office Departments (CODs), ROs, risk across auditee units. The revised methodology training establishments and associate institutions will facilitate effective decision-making regarding of the Reserve Bank. Compliance audit has been determining periodicity of the conduct of RBIA, introduced to ensure sustenance of compliance more granular risk mapping and peer comparison, of RBIA observations in a qualitative manner. categorisation of auditee offices as per their risk The Department had also achieved the targeted profile, size and nature of functioning. 230GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT Agenda for 2020-21 and actual realisation - both in terms of strategy and budget (Para XI.64); XI.61 During the year, the Department will focus on the following: • Setting up a Sub-Committee of Central Board for apex level monitoring of strategy • Implementing Project Audit for all the implementation (Para XI.65); and identified high value IT and non-IT projects of the Reserve Bank (Utkarsh); • Developing a Dashboard for facilitating early warnings for potential non- • Enhanced convergence with risk-rating achievement of strategic goals (Para as per RAM-OR with respect to RBIA XI.66). (Utkarsh); Implementation Status of Goals • Leveraging on AMRMS data mining, analytics and Management Information XI.64 In pursuance of the goals set for the System (MIS) reporting dashboards year, internal financial control mechanisms capabilities for effective risk assurance to were reinforced by overhauling budgetary and the ARMS and top management (Utkarsh); expenditure processes to rationalise expenses within the ambit of organisational objectives. • Knowledge and capacity building through A new framework was put in place to address training programmes (Utkarsh); and under-utilisation of capital expenditure. This • Implementing the revised risk rating and framework, which will come into force starting scoring methodology across the Reserve from the Reserve Bank's accounting year 2020- Bank. 21, monitors capital expenditure in terms of 6. CORPORATE STRATEGY AND BUDGET the three-year moving average of the last five MANAGEMENT years' actual utilisation. Any unforeseeable exigencies are met from a capital expenditure XI.62 The Corporate Strategy and Budget buffer, which is a global contingency arrangement Department (CSBD) coordinates and formulates and not a part of regular budget. the Reserve Bank’s strategies, prepares its annual budget and monitors its expenditure with a view XI.65 A Strategy Sub-Committee of the Central to ensuring budgetary discipline. The Department Board of Directors was formed for regular is also responsible for robust Business Continuity monitoring of the milestones set under the Plans (BCPs) for crisis situations. It is also invested Reserve Bank’s medium-term strategy framework with governance of External Funded Institutes - Utkarsh 2022. The Department is working as (EFIs). the Secretariat for this Strategy Sub-Committee. The progress made towards achieving milestones Agenda for 2019-20: Implementation Status during 2019-20 under Utkarsh is set out in Box Goals Set for 2019-20 XI.1. XI.63 Last year, the Department had set out the XI.66 Work on a Dashboard for centralised following goals under Utkarsh: monitoring of strategy implementation has • Enhancing internal control functions in commenced. This will facilitate early warnings on order to minimise gap between target potential non-achievements of strategic goals. 231ANNUAL REPORT Box XI.1 Progress on Implementation of Strategy Framework - Utkarsh 2022 In July 2019, the Reserve Bank launched its medium-term 2020; and also conducting annual conference of CSBD on strategy framework, namely ‘Utkarsh 2022’, re-articulating theme ‘Utkarsh 2022’ in January 2020. its mission statement, core purpose and values, setting 153 Implementation of ‘Utkarsh 2022’ is being guided and goals and 358 milestones to fulfil its core purposes. These monitored by a sub-committee of the Central Board, goals and milestones feed into the following visions set by namely the Strategy Sub-Committee (Chair: Dr. P. K. the Reserve Bank for the medium-term: Mohanty). Monitoring of the milestones is done through a key performance indicator (KPI) framework. The KPI • Vision 1: Excellence in performance of statutory and framework will help in the quantitative assessment of the other functions. implementation of the milestones as well as monitoring the • Vision 2: Strengthened trust of citizens and other sustenance of the milestones. Besides, work on a Dashboard institutions in the Reserve Bank. for centralised monitoring of strategy implementation has also commenced. • Vision 3: Enhanced relevance and significance in national and global roles. The unprecedented COVID-19 pandemic albeit posed challenges in achieving the set milestones, yet 112 out of • Vision 4: Transparent, accountable and ethics driven 199 milestones have been fully implemented during the year internal governance. (Chart 1). • Vision 5: Best-in-class and environment friendly digital as well as physical infrastructure. Chart 1: Milestones Completed Status (End-June 2020) • Vision 6: Innovative, dynamic and skilled human resources. While setting the medium-term goals, the Reserve Bank recognises the dynamic and fast changing environment 43.7 in which a central bank operates. Accordingly, several steps were taken to sensitise and internalise the strategy 56.3 framework during the year, such as distribution of a brochure on ‘Utkarsh 2022’ among CODs and ROs; organising video conferences and meetings with the stakeholders for outlining Milestones due and completed the approach to be followed in achieving the milestones; Milestones due but not completed workshops on ‘Utkarsh 2022’ at ZTC, Belapur for ROs in Source: RBI. December 2019 and at CAB, Pune for CODs in February XI.67 As the nodal Department for Business including the profiles of key resource personnel. Continuity Management (BCM) of the Reserve After imposition of lockdown following COVID-19 Bank, the CSBD took the lead in responding to outbreak, the Department has been functioning the outbreak of COVID-19 pandemic (Box XI.2). A on work-from-home basis, and select officers BCM Manual and a Standard Operating Procedure of the Department attended office on a periodic (SOP) on invocation of BCP were prepared during basis for carrying out core banking solution (CBS) the year for strengthening the BCM framework. The related transactions. Enterprise Content Management System (ECMS) portal of the Reserve Bank’s intranet enables XI.68 As part of the oversight of External Funded faster dissemination of BCM-related information, Institutions (EFIs), the Department continued to 232GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT Box XI.2 Reserve Bank’s Business Continuity Plan (BCP) for COVID-19 Pandemic In response to the outbreak of the COVID-19 pandemic IT infrastructure at data centres (DCs) forms the backbone on March 11, 2020, Business Continuity Committee of the of the Reserve Bank’s infrastructure for the financial Reserve Bank decided to set up multiple teams of trained system of the economy. In order to keep the DCs and IT personnel who can operate the time-sensitive critical infrastructure running for smooth functioning of critical activities (TSCAs) of the Reserve Bank. On March 17, 2020, systems, the Reserve Bank took on nature’s version of a the high-level crisis management team (CMT) decided zero-day malware in the form of COVID-19, and activated that an Alternative Work Area Site (AWAS) be set up for business resilience/continuity plans for DCs seamlessly all TSCAs. As directed by the CMT, a dedicated team was from an isolated location. Resource personnel from IT, deployed to man these operations, sequestered in a sterile DCs, business departments, service partners/associates building. Another team was kept in hot stand-by mode for including security, support and maintenance staff were moving in at short notice. also isolated near the respective DCs. Further, the BCP was continuously fine-tuned to be ready with remediation With critical business processes having been secured, plan for smooth flow of operations, staffing, key resources, departments and branch offices were pre-emptively crisis management groups, while keeping all insulated from required to work-from-home with effect from March 18, exposure to the fast-changing environment. 2020, with personnel in office premises whittled down to the barest minimum. When the Government of India ordered The swift and comprehensive response of the Reserve a 21-day nation-wide lockdown on March 24, 2020, the Bank to COVID-19 through BCP strategy was promptly Reserve Bank was already operating its critical operations picked up by the media, and was extensively reported. from its AWAS and running other operations on a work- Prominent national and financial dailies reported the move from-home basis. Simultaneously, precautionary measures with headlines like ‘How RBI set up war-room in just one day such as cleansing and sanitisation of surfaces, use of amid coronavirus outbreak’, ‘War room set up to save the face masks and hand sanitisers, and maintaining social country’s economy’ and ‘RBI chalks out contingency plan for distancing were put in place to contain the spread of the smooth functioning of services’. virus in workplaces. Safeguards on personal hygiene and Taking a cue from the Reserve Bank’s BCP strategy on sanitisation were also beefed up in residential colonies, COVID-19, several banks and financial institutions set up besides sensitising employees and their family members similar arrangements. The uninterrupted functioning of through circulars and guidelines detailing ‘Do’s and Don’ts’ NEFT/RTGS, ATMs and general banking services across issued by various government bodies and the WHO. This the country during the lockdown was possible due to such model has served the Reserve Bank well in dealing with prompt and coordinated response by various stakeholders the COVID-19 pandemic. With suitable modifications, this in the financial system. model could become a template for dealing with future pandemics. Source: RBI. reinforce their governance by facilitating meetings • Operationalising a Dashboard to implement the KPIs-based framework for monitoring of their Governing Boards and sub-committees, and assessing the implementation of implementation of the recommendations of their strategic goals/milestones (Utkarsh); Review Committees and selection of Directors • Strengthening of internal governance of when vacancies arose. EFIs; and Agenda for 2020-21 • Renewal of the memoranda of XI.69 The Department’s agenda for the year understanding (MoUs) with IGIDR and CAFRAL with the goal of enhancing the includes the following: collaboration with these institutes. 233ANNUAL REPORT 7. RAJBHASHA be used for submission and review at various platforms, including to the government. Adopting XI.70 The Rajbhasha Department is entrusted ‘less paper’ and virtual internal workflows is a with the responsibility of ensuring compliance with strategy followed by the Reserve Bank to achieve the Official Language Act, 1963 in the Reserve its medium-term strategy ‘Utkarsh 2022’ and Bank. This covers a wide range of activities in IRRS package created a conducive environment Hindi being performed by the ROs and CODs as while heading towards it. Various reports such as per the instructions of the Government of India Quarterly Progress Report, Annual Report, Hindi and the Committee of Parliament on Official Advisory Committee Report, Annual Assessment Language. The Department provides support Report, Town Official Language Implementation to ROs and CODs and coordinates with them Committee (TOLIC) Report and Roster of Hindi to ensure effective implementation of the official knowledge are generated through this package, a language policy of the Government of India in the virtual platform. It is useful in preparing responses Reserve Bank. to the Parliamentary Committee on Official Agenda for 2019-20: Implementation Status Language. One module of the IRRS package has gone live this year whereas the work for other Goals Set for 2019-20 modules is in progress. XI.71 Last year, the Department had set out the Publication of an e-Book following goals: • Implementation of the Integrated XI.73 The Department published an e-book on ‘Hindi Workshop related to Training Material’ in Rajbhasha Reporting System (Para XI.72); June 2020 for the use of Rajbhasha officers while and conducting Hindi workshops across CODs and • Publication of an e-book on ‘Hindi ROs of the Reserve Bank. Workshop related to Training Material’ for Major Developments faculty members (Para XI.73). XI.74 During the year, 146 staff members Implementation Status of Goals passed the Pragya1 and 190 passed the Parangat 2 Integrated Rajbhasha Reporting System examination. In order to enhance the use of Hindi on computers, staff members were trained to work XI.72 The Integrated Rajbhasha Reporting in Hindi on computers. 149 Hindi workshops were System (IRRS) is a package for collecting, conducted across the Reserve Bank during July processing, reporting and storing of data related 2019 to June 2020 including workshops organised to use of Hindi in the Reserve Bank. IRRS enables for senior officers at CODs and ROs, which helped Rajbhasha Department’s mission to collate in increasing the use of Hindi in notings and and disseminate data regarding use of Hindi to correspondences. 1 The examination is conducted for those who do not have the working knowledge of Hindi. 2 The highest examination to acquire proficiency in Hindi. 234GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT XI.75 CODs and ROs observed a ‘Hindi Department, besides its Hindi journal, Banking Fortnight’, organised Hindi Samaroh and seminars Chintan Anuchintan. The latest March 2020 in Hindi on various banking topics, held talks in issues of both these half yearly publications of Hindi and arranged various competitions and Rajbhasha Department were released in e-format programmes in order to create a conducive amidst the COVID-19 outbreak in a ‘work from environment for use of Hindi. As part of the home’ environment. strategic plan for the year 2019-20, the Rajbhasha Compliance of Assurances Given to the Committee Department successfully prepared specific of Parliament on Official Language glossaries for various departments. The publication XI.78 The Committee of Parliament on Official of a booklet on official notings in Hindi for senior Language visits the Reserve Bank’s Central Office officers has been completed. Work related to and ROs to review the progress made in the use maintenance of Hindi library, publication of Hindi of Hindi. The Reserve Bank’s Central Official magazines and organising Hindi Day function Language Implementation Committee monitors were streamlined. the compliance of the assurances given to the Training Committee. During the year, concerted efforts XI.76 In pursuance of Reserve Bank’s vision were made towards monitoring expenditure on statement ‘Utkarsh 2022’ which speaks about Hindi advertisements, training more staff for enhancing the skills of human resources for Parangat, filling up vacant Hindi posts, attending current and emerging challenges, one batch of the meetings of TOLIC by the Officers-in-Charge Rajbhasha Officers was imparted training under of concerned departments, and increasing usage the Management Development Programme. A of computer for Hindi work. translation workshop was conducted at the RBSC, Agenda for 2020-21 Chennai related to legal documents, financial and XI.79 During the year, the Department plans to banking terminologies. The CAB, Pune conducted focus on the following: Hindi workshop for personal secretaries of the Reserve Bank and ZTC, Kolkata organised a • Updating Banking Glossary; training on general banking for the Rajbhasha • Implementation of Annual Programme and officers. other guidelines issued by Government of Publications India from time to time; XI.77 The statutory publications of the Reserve • Preparation of department-specific Bank, viz., Annual Report, Report on Trend and terminologies to promote the use of Hindi; Progress of Banking in India, Monetary Policy • Commencing Hindi magazine competitions Report and other publications like the Financial for the ROs in order to enhance creativity Stability Report, Weekly Statistical Supplement in Hindi among employees; and monthly Reserve Bank of India Bulletin were published in bilingual form and are available • Conducting Hindi workshops for senior on the Reserve Bank’s website. Rajbhasha officers at ROs/CODs in order to update Samachar, covering the progressive use of them with the latest instructions/guidelines Hindi in the Reserve Bank, was published by the regarding use of Hindi; and 235ANNUAL REPORT • Conducting a lecture series on banking • Commencement of construction of topics in Hindi. new office buildings at Dehradun and Naya Raipur and residential quarters at 8. PREMISES DEPARTMENT Dehradun (Para XI.83). XI.80 The vision of the Premises Department is Implementation Status of Goals to provide ‘best in class’ and environment friendly physical infrastructure by integrating architectural XI.82 In 2019-20, developments were inspired excellence and aesthetic appeal with green ratings by the vision, as the Department endeavoured to fulfill the goals set in these areas. Several of in the Reserve Bank’s premises while ensuring the milestones set under Utkarsh have been the highest level of cleanliness. achieved by the Department. First, the Reserve Agenda for 2019-20: Implementation Status Bank received green ratings from IGBC for Goals Set for 2019-20 two of its buildings (one each at Bengaluru and Hyderabad) as on January 1, 2020. Second, as XI.81 Last year, the Department had set out the against the target of achieving 1.5 per cent power following goals: consumption by all Reserve Bank premises from • Getting relevant green rating from GRIHA3/ renewable sources, power consumption from IGBC4 for at least two buildings (Utkarsh) renewable sources was 3.34 per cent. Third, the [Para XI.82]; Reserve Bank achieved 10.2 per cent of energy savings as against the target of 1.25 per cent. • Attaining 1.5 per cent of power consumption Finally, the water conservation/savings stood from renewable sources (Utkarsh) [Para at 5.62 per cent as against the target of 2.5 per XI.82]; cent. However, digitising inventory and assets • Attaining 1.25 per cent of energy savings tracking system could not be implemented during (Utkarsh) [Para XI.82]; the year due to tepid response of vendors during • Attaining 2.5 per cent water conservation/ tendering process. This tracking system would be savings (Utkarsh) [Para XI.82]; implemented during the current year by December 2020. • Digitising inventory and assets tracking in association with ReBIT (Utkarsh) [Para XI.83 The construction of residential projects XI.82]; at Hauz Khas, New Delhi and Anna Nagar, Chennai are at advanced stages of completion. • Completion of construction of quarters at The drawings for the residential colony in Jammu New Delhi and Chennai (Para XI.83); have been completed. The construction of office • Completion of drawings of residential premises at Dehradun has commenced and the colony in Jammu (Para XI.83); and construction of office premises at Naya Raipur and 3 Green Rating for Integrated Habitat Assessment. 4 Indian Green Building Council. 236GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT residential premises at Dehradun are at advanced Reserve Bank. All new building projects have been stages of planning and approval. certified as green compliant by the IGBC. The Reserve Bank has generated renewable energy Other Construction Activities through solar power generation plants installed at XI.84 The construction to house the CAFRAL at various offices and residential colonies. The solar Mumbai is under progress, with the RCC structural power generation capacity has been enhanced work of the institutional portion of the project to 1,910 kwp in March 2020 from 1,440 kwp in having been completed. Among various projects March 2019, which enhanced further to 2,034 on deposit work basis with the Central Public kwp in June 2020. Rainwater harvesting systems, Works Department (CPWD), the construction of sewage treatment and wastewater treatment office premises at Imphal (boundary wall) has plants have been installed in various premises for commenced. Projects at Kharghar in Navi Mumbai conservation and efficient use of water. Similarly, (residential premises), office premises for Agartala organic waste converters have also been installed (boundary wall) and Ranchi (boundary wall) are at in many office and residential premises. advanced stages of planning and approval. Other Initiatives Maintenance Activities XI.88 As part of the Reserve Bank’s effort to XI.85 As part of efficient maintenance reduce plastic pollution to help the environment management of the Reserve Bank’s iconic office and move towards environmentally sustainable and residential buildings across India, guidelines products, the Department issued guidelines on for safety and stability of buildings have been phasing out of single use plastics in the Reserve issued and are being implemented through yearly Bank for implementation across all its offices. visual and maintenance inspection. The condition Agenda for 2020-21 assessment of structures through structural audit XI.89 For the year, the Department has set up (using non-destructive tests) has been taken up to the following goals: decide the course of retrofitting or otherwise. • Green rating certification from GRIHA/ Impact of COVID-19 IGBC for at least one office and five XI.86 The progress of various projects and existing residential buildings in addition to the maintenance work were affected due to all the new building projects (Utkarsh); COVID-19 pandemic related lockdown and • Attaining 3.0 per cent of power consumption restricted movement of labour. However, the from renewable sources (Utkarsh); Department undertook necessary measures for creating contactless environment for the safety of • Attaining 2.5 per cent of energy savings employees attending office for maintenance and (Utkarsh); related work during the lockdown period. • Attaining 5.0 per cent of water conservation/ Green Initiatives savings (Utkarsh); XI.87 The Department has taken various • Digitising inventory and assets tracking in measures as part of green initiatives in the association with ReBIT (Utkarsh); 237ANNUAL REPORT • Completion of the residential projects resources and also measures adopted during at Chennai, Mumbai and Delhi and the year for strengthening risk monitoring and construction of boundary walls at Agartala, internal audit mechanism in the Reserve Bank. Imphal and Ranchi; Human resources were upgraded through various innovative training programmes introduced by • Commencing construction of office the HRMD. While the Rajbhasha Department premises at Naya Raipur and residential ensured compliance with the statutory provisions projects at Dehradun, Kharghar in Navi of the Official Language Act of the Government Mumbai and Jammu; and of India, the Premises Department continued with • Reviewing and revising the contract its efforts to provide environment friendly physical architecture5 and implementation of the infrastructure. The departments described in this project management tools6 for monitoring chapter have not only evaluated their goals set of the projects. for the year, but also set out priorities for 2020- 21. With the outbreak of COVID-19, the Reserve 9. Conclusion Bank responded swiftly and comprehensively for XI.90 In sum, this chapter discussed securing critical business processes and ensured developments in the areas of governance, human business continuity in the financial system. 5 Refers to the framework covering planning to completion of construction projects. 6 These are software solutions that help in monitoring and efficiently managing the projects. 238GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT Annex Table XI.1: Attendance in the Meeting of the Central Board of Directors during July 1, 2019 – June 30, 2020 Name of the Member Appointed/Nominated under No. of Meetings No. of Meetings RBI Act, 1934 Held Attended 1 2 3 4 Shaktikanta Das 8(1)(a) 7 7 N. S. Vishwanathanx 8(1)(a) 6 4 Viral V. Acharya@ 8(1)(a) 1 1 B. P. Kanungo 8(1)(a) 7 6 Mahesh Kumar Jain 8(1)(a) 7 7 Michael Debabrata Patra# 8(1)(a) 3 3 Prasanna Kumar Mohanty 8(1)(b) 7 6 Dilip S. Shanghvi 8(1)(b) 7 5 Revathy Iyer 8(1)(b) 7 7 Sachin Chaturvedi 8(1)(b) 7 6 Natarajan Chandrasekaran 8(1)(c) 7 7 Bharat N. Doshi* 8(1)(c) 6 6 Sudhir Mankad* 8(1)(c) 6 6 Ashok Gulati 8(1)(c) 7 5 Manish Sabharwal 8(1)(c) 7 7 Satish Kashinath Marathe 8(1)(c) 7 6 Swaminathan Gurumurthy 8(1)(c) 7 5 Subhash Chandra Garg$ 8(1)(d) 1 1 Atanu Chakraborty^ 8(1)(d) 5 3 Rajiv Kumar^^ 8(1)(d) 6 5 Debasish Panda& 8(1)(d) 1 1 Tarun Bajaj% 8(1)(d) 1 1 X: Deputy Governor till March 31, 2020. @: Deputy Governor till July 23, 2019. #: Deputy Governor w.e.f January 15, 2020. *: Director till March 3, 2020. $: Director till July 29, 2019. ^: Director w.e.f July 29, 2019 till April 30, 2020. ^^: Director till February 28, 2020. &: Director w.e.f March 11, 2020. %: Director w.e.f May 5, 2020. 239ANNUAL REPORT Table XI.2: Attendance in the Meeting of the Committees of the Central Board during July 1, 2019 – June 30, 2020 Name of the Member Appointed /Nominated under No. of Meetings Held No. of Meetings Attended RBI Act,1934 1 2 3 4 I. Committee of the Central Board (CCB) Shaktikanta Das 8 (1) (a) 46 43 N. S. Vishwanathan$ 8 (1) (a) 34 20 Viral V. Acharya@ 8 (1) (a) 2 1 B. P. Kanungo 8 (1) (a) 46 33 Mahesh Kumar Jain 8 (1) (a) 46 39 Michael Debabrata Patra# 8 (1) (a) 22 22 Prasanna Kumar Mohanty 8 (1) (b) 13 13 Dilip S. Shanghvi 8 (1) (b) 16 14 Revathy Iyer 8 (1) (b) 16 16 Sachin Chaturvedi 8 (1) (b) 16 10 Natarajan Chandrasekaran 8 (1) (c) 9 1 Bharat N. Doshi* 8 (1) (c) 12 6 Sudhir Mankad* 8 (1) (c) 10 9 Ashok Gulati 8 (1) (c) 15 14 Manish Sabharwal 8 (1) (c) 17 15 Satish Kashinath Marathe 8 (1) (c) 16 8 Swaminathan Gurumurthy 8 (1) (c) 16 1 Atanu Chakraborty^ 8 (1) (d) 23 23 Tarun Bajaj% 8 (1) (d) 7 7 @: Deputy Governor till July 23, 2019. #: Deputy Governor w.e.f January 15, 2020. ^: Director w.e.f July 29, 2019 till April 30, 2020. *: Director till March 3, 2020. %: Director w.e.f May 5, 2020. $: Deputy Governor till March 31, 2020. II. Board for Financial Supervision (BFS) Shaktikanta Das Chairman 8 8 Mahesh Kumar Jain Vice-Chairman 8 8 N. S. Vishwanathan$ Member 7 5 B. P. Kanungo Member 8 4 Viral V. Acharya# Member 1 1 Michael Debabrata Patra* Member 2 2 Bharat N. Doshi@ Member 7 6 Sudhir Mankad@ Member 7 7 Ashok Gulati Member 8 7 Satish Kashinath Marathe Member 8 6 Sachin Chaturvedi^ Member 1 1 #: Member till July 23, 2019. *: Member w.e.f January 15, 2020. @: Member till March 03, 2020. ^: Member w.e.f May 14, 2020. $: Member till March 31, 2020. 240GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT Table XI.2: Attendance in the Meeting of the Committees of the Central Board during July 1, 2019 – June 30, 2020 (Concld.) Name of the Member Appointed /Nominated under No. of Meetings Held No. of Meetings Attended RBI Act,1934 1 2 3 4 III. Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) Shaktikanta Das Chairman 2 2 B. P. Kanungo Vice-Chairman 2 2 N. S. Vishwanathan$ Member 1 0 Mahesh Kumar Jain Member 2 2 Michael Debabrata Patra* Member 1 1 Natarajan Chandrasekaran Member 1 0 Manish Sabharwal Member 2 2 $: Member till March 31, 2020. *: Member w.e.f January 15, 2020. 241ANNUAL REPORT Table XI.3: Attendance in the Meeting of the Sub-Committees of the Board during July 1, 2019 – June 30, 2020 Name of the Member Appointed/Nominated under No. of Meetings Held No. of Meetings Attended RBI Act, 1934 1 2 3 4 I. Audit & Risk Management Sub-Committee (ARMS) Bharat N. Doshi@ Chairman 6 6 Sudhir Mankad@ Member 6 6 Revathy Iyer Member 6 5 N. S. Vishwanathan$ Member 6 5 Viral V. Acharya# Invitee 1 1 B. P. Kanungo Invitee 6 4 Mahesh Kumar Jain Invitee 6 6 Michael Debabrata Patra Invitee 3 2 @: Member till March 3, 2020. $: Member till March 31, 2020. #: Member till July 23, 2019. II. Building Sub-Committee (BSC) Dilip S. Shanghvi Chairman 1 1 Prasanna Kumar Mohanty Member 1 1 Mahesh Kumar Jain Member 1 1 III. Human Resource Management Sub-Committee (HRM-SC) Manish Sabharwal Chairman 4 4 Dilip Shanghvi Member 4 2 Mahesh Kumar Jain Member 4 3 IV. Information Technology Sub-Committee (IT-SC) Manish Sabharwal Chairman 3 3 Sachin Chaturvedi Member 3 3 B. P. Kanungo Member 3 1 V. Strategy Sub-Committee Prasanna Kumar Mohanty Chairman 1 1 Manish Sabharwal Member 1 1 Revathy Iyer Member 1 1 N. S. Vishwanathan$ Member 1 0 B. P. Kanungo Member 1 1 Mahesh Kumar Jain Member 1 1 Michael Debabrata Patra Member 1 1 $: Member till March 31, 2020. 242GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT Table XI.4: Attendance in the Meeting of Standing Committee of the Central Board of Directors for the Southern Area during July 1, 2019 - June 30, 2020 Name of the Member No. of Meetings Held No. of Meetings Attended 1 2 3 Prasanna Kumar Mohanty, Chairman 2 2 Satish Kashinath Marathe, Member 2 2 Table XI.5: Attendance in the Meetings of Local Boards during July 1, 2019 - June 30, 2020 Name of the Member Appointed/Nominated under No. of Meetings Held No. of Meetings Attended RBI Act, 1934 1 2 3 4 Sachin Chaturvedi, EALB Section 9(1) 4 4 Sunil Mitra, EALB Section 9(1) 4 4 Dilip S. Shanghvi, WALB Section 9(1) 4 4 V. R. Bhanshali, WALB Section 9(1) 4 4 Revathy Iyer, NALB Section 9(1) 4 4 R. N. Dubey, NALB Section 9(1) 4 4 P. K. Mohanty, SALB^ Section 9(1) 0 0 EALB: Eastern Area Local Board. WALB: Western Area Local Board. NALB: Northern Area Local Board. SALB: Southern Area Local Board. ^: SALB could not function due to lack of a required quorum. 243THE RESERVE BANK’S ACCOUNTS XII FOR 2019-20 The balance sheet size of the Reserve Bank increased by 30.02 per cent as on June 30, 2020. The gross total income for the year 2019-20 amounted to `1,496.72 billion as compared to `1,930.36 billion in 2018-19. The previous year’s income included a write back of excess provision from Contingency Fund amounting to `526.37 billion. A comparison excluding the same from previous year’s income, shows a marginal increase in the income for 2019-20. The expenditure of the Reserve Bank for the year 2019-20 is `925.40 billion which includes a risk provision of `736.15 billion towards Contingency Fund as compared to an expenditure of `170.45 billion in 2018-19. The year ended with an overall surplus of `571.28 billion. XII.1 The balance sheet of the Reserve Bank increase in gold by 52.85 per cent. On the liability plays a critical role in the functioning of the side, the increase was due to increase in Notes country’s economy largely reflecting the activities issued, Other Liabilities and Provisions, and carried out in pursuance of its currency issue Deposits by 21.52 per cent, 30.47 per cent and function as well as monetary policy and reserve 53.72 per cent, respectively. Domestic assets management objectives. The key financial results constituted 28.75 per cent while the foreign of the Reserve Bank’s operations during the year currency assets and gold (including gold deposit 2019-20 (July - June) are set out in the following and gold held in India) constituted 71.25 per cent paragraphs. of total assets as on June 30, 2020 as against 28.03 per cent and 71.97 per cent, respectively as XII.2 The balance sheet increased by on June 30, 2019. `12,318.88 billion, i.e., 30.02 per cent from `41,029.05 billion as on June 30, 2019 to XII.3 A provision of `736.15 billion was made `53,347.93 billion as on June 30, 2020. The and transferred to Contingency Fund (CF). No increase on the asset side was due to increase in provision was made towards Asset Development domestic and foreign investments by 18.40 per Fund (ADF). The trends in income, expenditure, cent and 27.28 per cent, respectively, increase in net disposable income and the surplus transferred loans and advances by 245.76 per cent and to the central government are given in Table XII.1. 244THE RESERVE BANK’S ACCOUNTS FOR 2019-20 Table XII.1: Trends in Income, Expenditure and Net Disposable Income (` billion) Item 2015-16 2016-17 2017-18 2018-19 2019-20 1 2 3 4 5 6 a) Income 808.70 618.18 782.81 1,930.36 1,496.72 b) Total Expenditure@ 149.90# 311.55^ 282.77& 170.45* 925.40** c) Net Disposable Income (a-b) 658.80 306.63 500.04 1,759.91 571.32 d) Transfer to Funds@@ 0.04 0.04 0.04 0.04 0.04 e) Surplus Transferred to the Central Government (c-d) 658.76 306.59 500.00 1,759.87 571.28 @ : Includes provision towards CF and ADF. # : Includes a provision of `10 billion towards additional capital contribution in BRBNMPL. ^ : Includes a provision of `0.50 billion towards additional capital contribution in the Reserve Bank’s subsidiary ReBIT and a provision of `131.40 billion towards transfer to CF. & : Includes a provision of `141.90 billion towards transfer to CF. * : Includes a provision of `0.64 billion towards transfer to ADF. ** : Includes a provision of `736.15 billion towards transfer to CF. @@: An amount of `0.01 billion each has been transferred to the National Industrial Credit (Long Term Operations) Fund, the National Rural Credit (Long Term Operations) Fund, the National Rural Credit (Stabilisation) Fund and the National Housing Credit (Long Term Operations) Fund, during each of the five years. XII.4 The Independent Auditors' Report, the of Significant Accounting Policies and supporting Balance Sheet and the Income Statement for the Notes to Accounts are as follows: year 2019-20 along with the schedules, statement 245ANNUAL REPORT INDEPENDENT AUDITORS’ REPORT To The President of India Report on Audit of Financial Statements Opinion 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 on June 30, 2020 and the Income Statement for the year ended on that date (hereinafter referred to as “financial statements”), which have been audited by us. 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 thereunder so as to exhibit true and correct view of the state of affairs of the Bank as on June 30, 2020 and its results of operations for the year ended on that date. Basis for Opinion We conducted our audit in accordance with the Standards on Auditing (SAs) issued by the Institute of Chartered Accountants of India (ICAI). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Bank in accordance with the ethical requirements that are relevant to our audit of the financial statements, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion on the financial statements. Information Other than the Financial Statements and Auditor’s Report Thereon The Management is responsible for the other information. The other information comprises the information included in the Notes to the accounts, but does not include the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of Management and Those Charged with Governance for the Financial Statements The Bank’s Management and Those Charged with Governance for the Financial Statements are 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 also includes maintenance of adequate accounting records and preventing and detecting frauds and other irregularities; selection and application of appropriate accounting policies; making judgements and estimates that are reasonable and prudent and 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. In preparing the financial statements, management is responsible for assessing the Bank’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so. Those charged with governance are also responsible for overseeing the Bank’s financial reporting process. Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with SAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. 246THE RESERVE BANK’S ACCOUNTS FOR 2019-20 As part of an audit in accordance with SAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit 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 financial control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. • Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Bank to cease to continue as a going concern. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Other Matters The audit of the financial statements of the Bank for the year ended June 30, 2019, was carried out and reported jointly by M/s Chhajed & Doshi and M/s G. P. Kapadia & Co., Chartered Accountants, vide their unmodified audit report dated August 26, 2019, whose report has been furnished to us by the management and which has been relied upon by us for the purpose of our audit of the financial information. Our opinion is not modified in respect of this matter. We report that we have called for information and explanations from the Bank considered necessary for the purpose of our audit and such information and explanations have been given to our satisfaction. We also report that the financial statements include the accounts of twenty-two accounting units of the Bank which have been audited by Statutory Branch Auditors and we have relied on their report in this regard. For Prakash Chandra Jain & Co. For Haribhakti & Co., LLP Chartered Accountants Chartered Accountants (ICAI Firm Registration (ICAI Firm Registration No. 002438C) No. 103523W/ W100048) Pratibha Sharma Hemant J. Bhatt Partner Partner Membership No. 400755 Membership No.036834 UDIN: 20400755AAAABU3505 UDIN: 20036834AAAAEB7640 Place: Mumbai Date: August 14, 2020 247ANNUAL REPORT RESERVE BANK OF INDIA BALANCE SHEET AS ON JUNE 30, 2020 (Amount in ` billion) Liabilities Schedule 2018-19 2019-20 Assets Schedule 2018-19 2019-20 Capital 0.05 0.05 Assets of Banking Department (BD) Reserve Fund 65.00 65.00 Notes, Rupee Coin, Small Coin 5 0.09 0.13 Other Reserves 1 2.30 2.32 Gold Coin and Bullion 6 882.98 1,428.75 Deposits 2 7,649.22 11,758.60 Investments-Foreign-BD 7 6,964.53 10,234.00 Other Liabilities and Provisions 3 11,624.51 15,166.21 Investments-Domestic-BD 8 9,898.77 11,720.27 Bills Purchased and Discounted 0.00 0.00 Loans and Advances 9 931.87 3,222.07 Investment in Subsidiaries 10 19.64 19.64 Other Assets 11 643.20 367.32 Liabilities of Issue Department Assets of Issue Department (ID) Notes Issued 4 21,687.97 26,355.75 Gold Coin and Bullion (as backing 6 792.04 1,131.46 for Note issue) Rupee Coin 8.28 7.85 Investment-Foreign-ID 7 20,887.65 25,216.44 Investment-Domestic-ID 8 0.00 0.00 Domestic Bills of Exchange and 0.00 0.00 other Commercial Papers Total Liabilities 41,029.05 53,347.93 Total Assets 41,029.05 53,347.93 Nirmal Chand M. D. Patra M. K. Jain B.P. Kanungo Shaktikanta Das Chief General Manager-in-Charge Deputy Governor Deputy Governor Deputy Governor Governor 248THE RESERVE BANK’S ACCOUNTS FOR 2019-20 RESERVE BANK OF INDIA INCOME STATEMENT FOR THE YEAR ENDED JUNE 2020 (Amount in ` billion) INCOME Schedule 2018-19 2019-20 Interest 12 1,068.37 1,093.33 Other income 13 861.99 403.39 Total 1,930.36 1,496.72 EXPENDITURE Printing of Notes 48.11 43.78 Expenditure on Remittance of Currency 0.88 0.87 Agency Charges 14 39.10 38.76 Employee Cost 68.51 89.28 Interest 0.01 0.01 Postage and Telecommunication Charges 1.03 1.17 Printing and Stationery 0.22 0.20 Rent, Taxes, Insurance, Lighting, etc. 1.26 1.36 Repairs and Maintenance 0.98 0.88 Directors’ and Local Board Members’ Fees and Expenses 0.02 0.02 Auditors’ Fees and Expenses 0.05 0.06 Law Charges 0.17 0.09 Miscellaneous Expenses 7.97 10.71 Depreciation 1.50 2.06 Provisions 0.64 736.15 Total 170.45 925.40 Available Balance 1,759.91 571.32 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) Fund1 0.01 0.01 ii) National Rural Credit (Stabilisation) Fund1 0.01 0.01 (c) Others Amount transferred to the Central Government during the year 280.00 0.00 Surplus payable to the Central Government 1,479.87 571.28 1. These funds are maintained by the National Bank for Agriculture and Rural Development (NABARD). Nirmal Chand M. D. Patra M. K. Jain B.P. Kanungo Shaktikanta Das Chief General Manager-in-Charge Deputy Governor Deputy Governor Deputy Governor Governor 249ANNUAL REPORT SCHEDULES FORMING PART OF BALANCE SHEET AND INCOME STATEMENT (Amount in ` billion) 2018-19 2019-20 Schedule 1: Other Reserves (i) National Industrial Credit (Long Term Operations) Fund 0.28 0.29 (ii) National Housing Credit (Long Term Operations) Fund 2.02 2.03 Total 2.30 2.32 Schedule 2: Deposits (a) Government (i) Central Government 1.01 1.00 (ii) State Governments 0.42 0.43 Sub total 1.43 1.43 (b) Banks (i) Scheduled Commercial Banks 5,129.26 4,376.17 (ii) Scheduled State Co-operative Banks 39.98 52.08 (iii) Other Scheduled Co-operative Banks 90.29 71.38 (iv) Non-Scheduled State Co-operative Banks 24.91 24.72 (v) Other Banks 209.64 184.14 Sub total 5,494.08 4,708.49 (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 46.38 45.49 (ii) Depositors’ Education and Awareness Fund 257.47 331.14 (iii) Balances of Foreign Central Banks 19.05 16.80 (iv) Balances of Indian Financial Institutions 2.13 23.47 (v) Balances of International Financial Institutions 3.38 3.52 (vi) Mutual Funds 0.01 0.01 (vii) Others 1,825.29 6,628.25 Sub total 2,153.71 7,048.68 Total 7,649.22 11,758.60 Schedule 3: Other Liabilities and Provisions (i) Contingency Fund (CF) 1,963.44 2,640.34 (ii) Asset Development Fund (ADF) 228.75 228.75 (iii) Currency and Gold Revaluation Account (CGRA) 6,644.80 9,771.41 (iv) Investment Revaluation Account-Foreign Securities (IRA-FS) 157.35 538.34 (v) Investment Revaluation Account-Rupee Securities (IRA-RS) 494.76 934.15 (vi) Foreign Exchange Forward Contracts Valuation Account (FCVA) 13.04 0.00 (vii) Provision for Forward Contracts Valuation Account (PFCVA) 0.00 59.25 (viii) Provision for Payables 22.81 26.00 (ix) Gratuity and Superannuation Fund 206.10 256.39 (x) Surplus Payable to the Central Government 1,759.87 571.28 (xi) Bills Payable 0.08 0.02 (xii) Miscellaneous 133.51 140.28 Total 11,624.51 15,166.21 Schedule 4: Notes Issued (i) Notes held in the Banking Department 0.09 0.13 (ii) Notes in Circulation 21,687.88 26,355.62 Total 21,687.97 26,355.75 250THE RESERVE BANK’S ACCOUNTS FOR 2019-20 2018-19 2019-20 Schedule 5: Notes, Rupee Coin, Small Coin (i) Notes 0.09 0.13 (ii) Rupee Coin 0.00 0.00 (iii) Small Coin 0.00 0.00 Total 0.09 0.13 Schedule 6: Gold Coin and Bullion (a) Banking Department (i) Gold Coin and Bullion 882.98 1,393.77 (ii) Gold Deposit 0.00 34.98 Sub Total 882.98 1,428.75 (b) Issue Department (as backing for Note issue) 792.04 1,131.46 Total 1,675.02 2,560.21 Schedule 7: Investments - Foreign (i) Investments - Foreign - BD 6,964.53 10,234.00 (ii) Investments - Foreign - ID 20,887.65 25,216.44 Total 27,852.18 35,450.44 Schedule 8: Investments - Domestic (i) Investments - Domestic - BD 9,898.77 11,720.27 (ii) Investments - Domestic - ID 0.00 0.00 Total 9,898.77 11,720.27 Schedule 9: Loans and Advances (a) Loans and Advances to : (i) Central Government 265.31 0.00 (ii) State Governments 26.66 46.24 Sub total 291.97 46.24 (b) Loans and Advances to: (i) Scheduled Commercial Banks 572.00 2,855.77 (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 0.00 221.23 (vi) Others 67.90 98.83 Sub total 639.90 3,175.83 (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 931.87 3,222.07 Schedule 10: Investment in Subsidiaries/Associates (i) Deposit Insurance and Credit Guarantee Corporation(DICGC) 0.50 0.50 (ii) Bharatiya Reserve Bank Note Mudran (P) Ltd.(BRBNMPL) 18.00 18.00 (iii) Reserve Bank Information Technology (P) Ltd.(ReBIT) 0.50 0.50 (iv) National Centre for Financial Education (NCFE) 0.30 0.30 (v) Indian Financial Technology & Allied Services (IFTAS) 0.34 0.34 Total 19.64 19.64 251ANNUAL REPORT 2018-19 2019-20 Schedule 11: Other Assets (i) Fixed Assets (net of accumulated depreciation) 6.51 8.16 (ii) Accrued income (a + b) 330.81 345.35 a. on loans to employees 3.27 3.47 b. on other items 327.54 341.88 (iii) Swap Amortisation Account (SAA) 0.00 0.00 (iv) Revaluation of Forward Contracts Account (RFCA) 13.04 0.00 (v) Miscellaneous 292.84 13.81 Total 643.20 367.32 Schedule 12: Interest (a) Domestic Sources (i) Interest on holding of Rupee Securities 583.43 703.04 (ii) Net Interest on LAF Operations 10.46 -130.53 (iii) Interest on MSF Operations 1.35 1.49 (iv) Interest on Loans and Advances 14.98 35.57 Sub total 610.22 609.57 (b) Foreign Sources (i) Interest Income from Foreign Securities 278.11 330.25 (ii) Net Interest on Repo / Reverse Repo Transactions -0.04 0.09 (iii) Interest on Deposits 180.08 153.42 Sub total 458.15 483.76 Total 1,068.37 1,093.33 Schedule 13: Other Income (a) Domestic Sources (i) Exchange 0.00 0.00 (ii) Discount 0.00 7.35 (iii) Commission 22.72 24.31 (iv) Rent Realised 0.07 0.09 (v) Profit/Loss on sale and redemption of Rupee Securities 0.40 12.52 (vi) Depreciation on Rupee Securities inter portfolio transfer -0.27 -0.09 (vii) Amortisation of premium/discount of Rupee Securities 21.45 16.81 (viii) Profit / Loss on sale of Bank's property 0.01 0.01 (ix) Provision no longer required and Miscellaneous Income 526.18 2.49 Sub total 570.56 63.49 (b) Foreign Sources (i) Amortisation of premium/discount of Foreign Securities -15.31 -27.42 (ii) Profit/Loss on sale and redemption of Foreign Securities 16.76 67.39 (iii) Exchange gain/loss from Foreign Exchange transactions 289.98 299.93 Sub total 291.43 339.90 Total 861.99 403.39 Schedule 14: Agency Charges (i) Agency Commission on Government Transactions 38.17 37.88 (ii) Underwriting Commission paid to the Primary Dealers 0.74 0.61 (iii) Sundries (Handling charges and turnover commission paid 0.02 0.06 to banks for Relief / Savings Bonds subscriptions; SBLA etc.) (iv) Fees paid to the External Asset Managers, Custodians, etc. 0.17 0.21 Total 39.10 38.76 252THE RESERVE BANK’S ACCOUNTS FOR 2019-20 STATEMENT OF SIGNIFICANT ACCOUNTING be subject to any liability other than the liabilities POLICIES FOR THE YEAR ENDED JUNE 30, of the Issue Department. The Act requires that the 2020 assets of the Issue Department shall consist of gold coins, gold bullion, foreign securities, rupee (a) General coins and rupee securities to such aggregate 1.1 Among other things, the Reserve Bank of amount as is not less than the total of the liabilities India was established under the Reserve Bank of of the Issue Department. The Act requires that the India Act, 1934 (the Act) “to regulate the issue of liabilities of the Issue Department shall be an Bank notes and the keeping of reserves with a amount equal to the total of the amount of the view to securing monetary stability in India and currency notes of the Government of India and generally to operate the currency and credit Bank notes for the time being in circulation. system of the country to its advantage”. (b) Significant Accounting Policies 1.2 The main functions of the Bank are:- 2.1 Convention a) Issue of bank notes and coins. The financial statements are prepared in b) Acts as monetary authority and accordance with the Reserve Bank of India Act, formulates, implements and monitors 1934 and the notifications issued thereunder and the monetary policy. in the form prescribed by the Reserve Bank of c) Regulation and supervision of the India General Regulations, 1949. These are based financial system. on historical cost except where it is modified to d) Regulation and supervision of the reflect revaluation. The accounting policies payment and settlement systems. followed in preparing the financial statements are consistent with those followed in the previous year e) Acts as manager of foreign exchange. except for the change in the valuation frequency f) Maintaining and managing the country’s for foreign securities and gold. The said valuation foreign exchange reserves. frequency has been changed from ‘monthly’ to g) Acting as the banker to banks and the ‘weekly and monthly’ during the year. governments. 2.2 Revenue Recognition h) Acting as the debt manager of the (a) Income and expenditure are recognised on governments. accrual basis except penal interest charged i) Developmental functions to support from the banks which is accounted for only national objectives. when there is certainty of realisation. Dividend income on shares is recognised on accrual 1.3 The Act requires that the issue of Bank notes basis when the right to receive the same is should be conducted by the Reserve Bank in an established. Issue Department which shall be separate and kept wholly distinct from the Banking Department (b) Balances unclaimed and outstanding for and the assets of the Issue Department shall not more than three clear consecutive accounting 253ANNUAL REPORT years in certain transit accounts including contracts where the rates are fixed Drafts Payable Account, Payment Orders contractually) are translated at the market Account, Sundry Deposits Account- exchange rates on the last business day of Miscellaneous, Remittance Clearance each week and month. Unrealised gains and Account, Earnest Money Deposit Account losses arising from such translation of foreign and Security Deposit Account are reviewed currency assets and liabilities are accounted and written back to income. Claims, if any, for in the CGRA. are considered and charged against income Foreign securities, other than Treasury Bills in the year of payment. (T-Bills), Commercial Papers and certain (c) Income and expenditure in foreign currency “held to maturity” securities (such as are recorded at the exchange rates prevailing investments in notes issued by the on the last business day of the week/ month/ International Monetary Fund and bonds year, as applicable. issued by India Infrastructure Finance Company (IIFC), UK which are valued at (d) Exchange gains / losses on sale of foreign cost) are marked-to-market as on the last currencies and gold are accounted for using business day of each week and month. the weighted average cost method for arriving at the cost. Unrealised gains/ losses on revaluation are recorded in the ‘Investment Revaluation 2.3 Gold & Foreign Currency Assets and Account- Foreign Securities’ (IRA-FS). Credit Liabilities balance in IRA-FS is carried forward to the Transactions in gold and foreign currency assets subsequent year. Debit balance, if any, at the and liabilities are accounted for on settlement date end of the year in IRA-FS is charged to the basis. CF and the same is reversed on the first a) Gold working day of the following accounting year. Gold (including gold deposits) is revalued on Foreign T-Bills and commercial papers are the last business day of each week and carried at cost as adjusted by amortisation of month at ninety (90) per cent of the London discount/ premium. Premium or discount on Bullion Market Association (LBMA) gold price foreign securities is amortised daily. Profit/ in US dollar and Rupee-US dollar market loss on sale of foreign securities is recognised exchange rate on the valuation days. with respect to the book value. On sale/ Unrealised valuation gains/ losses are redemption of foreign dated securities, accounted for in the Currency and Gold valuation gain/ loss in relation to the securities Revaluation Account (CGRA). sold/ redeemed, lying in IRA-FS, is transferred to Income Account. b) Foreign Currency Assets and Liabilities c) Forward/Swap Contracts All foreign currency assets and liabilities (excluding foreign currency received under Forward contracts entered into by the the swaps that are in the nature of repos and Reserve Bank are revalued on a half yearly 254THE RESERVE BANK’S ACCOUNTS FOR 2019-20 basis. While marked-to-market net gain is 2.4 Transactions in Exchange Traded credited to the ‘Foreign Exchange Forward Currency Derivatives (ETCD) Contracts Valuation Account’ (FCVA) with The ETCD transactions undertaken by the contra debit to ‘Revaluation of Forward Reserve Bank as part of its intervention operations Contracts Account’ (RFCA), marked-to- are marked-to-market on daily basis and the market net loss is debited to FCVA with resultant gain/ loss is booked in income account. contra credit to the ‘Provision for Forward 2.5 Domestic Investments Contracts Valuation Account’ (PFCVA). On (a) Rupee securities and oil bonds except those maturity of the contract, the actual gain or mentioned in (d) are marked-to-market as on loss is recognised in the Income Account and the last business day of each month. The the unrealised gains/ losses previously unrealised gains/ losses on revaluation is recorded in the FCVA, RFCA and PFCVA are accounted for in ‘Investment Revaluation reversed. At the time of half yearly revaluation, Account-Rupee Securities’ (IRA-RS). Credit the balance in FCVA and RFCA or PFCVA as balance in IRA-RS is carried forward to the on that day is reversed and fresh revaluation following accounting year. Debit balance, if is done for all the outstanding forward any, at the end of the year in IRA-RS is contracts. charged to the CF and the same is reversed Debit balance in FCVA, if any, on June 30, is on the first working day of the following charged to the CF and reversed on the first accounting year. On sale/ redemption of working day of the following year. The balance rupee securities/ oil bonds, valuation gain/ in the RFCA and PFCVA represents the net loss in respect of rupee securities and oil unrealised gains and losses, respectively, on bonds sold/ redeemed, lying in IRA-RS, is valuation of the forward contracts. transferred to income account. Rupee securities and oil bonds are also subjected to In the case of swaps at off-market rates that daily amortisation. are in the nature of repo, the difference (b) T-Bills are valued at cost. between the future contract rate and the rate at which the contract is entered into is (c) Investments in shares of subsidiaries are amortised over the period of the contract and valued at cost. recorded in the income account with contra in (d) Oil bonds and rupee securities earmarked for ‘Swap Amortisation Account’ (SAA). The various staff funds (like Gratuity and amounts recorded in the SAA are reversed Superannuation, Provident Fund, Leave on maturity of the underlying contracts. Encashment, Medical Assistance Fund) and Further, the amounts received under these Depositors’ Education and Awareness Fund swaps are not subject to periodic revaluation. (DEA Fund) are treated as ‘Held-to-Maturity’ and are held at amortised cost. While FCVA and PFCVA form part of ‘Other Liabilities’, RFCA and SAA form part of ‘Other (e) Transactions in domestic investment are Assets’. accounted for on settlement date basis. 255ANNUAL REPORT 2.6 Liquidity Adjustment Facility (LAF) Repo/ and depreciation is calculated on monthly Reverse Repo and Marginal Standing Facility pro-rata basis at the applicable rate. (MSF) (e) Individual items of computer software costing Repo transactions under LAF and MSF are treated `0.10 million and above are capitalised and as lending and are accordingly being shown under depreciation is calculated on monthly pro- ‘Loans and Advances’, whereas Reverse Repo rata basis at applicable rates. transactions under LAF are being treated as (f) Depreciation is provided on half year-end deposits and shown under ‘Deposit-Others’. balances of Fixed Assets on monthly pro-rata basis. In case of additions /deletions of assets 2.7 Fixed Assets other than land and building, depreciation is (a) Fixed Assets are stated at cost less provided for on monthly pro-rata basis depreciation except art and paintings and including the month of addition/deletion of freehold land which are held at cost. such assets. (b) Depreciation on Fixed Assets, other than (g) Depreciation on subsequent expenditure: land and buildings, acquired and capitalised i. Subsequent expenditure incurred on an during the year (July 01 to June 30) would be existing fixed asset which has not been reckoned on a monthly pro-rata basis from fully depreciated in the books of the month of capitalisation and effected on a accounts, is depreciated over the half yearly basis at prescribed rates depending remaining useful life of the principal upon the useful life of the assets applied. asset; and (c) Depreciation on the following fixed assets ii. Subsequent expenditure incurred on (costing more than `0.10 million) is provided modernisation/ addition/ overhauling of on a straight-line basis depending on the an existing fixed asset, which has useful life of an asset in the following manner: already been fully depreciated in the Asset Category Useful life books of accounts, is first capitalised (Rate of and thereafter depreciated fully in the Depreciation) year in which the expenditure is incurred. Electrical installations, UPS, Motor 5 years Vehicles, Furniture, Fixture, CVPS/ SBS (20 per cent) (h) Land and building: The accounting treatment Machines, etc. Computers, Servers, Micro-processors, 3 years in respect of land and building is as follows: Printers, Software, Laptops, e-book (33.33 per cent) reader/ i-Pad, etc. Land (d) Fixed Assets, costing up to `0.10 million i. Land acquired on leasehold basis for a (except easily portable electronic assets like period of more than 99 years is treated Laptop/ e-book reader) are charged to income as if it is on a perpetual lease basis. in the year of acquisition. Easily portable Such leases are considered as freehold electronic assets, such as laptops, etc. properties and accordingly not subjected costing more than `10,000 are capitalised to amortisation. 256THE RESERVE BANK’S ACCOUNTS FOR 2019-20 ii. Land acquired on lease up to 99 years is of such buildings is shown at `1. amortised over the period of the lease. The difference between the book value and realisable value (net iii. Land acquired on a freehold basis is not selling price)/ scrap value less subject to any amortisation. demolition cost is charged as Buildings depreciation. i. The life of all buildings is assumed as 2.8 Employee Benefits thirty years and depreciation is charged a. The Reserve Bank contributes monthly at a on a ‘straight-line’ basis over a period of determined rate to Provident Fund for the thirty years. In respect of buildings eligible employees and these contributions constructed on lease hold land (where are charged to Profit and Loss Account in the the lease period is less than thirty years) year to which it relates. depreciation is charged on a ‘straight- line’ basis over the lease period of the b. Other liability on account of long-term land. employee benefits is provided based on an actuarial valuation under the ‘Projected Unit ii. Impairment of buildings: For assessment Credit’ method. of impairment, buildings are classified into two categories, as under: NOTES TO ACCOUNTS a. Buildings which are in use but have XII.5 LIABILITIES OF THE RESERVE BANK been identified for demolition in XII.5.1 Capital future or will be discarded in future: The Reserve Bank was constituted as a private The value in use of such buildings is shareholders’ bank in 1935 with an initial paid-up the aggregate of depreciation for capital of `0.05 billion. The Reserve Bank was the future period up to the date it is nationalised with effect from January 1, 1949 and expected to be discarded/ its entire ownership remains vested with the demolished. The difference Government of India. The paid-up capital continues between the book value and to be `0.05 billion in terms of Section 4 of the aggregate of depreciation so arrived Reserve Bank of India (RBI) Act, 1934. at is charged as depreciation. XII.5.2 Reserve Fund b. Buildings which have been discarded/ vacated: These buildings The original Reserve Fund of `0.05 billion was are shown at realisable value (net created in terms of Section 46 of the RBI Act, 1934 selling price-if the asset is likely to as contribution from the central government for be sold in future) or scrap value less the currency liability of the then sovereign demolition cost (if it is to be government taken over by the Reserve Bank. demolished). If the resultant amount Thereafter, an amount of `64.95 billion was is negative, then the carrying value credited to this fund from out of gains on periodic 257ANNUAL REPORT revaluation of gold up to October 1990, taking it to There are two other Funds constituted in `65 billion. The fund has been static since then as terms of Section 46A of the RBI Act, 1934, the unrealised gain/loss on account of valuation of viz., National Rural Credit (Long Term gold and foreign currency is since being booked in Operations) Fund and National Rural Credit the CGRA which appears under ‘Other Liabilities (Stabilisation) Fund which are maintained by and Provisions’. National Bank for Agriculture and Rural XII.5.3 Other Reserves Development (NABARD) for which a token amount of `0.01 billion each is set aside and This includes National Industrial Credit (Long transferred to NABARD every year. Term Operations) Fund and National Housing Credit (Long Term Operations) Fund. XII.5.4 Deposits a) National Industrial Credit (Long Term These represent the balances maintained with the Operations) Fund Reserve Bank, by banks, the central and state This fund was created in July 1964, in terms governments, All India Financial Institutions such of Section 46C of the RBI Act, 1934 with an as Export-Import Bank of India (EXIM Bank) and initial corpus of `0.10 billion. The fund NABARD, Foreign Central Banks, International witnessed annual contributions from the Financial Institutions, balances in Administrator of Reserve Bank for financial assistance to RBI Employees’ Provident Fund, Depositors’ eligible financial institutions. Since 1992-93, Education and Awareness Fund (DEA Fund), a token amount of `0.01 billion is being amount outstanding against Reverse Repo, contributed each year to the Fund from the Medical Assistance Fund (MAF), etc. Reserve Bank’s income. The balance in the Total deposits increased by 53.72 per cent from fund stood at `0.29 billion as on June 30, `7,649.22 billion as on June 30, 2019 to 2020. `11,758.60 billion as on June 30, 2020. b) National Housing Credit (Long Term a. Deposits – Government Operations) Fund The Reserve Bank acts as the banker to the This fund was set up in January 1989 in terms of Section 46D of the RBI Act, 1934 for central government in terms of Sections 20 extending financial accommodation to the and 21 and as banker to the state governments National Housing Bank (NHB). The initial by mutual agreement in terms of Section 21A corpus of `0.50 billion has been enhanced by of the RBI Act, 1934. Accordingly, the central annual contributions from the Reserve Bank and state governments maintain deposits thereafter. From the year 1992-93, only a with the Reserve Bank. The balances held by token amount of `0.01 billion is being the central and state governments were contributed each year from the Reserve `1.00 billion and `0.43 billion, respectively, Bank’s income. The balance in the fund stood as on June 30, 2020 as compared to `1.01 at `2.03 billion as on June 30, 2020. billion and `0.42 billion, respectively, as on Note: Contribution to other Funds June 30, 2019. 258THE RESERVE BANK’S ACCOUNTS FOR 2019-20 b. Deposits – Banks Section 47 of the RBI Act, 1934. The details are as under: Banks maintain balances in their current accounts with the Reserve Bank to provide a. Contingency Fund (CF) for the Cash Reserve Ratio (CRR) This is a specific provision meant for requirements and for working funds to meet meeting unexpected and unforeseen payment and settlement obligations. The contingencies, including depreciation in deposits held by banks decreased by 14.30 the value of securities, risks arising out per cent from `5,494.08 billion as on June of monetary/exchange rate policy 30, 2019 to `4,708.49 billion as on June 30, operations, systemic risks and any risk 2020. arising on account of the special responsibilities enjoined upon the c. Deposits - Others Reserve Bank. As on June 30, 2020, an ‘Deposits- Others’ consists of balances of amount of `59.25 billion was charged to Administrator of RBI Employees Provident CF on account of debit balance of FCVA. Fund, balance in Depositors’ Education and The charge to CF is reversed on the first Awareness Fund (DEA Fund), balances of working day of the following year. Foreign Central Banks, Indian and Further, a provision of `736.15 billion International Financial Institutions, Medical was made towards CF. Accordingly, the Assistance Fund, amount outstanding under balance in CF as on June 30, 2020 was Reverse Repo, etc. The amount under `2,640.34 billion as compared to ‘Deposits-Others’ increased by 227.28 per `1,963.44 billion as on June 30, 2019. cent from `2,153.71 billion as on June 30, b. Asset Development Fund (ADF) 2019 to `7,048.68 billion as on June 30, 2020, primarily due to increase in reverse The ADF was created in 1997-98 and repo deposits with the Reserve Bank. the balance therein represents provision specifically made till date towards XII.5.5 Other Liabilities and Provisions investments in subsidiaries and The major components of ‘Other Liabilities and associate institutions and to meet Provisions’ are risk provisions and revaluation internal capital expenditure. It is also accounts. ‘Other Liabilities and Provisions’ treated as part of risk provisions of the increased by 30.47 per cent from `11,624.51 Reserve Bank. No provision was made billion as on June 30, 2019 to `15,166.21 billion for transferring to ADF in the year 2019- as on June 30, 2020, primarily due to increase in 20. Hence, the balance in ADF remains CGRA. at `228.75 billion as on June 30, 2020 (Table XII.2). i. Risk Provisions ii. Revaluation Accounts There are two risk provisions of the Reserve Bank, viz., CF and ADF. The provisions made The unrealised marked-to-market gains/ towards these funds are made in terms of losses are recorded in the revaluation heads, 259ANNUAL REPORT Table XII.2: Balances in Risk Provisions can come under pressure if there is an (` billion) appreciation of the rupee vis-à-vis major As on Balance in Balance in Total CF and currencies or a fall in the price of gold. June 30 CF ADF ADF as Percentage When CGRA is not sufficient to fully to Total meet exchange losses, it is replenished Assets 1 2 3 4=(2+3) 5 from the CF. During 2019-20, the 2016 2,201.83@ 227.61 2,429.44 7.5 balance in CGRA increased from 2017 2,282.07# 228.11 2,510.18 7.6 `6,644.80 billion as on June 30, 2019 to 2018 2,321.08^ 228.11 2,549.19 7.05 2019 1,963.44& 228.75 2,192.19 5.34 `9,771.41 billon as on June 30, 2020 2020 2,640.34* 228.75 2,869.09 5.38 mainly due to depreciation of rupee and @ : The decline in the CF is due to charging of the debit balance in the rise in the international price of gold. the FCVA on account of marked-to-market loss on forward contracts as on June 30, 2016. b. Investment Revaluation Account- # : Increase in CF is the net impact of provision of `131.40 billion and charging of the debit balance of IRS and FCVA amounting Foreign Securities (IRA-FS) to `65.85 billion as on June 30, 2017. ^ : Increase in CF is the net impact of provision of `141.90 billion The foreign dated securities are marked- and charging of the debit balance of IRA-FS amounting to `168.74 billion as on June 30, 2018. to-market on the last business day of & : The decline in the CF is due to writing back of excess provision each week and month and the unrealised of `526.37 billion as on June 30, 2019. * : Increase in CF is the net impact of provision of `736.15 billion gains/ losses arising therefrom are and charging of the debit balance in the FCVA on account of transferred to the IRA-FS. The balance marked-to-market loss on forward contracts amounting to `59.25 billion as on June 30, 2020. in IRA-FS increased from `157.35 billion as on June 30, 2019 to `538.34 billion viz., CGRA, IRA-FS, IRA-RS and FCVA. The as on June 30, 2020. details are as under: c. Investment Revaluation Account–Rupee a. Currency and Gold Revaluation Account Securities (IRA-RS) (CGRA) Rupee securities and oil bonds (with The major sources of market risk faced exception as mentioned under Significant by the Reserve Bank are currency risk, Accounting Policy) held as assets of the interest rate risk and movement in gold Banking Department are marked-to- prices. Unrealised gains/ losses on market as on the last business day of valuation of Foreign Currency Assets each month and the unrealised gains/ (FCA) and Gold are not taken to the losses arising therefrom are booked in Income Account but instead accounted IRA-RS. The balance in IRA-RS for in the CGRA. Net balance in CGRA, increased from `494.76 billion as on therefore, varies with the size of the June 30, 2019 to `934.15 billion as on asset base, its valuation and movement June 30, 2020 due to increase in portfolio in the exchange rate and price of gold. of rupee securities and decline in yields CGRA provides a buffer against on Government of India securities held exchange rate/ gold price fluctuations. It by the Reserve Bank during the year. 260THE RESERVE BANK’S ACCOUNTS FOR 2019-20 d. Foreign Exchange Forward Contracts iv. Provision for Payables Valuation Account (FCVA) This represents the year end provisions made Marking-to-market valuation of for expenditure incurred but not defrayed and outstanding forward contracts as on income received in advance/ payable, if any. June 30, 2020 resulted in a net unrealised The balance under this head increased by loss of `59.25 billion, which was debited 13.99 per cent from `22.81 billion as on June to the FCVA with contra credit to PFCVA. 30, 2019 to `26 billion as on June 30, 2020. As per the extant policy, the debit v. Surplus Payable to the Central Government balance of `59.25 billion in FCVA was Under Section 47 of the RBI Act, 1934 after adjusted against the CF on June 30, making provisions for bad and doubtful debts, 2020 and reversed on the first working depreciation in assets, contribution to staff day of the following year. Accordingly, and superannuation funds and for all matters the balance in FCVA was NIL as against for which provisions are to be made by or a balance of `13.04 billion on June 30, under the Act or that are usually provided by 2019. Also, as per the policy, the balance bankers, the balance of the profits of the in the FCVA and PFCVA as on the first Bank is required to be paid to the central working day of the following year is government. Under Section 48 of the RBI reversed on the maturity of the contracts. Act, 1934 the Reserve Bank is not liable to iii. Provision for Forward Contracts Valuation pay income tax or super tax on any of its Account (PFCVA) income, profits or gains. Accordingly, after Marked-to-market net loss on outstanding adjusting the expenditure, provision for CF forward contracts was credited to PFCVA as and contribution of `0.04 billion to four explained above. The balance in PFCVA as statutory funds, the surplus payable to the on June 30, 2020 was `59.25 billion, as central government for the year 2019-20 against NIL balance on June 30, 2019. amounted to `571.28 billion (including `6.32 billion as against `7.16 billion in the previous The balances in Revaluation Accounts and year payable towards the difference in PFCVA for the last five years is given in Table interest expenditure borne by the Government XII.3. of India, consequent on conversion of special Table XII.3: Balances in CGRA, FCVA, securities into marketable securities). PFCVA, IRA-FS and IRA-RS (` billion) vi. Bills Payable As on CGRA FCVA PFCVA IRA-FS IRA-RS The Reserve Bank provides remittance June 30 1 2 3 4 5 6 facilities for its constituents through issue of 2016 6,374.78 0.00 14.69 132.66 391.46 Demand Drafts (DDs) and Payment Orders 2017 5,299.45 0.00 29.63 0.00 570.90 (POs) (besides electronic payment 2018 6,916.41 32.62 0.00 0.00 132.85 2019 6,644.80 13.04 0.00 157.35 494.76 mechanism). The balance under this head 2020 9,771.41 0.00 59.25 538.34 934.15 represents the unclaimed DDs/POs. The 261ANNUAL REPORT amount outstanding under this head XII.6 ASSETS OF THE RESERVE BANK decreased from `0.08 billion as on June 30, XII.6.1 ASSETS OF BANKING DEPARTMENT 2019 to `0.02 billion as on June 30, 2020. i) Notes, Rupee Coin and Small Coin vii. Miscellaneous This head represents the balances of bank This is a residual head representing items notes, one rupee notes, rupee coins of `1, 2, such as interest earned on earmarked 5 and 10 and small coins kept in the vaults of securities, amounts payable on account of the Banking Department to meet the day-to- leave encashment, medical provisions for day requirements of the banking functions employees, global provision, etc. The balance conducted by the Reserve Bank. The balance under this head increased from `133.51 as on June 30, 2020 was `0.13 billion as billion as on June 30, 2019 to `140.28 billion against `0.09 billion as on June 30, 2019. as on June 30, 2020. ii) Gold Coin and Bullion XII.5.6 LIABILITIES OF ISSUE DEPARTMENT- Notes Issued As on June 30, 2020, the Reserve Bank holds 661.41 metric tonnes of gold as compared to The liabilities of Issue Department reflect the 618.16 metric tonnes as on June 30, 2019. quantum of currency notes in circulation. Section The increase is on account of addition of 34 (1) of the RBI Act, 1934 requires that all bank 43.25 metric tonnes of Gold during the year. notes issued by the Reserve Bank since April 1, 1935 and the currency notes issued by the Of 661.41 metric tonnes, 292.30 metric Government of India before the commencement tonnes as on June 30, 2020 is held as backing of operations of the Reserve Bank, be part of the for notes issued and shown separately as an liabilities of the Issue Department. The ‘Notes asset of Issue Department. The balance Issued’ increased by 21.52 per cent from 369.11 metric tonnes as on June 30, 2020 as `21,687.97 billion as on June 30, 2019 to compared to 325.86 metric tonnes on June `26,355.75 billion as on June 30, 2020. The 30, 2019 is treated as an asset of Banking increase is on account of the continued efforts of Department (Table XII.4). The value of gold Reserve Bank to supply adequate quantity of banknotes to meet the transactional needs of the Table XII.4: Physical Holding of Gold public. Also, an amount of `107.20 billion, representing the value of Specified Bank Notes As on As on June 30, 2019 June 30, 2020 (SBNs) not paid was transferred to ‘Other Liabilities Volume in Volume in and Provisions’ as on June 30, 2018. In terms of metric tonnes metric tonnes Gazette Notification issued by the Government of 1 2 3 India on May 12, 2017, the Reserve Bank has Gold held for backing notes 292.30 292.30 issued (held in India) made payments to the extent of `0.06 billion Gold held as asset of Banking 325.86 369.11 Department (held abroad) towards exchange value of SBNs to eligible Total 618.16 661.41 tenderers during the year ended June 30, 2020. 262THE RESERVE BANK’S ACCOUNTS FOR 2019-20 held as asset of Banking Department v) Investments-Domestic-Banking increased by 61.81 per cent from `882.98 Department (BD) billion as on June 30, 2019 to `1,428.75 Investments comprise dated Government billion as on June 30, 2020, on account of Rupee Securities, T-Bills and Special Oil addition of 43.25 metric tonnes of gold during Bonds. The Reserve Bank’s holding of the year as well as rise in the international domestic securities increased by 18.40 per price of gold. cent, from `9,898.77 billion as on June 30, iii) Bills Purchased and Discounted 2019 to `11,720.27 billion as on June 30, 2020. The increase was on account of liquidity Though the Reserve Bank can undertake management operations conducted by way purchase and discounting of commercial bills of net purchase of government securities under the RBI Act, 1934, no such activity was undertaken in 2019-20; consequently, there Table XII.5: Details of FCA was no such asset in the books of the Reserve (` billion) Bank as on June 30, 2020. Particulars As on June 30 iv) Investments-Foreign-Banking 2019 2020 Department (BD) 1 2 3 I Investments-Foreign –ID 20,887.65 25,216.44 The FCA of the Reserve Bank include: (i) II Investments-Foreign –BD* 6,964.53 10,234.00 deposits with other central banks; (ii) deposits Total 27,852.18 35,450.44 with the Bank for International Settlements *: includes Shares in BIS and SWIFT and SDRs transferred from (BIS); (iii) deposits with commercial banks GoI valued at `112.11 billion as on June 30, 2020 compared to `103.21 billion as on June 30, 2019. overseas; (iv) investments in foreign T-Bills Note: and securities; and (v) Special Drawing 1. The Reserve Bank has agreed to make resources available under the IMF’s New Arrangements to Borrow (NAB). Currently Rights (SDR) acquired from the Government India’s commitment under NAB stands at SDR 4.44 billion (`462.59 billion / US$ 6.13 billion). As on June 30, 2020, of India. investments amounting to SDR 0.22 billion (`22.91 billion / US$0.30 billion) have been made under the NAB. The FCA is reflected under two heads in the 2. The Reserve Bank has agreed to invest up to an amount, the aggregate of which shall not exceed US$5 billion (`377.55 Balance Sheet: (a) ‘Investments-Foreign-BD’ billion), in the bonds issued by India Infrastructure Finance Company (UK) Limited. As on June 30, 2020, the Reserve Bank shown as an asset of Banking Department has invested US$1.86 billion (`140.68 billion) in such bonds. and (b) ‘Investments-Foreign-ID’ shown as 3. In terms of the Note Purchase Agreement 2016 entered into by the Reserve Bank with IMF, the Reserve Bank would purchase an asset of Issue Department. SDR denominated Notes of IMF for an amount up to the equivalent of US$10 billion (`755.10 billion). Investments-Foreign-ID are the FCA, eligible 4. During the year 2013-14, the Reserve Bank and Government of India entered into a MoU for transfer of SDR holdings from as per Section 33(6) of the RBI Act, 1934, Government of India to the Reserve Bank in a phased manner. As on June 30, 2020, SDR 1.05 billion (`109.01 billion/ US$1.44 used for backing of Notes Issued. The billion) were held by the Bank. 5. With a view to strengthening regional financial and economic remaining of FCA constitutes ‘Investments- cooperation, the Reserve Bank has agreed to offer an amount of Foreign-BD’. US$2 billion both in foreign currency and Indian rupee under the SAARC Swap Arrangement to SAARC member countries. As on June 30, 2020, Swap with Bhutan and Maldives, amounting The position of FCA for the last two years is to US$0.19 billion (`14.28 billion) and US$0.15 billion (`11.33 given in Table XII.5. billion) respectively, is outstanding. 263ANNUAL REPORT amounting to `1,815.03 billion (face value). against Repo under LAF, MSF and special liquidity facility to banks. The A part of Investments-Domestic-BD is also amount outstanding increased from earmarked for various staff funds and DEA `572 billion as on June 30, 2019 to Fund as explained in para 2.5(d). As on June `2,855.77 billion as on June 30, 2020 30, 2020, `676.09 billion (face value) was primarily due to increase in amount earmarked for staff funds and DEA Fund outstanding against Repo to banks. taken together.  Loans and advances to NABARD: vi) Loans and Advances The Reserve Bank can extend loans to a) Central and State Governments NABARD under Section 17 (4E) of the These loans are extended in the form of RBI Act, 1934. The balance under this Ways and Means Advances (WMA) in head increased from NIL as on June 30, terms of Section 17(5) of the RBI Act, 2019 to `221.23 billion as on June 30, 1934 and the limit in case of central 2020. government is fixed from time to time in  Loans and advances to others: consultation with the Government of India and in case of state governments, The balance under this head represents the limits are fixed based on the loans and advances to National Housing recommendations of Advisory Bank (NHB) and liquidity support provided to Primary Dealers (PDs). The Committee/ Group constituted for this balance under this head increased by purpose. Loans and advances to the 45.55 per cent from `67.90 billion as on central government decreased from June 30, 2019 to `98.83 billion as on `265.31 billion as on June 30, 2019 to June 30, 2020 primarily due to increase NIL as on June 30, 2020 as the central in loans and advances to NHB. government was in surplus on that day whereas loans and advances to state vii) Investment in Subsidiaries/ Associates governments increased from `26.66 Total holding of the Reserve Bank in its billion as on June 30, 2019 to `46.24 subsidiaries/associate institutions amounted billion as on June 30, 2020. to `19.64 billion as on June 30, 2020 same b) Loans and advances to Commercial and as that in the previous year. The detail is Co-operative Banks; NABARD; and given in Table XII.6. others viii) Other Assets  Loans and advances to Commercial and ‘Other Assets’ comprises of fixed assets (net Co-operative Banks: of depreciation), accrued income, balances These include amounts outstanding held in SAA and RFCA, and miscellaneous 264THE RESERVE BANK’S ACCOUNTS FOR 2019-20 Table XII.6: Holdings in Subsidiaries/ b. Revaluation of Forward Contracts Associates in 2019-20 Account (RFCA) Subsidiaries/Associates Amount Per cent As per the extant policy, the forward (` billion) holding as on June 30, 2020 contracts are marked-to-market on a 1 2 3 half yearly basis and the net gain is a) Deposit Insurance and Credit 0.50 100 recorded in FCVA with contra entry in Guarantee Corporation (DICGC) the RFCA. RFCA had NIL balance as on b) Bharatiya Reserve Bank Note 18.00 100 June 30, 2020 as compared to `13.04 Mudran (P) Ltd. (BRBNMPL) c) Reserve Bank Information 0.50 100 billion as on June 30, 2019. Technology (P) Ltd. (ReBIT) XII.6.2 ASSETS OF ISSUE DEPARTMENT d) National Centre for Financial 0.30 30 Education (NCFE) The eligible assets of the Issue Department held e) Indian Financial Technology & 0.34 100 Allied Services (IFTAS) as backing for notes issued consist of Gold Coin and Bullion, Rupee Coin, Investments - Foreign - Total 19.64 ID, Government of India Rupee Securities and Domestic Bills of Exchange. The Reserve Bank assets. Miscellaneous assets comprise holds 661.41 metric tonnes of gold, of which mainly loans and advances to staff, amount 292.30 metric tonnes are held as backing for notes spent on projects pending completion, issued as on June 30, 2020 (Table XII.4). The security deposit paid, etc. The amount value of gold held as backing for notes issued outstanding under ‘Other Assets’ decreased increased by 42.85 per cent from `792.04 billion by 42.89 per cent from `643.20 billion as on as on June 30, 2019 to `1,131.46 billion as on June 30, 2019 as compared to `367.32 billion June 30, 2020 on account of rise in the international as on June 30, 2020. price of gold. Consequent upon the increase in notes issued, Investments-Foreign-ID held as a. Swap Amortisation Account (SAA) backing for notes issued increased by 20.72 per In case of swaps that are in the nature of cent from `20,877.65 billion as on June 30, 2019 repo at off-market rates, the difference to `25,216.44 billion as on June 30, 2020. The between the future contract rate and the balance of Rupee Coins held by the Issue rate at which the contract is entered into Department decreased by 5.19 per cent from is amortised over the period of the `8.28 billion as on June 30, 2019 to `7.85 billion contract and held in the SAA. The as on June 30, 2020. balance held in this account is to be XII.7 FOREIGN EXCHANGE RESERVES (FER) reversed on maturity of the outstanding contracts. As on June 30, 2020, there XII.7.1 FER comprises of FCA, Gold, SDRs and are no outstanding contracts. Reserve Tranche Position (RTP). The SDR (other 265ANNUAL REPORT than the amount acquired from Government of Table XII.7(b): Foreign Exchange Reserves India and included under ‘Investment-Foreign- (FER) BD’) does not form a part of Reserve Bank’s (US$ billion) balance sheet. Similarly, the RTP, which Components As on June 30 Variation represents India’s quota contribution to IMF in 2019 2020 Absolute Per Cent foreign currency is not part of Reserve Bank’s 1 2 3 4 5 balance sheet. The position of FER as on June Foreign Currency 400.71* 465.83** 65.12 16.25 Assets (FCA) 30, 2019 and June 30, 2020 in Indian Rupees and Gold 24.30 33.90 9.60 39.51 the US dollar, which is the numéraire currency for Special Drawing 1.46 1.45 (-) 0.01 (-) 0.68 Rights (SDR) our FER, is furnished in Tables XII.7 (a) and (b). Reserve Tranche 3.36 4.52 1.16 34.52 Position (RTP) in IMF Foreign Exchange 429.83 505.70 75.87 17.65 Table XII.7(a): Foreign Exchange Reserves Reserves (FER) (FER) * : Excludes (a) SDR Holdings of the Reserve Bank amounting to (` billion) US$ 1.46 billion, which is included under the SDR holdings, (b) US$ 1.86 billion invested in bonds of IIFC (UK) and (c) BTN Components As on June 30 Variation equivalent to US$ 0.1 billion equivalent of INR currency lent to 2019 2020 Absolute Per Cent Bhutan under a Currency Swap arrangement made available for SAARC countries. 1 2 3 4 5 **: Excludes (a) SDR Holdings of the Reserve Bank amounting to Foreign Currency 27,616.45^ 35,175.14# 7,558.69 27.37 US$ 1.44 billion, which is included under the SDR holdings, (b) Assets (FCA) US$ 1.86 billion invested in bonds of IIFC (UK) and (c) BTN Gold 1,675.02@ 2,560.21* 885.19 52.85 equivalent to US$ 0.19 billion equivalent of INR currency lent to Special Drawing 100.36 109.23 8.87 8.84 Bhutan and US$ 0.15 billion lent to Maldives under a Currency Rights (SDR) Swap arrangement made available for SAARC countries. Reserve Tranche 231.69 341.12 109.43 47.23 Position (RTP) in IMF ANALYSIS OF INCOME AND EXPENDITURE Foreign 29,623.52 38,185.70 8,562.18 28.90 XII.8 INCOME Exchange Reserves (FER) XII.8.1 The components of the Reserve Bank’s ^ : Excludes (a) SDR Holdings of the Reserve Bank amounting to income are ‘Interest Receipts’, which forms the `100.36 billion, which is included under the SDR holdings, (b) Investment of `128.39 billion in bonds issued by IIFC (UK), and major portion and ‘Other Income’ including (i) (c) `6.98 billion lent to Bhutan under a Currency Swap Discount; (ii) Exchange; (iii) Commission; (iv) arrangement made available for SAARC countries. #: Excludes (a) SDR Holdings of the Reserve Bank amounting to Amortisation of Premium/ Discount on Foreign `109.01 billion, which is included under the SDR holdings, (b) and Rupee Securities; (v) Profit/ Loss on Sale and Investment of `140.68 billion in bonds issued by IIFC (UK), and (c) `14.28 billion lent to Bhutan and `11.33 billion lent to Redemption of Foreign and Rupee Securities; (vi) Maldives under a Currency Swap arrangement made available Depreciation on Rupee Securities inter portfolio for SAARC countries. transfer; (vii) Rent Realised; (viii) Profit or loss on @: Of this, Gold valued at `792.04 billion is held as an asset of Issue Department and Gold valued at `882.98 billion is held sale of Bank’s property; and (ix) Provisions no under asset of Banking Department. longer required and Miscellaneous Income. * : Of this, Gold valued at `1,131.46 billion is held as an asset of Issue Department and Gold valued at `1,428.75 billion is held Certain items of income such as interest on LAF under asset of Banking Department. repo, Repo in foreign security and exchange gain/ 266THE RESERVE BANK’S ACCOUNTS FOR 2019-20 loss from foreign exchange transactions are by the net interest outgo on interest under LAF/ reported on net basis. MSF due to absorption of surplus liquidity in the banking system. Earnings from Foreign Sources XII.8.4 Interest on holding of Rupee Securities XII.8.2 The income from foreign sources, and oil bonds increased by 20.50 per cent from increased by 9.88 per cent from `749.58 billion in `583.43 billion in 2018-19 to `703.04 billion in 2018-19 to `823.66 billion in 2019-20 on account 2019-20 on account of increase in the Reserve of increase in the level of FCA, movement in the Bank’s holding of government securities as a exchange rates and a general rise in yield/ interest result of net purchase of `1,815.03 billion (face rates across all currencies in the first half of the value) in 2019-20. year. The rate of earnings on foreign currency assets was at 2.65 per cent in 2019-20 as XII.8.5 The net interest income from LAF/MSF compared with 2.79 per cent in 2018-19 (Table operations decreased from `11.81 billion in 2018- XII.8). 19 to `(-)129.04 billion in 2019-20 due to absorption of surplus liquidity in the banking Earnings from Domestic Sources system leading to net interest outgo under LAF/ XII.8.3 The income from domestic sources MSF. The higher banking system surplus was due amounted to `673.06 billion in 2019-20 as to pro-active liquidity management operations compared to `1,180.78 billion in 2018-19. The carried out by the Reserve Bank to augment previous year’s income included a write back of system-level liquidity and to channelise liquidity to excess provision in CF amounting to `526.37 specific sectors facing funding constraints on billion. A comparison excluding the same from account of disruptions caused due to COVID-19 previous year’s income, shows a marginal pandemic. increase in the income for 2019-20 (Table XII.9). XII.8.6 Profit on sale and redemption of Rupee The current year's income has also been impacted Securities increased from `0.40 billion in 2018-19 Table XII.8: Earnings from Foreign Sources to `12.52 billion in 2019-20 primarily on account (` billion) of higher sale operations amounting to `421.11 Item Variation billion (face value) in 2019-20 as compared to 2018-19 2019-20 Absolute Per Cent `0.60 billion (face value) in 2018-19. 1 2 3 4 5 XII.8.7 Premium/Discount on amortisation of Foreign Currency 27,852.18 35,450.44 7,598.26 27.28 Assets (FCA) Rupee Securities and Oil Bonds: The rupee Average FCA 26,896.92 31,103.66 4,206.74 15.64 securities and oil bonds, held by the Reserve Earnings from FCA 749.58 823.66 74.08 9.88 (interest, discount, Bank are amortised on daily basis during the exchange gain/loss, period of residual maturity and the premium/ capital gain/loss on securities) discount is booked in the income head. The net Earnings from FCA 2.79 2.65 -0.14 -5.02 as per cent of income from premium/discount on amortisation of average FCA domestic securities decreased by 21.63 per cent 267ANNUAL REPORT Table XII.9: Earnings from Domestic Sources (` billion) Variation Item 2018-19 2019-20 Absolute Per cent 1 2 3 4 5 Earnings (I+II+III+IV) 1,180.78 673.06 -507.72 -43.00 I. Earnings from Rupee Securities and Discounted Instruments i) Interest on holding of Rupee Securities and Oil Bonds 583.43 703.04 119.61 20.50 ii) Profit on Sale and Redemption of Rupee Securities 0.40 12.52 12.12 3,030.00 iii) Depreciation on Rupee Securities inter Portfolio Transfer -0.27 -0.09 0.18 66.67 iv) Amortisation of Premium/Discount on Rupee Securities and Oil Bonds 21.45 16.81 -4.64 -21.63 v) Discount 0.00 7.35 7.35 - Sub total (i+ii+iii+iv+v) 605.01 739.63 134.62 22.25 II. Interest on LAF/MSF i) Net Interest on LAF Operations 10.46 -130.53 -140.99 -1,347.90 ii) Interest on MSF Operations 1.35 1.49 0.14 10.37 Sub total (i+ii) 11.81 -129.04 -140.85 -1,192.63 III. Interest on Other Loans and Advances i) Government (Central & States) 12.85 23.14 10.29 80.08 ii) Banks & Financial Institutions 1.47 11.75 10.28 699.32 iii) Employees 0.66 0.68 0.02 3.03 Sub total (i+ii+iii) 14.98 35.57 20.59 137.45 IV. Other Earnings i) Exchange 0.00 0.00 0.00 0.00 ii) Commission 22.72 24.31 1.59 7.00 iii) Rent Realised, Profit or Loss on Sale of Bank’s Property, Provisions 526.26 2.59 -523.67 -99.51 No Longer Required and Miscellaneous Sub total (i+ii+iii) 548.98 26.90 -522.08 -95.10 from `21.45 billion during 2018-19 to `16.81 to central and state governments increased billion for 2019-20. by 80.08 per cent from `12.85 billion during 2018-19 to `23.14 billion in 2019-20. Of the XII.8.8 Discount-Domestic: During the year total, interest income received from the 2019-20, the Reserve Bank earned `7.35 billion Centre on account of WMA/OD increased by on holding of discounted instruments [T-Bills and 100.09 per cent from `10.65 billion in 2018- Cash Management Bills (CMBs)]. The Reserve 19 to `21.31 billion in 2019-20 and interest Bank did not hold any discounted instruments income received from the states on account during 2018-19. of WMA/OD/Special Drawing Facility (SDF) XII.8.9 Interest on loans and advances decreased by 16.82 per cent from `2.20 billion in 2018-19 to `1.83 billion in 2019-20. a. Central and State Government: The net increased earning was on account of Interest income on Ways and Means higher utilisation of WMA/OD facility by Advances (WMA)/Overdraft (OD) extended central government in 2019-20. 268THE RESERVE BANK’S ACCOUNTS FOR 2019-20 b. Banks & Financial Institutions: Interest on Table XII.10: Expenditure (` billion) loans and advances to banks and financial Item 2015- 2016- 2017- 2018- 2019- institutions increased by 699.32 per cent from 16 17 18 19 20 `1.47 billion in 2018-19 to `11.75 billion in 1 2 3 4 5 6 2019-20. i. Interest Payment 0.01 0.01 0.01 0.01 0.01 ii. Employee Cost 44.77 46.21 38.48 68.51 89.28 c. Employees: Interest on loans and advances iii. Agency Charges/ 47.56 40.52 39.03 39.10 38.76 Commission to employees increased by 3.03 per cent iv. Printing of Notes 34.21 79.65 49.12 48.11 43.78 from `0.66 billion in 2018-19 to `0.68 billion v. Provisions 10.00 131.90 141.90 0.64 736.15 vi. Others 13.35 13.26 14.23 14.08 17.42 in 2019-20. Total (i+ii+iii+iv+v+vi) 149.90 311.55 282.77 170.45 925.40 XII.8.10 Commission: The commission income increased by 7.00 per cent from `22.72 billion in 2018-19 to `24.31 billion in 2019-20 primarily on i) Interest payment account of increase in management commission During 2019-20, an amount of `0.01 billion received for servicing outstanding central and was paid as interest to Dr. B.R. Ambedkar state governments loan including savings bonds, Fund (set up for giving scholarship to wards government securities, T-Bills and CMBs. of staff) and Employees Benevolent Fund. XII.8.11 Rent Realised, Profit or Loss on Sale of ii) Employee cost Bank’s Property, Provisions No Longer Required The total employee cost for the year 2019-20 and Miscellaneous Income: Earnings from these increased by 30.32 per cent from `68.51 income heads decreased from `526.26 billion in billion in 2018-19 to `89.28 billion in 2019-20. 2018-19 to `2.59 billion in 2019-20. The income The increase was due to net impact of was higher in 2018-19 due to write back of excess increase in the Reserve Bank’s expenditure risk provision from CF to 'Provision No Longer towards accrued liabilities of various Required' in the previous year. superannuation funds in 2019-20. XII.9 EXPENDITURE iii) Agency Charges/Commission XII.9.1 The Reserve Bank incurs expenditure in a. Agency Commission on Government the course of performing its statutory functions by Transactions way of agency charges/ commission, printing of notes, expenditure on remittance of currency The Reserve Bank discharges the besides staff related and other expenses. The function of banker to the government total expenditure of the Bank increased from through a large network of agency bank `170.45 billion in 2018-19 to `925.40 billion in branches that serve as retail outlets for 2019-20 (Table XII.10), primarily on account of (a) government receipts and payments. The risk provision towards CF amounting to `736.15 Reserve Bank pays commission to these billion, and (b) increase in employee cost primarily agency banks at prescribed rates. These on account of actuarial valuation. rates were revised with effect from July 269ANNUAL REPORT 1, 2019. The agency commission paid as policy rate cuts and timely intervention on account of government business to ensure sufficient liquidity in the system decreased marginally by 0.76 per cent by means of Open Market Operations from `38.17 billion in 2018-19 to `37.88 (OMOs), Long Term Repo Operations billion in 2019-20. The marginal decrease (LTRO) and Targeted LTRO (TLTRO) of `0.29 billion is due to the dual impact resulted in considerable softening of of increased transaction processing by yields across the yield curve. This was the Reserve Bank through e-Kuber further aided by global factors like integration as well as possible decrease substantial drop in crude oil prices and a in underlying government transactions similar accommodative stance exhibited by central banks across the globe. on account of COVID-19 pandemic Further, the announcement of various related situation. economy boosting measures by the b. Underwriting Commission paid to Government of India and the Reserve Primary Dealers Bank contributed to a positive outlook in The Reserve Bank of India paid total the market. Hence, throughout the year, underwriting commission of `0.61 billion the domestic debt market conditions to Primary Dealers during 2019-20 as were stable, leading to a reduced compared to `0.74 billion during 2018- possibility of devolvement resulting in 19. The period July 2019-June 2020 the PDs demanding for a lesser witnessed an increased G-sec borrowing commission to underwrite the securities program and uncertainty caused by in comparison with the previous year. COVID-19 pandemic during the last c. Sundries quarter. However, a possible spike in This includes the expenses incurred on yields due to these events was handling charges, turnover commission adequately negated by a combination of paid to banks for Relief/ Savings Bonds factors throughout the year. During the subscriptions and Commission paid on first two quarters, economic conditions Securities Borrowing and Lending were fairly stable with reduced volatility. Arrangement (SBLA), etc. The Reduction in the policy repo rate and commission paid under this head market interventions by the Reserve increased from `0.02 billion in 2018-19 Bank ensured availability of adequate to `0.06 billion in 2019-20. liquidity in the system. On the d. Fees paid to the External Asset international front too, crude prices were Managers, Custodians, etc. fairly steady and trade disputes between major economies were diminished. Fees paid for custodial services During the last quarter, measures increased from `0.17 billion in 2018-19 undertaken by the Reserve Bank such to `0.21 billion in 2019-20. 270THE RESERVE BANK’S ACCOUNTS FOR 2019-20 iv) Printing of Notes shares of the BIS as on June 30, 2020 was `9.30 billion. The balances are callable at three months’ The supply of notes during the year 2019-20 notice by a decision of the BIS Board of Directors. at 22,388 million pieces (mpcs) was 23.31 per cent lower than that of the year 2018-19 XII.11 PRIOR PERIOD TRANSACTIONS (29,191 mpcs). Therefore, the expenditure XII.11.1 For the purpose of disclosure, prior incurred on printing of banknotes decreased period transactions of `0.01 million and above by 9.00 per cent from `48.11 billion in the only have been considered. The prior period year 2018-19 to `43.78 billion during the year transactions under expenditure and income 2019-20. amounted to `(-) 0.01 billion and `0.36 billion, v) Provisions respectively. In 2019-20, a provision of `736.15 billion was XII.12 PREVIOUS YEAR’S FIGURES made towards CF. XII.12.1 Figures for the previous year have been vi) Others rearranged, wherever necessary, to make them Other expenses consisting of expenditure on comparable with the current year. remittance of currency, printing and XII.13 AUDITORS stationery, audit fees and related expenses, XII.13.1 The statutory auditors of the Reserve miscellaneous expenses, etc. increased by Bank are appointed by the central government in 23.72 per cent from `14.08 billion in 2018-19 terms of Section 50 of the RBI Act, 1934. The to `17.42 billion in 2019-20. accounts of the Reserve Bank for the year 2019- XII.10 CONTINGENT LIABILITIES 20 were audited by M/s Prakash Chandra Jain & XII.10.1 Total contingent liabilities of the Reserve Co., Mumbai and M/s Haribhakti & Co., LLP, Bank amounted to `11.68 billion. The main Mumbai, as the Statutory Central Auditors and component of it being partly paid shares, M/s Kothari & Co., Kolkata, M/s Suri & Co., denominated in SDR, of the BIS held by the Chennai and M/s Bansal & Co. LLP, New Delhi as Reserve Bank. The uncalled liability on partly paid Statutory Branch Auditors. 271CAHNNRUAOL RNEPOORLTOGY OF ANNEX I MAJOR POLICY ANNOUNCEMENTS: JULY 2019 TO JUNE 20201 Date of Policy Initiative Announcement Monetary Policy Department August 7, 2019 The policy repo rate was reduced by 35 bps to 5.40 per cent. October 4, 2019 The policy repo rate was reduced by 25 bps to 5.15 per cent. February 6, 2020 Cash reserve ratio (CRR) exemption to scheduled commercial banks (SCBs) for a period of 5 years (from the date of origination of the loan or the tenure of the loan, whichever is earlier) for the amount equivalent to the incremental credit extended as retail loans for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs) during January 31, 2020 and July 31, 2020. March 27, 2020 • The policy repo rate was reduced by 75 bps to 4.4 per cent. The reverse repo rate was reduced by 90 bps to 4.0 per cent creating an asymmetrical corridor2. • CRR reduced3 by 100 bps to 3.0 per cent of NDTL effective March 28, 2020 for a period of one year ending on March 26, 2021. • Effective March 28, 2020, requirement of minimum daily CRR balance maintenance reduced from 90 per cent to 80 per cent of the prescribed CRR. This dispensation, initially available up to June 26, was further extended up to September 25, 20204. • Increase in marginal standing facility (MSF) borrowing from 2 per cent of statutory liquidity ratio (SLR) to 3 per cent effective March 28, 2020. This measure was initially available up to June 30, 2020 and later extended up to September 30, 2020. April 17, 2020 • The reverse repo rate was reduced by 25 bps to 3.75 per cent. • Special refinance facilities for a total amount of `50,000 crore were provided to NABARD, SIDBI and NHB to enable them to meet sectoral credit needs5. May 22, 2020 • The policy repo rate was reduced by 40 bps to 4.0 per cent. • The reverse repo rate was reduced by 40 bps to 3.35 per cent. • A line of credit of `15,000 crore was extended to EXIM bank for a period of 90 days from the date of availment with rollover up to a maximum period of one year to enable it to avail a US dollar swap facility to meet its foreign exchange requirements. 1 The list is indicative in nature and details are available on the Reserve Bank’s website. 2 The purpose of this measure relating to reverse repo rate is to make it relatively unattractive for banks to passively deposit funds with the Reserve Bank and instead, to use these funds for on-lending to productive sectors of the economy. 3 This reduction in the CRR released primary liquidity of about `1,37,000 crore uniformly across the banking system in proportion to liabilities of constituents rather than in relation to holdings of excess SLR. 4 This measure was announced taking cognisance of hardships faced by banks in terms of social distancing of staff and consequent strains on reporting requirements. 5 This comprised `25,000 crore to NABARD for refinancing regional rural banks (RRBs), cooperative banks and micro finance institutions (MFIs); `15,000 crore to SIDBI for on-lending/refinancing; and `10,000 crore to NHB for supporting housing finance companies (HFCs). Advances under this facility were provided at the Reserve Bank’s policy repo rate. 272CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS Date of Policy Initiative Announcement Financial Inclusion and Development Department August 1, 2019 Master Direction on priority sector lending was issued for small finance banks (SFBs). August 13, 2019 Lending by banks to NBFCs (other than MFIs) for ‘on-lending’ under specific categories was made eligible for classification under priority sector lending up to the limits prescribed. September 20, 2019 The sanctioned limits towards export credit for domestic SCBs were enhanced to boost credit to export sector. October 7, 2019 With a view to expanding and deepening the digital payments ecosystem, State/UT Level Bankers’ Committee Convenor banks were advised to identify one district in their respective States/UTs to make the district 100 per cent digitally enabled within one year. February 5, 2020 Modification in operational guidelines on interest subvention scheme (ISS) for MSMEs was issued. March 31, 2020 Circular on short-term crop loans eligible for ISS and prompt repayment incentive (PRI) extending timeline till June 30, 2020 in view of the COVID-19 pandemic, for converting all short-term crop loans into KCC loans. June 4, 2020 Circular on ISS and PRI for short-term crop loans during the years 2018-19 and 2019-20 extending moratorium period till August 31, 2020 in view of the COVID-19 pandemic. Financial Markets Regulation Department November 28, 2019 Units of debt exchange traded fund (ETF) were permitted as eligible security for repo. January 1, 2020 • Client transactions in currency derivatives above a threshold of USD 1 million were mandated to be reported to the trade repository. With effect from January 6, 2020, all client transactions in currency derivatives have been mandated to be reported to the trade repository. • Six benchmarks administered by Financial Benchmarks India Private Limited (FBIL) were notified by the Reserve Bank as ‘significant benchmarks’ under the Financial Benchmark Administrators (Reserve Bank) Directions, 2019, dated June 26, 2019. January 6, 2020 Authorised Dealers (AD) Category-I banks were permitted to voluntarily undertake client and inter- bank transactions beyond onshore market hours. January 20, 2020 Rupee derivatives with settlement in foreign currency were allowed to be traded in international financial services centres (IFSCs), starting with exchange traded currency derivatives (ETCD). January 23, 2020 • The short-term investment limit for Foreign Portfolio Investors (FPIs) in both corporate bonds and government securities were revised to 30 per cent from the existing 20 per cent. Also, debt instruments issued by asset reconstruction companies and by an entity under the corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 were exempted from the short-term investment limit. • Investment cap for FPIs under voluntary retention route (VRR) scheme was increased to `1,50,000 crore from the existing `75,000 crore. FPIs under the VRR scheme were also permitted to transfer their investments made under the general investment limit to VRR. Exchange traded funds that invest only in debt instruments were allowed under VRR. March 27, 2020 • AD Category-I banks in India which operate international financial services centre (IFSC) banking units (BUs) were permitted to offer non-deliverable derivative contracts involving the rupee, or otherwise, to persons not resident in India, with effect from June 1, 2020. 273ANNUAL REPORT Date of Policy Initiative Announcement • The timeline for implementation of legal entity identifier (LEI) in non-derivative markets was extended till September 30, 2020, in view of the challenges posed by the outbreak of the COVID-19 pandemic. March 30, 2020 A separate route, viz., fully accessible route (FAR) for investment by non-residents in specified securities issued by the Government of India (GoI) was introduced. April 3, 2020 followed The trading hours for various markets under the Reserve Bank’s regulation were revised to ensure by April 16 and April that market participants maintain adequate checks and controls while optimising their resources and 30, 2020 ensuring safety of personnel amid COVID-19 pandemic. April 7, 2020 The existing facilities for non-residents and residents to hedge foreign exchange risk have been reviewed to ease access to the domestic foreign exchange market, ensure protection for the retail customer and promote innovation for the sophisticated customers. April 15, 2020 The investment limits for the FPIs in debt securities under medium term framework (MTF) for the financial year 2020-21 were announced. May 18, 2020 • All non-deliverable derivative contracts involving the rupee, or otherwise, were mandated to be reported to the trade repository. All IFSC Banking Units were mandated to report all OTC foreign exchange, interest rate and credit derivative transactions (both inter-bank and client transactions) undertaken by them to the trade repository with effect from June 1, 2020. • The implementation date for the directions on hedging of foreign exchange risk (dated April 7, 2020) was deferred to September 1, 2020 from June 1, 2020 in view of the difficulties arising from the outbreak of COVID-19. May 22, 2020 FPIs that were allotted investment limits under the VRR scheme between January 24, 2020 and April 30, 2020 were allowed an additional time of three months to invest 75 per cent of their committed portfolio size (CPS) in view of the COVID-19 pandemic. Financial Markets Operations Department December 13, 2019 In order to facilitate smooth settlement of NEFT transactions in a 24x7 environment, an additional collateralised intra-day liquidity facility called liquidity support (LS) was provided to member banks. December 19, 2019 The Reserve Bank announced conducting simultaneous purchase of long-term and sale of short- term government securities under open market operations (OMOs). The first such auction was conducted on December 23, 2019. February 6, 2020 • The Reserve Bank revised its liquidity management framework based on the report of the Internal Working Group set up to review the liquidity management framework and comments/feedback received from stakeholders and members of the public. • The Reserve Bank augmented its liquidity management toolkit by announcing the long-term repo operations (LTROs) at fixed rate with a view to assuring banks about the availability of durable liquidity and facilitate the transmission of monetary policy actions and flow of credit to the economy. The first such LTRO was conducted on February 17, 2020. March 12, 2020 The Reserve Bank announced to undertake 6-month US Dollar sell/buy swap auctions to provide US Dollar liquidity to the foreign exchange market. The first such auction was conducted on March 16, 20206. 6 This measure was announced as financial markets worldwide were facing intense selling pressures on extreme risk aversion due to the spread of COVID-19 infections. 274CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS Date of Policy Initiative Announcement March 27, 2020 The Reserve Bank announced conducting targeted long-term repo operations (TLTROs) at a floating rate linked to the policy repo rate. Liquidity availed under the scheme by banks had to be deployed in investment grade corporate bonds, commercial paper, and non-convertible debentures. The first such TLTRO auction was conducted on March 27, 2020. March 30, 2020 Taking into account the impact of disruptions caused by COVID-19, it was decided to extend the window timings of fixed rate reverse repo and MSF operations as an interim measure so as to provide eligible market participants with greater flexibility in their liquidity management. April 17, 2020 The Reserve Bank announced conducting targeted long-term repo operations (TLTROs) 2.0 at the policy repo rate. Liquidity availed under the scheme by banks is to be deployed in investment grade corporate bonds, commercial paper, and non-convertible debentures with at least 50 per cent of the total amount availed going to small and mid-sized NBFCs and MFIs. Investments made under this facility would be classified as held to maturity (HTM) even in excess of 25 per cent of total investment permitted to be included in the HTM portfolio. Exposures under this facility would also not be reckoned under the large exposure framework (LEF). The first such TLTRO 2.0 auction was conducted on April 23, 2020. April 27, 2020 In order to ease the liquidity pressure on mutual funds, it was decided to open a special liquidity facility for mutual funds (SLF-MF). Liquidity availed under the scheme by banks is to be deployed exclusively for meeting needs of mutual funds. Liquidity availed under the facility would be classified as HTM even in excess of 25 per cent of total investment permitted to be included in the HTM portfolio. Exposures under this facility would also not be reckoned under the LEF. The first such SLF- MF auction was conducted on April 27, 2020. April 30, 2020 It was decided to extend regulatory benefits announced under the SLF-MF scheme to all banks, irrespective of whether they avail funding from the Reserve Bank or deploy their own resources to meet liquidity requirements of mutual funds. Foreign Exchange Department July 30, 2019 In consultation with the Government of India (GoI), the Reserve Bank relaxed the end-use restrictions on external commercial borrowing (ECB) proceeds, with a view to further liberalise the ECB framework. August 16, 2019 In order to bring in consistency in statutory provisions/regulations relating to commercial papers (CPs), sub-regulation (3) of Regulation 6 of FEMA 5(R)/2016-RB was deleted vide GoI Notification No. FEMA 5(R)(2)/2019-RB dated July 16, 2019. October 17, 2019 Consequent to the notification of Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 by GoI, the Reserve Bank issued “Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019” relating to mode of payment and reporting requirements for investment in India by a person resident outside India. November 22, 2019 • With a view to promote the usage of INR products by persons resident outside India, the scope of special non-resident rupee accounts (SNRR) was expanded, in consultation with the GoI. • The guidelines on re-export of unsold rough diamonds from special notified zone of customs were modified. As per the revised instructions, bill of entry shall be filed by the buyer for the lot(s) of imported rough diamonds meant to be traded by diamond mining companies and these are to be cleared at the centre(s), which are duly notified under Customs Act, 1962. 275ANNUAL REPORT Date of Policy Initiative Announcement December 9, 2019 In order to smoothen the process of obtaining permission of the Reserve Bank for re-exporting of leased aircraft/helicopter and/or engines/auxiliary power units (APUs) re-possessed by the overseas lessor, they were exempted from submission of export declaration form (EDF). January 23, 2020 With a view to further facilitate merchanting trade transactions (MTT), the existing guidelines on MTT were reviewed. March 17, 2020 Japanese Yen was permitted as currency of settlement under Asian Clearing Union (ACU) mechanism. The Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2016 were amended accordingly. April 1, 2020 Consequent to the COVID-19 pandemic, it was decided, in consultation with GoI, to increase the present period of realisation and repatriation to India of the amount representing the full export value of goods or software or services exported, from nine months to fifteen months from the date of export, for the exports made up to or on July 31, 2020. April 3, 2020 It was decided, in consultation with the GoI, to permit receipt of foreign inward remittances from non- residents through the overseas exchange houses in favour of the ‘Prime Minister’s Citizen Assistance and Relief in Emergency Situations (PM-CARES) Fund’, subject to the condition that AD Category-I banks shall directly credit the remittances to the 'PM-CARES Fund' and maintain the full details of the non-residents sending the donations/contributions under rupee drawing arrangement (RDA). May 22, 2020 In view of the disruptions due to the COVID-19 pandemic, the time period for completion of remittances against normal imports, i.e., excluding import of gold/diamonds and precious stones/jewellery, (except in cases where amounts are withheld towards guarantee of performance, etc.) was extended from six months to twelve months from the date of shipment for such imports made on or before July 31, 2020. Department of Regulation: Commercial Banks July 5, 2019 Banks were permitted to reckon the increase in facility to avail liquidity for liquidity coverage ratio (FALLCR) of 1.0 per cent of the bank’s NDTL as Level 1 high quality liquid assets (HQLA) for computing liquidity coverage ratio (LCR) [0.50 per cent each on August 1 and December 1, 2019], to the extent of incremental outstanding credit to NBFCs and Housing Finance Companies (HFCs) over and above the amount of credit to NBFCs/HFCs outstanding on their books as on July 5, 2019. August 2, 2019 • Banks were instructed that they shall not charge foreclosure charges/pre-payment penalties on any floating rate term loan sanctioned, for purposes other than business, to individual borrowers with or without co-obligant(s). • Revised guidelines on ‘fit and proper’ criteria for shareholder directors in the public sector banks (PSBs) were issued thereby aligning them with the eligibility requirements applicable for other directors. August 7, 2019 The bank rate was revised downwards by 35 bps from 6.00 per cent to 5.65 per cent with effect from August 7, 2019. Accordingly, all penal interest rates on shortfall in reserve requirements, which are specifically linked to the bank rate, also stand revised as bank rate plus 3.0 percentage points (8.65 per cent) or bank rate plus 5.0 percentage points (10.65 per cent), depending on the duration of the shortfalls. 276CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS Date of Policy Initiative Announcement August 9, 2019 Consequent to GoI notifying amendment to the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 on May 28, 2019, Master Direction was amended to the effect that, where the individual is a prisoner in a jail, the signature or thumb print shall be affixed in presence of the officer in-charge of the jail and the said officer shall certify the same under his signature and the account shall remain operational on annual submission of certificate of proof of address issued by the officer in-charge of the jail. August 13, 2019 The Reserve Bank of India placed on its website the final ‘Enabling Framework for Regulatory Sandbox’, after taking into consideration comments/feedback from various stakeholders including FinTech entities, banks, multilateral agencies, industry associations, payment aggregators, audit and legal firms, government departments and individuals on various aspects of the framework. August 16, 2019 Two changes were brought in the Gold Monetisation Scheme, 2015 - (i) Banks may identify at least one branch in a State/Union Territory where they have presence to accept the deposits under the Scheme and (ii) all designated banks shall give adequate publicity to the scheme through their branches, websites and other channels. September 4, 2019 Based on the recommendations of an internal study group constituted to examine various aspects of the marginal cost of funds-based lending rate (MCLR) system, banks were mandated to link all new floating rate personal or retail loans (housing, automobile, etc.) and floating rate loans to micro and small enterprises to an external benchmark from October 1, 2019, like Reserve Bank’s policy repo rate, GoI three/six months' treasury bill yield published by the Financial Benchmarks India Private Limited (FBIL) or any other benchmark market interest rate published by the FBIL. September 12, 2019 • The risk weight for consumer credit, including personal loans, but excluding credit card receivables was reduced to 100 per cent. Earlier, consumer credit, including personal loans and credit card receivables but excluding educational loans, attracted a higher risk weight of 125 per cent or higher, if warranted by the external rating of the counterparty. • The exposure limit of banks to a single NBFC (excluding gold loan companies) was harmonised with the general single counterparty limit under the LEF by increasing the limit on exposure to a single NBFC from 15 per cent to 20 per cent of bank’s eligible capital base. Bank finance to NBFCs predominantly engaged in lending against gold will continue to be governed by the limits prescribed earlier. October 4, 2019 The bank rate was revised downwards by 25 bps from 5.65 per cent to 5.40 per cent. October 14, 2019 Banks were permitted to lend to Infrastructure Investment Trusts (InvITs) subject to certain safeguards which include a Board approved policy on exposures to InvITs, assessment of all critical parameters including sufficiency of cash flows at InvIT level, overall leverage of the InvITs and the underlying special purpose vehicles (SPVs) to be within the leverage permitted under the Board approved policy, monitoring of performance of the underlying SPVs on an ongoing basis and lending to only those InvITs where none of the underlying SPVs are facing financial difficulty. November 1, 2019 RRBs were allowed to issue perpetual debt instruments (PDIs) eligible for inclusion as Tier-I capital with the prescription of terms and conditions for their issue. November 4, 2019 • Opening of the first cohort under the regulatory sandbox (RS), with retail payments as the theme and a window for submission of application were announced. The innovative products/services which, among others, shall be considered for inclusion under RS are: mobile payments including feature phone-based payment services, offline payment solutions and contactless payments. 277ANNUAL REPORT Date of Policy Initiative Announcement • Revised final guidelines on compensation of whole time directors/chief executive officers/material risk takers and control function staff for private sector banks were issued with salient features like inclusion of share-linked instrument such as employee stock ownership plans (ESOPs) as a component of variable pay and imposition of malus for divergence in NPA/provisioning. The revised guidelines were issued to better align with Financial Stability Board (FSB) guidelines on compensation practices. This was made applicable for pay cycles beginning from/after April 1, 2020. November 18, 2019 Banks were advised that on a voluntarily winding up application by Aditya Birla Idea Payments Bank Limited, the Hon’ble Bombay High Court passed an order on September 18, 2019 for liquidation and a liquidator was appointed. November 28, 2019 Vijaya Bank and Dena Bank were excluded from the Second Schedule to the Reserve Bank of India Act, 1934 with effect from April 1, 2019 since, after amalgamation with Bank of Baroda, they ceased to carry on banking business. December 5, 2019 The Reserve Bank released on its website, “Guidelines for ‘on tap’ licensing of small finance banks (SFBs) in the private sector with some important features like minimum paid-up voting equity capital/ net worth requirement of `200 crore, considering voluntary transition of primary (Urban) co-operative banks (UCBs) into SFBs with initial requirement of net worth of `100 crore and giving scheduled bank status to SFBs immediately upon commencement of operations. December 23, 2019 IFSC Banking Units (IBUs) were permitted to open current accounts (including escrow accounts) for their corporate borrowers subject to provisions of FEMA, 1999 to accept fixed deposits in foreign currency of tenor less than one year from non-bank entities and also repay fixed deposits prematurely without any time restrictions. January 9, 2020 Master Direction on know your customer (KYC) was updated to align it with the amendments brought in the prevention of money laundering (PML) Rules by the GoI vide Gazette Notifications issued on August 19, 2019 and November 13, 2019. Video based customer identification process (V-CIP) was also introduced by the Reserve Bank as a consent based alternate method of establishing the customer’s identity, for customer on-boarding. January 21, 2020 IFSC Banking Units (IBUs) were permitted to participate in exchange traded currency derivatives on rupee (with settlement in foreign currency) listed on stock exchanges set up at IFSCs. February 6, 2020 RRBs were allowed to act as merchant acquiring banks using Aadhaar Pay – BHIM app and point of sale (POS) terminals subject to certain conditions. February 7, 2020 Project loans in commercial real estate (CRE) sector were permitted to be restructured, without a downgrade in the asset classification, by way of revision of date of commencement of commercial operation (DCCO) up to one additional year (i.e., total 2 years extension from the original DCCO), as in the case of projects in non-infrastructure sectors. The asset classification benefit will be subject to certain conditions. February 11, 2020 A one-time restructuring of loans to MSMEs that were in default but ‘standard’ as on January 1, 2020, was permitted, without an asset classification downgrade, subject to certain conditions like aggregate exposure, including non-fund based facilities, of banks and NBFCs to the borrower not exceeding `25 crore as on January 1, 2020 and the borrower’s account is in default but is a ‘standard asset’ as on January 1, 2020 and continues to be classified as a ‘standard asset’ till the date of implementation of the restructuring. The borrowing entity has to be GST-registered. However, this condition will not apply to MSMEs that are exempt from GST-registration. 278CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS Date of Policy Initiative Announcement February 26, 2020 With a view to further strengthening monetary transmission, it was decided to link pricing of all new floating rate loans by SCBs for the medium enterprises also to the external benchmarks effective April 1, 2020 and accordingly, guidelines were issued to banks. March 17, 2020 • On account of inclusion of affordable housing under the harmonised master list (HML) for infrastructure sub-sectors by GoI, the definition of lending to affordable housing was re-aligned with that provided in the HML. Accordingly, for the purpose of issue of long terms bonds, the revised definition would include housing loans, eligible to be classified under priority sector lending (as updated from time to time) and to individuals for acquiring dwelling units within the prescribed threshold under the affordable housing definition in the HML. • Banks were permitted to treat investment fluctuation reserve (IFR), being at least 2 per cent built up out of profit on sale of securities under the held for trading (HFT) and available for sale (AFS) portfolios on a continuous basis, as part of Tier-II capital without the cap of 1.25 per cent of total credit risk weighted assets. March 23, 2020 A clarification was issued to the banks that exposure can be shifted from the credit risk mitigation (CRM) provider to the original counterparty, even if the counterparty was a person resident outside India, if CRM benefits like shifting of exposure/risk weights are not derived by that bank. The exposures thus shifted to a person resident outside India, will attract a minimum risk weight of 150 per cent. The date of applicability of the LEF guidelines to non-centrally cleared derivatives exposures was also deferred by one year to April 1, 2021. March 27, 2020 • The implementation of the last tranche of 0.625 per cent of capital conservation buffer (CCB) shall stand deferred from March 31, 2020 to September 30, 2020. Accordingly, minimum capital conservation ratios as applicable from March 31, 2018, will also apply for a further period of six months from March 31, 2020 till the CCB attains the level of 2.5 per cent on September 30, 2020. Further, the pre-specified trigger for loss absorption through conversion/write-down of additional tier 1 instruments (perpetual non-cumulative preference shares and perpetual debt instruments) shall remain at 5.5 per cent of risk-weighted assets (RWAs) and will rise to 6.125 per cent of RWAs on September 30, 2020. • The implementation of net stable funding ratio (NSFR), was deferred by six months from April 1, 2020 to October 1, 2020. • Certain regulatory measures were announced to mitigate the burden of debt servicing brought about by disruptions on account of COVID-19 pandemic and to ensure the continuity of viable businesses. The salient features included rescheduling of payments for term loans and working capital facilities, easing of working capital financing and exemption from classification of special mention account (SMA) and non-performing assets (NPA) on account of implementation of the above reliefs. • The bank rate was revised downwards by 75 bps from 5.40 per cent to 4.65 per cent with immediate effect. All penal interest rates on shortfall in reserve requirements, which are specifically linked to the bank rate, also stand revised, accordingly, depending on duration of shortfalls i.e., bank rate plus 3.0 percentage points (7.65 per cent from the earlier 8.40 per cent) or bank rate plus 5.0 percentage points (9.65 per cent instead of the earlier rate of 10.40 per cent). March 28, 2020 Guidelines for on-tap licensing of SFBs in private sector were modified to extend certain norms to existing SFBs like granting of general permission to open banking outlets subject to adherence to unbanked rural centre norms and exemption from seeking prior approval of the Reserve Bank for undertaking such non-risk sharing simple financial service activities, which do not require any commitment of own fund, after three years of commencement of business of SFBs. Some clarifications were also provided on promoters and paid up equity capital. 279ANNUAL REPORT Date of Policy Initiative Announcement March 30, 2020 As announced in the scheme of amalgamation of certain public sector banks by GoI dated March 4, 2020, Oriental Bank of Commerce/United Bank of India/Andhra Bank/Corporation Bank/Syndicate Bank/Allahabad Bank (transferor banks) will be excluded from the Second Schedule to the RBI Act as they would cease to carry on banking business w.e.f., April 1, 2020. Consequently, all their branches will function as branches of their respective transferee bank (Punjab National Bank/Union Bank of India/Canara Bank/Indian Bank) from April 1, 2020 and their customers, including depositors, will be treated as customers of respective transferee banks with effect from April 1, 2020. March 31, 2020 • Based on the review of certain instructions regarding appointment of managing director and chief executive officer (MD and CEO)/CEO/part-time chairperson (PTC) in private sector banks and foreign banks, the ‘Declaration and Undertaking’ to be obtained from candidate and specimen of ‘Form A’ (Application by bank for amendment in its appointment related provisions) as well as ‘Form B’ (Application for approval of appointment/re-appointment) were revised. Two other changes were also introduced, viz., submission of application to the Reserve Bank by banks for re-appointment of MD and CEO at least six months (as against four months) before the expiry of the term of office and submission of proposals for appointment of a new MD and CEO with a panel of at least two names (as against three, currently) in the order of preference, at least four months before the expiry of the term of the present incumbent. • In order to make the doorstep banking services for senior citizens and differently abled persons effective, banks were advised to offer these services on pan India basis by developing a Board approved framework for determining the nature of branches where these services will be provided mandatorily and those where it will be provided on a best effort basis. Banks have to update the list of such branches on its website regularly, make the policy and charges in this regard public and give adequate publicity on the availability of such services in their public awareness campaigns. The progress made in this regard has to be reported to the Customer Service Committee of their Board every quarter and banks were advised to ensure compliance to the instructions by April 30, 2020. April 1, 2020 • Based on the review and empirical analysis of counter cyclical capital buffer (CCyB) indicators, it was decided not to activate CCyB (framework for which was put in place in terms of guidelines issued on February 5, 2015, with pre-announcement of the decision to activate it as and when circumstances warranted) for a period of one year or earlier, as may be necessary. • Amendment to the Master Direction on KYC dated February 25, 2016 was made to align it with the amendment brought in the PML Rules by the GoI through a gazette notification dated March 31, 2020. The amendment pertains to small accounts, opened for customers unable to furnish officially valid documents (OVDs) to banks, for which the limitations and conditions have been provided in the PML rules itself. The amendment was carried out to enable the Government to transfer the direct benefit transfer (DBT) amounts to the beneficiaries’ accounts and allow the beneficiaries to withdraw the amount for their needs in the current pandemic situation due to COVID-19, without causing any hardships due to the KYC requirements. April 17, 2020 • It was decided that in respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day NPA norm shall exclude the moratorium period, i.e., there would be an asset classification standstill for all such accounts from March 1, 2020 to May 31, 2020. At the same time, with the objective of ensuring that banks maintain sufficient buffers and remain adequately provisioned to meet future challenges, they will have to maintain higher provision of 10 per cent on all such accounts under the standstill, spread over two quarters, i.e., March, 2020 and June, 2020. These provisions can be adjusted later on against the provisioning requirements for actual slippages in such accounts. 280CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS Date of Policy Initiative Announcement • Under Reserve Bank’s prudential framework of resolution of stressed assets dated June 7, 2019, in the case of large accounts under default, SCBs are currently required to hold an additional provision of 20 per cent if a resolution plan has not been implemented within 210 days from the date of such default. Recognising the challenges to resolution of stressed assets in the current volatile environment, it has been decided that the period for resolution plan shall be extended by 90 days. • With a view to conserve capital of banks to retain their capacity to support the economy and absorb losses in an environment of heightened uncertainty, it was decided that in view of the COVID-19-related economic shock, SCBs shall not make any further dividend payouts from profits pertaining to the financial year ended March 31, 2020 until further instructions. This restriction shall be reviewed on the basis of the financial position of banks for the quarter ending September 30, 2020. • In order to ease the liquidity position at the level of individual institutions, the LCR requirement for SCBs is being brought down from 100 per cent to 80 per cent with immediate effect. The requirement shall be gradually restored back in two phases – 90 per cent by October 1, 2020 and 100 per cent by April 1, 2021. April 20, 2020 Master Direction on KYC was updated regarding internal risk assessment by regulated entities (REs) relating to money laundering/terrorist financing to further align the Reserve Bank’s instructions to the provisions of financial action task force (FATF) Recommendation 1. The internal risk assessment carried out by REs should be commensurate to their size, geographical presence, complexity of activities/structure, etc. REs shall have to apply a Risk Based Approach (RBA) for mitigation and management of the identified risk and should have Board approved policies, controls and procedures in this regard. The assessment will have to be properly documented and the outcome should be reported to the Board or any Committee of the Board. April 23, 2020 Banks were permitted to issue electronic cards, with their Board approved policy, to natural persons having overdraft accounts that are in the nature of personal loan without any specific end-use restrictions, only for domestic online/non-cash transactions. However, restrictions on cash transaction shall not apply to Pradhan Mantri Jan-Dhan Yojana (PMJDY) overdraft facility. The card shall be issued for a period not exceeding the validity of the facility and instructions on terms and conditions, security aspects, etc., as applicable for debit cards, will be applicable to these cards. April 29, 2020 In order to mitigate the difficulties in timely submission of various regulatory returns, due to disruptions on account of COVID-19 pandemic, the timelines for the submission was extended for the regulated entities, permitting a delay of up to 30 days from the due date, which will be applicable to regulatory returns required to be submitted up to June 30, 2020. However, no extension is permitted for submission of statutory returns, i.e., returns prescribed under the Banking Regulation Act, 1949, RBI Act, 1934 or any other Act (for instance, returns related to CRR/SLR). May 13, 2020 Interest equalisation scheme on pre- and post-shipment rupee export credit was extended by GoI for one year, i.e., up to March 31, 2021, with same scope and coverage, and all extant operational instructions issued by the Reserve Bank under the said scheme shall continue to remain in force up to March 31, 2021. May 22, 2020 The bank rate was revised downwards by 40 bps from 4.65 per cent to 4.25 per cent with effect from May 22, 2020. Accordingly, all penal interest rates on shortfall in reserve requirements, which are specifically linked to the bank rate, also stand revised as bank rate plus 3.0 percentage points (7.25 per cent from the earlier 7.65 per cent) or bank rate plus 5.0 percentage points (9.25 per cent instead of the earlier rate of 9.65 per cent), depending on the duration of the shortfalls. 281ANNUAL REPORT Date of Policy Initiative Announcement May 23, 2020 • With a view to facilitate greater flow of resources to corporates that faced difficulties in raising funds from the capital market and predominantly dependent on bank funding, caused by market uncertainties due to COVID-19 pandemic, a bank’s exposure under the Large Exposure Framework, to a group of connected counterparties was increased from 25 per cent to 30 per cent of the eligible capital base of the bank. The increased limit will be applicable up to June 30, 2021. • Taking forward the COVID-19 regulatory package released in March and April 2020, additional measures were announced, providing relaxations in repayment pressures and improving access to working capital by mitigating the burden of debt servicing, for preventing the transmission of financial stress to the real economy, and ensuring the continuity of viable businesses and households on continuous economic disruption due to extension of lockdown. • Further extension of the resolution timelines, prescribed in the Prudential Framework for Resolution of Stressed Assets dated June 7, 2019, was provided after a review in continuation of the earlier instructions of April 2020, on account of continued challenges to resolution of stressed assets in a volatile environment. This was applicable in respect of accounts which were within and past the review period as on March 1, 2020, subject to conditions. • To alleviate genuine difficulties being faced by exporters in their production and realisation cycles, the maximum permissible period of pre-shipment and post-shipment export credit sanctioned by banks was increased from one year to 15 months, for disbursements made up to July 31, 2020. This was in line with the permission already granted for increase in the period of realisation and repatriation of the export proceeds to India from nine months to 15 months from the date of export in respect of exports made up to July 31, 2020. June 21, 2020 As credit facilities to MSME borrowers, extended under the emergency credit line guarantee scheme of GoI guaranteed by National Credit Guarantee Trustee Company (NCGTC), are backed by an unconditional and irrevocable guarantee provided by the GoI, member lending institutions, viz., SCBs (including scheduled RRBs), NBFCs (including HFCs as eligible under the scheme) and all India financial institutions (AIFIs), were permitted to assign zero per cent risk weight on the credit facilities extended under these schemes to the extent of guarantee coverage. Department of Regulation: Cooperative Banks August 30, 2019 The Meghalaya Co-operative Apex Bank Limited was included in the Second Schedule to the Reserve Bank of India Act, 1934. November 29, 2019 The amalgamation of 13 District Central Co-operative Banks (DCCBs) in the state of Kerala with Kerala State Co-operative Bank was undertaken. December 19, 2019 Banking license was issued to Supaul District Central Co-operative Bank, Supaul, Bihar. December 27, 2019 The guidelines on reporting of large exposures to central repository of information on large credits (CRILC) issued to urban co-operative banks. December 31, 2019 The guidelines on Board of Management were issued to urban co-operative banks. January 6, 2020 • The revised guidelines on supervisory action framework for urban co-operative banks were issued. • Shivalik Mercantile Co-operative Bank Limited was granted ‘in principle’ approval for grant of an SFB license. 282CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS Date of Policy Initiative Announcement March 13, 2020 Guidelines on limits on exposure to single and group borrowers/parties and large exposures and revision in the target for priority sector lending were issued to UCBs. April 20, 2020 Guidelines related to provisioning on inter-bank exposure of Primary UCBs under all inclusive directions were issued to UCBs. April 24, 2020 Guidelines on non-achievement of priority sector lending targets by Primary UCBs - contribution to the rural infrastructure development fund (RIDF) and other funds were issued to UCBs. June 8, 2020 'In-principle’ approval was granted to Government of Punjab for the amalgamation of DCCBs in the state with the Punjab State Co-operative Bank, subject to fulfilment of conditions stipulated by the Reserve Bank and additional conditions, if any, imposed by NABARD. Department of Regulation: NBFCs August 2, 2019 Clarification was issued to NBFCs not to charge foreclosure charges/pre-payment penalties on floating rate term loan sanctioned for purposes other than business to individual borrowers, with or without co-obligant(s). November 4, 2019 Revised liquidity risk management framework for NBFCs and core investment companies (CICs) was issued. November 8, 2019 • Technical specifications (framed by ReBIT) were prescribed for all the participants of the NBFC- account aggregator (NBFC-AA) ecosystem, regulated by the Reserve Bank. • Household income limits and loan limits for qualifying assets of NBFC-MFIs were increased. November 11, 2019 Exemptions granted to housing finance institutions from the provisions of Chapter IIIB of RBI Act (except Section 45-IA) were withdrawn. December 6, 2019 Asset reconstruction companies (ARCs) were advised to acquire financial assets from their lenders, sponsors or group entities through auctions which are conducted in a transparent manner, on arm’s length basis and at prices determined by market forces. December 23, 2019 The aggregate exposure of a lender to all borrowers at any point of time, across all peer-to-peer (P2P) platforms, was increased to `50,00,000. December 31, 2019 Relaxation on minimum holding period (MHP) requirement for securitisation transactions related to loans of original maturity above 5 years, was further extended for six months, i.e., till June 30, 2020. January 21, 2020 NBFCs were permitted to pool gold jewellery from different branches in a district and auction it at any location within the district, if the first auction has failed. March 13, 2020 Guidelines related to specific prudential aspects of Ind AS applicable on Ind AS implementing NBFCs and ARCs were issued. April 17, 2020 Guidelines related to prudential norms on income recognition, asset classification and provisioning pertaining to advances - projects under implementation in commercial real estate (CRE) sectors as applicable to banks were extended, mutatis mutandis, to NBFCs. May 19, 2020 Master Direction on KYC Direction, 2016 was extended to housing finance companies (HFCs). June 17, 2020 A draft framework reviewing the extant regulations applicable to HFCs was released for public comments. 283ANNUAL REPORT Date of Policy Initiative Announcement June 24, 2020 All SCBs (excluding RRBs) and NBFCs (including HFCs) were advised to adhere to Fair Practices Code and Outsourcing Guidelines for loans sourced over digital lending platforms either through their own or under an outsourcing arrangement. Department of Supervision September 18, 2019 The guidelines on concurrent audit system in commercial banks were revised based on a review undertaken. December 31, 2019 • Comprehensive cyber security framework for primary UCBs was framed based on a graded approach. • Baseline cyber security controls were mandated for third party ATM switch application service providers through contractual agreements with supervised entities. March 16, 2020 In the context of COVID-19 outbreak, banks/financial institutions were advised regarding an indicative list of measures to be taken by them as part of their operational and business continuity plans. Consumer Education and Protection Department October 22, 2019 Internal Ombudsman Scheme was extended to non-bank system participants with more than one crore outstanding prepaid payment instruments (PPIs) as on March 31, 2019. April 3, 2020 The Consumer Education and Protection cells at the Reserve Bank’s regional offices and all subordinate offices under the centralised public grievance redress and monitoring system (CPGRAMS) were advised regarding the prompt handling of public grievances pertaining to COVID-19 in line with GoI guidelines. Internal Debt Management Department November 7, 2019 The ‘scheme for non-competitive bidding facility in the auction of state development loans' (SDLs) was revised to permit specified stock exchanges to act as aggregators/facilitators (in addition to scheduled banks and primary dealers) to aggregate the bids of their stockbrokers/other retail participants and submit a single consolidated bid under the non-competitive segment of primary auctions of SDLs. February 6, 2020 It was decided that the Reserve Bank will modify its government securities registry (the PDO-NDS system) to include constituent details in the constituent subsidiary general ledger (CSGL) accounts. This is expected to fuel interest of retail investors to invest in government securities. April 1, 2020 The ways and means advances (WMA) limit of state governments/union territories (UT) were increased by 30 per cent from the limit existing on March 31, 2020, to enable the state governments to tide over the fiscal stress caused by the outbreak of COVID-19 pandemic. The revised limits came into effect from April 1, 2020 and will be valid till September 30, 2020. April 7, 2020 In order to provide greater flexibility to state governments to tide over their cash-flow mismatches, the ‘overdraft (OD) scheme for state governments’ was reviewed and the number of days for which a State/UT can be in OD continuously, was increased from 14 working days to 21 working days. Further, the number of days for which a State/UT can be in OD in a quarter, was increased from 36 working days to 50 working days. April 13, 2020 With a view to facilitate availability of all the current operative instructions on the sovereign gold bond (SGB) scheme of the GoI at one place, consolidated procedural guidelines on the SGB scheme were issued. 284CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS Date of Policy Initiative Announcement April 17, 2020 With a view to provide greater comfort to state governments in undertaking containment and mitigation efforts for COVID-19, and to enable them to plan their market borrowings, the WMA limit of states was increased further, by 60 per cent over and above the level existing on March 31, 2020. The increased limit will be valid till September 30, 2020. April 20, 2020 To tide over the situation arising from the outbreak of COVID-19 pandemic, it was decided in consultation with the GoI, that the limit for WMA of GoI for the remaining part of first half of the financial year 2020-21 (April 2020 to September 2020) will be revised from `1,20,000 crore to `2,00,000 crore. May 22, 2020 In the light of the COVID-19 pandemic and the consequent stress created on state government finances, the ‘scheme for constitution and administration of consolidated sinking fund (CSF)’ was reviewed and the rules governing withdrawal from CSF were relaxed, while ensuring that a sizeable corpus is retained in the fund. June 26, 2020 A new Savings Bonds Scheme - Floating Rate Savings Bonds 2020 (Taxable) was announced to open for subscription from July 1, 2020. Department of Currency Management January 1, 2020 Launch of MANI (Mobile Aided Note Identifier), a mobile application for aiding visually impaired persons to identify the denomination of Indian banknotes. Department of Payment and Settlement Systems August 14, 2019 It was clarified that transactions failed due to technical reasons ascribable to the bank/service provider, invalid PIN/validations, etc., shall not form part of free transactions available to a customer. Non-cash withdrawal ‘on-us’ transactions shall also not form part of free transactions allowed at an ATM. August 21, 2019 • The availability of RTGS system was increased with operations commencing from 7:00 AM instead of 8:00 AM. • Processing of e-mandate on cards for recurring transactions (merchant payments) was permitted with additional factor of authentication (AFA) during e-mandate registration, modification and revocation, as also for the first transaction. August 30, 2019 The timeline for conversion of minimum detail prepaid payment instruments (PPIs) to KYC compliant PPIs was extended from 18 months to 24 months. September 16, 2019 Scope and coverage of Bharat Bill Payment Systems (BBPS) was enhanced to include all categories of billers who raise recurring bills (except prepaid recharges) as eligible participants, on a voluntary basis. September 20, 2019 Framework for turn around time (TAT) and customer compensation for failed transactions using authorised payment systems was prescribed. October 15, 2019 On-tap authorisation was allowed for Bharat bill payment operating units (BBPOU); trade receivables discounting system (TReDS) platforms; and white label ATM (WLA) operators. December 6, 2019 Modalities of the NEFT 24x7 system and timeline were advised to all member banks. December 16, 2019 Member banks were advised to waive charges for NEFT transactions initiated online by savings bank account holders. 285ANNUAL REPORT Date of Policy Initiative Announcement December 24, 2019 A new type of semi-closed PPI was introduced with loading only from a bank account, amount loaded during any month restricted to `10,000 and usage restricted to purchase of goods and services. December 30, 2019 All authorised payment systems and instruments were permitted for linking with FASTags under the national electronic toll collection (NETC) system. January 10, 2020 • Processing of e-mandate on unified payments interface (UPI) for recurring transactions (merchant payments) was permitted with AFA during e-mandate registration, modification and revocation, as also for the first transaction. • Amendment was made to the master circular to enable use of mobile banking for cross-border transactions. • Framework for imposing monetary penalty on authorised payment system operators/banks was revised. January 15, 2020 Guidelines were issued to improve user convenience and increase security of card transactions. January 31, 2020 Banks were permitted to provide facility of cash withdrawal at PoS terminals based on approval from their Board. March 16, 2020 Press release informing the general public about round the clock availability of payment systems that could be used for making payments from comfort of their home by avoiding social contact. March 17, 2020 Guidelines covering regulation of payment aggregators and payment gateways covering authorisation, capital requirements, governance, merchant on-boarding, settlement and escrow account management, dispute management framework, etc., were issued. March 24, 2020 Extension of timeline for compliance with various payment system requirements in view of the ongoing COVID-19 situation. June 4, 2020 Further extension in timeline provided to payment system operators to comply with various payment system requirements in view of the ongoing COVID-19 situation. June 22, 2020 Authorised payment system operators and participants were advised to undertake targeted multi- lingual campaigns to educate their users on safe and secure use of digital payments. 286CHCRHROONNOOLOLGYO OGN CYOV OID-1F9 MMEAASUJREOSR POLICY ANNEX II ANNOUNCEMENTS TO MITIGATE THE IMPACT OF COVID-19 Date of Policy Initiative Announcement A. Government of India (GoI) February 25, 2020 Export prohibition of specified personal protective equipment (PPE), including clothing and masks (NBR gloves and medical goggles), while exempting some items such as surgical blades, non-woven disposable shoe covers, breathing appliances used by airmen, firemen, divers and mountaineers, gas masks, tarpaulin, PVC conveyer belt and biopsy punch. March 3, 2020 Export restriction of certain active pharmaceutical ingredients (APIs) and formulations made from them such as paracetamol, acyclovir, vitamins B1, B6 and B12. March 14, 2020 Norms for assistance from State Disaster Response Fund (SDRF) were issued. March 19, 2020 Export prohibition of surgical masks/disposal masks (2/3 ply masks), ventilators (including any artificial respiratory apparatus or oxygen therapy or any other breathing appliances/devices), textile raw materials for masks and coveralls. March 24, 2020 • Relaxations in statutory and compliance matters were made such as extension of deadline for filing income tax/GST returns, payments under Vivad se Vishwas scheme and various corporate matters. • Bank charges for digital trade transactions for trade finance consumers were reduced. • Threshold of default under Section 4 of the Insolvency and Bankruptcy Code (IBC) was raised from `1 lakh to `1 crore to prevent triggering of insolvency proceedings against micro, small and medium enterprises (MSMEs) which are going through a phase of financial distress. • Waiver of charges for cash withdrawal from ATMs using debit cards for three months. • Export prohibition of sanitisers. March 26, 2020 Union Finance Minister announced `1.70 lakh crore relief package under Pradhan Mantri Garib (Pradhan Mantri Kalyan Yojana for the poor to help them fight the battle against COVID-19. Support measures include Garib Kalyan Yojana) the following: • 5 kg wheat/rice per member and 1 kg of pulses per family per month would be provided free of cost for 3 months. • Jan Dhan women account-holders would be given an ex-gratia of `500 per month for three months. • Direct benefit transfers would be made to poor Divyang, widows and senior citizens. • Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) wages would be increased by `20. • Gas cylinders would be provided free of cost for 3 months to poor families. • Medical insurance would be provided to health workers fighting COVID-19. • The first instalment of `2,000 due in 2020-21 under the Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) will be front-loaded in April 2020. • State governments will be directed to utilise funds available under District Mineral Fund for COVID-19 health response. 287ANNUAL REPORT Date of Policy Initiative Announcement • State governments will be directed to utilise the 'welfare fund for building and other construction workers' to provide support to construction workers. • Collateral free lending limit for women self-help groups (SHGs) would be increased from `10 lakh to `20 lakh. • Mandatory employee provident fund (EPF) contribution, on the part of both employee and employer, shall be borne by the government for three months for low wage earners in businesses with less than 100 workers. • EPF regulations will be amended to include pandemic as the reason to allow non-refundable advance of 75 per cent of the amount or three months of wages, whichever is lower, from accounts. March 28, 2020 Ministry of Agriculture and Farmer’s Welfare released a memorandum on extension of dates for conversion of agricultural gold loan and other agricultural accounts into KCC accounts in view of the health emergency due to COVID-19. March 30, 2020 • Department of Administrative Reforms and Public Grievances advised all Nodal Public Grievance Officers and Government of India departments of the procedure to redress grievances pertaining to COVID-19 expeditiously. • Benefit of 2 per cent interest subvention to banks and 3 per cent prompt repayment incentive for all farmers was extended up to May 31, 2020 for all crop loans up to `3 lakh given by banks, due between March 1 and May 31, 2020. March 31, 2020 • The Taxation and Other Laws (Relaxations of Certain Provisions) Ordinance 2020 provided relaxation in compliance and enforcement of a plethora of economic laws. • Foreign Trade Policy 2015-20 was extended for a year and other relaxations were granted in the field of exports and imports procedures. April 2, 2020 New features of e-NAM platform introduced to help fight against COVID-19. April 3, 2020 Advance release of central government’s first instalment of State Disaster Risk Management Fund for the year 2020-21, amounting to `11,092 crore, with a view to augment funds available with the state governments. April 4, 2020 • A slew of exemptions and relaxations were granted for agriculture and allied sectors with respect to the 21-day lockdown over the COVID-19 pandemic outbreak so as to ensure that the farmers do not suffer from any adverse fallout. Shops of agricultural machinery, its spare parts (including its supply chain) & repairs and shops for truck repairs on highways, preferably at fuel pumps, were allowed to remain open in order to facilitate transportation of farm produce. Besides, tea industry, including plantations were allowed to function with maximum of 50 per cent workers. • Under Ministry of Rural Development’s National Rural Livelihood Mission, face mask production was initiated by SHG members in 24 states covering 399 districts of the country. • Export prohibition of hydroxychloroquine and formulations made from it. April 8, 2020 • It was announced that all pending income-tax refunds up to `5 lakh, and all pending GST and customs refunds would be issued immediately, amounting to total refund of `18,000 crore. • Indian railways introduced unhindered services of time tabled parcel trains for nationwide transportation of essential commodities and other goods to boost the supply chain across the country. 288CHRONOLOGY ON COVID-19 MEASURES Date of Policy Initiative Announcement • NGOs permitted to buy foodgrains directly from food corporation of India (FCI) for relief operations at the open market scheme sale rates without going through the auction process. April 9, 2020 • `15,000 crore was sanctioned for ‘India COVID-19 Emergency Response and Health System Preparedness Package’. • Foodgrains to be provided to non-National Food Securities Act beneficiaries with ration cards issued by state governments. April 15, 2020 To facilitate transportation of perishable agricultural products, provisions were made for deployment of railways at fast speed, Kisan Rath mobile app and All India Agri Transport Call Centre. April 18, 2020 The extant Foreign Direct Investment (FDI) policy was amended for curbing opportunistic takeovers/ acquisitions of Indian companies due to COVID-19 pandemic. May 13, 2020 • `3 lakh crore collateral free loans with 100 per cent credit guarantee cover would be extended to (Atmanirbhar Bharat standard businesses/MSMEs. Abhiyan - Part I) • `20,000 crore subordinate debt with partial credit guarantee support would be extended to non- performing asset (NPA)/stressed MSMEs. • Fund of funds with corpus of `10,000 crore would be created for equity funding of MSMEs with growth potential and viability. • Definition of MSMEs would be revised to extend benefits to larger number of firms. • Global tenders for government procurement would be disallowed up to `200 crore to support Make in India and e-market linkages for MSMEs will be promoted. • MSME receivables from government/central public sector enterprises (CPSEs) will be released in 45 days. • `2,500 crore EPF support for eligible businesses and workers will be extended for 3 more months (June to August, 2020). • For other businesses and workers, EPF contribution will be reduced to 10 per cent each, for 3 months - providing liquidity of `6,750 crore. • `30,000 crore special liquidity scheme will be launched for non-banking financial companies (NBFCs)/housing finance companies (HFCs)/microfinance institutions (MFIs). • The partial credit guarantee scheme will be extended to cover borrowings of lower rated NBFCs, HFCs and MFIs. • Electricity distribution companies (DISCOMs) will be infused with `90,000 crore liquidity. • Central public sector generation companies will give rebate to DISCOMS, which shall be passed on to the final consumers (industries). • Measures to de-stress real estate and construction will be taken, contracts will be extended up to 6 months by central government agencies. • Tax deducted at source (TDS)/Tax collected at source (TCS) rates will be reduced by 25 per cent for remaining period of 2020-21. • Dates for filing of income tax return and payment under Vivad se Vishwas scheme were further extended. 289ANNUAL REPORT Date of Policy Initiative Announcement May 14, 2020 • Free foodgrains will be provided to migrants who are not beneficiaries of National Food Security (Atmanirbhar Bharat Act (NFSA)/State Card, for 2 months. 83 per cent of public distribution system (PDS) population Abhiyan - Part II) will be covered under ‘One Nation One Ration Card’ scheme by August 2020 for national portability of PDS benefits (100 per cent by March 2021). • Affordable rental housing complexes (ARHC) will be developed and incentivised for migrant workers/urban poor. • Interest subvention of 2 per cent will be provided for prompt payees of MUDRA-Shishu loans for a period of 12 months. • `5,000 crore special credit facility will be extended to street vendors. • Credit linked subsidy scheme for middle income group under Pradhan Mantri Awas Yojana (PMAY)-Urban will be extended up to March 2021 to provide `70,000 crore boost to housing sector. • Compensatory Afforestation Fund Management and Planning Authority (CAMPA) funds to be utilised for afforestation and plantation works to create job opportunities. • `30,000 crore additional emergency working capital funding will be provided to farmers through refinance support from NABARD. • `2 lakh crore concessional credit will be extended to 2.5 crore farmers through Kisan Credit Cards (KCCs). May 15, 2020 • Financing facility of `1,00,000 crore will be provided for funding agriculture infrastructure projects (Atmanirbhar Bharat at farm-gate and aggregation points. Abhiyan - Part III) • `10,000 crore scheme will be launched for formalisation of micro food enterprises (MFE). • `20,000 crore will be allocated for development of fisheries through Pradhan Mantri Matsya Sampada Yojana (PMMSY). • Animal Husbandry Infrastructure Development Fund of `15,000 crore will be set-up to support private investment in dairy. • Herbal cultivation and beekeeping initiatives will be promoted. • Operation Greens will be extended from Tomatoes, Onions and Potatoes (TOP) to all fruits and vegetables. • Essential Commodities Act, 1955 will be amended to deregulate certain food items. • Central law will be formulated for barrier free inter-state trade. • Facilitative legal framework that includes risk mitigation, assured returns, and quality standardisation will be framed to enable farmers to engage with processors/aggregators/large retailers. May 16, 2020 • Private sector participation in commercial coal production and exploration will be permitted; coal (Atmanirbhar Bharat gasification/liquefaction will be incentivised; ease of doing business measures will be undertaken; Abhiyan - Part IV) coal bed methane extraction rights will be auctioned from Coal India Limited’s (CIL’s) coal mines; concessions in commercial terms will be given to CIL’s consumers. 290CHRONOLOGY ON COVID-19 MEASURES Date of Policy Initiative Announcement • Infrastructure development of `50,000 crore will be undertaken in coal sector. • Seamless composite exploration-cum-mining-cum-production regime will be introduced for enhancing private investments in the mineral sector; 500 mining blocks will be auctioned; bauxite and coal mineral blocks will be jointly auctioned; distinction between captive and non-captive mines will be removed; Mineral Index for different minerals is being developed; stamp duty payable for mining lease will be rationalised. • A list of weapons/platforms with ban on imports will be notified; imported spares will be indigenised; Ordnance Factory Board will be corporatised; foreign direct investment limit in defence manufacturing under automatic route will be raised to 74 per cent; time-bound defence procurement process will be ushered in. • Air-space will be managed efficiently leading to reduction in flying cost by `1,000 crore per year; world-class airports will be developed through public-private partnership (PPP). • PPP will be encouraged for establishment of research reactors for production of medical isotopes, irradiation technology for food preservation; and Technology Development cum Incubation Centres will be set up. • Quantum of viability gap funding for private sector investment in social infrastructure projects will be enhanced with outlay of `8,100 crore. • New tariff policy for power sector will be released and power utilities in union territories will be privatised. • Private sector will be allowed to use indian space research organisation (ISRO) facilities to improve their capacities; liberal geo-spatial data policy will provide remote-sensing data to tech- entrepreneurs; planetary exploration and outer space travel will be opened for private sector. May 17, 2020 • Health and wellness centres in rural and urban areas will be ramped up; infectious diseases (Atmanirbhar Bharat hospital blocks will be set up in all districts; lab and surveillance network will be strengthened; and Abhiyan - Part V) National Digital Health Blueprint will be implemented under the National Digital Health Mission. • PM e-VIDYA programme, Manodarpan for psycho-social support, new National Curriculum and Pedagogical Framework, and National Foundational Literacy and Numeracy Mission will be launched. • Special insolvency resolution framework for MSMEs will be notified; fresh initiation of insolvency proceedings will be suspended up to one year; COVID-19 related debt will be excluded from the definition of “default” under IBC for the purpose of triggering insolvency proceedings; private companies which list non-convertible debentures (NCDs) on stock exchanges will not be regarded as listed; penalties for all defaults for small companies/one-person companies/producer companies/start-ups will be lowered. • Offences (involving minor technical and procedural defaults) under Companies Act will be decriminalised. • List of strategic sectors requiring presence of public sector enterprises (PSEs) in public interest would be notified; in strategic sectors, at least one enterprise will remain in the public sector but private sector will also be allowed; in other sectors, PSEs would be privatised; and to minimise wasteful administrative costs, number of enterprises in strategic sectors will be only one to four. 291ANNUAL REPORT Date of Policy Initiative Announcement • Borrowing limits of states will be increased from 3 per cent to 5 per cent of gross state domestic product (GSDP) for 2020-21, partly linked to specific reforms, leading to extra resources of `4.28 lakh crore. • MGNREGA allocation for 2020-21 will be increased by `40,000 crore. May 23, 2020 Notification on emergency credit line guarantee scheme (ECLGS) for mitigating the economic distress being faced by MSMEs by providing them additional funding of up to `3 lakh crore in the form of a fully guaranteed emergency credit line (GECL). The entire funding provided under GECL shall be provided with a 100 per cent credit guarantee by National Credit Guarantee Trustee Company to member lending institutions. Business enterprises/MSMEs with outstanding loan of up to `25 crore would be eligible under the scheme for a limited period. June 1, 2020 Ministry of Agriculture and Farmer’s Welfare released a memorandum on extension of repayment date up to August 31, 2020 for short-term loans up to `3 lakh advanced for agriculture including animal husbandry, dairy & fisheries by banks, which have become due or shall become due between March 1, 2020 and August 31, 2020 with continued benefit of 2 per cent interest subvention (IS) to banks and 3 per cent prompt repayment incentive (PRI) to farmers. June 12, 2020 GST relaxations will be provided to small taxpayers through reduction in late fee, and one time extension in period for seeking revocation of cancellation of registration. June 20, 2020 Under Garib Kalyan Rojgar Yojana, provision has been made for additional employment to the returnee migrant workers for 125 days in six states facing high reverse migration. June 24, 2020 Government of India introduced “Distressed Assets Fund – Subordinate Debt for Stressed MSMEs”. A credit guarantee scheme for subordinate debt (CGSSD) was launched under which guarantee coverage would be provided to SCBs which are member lending institutions (MLIs) of CGTMSE for facilitating support to stressed MSMEs. The objective of the credit guarantee scheme is to facilitate loans through banks to the promoters of stressed MSMEs for infusion as equity/quasi equity in the business. June 30, 2020 Free provision of foodgrains under Pradhan Mantri Garib Kalyan Anna Yojana was extended till November, 2020. B. Reserve Bank of India Monetary Policy Department February 6, 2020 Cash reserve ratio (CRR) exemption to scheduled commercial banks (SCBs) for a period of 5 years (from the date of origination of the loan or the tenure of the loan, whichever is earlier) for the amount equivalent to the incremental credit extended as retail loans for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs) during January 31, 2020 and July 31, 2020. March 27, 2020 • Monetary Policy Committee (MPC) advanced its April 2020 meeting to March and reduced the policy repo rate by 75 bps to 4.4 per cent. The reverse repo rate was reduced by 90 bps to 4.0 per cent creating an asymmetrical corridor1. 1 The purpose of this measure relating to reverse repo rate is to make it relatively unattractive for banks to passively deposit funds with the Reserve Bank and instead, to use these funds for on-lending to productive sectors of the economy. 292CHRONOLOGY ON COVID-19 MEASURES Date of Policy Initiative Announcement • CRR reduced2 by 100 bps to 3.0 per cent of NDTL effective March 28, 2020 for a period of one year ending on March 26, 2021. • Effective March 28, 2020, requirement of minimum daily CRR balance maintenance was reduced from 90 per cent to 80 per cent of the prescribed CRR. This dispensation, initially available up to June 26, was further extended up to September 25, 20203. • Increase in marginal standing facility (MSF) borrowing from 2 per cent of statutory liquidity ratio (SLR) to 3 per cent effective March 28, 20204. This measure was initially available up to June 30, 2020 and later extended up to September 30, 2020. April 17, 2020 • The reverse repo rate was reduced by 25 bps to 3.75 per cent. • Special refinance facilities for a total amount of `50,000 crore were provided to NABARD, SIDBI and NHB to enable them to meet sectoral credit needs5. May 22, 2020 • The June 2020 meeting of the MPC was brought forward and the policy repo rate was reduced by 40 bps to 4.0 per cent. • The reverse repo rate was reduced by 40 bps to 3.35 per cent. • A line of credit of `15,000 crore was extended to EXIM bank for a period of 90 days from the date of availment with rollover up to a maximum period of one year to enable it to avail a US dollar swap facility to meet its foreign exchange requirements. Financial Inclusion and Development Department March 31, 2020 Circular on short-term crop loans eligible for interest subvention scheme (ISS) and prompt repayment incentive (PRI) extending the timeline till June 30, 2020, for converting all short-term crop loans into KCC loans. June 4, 2020 Circular on ISS and PRI for short-term crop loans during the years 2018-19 and 2019-20 extending moratorium period till August 31, 2020. Financial Markets Regulation Department March 27, 2020 The timeline for implementation of legal entity identifier (LEI) in non-derivative markets was extended till September 30, 2020. April 3, 2020 followed The trading hours for various markets under the Reserve Bank’s regulation were revised to ensure by April 16 and April that market participants maintain adequate checks and controls while optimising their resources and 30, 2020 ensuring safety of personnel. May 18, 2020 The implementation date for the directions on hedging of foreign exchange risk (dated April 7, 2020) was deferred to September 1, 2020 from June 1, 2020. 2 This reduction in the CRR released primary liquidity of about `1,37,000 crore uniformly across the banking system in proportion to liabilities of constituents rather than in relation to holdings of excess SLR. 3 This measure was announced taking cognisance of hardships faced by banks in terms of social distancing of staff and consequent strains on reporting requirements. 4 Announced in view of the exceptionally high volatility in domestic financial markets, to provide comfort to the banking system. 5 This comprised `25,000 crore to NABARD for refinancing regional rural banks (RRBs), cooperative banks and micro finance institutions (MFIs); `15,000 crore to SIDBI for on-lending/refinancing; and `10,000 crore to NHB for supporting housing finance companies (HFCs). Advances under this facility were provided at the Reserve Bank’s policy repo rate. 293ANNUAL REPORT Date of Policy Initiative Announcement May 22, 2020 Foreign portfolio investors (FPIs) that were allotted investment limits under the voluntary retention route (VRR) scheme between January 24, 2020 and April 30, 2020 were allowed an additional time of three months to invest 75 per cent of their committed portfolio size (CPS). Financial Markets Operations Department February 6, 2020 Announcement of long-term repo operations (LTROs) to provide durable liquidity at policy repo rate for 1-3 years to augment credit flows to productive sectors. The first such LTRO was conducted on February 17, 2020. March 12, 2020 It was decided to undertake 6-month US Dollar sell/buy swap auctions to provide US Dollar liquidity to the foreign exchange market6. The first such auction was conducted on March 16, 2020. March 18, 2020 Net liquidity amounting to `1,63,444 crore was injected by the Reserve Bank from March 18, 2020 to June 2020 via open market operation (OMO) including the operations conducted on NDS-OM. The first OMO auction was conducted on March 18, 2020. March 23, 2020 Announcement of two variable rate term repos amounting to `1,00,000 crore. Subsequently, additional variable rate repo operations amounting to `75,000 crore were conducted on March 26 and March 31, 2020. March 24, 2020 The standing liquidity facility (SLF) available to standalone primary dealers (SPDs) was temporarily enhanced from `2,800 crore to `10,000 crore. March 27, 2020 Introduced targeted long-term repo operations (TLTROs) under which liquidity availed by banks was to be deployed in investment grade corporate bonds, commercial paper, and non-convertible debentures over and above the outstanding level of their investments in these bonds. The first such TLTRO operation was conducted on March 27, 2020. March 30, 2020 Extension of the window timings of fixed rate reverse repo and MSF operations as an interim measure so as to provide eligible market participants with greater flexibility in their liquidity management. April 17, 2020 It was decided to conduct Targeted Long-Term Repo Operations (TLTROs) 2.0 at the policy repo rate. Liquidity availed under the scheme by banks is to be deployed in investment grade corporate bonds, commercial paper, and non-convertible debentures with at least 50 per cent of the total amount availed going to small and mid-sized NBFCs and MFIs. Investments made under this facility would be classified as held to maturity (HTM) even in excess of 25 per cent of total investment permitted to be included in the HTM portfolio. Exposures under this facility would also not be reckoned under the large exposure framework. The first such TLTRO 2.0 auction was conducted on April 23, 2020. April 27, 2020 In order to ease the liquidity pressure on mutual funds, it was decided to open a special liquidity facility for mutual funds (SLF-MF). Liquidity availed under the scheme by banks is to be deployed exclusively for meeting needs of mutual funds. Liquidity availed under the facility would be classified as HTM even in excess of 25 per cent of total investment permitted to be included in the HTM portfolio. Exposures under this facility would also not be reckoned under the large exposure framework. The first such SLF-MF auction was conducted on April 27, 2020. April 30, 2020 It was decided to extend regulatory benefits announced under the SLF-MF scheme to all banks, irrespective of whether they avail funding from the Reserve Bank or deploy their own resources to meet liquidity requirements of mutual funds. 6 This measure was announced as financial markets worldwide were facing intense selling pressures on extreme risk aversion due to the spread of COVID-19 infections. 294CHRONOLOGY ON COVID-19 MEASURES Date of Policy Initiative Announcement Foreign Exchange Department April 1, 2020 The period of realisation and repatriation to India of the amount representing the full export value of goods or software or services exported was increased from nine months to fifteen months from the date of export, for the exports made up to or on July 31, 2020. April 3, 2020 It was decided, in consultation with the GoI, to permit receipt of foreign inward remittances from non- residents through the overseas exchange houses in favour of the ‘Prime Minister’s Citizen Assistance and Relief in Emergency Situations (PM-CARES) Fund’, subject to the condition that Authorised Dealers (AD) Category-I banks shall directly credit the remittances to the 'PM-CARES Fund' and maintain the full details of the non-residents sending the donations/contributions under rupee drawee arrangement (RDA). May 22, 2020 The time period for completion of remittances against normal imports, i.e., excluding import of gold/ diamonds and precious stones/ jewellery (except in cases where amounts are withheld towards guarantee of performance) was extended from six months to twelve months from the date of shipment for such imports made on or before July 31, 2020. Department of Regulation March 27, 2020 • Announcement of regulatory measures to mitigate the burden of debt servicing and to ensure the continuity of viable businesses. The salient features included rescheduling of payments for term loans and working capital facilities, easing of working capital financing and exemption from classification of special mention account (SMA) and NPA on account of implementation of the above measures. • The implementation of the last tranche of 0.625 per cent of capital conservation buffer (CCB) shall stand deferred from March 31, 2020 to September 30, 2020. Accordingly, minimum capital conservation ratios as applicable from March 31, 2018, will also apply for a further period of six months from March 31, 2020 till the CCB attains the level of 2.5 per cent on September 30, 2020. Further, the pre-specified trigger for loss absorption through conversion/write-down of additional tier 1 instruments (perpetual non-cumulative preference shares and perpetual debt instruments) shall remain at 5.5 per cent of risk weighted assets (RWAs) and will rise to 6.125 per cent of RWAs on September 30, 2020. • The implementation of net stable funding ratio (NSFR) was deferred by six months from April 1, 2020 to October 1, 2020. April 1, 2020 Based on the review and empirical analysis of counter cyclical capital buffer (CCyB) indicators, it was decided not to activate CCyB (framework for which was put in place in terms of guidelines issued on February 5, 2015, with pre-announcement of the decision to activate it as and when circumstances warranted) for a period of one year or earlier, as may be necessary. April 17, 2020 • It was decided that in respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day NPA norm shall exclude the moratorium period, i.e., there would be an asset classification standstill for all such accounts from March 1, 2020 to May 31, 2020. At the same time, with the objective of ensuring that banks maintain sufficient buffers and remain adequately provisioned to meet future challenges, they will have to maintain higher provision of 10 per cent on all such accounts under the standstill, spread over two quarters, i.e., March, 2020 and June, 2020. These provisions can be adjusted later on against the provisioning requirements for actual slippages in such accounts. 295ANNUAL REPORT Date of Policy Initiative Announcement • Under the Reserve Bank’s prudential framework of resolution of stressed assets dated June 7, 2019, in the case of large accounts under default, SCBs are currently required to hold an additional provision of 20 per cent if a resolution plan has not been implemented within 210 days from the date of such default. Recognising the challenges to resolution of stressed assets in the current volatile environment, it has been decided that the period for resolution plan shall be extended by 90 days. • With a view to conserve capital of banks to retain their capacity to support the economy and absorb losses in an environment of heightened uncertainty, it was decided that, SCBs shall not make any further dividend payouts from profits pertaining to the financial year ended March 31, 2020 until further instructions. This restriction shall be reviewed on the basis of the financial position of banks for the quarter ending September 30, 2020. • In order to ease the liquidity position at the level of individual institutions, the LCR requirement for SCBs was brought down from 100 per cent to 80 per cent with immediate effect. The requirement shall be gradually restored back in two phases – 90 per cent by October 1, 2020 and 100 per cent by April 1, 2021. April 29, 2020 In order to mitigate the difficulties in timely submission of various regulatory returns, due to disruptions on account of COVID-19 pandemic, the timelines for the submission were extended for the regulated entities, permitting a delay of up to 30 days from the due date, which will be applicable to regulatory returns required to be submitted up to June 30, 2020. However, no extension is permitted for submission of statutory returns, i.e. returns prescribed under the Banking Regulation Act 1949, RBI Act 1934 or any other Act (for instance, returns related to CRR/SLR). May 13, 2020 Interest equalisation scheme on pre and post shipment rupee export credit was extended by GoI for one year, i.e., up to March 31, 2021, with same scope and coverage and all extant operational instructions issued by the Reserve Bank under the said captioned scheme shall continue to remain in force up to March 31, 2021. May 22, 2020 The bank rate was revised downwards by 40 bps from 4.65 per cent to 4.25 per cent with effect from May 22, 2020. Accordingly, all penal interest rates on shortfall in reserve requirements, which are specifically linked to the bank rate, also stand revised as bank rate plus 3.0 percentage points (7.25 per cent from the earlier 7.65 per cent) or bank rate plus 5.0 percentage points (9.25 per cent instead of the earlier rate of 9.65 per cent), depending on the duration of the shortfalls. May 23, 2020 • With a view to facilitate greater flow of resources to corporates that faced difficulties in raising funds from the capital market and predominantly dependent on bank funding, caused by sudden market uncertainties, a bank’s exposure under the Large Exposure Framework, to a group of connected counterparties was increased from 25 per cent to 30 per cent of the eligible capital base of the bank. The increased limit will be applicable up to June 30, 2021. • Taking forward the COVID-19 regulatory package released in March and April 2020, additional measures were announced, providing relaxations in repayment pressures and improving access to working capital by mitigating the burden of debt servicing, for preventing the transmission of financial stress to the real economy, and ensuring the continuity of viable businesses and households on continuous economic disruption due to extension of lockdown. • Further extension of the resolution timelines, prescribed in the prudential framework for resolution of stressed assets dated June 7, 2019, was provided after a review in continuation of the earlier instructions of April 2020, on account of continued challenges to resolution of stressed assets in a volatile environment. This was applicable in respect of accounts which were within and past the review period as on March 1, 2020, subject to conditions. 296CHRONOLOGY ON COVID-19 MEASURES Date of Policy Initiative Announcement • To alleviate genuine difficulties being faced by exporters in their production and realisation cycles, the maximum permissible period of pre-shipment and post-shipment export credit sanctioned by banks was increased from one year to 15 months, for disbursements made up to July 31, 2020. This was in line with the permission already granted for increase in the period of realisation and repatriation of the export proceeds to India from nine months to 15 months from the date of export in respect of exports made up to July 31, 2020. June 21, 2020 As credit facilities to MSME borrowers, extended under the emergency credit line guarantee scheme of GoI guaranteed by national credit guarantee trustee company (NCGTC), are backed by an unconditional and irrevocable guarantee provided by the GoI, member lending institutions, viz., SCBs (including scheduled RRBs), NBFCs (including HFCs as eligible under the scheme) and AIFIs, were permitted to assign zero per cent risk weight on the credit facilities extended under the scheme to the extent of guarantee coverage. Department of Supervision March 16, 2020 Banks and financial institutions were advised regarding an indicative list of measures to be taken by them as part of their operational and business continuity plans. Consumer Education and Protection Department April 3, 2020 The consumer education and protection cells at the Reserve Bank’s ROs and all subordinate offices under the centralised public grievance redress and monitoring system (CPGRAMS) were advised regarding the prompt handling of public grievances pertaining to COVID-19 in line with GoI guidelines. Internal Debt Management Department April 1, 2020 The WMA limit of state governments/union territories (UTs) were increased by 30 per cent from the limit existing on March 31, 2020, to enable the state governments to tide over the fiscal stress. The revised limits came into effect from April 1, 2020 and will be valid till September 30, 2020. April 7, 2020 In order to provide greater flexibility to state governments to tide over their cash-flow mismatches, the ‘overdraft (OD) scheme for state governments’ was reviewed and the number of days for which a State/UT can be in OD continuously, was increased from 14 working days to 21 working days. Further, the number of days for which a State/ UT can be in OD in a quarter, was increased from 36 working days to 50 working days. April 17, 2020 With a view to provide greater comfort to state governments in undertaking containment and mitigation efforts, and to enable them to plan their market borrowings, the WMA limit of states was increased further, by 60 per cent over and above the level existing on March 31, 2020. The increased limit would be valid till September 30, 2020. April 20, 2020 It was decided in consultation with the GoI, that the limit for WMA of GoI for the remaining part of first half of the financial year 2020-21 (April 2020 to September 2020) will be revised from `1,20,000 crore to `2,00,000 crore. May 22, 2020 The ‘scheme for constitution and administration of consolidated sinking fund (CSF)’ was reviewed and the rules governing withdrawal from CSF were relaxed, while ensuring that a sizeable corpus is retained in the Fund. 297ANNUAL REPORT Date of Policy Initiative Announcement Department of Payment and Settlement Systems March 16, 2020 Press release informing the general public about round the clock availability of payment systems that could be used for making payments from comfort of their home by avoiding social contact. March 24, 2020 Extension of timeline for compliance with various payment system requirements. June 4, 2020 Further extension in timeline provided to payment system operators to comply with various payment system requirements. June 22, 2020 Authorised payment system operators and participants were advised to undertake targeted multi- lingual campaigns to educate their users on safe and secure use of digital payments. 298APPENDIX TABLES APPENDIX TABLE 1: MACROECONOMIC AND FINANCIAL INDICATORS Item Average Average 2017-18 2018-19 2019-20 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)* 7.9 6.7 7.0 6.1 4.2 I.2 Real GVA at basic prices (% change)* 7.7 6.3 6.6 6.0 3.9 I.3 Foodgrains Production (Million tonnes) 213.6 248.8 285.0 285.2 296.7 I.4 a) Food Stocks (Million tonnes at end-March) 18.6 50.0 43.3 72.7 74.0 b) Procurement 39.4 61.3 68.2 80.4 73.6 c) Off-take 41.5 56.9 60.3 65.9 62.2 I.5 Index of Industrial Production (% change) 11.2 4.6 4.4 3.8 -0.8 I.6 Index of Eight Core Industries (% change) 5.9 4.9 4.3 4.4 0.4 I.7 Gross Domestic Saving Rate (% of GNDI at current prices)* 33.6 33.9 32.0 29.7 _ I.8 Gross Domestic Investment Rate (% of GDP at current prices)* 35.2 38.0 34.2 32.2 _ II. Prices II.1 Consumer Price Index (CPI) Combined (average % change) _ _ 3.6 3.4 4.8 II.2 CPI- Industrial Workers (average % change) 5.0 10.3 3.1 5.4 7.5 II.3 Wholesale Price Index (average % change)# 5.5 7.1 2.9 4.3 1.7 III. Money and Credit III.1 Reserve Money (% change) 20.4 12.1 27.3 14.5 9.4 III.2 Broad Money (M) (% change) 18.6 14.7 9.2 10.5 8.9 3 III.3 a) Aggregate Deposits of Scheduled Commercial Banks (% change) 20.2 15.0 6.2 10.0 7.9 b) Bank Credit of Scheduled Commercial Banks (% change) 26.7 16.7 10.0 13.3 6.1 IV. Financial Markets IV.1 Interest rates (%) a) Call/Notice Money rate 5.6 7.2 5.9 6.3 5.4 b) 10 year G-Sec yield 7.0 8.0 7.0 7.7 6.7 c) 91-Days T-bill yield - - 6.2 6.6 5.5 d) Weighted Average cost of Central Government Borrowings - - 7.0 7.8 6.9 e) Commercial Paper 7.7 8.4 7.0 7.6 6.6 f) Certificate of Deposits## 8.9 8.2 6.6 7.3 5.9 IV.2 Liquidity (` lakh crore ) a) LAF Outstanding~ - - -0.6 -1.5 2.6 b) MSS Outstanding~~ - - 0.0 0.0 0.0 c) Average Daily Call Money Market Turnover 0.2 0.3 0.3 0.4 0.3 d) Average Daily G-Sec Market Turnover### 0.1 0.2 0.5 0.4 0.6 e) Variable Rate Repo$ - - 2.6 1.6 0.9 f) Variable Rate Reverse Repo$ - - 0.2 0.0 1.2 g) MSF$ - - 0.53 0.94 0.02 V. Government Finances& V.1 Central Government Finances (% of GDP) a) Revenue Receipts 10.0 9.2 8.4 8.2 8.3 b) Capital Outlay 1.6 1.6 1.4 1.5 1.5 c) Total Expenditure 14.9 15.0 12.5 12.2 13.2 d) Gross Fiscal Deficit 3.7 5.4 3.5 3.4 4.6 V.2 State Government Finances&& a) Revenue Deficit (% of GDP) 0.4 0.0 0.1 0.1 0.6 b) Gross Fiscal Deficit (% of GDP) 2.7 2.2 2.4 2.1 2.8 c) Primary Deficit (% of GDP) 0.3 0.6 0.7 0.6 1.3 299APPENDIX TABLES APPENDIX TABLE 1: MACROECONOMIC AND FINANCIAL INDICATORS (Concld.) Item Average Average 2017-18 2018-19 2019-20 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 10.3 9.1 -5.0 b) Merchandise Imports (% change) 32.3 9.7 19.5 10.3 -7.6 c) Trade Balance/GDP (%) -5.5 -9.1 -6.0 -6.6 -5.5 d) Invisible Balance/GDP (%) 5.2 5.8 4.2 4.5 4.6 e) Current Account Balance/GDP (%) -0.3 -3.3 -1.8 -2.1 -0.9 f) Net Capital Flows/GDP (%) 4.7 3.8 3.4 2.0 2.9 g) Reserve Changes [(BoP basis) (US$ billion) [(Increase (-)/ -40.3 -6.6 -43.6 3.3 -59.5 Decrease (+)] VI.2 External Debt Indicators a) External Debt Stock (US$ billion) 156.5 359.0 529.3 543.1 558.5 b) Debt-GDP Ratio (%) 17.8 20.9 20.1 19.8 20.6 c) Import cover of Reserves (in Months) 14.0 8.5 10.9 9.6 12.0 d) Short-term Debt to Total Debt (%) 13.6 21.3 19.3 20.0 19.1 e) Debt Service Ratio (%) 8.3 5.6 7.5 6.4 6.5 f) Reserves to Debt (%) 113.7 84.8 80.2 76.0 85.5 VI.3 Openness Indicators (%) a) Export plus Imports of Goods/GDP 30.7 41.0 29.3 31.5 27.8 b) Export plus Imports of Goods & Services/GDP 41.3 53.2 41.1 43.8 39.7 c) Current Receipts plus Current Payments/GDP 47.1 59.4 46.5 49.6 45.6 d) Gross Capital Inflows plus Outflows/GDP 37.3 50.4 45.1 38.0 39.6 e) Current Receipts & Payments plus Capital Receipts & 84.4 109.8 91.6 87.5 85.3 Payments/GDP VI.4 Exchange Rate Indicators a) Exchange Rate (Rupee/US Dollar) End of Period 43.1 51.1 65.0 69.2 75.4 Average 44.1 51.2 64.5 69.9 70.9 b) 36 - Currency REER (% change) 3.1^ 0.8 4.5 -4.8 2.4 c) 36 - Currency NEER (% change) 1.7^ -4.9 3.1 -5.6 0.9 d) 6 - Currency REER (% change) 4.4^ 1.9 3.2 -5.8 3.3 e) 6 - Currency NEER (% change) 1.6^ -5.4 1.6 -7.1 0.8 - : Not Available. * : Data are at 2011-12 base year series. # : 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 2019-20 are Provisional Accounts. && : Data upto 2017-18 pertains to all States and Union Territories. From 2018-19 onwards, data are provisional and pertains to 25 States only. ^ : Average of period 2005-06 to 2007-08. Note : Real Effective Exchange Rate (REER) are based on CPI (combined). Source : RBI, National Statistical Office, Ministry of Agriculture & Farmers Welfare, Ministry of Commerce and Industry, Food Corporation of India (FCI), Labour Bureau and Budget documents of the central and state governments. 300APPENDIX TABLES APPENDIX TABLE 2 : GROWTH RATES AND COMPOSITION OF REAL GROSS DOMESTIC PRODUCT (At 2011-12 Prices) (Per cent) Sector Growth Rate Share Average 2017-18 2018-19 2019-20 2017-18 2018-19 2019-20 2013-14 to 2019-20 1 2 3 4 5 6 7 8 Expenditure Side GDP 1. Private Final Consumption Expenditure 7.0 7.0 7.2 5.3 56.0 56.6 57.2 2. Government Final Consumption Expenditure 7.9 11.8 10.1 11.8 10.2 10.6 11.3 3. Gross Fixed Capital Formation 4.8 7.2 9.8 -2.8 30.8 31.9 29.8 4. Change in Stocks 16.4 76.0 22.5 1.9 1.6 1.9 1.9 5. Valuables -1.0 27.2 -11.9 13.5 1.5 1.2 1.3 6. Net Exports -17.1 -257.7 11.8 29.2 -3.6 -3.0 -2.0 a) Exports 3.2 4.6 12.3 -3.6 19.7 20.9 19.3 b) Less Imports 1.5 17.4 8.6 -6.8 23.4 23.9 21.4 7. Discrepancies -58.4 65.1 -73.9 -25.6 3.5 0.9 0.6 8. GDP 6.8 7.0 6.1 4.2 100.0 100.0 100.0 GVA at Basic Prices (Supply Side) 1. Agriculture, forestry and fishing 3.6 5.9 2.4 4.0 15.1 14.6 14.6 2. Industry 6.4 6.8 4.5 0.8 23.4 23.1 22.4 of which : a) Mining and quarrying 4.6 4.9 -5.8 3.1 3.0 2.7 2.7 b) Manufacturing 6.6 6.6 5.7 0.0 18.1 18.1 17.4 c) Electricity, gas, water supply and other utility 7.1 11.2 8.2 4.1 2.3 2.3 2.3 services 3. Services 7.4 6.7 7.5 5.0 61.4 62.3 62.9 of which : a) Construction 4.1 5.0 6.1 1.3 8.0 8.0 7.8 b) Trade, hotels, transport, communication and 7.5 7.6 7.7 3.6 19.1 19.4 19.4 services related to broadcasting c) Financial, real estate and professional services 8.2 4.7 6.8 4.6 21.6 21.8 21.9 d) Public Administration, defence and other services 8.1 9.9 9.4 10.0 12.7 13.1 13.9 4. GVA at basic prices 6.5 6.6 6.0 3.9 100.0 100.0 100.0 Source: National Statistical Office (NSO). 301APPENDIX TABLES APPENDIX TABLE 3: GROSS SAVINGS (Per cent of GNDI) Item 2015-16 2016-17 2017-18 2018-19 1 2 3 4 5 I. Gross Savings 30.5 30.9 32.0 29.7 1.1 Non-financial corporations 12.0 11.6 11.9 10.7 1.1.1 Public non-financial corporations 1.1 1.1 1.4 1.3 1.1.2 Private non-financial corporations 10.9 10.5 10.6 9.4 1.2 Financial corporations 2.1 2.2 2.2 1.8 1.2.1 Public financial corporations 1.3 1.4 1.4 0.9 1.2.2 Private financial corporations 0.8 0.9 0.9 0.9 1.3 General Government -1.2 -0.8 -1.1 -0.8 1.4 Household sector 17.6 17.9 18.9 17.9 1.4.1 Net financial saving 7.9 7.3 7.6 6.4 Memo: Gross financial saving 10.7 10.4 11.9 10.4 1.4.2 Saving in physical assets 9.4 10.2 11.0 11.3 1.4.3 Saving in the form of valuables 0.3 0.3 0.2 0.2 GNDI : Gross national disposable income. Note : Net financial saving of the household sector is obtained as the difference between gross financial savings and financial liabilities during the year. Source : National Statistical Office (NSO). 302APPENDIX TABLES APPENDIX TABLE 4: INFLATION, MONEY AND CREDIT (Per cent) Inflation Consumer Price Index (All India)# Rural Urban Combined 2017-18 2018-19 2019-20 2017-18 2018-19 2019-20 2017-18 2018-19 2019-20 1 2 3 4 5 6 7 8 9 10 General Index (All Groups) 3.6 3.0 4.3 3.6 3.9 5.4 3.6 3.4 4.8 Food and beverages 2.4 0.7 4.8 1.8 0.7 8.1 2.2 0.7 6.0 Housing … … … 6.5 6.7 4.5 6.5 6.7 4.5 Fuel and light 6.5 6.0 1.1 5.6 5.2 1.7 6.2 5.7 1.3 Miscellaneous 4.3 6.3 5.1 3.1 5.4 3.7 3.8 5.8 4.4 Excluding Food and Fuel 4.7 5.7 4.1 4.6 5.9 4.0 4.6 5.8 4.0 Other Price Indices 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 1. Wholesale Price Index (2011-12=100)* All Commodities 8.9 7.4 5.2 1.3 -3.7 1.7 2.9 4.3 1.7 Primary Articles 9.8 9.8 9.8 2.2 -0.4 3.4 1.4 2.7 6.8 of which : Food Articles 7.3 9.9 12.3 5.6 2.6 4.0 2.1 0.3 8.4 Fuel and Power 14.0 10.3 7.1 -6.1 -19.7 -0.3 8.2 11.5 -1.8 Manufactured Products 7.3 5.4 3.0 2.6 -1.8 1.3 2.7 3.7 0.3 Non-Food Manufactured Products 7.3 4.9 2.7 2.7 -1.8 -0.1 3.0 4.2 -0.4 2. CPI- Industrial Workers (IW) (2001=100) 8.4 10.4 9.7 6.3 5.6 4.1 3.1 5.4 7.5 of which : CPI- IW Food 6.3 11.9 12.3 6.5 6.1 4.4 1.5 0.6 7.4 3. CPI- Agricultural Labourers (1986-87=100) 8.2 10.0 11.6 6.6 4.4 4.2 2.2 2.1 8.0 4. CPI- Rural Labourers (1986-87=100) 8.3 10.2 11.5 6.9 4.6 4.2 2.3 2.2 7.7 Money and Credit 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17^ 2017-18 2018-19 2019-20 Reserve Money (RM) 3.6 6.2 14.4 11.3 13.1 -12.9 27.3 14.5 9.4 Currency in Circulation 12.4 11.6 9.2 11.3 14.9 -19.7 37.0 16.8 14.5 Bankers’ Deposits with RBI -15.9 -10.0 34.0 8.3 7.8 8.4 3.9 6.4 -9.6 Currency-GDP Ratio$ 12.2 12.0 11.6 11.6 12.1 8.7 10.7 11.3 12.0 Narrow Money (M1) 6.0 9.2 8.5 11.3 13.5 -3.9 21.8 13.6 11.2 Broad Money (M3) 13.5 13.6 13.4 10.9 10.1 6.9 9.2 10.5 8.9 Currency-Deposit Ratio 16.1 15.7 15.1 15.2 16.0 11.0 14.4 15.4 16.3 Money Multiplier (Ratio)## 5.2 5.5 5.5 5.5 5.3 6.7 5.8 5.6 5.5 GDP-M Ratio$## 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 3 Scheduled Commercial Banks Aggregate Deposits 13.5 14.2 14.1 10.7 9.3 11.3 6.2 10.0 7.9 Bank Credit 17.0 14.1 13.9 9.0 10.9 4.5 10.0 13.3 6.1 Non-food Credit 16.8 14.0 14.2 9.3 10.9 5.2 10.2 13.4 6.1 Credit-Deposit Ratio 78.0 77.9 77.8 76.6 77.7 72.9 75.5 77.7 76.4 Credit-GDP Ratio$ 52.8 52.9 53.4 52.4 52.6 50.9 50.4 51.5 51.0 # : Base for Consumer Price Index (All India) is 2012=100. … : CPI Rural for Housing is not compiled. * : Base for WPI is 2004-05=100 for the period 2011-12 to 2012-13 and 2011-12=100 for the period 2013-14 to 2019-20. ## : Not expressed in per cent. ^ : March 31, 2017 over April 1, 2016 barring RM and its components. $ : GDP data from 2011-12 onwards are based on new series i.e., base: 2011-12. GDP refers to GDP at Current Market Prices. Note : Data refer to y-o-y change in per cent unless specified otherwise. Source: RBI, NSO, Labour Bureau and Ministry of Commerce and Industry. 303APPENDIX TABLES APPENDIX TABLE 5: CAPITAL MARKET - PRIMARY AND SECONDARY (Amount in ` lakh crore) Item 2018-19 2019-20 P Number Amount Number Amount 1 2 3 4 5 I. PRIMARY MARKET A. Prospectus and Rights Issues 1. Private Sector (a+b) 154 0.5 106 0.8 a) Financial 31 0.4 38 0.2 b) Non-Financial 123 0.1 68 0.6 2. Public Sector (a+b+c) 4 0.0 3 0.1 a) Public Sector Undertakings 4 0.0 2 0.0 b) Government Companies … … … … c) Banks/Financial Institutions … … 1 0.1 3. Total (1+2, i+ii, a+b) 158 0.5 109 0.9 Instrument Type (i) Equity 133 0.2 75 0.8 (ii) Debt 25 0.4 34 0.1 Issuer Type (a) IPOs 123 0.2 58 0.2 (b) Listed 35 0.4 51 0.7 B. Euro Issues (ADRs and GDRs) 1 0.1 … … C. Private Placement 1. Private Sector (a+b) 2,162 3.9 1,467 3.3 a) Financial 1,911 2.7 1,279 2.3 b) Non-Financial 251 1.2 188 1.0 2. Public Sector (a+b) 187 2.5 244 3.5 a) Financial 150 2.1 157 2.2 b) Non-Financial 37 0.4 87 1.4 3. Total (1+2, i+ii) 2,349 6.4 1,711 6.8 (i) Equity 14 0.1 13 0.5 (ii) Debt 2,335 6.3 1,698 6.3 D. Qualified Institutional Placement 14 0.1 13 0.5 E. Mutual Funds Mobilisation (Net)# 1.1 0.9 1. Private Sector 0.6 0.2 2. Public Sector 0.5 0.6 II. SECONDARY MARKET BSE BSE Sensex: End-Period 38,672.9 29,468.5 Period Average 35,971.8 38,756.7 Price Earning Ratio@ 28.0 17.8 Market Capitalisation to GDP ratio (%) 79.6 55.8 Turnover Cash Segment 7.8 6.6 Turnover Derivatives Segment 0.0 2.6 NSE S&P CNX Nifty: End-Period 11,623.9 8,597.8 Period Average 10,859.5 11,488.0 Price Earning Ratio@ 29.0 19.4 Market Capitalisation to GDP ratio (%) 78.7 55.3 Turnover Cash Segment 79.5 90.0 Turnover Derivatives Segment 2,376.0 3,445.3 …: Nil. P: Provisional (for 2019-20). #: Net of redemptions. @: As at end of the period. Source: SEBI, NSE, BSE and various merchant bankers. 304APPENDIX TABLES APPENDIX TABLE 6: KEY FISCAL INDICATORS (As per cent of 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 4.0 3.2 -0.5 7.7 54.6 60.6 1995-96 0.8 2.5 -1.7 5.0 50.3 58.3 2000-01 0.9 4.0 -0.7 5.6 54.6 60.4 2009-10 3.2 5.3 2.0 6.6 55.4 57.3 2010-11 1.8 3.3 0.2 4.9 51.6 53.2 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 50.1 51.4 2015-16 0.7 2.5 -0.7 3.9 50.1 51.5 2016-17 0.4 2.1 -1.1 3.5 48.4 49.5 2017-18 0.4 2.6 -0.5 3.5 48.3 49.7 2018-19 0.4 2.4 -0.7 3.4 48.4 49.6 2019-20 (RE)# 0.7 2.5 -0.6 3.8 49.9 51.4 2019-20 (PA) 1.6 3.3 0.3 4.6 ... ... 2020-21 (BE) 0.4 2.7 -0.4 3.5 49.5 50.7 States* 1990-91 1.8 0.9 -0.6 3.3 22.2 22.2 1995-96 0.8 0.7 -1.1 2.6 20.8 20.8 2000-01 1.8 2.5 0.1 4.2 28.1 28.1 2009-10 1.2 0.4 -1.4 3.0 26.4 26.4 2010-11 0.4 -0.2 -1.8 2.1 24.4 24.4 2011-12 0.4 -0.3 -1.9 2.0 23.2 23.2 2012-13 0.4 -0.3 -1.8 2.0 22.6 22.6 2013-14 0.7 0.0 -1.5 2.2 22.3 22.3 2014-15 1.1 0.3 -1.2 2.6 22.0 22.0 2015-16 1.5 0.0 -1.6 3.0 23.7 23.7 2016-17 1.8 0.2 -1.4 3.5 25.1 25.1 2017-18 0.7 0.1 -1.6 2.4 25.1 25.1 2018-19 0.6 0.1 -1.4 2.1 22.3 22.3 2019-20 (RE) 1.3 0.6 -0.9 2.8 23.0 23.1 2020-21 (BE) 0.8 0.0 -1.5 2.3 23.3 23.3 Combined* 1990-91 5.0 4.1 -0.2 9.3 64.0 70.1 1995-96 1.5 3.1 -1.8 6.4 60.4 68.5 2000-01 3.5 6.5 0.7 9.3 69.2 75.0 2009-10 4.6 5.8 0.9 9.5 70.0 71.8 2010-11 2.4 3.3 -1.3 7.0 65.3 66.9 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 65.2 66.6 2015-16 2.2 2.5 -2.2 6.9 67.1 68.5 2016-17 2.2 2.3 -2.4 6.9 67.6 68.8 2017-18 1.1 2.7 -2.1 5.8 68.4 69.8 2018-19 0.9 2.5 -2.1 5.4 66.2 67.5 2019-20 (RE) 1.9 3.1 -1.5 6.5 69.0 70.4 2020-21 (BE) 1.1 2.7 -1.9 5.8 69.2 70.5 ... : 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 upto 2017-18 pertains to all States and Union Territories. From 2018-19 onwards, data are provisional and pertains to 25 States only. # : Going by the principle of using latest GDP data for any year, GDP used for 2019-20 (RE) is the latest available Provisional Estimates. In view of this, the fiscal indicators as per cent to GDP given in this Table may at times marginally vary from those reported in the Union Budget documents. 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 figures used in this table are on 2011-12 base, which are the latest available estimates. Source : Budget documents of central and state governments, Status paper on government debt, 2018-19 and Quarterly report on public debt management (Jan-March, 2020). 305APPENDIX TABLES APPENDIX TABLE 7: COMBINED RECEIPTS AND DISBURSEMENTS OF THE CENTRAL AND STATE GOVERNMENTS (Amount in ` thousand crore) Item 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 (RE) (BE) 1 2 3 4 5 6 7 1 Total Disbursements 3,760.6 4,266.0 4,515.9 4,592.8 5,384.0 5,891.7 1.1 Developmental 2,201.3 2,537.9 2,635.1 2,561.8 3,136.6 3,399.6 1.1.1 Revenue 1,668.3 1,878.4 2,029.0 1,969.2 2,430.0 2,600.3 1.1.2 Capital 412.1 501.2 519.4 536.1 631.8 701.2 1.1.3 Loans 121.0 158.3 86.7 56.6 74.8 98.1 1.2 Non-Developmental 1,510.8 1,672.7 1,812.5 1,961.3 2,163.6 2,405.7 1.2.1 Revenue 1,379.7 1,555.2 1,741.4 1,851.4 2,049.1 2,283.4 1.2.1.1 Interest Payments 648.1 724.5 814.8 857.0 931.4 1,043.2 1.2.2 Capital 127.3 115.8 69.4 108.9 113.3 121.0 1.2.3 Loans 3.8 1.6 1.7 1.0 1.2 1.4 1.3 Others 48.5 55.4 68.4 69.6 83.9 86.4 2 Total Receipts 3,778.1 4,288.4 4,528.4 4,575.7 5,286.3 5,953.5 2.1 Revenue Receipts 2,748.4 3,132.2 3,376.4 3,422.2 3,938.3 4,364.5 2.1.1 Tax Receipts 2,297.1 2,622.2 2,978.1 3,009.9 3,282.5 3,670.4 2.1.1.1 Taxes on commodities and services 1,441.0 1,652.4 1,853.9 1,844.7 1,970.0 2,232.6 2.1.1.2 Taxes on Income and Property 852.3 965.6 1,121.2 1,162.4 1,308.3 1,433.3 2.1.1.3 Taxes of Union Territories 3.9 4.2 3.1 2.8 4.2 4.5 (Without Legislature) 2.1.2 Non-Tax Receipts 451.3 510.1 398.3 412.3 655.8 694.1 2.1.2.1 Interest Receipts 35.8 33.2 34.2 35.1 32.6 30.2 2.2 Non-debt Capital Receipts 59.8 69.1 142.4 138.2 124.1 230.4 2.2.1 Recovery of Loans & Advances 16.6 20.9 42.2 42.6 57.1 16.5 2.2.2 Disinvestment proceeds 43.3 48.1 100.2 95.6 67.0 213.9 3 Gross Fiscal Deficit [ 1 - ( 2.1 + 2.2 ) ] 952.4 1,064.7 997.1 1,032.4 1,321.7 1,296.8 3A Sources of Financing: Institution-wise 3A.1 Domestic Financing 939.7 1,046.7 989.2 1,026.9 1,316.7 1,292.2 3A.1.1 Net Bank Credit to Government 231.1 617.1 144.8 387.1 518.1 … 3A.1.1.1 Net RBI Credit to Government 60.5 195.8 -144.8 326.0 190.2 … 3A.1.2 Non-Bank Credit to Government 708.6 429.6 844.4 639.8 798.6 … 3A.2 External Financing 12.8 18.0 7.9 5.5 4.9 4.6 3B Sources of Financing: Instrument-wise 3B.1 Domestic Financing 939.7 1,046.7 989.2 1,026.9 1,316.7 1,292.2 3B.1.1 Market Borrowings (net) 673.3 689.8 794.9 750.8 904.0 1,016.9 3B.1.2 Small Savings (net) -78.5 -105.0 -163.2 -198.6 -311.5 -286.6 3B.1.3 State Provident Funds (net) 35.3 45.7 42.4 40.9 35.8 37.5 3B.1.4 Reserve Funds -3.3 -6.4 18.4 -18.3 -0.2 3.0 3B.1.5 Deposits and Advances 13.5 17.8 25.1 66.3 32.9 36.0 3B.1.6 Cash Balances -17.4 -22.5 -12.5 17.1 97.8 -61.8 3B.1.7 Others 316.9 427.3 284.1 368.7 558.0 547.1 3B.2 External Financing 12.8 18.0 7.9 5.5 4.9 4.6 4 Total Disbursements as per cent of GDP 27.3 27.7 26.4 24.2 26.5 26.2 5 Total Receipts as per cent of GDP 27.4 27.9 26.5 24.1 26.0 26.5 6 Revenue Receipts as per cent of GDP 20.0 20.3 19.7 18.0 19.4 19.4 7 Tax Receipts as per cent of GDP 16.7 17.0 17.4 15.9 16.1 16.3 8 Gross Fiscal Deficit as per cent of GDP 6.9 6.9 5.8 5.4 6.5 5.8 … : Not Available. RE: Revised Estimates. BE: Budget Estimates. Note : Data upto 2017-18 pertains to all States and Union Territories. From 2018-19 onwards, data are provisional and pertains to 25 States only. GDP data are based on 2011-12 base. Source : Budget Documents of the central and state governments. 306APPENDIX TABLES APPENDIX TABLE 8: INDIA’S OVERALL BALANCE OF PAYMENTS (US$ million) 2015-16 2016-17 2017-18 2018-19 2019-20 (P) 1 2 3 4 5 6 A. CURRENT ACCOUNT 1 Exports, f.o.b. 2,66,365 2,80,138 3,08,970 3,37,237 3,20,431 2 Imports, c.i.f. 3,96,444 3,92,580 4,69,006 5,17,519 4,77,937 3 Trade Balance -1,30,079 -1,12,442 -1,60,036 -1,80,283 -1,57,506 4 Invisibles, Net 1,07,928 98,026 1,11,319 1,23,026 1,32,850 a) ‘Non-Factor’ Services of which : 69,676 68,345 77,562 81,941 84,922 Software Services 71,454 70,763 72,186 77,654 84,643 b) Income -24,375 -26,302 -28,681 -28,861 -27,281 c) Private Transfers 63,139 56,573 62,949 70,601 76,217 5 Current Account Balance -22,151 -14,417 -48,717 -57,256 -24,656 B. CAPITAL ACCOUNT 1 Foreign Investment, Net (a+b) 31,891 43,224 52,401 30,094 44,417 a) Direct Investment 36,021 35,612 30,286 30,712 43,013 b) Portfolio Investment -4,130 7,612 22,115 -618 1,403 2 External Assistance, Net 1,505 2,013 2,944 3,413 3,751 3 Commercial Borrowings, Net -4,529 -6,102 -183 10,416 22,960 4 Short Term Credit, Net -1,610 6,467 13,900 2,021 -1,026 5 Banking Capital of which : 10,630 -16,616 16,190 7,433 -5,315 NRI Deposits, Net 16,052 -12,367 9,676 10,387 8,627 6 Rupee Debt Service -73 -99 -75 -31 -69 7 Other Capital, Net$ 3,315 7,559 6,213 1,057 18,462 8 Total Capital Account 41,128 36,447 91,390 54,403 83,180 C. Errors & Omissions -1,073 -480 902 -486 974 D. Overall Balance [A(5)+B(8)+C] 17,905 21,550 43,574 -3,339 59,498 E. Monetary Movements (F+G) -17,905 -21,550 -43,574 3,339 -59,498 F. IMF, Net 0 0 0 0 0 G. Reserves and Monetary Gold (Increase -, Decrease +) -17,905 -21,550 -43,574 3,339 -59,498 of which : SDR allocation 0 0 0 0 0 Memo: As a ratio to GDP 1 Trade Balance -6.2 -4.9 -6.0 -6.6 -5.5 2 Net Services 3.3 3.0 2.9 3.0 3.0 3 Net Income -1.2 -1.1 -1.1 -1.1 -1.0 4 Current Account Balance -1.1 -0.6 -1.8 -2.1 -0.9 5 Capital Net (Excld. changes in reserves) 2.0 1.6 3.4 2.0 2.9 6 Foreign Investment, Net 1.5 1.9 2.0 1.1 1.5 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. Source : RBI. 307APPENDIX TABLES APPENDIX TABLE 9: FOREIGN DIRECT INVESTMENT FLOWS TO INDIA: COUNTRY-WISE AND INDUSTRY-WISE (US$ million) Source/Industry 2015-16 2016-17 2017-18 2018-19 2019-20 P 1 2 3 4 5 6 Total FDI 36,068 36,317 37,366 38,744 42,629 Country-wise Inflows Singapore 12,479 6,529 9,273 14,632 12,612 Mauritius 7,452 13,383 13,415 6,570 7,498 Netherlands 2,330 3,234 2,677 2,519 5,295 Cayman Islands 440 49 1,140 863 3,496 U.S.A. 4,124 2,138 1,973 2,823 3,401 Japan 1,818 4,237 1,313 2,745 2,308 France 392 487 403 375 1,167 United Kingdom 842 1,301 716 1,211 1,125 South Korea 241 466 293 982 777 Hongkong 344 134 1,044 598 678 Cyprus 488 282 290 161 657 Germany 927 845 1,095 817 443 Belgium 57 172 213 56 388 U.A.E. 961 645 408 853 323 Luxembourg 784 99 243 251 252 UK Virgin Islands 203 212 21 290 250 China 461 198 350 229 162 Others 1,725 1,905 2,498 2,768 1,796 Sector-wise Inflows Manufacturing 8,439 11,972 7,066 7,919 8,153 Communication Services 2,638 5,876 8,809 5,365 6,838 Retail & Wholesale Trade 3,998 2,771 4,478 4,311 4,914 Financial Services 3,547 3,732 4,070 6,372 4,326 Computer Services 4,319 1,937 3,173 3,453 4,104 Business services 3,031 2,684 3,005 2,597 3,684 Restaurants and Hotels 889 430 452 749 2,546 Transport 1,363 891 1,267 1,019 2,333 Construction 4,141 1,564 1,281 2,009 1,937 Electricity and other energy Generation, Distribution & Transmission 1,364 1,722 1,870 2,427 1,906 Real Estate Activities 112 105 405 213 564 Education, Research & Development 394 205 347 736 528 Miscellaneous Services 1,022 1,816 835 1,226 443 Mining 596 141 82 247 217 Trading 0 0 0 0 0 Others 215 470 226 102 137 P: Provisional. Note: Includes FDI through SIA/FIPB and RBI routes only. Source: RBI. 308