Annual Report of the RBI for the Year 2020-21

Report of the Central Board of Directors on the working of the Reserve Bank of India for the year ended March 31, 2021 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 2020-21CENTRAL BOARD / LOCAL BOARDS GOVERNOR Shaktikanta Das DEPUTY GOVERNORS MEMBERS OF LOCAL BOARDS Mahesh Kumar Jain Michael Debabrata Patra WESTERN AREA M. Rajeshwar Rao T. Rabi Sankar EASTERN AREA DIRECTORS NOMINATED UNDER Sachin Chaturvedi SECTION 8 (1) (b) OF THE RBI ACT, 1934 Revathy Iyer Sachin Chaturvedi DIRECTORS NOMINATED UNDER NORTHERN AREA SECTION 8 (1) (c) OF THE RBI ACT, 1934 Revathy Iyer Natarajan Chandrasekaran Raghvendra Narayan Dubey Satish Kashinath Marathe Swaminathan Gurumurthy DIRECTORS NOMINATED UNDER SOUTHERN AREA SECTION 8 (1) (d) OF THE RBI ACT, 1934 Debasish Panda Ajay Seth (Position as on May 24, 2021)PRINCIPAL OFFICERS (As on May 24, 2021) EXECUTIVE DIRECTORS ....................................................................... Anil K. Sharma ....................................................................... S. C. Murmu ....................................................................... P. Vijaya Kumar ....................................................................... O. P. Mall ....................................................................... Mridul K. Saggar ....................................................................... Saurav Sinha ....................................................................... Vivek Deep ....................................................................... Jayant Kumar Dash ....................................................................... R. Subramanian ....................................................................... Rohit Jain ....................................................................... R. S. Ratho ....................................................................... Jose J. Kattoor ....................................................................... Sudha Balakrishnan (Chief Financial Offi cer) 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 ............................................ Rajani Prasad, Chief General Manager Department of Regulation ......................................................................... Neeraj Nigam, Chief General Manager-in-Charge Department of Supervision ........................................................................ A. K. Choudhary, Chief General Manager-in-Charge Department of Communication .................................................................. Yogesh K. Dayal, Chief General Manager Department of Currency Management ...................................................... Subrata Das, Chief General Manager-in-Charge Department of Economic and Policy Research ......................................... D. P. Rath, Offi cer-in-Charge Department of External Investments and Operations................................ Aditya Gaiha, Chief General Manager-in-Charge Department of Government and Bank Accounts ....................................... Charulatha S. Kar, 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 Statistics and Information Management ............................ A. R. Joshi, Offi cer-in-Charge Enforcement Department .......................................................................... H. N. Iyer, Chief General Manager-in-Charge Financial Inclusion and Development Department ................................... Sonali Sengupta, Chief General Manager-in-Charge Financial Markets Operations Department ................................................ Seshsayee G., Chief General Manager Financial Markets Regulation Department ................................................ Dimple Bhandia, Chief General Manager Foreign Exchange Department.................................................................. Ajay Kumar Misra, Chief General Manager-in-Charge Financial Stability Unit ............................................................................... Nisha Nambiar, Chief General Manager Human Resource Management Department ............................................. Vandana Khare, Chief General Manager Inspection Department .............................................................................. G P Borah, Chief General Manager Internal Debt Management Department .................................................... R Gurumurthy, Chief General Manager International Department ........................................................................... Mohua Roy, Adviser-in-Charge Legal Department ...................................................................................... A. Unnikrishnan, Legal Adviser-in-Charge Monetary Policy Department ..................................................................... Rajiv Ranjan, Adviser-in-Charge Premises Department ................................................................................ Mala Sinha, Chief General Manager Rajbhasha Department ............................................................................. Sadhana Varma, Chief General Manager Risk Monitoring Department ...................................................................... Manoranjan Dash, Chief General Manager Secretary’s Department ............................................................................. Aviral Jain, Chief General Manager-in-Charge & Secretary COLLEGES PRINCIPALS College of Agricultural Banking, Pune ....................................................... V. G. Sekar 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 .................................................................................................. R. Karthikeyan, GM-in-Charge Bhopal ....................................................................................................... Vivek Aggarwal Bhubaneswar ............................................................................................. H. N. Panda Chandigarh ................................................................................................ J. K. Pandey Dehradun ................................................................................................... Rajesh Kumar Guwahati ................................................................................................... Sanjeev Singha Hyderabad ................................................................................................. K. Nikhila Jaipur ......................................................................................................... Arun Kumar Singh Jammu ....................................................................................................... K. P. Patnaik Kanpur ....................................................................................................... Tuli Roy Lucknow .................................................................................................... R. L. K. Rao Nagpur ....................................................................................................... Sangeeta Lalwani Patna ......................................................................................................... Brij Raj, GM-in-Charge Raipur ........................................................................................................ A. Sivagami Thiruvananthapuram ................................................................................. Reeny Ajith OFFICERS-IN-CHARGE Agartala ..................................................................................................... Tamal Biswas, Chief General Manager Aizawl ........................................................................................................ Mary Lianlunkim Deng, General Manager (O-i-C) Belapur ...................................................................................................... Jaikish, Chief General Manager Gangtok ..................................................................................................... R. V. Sangvai, Chief General Manager Imphal ........................................................................................................ Mary Lawm Ngaih Ching Gwite, General Manager (O-i-C) Kochi .......................................................................................................... V. K. Nayak, General Manager, (O-i-C) Panaji ......................................................................................................... N. J. Nampoothiri, General Manager (O-i-C) Ranchi ....................................................................................................... Sanjiv Sinha, General Manager (O-i-C) Shillong ...................................................................................................... Paoboi Gangte, 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 Lessons from the 2020-21 Experience ....................................................................... 3 Looking Ahead to 2021-22 and Beyond ...................................................................... 10 II. ECONOMIC REVIEW ................................................................................................ 18 The Real Economy ..................................................................................................... 18 Price Situation ............................................................................................................ 39 Money and Credit ....................................................................................................... 51 Financial Markets ....................................................................................................... 62 Government Finances ................................................................................................ 74 External Sector ........................................................................................................... 83 PART TWO: THE WORKING AND OPERATIONS OF THE RESERVE BANK OF INDIA ...... 101 III. MONETARY POLICY OPERATIONS ......................................................................... 101 Monetary Policy .......................................................................................................... 102 The Operating Framework: Liquidity Management ..................................................... 104 Monetary Policy Transmission ................................................................................... 110 Sectoral Lending Rates .............................................................................................. 112 IV. CREDIT DELIVERY AND FINANCIAL INCLUSION ................................................. 115 Credit Delivery ............................................................................................................ 117 Financial Inclusion ...................................................................................................... 121 Financial Literacy ....................................................................................................... 122 V. FINANCIAL MARKETS AND FOREIGN EXCHANGE MANAGEMENT ................... 124 Financial Markets Regulation Department .................................................................. 124 Financial Markets Operations Department .................................................................. 126 Foreign Exchange Department ................................................................................... 130 VI. REGULATION, SUPERVISION AND FINANCIAL STABILITY .................................. 134 Financial Stability Unit ................................................................................................. 135 Department of Regulation Commercial Banks .............................................................................................. 137 iCONTENTS Page No. Cooperative Banks .............................................................................................. 143 Non-Banking Financial Companies ..................................................................... 145 Department of Supervision Commercial Banks .............................................................................................. 148 Urban Cooperative Banks ................................................................................... 152 Non-Banking Financial Companies ..................................................................... 154 All Supervised Entities ....................................................................................... 157 Enforcement Department ........................................................................................... 160 Consumer Education and Protection Department ...................................................... 162 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 .................................................................................... 177 Developments in Currency in Circulation .................................................................... 177 Currency Management Infrastructure ......................................................................... 179 Expenditure on Security Printing ................................................................................. 180 Bharatiya Reserve Bank Note Mudran Private Limited ............................................... 182 IX. PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY ... 184 Department of Payment and Settlement Systems ...................................................... 184 Department of Information Technology ....................................................................... 197 X. COMMUNICATION, INTERNATIONAL RELATIONS, RESEARCH AND STATISTICS .................................................................................. 202 Communication Processes ........................................................................................ 202 International Relations ............................................................................................... 207 Government and Bank Accounts ............................................................................... 211 Managing Foreign Exchange Reserves ...................................................................... 214 Economic and Policy Research ................................................................................... 216 Statistics and Information Management ...................................................................... 218 Legal Issues ................................................................................................................ 221 iiCONTENTS Page No. XI. GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT .......................................................................................................... 225 Governance Structure ................................................................................................ 226 Human Resource Development Initiatives ................................................................. 227 Enterprise-Wide Risk Management ........................................................................... 233 Internal Audit/Inspection ............................................................................................. 234 Corporate Strategy and Budget Management ............................................................ 235 Rajbhasha .................................................................................................................. 238 Premises Department ................................................................................................ 240 Annex ......................................................................................................................... 244 XII. THE RESERVE BANK’S ACCOUNTS FOR 2020-21 ................................................ 248 Balance Sheet as on March 31, 2021 ......................................................................... 252 Income Statement for the year ended March 31, 2021 ............................................... 253 Schedules forming part of Balance Sheet and Income Statement.............................. 254 Statement of Signifi cant Accounting Policies for the year ended March 31, 2021 ..... 257 Notes to Accounts ...................................................................................................... 261 Annex I: Chronology of Major Policy Announcements: March 2020 to March 2021 ....... 276 Annex II: Chronology of Major Policy Announcements to Mitigate the Impact of COVID-19: March 2020 to March 2021 ................................................................. 296 Appendix Tables ................................................................................................................... 315 iiiCONTENTS Page No. BOXES II.1.1 : What Drives Recovery in Growth after a Crisis? ...................................................... 22 II.1.2 : Impact of COVID-19 on Corporate Performance ...................................................... 32 II.2.1 : Post - COVID-19 Surge in Mark-ups and Food Infl ation Surprise ........................... 50 II.4.1 : Is the Bubble in Stock Markets Rational? ................................................................. 69 II.4.2 : The Phenomena of Listing Returns in India: Some Exploration ............................... 71 II.5.1 : 15th Finance Commission Recommendations: A Comparative Analysis .................. 80 II.6.1 : COVID-19 Pandemic - Opportunities and Challenges for Indian Pharmaceutical Exports ................................................................................ 86 II.6.2 : Is FDI COVID-Proof? ................................................................................................ 95 III.1 : The Lender of Last Resort ....................................................................................... 108 IV.1 : Addressing Regional Disparities in the Flow of Priority Sector Credit ...................... 118 V.1 : Mitigating COVID-19 Impact on Bond Market through Dynamic Approach in Open Market Operations .......................................................................................... 128 VI.1 : COVID-19 Related Regulatory Measures - A Cross-country Perspective ............... 139 VI.2 : Revised Regulatory Framework for NBFCs - A Scale-Based Approach .................. 146 VI.3 : Changing Paradigm of UCB Supervision – Way Forward ........................................ 153 VI.4 : Structural Changes in Business Models of Non-Banking Financial Companies (NBFCs) and Strengthened Supervision .................................................................. 155 VI.5 : Framework for Education from a Consumer Protection Perspective ........................ 163 VI.6 : Deposit Insurance Pricing - Mitigating Moral Hazard through Risk-based Premium (RBP) ........................................................................................................ 166 VIII.1 : Automation of Banknote Handling Process .............................................................. 182 IX.1 : Reserve Bank of India – Digital Payments Index (RBI-DPI) ..................................... 191 IX.2 : FinTech Activity in India: Funding and Employment Trends during COVID-19 ......... 194 IX.3 : RTGS 24X365, Including Lessons from the Country Experience ............................ 198 X.1 : Central Bank Communication during Pandemic ....................................................... 203 X.2 : SAARCFINANCE and RBI Initiatives ...................................................................... 209 X.3 : Treasury Single Account System for e-Payment by Central Government Autonomous Bodies ................................................................................................. 212 ivCONTENTS Page No. X.4 : Challenges to Forex Reserves Management in a Low Yield Environment ............... 214 X.5 : Surveys during COVID-19 Pandemic ....................................................................... 220 XI.1 : Competency Management Framework for the Reserve Bank .................................. 228 XI.2 : The Strategic Framework of the Reserve Bank........................................................ 237 APPENDIX TABLES 1. Macroeconomic and Financial Indicators ................................................................. 315 2. Growth Rates and Composition of Real Gross Domestic Product (At 2011-12 Prices) .................................................................................................. 317 3. Gross Savings .......................................................................................................... 318 4. Infl ation, Money and Credit ...................................................................................... 319 5. Capital Market – Primary and Secondary ................................................................ 320 6. Key Fiscal Indicators ................................................................................................ 321 7. Combined Receipts and Disbursements of the Central and State Governments .................................................................................................. 322 8. India’s Overall Balance of Payments ........................................................................ 323 9. Foreign Direct Investment Flows to India: Country-wise and Industry-wise ............. 324 With the change in its accounting year to April-March (earlier July-June), this Annual Report covers the working and functions of the Reserve Bank for the transition period of nine months (July 2020 - March 2021). vSELECT ABBREVIATIONS AACS - As Applicable to Cooperative Societies BCBS - Basel Committee on Banking ABs - Autonomous Bodies Supervision AD - Authorised Dealer BCD - Basic Customs Duty BCM - Business Continuity Management ADF - Asset Development Fund BCP - Business Continuity Plan AEs - Advanced Economies BCSBI - Banking Codes and Standards Board AFA - Additional Factor of Authentication of India AePS - Aadhar Enabled Payment System BD - Banking Department AI - Artifi cial Intelligence BE - Budget Estimates AID - All-Inclusive Directions BFS - Board for Financial Supervision AIFIs - All India Financial Institutions BHIM - Bharat Interface for Money AML - Anti-Money Laundering BIA - Basic Indicator Approach AMRMS - Audit Management and Risk BIS - Bank for International Settlements Monitoring System BLS - Bank Lending Survey ANBC - Adjusted Net Bank Credit BOS - Banking Ombudsman Scheme ATBs - Auction Treasury Bills BoJ - Bank of Japan ATM - Automatic Teller Machines BPS - Basis Points AQI - Asset Quality Index BPSS - Board for Regulation and Supervision AP - Authorised Persons of Payment and Settlement Systems API - Application Programming Interface BR - Banking Regulations APIs - Active Pharmaceutical Ingredients BRBNMPL - Bharatiya Reserve Bank Note Mudran APMCs - Agriculture Produce Market Private Limited Committees BRICS - Brazil, Russia, India, China and South ARCs - Asset Reconstruction Companies Africa AREAER - Annual Report on Exchange BSA - Bilateral Swap Arrangement Arrangements and Exchange BSS - Betaar Sanchar Seva Restrictions BSC - Building Sub-Committee ARMS - Audit and Risk Management BTFP - BRICS Task Force on Payments Sub-Committee CA - Concurrent Audit ASISO - Automated Sweep in and Sweep Out CAD - Current Account Defi cit AUM - Assets Under Management CAFRAL - Centre for Advanced Financial BBA - Bilateral Borrowing Agreements Research and Learning BBPOUs - Bharat Bill Payment Operating Units CAMELS - Capital Adequacy, Asset Quality, BBPS - Bharat Bill Payment System Management, Earnings, Liquidity and BBF - BRICS Bond Fund Sensitivity BCs - Business Correspondents CBDC - Central Bank Digital Currency viSELECT ABBREVIATIONS CBDT - Central Board of Direct Taxes CLM - Co-Lending Model CBG - Compressed Bio Gas CMBs - Cash Management Bills CBIC - Central Board of Indirect Taxes and CMS - Complaint Management System Customs CO - Central Offi ce CBS - Core Banking Solution CoA - Certifi cate of Authorisation CC - Currency Chests COB - Central Offi ce Building CODs - Central Offi ce Departments CCB - Committee of the Central Board CoR - Certifi cate of Registration CCIL - Clearing Corporation of India Limited CoS - College of Supervisors CCO - Chief Compliance Offi cer COSMOS - Computerised Off-Site Monitoring and CCS - Consumer Confi dence Survey Surveillance System CCyB - Countercyclical Capital Buffer CPC - Central Pay Commission CDs - Certifi cates of Deposit CPs - Commercial Papers CD Ratio - Credit-to-Deposit Ratio CPF - Contributory Provident Fund CDS - Credit Default Swaps CPI - Consumer Price Index CDSL - Clearcorp Dealing System (India) Ltd CPP - Comprehensive Pension Package CEOs - Chief Executive Offi cers CPMI-IOSCO - Committee on Payments and CEOBE - Credit Equivalent of Off Balance Market Infrastructures-International Sheet Exposure Organisation of Securities CEP - Consumer Education and Protection Commissions CEPD - Consumer Education and Protection CPSEs - Central Public-Sector Enterprises Department CPWD - Central Public Works Department CF - Contingency Fund CRA - Contingent Reserve CFL - Centres for Financial Literacy Arrangement CFM - Capital Flow Management Measures CRAR - Capital to Risk Weighted Assets Ratio CFR - Central Fraud Registry CRILC - Central Repository of Information on Large Credits CFS - Consolidated Financial Statements CRM - Credit Risk Mitigation CGA - Controller General of Accounts CRO - Chief Risk Offi cer CGFS - Committee on the Global Financial CRPC - Centralised Receipt and Processing System Centre CGRA - Currency and Gold Revaluation CRR - Cash Reserve Ratio Account CSAA - Control Self-Assessment Audit CICs - Core Investment Companies CSBD - Corporate Strategy and Budget CiC - Currency in Circulation Department CII - Confederation of Indian Industry CSF - Consolidated Sinking Fund CIMS - Centralised Information Management System CSGL - Centralised Subsidiary General Ledger CISO - Chief Information Security Offi cer CSII - Colour Shift Intaglio Inks viiSELECT ABBREVIATIONS CSPs - Critical Service Providers DSSI - Debt Service Suspension Initiative CTS - Cheque Truncation System DXP - Digital Experience Platform CVPS - Currency Verifi cation and Processing e-BAAT - Electronic Banking Awareness and System Training CwP - Currency with the Public EBIT - Earnings Before Interest and Taxes CyM - Currency Management Module ECA - Essential Commodities Act DBS - Development Bank of Singapore ECB - External Commercial Borrowings DCCBs - District Central Cooperative Banks ECF - Economic Capital Framework DCGI - Drugs Controller General of India ECCS - Express Cheque Clearing System DD - Demand Drafts ECL - Expected Credit Losses DEA - Depositors’ Education and Awareness ECS - Electronic Clearing Service DEIO - Department of External Investments EDC - Executive Directors’ Committee and Operations EDMS - Electronic Document Management DEPR - Department of Economic Policy and System Research EDSP - Electronic Data Submission Portal DFI - Development Finance Institution EFC - Economic and Financial Co-operation DGBA - Department of Government and Bank EFD - Enforcement Department Accounts EFI - External Funded Institutions DHFL - Dewan Housing Finance Ltd. EKP - Enterprise Knowledge Portal DICGC - Deposit Insurance and Credit ELIs - Eligible Lending Institutions Guarantee Corporation EPFO - Employees’ Provident Fund DIF - Deposit Insurance Fund Organisation DIS - Deposit Insurance Systems EM - Emerging Market DIT - Department of Information and EMC - Expenditure Management Commission Technology EMDEs - Emerging Market and Developing DoC - Department of Communication Economies DoR - Department of Regulation EMEs - Emerging Market Economies DoS - Department of Supervision EMV - Europay, MasterCard and Visa DoT - Department of Telecommunications EoI - Expression of Interest DPI - Digital Payments Index ERM - Enterprise wide Risk Management DPSS - Department of Payment and ETCD - Exchange Traded Currency Derivatives Settlement Systems EU - European Union DSIM - Department of Statistics and EVs - Electric Vehicles Information Management EWS - Early Warning Signal DSL - Data Science Lab EXIM - Export Import Bank of India viiiSELECT ABBREVIATIONS FAME - Financial Awareness Messages FMRD - Financial Markets Regulation Booklet Department FAR - Fully Accessible Route FPC - Farmers Producers Companies FATF - Financial Action Task Force FPI - Foreign Portfolio Investment FAQs - Frequently Asked Questions FPO - Farmer Producer Organisation FBIL - Financial Benchmark India Pvt. Ltd FRBM Act - Fiscal Responsibility and Budget FC - Finance Commission Management Act FCA - Foreign Currency Asset FPOs - Follow-on Public Offers FCBs - Foreign Central Bank FRB - Floating Rate Bonds FCI - Financial Conditions Index FRL - Fiscal Responsibility Legislation FCNR(B) - Foreign Currency Non-Resident FSAP - Financial Sector Assessment Account Programme FCVA - Foreign Exchange Forward Contracts FSB - Financial Stability Board Valuation Account FSDC - Financial Stability and Development FDI - Foreign Direct Investment Council FDIC - Federal Deposit Insurance Corporation FSDC-SC - Financial Stability and Development FED - Foreign Exchange Department Council - Sub-Committee FEDAI - Foreign Exchange Dealers’ Association FSR - Financial Stability Report of India FSU - Financial Stability Unit FEMA - Foreign Exchange Management Act FTA - Free Trade Agreements FFMCs - Full-Fledged Money Changers F-TRAC - FIMMDA Trade Reporting and FER - Foreign Exchange Reserves Confi rmation System FETERS - Foreign Exchange Transactions FWG - Framework Working Group Electronic Reporting System G-20 - Group of Twenty FI - Financial Institutions GC - Governing Council FICNs - Fake Indian Currency Notes GDAL - Granular Data Access Lab FIMMDA - The Fixed Income Money Market and GDP - Gross Domestic Product Derivatives Association of India GFC - Global Financial Crisis FinTech - Financial Technology GFCE - Government Final Consumption FIPs - Financial Inclusion Plans Expenditure FIRMS - Foreign Investment Reporting GFD - Gross Fiscal Defi cit Management System FLCs - Financial Literacy Centres GHOS - Group of Central Bank Governors and Heads of Supervision FLW - Financial Literacy Week GNDI - Gross National Disposable Income FMCG - Fast Moving Consumer Goods FMOD - Financial Markets Operations GNPA - Gross Non-Performing Asset Department GoI - Government of India ixSELECT ABBREVIATIONS GR - Government Report ICSDs - International Central Securities GRC - Governance. Risk management and Depositories Compliance ICT - Information and Communication Technology GRF - Guarantee Redemption Fund ID - Issue Department GRIHA - Green Rating for Integrated Habitat Assessment IDMD - Internal Debt Management Department GRMC - Group Risk Management Committee IESH - Infl ation Expectations Survey of Households GRQ - General Review of Quotas IFA - International Financial G-SAP - G-sec Acquisition Programme Architecture G-sec - Government Securities IFA WG - International Financial Architecture GSLM - Government Security Lending Working Group Mechanism IFSCA - International Financial Services GSLBM - Government Security Lending and Centres Authority Borrowing Mechanism IFTAS - Indian Financial Technology & Allied GST - Goods and Services Taxes Services GVA - Gross Value Added IGBC - Indian Green Building Council GVCs - Global Value Chains IGIDR - Indira Gandhi Institute of HFCs - Housing Finance Companies Development Research HLPs - High Level Principles IGST - Integrated Goods and Service Tax HRMD - Human Resource Management IIBM - Indian Institute of Bank Management Department IIFC - India Infrastructure Finance Company HRM-SC - Human Resource Management Sub- IIP - Index of Industrial Production Committee IL&FS - Infrastructure Leasing & Financial HTM - Held to Maturity Services IADI - International Association of Deposit IMF - International Monetary Fund Insurers IMFC - International Monetary and Financial IBA - Indian Banks’ Association Committee IBC - Insolvency and Bankruptcy Code IMPS - Immediate Payment Service IBS - International Banking Statistics IMSS - Integrated Market Surveillance ICAI - Institute of Chartered Accountants of System India IMU - Ink Manufacturing Unit ICEGATE - Indian Customs Electronic Gateway Indy AS - Indian Accounting Standards ICMTS - Integrated Compliance Management INFE - International Network on Financial and Tracking System Education ICR - Interest Coverage Ratio InvITS - Infrastructure Investment Trusts xSELECT ABBREVIATIONS IO - Internal Ombudsmen LIBOR - London Inter-Bank Offered Rate IOs - International Organisations LICs - Low Income Countries IOS - Industrial Outlook Survey LMS - Learning Management System IRACP - Income Recognition, Asset LO - Liason Offi ce Classifi cation and Provisioning LOLR - Lender of Last Resort IRA-FS - Investment Revaluation Account- LPA - Long Period Average Foreign Securities LSF - Late Submission Fees IRA-RS - Investment Revaluation Account- LTROs - Long Term Repo Operations Rupee Securities LTV - Loan-to-Value IRDAI - Insurance Regulatory and MA-SAAR - Moving Average of Seasonally Development Authority of India Adjusted Average Growth Rate IRF - Interest Rate Futures MAF - Medical Assistance Fund IRR - Interest-Rate Risk MCLR - Marginal Cost of Funds-based IRRBB - Interest Rate Risk in Banking Book Lending Rate IRRS - Integrated Rajbhasha Reporting MD - Managing Director System MeitY - Ministry of Electronics and ISS - Interest Subvention Scheme Information Technology ISWG-PS - Inter-Secretariat Working Group on MFIs - Microfi nance Institutions Price Statistics MGNREGA - Mahatma Gandhi National Rural IT - Information Technology Employment Guarantee Act IT-SC - Information Technology Sub- MIS - Management Information System Committee ML - Machine Learning ITBs - Intermediate Treasury Bills MMLR - Market Maker of Last Resort IWG - Internal Working Group MMS - Mail Messaging System KLEMS - Capital(K), Labour(L), Energy(E), MoE - Memorandum of Error Material(M) and Services(S) MoU - Memorandum of Understanding KMS - Kharif Marketing Season MPC - Monetary Policy Committee KCC - Kisan Credit Card MSEs - Minimum Supervisory Expectations KPI - Key Performance Indicators MSMEs - Micro, Small and Medium Enterprises KYC - Know Your Customer MSF - Marginal Standing Facility LAB - Local Area Banks MSPs - Minimum Support Prices LAF - Liquidity Adjustment Facility MTF - Medium Term Framework LBMA - London Bullion Market Association NAB - New Agreements to Borrow LCR - Liquidity Coverage Ratio NABARD - National Bank for Agriculture and LEI - Legal Entity Identifi er Rural Development LFAR - Long Form Audit Report NBFC - Non-Banking Financial Company xiSELECT ABBREVIATIONS NBFC-D - Deposit taking NBFCs NSSF - National Small Savings Fund NBFC-ND - Non-Deposit taking NBFCs NSO - National Statistical Offi ce NBFC-ND-SI - Systemically Important Non-Deposit OBC - Other Backward Classes taking NBFCs OBICUS - Order Books, Inventories and NCCDs - Non-Centrally Cleared Derivatives Capacity Utilisation Survey NCDs - Non-Convertible Debentures OD - Overdraft NCFE - National Centre for Financial ODR - Online Dispute Resolution Education OECD - Organisation for Economic NDF - Non-Deliverable Forward Co-operation and Development NDI - Non-Debt Instrument OLTAS - Online Tax Accounting System NDTL - Net Demand and Time Liabilities OMBs - Open Market Borrowings NDS-OM - Negotiated Dealing System-Order OMOs - Open Market Operations Matching OMS - Open Market Sales NEER - Nominal Effective Exchange Rate OPEC - Organisation of Petroleum Exporting NEFT - National Electronic Funds Countries Transfer OPEC+ - Organisation of Petroleum Exporting NFA - Net Foreign Assets Countries and allies NFC - Non- Food Credit OSNBFC - Ombudsman Scheme for NBFCs NGOs - Non-Government Organisations OTC - Over the Counter NGSFMS - Next Generation Structured Financial PAs - Payment Aggregators Messaging System PAN - Permanent Account Number NHB - National Housing Bank PADO - Public Administration, Defence and NIIF - National Investment and Infrastructure Other Services Fund PBs - Payment Banks NIM - Net Interest Margin PCR - Public Credit Registry NIP - National Infrastructure Pipeline PDs - Primary Dealers NOF - Net Owned Fund PDS - Public Distribution System NOFHC - Non-Operative Financial Holding P/E - Price to Earnings Ratio Company PE - Preliminary Estimates NPA - Non-Performing Assets PF - Provident Fund NPCI - National Payments Corporation of PFCE - Private Final Consumption India Expenditure NSFE - National Strategy for Financial PFCVA - Provision for Forward Contracts Education Valuation Account NSFI - National Strategy for Financial PFMIs - Principles for Financial Market Inclusion Infrastructure xiiSELECT ABBREVIATIONS PFMS - Public Financial Management System RCA - Root Cause Analysis PIDF - Payments Infrastructure Development RE - Revised Estimates Fund ReBIT - Reserve Bank Information Technology PLFS - Periodic Labour Force Survey Private Limited PLI - Production- Linked Incentive REER - Real Effective Exchange Rate PMC - Punjab and Maharashtra Cooperative RegTech - Regulatory Technology PMGKP - Pradhan Mantri Garib Kalyan Package RFCA - Revaluation of Forward Contracts PMGKY - Pradhan Mantri Garib Kalyan Yojana Account PMGKAY - Pradhan Mantri Garib Kalyan Anna RFP - Request for Proposal Yojana RFQ - Request for Quote PMI - Purchasing Managers’ Index RIDF - Rural Infrastructure Development Fund PPAC - Petroleum Planning and Analysis Cell RM - Reserve Money PO - Project Offi ce RMD - Risk Monitoring Department POS - Point of Sale RMS - Rabi Marketing Season POs - Payment Orders ROs - Regional Offi ces PPIs - Prepaid Payment Instruments RPOs - Renewable Purchase Obligations PRAKALP - Pratayaksh Kar Lekhankan Pranali RRBs - Regional Rural Banks PSBs - Public Sector Banks RS - Regulatory Sandbox PSL - Priority Sector Lending RSD - Risk Specialist Division PSLCs - Priority Sector Lending RTGS - Real Time Gross Settlement Certifi cates RTI - Right to Information PSOs - Payment System Operators RTP - Reserve Tranche Position PSPs - Payment Service Providers RTL - Risk Tolerance Limits PSS - Payment and Settlement Systems SA - Standardised Approach PVT - Private Sector Banks SAs - Standards on Auditing PWD - Persons with Disabilities SAA - Swap Amortisation Account QIP - Qualifi ed Institutional Placement SAARC - The South Asian Association of QPM - Quarterly Projection Model Regional Cooperation QR - Quick Response SAF - Supervisory Action Framework RAM-OR - Risk Assessment Methodology for SARTTAC - South Asian Regional Training and Operational Risk Technical Assistance Centre RBA - Risk-Based Approach SBLA - Securities Borrowing and Lending RBIA - Reserve Bank of India Archives Arrangement RBIH - Reserve Bank Innovation Hub SBN - Special Bank Notes RBP - Risk Based Premium SCBs - Scheduled Commercial Banks RBS - Risk Based Supervision SCRA - Securities Contracts Regulation Act xiiiSELECT ABBREVIATIONS SDRs - Special Drawing Rights SPARC - Supervisory Programme for SDF - Special Drawing Facility Assessment of Risk and Capital SDLs - State Development Loans SPARSH - System of Pension Administration (Raksha) SDMX - Statistical Data and Metadata Exchange SPDs - Standalone Primary Dealers SEs - Supervised Entities SPV - Special Purpose Vehicle SEACEN - South East Asian Central Banks SPMCIL - Security Printing and Minting Corporation of India Limited SEBI - Securities and Exchange Board of India SR - Secretariat Report SEDs - Supervisory Examination Divisions SRO - Self-Regulatory Organisation SEMI - System of Exchange of SSCI - Service Sector Composite Index Macroeconomic Information SSMs - Senior Supervisory Managers SF - SAARCFINANCE ST - Service Tax SFBs - Small Finance Banks StCBs - State Cooperative Banks SFDB - Several Bilateral SF Database STP - Straight Through Processing SFMS - Structured Financial Messaging STRIPS - Separate Trading of Registered System Interest and Principal Securities SGBs - Sovereign Gold Bonds SupTech - Supervisory Technology SGL - Subsidiary General Ledger SVAMITVA - Survey of Villages and Mapping With SIDBI - Small Industries Development Bank Improvised Technology in Village of India Areas SIOS - Services and Infrastructure Outlook SWIFT - Society for Worldwide Interbank Survey Financial Telecommunication SLBC - State Level Bankers Committees SWM - South West Monsoon SLCCs - State Level Coordination Committees TAT - Turn Around Time SLD - Senior Level Dialogue TACS - Technical Advisory Committee in Surveys SLF - Special Liquidity Facility T-Bills - Treasury Bills SLF-MF - Special Liquidity Facility for Mutual Funds TBTF - Too Big to Fail SLMA - Secondary Loan Market Association TGFIFL - Technical Group on Financial Inclusion and Financial Literacy SLS - Special Liquidity Scheme TIN - Tax Information System SLR - Statutory Liquidity Ratio TLTROs - Targeted Long-Term Repo Operations SoC - Sectoral Security Operations Centre TOLIC - Town Offi cial Language SOFR - Secured Overnight Financing Rate Implementation Committee SOP - Standard Operating Procedure xivSELECT ABBREVIATIONS TOT - Train the Trainer VUCA - Vulnerable, Uncertain. Complex and TPR - Trade Policy Review Ambiguous TRAI - Telecom Regulatory Authority of India WACR - Weighted Average Call Rate TReDS - Trade Receivables Discounting System WADTDR - Weighted Average Domestic Term TSA - Treasury Single Account Deposit Rate UCBs - Urban Cooperative Banks WALR - Weighted Average Lending Rate UK - United Kingdom WAM - Weighted Average Maturity UPI - Unifi ed Payments Interface WAS - Weighted Average Spread US - United States WAY - Weighted Average Yield USSD - Unstructured Supplementary Service WEO - World Economic Outlook Data WG - Working Group UAT - User Acceptance Testing WHO - World Health Organisation UTs - Union Territories WLA - White Label ATM UTI - Unique Transaction Identifi er WMA - Ways and Means Advances UTLBC - Union Territory Level Bankers WPI - Wholesale Price Index Committees WSS - Weekly Statistical Supplement URL - Uniform Resource Locators WTO - World Trade Organisation URRBCH - Uniform Regulations and Rules for Bankers Clearing Houses WOS - Wholly owned Subsidiary VaR/ES - Value at Risk/Expected Shortfall XBRL - eXtensible Business Reporting VIX - Volatility Index Language VRR - Voluntary Retention Route ZTCs - Zonal Training Centres This Report can be accessed on Internet URL: www.rbi.org.in xvxviTHE ANNUAL REPORT ONAS TSHEESS WMEONRTK AINNDG P ROOFS TPHECET SRESERVE BANK OF INDIA FFoorr t hthee Y Yeeaarr J Juulyly 1 1, ,2 2002106 t oto M Juanrceh 3 301, ,2 2001271** PART ONE: THE ECONOMY - REVIEW AND PROSPECTS I ASSESSMENT AND PROSPECTS I.1 Embattled by new waves of infections to the pandemic. In factory-based manufacturing and mutant strains of COVID-19, the slow pace and institutionalised services, there has been of inoculation in several parts of the world and considerable adaptation to pandemic protocols, visceral vaccine protectionism, the global and enabling normalisation of work processes quicker domestic outlook has once again turned grim and than in other sectors. Besides the toll on life and overcast with extreme uncertainty and downside living, the year 2020 was ravaged by output and risks. By May 23, 2021 there were more than 167 employment losses unprecedented in history, million confi rmed infections and over 3.4 million globally and in India. The pandemic also turned out fatalities worldwide, with over 26 million infections to be highly inequitable – it is estimated that around and 3,03,720 mortalities in India. Increasingly, 95 million additional people around the world have country experiences underscore the paramount been forced into extreme poverty during the year, need for speedy and universal vaccination on a with 80 million more undernourished, mostly in war footing - the virus will mutate as long as it low-income countries2. stays with humans; nobody is safe until everyone I.3 While the pandemic was sudden and is safe. devastatingly swift, the policy response was I.2 Just a year ago when the World Health unprecedented and expansive in its reach. Organisation (WHO) declared COVID-19 a Governments and central banks across the globe pandemic1 and India imposed a strict lockdown in fashioned measures in the form of additional March, a deep despondency and risk psychosis fi scal spending, foregone revenues, capital became pervasive. Since then, lives have been and debt injections, contingent liabilities, and lost, surviving life has been disrupted and liquidity/ funding for lending adding up to US$ 16 lifestyles have been fundamentally altered. In trillion3 or 15.3 per cent of world GDP. In India, India, some areas of activity, especially contact- a calibrated policy stimulus began with direct intensive ones, have been deeply scarred while assistance in cash and kind to the poor and others such as agriculture and allied activities, progressively broadened into a comprehensive information technology, highway infrastructure, package (AatmaNirbhar Bharat) to provide tractor sales, railway freight, electricity demand support to the various sectors of the economy. and domestic trade have shown a rare resilience In 2020-21, it cumulated to 15.7 per cent of GDP, * With the change in its accounting year to April-March (earlier July-June), this Annual Report covers the working and functions of the Reserve Bank for the transition period of nine months (July 2020 - March 2021). Where available, the Report has been updated beyond March 2021. 1 The World Health Organisation declared the outbreak a ‘Public Health Emergency of International Concern’ on January 30, 2020, and a ‘Pandemic’ on March 11, 2020. 2 IMF (2021), ‘World Economic Outlook- Managing Divergent Recoveries’, International Monetary Fund, Washington D.C., April. 3 IMF (2021), ‘Fiscal Monitor - A Fair Shot’, International Monetary Fund, Washington D.C., April. 1ANNUAL REPORT 2020-21 including liquidity and other measures taken by I.6 Economies across the world fell off a cliff in the Reserve Bank of India (RBI). the second quarter of 2020, plunging to depths of contraction not fathomed before, but in the second I.4 Once again, central banks became the half of the year, a robust recovery materialised fi rst line of defence as they proactively designed faster than anticipated. Financial markets caught and implemented various conventional and the winds of refl ation trade and risk-on sentiment, unconventional interventions, based on their with equity market scaling new highs, bond yields experience from past crises. They also stepped softening and most currencies appreciating into uncharted terrain, lowering policy rates to against a weakening US dollar. new lows, launching asset purchase programmes, widening the range of eligible counterparties and I.7 In India too, a quick turnaround lifted the easing collateral norms, increasing the scale economy from an unprecedented contraction in and tenor of repo operations, and providing Q1 of 2020-21 (Q2 of 2020) to positive territory relief in the form of regulatory forbearances. by Q3 (Q4 of 2020), aided by supportive fi nancial These measures were complemented by implicit conditions engendered by the Reserve Bank’s and explicit forward guidance on the stance of liquidity measures. Sensing the recovery gaining monetary and macro-prudential policies. The traction, equity markets became ebullient, with Reserve Bank too undertook several measures, the BSE Sensex rising 95 per cent above the system-wide as well as institution - instrument- lows of March 2020 (till May 24, 2021). Corporate and sector-specifi c, to arrest the precipitous performance in Q2 and Q3 of 2020-21 turned out downturn in domestic economic activity, to ease to be strong, with the contraction in sales offset fi nancial conditions and in particular, to ensure by expenditure compression so that profi tability the normal functioning of fi nancial markets and improved robustly. Financial markets regained intermediaries while preserving and maintaining verve, equity valuations surged, bond yields fi nancial stability and the soundness and integrity eased and remained range-bound, and the Indian of payment and settlement systems. Overall, the rupee traded with an appreciating bias as India total support announced by the Reserve Bank for became a preferred habitat for capital fl ows. As the economy since February 6, 2020 (up to May 5, fresh infections began to fall away and plateaued 2021) amounted to `15.7 lakh crore (8.0 per cent in February 2021, even as countries around the of 2020-21 nominal GDP). world started experiencing second waves and lockdowns, the worst of the pandemic seemed to I.5 By and large, pandemic policies have be behind India. worked. Global and domestic fi nancial conditions that froze up at the onset of the crisis responded to I.8 All this has changed abruptly and central bank actions. Government and corporate deleteriously so since March 2021. Staring at bond yields eased to historic lows and spreads among the highest caseloads in the world and the got compressed. Capital fl ows turned mobile as highest daily new infections, India has stepped on risk appetite returned and emerging markets as the accelerator of its vaccination drive. Efforts are an asset class became the fl avour of the season. also underway on a war footing to build up gaps Overall, the easing of fi nancial conditions helped in medical supplies and raw materials as well as limit the amplifi cation of the pandemic shock. In hospital infrastructure. The regulators - National hindsight, it is evident that without the extraordinary Pharmaceutical Pricing Authority (NPPA) and policy support, the impact of the pandemic could Central Drugs Standard Control Organisation have been far worse. (CDSO) - are monitoring demand, movement, 2ASSESSMENT AND PROSPECTS costing and pricing of COVID-19 treatment drugs necessitating stringent lockdowns that resulted and the central government is taking various in even larger disruptions to activity, even as the steps to augment production and smoothen sheer scale of infections challenged testing and the medicine supply chains, including by way of hospital intensive care capacity. Globally, GDP mapping producers to states. With the surge in outcomes in the fi rst quarter of 2020 were worse demand of Remdesivir injection, a key life-saving than expected, but there were notable exceptions drug being used in the treatment, it engaged with of which India was one. In the second quarter, manufacturers to double its production over a however, the pandemic took down all economies month to about 3 lakh vials per day in May 2021. in its path, producing a deep, synchronised The production and supply of medical oxygen plunge which was unprecedented. Unlike in was similarly ramped up, including temporarily other recessions, private consumption demand, prohibiting its use in several industries, by way services output and the labour market, especially of imports of oxygen concentrators, removal of for low-skilled workers who do not have the basic customs duty and health cess on oxygen option of working from home, went into a marked and oxygen related equipment, besides plans to retrenchment, refl ecting the combination of social boost capacity further by setting up new oxygen distancing, activity and mobility restrictions, steep plants. Policy authorities are bracing up to deal income losses, and severely dented consumer with adverse fallouts on the economy from region- confi dence. Businesses cut back on investment centric restrictions. The near-term outlook is in the face of the evaporation of demand, supply clouded, with an accentuation of downside risks and chain disruptions and pessimism about future potential externalities of global spillovers, but over earnings. Thus, the pandemic produced a fusion the course of the tumultuous year gone by, there of a broad-based aggregate demand shock and a have been learnings and adaptations. Drawing on lockdown-induced supply shock. Trade contracted these lessons gleaned, India can prepare for the precipitously, refl ecting weak demand, the collapse year ahead with confi dence and fortitude. Faster in cross-border tourism, supply dislocations and vaccination holds the key to an escape from the trade restrictions. pandemic. Around this centrepiece, public policies I.10 Towards the close of the second quarter must design and implement strategies that put us and into the third quarter, infections abated in many back on a secure path of strong and sustainable countries. As economies re-opened and there was growth with macroeconomic and fi nancial stability a pick-up in mobility, the global economy began so that India is once again engaged in achieving climbing out of the recession. Overall activity its developmental aspirations. normalised faster than anticipated, with private Lessons from the 2020-21 Experience consumption rebounding the most vigorously. In some economies, GDP outturns surprised on I.9 Looking back, COVID-19 unleashed a the upside, supported by public transfers and once-in-a-lifetime crisis on the global economy, investment. Global trade began recovering with the defying all prognoses and producing downturns restart of activity and a strong pickup in external in a wide swathe of countries that were deeper demand. than the most pessimistic projections. From the time it was declared a public health emergency I.11 By late September, however, the pandemic of international concern by WHO in January began to spread again, with the number of 2020, contagion rapidly fl ared across the globe, confi rmed infections worldwide touching 34 million, 3ANNUAL REPORT 2020-21 with over a million deaths. Moreover, there were settlement systems, both wholesale and retail, renewed surges even where the infection curve and all functions that Reserve Bank performs in had fl attened. Consequently, countries had to slow the national interest, including foreign exchange down re-opening and reinstate lockdowns, which transactions and external investments. eventually caused GDP to decelerate globally again I.14 In its fi rst wave, the pandemic’s fury was in the fourth quarter. By end December, multiple at its height in Q1:2020-21. The Indian economy vaccine approvals and the launch of vaccination contracted 24.4 per cent y-o-y, the deepest in some countries brought hope. Together with a downturn amongst G20 countries. In Q2, however, progressive adaptation to pandemic protocols and the contraction started to ease, refl ecting vigorous additional policy measures by some countries, efforts to revive the economy, gradual relaxation conditions moved into place for a strong start to of mobility restrictions, monetary and liquidity the year 2021. easing, and fi scal support. By Q3, India had pulled I.12 For the year 2020, global output sank into out of a technical recession. In its February 2021 its steepest contraction since the Great Depression estimates, the National Statistical Offi ce (NSO) at (-) 3.3 per cent, with advanced countries’ GDP estimated that real GDP for the full year would down by 4.7 per cent and that of emerging and have shrunk by 8.0 per cent, the fi rst contraction developing countries (EMDEs) by 2.2 per cent. since 1980-81 and the severest since national World trade volume of goods and services shrank accounts have been compiled in India. by 8.5 per cent. Consumer price infl ation halved I.15 Private consumption contributes about in advanced economies but remained broadly 56 per cent of GDP, the stable bedrock of unchanged year-on-year in EMDEs, refl ecting the domestic demand. During the pandemic, however, fi rming up of non-fuel commodity prices. Crude private consumption sank unprecedentedly prices, on the other hand, declined by close to 33 into contraction. Urban demand remained in per cent during the year. retrenchment and lagged its rural counterpart. I.13 Turning to domestic developments in 2020- Government fi nal consumption expenditure 21, the Reserve Bank swung into pandemic mode (GFCE) played a counter-crisis cushioning role in March 2020. As a part of its Business Continuity and smoothed aggregate demand. Excluding Plan (BCP), a team of over 200 offi cers, staff and GFCE, GDP would have fallen by 29 per cent service providers was quarantined to work 24x7 in Q1 and by 9.3 per cent in the full year 2020- in isolation in order to keep essential fi nancial 21. Moreover, growth in capital expenditure of market and payment services available to the the Centre created conducive conditions for a nation. Multiple teams of trained personnel were modest upturn in gross capital formation after a set up for the smooth functioning of time-sensitive hiatus of two quarters, pivoting overall economic critical activities (TSCAs) from an Alternative Work activity from contraction to growth in Q3. The Area Site (AWAS). The country-wide invocation level of capital formation for the year as a whole, of BCP by all regional offi ces/business units was however, remains below pre-pandemic. When handled with enhanced recourse to technology. plans to revive the capex cycle come to fruition, These crisis management initiatives ensured it can be the crucial lever of growth in 2021-22. uninterrupted 24x7 functioning of fi nancial Net exports contributed positively to aggregate markets and institutions, adequate currency in demand in 2020-21, but mainly on account of the circulation, seamless and secure payment and higher contraction in imports relative to exports. 4ASSESSMENT AND PROSPECTS The current account balance is expected to have sharp increase in Q3. At this juncture, therefore, recorded a modest surplus for the year as a the Indian economy is at a cusp. A virtuous whole for the fi rst time after 2003-04. During April- combination of public and private investment can December 2020, net capital fl ows amounted to 2.7 ignite a shift towards investment and thereby to per cent of GDP and in the absence of a fi nancing a trajectory of sustained growth by exploiting the requirement from the current account, there was a unique point at which the economy is poised – at large accretion to foreign exchange reserves. the crossroads of regaining its place as the fastest growing economy in the world, the third largest I.16 These developments have sobering in terms of purchasing power parity, with late lessons. First, the health crisis has shown us how dividends of demographic transition still accruing, globalised we are, not only in our vulnerability to and a strong external position. viral infections but also in the manner in which vaccines are produced and shared. Excoriating I.17 Aggregate supply conditions were COVID-19 from the earth will need a global effort underpinned by the robust performance of so that everyone is vaccinated. Second, compared the farm sector amidst the encircling gloom. to fi nancial crises, a health crisis can be more Agriculture and allied activities emerged as the pervasive, persistent and debilitating in its impact bright spot in the Indian economy in 2020-21. on the real economy. Letting down the guard is With adequate monsoon rainfall for the third perilous; it is best to prepare for future waves. successive year, new records were scaled in Third, private investment is the missing piece in the foodgrains and horticulture production, propelling story of the Indian economy in 2020-21; reviving an above-trend expansion in the output of the it awaits an environment in which ‘animal spirits’ sector as a whole. Foodgrains stocks rose to are rekindled and entrepreneurial energies are 6.5 times the buffer norms for rice and 2 times released so that backward and forward linkages for wheat, entrenching food security in these and multipliers prepare the ground for a durable challenging times, but also posing diffi culties investment-driven recovery. Fiscal policy, with the for stock management. The prudent decision to largest capex budget ever and emphasis on doing keep the farm sector outside the ambit of the business better, has swung into a crowding-in role. lockdown ensured that sowing and harvesting It is apposite now for Indian industry to pick up the cycles were not disrupted. Unlike other countries, gauntlet. The share of GFCF in aggregate GDP India had to confront the problem of large-scale inched up to a six-quarter high at 33.0 per cent in reverse migration of labour as in the initial phase, Q3:2020-21, but in relation to its peak in 36.1 per COVID-19 was widely perceived to be an urban cent in Q2:2008-09 there is some catch-up still. disease. The Pradhan Mantri Garib Kalyan Within saving too, there is a compositional shift Yojana (PMGKY), under which provision has underway among institutional sectors, refl ecting been made for additional employment to returnee the normalisation of economic activity. Preliminary migrant workers for 125 days, played a safety estimates indicate that household fi nancial saving net role in managing the labour displacement, plateaued to 8.1 per cent in Q3:2020-21 from a complemented by employment offered under the high of 21.0 per cent in Q1 – precautionary and Mahatma Gandhi National Rural Employment forced saving in response to the pandemic was Guarantee Act (MNREGA). A direct boost to the being unwound. At the same time, a surge in agricultural sector was also provided through retained earnings is boosting saving by the non- various initiatives under the AatmaNirbhar Bharat fi nancial corporate sector, which registered a Abhiyan, viz., an Agriculture Infrastructure Fund, 5ANNUAL REPORT 2020-21 an Animal Husbandry Infrastructure Development improvement in e-way bills in the second half of the Fund, Kisan Rail, and the Pradhan Mantri Matsya year, along with strong GST collections, indicated Sampada Yojana (PMMSY). that a recovery is underway in domestic trading activity. Just like the primary sector, the ultra- I.18 Indian industry’s passage through tertiary industries such as IT displayed remarkable pandemic times has been one of both deep resilience in the face of the pandemic. Another losses and windows of opportunity. Manufacturing area of strength turned out to be construction, suffered the worst contraction, with the brunt boosted by the emphasis on sustaining the pace of the loss of output concentrated in Q1. The of expansion of the physical infrastructure - the mining sector continued to languish, throttled by construction of national highways reached a supply bottlenecks, with the steepest contraction new record of 13,000 kilometres in 2020-21, with in 2020-21 after 2011-12. Crude oil and natural around 37 kilometres of construction a day. This gas production dropped due to lack of critical also had positive effects in reviving the demand for infrastructure and equipment and operational housing. FASTags, a step towards cashless tolling diffi culties amidst the pandemic. At the same time, made mandatory in February 2021, resulted in a the pandemic opened up vistas of expansion for strong growth of National Electronic Toll Collection pharmaceuticals. The production-linked incentive (NETC), both in value and volume. E-commerce (PLI) scheme introduced for bulk drugs and medical platforms thrived through the pandemic, supported devices has been received well by the industry and by a wave of start-ups and the rising tide of it is expected to support domestic pharmaceutical digitisation. Even brick and mortar enterprises production and medical exports. Automobiles also made their presence online to hold on to market posted strong growth. The passenger car and two shares. wheelers’ segments benefi ted from the change in consumer preferences induced by social I.20 The services sector is still wounded. distancing towards personal vehicles over public The outlook was brightening in Q4 of transport. Another heartening feature of industrial 2020-21 with multi-speed paths out of the activity has been the early revival of electricity pandemic among different sub-sectors. The generation and its robust growth profi le in the services PMI witnessed its deepest contraction second half of the year. In Q4:2020-21, however, in April 2020, but it recovered slowly thereafter, the industrial sector relapsed, with contraction in entering into expansion zone since October and overall output of 0.9 per cent in January 2021 and staying there for seven consecutive months. The 3.4 per cent in February. Since August 2020, the pandemic ravaged the labour market, with self- manufacturing purchasing managers’ index has employed and casual labourers suffering the been in expansion, indicating a brighter outlook, biggest hits. With the easing of lockdowns and the but current conditions remain fragile and volatile. return of migrant labour to cities, employment had started edging towards normalcy, as portrayed by I.19 The services sector suffered heavily as data emanating from households’ surveys, pay activity in contact intensive services came to a roll numbers and new openings in the corporate near standstill in the initial period of the pandemic. sector before the second wave. Even as contact intensive sectors like aviation, tourism and hospitality suffered grievously, high I.21 The nation-wide lockdown and excessive frequency indicators pointed to a swifter than rains in some parts of the country caused supply expected recovery in other sectors. The steady disruptions, keeping food infl ation elevated during 6ASSESSMENT AND PROSPECTS the major part of the year. Rising global edible in the policy rate during February 2019-February oils prices exacerbated price pressures in view 2020, the cumulative reduction in the policy rate of India’s large dependence on palm oil imports. in the current easing cycle has been 250 bps. Ratchet effects of a hike in excise duties on petrol Monetary transmission improved notably during and diesel in May 2020, the increase in global gold 2020-21 on the back of surplus liquidity conditions prices in the fi rst half of the year, shortage of labour and mandated external benchmark-based pricing due to reverse migration and additional safety of fl oating rate loans to select sectors. The weighted measures added to cost push, fi rming up core average lending rate (WALR) on fresh rupee loans (excluding food and fuel) infl ation. Furthermore, declined by 79 bps during the year. The MPC gave margins were increased in order to recoup lost time-contingent forward guidance, stating that incomes; in general, retail markets become less monetary policy would remain accommodative competitive under epidemics as consumers are through the fi nancial year 2020-21 and into 2021- unable to scout for lower prices due to the need for 22 to revive growth and mitigate the impact of social distancing. As a consequence of all these COVID-19 on the economy, while ensuring that factors, headline infl ation remained above 6 per infl ation remains within the target going forward. cent for the fi rst eight months of the year, including I.23 The Reserve Bank undertook several in April and May when data were imputed in conventional and unconventional measures absence of satisfactory data collection. After a to ensure ample system-level liquidity as well brief moderation during November 2020 - January as targeted liquidity to support vulnerable 2021 on account of the seasonal winter easing in sectors, institutions and fi nancial instruments. food prices, infl ation resumed its uptrend during As a consequence, interest rates eased across February-March 2021 as core infl ation maintained the spectrum, spreads were compressed and an unrelenting elevation. Refl ecting these conducive fi nancial conditions prevailed. This infl uences and the fi rming up of global commodity enabled the normal functioning of fi nancial prices into what is widely believed to be the onset markets and institutions, an orderly completion of of another commodities supercycle, CPI headline the enhanced government borrowing programme infl ation rose to an average of 6.2 per cent during at a 17-year low weighted average cost of 2020-21 from 4.8 per cent in 2019-20. Year-on- borrowings, and a record volume of corporate year, in March 2021, the prices of global energy (World Bank Pink Sheet Data) increased by 89.7 bond issuances. per cent, food prices by 29.4 per cent, metals and I.24 As stated in the foregoing, explicit forward minerals prices by 60.4 per cent and precious guidance became an innovative feature of the metals prices by 16.3 per cent. Thus, India was conduct of monetary policy during 2020-21. The confronted with a trade-off between depressed Reserve Bank emphasised that fi nancial market economic activity in relation to potential and stability and the orderly evolution of the yield curve infl ation ruling above the target, each imposing are public goods, the benefi ts of which accrue to confl icting pulls and challenging the conduct of all stakeholders in the economy. In this scenario, monetary policy. the Reserve Bank conducted market operations I.22 Against this backdrop, the monetary policy through a variety of instruments, including long committee (MPC) reduced the policy repo rate by term repo operations (LTROs), targeted long 115 basis points (bps) during March-May 2020 to term repo operations (TLTROs), on-tap TLTROs 4.0 per cent. Taking into account the cuts of 135 bps aimed at specifi c sectors, a liquidity window for 7ANNUAL REPORT 2020-21 mutual funds, a special liquidity scheme (SLS) disinvestment. In the event, the expenditure push operationalised through a special purpose vehicle led to the fi scal defi cit expanding to 9.4 per cent to improve the liquidity position of non-banking of GDP, signifi cantly above the budget estimate of fi nancial companies (NBFCs) and housing fi nance 3.5 per cent. companies (HFCs), open market operations I.26 On the external front, India’s merchandise - including in state development loans (SDLs) - trade deteriorated sharply in Q1:2020-21 under and twist operations. These operations dispelled the onslaught of the fi rst wave of the COVID-19 illiquidity fears and avoided any potential systemic pandemic. With the gradual resumption of cross- risks to the fi nancial sector. As normalcy returned, border trading activity and unlocking of the banks were enabled to benefi t from the benign domestic economy as infections abated from interest rate environment by prematurely returning mid-September, merchandise trade started to the funds availed earlier under LTRO/ TLTROs. show signs of recovery. A revival in exports was Additionally, Cash Reserve Ratio (CRR) was backed by the strong performance of drugs and reduced by 100 bps (from 4.0 per cent to 3.0 per pharmaceuticals and agriculture. India emerged as cent). Further, the borrowing limit for banks under a key pharmaceutical supplier to the world on the the Marginal Standing Facility (MSF), by dipping basis of its generic drug manufacturing capacity into their Statutory Liquidity Ratio (SLR), was – India has the largest number of pharmaceutical enhanced to 3 per cent of NDTL from 2 per cent plants approved by international regulatory bodies earlier. Pre-emptive regulatory measures were (US Food and Drug Administration; World Health announced to provide relief to the borrowers in the Organisation - Good Manufacturing Practice or form of moratorium on loan repayments, followed WHO-GMP; and European Directorate of Quality by a comprehensive Resolution Framework 1.0 to Medicines or EDQM). Merchandise imports also enable resolution of viable accounts impacted by picked up towards the second half of the year as the COVID-19. domestic demand began to recover. For the year I.25 India also mounted a large fi scal stimulus as a whole, the merchandise trade defi cit shrank that was referred to earlier, in a calibrated rollout to y-o-y from US$ 161.3 billion to US$ 98.6 billion. mitigate the impact of COVID-19 on the economy. The collapse in overseas demand amidst travel As a consequence, capital expenditure grew by and transportation restrictions suppressed both a robust 104.4 per cent during October 2020 - exports and import of services, with only IT-related February 2021, reversing the contraction of 11.6 services exhibiting resilience and providing critical per cent in H1:2020-21. This improvement in the support to overall net exports. Worsening income quality of expenditure was also mirrored at the levels and losses of job opportunities in host sub-national level, with states’ capital expenditure countries, coupled with reverse migration from the (net of loans and advances disbursed) recovering Gulf region, impinged upon the fl ow of inbound to pre-pandemic levels during H2:2020-21. remittances. Given the underlying developments Government revenues, on the other hand, in merchandise and invisibles, the current account plummeted in 2020-21, with the cyclical and surplus of 3.0 per cent of GDP in H1:2020-21 pandemic-induced shortfalls in tax revenue fl ipped into a defi cit of about 0.5 per cent of GDP exacerbated by the absence of cushions from in H24. 4 Based on projections for Q4:2020-21. 8ASSESSMENT AND PROSPECTS I.27 India remained an attractive investment at end-March 2020, aided by capital raising from destination as net foreign direct investment (FDI) the market by public and private sector banks, and fl ows crossed a high during the year, even though retention of profi ts. Scheduled commercial banks’ there was a collapse in global FDI fl ows, and (SCBs) credit to the commercial sector rose by especially those going to advanced economies. 5.6 per cent (y-o-y as on March 26, 2021), lower The digital sector turned out to be a large recipient than 6.1 per cent a year ago. Their investments in of FDI into India with a few big-ticket deals. government securities accelerated, rising by 19.3 Foreign portfolio investment (FPI) fl ows also per cent as against 10.6 per cent a year ago. After surged as investors’ risk appetite returned, with reporting net losses in the March 2020 quarter, ultra-accommodative monetary policy stances of public sector banks (PSBs) reported a positive advanced economies’ central banks acting as the return on assets (RoA) in subsequent quarters. main push factor. The true position of their balance sheets and capital positions can be gauged only with the roll I.28 The health of the banking sector emerged back of regulatory reliefs. as a priority for the Reserve Bank as it sought to cushion the former from the pandemic. A number I.30 The Reserve Bank also took several of measures were put in place to mitigate its steps during the year to strengthen the regulatory impact, which included inter alia easier access to framework for NBFCs and HFCs. For NBFCs, working capital; moratorium; asset classifi cation it commenced a move towards a scale-based standstill; restriction on dividend pay-outs; regulatory framework. A revised framework permitting restructuring of viable accounts; for HFCs was put in place in October 2020 to and also postponement of planned roll-outs of promote a regulatory level-playing fi eld. There prudential norms such as the capital conservation has been a phased introduction of a liquidity risk buffer (CCB) and the net stable funding ratio management framework for NBFCs, including (NSFR), along with easing of the dispensation a liquidity coverage ratio (LCR). Guidelines for for the liquidity coverage ratio (LCR) requirement core investment companies (CICs) were also (details of major policy measures announced by comprehensively reviewed. The gross NPA ratio for the Reserve Bank during the year are covered in NBFCs improved to 5.7 per cent in December 2020 Annex I and II of the Report). from 6.8 per cent in March 2020, though largely on account of relaxation in asset classifi cation norms I.29 The gross non-performing assets (GNPA) pursuant to the Supreme Court’s decision on ratio of scheduled commercial banks (SCBs) standstill. The CRAR for NBFCs also marginally decreased to 6.8 per cent by end-December improved to 24.8 per cent from 23.7 per cent 2020 from 8.2 per cent in March 2020. Prudent during the same period. provisioning by banks, even over and above regulatory prescriptions for accounts availing I.31 During the year, the Reserve Bank moratorium and undergoing restructuring, resulted implemented the recommendations of the in an improvement in the provision coverage ratio Expert Committee on MSMEs and the Internal of SCBs to 75.5 per cent at end-December 2020 Working Group on Agricultural Credit to improve from 66.6 per cent in March 2020. Adjusting for inclusiveness and to enhance fl ow of credit to write offs, the PCR was 88.0 per cent, up from these sectors. Revised Master Directions on 81.3 per cent in March 2020. The capital to risk- priority sector lending (PSL) were issued to align weighted assets ratio (CRAR) of SCBs rose to 15.9 it with emerging national priorities. Co-lending per cent by end-December 2020 from 14.8 per cent was introduced to improve the fl ow of credit to the 9ANNUAL REPORT 2020-21 unserved and underserved sectors of the economy per cent (y-o-y). In the retail segment, the Unifi ed at an affordable cost. The scaling up of pilot centres Payments Interface (UPI) recorded 273 crore for fi nancial literacy (CFL) was initiated to cover the transactions, with values crossing the `5 lakh crore entire country in a phased manner. mark for the fi rst time. Transactions through other retail payment systems, like the National Electronic I.32 The Reserve Bank has been working Funds Transfer (NEFT), the National Electronic towards strengthening the supervisory framework Toll Collection (NETC), the Bharat Bill Payment for both banking and non-banking sectors. The System (BBPS), the Immediate Payment Service supervisory approach is now more forward- (IMPS) and the National Automated Clearing looking and root-cause oriented than before, House (NACH), also grew strongly. Overall, the incorporating both quantitative and qualitative total digital transaction volume in 2020-21 stood elements into assessment processes. During at 4,371 crore, as against 3,412 crore in 2019-20, the year, initiatives were taken towards (a) attesting to the resilience of the digital payment integration of supervisory functions meant for system in the face of the pandemic. different supervised entities; (b) specialisation and reinforcement of supervision through both vertical I.35 2020-21 will go down in history as the year and horizontal risk assessments; (c) setting up of the COVID-19 pandemic break in the life and a dedicated College of Supervisors for capacity ethos of humanity. It altered economic activity, development; and (d) harnessing SupTech. fi nance and, more generally, life and livelihoods in a drastic and deep way that may take several I.33 The COVID-19 pandemic has fast-tracked years to heal. The pandemic also exposed the digital transformation of the payments ecosystem fragility of health care infrastructure and the in India. Besides augmenting the broad-based inadequacy of health spending over the years. The use of technology, the pandemic has fuelled the year 2020 will also be notable for unprecedented proliferation of digital modes of payment, propelling policy responses which, although not coordinated, the country towards ‘less-cash’ alternatives. turned out to be synchronised globally. Admirably, Digital transactions recovered from their lows in the scientifi c community mobilised on a scale and the months of the lockdown and gained traction speed never seen before and the rollout of vaccines over the rest of the year with a growing preference by December 2020 is a testimony to its versatility for contactless transactions and tailored fi nancial and brilliance. The selfl ess and committed work offerings by FinTech players to adapt to the needs of healthcare professionals and frontline workers of end-users. Driving the continued policy support in helping the system to control the pandemic, by the Reserve Bank and the government is an even by risking their lives, deserves accolades emphasis on balancing the objectives of fashioning in these uncertain times. From this point in time, an appropriate regulatory policy, while ensuring the global recovery and its outlook, including for an orderly growth of the digital lending ecosystem. India, will be contingent on the pace and coverage I.34 The introduction of 24x7 RTGS in December of vaccination and its effi cacy against emerging 2020 created an enabling environment for the variants of the virus. speedy and secure growth of digital transactions. Looking Ahead to 2021-22 and Beyond India has become one of the very few countries across the world where RTGS system operates I.36 Historically, outbreaks of infl uenza round the clock throughout the year. In March pandemics occur in waves. Several countries 2021, transactions through RTGS swelled by 70 across the world have already experienced 10ASSESSMENT AND PROSPECTS two or more waves of COVID-19. Each of these risks tilt the balance: pandemic resurgence; visitations present painful trade-offs between tighter fi nancial conditions; extended scarring; protecting lives through restrictive measures intensifi ed social unrest; and geopolitical and and protecting livelihoods by not resorting to trade frictions. Hearteningly in October 2020, the them. This is the dilemma confronting all as the G20 has reaffi rmed its determination to continue recent virulent waves surge through various parts to use all available policy tools as long as required of the world. India is not immune to this razor’s to safeguard people’s lives, jobs and income, edge dilemma. In line with the mathematical support the global economic recovery, and models built around epidemiological regularities enhance the resilience of the fi nancial system, predicting that India’s second wave may broadly while safeguarding against downside risks. peak by mid-May 2021, the daily new infections I.38 As the recovery strengthens in 2021, global have started to drop recently, though the incidence trade is expected to accelerate. The IMF projects and replication factor still remain high for comfort. an expansion of 8.4 per cent in trade volumes Under this outcome, the macro-economic costs of goods and services (the WTO’s projection of this wave can be limited to Q1:2021-22 with of merchandise trade volume is 8.0 per cent), possible spillovers into July. This is the most although they will remain below the pre-pandemic optimistic scenario that can be envisaged at this trend. Cross-border services trade (tourism and juncture – it provides a limited window to establish transportation) is likely to remain subdued until strict pandemic protocols and logistics, ramp up the pandemic recedes globally, pandemic-related vaccines production and medical supplies, fi ll gaps restrictions on international travel ease and in the health infrastructure and build up stocks, confi dence returns. especially of vaccines, in preparation for the next wave of infections. In all other outcomes, losses in I.39 Infl ation is expected to remain low in terms of lives, employment and output are likely advanced economies (AEs) and in most of the to be adverse and long lasting. Given the size and emerging market economies (EMEs) due to sophistication of India’s pharmaceutical industry, considerable slack in economic activity; in the there is certainly hope that India can leverage on nearer-term, though, large fi scal and monetary its strength and contain future waves. stimuli and elevated commodity prices pose upside risks as market-based indicators of I.37 An uneven global recovery haltingly ekes infl ation expectations are revealing. By April 2021, its way through new infections and mutations, energy prices had risen by 170 per cent and non- struggling to gain traction. Countries that are energy commodity prices (agriculture, fertilisers, vaccinating rapidly and widely are fl attening the minerals, metals and precious metals) by 42 per infections curve. They will likely exit the current cent from pandemic lows a year ago. waves of the pandemic sooner than others and lead the global recovery, although they will remain I.40 In India, the pace of contagion in the second at risk until vaccination is equal and universal. wave has been alarming, stretching the health Forces rooting for the recovery are the ongoing infrastructure in terms of the capacity to handle a vaccination drives, and additional policy support surge of this size and speed. Daily new confi rmed wherever headroom is available. Under these infections surpassed the peak of the fi rst wave and conditions, the global economy is projected to crossed 1 lakh in early April, before vaulting above grow at 6.0 per cent in 2021 by the IMF in its 4 lakh by the end of the month and then dipping April 2021 World Economic Outlook. Downside to 2.2 lakh as on May 23, 2021. Recoveries have 11ANNUAL REPORT 2020-21 lagged behind infections, resulting in the recovery release up to 50 per cent of their supplies to states rate dropping to 88.7 per cent as on May 23, 2021 and the open market at a pre-declared price. even as the confi rmed death rate hovered around The pricing of vaccine has been liberalised to 1.1 per cent amidst reports of higher fatalities that incentivise scaling up of production and to attract were not confi rmed medically. While in the initial new players into vaccine production. To augment stages, Maharashtra appeared to be its epicentre, the basket of vaccines available for fi ghting the the second wave engulfed other parts of the pandemic, the government has permitted vaccines country over the next few weeks, with a total tally approved in the United States (US), the United of confi rmed cases crossing 2.6 crore, with over Kingdom (UK), the European Union (EU), Japan 27 lakh active cases and 3.03 lakh fatalities as on and/or listed by the World Health Organisation May 23, 2021. As of May 23, 2021, total confi rmed (WHO) for emergency use in India. Furthermore, COVID-19 cumulative death rate per capita in the government has approved an advance of India has been 50 per cent below global average. `4,500 crore to vaccine manufacturers to ramp up With the recent second wave, the marginal death production of vaccines. rate - 7-day average of new deaths per million of I.42 The onset of the second wave has triggered population - in India at 3.04 per cent moved ahead a raft of revisions to growth projections, with the of global total of 1.55 per cent; though the new consensus gravitating towards the Reserve Bank’s deaths as percentage of new infections on a 7-day projection of 10.5 per cent for the year 2021-22 - average basis still remains 20 per cent below 26.2 per cent in Q1, 8.3 per cent in Q2, 5.4 per global average5. cent in Q3 and 6.2 per cent in Q4. The pandemic I.41 Yet, the extent of misery and the loss itself, especially the impact and duration of the of human lives has left indelible fi ssures and second wave, is the biggest risk to this outlook. several lessons for the future: eternal vigilance Yet, upsides also stem from the capex push by in terms of pandemic preparedness – it is not the government, rising capacity utilisation and the going away for some time; priority for upscaling turnaround in capital goods imports. health spending and health infrastructure; faster I.43 For April and early May 2021, available rollout of vaccines and vaccination while building up stocks; investing in research and development high frequency indicators present a mixed picture. as vaccine developers/producers are challenged While mobility and sentiment indicators have by new variants of the virus; prudent and pre- moderated, several activity indicators have held emptive pandemic protocols, including local their own and shown resilience in the face of lockdowns, restrictions on mobility and other the second wave. GST collections crossed the COVID-appropriate behaviour. In order to speed `1 lakh crore mark for the seventh consecutive up the vaccination drive, the Drugs Controller month in April and notched up the highest level General of India (DCGI) has approved the use on record, suggesting that manufacturing and of Russia’s Sputnik V in India on April 13, 2021. services production has been maintained. On Furthermore, in order to expand inoculation the other hand, e-way bills moderated, pointing coverage, all Indians above the age of 18 are to mobility restrictions and possible slackening eligible for vaccination from May 1, 2021. Vaccine of GST collections in ensuing months. Slowing manufacturers have been provided fl exibility to down of mobility is also refl ected in toll collection 5 Our World in Data. 12ASSESSMENT AND PROSPECTS volumes during April. In the agricultural sector, 2021-22. Even though India’s merchandise exports work demanded under the MGNREGA has and imports show nascent signs of recovery, tapered during the month, indicative of increased the worsening global trade environment due to demand for farm labour. As regards industrial resurgence in COVID-19 infections may impinge activity, electricity demand is stable. Transportation upon external demand. Seizing the opportunities remains resilient as refl ected in rising freight opened up in the wake of the pandemic, domestic traffi c supported by the pandemic-related surge fi rms must prepare for greater participation in demand for essential medical supplies. On the in technology and capital-intensive sectors of external front, merchandise exports and imports global value chains (GVCs) through upgradation have recorded growth rates of 195.7 per cent of requisite skills and focus on research and and 167.1 per cent in April, partly refl ecting low development capabilities. The government’s base effect but also pointing to the revival of both push under the production-linked incentive (PLI) external and domestic demand. The value of total scheme is aimed at incentivising value addition, digital transactions has been maintained in April. production and exports and to boost the integration Financial conditions have generally remained of domestic industries in GVCs. In preparation, congenial and supportive of the recovery. the inverted duty structure under which inputs are I.44 Looking ahead, the evolving CPI infl ation taxed at a higher rate than fi nished goods in PLI trajectory is likely to be subjected to both upside sectors needs to be corrected to incentivise large and downside pressures. The food infl ation path fi rms to shift their production bases to India and will critically depend on the temporal and spatial also to reap economies of scale. The integration progress of the south-west monsoon in 2021. of the ‘One District One Product (ODOP)’ scheme6 Second, some respite from the incidence of in export promotion initiatives under the states’ domestic taxes on petroleum products through industrial policy/export policy should also boost coordinated action by the centre and states exports. The ongoing policy dialogue on trade could provide relief, although international facilitation with various nations and multilateral crude oil prices continued to be volatile. Third, institutions, new trade agreements and fi ne- a combination of high international commodity tuning of existing Free Trade Agreements (FTAs) prices and logistic costs may push up input price to leverage competitiveness is also a priority for pressures across manufacturing and services. enhancing export growth and GVC participation. In Taking into consideration all these factors, CPI the pharmaceutical sector, India should leverage infl ation is expected to average 5 per cent during its global competitive advantage in COVID-19 2021-22 - 5.2 per cent in Q1:2021-22; 5.2 per cent vaccine production to further boost domestic in Q2; 4.4 per cent in Q3; and 5.1 per cent in Q4, pharmaceutical exports, with a strong emphasis with risks broadly balanced. During April 2021, on domestic production of Active Pharmaceutical infl ation moderated on favourable base effects. Ingredients (APIs). The indigenous production of I.45 Global developments and their spillovers containers should also be prioritised to ensure a are likely to shape India’s external sector in robust cross-border supply chain network. 6 It is an initiative under the Ministry of Commerce and Industry, Government of India, envisaged as a transformational step towards realising the true potential of a district, fuelling economic growth and generating employment and rural entrepreneurship. The objective is to convert each district of the country into an export hub by identifying products with export potential, addressing bottlenecks for exports, supporting local exporters/manufacturers, and fi nd potential buyers outside India with the aim of promoting exports/manufacturing/services industry in the district and generate employment. 13ANNUAL REPORT 2020-21 I.46 IT services exports are likely to maintain consolidation in the GFD at around 3.2 per cent in their resilience amidst growing demand for digital 2021-22 (based on budgets of 17 states), keeping operations and cloud services. Major IT exporter in view the 15th Finance Commission’s target of companies have secured new client strategic 4.0 per cent. The pandemic may induce states to partnerships with leading global companies. In borrow more to provide counter-cyclical support in anticipation of the global recovery, spending on IT order to deal with the second wave. services is set to increase and exports of Indian IT I.48 Given the adverse impact of COVID-19 on companies are also likely to gain from the planned state fi nances, the Reserve Bank increased ways increase of 9.0 per cent in global IT services spend and means advances (WMA) limit in April 2020 in 20217. by 60 per cent over and above the level as on I.47 An important factor that brightens the March 31, 2020. This was extended for a further prospects of the recovery is the fi scal policy stance. period of 6 months till March 31, 2021, and then, The thrust on infrastructure can create conditions based on the recommendations of the Advisory for broadening the revival in activity by exploiting Committee on WMA to State Governments forward and backward linkages and multiplier (2021) [Chairman: Shri Sudhir Shrivastava], the effects. The Union Budget 2021-22 announcement existing interim limit was extended for further for setting up a Development Financial Institution six months, i.e., up to September 30, 2021. The (DFI) with a capital base of `20,000 crore to fi nance number of days for overdraft (OD) was increased till projects under the National Infrastructure Pipeline March 31, 2021 and then extended till September (NIP) aims to address the problem of long-term 2021 in May 2021. Furthermore, the Reserve Bank project fi nancing. Measures are also on the anvil relaxed the rules governing withdrawal from the consolidated sinking fund (CSF) to enable states for easing the doing of business in the economy. In to meet a larger proportion of their redemption particular, enforcing contracts and trading across of market borrowings. The Centre has allocated borders (i.e., logistical process of exporting and `15,000 crore under the scheme of ‘Special importing goods) need policy attention to further Assistance to States for Capital Expenditure’ improve India’s ranking in the World Bank’s index. for 2021-22 as interest-free 50-year loans, Recognising the risks to the recovery from a which is in addition to `11,830 crore released to premature fi scal tightening, the central government states in 2020-21 as part of the AatmaNirbhar has opted for a gradual fi scal consolidation by Bharat package to carry out capital expenditure budgeting the gross fi scal defi cit (GFD) at 6.8 during the pandemic. Based on the 15th Finance per cent of GDP in 2021-22 – down from 9.4 per Commission’s recommendation, the Centre has cent in the preceding year – and bringing it down allowed states a net market borrowing of up to gradually to below 4.5 per cent of GDP by 2025- 4 per cent of GSDP for the year 2021-22, with a 26. Increased buoyancy of tax revenue on the back fl exibility to go beyond 4 per cent on fulfi llment of of improved compliance, and receipts from asset power sector reforms. monetisation and disinvestment are expected to support capital outlay (capital expenditure I.49 The conduct of monetary policy in less loans and advances) that is budgeted to 2021-22 would be guided by evolving increase by 54.7 per cent. States have budgeted a macroeconomic conditions, with a bias to remain 7 Gartner, April 2021. 14ASSESSMENT AND PROSPECTS supportive of growth till it gains traction on a I.51 With the second wave intensifying, the durable basis while ensuring infl ation remains Reserve Bank announced on May 5, 2021 an within the target. The government has retained array of measures as the fi rst set of a calibrated the infl ation target at 4 per cent with the lower strategy to fi ght the pandemic, with its focus being and the upper tolerance band of 2 per cent and on the smallest and most vulnerable. Recognising 6 per cent, respectively, for the next fi ve years that the second wave could pose diffi culties in loan (April 2021 - March 2026), refl ecting not just the servicing, it announced Resolution Framework credibility of the current framework, but also its 2.0 which allows restructuring of loans taken by role in preserving macro-economic stability. In its individuals, small businesses and MSMEs with April 2021 resolution, the MPC voted unanimously an exposure cap of `25 crore. Fresh lending to to keep the policy repo rate unchanged and MSMEs was allowed equivalent exemption from continue with the accommodative stance as long the Cash Reserve Ratio (CRR). Lending by small as necessary to sustain growth on a durable fi nance banks (SFBs), micro fi nance institutions basis, while ensuring that infl ation remains within (MFIs) – NBFC-MFIs and others – with gross loan the target going forward. portfolios of up to `25 crore by end-March 2021 – was made eligible for reckoning as priority sector I.50 The Reserve Bank will ensure that system lending (PSL) and such loans can be deducted level liquidity remains comfortable during 2021- from net demand and time liabilities (NDTL) 22 in alignment with the stance of monetary for cash reserve ratio requirements up to end- policy, and monetary transmission continues December 2021. Banks were also allowed to utilise unimpeded while maintaining fi nancial stability. 100 per cent of fl oating provisions/ countercyclical This is exemplifi ed by the introduction of the provisioning buffer held by them as at end of secondary market G-sec acquisition programme 2020 for making specifi c provisions for NPAs. In (G-SAP) in 2021-22 under which the Reserve view of mobility restrictions posed by the second Bank has committed upfront to a specifi c amount wave, regulated entities (REs) were asked not for open market purchases of G-secs with a view to restrict till end-December 2021 operations of to enabling a stable and orderly evolution of the those accounts for which periodic KYC updation yield curve under congenial fi nancial conditions. is pending. The positive externalities of G-SAP 1.0 operations need to be seen in the context of those segments I.52 In an effort to boost provision of immediate of the fi nancial markets that rely on the G-sec liquidity for ramping up COVID related healthcare yield curve as a pricing benchmark. The fi rst infrastructure and services in the country, an on- tranche of the G-SAP of `1 lakh crore has been tap liquidity window of `50,000 crore with tenors of received well and it has had a salutary effect on up to three years at the repo rate was opened till the evolution of G-sec yields. At the same time, the end of 2021-22. It was also decided to conduct efforts are underway to further deepen the G-sec special three-year long-term repo operations market with increased retail participation. In a (SLTRO) of `10,000 crore at the repo rate for the major structural reform that places India in a select SFBs to be deployed for fresh lending of up to `10 league of countries, the Reserve Bank announced lakh per borrower. In order to expand system-level online retail participation in government securities liquidity further and enable the orderly evolution of market - both primary and secondary - along with the yield curve the second purchase of government the facility to open gilt securities accounts (‘Retail securities of `35,000 crore under G-SAP 1.0 was Direct’) with the Reserve Bank. also announced. 15ANNUAL REPORT 2020-21 I.53 With the lifting of the interim stay on asset help in reducing the stressed assets on the bank classifi cation standstill by the Hon’ble Supreme balance sheets. Court on March 23, 2021 banks’ asset quality will I.55 Steps would be taken to further strengthen need to be closely monitored in coming quarters, the on-site assessment of oversight and assurance with preparedness for higher provisioning. The functions, including risk and compliance culture waiving of interest on interest charged on loans as also business strategy/models. Efforts will be during moratorium period (March 1, 2020 to made to smoothen the supervisory return system August 31, 2020) may also impinge on lending by integrating the supervisory data structure for institutions’ fi nances. They are, however, better all supervised entities (SEs) by reviewing and positioned than before in managing stress in consolidating the extant framework of returns. The balance sheets in view of higher capital buffers, effi ciency and effi cacy of supervisory processes improvement in recoveries and a return to will be further enhanced with the adoption of profi tability. Stress tests indicate that Indian innovative and scalable supervisory technology banks have suffi cient capital at the aggregate (SupTech). The fraud risk management system level even in a severe stress scenario. Bank-wise would be fi ne-tuned by improving the early as well as system-wide supervisory stress testing warning signal (EWS) framework, strengthening provide clues for a forward-looking identifi cation fraud governance and response systems, of vulnerable areas. augmenting data analysis for monitoring of I.54 In the regulatory and supervisory domain, transactions, introducing dedicated market several measures are expected to be put in intelligence unit for frauds and implementation of automated unique system generated number place during 2021-22, including a review of the for each fraud. With a view to strengthening the regulations applicable to all the regulated entities audit systems in SEs, harmonised guidelines on engaged in microfi nance; guidelines on dividend appointment of Statutory Auditors of commercial distribution by non-banking fi nancial companies banks (excluding RRBs), primary (urban) co- (NBFCs) and scale-based regulation for them. operative banks (UCBs) and NBFCs have been Resumption of the insolvency processes under issued. Similarly, in the area of cyber security, the Insolvency and Bankruptcy Code (IBC), and specifi c regulations have been planned: Master the introduction of a pre-packaged insolvency Direction on Information Technology Governance, mechanism for MSMEs to provide an easier Risk, Controls and Assurance Practices 2020; and resolution channel are expected to bring back the Master Direction on IT Outsourcing. A web-based focus on meaningful resolution of stressed assets application portal, i.e., the Integrated Compliance by the lenders, even as necessary regulatory Management and Tracking System (ICMTS) will measures are taken to respond to the fallout of be implemented to further enhance the effi ciency resurgent pandemic. The envisaged bad bank, and consistency of compliance monitoring across the regulatory measures aimed at developing all the SEs. market-based mechanisms for credit risk transfer, such as securitisation, transfer of loan exposures I.56 The Business Correspondent (BC) model8 and development of secondary loan market may came to the fore in extending unhindered fi nancial 8 The BC model was initiated by the Reserve Bank in 2006 to promote fi nancial inclusion. 16ASSESSMENT AND PROSPECTS services to the last mile during the pandemic. The increasing trend of outsourcing arrangements, a impact of COVID-19 has triggered a paradigm shift regulatory framework for management of attendant in the way banking business is undertaken across risks in outsourcing arrangements by non-bank the globe, with an increasing role of the digital payment system operators will be operationalised. medium in deepening fi nancial inclusion. Drawing I.59 The prospects for FinTech in India’s on these advances, the BC model will be further fi nancial system in 2021-22 will depend upon strengthened to adapt to the evolving needs and the degree of entrenchment of digital usage, demands of the sector. To measure the extent which is, in turn, contingent upon the resilience of fi nancial inclusion in the country, the Reserve of the underlying acceptance infrastructure, Bank proposes to construct a Financial Inclusion fi nancial literacy and awareness of the users (both Index (FI Index), based on multiple parameters. It merchants and consumers) and strengthening will be published in July for every fi nancial year. of the customer protection and cyber security I.57 Through the pandemic, the grievance protocols in place. All these factors will help in redressal mechanism will remain available 24x7, cementing the trust of users in digital modes. The ensuring that complaints against REs receive Reserve Bank’s initiative to set up a pan-India timely and adequate attention even during the new Umbrella Entity will intensify competition in lockdown and the phased unlock. The Reserve the digital space and bring out the best for end- Bank will focus on further improving customer users and other participants in terms of effi ciency services for which internal grievance redressal gains and convenience. Collaborations between mechanism of banks will be assessed under the card issuing banks, FinTech players and other framework for strengthening grievance redressal stakeholders of the payments ecosystem are mechanisms by banks. Education and awareness likely to give rise to a new hybrid model of fi nance efforts on consumer protection will also be that will help address credit gaps and ramp up last sustained in the ensuing year. mile outreach by leveraging on the geographical footprint of banks and technological know-how of I.58 In the area of digital payments, various FinTech companies. initiatives such as an innovation hub, a regulatory sandbox and offl ine payment solutions are I.60 To sum up, the year gone by has left a underway to ensure that in the digital ecosystem, scar on the economy. In the midst of the second India maintains its position as a leader. The wave as 2021-22 commences, pervasive despair Reserve Bank is in the process of extending the is being lifted by cautious optimism built up by geo-tagging framework put in place to capture vaccination drives. Intense national efforts to beat location of bank branches, ATMs and BCs to cover back the virus are coalescing at least to some payment system touch points, enabling accurate synchronicity across the world. Countries are capture of their location across the country. In stepping away from vaccine nationalism as the line with the G-20 mandate of enhancing cross- world adapts by learning to survive. A collective border payment arrangements, the possibility global effort to fi ght the pandemic will surely bring of leveraging India’s domestic payment systems better results than individual countries fi ghting on to facilitate cross-border transactions is being their own. The G20 goal of strong, sustainable and explored, and corridors and charges for inward inclusive growth may yet be in sight and within remittances will be reviewed. Keeping in mind the reach. 17ANNUAL REPORT 2020-21 II ECONOMIC REVIEW India joined the global economy in an unprecedented contraction in 2020-21, dragged down by the COVID-19 pandemic. Headline inflation was elevated for most part of the year led by supply chain disruptions due to the pandemic and spikes in key food prices. Inflation, however, moderated subsequently due to seasonal easing in food prices since December 2020, albeit with an upside push from adverse base effects during February-March 2021. Monetary and credit conditions remained expansionary and financial market conditions eased considerably on the back of abundant liquidity. Public finances were impacted by a cyclical slowdown in revenues, which was exacerbated by COVID-19, while pandemic-induced fiscal measures pushed up expenditure. On the external front, the sizeable contraction in imports relative to exports, under deep recessionary conditions, led to a current account surplus; along with robust net capital inflows, this led to a large build-up of foreign exchange reserves. II.1 THE REAL ECONOMY not coordinated, turned out to be synchronised. A slew of conventional and unconventional II.1.1 In 2020, the global economic sky was measures was unleashed across the world, overcast with COVID-19 - a virus of the size of with monetary authorities slashing policy rates 0.12 microns. By end-March 2021, the virus had to zero and below in real terms - and even in resulted in over 128 million infections and over nominal terms in some countries - while executing 2.8 million mortalities worldwide. The year 2021 massive asset purchase programmes, payment has commenced with both hope and fear - several deferral schemes, provision of public guarantees, parts of the world are locking down and bracing emergency funding avenues and provision of against new waves of infections and speedily ample liquidity to fi nancial markets. The stimulus communicable mutations. At the same time, provided by fi scal authorities was equally the approval of several vaccines has spurred vaccination drives worldwide, albeit at different unprecedented in scale and scope, amounting speeds. Nearly 600 millions of vaccine doses have to US$ 16 trillion2 (15.3 per cent of the GDP). already been administered (March 31, 2021), even Of the total amount, US$ 10 trillion consisted of as vaccine producers struggle to tweak vaccines additional spending or foregone revenue, while to keep pace with mutations. In the event, 2020 US$ 6 trillion comprised liquidity support in the has gone down in human history as the year of form of guarantees, loans, asset/debt purchases, the ‘Great Lockdown’1, with output losses dwarfi ng and equity injections. This policy fi ghtback led those suffered during the global fi nancial crisis to a massive easing of fi nancial conditions and (GFC) of 2008-09. World trade declined by around imparted stability to the fi nancial system, thereby 8.5 per cent, with the contraction in services trade containing downside risks to growth. outpacing the fall in merchandise trade. II.1.3 Equity markets, in particular, have II.1.2 The year 2020 will also be memorable for recovered exuberantly from the panic that set in unprecedented policy responses which, although when COVID-19 was declared a pandemic in March 1 IMF (2020), ‘World Economic Outlook’, International Monetary Fund, Washington D.C., April. 2 IMF (2021), ‘Fiscal Monitor- A Fair Shot’, International Monetary Fund, Washington D.C., April. 18ECONOMIC REVIEW 2020. Cyclical stocks3 have led the rally, driven by II.1.5 With gradual lifting of restrictions and optimism surrounding the arrival of vaccines and reopening of the economy, the pace of contraction fresh rounds of fi scal stimulus in major economies. moderated in Q2 and GDP returned to positive Crude oil prices and other commodity prices are terrain in Q3 of 2020-21. Sensing the recovery also fi rming up on the back of these positive gaining traction, equity markets became ebullient, developments, with production restraints by the with the BSE Sensex staging a V-shaped recovery organisation of the petroleum exporting countries and rising over 91 per cent by end-March (OPEC) providing added momentum in February 2021 from the lows of March 2020, buoyed by and March 2021 and creating conditions for the strong corporate performance in Q2 and Q3 of forming of a new commodity super-cycle. 2020-21, the roll-out of a massive vaccine programme, fi scal and monetary stimulus in II.1.4 The agglutination of supply disruptions, place and surges of capital infl ows. The prospects the health crisis, an unparalleled mass migration for the Indian economy though impacted by and a hostile global environment took a heavy the second wave, remain resilient backed by toll on the Indian economy. A cyclical slowdown the prospects of another bumper rabi crop, the had preceded the pandemic, causing real gross gathering momentum of activity in several sectors domestic product (GDP) growth to register a of the economy till March, especially housing, road sequential deceleration since 2017-18, which construction and services activity in construction, slumped into contraction under the onslaught of freight transportation and information technology COVID-19. Within two weeks of the World Health (IT). Meanwhile, the activation of the production- Organisation (WHO) declaring it a pandemic, India linked incentive (PLI) scheme, spectrum auctions imposed a strict lockdown. The combination of and considerable easing of fi nancial conditions demand compression and supply disruption that are helping to shape the turnaround. On the other took hold in its wake caused severe debilitating hand, large and medium-scale industry, mining effects on the economy in Q1:2020-21. By mid- and quarrying and several contact-intensive September, the total number of COVID-19 cases sectors remain subdued. crossed 50 lakh - the second highest caseload in the world, with over 0.8 lakh fatalities. It was II.1.6 Against this backdrop, component-wise a turning point, however; thereon, India bent analysis of aggregate demand is set out in the the COVID-19 curve, with the seven-day rolling following sub-section. Developments in aggregate average of new confi rmed cases dropping from supply conditions in terms of the performance of 93,199 on September 16, 2020 to 11,145 on agriculture and allied sectors, value added in the February 11, 2021 before rising sharply thereafter industrial sector, and performance of services are (62,019 on March 31, 2021). By the end of March sketched out in sub-section 3. The sub-section 4 2021, the recovery rate was around 94 per cent presents analysis of employment based on high and the number of active cases had surged to 5.8 frequency indicators. The concluding sub-section lakh. offers some policy perspectives. 3 Cyclical stocks are stocks of companies from sectors such as metals, energy and industries that fl uctuate according to business cycles and performance of the economy. 19ANNUAL REPORT 2020-21 2. Aggregate Demand Chart II.1.1: GDP Growth: Y-o-Y and 3-Quarter MA-SAAR II.1.7 The second advance estimate (SAE) that were released by the National Statistical Offi ce (NSO) in February 2021 revealed that aggregate demand, measured by real GDP, contracted by 8.0 per cent in 2020-21 (Table II.1.1 and Appendix Table 1). This is the fi rst contraction experienced since 1980-81 and the severest ever. In fact, the contraction was of the order of 15.9 per cent in the fi rst half of 2020-21 under the full brunt of the lockdown imposed to curb the transmission of COVID-19. II.1.8 Progressive restoration in demand conditions was evident with a sharp rebound #: Implicit growth. in seasonally adjusted annualised growth rate Source: NSO and RBI staff estimates. (SAAR) in Q2:2020-21, indicating a recovery in momentum. This was sustained in the next II.1.9 Underlying the vicissitudes in aggregate quarter as well, refl ected in an uptick in the three- demand conditions in 2020-21 were compositional quarter moving average (MA-SAAR) of GDP in shifts among constituents. Private fi nal Q3:2020-21 (Chart II.1.1 and Appendix Table 2). consumption expenditure (PFCE) registered a contraction for the fi rst time in the past four decades (Chart II.1.2). Government fi nal Table II.1.1: Real GDP Growth (Per cent) consumption expenditure (GFCE) continued to Component 2016-17 2017-18 2018-19 2019-20 2020-21 provide support to aggregate demand; however, 1 2 3 4 5 6 Chart II.1.2: Weighted Contribution to GDP Growth I. Total 7.8 7.1 7.4 5.9 -7.1 Consumption Expenditure Private 8.1 6.2 7.6 5.5 -9.0 Government 6.1 11.9 6.3 7.9 2.9 II. Gross Capital 3.7 10.8 9.7 2.3 -12.9 Formation Fixed 8.5 7.8 9.9 5.4 -12.4 Investment Change in -48.8 68.3 27.2 -39.7 -3.5 Stocks Valuables -18.6 40.2 -9.7 -14.2 -38.0 III. Net Exports Exports 5.0 4.6 12.3 -3.3 -8.1 Imports 4.4 17.4 8.6 -0.8 -17.6 Note: Component-wise contributions do not add up to the growth IV. GDP 8.3 6.8 6.5 4.0 -8.0 rate as change in stocks, valuables and statistical discrepancies are not included. Source: NSO. Source: NSO. 20ECONOMIC REVIEW its contribution waned in 2020-21 as stress After a marked improvement in January, the March mounted on government fi nances. Gross fi xed 2021 round of the Reserve Bank’s consumer capital formation (GFCF) recorded a contraction, confi dence survey (CCS) showed a worsening primarily due to prevailing uncertainty and the consumer sentiment on the back of deteriorating imposition of lockdown. There was a marked sentiments on general economic situation, income contraction in the external sector too; however, with and prices. The future expectations index (FEI) imports declining sharper than exports, overall net also indicated lower optimism for the year ahead. exports made a positive contribution to aggregate Going forward, the recovery of the economy from the COVID-19 will critically depend on the robust demand. The contraction in GDP outpaced the revival of private demand that may be led by retrenchment in gross value added (GVA) at basic the consumption in the short-run but will require prices on account of Food Corporation of India acceleration of investment to sustain the recovery (FCI) food subsidies being refl ected on the Union (Box II.1.1). Budget. II.1.12 Indicators of rural demand reveal a Consumption promising picture. The pandemic affected rural II.1.10 Private consumption - the mainstay of areas less than urban areas where population aggregate demand - was severely affected by the density is higher. Furthermore, agriculture and pandemic. Wilting from its innate resilience, PFCE allied activities were generally exempted from the contracted by 9.0 per cent in 2020-21, refl ecting lockdown measures and exhibited resilience owing cliff effects of the impact of the stringent nation- to a confl uence of factors working in conjunction, wide lockdown and social distancing norms, viz., a bountiful monsoon, adequate soil moisture, heightened uncertainty as a result of transitory replenished reservoir levels, improved labour and permanent job losses, closures of small, availability during pandemic and favourable micro and unincorporated businesses and wage terms of trade for agricultural products. The resets. Discretionary consumption, particularly acceleration in fertilizers production and tractor on transport, hotel and restaurants, recreation sales supported rural demand and brightened and culture, with a combined share of around the outlook. After remaining in contraction for 19 20 per cent in PFCE, remained much below consecutive months, motorcycle sales entered pre-COVID-19 levels. Reverse migration of workers expansion territory in August 2020 and have since contributed to losses in disposable income, been robust. thereby negatively affecting domestic remittances Investment and Saving and consumption. Although the deleterious II.1.13 The rate of gross domestic investment ramifi cations were faced in both rural and urban in the Indian economy, measured by the ratio of areas, contraction in private consumption has gross capital formation (GCF) to GDP at current been more pronounced in case of the latter. prices, reduced to 32.2 per cent in 2019-20 from II.1.11 A sharp recovery in consumption has 32.7 per cent in the preceding year. Although become evident from Q2. Passenger vehicle sales data on GCF are not yet available for 2020-21, normalised since September 2020. In response movements in its constituents suggest that the to improving demand, production of consumer slowdown would continue. The ratio of real gross durables that remained sluggish during H1:2020- fi xed capital formation (GFCF) to GDP decreased 21, also witnessed a sharp revival in H2:2020-21. to 30.9 per cent in 2020-21 from 32.5 per cent in 21ANNUAL REPORT 2020-21 Box II.1.1 What Drives Recovery in Growth after a Crisis? For a self-sustaining GDP growth trajectory post-COVID-19, Table 1: Models of GDP Growth a durable revival in private consumption and investment Dependent Variable GDP Growth demand together would be critical as they account for Consumption Growth Investment Growth around 85 per cent of GDP. In view of the limited share of 1 2 3 government consumption demand in GDP (at around 13 per cent in 2020-21), a rebound in private demand is essential Estimation Period Q2:1998-99-Q1:2020-21Q2:1998-99-Q1:2020-21 Consumption 0.63*** to sustain the recovery. Typically, post-crisis recoveries have Consumption*up-cycle 0.17* been led more by consumption than investment; however, Consumption*down-cycle 0.42*** investment-led recoveries can be more sustainable and can Investment 0.32*** also lift consumption in parts by better job creation. In either Investment*up-cycle 0.14* Investment*down-cycle 0.26*** case, private demand plays a pivotal role. In this context, the turning points in the growth cycle, determined by identifying ***: Signifi cant at 1 per cent level. *: Signifi cant at 10 per cent level. the local maxima and minima - using the fi rst and fourth Source: RBI staff estimates. quartiles of GDP growth, i.e., the lowest 25 per cent and the highest 25 per cent of the growth are examined. Additionally, A group of AR(1) models of GDP growth, augmented by current period (i) private fi nal consumption expenditure a few censor rules are applied, such as eliminating back to (PFCE) and (ii) investment [gross fi xed capital formation back minima or maxima and ensuring that there is at least (GFCF)] is estimated (Table 1). The analysis uses the GDP a one quarter gap between maxima and minima. These cycle dating algorithm to create dummies that capture additional censor rules help to cleanly identify turning points upcycles and downcycles. in the GDP cycle (Chart 1). The fi ndings suggest that an increase in consumption and investment during a downcycle boosts GDP growth more Chart 1: Turning Points in the GDP Cycle for India than during an upcycle. The analysis also suggests that GDP an increase in investment leads to higher consumption4, suggesting that an investment-led recovery could boost both output and consumption. A mix of policies may be needed, as very low capacity utilisation rates may leave little incentive for the private sector to start a strong investment cycle. Therefore, there will be a need for an increase in public investment spending that can crowd in private investment, while private consumption needs to be supported through improvement in consumer credit. As a robustness check, high-frequency lead indicators of consumption and investment demand confi rm that an increase in investment and consumption contribute more to Phase Quarters GDP growth during a downcycle than in an upswing5. While Down-cycle Jun-2000 to Mar-2001 Cycle 1 an increase in investment leads to higher consumption Up-cycle Jun-2001 to Dec-2003 demand through positive income and employment effects, Down-cycle Mar-2004 to Mar-2009 an increase in consumption does not cause an increase in Cycle 2 GFC Dec-2008 to Sep-2009 investment. Both results highlight the role of an investment- Up-cycle Jun-2009 to Mar-2010 led recovery for sustaining the post COVID-19 rebound. Down-cycle Jun-2010 to Mar-2013 Cycle 3 Up-cycle Jun-2013 to Sep-2016 Reference: Cycle 4 Down-cycle Dec-2016 to Jun-2020 Bhadury, S., S. Ghosh and P. Kumar (2020), ‘Nowcasting Indian GDP Growth using a Dynamic Factor Model’, Working Source: RBI staff estimates. Paper No.3, Reserve Bank of India. 4 There is no statistically signifi cant evidence of the reverse causality. 5 For tracking the investment cycle, a single-index dynamic factor was constructed from high-frequency indicators such as IIP-core, cement production, electricity production, and manufacturing activity. Similarly, the dynamic factor for consumption activity was constructed using air passenger, rail passenger, IIP-consumer goods, and automobile sales. 22ECONOMIC REVIEW 2019-20, refl ective of weak investment sentiment half of the year with a gradual revival in sales, in the economy. GFCF registered a contraction of primarily due to favourable interest rates, steep 12.4 per cent in 2020-21, in view of the prevailing discounts by developers to liquidate inventory, uncertainty in the economy, waning business and reduction in stamp duty by a few states. confi dence and fl agging entrepreneurial appetite There was a collapse in investment in machinery for new investment. Fixed investment continues and equipment, refl ective of muted investment by to be the Achilles’ heel of the economy and the private sector. Both its proximate coincident rekindling of animal spirits remains a top priority indicators – imports and production of capital for policymakers. goods - registered a contraction in every month of H1:2020-21. II.1.14 Among the components of GFCF, construction activity remained subdued in II.1.15 At a disaggregated level, fi xed investment H1:2020-21. Apart from being affected by the in dwellings, other buildings and structures pandemic, construction was throttled by a decreased by 0.3 percentage points to 15.5 stringent lockdown, reverse migration of workers per cent of GDP in 2019-20, mainly due to from the urban construction sites, a large public non-fi nancial corporations and the inventory overhang, coupled with stressed liquidity household sector, which offset the gains made conditions in the early part of the pandemic. This by the general government sector through its was also refl ected in its proximate coincident thrust on infrastructure and affordable housing indicators – steel consumption and cement (Chart II.1.4). There has been a steady growth production (Chart II.1.3). Infusion of liquidity in fi xed investment in machinery and equipment helped arrest the deterioration, and housing from 10.5 per cent of GDP in 2014-15 to 12.8 per and construction activity rebounded in the latter cent in 2019-20, primarily led by the household Chart II.1.3: Indicators of Investment Demand Chart II.1.4: Sectoral Composition of Gross Fixed Capital Formation Source: Joint Plant Committee, Office of Economic Adviser, NSO and NPISH: Non-profit Institutions Serving Households. DGCI&S. Source: NSO. 23ANNUAL REPORT 2020-21 sector. Investment in intellectual property products respondents’ sentiments on availability of fi nance (IPP) - expenditure on research and development; through banks, internal accruals and overseas mineral exploration; computer software; and sources improved, they perceived higher cost other intellectual property products by private pressures emanating from input purchases and non-fi nancial corporations picked up sharply in salary outgoes. For the fi rst three quarters of 2019-20. 2021-22, manufacturers are optimistic on improvement in production, capacity utilisation, II.1.16 As per the order books, inventories and employment conditions and the overall business capacity utilisation survey (OBICUS) of the situation. Reserve Bank, seasonally adjusted capacity II.1.18 The rate of gross domestic saving picked utilisation in manufacturing recovered from a up to 30.9 per cent of gross national disposable sharp drop to 47.9 per cent in Q1:2020-21 to 66.6 income (GNDI) in 2019-20 from 30.1 per cent per cent in Q3, though still below the long-term a year ago. This increase was led by fi nancial average of 73.8 per cent. The inventory-to-sales corporations - more pronounced in the public ratio fell sharply in Q2:2020-21 as sales exhibited sphere - coupled with an uptick in fi nancial an improvement with revival in economic activity saving of the household sector - the most while inventories remained close to their level in important source of funds - by 0.7 percentage the preceding quarter. With an increase in both points to 7.8 per cent of GNDI in 2019-20, sales and inventories, inventory-to-sales ratio the highest in the past four years (Table II.1.2 and increased marginally in Q3:2020-21. Appendix Table 3). Preliminary estimates show II.1.17 The 93rd round of the Reserve Bank’s an upsurge in household fi nancial savings to industrial outlook survey (IOS) conducted during 21.0 per cent of GDP in Q1:2020-21 vis-à-vis 4.0 Q4:2020-21 points to further strengthening of per cent in Q1:2019-20, owing to the COVID-19 production, order books and employment. While led reduction in discretionary expenditure and 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 11.1 11.0 of which: 1. Currency 1.2 1.1 0.9 1.0 1.4 -2.1 2.8 1.4 1.4 2. Deposits 6.0 6.0 5.8 4.8 4.6 6.3 3.0 4.2 4.2 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 1.1 1.3 5. Insurance Funds 2.2 1.8 1.8 2.4 1.9 2.3 2.0 1.9 1.5 6. Provident and Pension Funds 1.1 1.5 1.5 1.5 2.1 2.1 2.1 2.1 2.2 B. Financial Liabilities 3.2 3.2 3.1 3.0 2.7 3.0 4.3 4.1 3.2 C. Net Financial Saving (A-B) 7.2 7.2 7.2 6.9 7.9 7.3 7.5 7.1 7.8 GNDI: Gross National Disposable Income. Note: Figures may not add up to the total due to rounding off. Source: NSO. 24ECONOMIC REVIEW the associated surge in precautionary saving 3. Aggregate Supply despite stagnant/reduced income. The excess II.1.20 Aggregate supply, measured by gross household fi nancial savings, however, waned substantially and its rate dropped to 10.4 per cent value added (GVA) at basic prices, contracted by of GDP in Q2:2020-21 as households switched 6.5 per cent in 2020-21, after growing 4.1 per cent from ‘essential only’ spending to discretionary in the preceding year. Disentangling momentum spending with gradual reopening/unlocking of the from base effects, three-quarter moving average economy. of seasonally adjusted annualised growth rate (MA-SAAR) of GVA exhibited an uptick in II.1.19 There has been a discernible narrowing in momentum in Q3:2020-21 with gradual easing of the saving-investment gap for the Indian economy since 2013-14, indicating that a larger part of restrictions (Chart II.1.6). investment funding requirement was being met II.1.21 The deceleration in GVA growth was through domestic resources (Chart II.1.5). The underpinned by a contraction in the industrial resource gap of non-fi nancial corporations, both and the services sectors. While industrial GVA, public and private, has registered a perceptible driven by its largest constituent – manufacturing decline over the years, refl ecting that their – moved out of contraction in Q3:2020-21, after investment needs were increasingly being met through internal resources. The drawdown on having registered contraction in the preceding fi ve saving by the general government sector remained quarters, the resilience of the agricultural sector at an elevated level and led to excessive draft on provided a fl oor to the contraction in aggregate households’ fi nancial surplus. supply (Table II.1.3). Chart II.1.5: Sectoral Resource Gap Chart II.1.6: GVA Growth: Y-o-Y and 3-Quarter MA-SAAR 150 100 50 0 -50 -100 NPISH: Non-profit Institutions Serving Households. #: Implicit growth. Source: NSO and RBI staff estimates. Source: NSO and RBI staff estimates. 25 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q #4Q 2017-18 2018-19 2019-20 2020-21 tnecreP Y-o-Y Q-o-Q SAAR 3-Quarter MA-SAARANNUAL REPORT 2020-21 Table II.1.3: Real GVA Growth (Per cent) Sector 2016-17 2017-18 2018-19 2019-20 2020-21 1 2 3 4 5 6 I. Agriculture, Forestry and Fishing 6.8 6.6 2.6 4.3 3.0 II. Industry 8.4 6.1 5.0 -2.0 -7.4 i. Mining and Quarrying 9.8 -5.6 0.3 -2.5 -9.2 ii. Manufacturing 7.9 7.5 5.3 -2.4 -8.4 iii. Electricity, Gas, Water Supply and Other Utility Services 10.0 10.6 8.0 2.1 1.8 III. Services 8.1 6.2 7.1 6.4 -8.4 i. Construction 5.9 5.2 6.3 1.0 -10.3 ii. Trade, Hotels, Transport, Communication and Services related to Broadcasting 7.7 10.3 7.1 6.4 -18.0 iii. Financial, Real Estate and Professional Services 8.6 1.8 7.2 7.3 -1.4 iv. Public Administration, Defence and Other Services 9.3 8.3 7.4 8.3 -4.1 IV. GVA at Basic Prices 8.0 6.2 5.9 4.1 -6.5 Source: NSO. Agriculture and Allied Activities II.1.24 The delayed withdrawal of SWM and the simultaneous start of north-east monsoon (NEM) II.1.22 GVA by agriculture and allied activities [by October 28, 2020] created adequate soil registered a growth of 3.0 per cent in 2020-21, moisture and reservoir levels. As on January 31, with record production in foodgrains. This was the 2021, water storage stood at 63 per cent of the full only sector which remained in expansion zone reservoir level (FRL) capacity, up from the decadal in 2020-21, resulting in an increase in the share average of 52 per cent (Chart II.1.7). This augured of agriculture in overall GVA by 1.5 percentage well for rabi sowing which got completed to the points to 16.3 per cent. extent of 110 per cent of the fi ve-year average II.1.23 The onset of the southwest monsoon (SWM) in 2020 was on time (June 1) and it Chart II.1.7. Reservoir Level progressed swiftly to cover the entire country by June 26, 2020, i.e., 12 days prior to its normal date. Notwithstanding a loss of momentum in the month of July due to less rains in north, east and central India, the rainfall revived subsequently and the cumulative SWM rainfall at the end of the monsoon season stood at 9 per cent above the long period average (LPA). As regards the spatial distribution, while 85 per cent of the subdivisions received normal and above normal rainfall, the cumulative rainfall in north-west India was 16 per cent below LPA. Aided by the good spatial and temporal coverage of the monsoon, the area sown was higher by 4.8 per cent year-on-year for kharif Source: Central Water Commission, GoI. crops. 26ECONOMIC REVIEW (2013-14 to 2017-18) by January 31, 2021. The Chart II.1.8: Rabi Sowing as Percentage of Normal jump in rabi acreage this year is mainly driven by higher sowing under wheat, pulses and oilseeds (Chart II.1.8). Consequently, total foodgrain production in 2020-21 as per the second advance estimate (AE) is 3,033.4 lakh tonnes, 2.0 per cent higher than that in 2019-20 final estimate (FE) [Table II.1.4]. II.1.25 The production of horticulture crops during 2020-21 was a record at 3,266 lakh tonnes (1st AE), 1.8 per cent higher than the final estimate of 2019-20, surpassing the foodgrain production for the ninth consecutive year (Table II.1.5). The record production in horticulture crops was led by an increase in area under cultivation by 2.7 Source: Ministry of Agriculture and Farmers Welfare, GoI. per cent in 2020-21 over 2019-20 even though Table II.1.4: Agricultural Production 2020-21 (Lakh tonnes) Crop Season 2019-20 2020-21 2020-21 2nd AE FE Target 2nd AE Variation (Per cent) Over 2019-20 2nd AE Over 2019-20 FE Over Target 1 2 3 4 5 6 7 8 9 Foodgrains Kharif 1,423.6 1,438.1 1,493.5 1,479.5 3.9 2.9 -0.9 Rabi 1,496.0 1,536.9 1,516.5 1,554.0 3.9 1.1 2.5 Total 2,919.5 2,975.0 3,010.0 3,033.4 3.9 2.0 0.8 Rice Kharif 1,019.5 1,022.8 1,026.0 1,037.5 1.8 1.4 1.1 Rabi 155.3 165.9 170.0 165.7 6.7 -0.1 -2.5 Total 1,174.7 1,188.7 1,196.0 1,203.2 2.4 1.2 0.6 Wheat Rabi 1,062.1 1,078.6 1,080.0 1,092.4 2.9 1.3 1.1 Coarse Cereals Kharif 324.9 336.1 361.5 357.4 10.0 6.3 -1.1 Rabi 127.5 141.3 116.5 136.3 6.9 -3.5 17.0 Total 452.4 477.5 478.0 493.6 9.1 3.4 3.3 Pulses Kharif 79.2 79.2 106.0 84.6 6.8 6.8 -20.2 Rabi 151.1 151.0 150.0 159.6 5.6 5.7 6.4 Total 230.2 230.3 256.0 244.2 6.1 6.0 -4.6 Oilseeds Kharif 234.4 222.5 255.5 250.1 6.7 12.4 -2.1 Rabi 107.5 109.7 114.5 123.0 14.4 12.1 7.4 Total 341.9 332.2 370.0 373.1 9.1 12.3 0.8 Sugarcane Total 3,538.5 3,705.0 3,900.0 3,976.6 12.4 7.3 2.0 Cotton # Total 348.9 360.7 360.0 365.4 4.7 1.3 1.5 Jute & Mesta ## Total 98.1 98.8 105.0 97.8 -0.3 -1.0 -6.9 #: Lakh bales of 170 kg each. ##: Lakh bales of 180 kg each. AE: Advance Estimate. FE: Final Estimate. Source: Ministry of Agriculture and Farmers Welfare, GoI. 27ANNUAL REPORT 2020-21 Table II.1.5: Horticulture Production (Lakh tonnes) Crop 2018-19 2019-20 2020-21 Variation (Per cent) Final 1st AE Final 1st AE 2019-20 2020-21 2020-21 Estimate (FE) Estimate (FE) FE over 1st AE 1st AE 2018-19 over over FE 2019-20 2019-20 1st AE FE 1 2 3 4 5 6 7 8 Total Fruits 979.7 957.4 1,020.3 1,032.3 4.1 7.8 1.2 Banana 304.6 296.5 326.0 337.3 7.0 13.8 3.5 Citrus 134.0 131.8 145.7 142.4 8.7 8.0 -2.2 Mango 213.8 212.9 202.7 211.2 -5.2 -0.8 4.2 Total Vegetables 1,831.7 1,880.1 1,889.1 1,936.1 3.1 3.0 2.5 Onion 228.2 244.5 260.9 262.9 14.3 7.5 0.8 Potato 501.9 519.5 485.6 531.1 -3.2 2.2 9.4 Tomato 190.1 193.3 211.7 201.5 11.4 4.2 -4.8 Plantation Crops 165.9 164.1 156.8 157.7 -5.5 -3.9 0.6 Total Spices 95.0 93.7 103.0 102.4 8.4 9.3 -0.5 Aromatics and Medicinal 8.0 8.2 7.3 8.1 -7.7 -1.2 10.6 Total Flowers 29.1 28.7 30.0 27.9 3.1 -2.8 -6.9 Total Horticulture Production 3,110.5 3,133.5 3,207.7 3,265.8 3.1 4.2 1.8 Source: Ministry of Agriculture and Farmers Welfare, GoI. productivity declined by 0.9 per cent. Onion year, the surge in foodstocks during 2020-21 has cultivation witnessed the highest area expansion exacerbated the problem of plenty and brought to at 11.5 per cent. fore the inefficiencies in the food security system, with old stock not getting disposed due to inferior II.1.26 As in the previous three years, minimum quality. As on March 31, 2021, the stocks of rice support prices (MSPs) announced in 2020-21 for were 6.5 times the quarterly buffer norms and both rabi and kharif crops ensured a minimum wheat at two times (Chart II.1.10). return of 50 per cent over the cost of production. There has been an overall rise in the range of 2.1 to II.1.27 Concerted efforts were made so that 12.7 per cent in MSPs announced during 2020-21 harvesting and sowing cycles are not disrupted over the previous year. After record procurement by the spread of COVID-19. Distribution of of both rice and wheat in the kharif marketing free foodgrains under the Pradhan Mantri season (KMS) 2019-20 (October 2019-September Garib Kalyan Anna Yojana (PM-GKAY) and 2020) and rabi marketing season (RMS) 2020-21 AatmaNirbhar Bharat Scheme (ANBS) helped (April-July 2020), respectively, the procurement of budget constrained consumers maintain their rice during 2020-21 is higher by 26 per cent over consumption levels at a critical time when safety the previous year (Chart II.1.9). Despite a jump in nets needed to be ramped up to mitigate COVID-19 offtake during March-November 2020 by 53 per related hardships. Around 8.7 crore farmers were cent over the corresponding period of the last paid the first instalment of `2,000 under Pradhan 28ECONOMIC REVIEW Chart II.1.9: Annual Procurement Chart II.1.10: Cereal- Monthly Position of of Rice and Wheat (April-March) Stock and Buffer Norm Source: Ministry of Agriculture and Farmers Welfare, GoI. Source: Ministry of Agriculture and Farmers Welfare, GoI. Mantri Kisan Samman Nidhi Yojana in April 2020 deployment of railways at fast speed along with itself. Additionally, the Mahatma Gandhi National launch of Kisan Rath mobile app and All India Agri Rural Employment Guarantee Act (MGNREGA) Transport Call Centre. Also, a fund with a corpus of wage was increased by `20 per day, implying `1 lakh crore has been proposed for development supplementary income of around `2,000 per of agriculture infrastructure projects at farm-gate annum for around 13.6 crore rural families with and aggregation points [such as cooperative an increased budgetary allocation of `40,000 societies and Farmer Producer Organisations crore for 2020-21. Under Pradhan Mantri Garib (FPOs)]. Kalyan Rojgar Abhiyaan (PMGKRA), provision II.1.29 Apart from providing immediate succour, was made for additional employment to returnee the government pressed ahead with far reaching migrant workers for 125 days in six states6 facing structural reforms to address the built-in high reverse migration. The dates for ongoing ineffi ciencies associated with public interventions conversion of agricultural gold loan and other in the farm sector. The Parliament passed three agricultural accounts into Kisan Credit Card farm bills with the aim of giving a boost to rural (KCC) accounts were extended. The benefi t of 2 India by increasing farmers’ income. They covered per cent interest subvention to banks and 3 per delisting of various agricultural commodities cent prompt repayment incentive for all farmers from the Essential Commodities Act (ECA) to was extended up to August 31, 2020 for all crop develop seamless marketing and promote storage loans up to `3 lakh given by banks, due between infrastructure in agriculture; ‘The Farmers’ Produce March 1 and August 31, 2020. Trade and Commerce (Promotion and Facilitation) II.1.28 To facilitate transportation of perishable Act, 2020’ to ensure barrier free trade of agriculture agricultural products, provisions were made for the produce; and the ‘Farmers (Empowerment and 6 Bihar, Uttar Pradesh, Madhya Pradesh, Rajasthan, Odisha and Jharkhand. 29ANNUAL REPORT 2020-21 Protection) Agreement on Price Assurance II.1.31 A key role can be played by agricultural and Farm Services Act, 2020’ to empower the extension services to enhance farmers’ farmers to engage with processors, aggregators, awareness and market intelligence to help them wholesalers, large retailers, and exporters in a make informed decisions, policy stability to fair and transparent manner. The Farm Acts are give right market signals and incentivise private currently suspended by the Supreme Court and a investments, building bargaining power of farmers four-member expert panel is examining them. through initiatives like development and skilling of FPOs, building a reliable system of recording data II.1.30 Further reforms in the agriculture sector particularly related to trade happening outside the are needed. The current agriculture storage Agricultural Produce Market Committees (APMCs) capacity in India in terms of warehouses and to ensure transparency and effective evaluation in cold storages is substantially lower in relation future. to agriculture production (Charts II.1.11 and II.1.12). Moreover, many of the existing cold II.1.32 The Union Budget 2021-22 has storage facilities are either sick or on the verge emphasised on infrastructure development in of getting closed due to lack of capital to upgrade rural areas and the agriculture sector, promotion plant and machinery as well as technology. The of agricultural diversifi cation along with enhancing warehousing storage capacities available with credit fl ow to allied sectors and improvement in government agencies are primarily used for supply chains for perishables through extension of keeping the central stock of foodgrain for the ‘Operation Green’ to 22 perishable commodities. buffer stock, public distribution systems (PDS) Enhancement in the allocation to the Rural are overstretched due to excessive foodstocks Infrastructure Development Fund (RIDF) from and also need modernisation. This suggests `30,000 crore in 2019-20 to `40,000 crore in that there is a need for massive investments in 2021-22 along with doubling of micro-irrigation storage and supply chain infrastructure in India. fund will have a favourable impact on the rural Chart II.1.11: Agriculture Warehousing Capacity and Chart II.1.12: Cold Storage Capacity and Foodgrain Production Horticulture Production FCI: Food Corporation of India. CWC: Central Warehousing Corporation. SWC: State Warehousing Corporation. Source: Ministry of Agriculture and Farmers Welfare, GoI. Source: Ministry of Agriculture and Farmers Welfare, GoI. 30ECONOMIC REVIEW Chart II.1.13: Growth in Industrial Production a. GVA b. IIP Source: NSO and RBI staff calculations. economy and farm infrastructure. The Agriculture allied sectors and giving a boost to fi sheries and Infrastructure and Development Cess (AIDC) seaweed cultivation. on several items (such as fuels, crude oilseeds, Industrial Sector pulses and apple) has been imposed to generate II.1.33 GVA growth in industry contracted sharply funds for improving agriculture infrastructure. on a y-o-y basis by 7.4 per cent in 2020-21. This increase in cost, however, has been offset This is the fi fth year of sequential deceleration, by equivalent amounts of reduction in the basic custom duties to keep prices unaffected for including two successive years of contraction farmers and consumers. On the other hand, in the industrial sector. During Q1:2020-21, custom duties on items such as cotton, raw silk, industrial activity plummeted sharply, registering silk yarn has been increased to help farmers a contraction of 31.1 per cent. The turnaround get better prices. The extension of agriculture in industrial activity since then has been volatile. infrastructure fund to APMCs and integration of IIP data show that the contraction was severe in additional 1,000 APMC mandis with the electronic case of consumer durables and capital goods, as national agriculture market (e-NAM) are expected consumers shunned discretionary expenditure to enhance marketing effi ciency in the agriculture while fi rms curbed investment. Cumulatively, the sector, thereby benefi ting farmers through better IIP declined by 8.6 per cent in 2020-21. At the access and higher transparency in mandis in years sub-sectoral level, however, electricity, gas, water to come. The budget has also focused beyond the supply and other utility services recorded a growth traditional activities to generate value addition for of 1.8 per cent in GVA (Charts II.1.13a and II.1.13b) the farming community by enhancing credit fl ow to [Box II.1.2]. 31ANNUAL REPORT 2020-21 Box II.1.2 Impact of COVID-19 on Corporate Performance Following the announcement of a nation-wide lockdown on Chart 1: Revenue, Expenditure and Profits March 25, 2020 and restrictions on mobility that continued even after the gradual opening up of the economy, the corporate sector witnessed a sudden and sharp contraction in demand and also clogged supply chains due to stalled movement of goods, both for inputs used in production processes as well as fi nal products meant for wholesale and retail sale. Survival of businesses in this environment of collapsing sales, vanishing cash fl ows and sticky operating expenses emerged as a key challenge. In Q1:2020-21, average revenue from sales contracted by 32 per cent for a sample of 2,536 listed fi rms. Firms resorted to aggressive Source: Database on Indian Economy (DBIE), RBI. cost cutting measures, enabling them to lower their total expenditure by 34 per cent. Profi ts nosedived, endangering fi rms are relatively more vulnerable to extended periods of their debt servicing capacity. lockdown (Shen et al., 2020; OECD, 2020; Cowling et al., Indian corporates, however, adjusted quickly to the altered 2020). Larger fi rms may have found it easier to cut costs business environment. As sales recovered in Q2:2020- compared to smaller fi rms during the lockdown. 21, cost cutting continued as the preferred path to regain In India, although the interest coverage ratio (ICR) effi ciency and return to profi tability. While revenue contraction deteriorated for fi rms of all size categories in 2020-21, small moderated to 5.3 per cent, total expenditure (which includes fi rms appear to have been affected more by the lockdown in costs) contracted by 12.5 per cent, enabling net operating Q1:2020-21 (Chart 2)8. However, both small fi rms and large profi t to rise by 33.4 per cent in Q2. However, in Q3, revenue fi rms have improved their debt serviceability ratios in Q3 to increased by 2.0 per cent and expenditure increased by levels which are higher than pre-pandemic period. Rise in 0.3 per cent that led to further increase in profi ts by 35.6 profi ts and a sharp decline in borrowing costs contributed per cent. This in turn improved their capacity to service to the recovery in the interest coverage ratio. Industry- debt, as evident from the increase in interest coverage ratio (ICR) to 3.7 in Q2 and 4.5 in Q3 from 2.0 in Q1. As demand conditions in many segments normalised fully by Chart 2: Interest Coverage Ratio (ICR) by Firm Size the end of Q3:2020-21 to pre-COVID-19 levels, there was evidence of improvement in margins, on account of revenue recovery, cost saving and pass-through of increased costs to retail producer and retail prices. Therefore, profi tability has improved further in Q3. In the three quarters of 2020-21 combined, revenues and expenditure declined by 11.6 per cent and 15.2 per cent, respectively, while operational profi t (earnings before interest and taxes - EBIT) increased by 7 per cent year-on-year (Chart 1)7. The impact of COVID-19 has been varied for fi rms of Source: RBI staff calculations and CMIE. different size/nature of operations. Evidence from both advanced and emerging economies show that smaller sized (Contd.) 7 The chart compares the average revenue, cost, and profi t of three quarters of 2020-21, 2019-20, and 2018-19 for a sample of around 2,700 non-fi nancial non-government listed fi rms whose quarterly results are available in Database on Indian Economy (DBIE), RBI. 8 The classifi cation of size of the fi rms is based on the distribution of gross revenues, averaged over last ten quarters. Firms which fall below the 25th percentile in terms of gross revenue are classifi ed as 'Small'. Firms which lie between the 25th and 75th percentiles are classifi ed as 'Medium'. Finally, fi rms whose gross revenue lie above the 75th percentile are classifi ed as 'Large'. 32ECONOMIC REVIEW wise sectors which depend on discretionary spending by and SMEs’ International Small Business Journal, Vol. 38, consumers were impacted more (such as hotels, recreation No.7, Pages 593-604. services, gems and jewellery), while sectors which were 2. Shen, H., M. Fu, H. Pan, Z. Yu, and Y. Chen (2020), excluded from the lockdown (such as food and utilities) ‘The Impact of the COVID-19 Pandemic on Firm experienced relatively lower deterioration in ICR in Q1. Performance’ Emerging Markets Finance and Trade, References: Vol. 56, No.10, Pages 2213-2230. 1. Cowling, M., R. Brown and A. Rocha (2020), ‘Did You 3. OECD Policy Responses to Coronavirus (COVID-19), Save Some Cash for a Rainy COVID-19 Day? The Crisis [2020]: SME Policy Responses. II.1.34 The decline in industrial activity was durables, especially consumer electronics and witnessed across countries (Table II.1.6). India white goods, benefi tting from pent-up demand witnessed the severest downturn and it was (Charts II.1.14). also one of the fi rst to revive from contraction in II.1.36 The industrial recovery has also gradually September 2020, along with South Korea and become broad-based (Chart II.1.15). The Brazil, though growth remained volatile. manufacture of basic metals and motor vehicle II.1.35 The growth was supported by segment, which were the largest negative improvement in consumer durables and non- contributors to manufacturing IIP during the Table II.1.6: Index of Industrial Production: Growth (Y-o-Y) Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 1 2 3 4 5 6 7 8 9 10 11 12 13 14 33 sEA Japan -15.0 -26.3 -18.2 -15.5 -13.8 -9.0 -3.0 -3.9 -2.6 -5.2 -2.0 4.0 South Korea -5.2 -5.6 0.7 -1.5 -3.4 3.4 -3.1 -0.7 -0.7 1.5 0.4 5.8 Taiwan 4.2 1.7 7.2 2.8 3.6 11.6 6.4 7.6 10.3 19.0 2.5 16.8 France -35.1 -27.6 -6.7 -10.4 -7.3 -3.2 -6.9 -2.9 -0.9 -4.6 -6.1 16.0 Germany -24.4 -24.6 -4.2 -9.5 -11.2 -3.2 -2.0 0.0 4.9 -10.4 -5.7 8.8 United Kingdom -24.4 -20.5 -11.9 -6.7 -4.8 -4.8 -5.4 -2.6 -2.1 -8.8 -5.8 5.7 US -17.1 -15.9 -10.6 -6.8 -6.7 -7.0 -4.9 -4.9 -3.4 -1.7 -4.3 1.3 SCIRB Brazil -27.6 -21.9 -8.7 -2.6 -2.5 3.7 0.3 2.6 8.3 2.3 0.3 10.4 Russian Federation -4.7 -8.0 -7.4 -6.1 -4.4 -4.0 -5.7 -1.5 2.1 -1.8 -3.7 1.1 India -57.3 -33.4 -16.6 -10.5 -7.1 1.0 4.2 -1.9 1.6 -0.9 -3.6 22.4 China 3.9 4.4 4.8 4.8 5.6 6.9 6.9 7.0 7.3 - - 14.1 South Africa -48.7 -32.3 -13.2 -9.6 -10.4 -2.0 -3.9 -4.2 2.4 -4.3 -2.5 4.6 ADE Malaysia -32.0 -21.6 -0.4 1.2 0.2 1.0 -0.5 -2.2 1.7 1.2 1.5 9.3 Philippines -63.2 -72.7 -80.4 -72.6 -82.0 -55.7 -22.6 -20.1 -12.0 -16.7 -46.5 -74.2 Sri Lanka -48.7 -25.5 -13.7 2.3 -9.0 1.1 -3.6 -1.7 1.7 0.2 1.7 42.2 Thailand -19.1 -24.1 -17.9 -13.6 -9.3 -2.6 -1.3 -0.6 -2.8 -2.0 -1.4 4.1 Vietnam -13.4 -5.8 4.5 4.0 2.1 5.9 5.3 6.9 10.5 25.0 -7.2 4.3  Contraction Expansion  -: Not available. AEs: Advanced Economies. BRICS: Brazil, Russia, India, China and South Africa. EDA: Emerging and Developing Asia. Source: Census and Economic Information Center (CEIC).ANNUAL REPORT 2020-21 Chart II.1.14: Index of Industrial Production a: Sectoral - Weighted Contributions b: Use based: Weighted Contributions Source: Ministry of Statistics and Programme Implementation, GoI. lockdown period, saw revival since September from the lockdown. Electricity generation also 2020. Passenger vehicles and two wheelers, which contracted in H1:2020-21, particularly in Q1, were facing contraction even before the onset of with lockdown restrictions halting manufacturing. COVID-19, registered a pronounced uptick since With IIP manufacturing improving in the latter September 2020. half, electricity demand also picked up. Hydro electricity and thermal generation contracted in II.1.37 The mining sector also contracted sharply 2020-21; however, thermal generation grew at a due to restrictions imposed on movement, lack rate of 12.4 per cent in Q4:2020-21. of demand and labour supply shortages in H1:2020-21. An exception was the coal sector II.1.38 The manufacturing capacity utilisation also that showed relative resilience as it was exempted remains at low levels (Chart II.1.16). Chart II.1.15: Expansion versus Contraction- Chart II.1.16: Manufacturing Capacity Utilisation IIP Item Level Indices *: Average of Q1, Q2 and Q3. Source: Ministry of Statistics and Programme Implementation, GoI. Source: RBI. 34ECONOMIC REVIEW Services Sector transport, communications and services relating to broadcasting and fi nancial, real estate and II.1.39 The contraction in the services sector professional services. In 2020-21, COVID-19 in 2020-21 is unprecedented in independent brought major services activities to a near halt India’s history. Even during the GFC, the and the sector contracted in a broad-based services sector remained resilient. In 2020-21, manner by 24.8 per cent in Q1:2020-21 and however, construction suffered in the aftermath 10.9 per cent in Q2:2020-21, but in Q3:2020- of the pandemic due to an inventory overhang 21, services sector output returned broadly to in residential housing, coupled with stressed its level a year ago. Domestic trading activities, liquidity conditions which restricted new launches. railway freight traffi c, port cargo, construction The situation was exacerbated by imposed activities, and automobiles sales indicators for social distancing norms which led to construction Q4:2020-21 suggested improvement in services activity in Q1:2020-21 getting reduced by half sector. However, with the onslaught of second year-on-year. However, the revival of housing wave, many indicators showed a moderation sector in H2:2020-21 has been a sharp ‘V’, with though it was not to the extent of last year sales almost doubling in Q3:2020-21 sequentially, (Table II.1.7). supported by favourable interest rates, adequate liquidity and steep discounts by developers to II.1.42 The Reserve Bank’s services sector clear inventory, besides reduction in stamp duty by composite index (SSCI)9, which tracks activity in a few states. With new launches also registering construction, trade, transport and fi nancial services a sharp rebound, the inventory overhang has and is a coincident indicator of GVA growth in the dropped sharply. services sector excluding public administration, defence and other services (PADO), witnessed a II.1.40 The contraction was severe in contact- marginal decline in Q4:2020-21 after registering intensive sectors as activities in hotels, an uptick in the previous quarter (Chart II.1.17). restaurants, and passenger transport remained much below pre-COVID-19 levels. There has been 4. Employment a swift recovery in trading activities as evident in II.1.43 As per the annual Periodic Labour Force the collection of the goods and services tax (GST) Survey (PLFS), the labour force participation rate and issuance of E-way bills. This has also imparted (LFPR) was estimated at 37.5 per cent in 2018-19, a boost to freight traffi c. The performance of which was an increase of 0.6 percentage points information technology (IT) companies has been over 2017-18. In terms of gender divide, the annual better than their counterparts in the hospitality PLFS report suggested that the LFPR for females and the aviation segments. continues to be lower at 18.6 per cent (rural: 19.7 II.1.41 Sector-wise GVA trend estimates for per cent and urban: 16.1 per cent) in 2018-19, the services show that realised growth in 2019- compared to the rate of 55.6 per cent for males 20 was below trend growth for trade, hotels, (rural: 55.1 per cent and urban: 56.7 per cent). 9 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 traffi c, non-oil imports, tourist arrivals, real bank credit and insurance premium. 35ANNUAL REPORT 2020-21 Table II.1.7: High Frequency Indicators: Growth Rates (Y-o-Y) Indicator Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 1 2 3 4 5 6 7 8 9 10 11 12 13 Urban Demand Automobiles Sales - -84.8 -43.0 -18.6 -1.3 7.2 10.5 6.0 0.7 0.4 6.3 74.5 Passenger Vehicles - -85.2 -49.6 -3.9 14.2 26.5 14.2 4.6 13.6 11.1 17.9 115.2 Agriculture / Rural Demand Domestic Sales of Tractors -79.4 4.0 22.4 38.5 74.7 28.3 7.7 51.3 43.1 46.7 31.1 172.4 Two Wheelers Sales - -83.8 -38.6 -15.2 3.0 11.6 16.9 13.4 7.4 6.6 10.2 72.7 Three Wheelers Sales - -95.3 -80.1 -77.2 -75.3 -71.9 -60.9 -57.6 -58.9 -56.8 -33.8 15.7 Transport Vahan Total Registration -78.3 -88.6 -41.4 -35.2 -25.4 -8.4 -22.3 -17.5 11.7 -8.6 -12.6 -28.1 Domestic Air Passenger Traffi c -99.9 -97.4 -83.5 -82.6 -75.8 -65.1 -56.8 -50.2 -42.9 -38.7 -35.9 2.5 International Air Passenger Traffi c -99.1 -98.0 -93.0 -90.4 -89.7 -87.8 -85.2 -82.8 -79.5 -76.9 -73.6 -37.6 Domestic Air Cargo -92.9 -82.9 -48.0 -41.4 -36.0 -20.0 -15.7 -9.8 -3.0 -9.3 -6.6 42.5 International Air Cargo -77.0 -58.2 -35.7 -30.1 -24.9 -13.6 -12.4 -15.0 -12.7 -12.2 -9.9 29.4 Freight Traffi c Net Tonne Kilometre -40.1 -28.1 -11.6 -7.7 1.4 17.9 11.0 8.4 13.5 11.1 7.8 33.0 Freight Traffi c Freight Originating -35.3 -21.3 -7.7 -4.6 3.9 15.5 15.4 9.0 8.7 8.7 5.5 26.6 Port Cargo -21.1 -23.3 -14.5 -13.2 -10.4 -1.9 -1.2 2.8 4.4 4.0 1.9 16.4 Domestic Trade GST E-Way Bill -83.6 -53.0 -12.7 -7.3 -3.5 9.6 21.4 8.1 15.9 10.5 11.6 75.2 GST E-Way Bill Intra-state -79.8 -46.1 -7.9 -3.9 1.4 15.1 23.3 9.6 17.3 13.0 14.5 76.3 GST E-Way Bill Inter-state -88.9 -62.8 -19.9 -12.3 -10.4 2.2 18.8 6.0 13.8 6.8 7.6 73.5 GST Revenue -71.7 -38.0 -9.0 -14.4 -12.0 3.9 10.2 1.4 11.6 8.1 7.4 27.0 Construction Steel Consumption -85.8 -45.9 -26.0 -10.3 -11.3 0.1 6.2 18.0 17.5 9.3 11.3 45.7 Cement Production -85.2 -21.4 -6.8 -13.5 -14.5 -3.4 3.2 -7.3 -7.2 -5.8 -5.6 32.5 -: Not available.  Contraction Expansion  Source: CEIC. Some of the reasons cited for low female labour Chart II.1.17: Growth in Services Sector (excluding force participation include higher educational PADO) and Services Sector Composite Index enrolment, higher household income and absence of suitable employment opportunities. More recent information on LFPR, as available from the Centre for Monitoring Indian Economy (CMIE) database, shows that it increased to 40.2 per cent in March 2021 from 35.6 per cent in April 2020 (Chart II.1.18). II.1.44 The majority of states recorded an improvement in employment conditions in the post- lockdown phase, supported by faster recovery in rural employment (Charts II.1.19a and II.1.19b). For the majority of states, LFPR has reached pre-lockdown period levels, with the exception of Source: NSO and RBI staff estimates. Delhi, Kerala, Tamil Nadu and Tripura. 36ECONOMIC REVIEW II.1.45 Updated data on organised sector Chart II.1.18: Unemployment and Labour Force Participation Rate employment measured by payroll data presents a mixed picture with regards to job creation in 2020-21 (Chart II.1.20). On a cumulative basis, the average of net subscribers added to Employees’ Provident Fund Organisation (EPFO) per month decreased marginally to 6.42 lakh in April-March 2021 from 6.55 lakh in the previous year. On the other hand, the average number of members who paid their contribution to Employees’ State Insurance Corporation (ESIC) expanded by 0.64 lakh in April-February 2021 as compared with a contraction of 0.93 lakh in the corresponding period of the previous year. New subscribers to the National Pension Scheme (NPS) also decreased Source: CMIE Household Survey. during the same period. Chart II.1.19a: State-wise Labour Force Participation Rate Chart II.1.19b: State-wise Unemployment Rate Source: CMIE Household Survey. 37ANNUAL REPORT 2020-21 September 2020, three labour codes - Industrial Chart II.1.20: Jobs in Organised Sector Relations Code Bill, 2020, Code on Social Security Bill, 2020 and Occupational Safety, Health and Working Conditions Code Bill, 2020 were passed which would promote harmonious industrial relations, higher productivity and more employment generation. These measures would benefi t workers of both formal and informal sectors and positively contribute to mitigate the distress of labour market in India. II.1.48 The launch of the proposed National Monetisation Pipeline will enhance the viability of potential brownfi eld infrastructure projects and is also likely to help real sectors signifi cantly while freeing resources to fi nance further investment. Source: Government of India. The National Highways Authority of India (NHAI) and the Power Grid Corporation of India Limited II.1.46 Several policy initiatives are being taken by (PGCIL) have already sponsored one Infrastructure the government to promote industrial production Investment Trust (InvIT) each, with investment of and generate employment opportunities. Apart `5,000 crore and `7,000 crore, respectively. from the measures taken under AatmaNirbhar Bharat Abhiyan, the Government of India II.1.49 Moving forward, outturn predictability introduced PLI scheme worth `1.45 lakh crore has turned a bit turbid. The growth prospects essentially depend on how fast India can arrest for 10 key sectors with the objective to attract the second wave of COVID-19 pandemic. While investments, drive domestic manufacturing, create the economy has not moderated to the extent economies of scale and facilitate their integration during the fi rst wave, the surrounding uncertainties with the global supply chain. can act as a deterrent in the immediate period. 5. Conclusion On the supply side, agriculture has proven its II.1.47 Going forward, reform measures in various resilience, enduring the shock of the pandemic, areas are likely to uplift India’s growth potential thus providing support to rural demand and the on a sustainable basis. To bring in transparency economy at large. In case of services, recovery and credibility in land records and also for has been varied, with revival in construction, trade, facilitating use of property as a fi nancial asset, freight transportation and information technology the government in October 2020 launched the (IT) related activities. While performance of Survey of Villages and Mapping with Improvised contact-intensive sectors is still sub-par, it is also Technology in Village Areas (SVAMITVA) scheme. improving. Going ahead, as the vaccination drive The scheme aims to reduce property litigations and picks-up and cases of infections fall, a sharp transaction costs and improve the ease of doing turnaround in growth is likely, supported by strong business by bringing clarity in land ownership. In favourable base effects. 38ECONOMIC REVIEW II.2 PRICE SITUATION prices of gold; and several rounds of hikes in pump prices of petrol and diesel on the back of II.2.1 The global infl ation environment remained fi rming crude oil prices and higher excise duties benign during 2020, with weak aggregate demand (Chart II.2.1)11. outweighing the impact of supply disruptions on commodity prices caused by the pandemic. II.2.4 Although average infl ation has remained Infl ation in advanced economies dipped in 2020, high in 2020-21, its volatility measured by while in emerging markets it remained sticky at the standard deviation of the consumer price around the previous year’s level. Producer prices index (CPI) infl ation was lower than a year ago softened through the year, but commodity prices (Table II.2.1). The intra-year distribution of infl ation rebounded since the second-half, raising concerns had a high negative skew, refl ecting low food about a rise in global infl ation on the back of cost infl ation prints during December 2020-February push pressures. By March 2021, the World Bank 2021, amidst persistently elevated infl ation during energy price index was 2.7 times its April 2020 the rest of the year. Furthermore, kurtosis turned low, while ‘metals and minerals’ and agriculture less negative, suggesting few instances of large commodity price indices were also up by 68.1 per deviations from mean infl ation, which was also cent and 26.6 per cent, respectively. Commodity refl ected in the less wide gap between maximum prices have rallied on the back of the slush of and minimum infl ation during the year. global liquidity. Non-energy prices were up by 38.4 per cent, more than offsetting the pandemic- Chart II.2.1: Inflation across Major Components induced weakening of demand. II.2.2 While prices of food and medical supplies rose during the early phase of the lockdown, crude oil and metals prices became the drivers of refl ation as rising discretionary consumer spending was unleashed when economies reopened and activity normalised. II.2.3 In India, headline infl ation10, breached the upper tolerance band of the infl ation target during June-November 2020 due to a sharp spike in food infl ation and elevated core (excluding food and fuel) infl ation on a combination of adverse Note: Figures in parentheses indicate weight in CPI-Combined. April developments, i.e., excess rains and supply and May 2020 data were imputed by the NSO. disruptions; safe haven impelled increase in the Source: NSO and RBI staff estimates. 10 Headline infl ation 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 Offi ce (NSO), Ministry of Statistics and Programme Implementation, Government of India. 11 The initial spike in infl ation during the lockdown period of April-May 2020 was in large part caused by the impact of imputation adopted by the NSO, to address non-availability of data, following the internationally accepted Business Continuity Guidelines, and was, therefore, looked through for policy purposes. The ‘Business Continuity Guidelines’, was brought out by the Inter-Secretariat Working Group on Price Statistics (ISWG-PS), a combined forum of International Labour Organisation (ILO), EuroStat, Organisation for Economic Co-operation and Development (OECD), UN Economic Commission for Europe (UNECE), World Bank and IMF in May 2020. 39ANNUAL REPORT 2020-21 Table II.2.1: Headline Infl ation – Key Summary Statistics (Per cent) 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21* 1 2 3 4 5 6 7 8 9 10 Mean 10.0 9.4 5.8 4.9 4.5 3.6 3.4 4.8 6.2 Standard Deviation 0.5 1.3 1.5 0.7 1.0 1.2 1.1 1.8 1.1 Skewness 0.2 -0.2 -0.1 -0.9 0.2 -0.2 0.1 0.5 -0.7 Kurtosis -0.2 -0.5 -1.0 -0.1 -1.6 -1.0 -1.5 -1.4 -0.7 Median 10.1 9.5 5.5 5.0 4.3 3.4 3.5 4.3 6.5 Maximum 10.9 11.5 7.9 5.7 6.1 5.2 4.9 7.6 7.6 Minimum 9.3 7.3 3.3 3.7 3.2 1.5 2.0 3.0 4.1 *: Excluding the imputed data for April-May 2020, the mean works out to 6.1, standard deviation: 1.2, skewness: - 0.5, kurtosis: -1.1, median: 6.5, maximum: 7.6 and minimum: 4.1. Annual infl ation is the average of the monthly infl ation rates during the year and, therefore may vary from the annual infl ation calculated from the average index for the year. Note: Skewness and Kurtosis are unit-free. Source: NSO and RBI staff estimates. II.2.5 Against this backdrop, sub-section 2 beginning of the pandemic, remained elevated assesses developments in global commodity on safe-haven demand amidst heightened global prices and infl ation. Sub-section 3 discusses uncertainties. By September 2020, however, these movements in headline infl ation in India, followed prices stabilised as demand for safe haven assets by a detailed analysis of its major constituents declined due to improving economic conditions. in sub-section 4. Other indicators of prices and Global crude oil prices, which were on an easing costs are analysed in sub-section 5, followed by trajectory during January-April 2020 due to the concluding observations. pandemic, picked up signifi cantly from May 2020 on sharp oil supply cuts by the organisation of the 2. Global Infl ation Developments petroleum exporting countries (OPEC) and their II.2.6 International food prices fi rmed up from allies (OPEC plus) by 9.7 million barrels per day June 2020, primarily led by edible oils (palm oil; sunfl ower oil; and soybean oil) prices, driven by Chart II.2.2: International Commodity Prices supply shortfalls as well as depreciation of the US dollar (Chart II.2.2). Prices of wheat (tightening supplies among major exporters and a Russian export tax as well as export quota), rice (tight Thai and Vietnamese availability), maize (weaker than expected harvest in the US and South America), meat (protein demand) and sugar also witnessed noteworthy increases. In the non-food category, metal prices recouped losses experienced during the beginning of COVID-19 pandemic and fi rmed up in consonance with the recovery in the global economy. Supply disruptions in Latin America and pick-up in industrial demand in China and other advanced economies added further upsides. Source: World Bank Pink Sheet Database. Prices of precious metals, which surged in the 40ECONOMIC REVIEW (bpd) [amounting to about 10 per cent of global bringing the economy back to normal as the oil supply] beginning May 2020 to be tapered number of new confi rmed positive cases started gradually over a period of two years. Successful to decline. As a result of the restrictions imposed COVID-19 vaccine trials, and prospects of a faster during the lockdown, NSO could collect partial than expected economic recovery lifted crude data largely through telephonic enquiries from prices even further. Average Indian crude oil basket the designated outlets and supplemented it by prices almost trebled, reaching US$ 65 per barrel information collected through personal purchases in March 2021 from the low of US$ 20 per barrel in of fi eld staff of the NSO. Following the principles of April 2020. Rising crude oil prices were supported adequacy12, indices for all sub-groups under food by monetary policy easing by advanced economy and beverages (barring meat and fi sh for April central banks, supply restraints effected by OPEC 2020, and prepared meals, snacks, sweets, etc. plus and geopolitical events in March 2021 on for April and May 2020), fuel and light, housing account of attacks on Aramco oil facilities that sent and health sub-group under the miscellaneous oil prices soaring past US$ 70 per barrel. Demand group were reported by the NSO during for oil is expected to rise as global economic activity April-May 2020. returns to pre-pandemic levels by 2022. II.2.9 In order to address the non-availability of II.2.7 Refl ecting these global commodity data for several sub-groups during April-May 2020, price developments, consumer price infl ation the NSO undertook a separate exercise, based in emerging market and developing economies on the imputation methodology recommended (EMDEs) picked up after having declined sharply in ‘Business Continuity Guidelines’ of the Inter- in the beginning of the pandemic, while infl ation in Secretariat Working Group on Price Statistics advanced economies (AEs) remained below pre- (ISWG-PS) in May 2020. Broadly, this approach pandemic levels as the effects of weak aggregate advocated imputing the missing (due to non- demand outweighed the impact of supply availability of data) sub-group index with the index interruptions in these countries. computed at the next higher level of aggregation. 3. Infl ation in India This imputation methodology mostly involved the items in the core or non-food non-fuel category, II.2.8 A nationwide lockdown was announced in as transactional data for these items were not India on March 24, 2020 to contain the spread of available during the lockdown. COVID-19. The initial lockdown was announced for 21 days effective from March 25, 2020 to April II.2.10 Headline infl ation, which started picking 14, 2020, but it was extended in phases till May up in H2:2019-20, remained elevated during 31, 2020, as the number of confi rmed positive 2020-21 and reached a multi-year peak of 7.6 cases kept rising. Effective from June 1, 2020, per cent in October 2020 (highest in 77 months) announcements for relaxations in lockdown were [Chart II.2.3]. Supply disruptions during the made as part of “Unlock 1”. Further relaxations nationwide lockdown, non-availability of labour were announced in phases to resume services, at mandis, impediments to transportation, and 12 The price of only those items were included which have been reported from at least 25 per cent of markets, separately for rural and urban sectors and constituted more than 70 per cent weight of the respective sub-groups/groups. 41ANNUAL REPORT 2020-21 II.2.13 For the year 2020-21, infl ation picked up to Chart II.2.3: Movements in Headline Inflation average 6.2 per cent, 140 basis points higher than the previous year (Appendix Table 4). Refl ecting the uptick in headline infl ation from October 2019, households’ median infl ation expectations hardened during 2020-21 by 159 basis points (bps) three months ahead and by 120 bps a year ahead as compared with March 2020 round readings. This upturn in expectations is also corroborated by more forward-looking assessments of professional forecasters. 4. Constituents of CPI Infl ation II.2.14 The drivers of CPI headline infl ation exhibited distinct shifts during 2020-21 with Note: April and May 2020 data were imputed by the NSO. Source: NSO and RBI staff estimates. food group remaining the major contributor along with an increase in the contribution of transport and communication group excess rains during the kharif harvest period led (Chart II.2.4). Food price infl ation moderated to crop damages and pushed up food prices, during May-June 2020 with the gradual relaxation especially those of vegetables. Subsequently, with of lockdown conditions and easing supply the ebbing of these pressures and encouraging constraints, but it picked up again during August- prospects for the rabi crop, food infl ation started October 2020 as excess rains led to crop damage. easing from November 2020 and reached 2.7 per cent in January 2021 from 10.1 per cent in October 2020, before increasing to 5.2 per cent in Chart II.2.4: Drivers of Inflation (Y-o-Y) March 2021 largely due to adverse base effects. II.2.11 Fuel prices remained subdued during 2020-21 due to a fall in prices of liquefi ed petroleum gas (LPG) and non-PDS kerosene; however, LPG prices started increasing from December 2020 onwards. II.2.12 On the other hand, infl ation excluding food and fuel, hardened during the year and reached a peak of 6.0 per cent in February 2021 from the historic low of 3.4 per cent in October 2019. This elevation was driven by near double-digit infl ation in prices of transport and communication, *: Includes recreation and amusement, and personal care and effects. personal care and effects, and pan, tobacco and Note: April and May 2020 data were imputed by the NSO. Source: NSO and RBI staff estimates. intoxicants. 42ECONOMIC REVIEW Food infl ation again eased sharply during Chart II.2.6: Inflation in 2020-21 November 2020-January 2021 on seasonal ebbs in key prices and as a result, food infl ation which had hovered over headline infl ation during April- November 2020, trended below it from December 2020. Infl ation excluding food and fuel generally remained elevated. Infl ation in fuel prices remained subdued and below headline infl ation throughout the year. Food II.2.15 Infl ation in prices of food and beverages (weight: 45.9 per cent in CPI) crossed 6 per cent in October 2019 and remained elevated till Note: For April 2020, indices for meat and fish and prepared meals, November 2020, contributing 54.8 per cent to snacks, sweets, etc. and for May 2020, index for prepared meals, snacks, sweets, etc. were imputed by the NSO. overall infl ation in 2020-21. This was primarily Source: NSO and RBI staff estimates. driven by animal protein items and vegetables because of adverse supply shocks from and limited availability of labour at the mandis, lockdowns and crop damage caused by excess led to sharp spike in food prices in April 2020. rains during the monsoon season (Chart II.2.5). II.2.16 Within food and beverages group, price Consumers resorted to panic buying and stocking pressures remained high and broad-based over durable food items like cereals and pulses at the ensuing months, with fi ve out of the twelve sub- the beginning of the lockdown. Initial diffi culties groups witnessing double digit infl ation (pulses, in transportation, despite food items being oils and fats, meat and fi sh, eggs, and spices) exempted from the lockdown related restrictions, [Chart II.2.6]. However, vegetables’ prices went into defl ation from December 2020 as prices of Chart II.2.5: Drivers of Food Inflation (Y-o-Y) onions, tomatoes and potatoes eased seasonally on the back of fresh crop arrivals, leading to a sharp softening in overall food infl ation. Infl ation increased again during February-March 2021 largely due to adverse base effects and sustained price pressures in oils and fats, pulses, prepared meals, snacks, sweets, etc., and non-alcoholic beverages. II.2.17 At the sub-group level, prices of vegetables (weight: 13 per cent in CPI-Food and beverages) remained the key pressure point during April- * : Includes meat and fish, egg, and milk and products. November 2020. Excluding vegetables, food #: Includes sugar and confectionery, spices, non-alcoholic beverages, and prepared meals, snacks, sweets, etc.. infl ation would have averaged 96 bps lower Note: For April 2020, indices for meat and fish and prepared meals, snacks, sweets, etc. and for May 2020 index for prepared meals, snacks, sweets, etc. during this period. Supply chain disruptions, were imputed by NSO. Source: NSO and RBI staff estimates. excess rains and production shortfalls (in the 43ANNUAL REPORT 2020-21 Chart II.2.7: CPI-Vegetables: Seasonality in Prices and Drivers of Inflation a: CPI-Vegetables (Cumulative Momentum) b: Drivers of CPI Vegetables Inflation (Y-o-Y)# #: Item level CPI data were not released by the NSO during March-May 2020. Source: NSO and RBI staff estimates. case of potatoes) resulted in higher margins and II.2.19 In the case of tomatoes, prices picked up similar build-up of momentum as in the previous during the lean season, i.e., June-July 2020, due year (Chart II.2.7a). to lower supplies on account of pre-monsoon rains related damages to crops and lower plantation II.2.18 Onion prices underwent an uptick during than a year ago. Excess rains during the south- September-November 2020, refl ecting signifi cant west monsoon again lifted prices in September damages to kharif crops and late harvesting 2020; thereafter tomato prices eased with fresh in major producing states due to excess rains. supplies entering the market. Higher exports during April-September 2020 by 35 per cent over the corresponding period II.2.20 Infl ation in potato prices surged from 2.3 of previous year also contributed to the ascent. per cent in November 2019 to 107.0 per cent in As in the past, the government responded by November 2020, which propelled vegetable group banning the export of all varieties of onion on infl ation to double digits during July-November September 14, 2020 (lifted in January 2021); 2020 (Chart II.2.7b). The two major potato increasing imports of better quality (similar to the producing states witnessed weather related local variety); relaxing import norms [conditions disturbances - unseasonal rains in Uttar Pradesh for fumigation and additional declaration on the in March 2020 and cyclone-related damage to Phytosanitary Certifi cate (PSC) under the Plant the crop in West Bengal in May 2020 - leading Quarantine (PQ) Order, 2003] during October 21, to considerable supply disruptions and lower 2020 to January 31, 2021; releasing buffer stocks; production [by 3.2 per cent as per fi nal estimates and imposing stock limits on wholesalers and (FE) 2019-20 over 2018-19 FE]. This was further retailers to curb market speculation and hoarding. aided by panic buying during the initial months of These well-timed steps and fresh arrivals resulted the lockdown, labour shortages at mandis and in containing price pressures and onion prices lower stock availability in cold storages. However, moderated during December 2020-March 2021, in October 2020, the government revised down barring February 2021 when prices increased due the import duty on potato from 30 per cent to 10 to lower arrivals. per cent for a quota of 10 lakh tonnes until January 44ECONOMIC REVIEW 31, 2021 to improve the domestic availability along Chart II.2.8: CPI-Egg, Meat and Fish with relaxation of import norms similar to onions. (Cumulative Momentum) Refl ecting this and fresh arrivals, potato prices eased from December 2020. II.2.21 Infl ation in prices of cereals and products (weight: 21 per cent in CPI-Food and beverages) presented mixed dynamics - it remained above 6 per cent for the fi rst four months, followed by moderation in the next eight months of 2020-21 even reaching into the defl ation territory during February-March 2021, refl ecting market distortions from a complex interplay of massive buffer stocks imparting downward pressure and higher procurement pushing up prices. At the item level, panic buying during lockdown, pick up Source: NSO and RBI staff estimates. in rice exports (81 per cent during April-February 2020-21), distribution of wheat and rice under caused by transport disruption and reverse Pradhan Mantri Garib Kalyan Anna Yojana migration also led to the price pick-up. Meat and (PMGKAY), record production of both rice and fi sh prices, however, eased in December 2020 wheat [higher by 1.2 per cent for rice and 1.3 per in contrast to the usual winter pick-up in prices, cent for wheat as per 2nd Advance Estimates (AE) refl ecting restoration of supplies in the poultry 2020-21 over 2019-20 (FE)], and moderate growth industry. The outbreak of bird fl u in several states in minimum support prices (MSPs) [2.9 per cent in January 2021 led to a fall in demand and further and 2.6 per cent for rice and wheat, respectively] easing in prices of poultry items during January- remained the major price drivers in this tangled February 2021. The price of chicken picked up development. sharply in March 2021 refl ecting a recovery in demand amid short supply. II.2.22 Among protein-rich items such as eggs, meat and fi sh (weight: 8.8 per cent in CPI-Food II.2.23 Oils and fats (weight: 7.8 per cent in and beverages), historically high build-up of price CPI-Food and beverages) went through a momentum was observed, leading to double sharp price build-up, leading to a historically digit infl ation of 12.9 per cent and 15.4 per cent in high infl ation of 24.9 per cent in March 2021 the case of eggs and, meat and fi sh, respectively (Chart II.2.9). Precautionary buying on account of (Chart II.2.8). Initial fears caused by pandemic the pandemic and rise in international prices of resulted in lower consumption demand for eggs edible oils led to this adverse development. In order and chicken during February-March 2020 which to contain the price escalation, import duty in the resulted in distress sale by poultry farmers to avoid form of Basic Customs Duty (BCD) on crude palm making losses. As rumours cleared and demand oil (CPO) was revised down to 27.5 per cent from picked up fi ercely because of the perception that 37.5 per cent with effect from November 27, 2020, protein rich items are immunity boosting, supply and revised further to 32.5 per cent [including could not match demand. Supply constraints the Agricultural Infrastructure Development Cess 45ANNUAL REPORT 2020-21 Chart II.2.9: CPI-Oils and Fats Chart II.2.10: Drivers of CPI-Pulses Inflation (Y-o-Y) (Cumulative Momentum) *: Includes moong, masur, peas, khesari, besan and other pulses products. Note: 1. Figures in parentheses indicate weight in CPI-pulses and products. 2. Item level CPI data were not released by the NSO during March-May 2020. Source: NSO and RBI staff estimates. Source: NSO and RBI staff estimates. (AIDC)] in the Union Budget 2021-22. However, tonnes for 2020-21 as on December 31, 2020, increasing global prices, increase in export levy expediting imports of urad under the already issued on crude palm oil by Indonesia from December import quota of 1.5 lakh tonnes and extending 2020 and imposition of 8 per cent export tax on the memorandum of understanding (MoU) with crude palm oil by Malaysia from January 2021 Mozambique for import of 2 lakh tonnes of tur for kept prices high. another fi ve years. With pulses production rising by 6 per cent for 2020-21 (2nd AE) over 2019-20 II.2.24 Prices of pulses (weight: 5.2 per cent in (FE), tur, gram and masur prices eased during CPI-Food and beverages) recorded a 45 month- December 2020-February 2021. high infl ation of 22.8 per cent in April 2020 primarily led by tur (arhar) and urad (Chart II.2.10). II.2.25 Infl ation in fruits (weight: 6.3 per cent in Prices witnessed robust growth during the months CPI-Food and beverages) remained subdued of April-May and September-November 2020, during a large part of 2020-21, supported by robust refl ecting stockpiling by consumers, lockdown production growth of 4.1 per cent in 2019-20 and and rain related supply disruption and a decline in 1.2 per cent in 2020-21 (as per 1st AE 2020-21 over kharif pulses production (lower by 2.1 per cent as 2019-20 FE). Infl ation in sugar and confectionery per 2019-20 FE over 2018-19 FE and especially (weight: 3.0 per cent in CPI-Food and beverages) urad production by 43.6 per cent), higher exports also remained subdued and averaged 2.5 per cent and lower imports during April-February 2020-21 in 2020-21 refl ecting higher domestic production. [27.2 per cent and (-)14.8 per cent, respectively]. Fuel Consequently, the government responded with an array of supply side measures, such as releasing II.2.26 The contribution of the fuel group (weight of 2 lakh tonnes of tur from the buffer stock through 6.8 per cent in CPI) to headline infl ation increased open market sales (OMS), extending the time limit to 2.9 per cent in 2020-21 from 1.9 per cent in for import of tur under an import quota of 4 lakh the previous year. Fuel infl ation eased from 6.6 46ECONOMIC REVIEW and continued defl ation in kerosene PDS prices. Chart II.2.11: Drivers of Fuel Inflation (Y-o-Y) Infl ation in fi rewood and chips and electricity remained moderate during the year, refl ecting favourable base effects and possibly subdued demand during the lockdown period. Refl ecting these developments, fuel infl ation moderated to 1.6 per cent in November 2020 before rising to 4.4 per cent in March 2021 on the back of increase in LPG and kerosene prices. Infl ation Excluding Food and Fuel II.2.27 Infl ation excluding food and fuel picked up over 2019-20 levels to an average of 5.5 per cent *: Includes kerosene PDS and kerosene other sources. in 2020-21, with an intra-year peak of 6.0 per cent **: Includes diesel, coke, coal, charcoal, and other fuel. Note: 1. Figures in parentheses indicate weight in CPI-fuel and light. in February 2021 (Chart II.2.13). Infl ation in this 2. Item level CPI data were not released by NSO during March-May 2020. Source: NSO and RBI staff estimates. category continued to increase till October 2020 on the back of gold prices, hikes in taxes on liquor, per cent in March 2020 to 0.5 per cent in June and the hike in excise duties on petrol and diesel 2020 largely due to easing in domestic LPG - by the government in May 2020 (Chart II.2.14). which tracked international price movements - and It eased to 5.5 per cent by January 2021 due to kerosene prices (Chart II.2.11 and Chart II.2.12). favourable base effects, before picking up again to Fuel infl ation eased again during September- close the year at 5.9 per cent as favourable base November 2020 due to favourable base effects effects waned and price pressures continued. Chart II.2.12: Movements in LPG Retail Prices Chart II.2.13: Drivers of CPI Excluding Food and Fuel Inflation (Y-o-Y) Note: Domestic Non-subsidised LPG prices are the average of prices in four *: Includes recreation and amusement and personal care and effects. metros. Note: April and May 2020 data were imputed by the NSO. Source: Petroleum Planning and Analysis Cell (PPAC), GoI and Bloomberg. Source: NSO and RBI staff estimates. 47ANNUAL REPORT 2020-21 in May-June 2020 as the impact of the seventh Chart II.2.14: Domestic Oil Price Trends central pay commission (CPC) on housing infl ation dissipated and clothing infl ation moderated. It increased during July-October 2020, refl ecting increase in food prices. The Labour Bureau released CPI-IW with a new base (2016=100 from 2001=100) in October 2020 with data beginning from September 2020, refl ecting the latest consumption pattern of industrial workers. It adopts a broadly similar classifi cation of sub- groups/major groups as in CPI-C/CPI-Urban(U) (base: 2012=100) released by the NSO. Infl ation based on the consumer price index for agricultural labourers (CPI-AL) and the consumer price index Note: International crude oil price represents the average price of for rural labourers (CPI-RL), which do not have WTI, Brent and Dubai Fateh. Source: World Bank Pink Sheet Database, Indian Oil Corporation housing components, also eased to 6.3 per cent Limited, and PPAC. and 6.1 per cent in September 2020 from 8.8 per cent and 8.5 per cent in April 2020, respectively, II.2.28 Among the major constituents of this group, due to favourable base effects, before increasing infl ation in miscellaneous category increased to in October 2020 due to broad based price 7.0 per cent in August 2020 and broadly remained pressures especially in the case of food prices. elevated thereafter. All three measures witnessed easing in infl ation in II.2.29 Housing infl ation moderated to 3.3 per cent November 2020-January 2021 due to favourable in 2020-21 (4.5 per cent in 2019-20), refl ecting base effects and easing in food prices before the impact of favourable base effects and lower increasing again during February-March 2021 demand during the lockdown period. A historic low partly on the back of adverse base effects. of 2.8 per cent was recorded in September 2020. II.2.32 Infl ation, measured by the wholesale price Net of housing, infl ation excluding food and fuel index (WPI), remained subdued during 2020-21. averaged 6.2 per cent in 2020-21, up from 3.9 per It went into defl ation during April-July 2020 and cent a year ago. reached an intra-year low of (-) 3.4 per cent in II.2.30 Infl ation in clothing and footwear remained May 2020 (lowest in 54 months) as prices of non- moderate averaging 3.4 per cent in 2020-21, largely food primary articles, minerals, crude petroleum refl ecting muted input costs and weak demand and natural gas, mineral oils and manufactured conditions. International prices of cotton, a major products declined due to a fall in global commodity input into clothing production, as measured by the prices and decrease in demand during the Cotton A Index, were affected by the outbreak of lockdown. Softer WPI infl ation, however, did COVID-19 and registered a fall during February- not pass-through to CPI infl ation as mark-ups April 2020, before recovering gradually thereafter. increased amidst social distancing and frozen markets. WPI infl ation picked up during August 5. Other Indicators of Infl ation 2020-March 2021, barring December 2020, and II.2.31 During 2020-21, sectoral CPI infl ation, reached 7.4 per cent in March 2021 driven by based on the consumer price index of industrial price pressures mainly in fuel and power and workers (CPI-IW), moderated to 5.1 per cent manufactured products groups along with adverse 48ECONOMIC REVIEW Chart II.2.15: Food Price Inflation and Inflation Gap a. CPI Food Inflation b. Food Inflation Gap (CPI-WPI) Note: CPI data for April and May 2020 were imputed by the NSO. Source: Office of the Economic Adviser (OEA), NSO and RBI staff estimates. base effects. On an annual average basis, WPI II.2.34 After the increases in MSPs during infl ation softened to 1.3 per cent in 2020-21 from 2019-20 for kharif and rabi crops, there was 1.7 per cent in 2019-20. The GDP defl ator infl ation, another moderate hike in 2020-21. The extent of however, hardened to 4.6 per cent in 2020-21 from MSP increases varied across crops, ranging from 3.6 per cent in 2019-20. 2.1 per cent in the case of moong and saffl ower to 12.7 per cent for nigerseed. MSPs of rice and II.2.33 The divergence between WPI and CPI wheat were increased by 2.9 per cent and 2.6 per infl ation refl ected the behaviour of food infl ation. cent, respectively. CPI food infl ation surged, following the imposition of a nation-wide lockdown even as food price II.2.35 Wage growth for agricultural and non- infl ation captured in the WPI eased, refl ecting the agricultural labourers witnessed a major spike role of supply chain disruptions and opportunistic during the year, averaging 7.8 per cent and pricing in raising mark-ups. The extent of retail 7.2 per cent, respectively, during May-March price increase in the post-lockdown period was 2020-21, refl ecting the shortage of labourers also much higher than the usual summer uptick in during the lockdown period, and the hike in food prices (Chart II.2.15a). The gap between retail wages under the Mahatma Gandhi National Rural and wholesale price infl ation – a proxy for retail Employment Guarantee Act (MGNREGA) 2005 margins or mark-ups also remained unusually by `20 effective from April 1, 2020 announced high (Chart II.2.15b). Since the expected easing by the central government. However, the growth of supply disruptions got delayed even after the rates moderated to 6.8 per cent and 5.6 per cent, gradual opening up of the economy due to excess respectively, in November 2020 from their peaks rain induced crop damages, mark-ups played of 10.5 per cent and 9.9 per cent in June 2020 a dominant role in the evolution of the infl ation and July 2020, respectively, before increasing trajectory during 2020-21 (Box II.2.1). marginally during December 2020-March 2021. 49ANNUAL REPORT 2020-21 Box II.2.1 Post-COVID-19 Surge in Mark-ups and Food Infl ation Surprise The Department of Consumer Affairs (DCA) collects, The results show that the interaction term corresponding monitors and publishes daily prices of 22 essential food to the lockdown phase is positive and signifi cant, indicating items for 135 centres spread across the country. The DCA that the lockdown led to an increase in margins (Table 1). data show an increase in retail margins for the 22 food items The results also indicate that the increase in margins during the lockdown period (Chart 1a) which varied across predominantly originated from low mobility (high lockdown centres depending to some extent on the degree of mobility intensity) centres. (Chart 1b). Table 1: Price Margin Across Centres An empirical exercise to understand the causal impact of All High Intensity Low Intensity Centres Lockdown Lockdown lockdown-induced supply disruptions on price margins of 22 Centres Centres food items across 80 centres13 using a panel regression 1 2 3 4 model14 based on the difference in difference (DID) strategy 2020=1 × March 25-May 31=1 0.441*** 0.602*** 0.136 (0.0914) (0.116) (0.142) (Varshney, Roy and Meenakshi, 2020) is evaluated for two 2020=1 × June-Nov=1 0.312** 0.372* 0.228 sub-samples - centres which experienced comparatively (0.144) (0.191) (0.185) Adjusted R 2 0.779 0.776 0.800 stricter lockdowns vis-à-vis others. Variation in lockdown Observations 834133 573750 260383 intensity across centres is measured using Google mobility Note: Centre × Commodity FE, State × Month FE, State × Year FE, Commodity indices. A high mobility centre (low intensity of lockdown) is × Month FE, and Commodity × Year FE are included in all the above specifi cations. Standard errors are clustered at the commodity-centre level. defi ned as the one which witnessed a lower than median fall Standard errors in parentheses. in the mobility index during the lockdown period. ***: Signifi cant at 1 per cent level. **: Signifi cant at 5 per cent level. *: Signifi cant at 10 per cent level. Source: RBI staff estimates. Chart 1: Behaviour of Margins and Mobility a. DCA Food Price Margins b: Mobility vs Margin Note: 1. Food price margin is the difference between retail and wholesale prices across centres, weighted by CPI weights for the 22 food items. 2. Mean margin is the average of price margins for 22 commodities in a given centre during March 25 - May 31, 2020, while mean mobility is the average of google mobility indices for each centre during the same period. Mobility is defined in terms of deviations from a base line (January 3 - February 6, 2020) before COVID-19 in the retail category. Source: DCA, Google Mobility Indices and RBI staff calculations. Reference: Varshney, D., D. Roy, and J. V. Meenakshi (2020), ‘Impact of COVID-19 on Agricultural Markets: Assessing the Roles of Commodity Characteristics, Disease Caseload and Market Reforms’, Indian Economic Review, Vol. 55, Pages S83-S103. 13 Although daily prices data are released for 135 centres, 80 centres are selected for the empirical exercise for which google mobility indices are available, to assess the impact of lockdown and mobility on margins. 14 The model is as follows: ; where is the price margin recorded at market centre i for commodity j at time t; Time Period is a dummy variable which takes the value 1 for the lockdown 1 phase (March 25 - May 31, 2020); Time Period is a dummy variable which takes the value 1 for the unlocking period (June - November, 2020); 2 2020 is a dummy variable that takes the value 1 for the year 2020; is the centre-commodity fi xed effect (FE); captures commodity-month FE; captures commodity-year FE; controls for state-month FE; controls for state-year FE; and is the error term. Robust standard errors are clustered at the market centre-commodity level. 50ECONOMIC REVIEW 6. Conclusion bolstered by a build-up of net foreign assets (NFA) of the Reserve Bank and its proactive II.2.36 In sum, headline infl ation remained liquidity management. The banking system elevated, having tested the upper tolerance level experienced liquidity leakages on account of a during June-November 2020. The substantial substantial upsurge in precautionary currency wedge between wholesale and retail price infl ation demand in response to COVID-19 pandemic during the year pointed to persistence of supply-side led uncertainties. Currency hoarding was bottlenecks and higher retail margins, underscoring accompanied by a sharp drop in the velocity of the importance of supply management. Pressures money refl ecting pandemic-depressed demand from food items like pulses and edible oils are likely and extreme uncertainty. Money supply (M3) was to persist in view of supply-demand imbalances, bolstered by a surge in aggregate deposits with while cereals’ prices may continue to soften with the virtual drying up of spending. Bank credit the bumper foodgrains production in 2020-21. growth remained subdued as demand languished Crude oil prices have picked up on optimism and risk aversion continued to grip the banking of demand recovery and continuation of OPEC system. Since November 2020, however, incipient plus production cuts; and are expected to remain signs of credit revival began to show up alongside volatile in the near-term. Cost-push pressures have green shoots of recovery in economic activity, also emanated from non-energy commodity prices facilitated by favourable liquidity conditions and and could fi rm up further as economic activity a gradual unlocking of the economy. With the normalises and demand picks up. As pandemics allaying of illiquidity fears in response to the typically leave markets less competitive, the measures taken by the Reserve Bank, interest rates and spreads eased across fi nancial market increase in number of active COVID-19 cases with instruments and rating categories and, along with the beginning of second wave from March 2021 expansionary monetary movements, supported along with the associated effects on supply chains congenial fi nancial conditions to nurture the amid containment measures could also affect economic recovery. infl ation going forward. II.3.2 Against this backdrop, sub-section 2 delves II.3 MONEY AND CREDIT into the dynamics underlying movements in RM and, thereby, the shifts in the Reserve Bank’s II.3.1 Monetary conditions eased during the balance sheet as it went into a crisis management year with the sharp compression in aggregate mode. Sub-section 3 examines developments demand imposed by the pandemic, especially in money supply in terms of its components during H1:2020-21 even as ample liquidity was and sources, throwing light on the movements engendered by the Reserve Bank’s operations, in assets and liabilities of the banking sector in both conventional and unconventional. Reserve exceptional times. The underpinnings of bank money (RM) adjusted for fi rst round effects of credit are covered in sub-section 4, followed by cash reserve ratio (CRR) expanded strongly, concluding observations. 51ANNUAL REPORT 2020-21 2. Reserve Money 15 (110 per cent a year ago), below the decennial average (2011-20) of 109 per cent. II.3.3 Reserve money - a stylised depiction of the Reserve Bank’s balance sheet that focuses on its II.3.5 The demand for CiC normally follows a ‘moneyness’16 comprising currency in circulation, predictable intra-month pattern – expansion bankers’ deposits and other deposits with the during the fi rst fortnight due to transactions by Reserve Bank - increased by 14.2 per cent in households, followed by a contraction in the 2020-21, higher than 9.8 per cent a year ago as second fortnight due to fl ow back of currency well as its decennial average (2011-20) of 10.6 from households to the banking system per cent [Chart II.3.1]. Adjusted for the reduction in (Chart II.3.2). CRR by 100 basis points (bps) effective March 28, II.3.6 There was an unusual rise in month- 2020 - which reduced RM statistically by around over-month (M-o-M) CiC variation during April- `1,37,000 crore - RM grew by 18.0 per cent during June 2020 vis-à-vis the corresponding period the year17, as against 9.4 per cent a year ago. of previous years due to the onset of the II.3.4 Among its components, currency in COVID-19 pandemic and a panic-driven surge circulation (CiC) constituted around 82 per cent in precautionary demand for cash as cushion of RM in 2020-21. Although the contribution of in a health crisis (Chart II.3.3 & Chart II.3.4). currency in determining the overall expansion in Subsequently, with the epidemiological curve RM peaked in April 2020, CiC accounted for 97 bending downwards from mid-September 2020 per cent of the expansion in RM during the year to February 2021 and in the light of the optimism Chart II.3.1: Reserve Money Growth Chart II.3.2: Weekly Variation in Currency in Circulation #: RM adjusted for CRR reduction. Source: RBI. Source: RBI. 15 In sub-section 2, growth and other ratios pertaining to end of fi nancial year/quarter/month are based on data as on the last Friday of the respective fi nancial year/quarter/month. 16 ‘Moneyness’ refers to the characteristics of an asset to convert readily into liquidity at a low or zero transaction cost. 17 The effect of increase in CRR from 3.0 per cent to 3.5 per cent, effective March 27, 2021, will be refl ected in the fi nancial year 2021-22. 52ECONOMIC REVIEW Chart II.3.3: Impact of COVID-19 on CiC Chart II.3.4: Number of Confirmed COVID-19 Cases in India Note: The unusual increase in CiC during January-June 2017 was on account of the remonetisation process, post-demonetisation. Source: Worldometer and Ministry of Health and Family Welfare, Source: RBI. Government of India. surrounding the mass vaccination programme, and resumption in construction activities in the the variations in CiC were mostly determined by real estate sector. The higher CiC growth at 17.2 seasonal factors. Nonetheless, a sudden spurt in per cent in 2020-21 (14.0 per cent a year ago) the number of confi rmed cases of corona virus resulted in the currency-GDP ratio increasing to infection in its second wave from March 2021 14.7 per cent (12.0 per cent last year) as cash- onwards may impact variation in CiC for the next intensity in the economy increased in the wake of fi nancial year. the pandemic (Chart II.3.6). II.3.7 The pandemic-induced dash for cash Chart II.3.5: Quarterly Variation in Currency in Circulation was superimposed on the usual seasonal spurt in currency demand in Q1:2020-21 which is associated with rabi procurement and kharif sowing. In the following quarter, despite an overall slowdown in economic activity and the seasonal slack in demand from cash-intensive sectors such as construction and agriculture, the fear of virus kept CiC at an elevated level. In Q3:2020-21, CiC expanded, refl ecting rise in currency demand for festivals, kharif harvest and the legislative assembly election in one state (Chart II.3.5). Further expansion in CiC was evident during Q4:2020-21 due to harvest of rabi crops, various festivals, run up to the legislative assembly Source: RBI. elections in four states and one Union Territory 53ANNUAL REPORT 2020-21 Chart II.3.6: India’s Currency-GDP Ratio Chart II.3.7: Bankers’ Deposits with the Reserve Bank Source: RBI, and Ministry of Statistics and Programme Implementation, Government of India. Source: RBI. II.3.8 Growth in bankers’ deposits with the the expansionary effects of accumulation of net Reserve Bank increased marginally by 0.8 per foreign assets (NFA) [Chart II.3.8a]. During 2020- cent in 2020-21 as against a decrease of 4.2 per 21, net purchases from authorised dealers stood cent in the previous year, primarily due to the at `5,16,389 crore vis-à-vis `2,96,943 crore in the reduction in CRR by 100 bps to 3.0 per cent18, previous year. Consistent with the accommodative effective March 28, 2020 (Chart II.3.7). stance of monetary policy, liquidity management II.3.9 The liquidity drain due to expansion in operations boosted net domestic assets (NDA) of CiC during the year was more than offset by the Reserve Bank (Chart II.3.8b). Chart II.3.8: NFA and NDA of the Reserve Bank a: NFA as per cent of RM b: Variation in NFA and NDA Source: RBI. 18 Refer to the footnote 17 of Para II.3.3. 54ECONOMIC REVIEW II.3.10 In particular, although net open market Chart II.3.9: NDA (Y-o-Y Variation) purchases (including auctions of special OMOs involving simultaneous purchase and sale of securities for liquidity distribution across the yield curve and OMOs in state development loans) amounted to `3.13 lakh crore, the net Reserve Bank credit to the government contracted by `1,12,071 crore during 2020-21 – mainly counterbalanced by accretion of massive government surplus balances. On the other hand, contraction in the Reserve Bank’s net credit to banks and the commercial sector (mainly PDs) primarily refl ected net liquidity adjustment facility (LAF) absorption aimed at sterilising forex operations and managing the large overhang of Source: RBI. liquidity in the system19 (Chart II.3.9). II.3.11 The net LAF position remained in reverse 3. Money Supply 20 repo mode throughout 2020-21, supplemented by repayment of long-term repo operations II.3.12 Stabilising from a prolonged decline till (LTROs) [availed during February-March 2020] 2016-17, M3 - comprising currency with the as well as of targeted LTROs (TLTROs) worth public (CwP), aggregate deposits (AD) and other `1,23,572 crore and `37,348 crore, respectively deposits with the Reserve Bank - recorded a (Chart II.3.10a and Chart II.3.10b). growth of 11.8 per cent during the year (8.7 per Chart II.3.10: Liquidity Injection/Absorption a: 2019-20 b: 2020-21 Source: RBI. 19 Details of liquidity management operations are covered in chapters III and V. 20 In sub-sections 3 and 4, growth and other ratios pertaining to end of fi nancial year/quarter/month are based on data as on the last reporting Friday of the respective fi nancial year/quarter/month. 55ANNUAL REPORT 2020-21 Chart II.3.11: Aggregate Deposits and M3 Chart II.3.12: SCBs’ Time Deposits: Y-o-Y Growth and Interest Rate Source: RBI. Source: RBI. cent a year ago) driven by AD, especially time 2020-21 (Chart II.3.14). The net bank credit to the deposits (Chart II.3.11). government grew, with commercial/cooperative banks augmenting their SLR portfolios in search II.3.13 On the components side, M3 expansion of safe haven, and consequently, their investment was driven by AD, as stated earlier, its largest in government securities increased by 18.7 per constituent (85 per cent share). In fact, AD cent in 2020-21 as compared with 10.6 per cent accounted for 79 per cent of the increase in M3 a year ago. On the other hand, bank credit to the during 2020-21, with time deposits growing at commercial sector - the largest constituent of M3 10.3 per cent in spite of considerable moderation in interest rates, refl ecting risk averse behaviour Chart II.3.13: Currency with the Public and Demand of depositors and lack of lucrative alternative Deposits: Fortnightly Variation investment avenues (Chart II.3.12). As usual, demand deposits remained volatile (especially during the fortnight ended April 10, 2020 which coincided with the 21 days nation-wide lockdown announced to contain the spread of COVID-19 pandemic) largely mirroring the variations in currency with the public which grew by 17.8 per cent in 2020-21 vis-à-vis 14.0 per cent in the previous year (Chart II.3.13). II.3.14 Net foreign exchange assets of the banking sector, net bank credit to the government and bank credit to the commercial sector led the Source: RBI. expansion in M3 from the sources side during 56ECONOMIC REVIEW Key Monetary Ratios Chart II.3.14: Expansion in M3: Components and Sources II.3.15 The money multiplier stood at 5.4 in 2020-21, which is marginally below its decennial average (2011-20) of 5.5. However, adjusted for the reverse repo - analytically more meaningful and akin to banks’ deposits with the central bank - money multiplier turned out to be lower at 4.7 in 2020-21, explaining the slowdown in money creation under subdued credit demand conditions. As a result, a substantial expansion in RM (adjusted for the fi rst-round effects of CRR changes) did not translate into a commensurate increase in M3 (Chart II.3.15 & Chart II.3.16). II.3.16 The currency-deposit ratio stood at 17.3 Source: RBI. per cent in 2020-21, slightly above its decennial average (2011-20) of 15.1 per cent. The shift in from the sources side - grew at a rate lower than the public’s preference towards stashing cash, a year ago, refl ecting passive liquidity surpluses the most liquid asset, was in response to the (Table II.3.1). Growth of NFA of the banking sector uncertainties relating to the pandemic. The mirrored NFA in RM. reserves-deposit ratio at 3.7 per cent (4.0 per cent Table II.3.1: Monetary Aggregates Item Outstanding as on Year-on-Year Growth Rate March 26, 2021 (in per cent) (` crore) 2018-19 2019-20 2020-21 1 2 3 4 5 I. Reserve Money (RM) 34,90,233 15.1 9.8 14.2 II. Money Supply (M3) 187,73,142 10.6 8.7 11.8 III. Major Components of M3 III.1. Currency with the Public 27,57,847 16.7 14.0 17.8 III.2. Aggregate Deposits 159,67,947 9.6 8.0 10.8 IV. Major Sources of M3 IV.1. Net Bank Credit to Government 56,92,569 11.1 14.2 12.5 IV.2. Bank Credit to Commercial Sector 116,10,050 12.7 6.3 5.2 IV.3. Net Foreign Assets of the Banking Sector 45,11,386 5.1 22.4 20.1 V. M3 net of FCNR(B) 186,24,899 10.6 8.7 12.1 VI. Money Multiplier 5.4 Note: Data are provisional. Source: RBI. 57ANNUAL REPORT 2020-21 Chart II.3.15: M3 Growth Chart II.3.17: Monetary Ratios Source: RBI. Source: RBI. a year ago), refl ected the impact of CRR reduction were available with the banking system for during 2019-20 (Chart II.3.17). extending credit. However, SCBs’ credit-deposit ratio moderated to 72.4 per cent in 2020-21 from 4. Credit 76.4 per cent a year ago, largely refl ecting the II.3.17 With the extant policy prescription of subdued credit demand conditions in the economy 3.5 per cent and 18 per cent for CRR and SLR, even as deposit mobilisation remained robust respectively, around 79 per cent of the deposits (Chart II.3.18 & Chart II.3.19). Chart II.3.16: Monetary Ratios Chart II.3.18: SCBs’ Credit-Deposit Ratio Source: RBI. Source: RBI. 58ECONOMIC REVIEW Chart II.3.19: Incremental Credit-Deposit Ratio Chart II.3.20: SCBs’ Credit Growth: Momentum and Base Effect Source: RBI. Source: RBI. II.3.18 The y-o-y growth in SCBs’ credit, which Reserve Bank, and supported by several started slowing down in 2019-20, was further sector specifi c measures announced by the impacted during H1: 2020-21 in the wake of government during the year (Chart II.3.20). COVID-19 pandemic related restrictions and The credit-to-GDP gap narrowed as at end- stood at 5.1 per cent for October 2020 (the September 2020 (Chart II.3.21); however, the lowest since May 2017). However, the worst gap still continues to be large, refl ecting the seems to be over as it gradually recovered lost persisting slack in credit demand in the economy. pace, backed by resumption in economic activity. II.3.19 The slowdown in SCBs’ credit growth During 2020-21, as per Section 42 returns, during 2020-21 has been broad-based across all fi nancial year variation in SCBs’ credit turned major sectors, except agriculture. According to positive for the fi rst time in November 2020 and data on the sectoral deployment of bank credit21 its growth stood at 5.6 per cent on a year-on- for March 2021, credit growth to agriculture and year basis for 2020-21 as compared with 6.1 per allied activities accelerated to 12.3 per cent cent a year ago. A positive momentum in credit in March 2021 (4.2 per cent a year ago), the offtake since November 2020 refl ects recovery highest since April 2017. Credit growth to industry in economic activity that has been supported decelerated marginally to 0.4 per cent (0.7 per by the cumulative reduction in the policy repo cent a year ago) mainly due to credit to large rate by 250 bps since February 2019, and industries, which contracted by 0.8 per cent in 115 bps since March 2020, as well as various March 2021 (as compared with a growth of 0.6 liquidity enhancing measures undertaken by the per cent a year ago). This is primarily on account 21 Data on sectoral deployment of bank credit is collected on a monthly basis from select SCBs (33 banks) which account for about 90 per cent of the total non-food credit deployed by all SCBs. 59ANNUAL REPORT 2020-21 to medium industries which registered a growth Chart II.3.21: Credit-to-GDP Gap of 28.8 per cent in March 2021 (as compared to contraction of 0.7 per cent a year ago), refl ecting the positive effects of various measures taken by the Government of India and the Reserve Bank for the micro, small and medium enterprises (MSME) sector. Credit growth to micro and small industries has witnessed marginal growth in the recent period (Table II.3.2). II.3.20 Insofar as credit to industrial sub-sectors is concerned, credit to food processing; textile; leather and leather products; wood and wood products; paper and paper products; glass and glassware; and gems and jewellery registered Source: RBI and Bank for International Settlements (BIS) Credit-to- accelerated growth in 2020-21 on a year-on- GDP Gap Statistics. year basis. However, credit growth to mining and quarrying; rubber, plastic and their products; as well of large industries obtaining fi nancial resources as vehicles, vehicle parts and transport equipment from non-bank sources, while the silver lining has decelerated. Industries such as beverages and been provided by the robust performance of credit tobacco; petroleum, coal products and nuclear Table II.3.2: Credit Deployment to Select Sectors Sectors Outstanding as on Year-on-Year Growth (Per cent) March 26, 2021 (` crore) 2018-19* 2019-20# 2020-21## 1 2 3 4 5 Non-food Credit (1 to 4) 96,62,022 12.3 6.7 4.9 1. Agriculture & Allied Activities 12,99,914 7.9 4.2 12.3 2. Industry (Micro & Small, Medium and Large) 29,18,028 6.9 0.7 0.4 2.1. Micro & Small 3,83,854 0.7 1.7 0.5 2.2. Medium 1,36,054 2.6 -0.7 28.8 2.3. Large 23,98,121 8.2 0.6 -0.8 (i) Infrastructure 10,91,624 18.5 -0.2 3.6 of which: (a) Power 5,66,455 9.5 -1.6 1.2 (b) Telecommunications 1,13,080 36.7 24.4 -21.3 (c) Roads 2,36,947 5.2 0.7 34.4 (ii) Chemicals & Chemical Products 1,86,911 17.5 6.0 -7.9 (iii) Basic Metals & Metal Products 3,28,663 -10.7 -5.7 -6.2 (iv) Food Processing 1,65,669 1.1 -1.9 7.5 3. Services 26,30,566 17.8 7.4 1.4 4. Personal Loans 28,13,513 16.4 15.0 10.2 *: March 2019 over March 2018. #: March 2020 over March 2019. ##: March 2021 over March 2020. Note: Data are provisional. Source: RBI. 60ECONOMIC REVIEW Chart II.3.22: Sectoral Deployment of Non-Food Bank Credit Growth a: Y-o-Y Credit Growth - Sector-wise b: Y-o-Y Credit Growth - Bank Group-wise Note: Data are provisional. Source: RBI. fuels; chemicals and chemical products; basic (NFC) growth decelerated to 4.9 per cent from metal and metal products; cement and cement 6.7 per cent a year ago. Among bank groups, products; all engineering and construction public sector banks registered credit growth of witnessed contraction in credit offtake. 3.1 per cent in March 2021 (3.4 per cent a year ago), whereas, credit extended by private sector II.3.21 After witnessing a marginal contraction banks grew by 9.6 per cent (13.9 per cent a year in 2019-20, credit growth to infrastructure, which ago) mainly due to deceleration in credit growth in accounts for around 37 per cent of industrial the personal loans segment (Chart II.3.22.a and credit, showed some improvement during 2020- Chart II.3.22.b). 21, mainly due to signifi cant acceleration in credit growth to roads, refl ecting government’s 5. Conclusion push for this segment. However, credit to II.3.23 To sum up, despite a surge in currency telecommunications witnessed a signifi cant demand with the onset of COVID-19 pandemic, contraction, while credit to power showed some monetary conditions eased on account of recovery. Credit growth to the services sector proactive liquidity management measures decelerated to 1.4 per cent during 2020-21 from undertaken by the Reserve Bank through 7.4 per cent in the previous year, primarily driven conventional and unconventional measures. A down by sharp deceleration in credit growth to gradual pick up in economic activity during the NBFCs after a spurt in the preceding year and second half of 2020-21 pulled up credit growth. contraction in credit to professional services. Going forward, accommodative liquidity conditions However, credit to wholesale trade bucked the and interest rates, several growth enhancing downtrend, registering accelerated growth. measures announced by the government and Personal loans growth decelerated during the commencement of the mass vaccination drive year but remained in double digits. are likely to nurture the recovery which, in turn, is II.3.22 As per sectoral deployment of bank credit expected to have a favourable bearing on credit database22, on March 26, 2021, non-food credit demand and supply. 22 Refer to the footnote of Para II.3.19. 61ANNUAL REPORT 2020-21 II.4 FINANCIAL MARKETS investment (FPI) infl ows, better than expected corporate earnings, pick-up in economic activity II.4.1 After the pandemic shock in H1:2020, and roll-out of vaccines in the country and abroad. global fi nancial markets quickly regained normalcy I ndian Rupee depreciated to touch a historical low over the ensuing period, drawing support from of 76.91 on an intra-day basis on April 22, 2020 liquidity fl ushed in by global central banks and due to unprecedented FPI outfl ows induced by unprecedented fi scal support by governments. the pandemic. The Indian rupee subsequently Financial conditions eased and the return of appreciated in line with other emerging market risk appetite enhanced the demand for fi nancial currencies, led by strong FPI infl ows, as risk assets across risk and rating categories with appetite returned for EME assets amidst pick-up in equity markets turning exuberant and scaling economic activity, progress on vaccine discovery fresh heights in several countries. Emerging and inoculation and easing of COVID-19 related market economies (EMEs) like China and India restrictions. Moreover, India was the only major received surges of portfolio fl ows. The US dollar country among emerging markets (excluding weakened, paving the way for appreciation of China) that received equity FPI infl ows in calendar other currencies in tandem with improvement in year 202023. risk sentiment. Bond markets recorded sharp falls in yields, supported by liquidity infusion and policy II.4.3 Money market developments are detailed rate cuts by central banks. However, global bond in sub-section 2. G-sec yields are discussed in sub- yields seemed to have bottomed out. The yield on section 3. Sub-section 4 presents developments in US 10-year G-sec has risen by 123 basis points the corporate bond market wherein yields eased (bps) since its low in early-August (till March 31, signifi cantly in 2020-21. Sub-section 5 profi les 2021). Indian generic 10-year G-sec yield fi rmed developments in the domestic equity market, up 39 bps over the same period. followed by a discussion on movements in the Indian rupee in the foreign exchange market II.4.2 In India, the equity market made a sharp in sub-section 6, and fi nally followed by the V-shaped recovery in sync with global markets on the back of massive fi scal and monetary stimuli concluding sub-section on some forward-looking and gradual easing in COVID-induced restrictions. perspectives. The Reserve Bank announced liquidity measures 2. Money Market aggregating `13.6 lakh crore (6.9 per cent of II.4.4 After the global market turmoil during nominal GDP for 2020-21) during February 6, March 2020 when fi nancial spreads spiked and the 2020 - March 31, 2021. This shrank spreads and money market rates fi rmed up, the money market pushed market rates down. On the back of policy stabilised through the rest of 2020-21 amidst support, the Sensex gained 91 per cent from its proactive liquidity management by the Reserve post-pandemic lows during 2020-21, which was Bank, using several instruments at its command. among the highest worldwide. The rally was, however, interrupted intermittently by the rise in II.4.5 To address any liquidity shortage during the COVID-19 cases and simmering India-China pandemic and the unusual expansion in currency border tensions. Domestic equities scaled all-time in circulation due to pandemic-stricken tendency peak in H2:2020-21 on record foreign portfolio to hold cash, the Reserve Bank conducted 23 National Securities Depository Ltd. (NSDL) and Institute of International Finance (IIF). 62ECONOMIC REVIEW liquidity management operations through a variety liquidity in the banking system prevailed during the of conventional and unconventional instruments entire year. In H2: 2020-21, overnight collateralised as set out in chapters III and V. and uncollateralised rates, and at times 91-day treasury bills (T-Bills) and commercial paper (CP) II.4.6 Furthermore, as part of the AatmaNirbhar rates, fell below the reverse repo rate. Bharat programme announced by the Government of India (GoI) in May 2020, the Reserve Bank II.4.8 During 2020-21, volatility in the call money notifi ed a special liquidity scheme at the repo market, measured by the coeffi cient of variation24 rate to improve the liquidity position of Non- of the WACR, increased to 8.34 from 7.55 in Banking Financial Companies/Housing Finance 2019-20, refl ecting swings in liquidity conditions. Companies (NBFCs/HFCs) to avoid any potential The triparty repo as well as the market repo rates systemic risks to the fi nancial sector on July 1, remained below the WACR by 37 bps and 38 bps, 2020. The aggregate principal amount invested respectively, on an average. by the Reserve Bank under the scheme stood at II.4.9 The average daily volume in the money `7,126 crore. market (call money, triparty repo and market repo II.4.7 The weighted average call rate (WACR) in taken together, excluding Saturdays) increased the unsecured call money market – the operating by 39 per cent to `3,36,371 crore during 2020-21 target of monetary policy – remained within the from `2,42,658 crore in 2019-20 (April-March). policy corridor with a downward bias till mid- Volumes in the triparty repo and market repo October 2020 before slipping below the reverse segments increased and they accounted for 69 repo rate, refl ecting surplus liquidity conditions per cent and 28 per cent, respectively, of the (Chart II.4.1). The average spread of the WACR total money market volume (call/triparty repo and over the policy repo rate increased to (-) 63 bps market repo) during 2020-21 as compared with 68 in 2020-21 from (-) 9 bps in 2019-20 as surplus per cent and 25 per cent, respectively, in 2019-20 Chart II.4.1: Money Market Rates and Policy Corridor Chart II.4.2: Share of Major Segments in Money Market Volume Source: RBI, CCIL, CCIL-Ftrac, FBIL and RBI staff calculations. Source: CCIL and RBI staff calculations. 24 Coeffi cient of variation is measured as a ratio of standard deviation to the mean. 63ANNUAL REPORT 2020-21 (Chart II.4.2). In the call money segment, average thereafter by about 100 bps to 3.7 per cent as at daily volumes decreased by 34 per cent during end-December 2020, before inching up thereafter the year to `10,993 crore (from `16,558 crore), to 4.7 per cent by end-March 2021 (Chart II.4.3). reducing market share to 3 per cent from 7 per Similarly, the 3-month CP rates for both NBFCs cent in the previous year. and non-NBFCs hardened as well. The 3-month CP (NBFC) rate increased from 3.4 per cent at II.4.10 Interest rates on other money market end-December 2020 to 3.5 per cent by end-March instruments, viz., 91-day T-Bills, certifi cates of 2021. Concomitantly, the 3-month CP (non-NBFC) deposit (CDs) and CPs generally softened on rate increased from 3.3 per cent at end-December account of surplus liquidity during 2020-21. With 2020 to 3.7 per cent at end-March 2021. the decrease in the policy repo rate and proactive liquidity augmenting measures by the Reserve II.4.12 In the primary market, fresh issuance of Bank, the spread of CD rates over T-bill rates CDs decreased to `1.3 lakh crore during 2020-21 narrowed signifi cantly from 44 bps in Q1:2020- as compared with `3.9 lakh crore in the previous 21 to 7 bps during Q2:2020-21, but widened year (April-March). New issuance of CPs in the marginally during Q3:2020-21 to 8 bps. Spreads primary market also decreased to `17.4 lakh of CD rates over T-bill rates, however, narrowed to crore in 2020-21 from `22.0 lakh crore in 2019-20 6 bps in Q4: 2020-21 (Chart II.4.3). (April-March). II.4.11 The average daily spread of 3-month 3. G-sec Market CP(NBFC) rates over the 91-day T-bill rates II.4.13 In April 2020, the G-sec yields decreased from 31 bps during Q2:2020-21 to 22 hardened initially due to selling pressure from bps in Q3:2020-21, before increasing to 35 bps FPIs, expectation of increase in government in Q4:2020-21. The weighted average discount borrowing, rise in US treasury yields and rates in the primary CP market, which hardened adverse developments in mutual fund sector in end-September 2020 to 4.6 per cent, softened leading to redemption stress and intensifi ed liquidity pressures. However, yields softened Chart II.4.3: Spread of 3-Month CP and CD Rate later tracking the Reserve Bank’s announcement over 91-day T-Bill Rate of special liquidity facility for mutual funds (SLF- MF), conduct of OMOs and decline in crude oil prices. In the month of May 2020, bond yields again rose due to upward revision of gross market borrowings of GoI for 2020-21 to `12 lakh crore from the budgeted level of `7.8 lakh crore but fell subsequently after the monetary policy committee (MPC) reduced the repo rate by 40 bps. In June 2020, G-sec yields hardened as market sentiment was dampened by the downgrade in India’s sovereign rating to a negative outlook by Moody’s Investor service from Baa2 to Baa3, escalation of Indo-China border tensions and Source: Bloomberg, FBIL and RBI staff calculations. selling pressure from FPIs. Movement in US 64ECONOMIC REVIEW treasury yields and crude oil prices also weighed primary auction in end-December. Overall, the on the yield movements. Overall, during Q1:2020- 10-year generic G-sec yield declined by 15 bps in 21, the 10-year generic G-sec yield softened by Q3:2020-21. 25 bps to close lower at 5.89 per cent on June II.4.16 In Q4:2020-21, the G-sec yield initially 30, 2020. softened on the back of buying support by mutual II.4.14 During Q2:2020-21, the 10-year generic funds and foreign banks. It rebounded thereafter G-sec yield hardened by 13 bps, tracking higher and remained elevated after the government than expected CPI data prints for June 2020 and announced additional borrowing of `80,000 crore July 2020, status quo on the policy rate in the for 2020-21 and indicated elevated borrowing of August 2020 meeting of the MPC and subsequent around `12 lakh crore for 2021-22. The increase MPC minutes refl ecting concerns on elevated in US Treasury yields and rebound in crude oil infl ation. Subsequently, a series of measures prices also contributed to the upward movement announced by the Reserve Bank to foster orderly in bond yields. In Q4, the 10-year generic G-sec market conditions on August 31, 2020 led to a sharp yield hardened by 30 bps to close at 6.17 per cent decline in bond yields. Furthermore, bond yields on March 31, 2021 (Chart II.4.4). drew comfort from a series of OMOs carried out II.4.17 With the introduction of the fully accessible by the Reserve Bank. The release of lower-than- route (FAR)25 with effect from April 1, 2020, expected CPI data for August 2020 and reports FPIs have three routes to invest in G-secs, viz., that the GoI is unlikely to announce additional general route with investment limits set under market borrowings in H2:2020-21 supported bond the medium-term framework (MTF), voluntary yields. II.4.15 In Q3:2020-21, softening of G-sec yield Chart II.4.4: 10 year G-sec Generic Yield continued, and it declined by 13 basis points in October 2020 in response to an unchanged borrowing calendar for the second half of 2020-21, announcement of conduct of OMO in State Development Loans (SDL), increase in size of OMO purchases, and extension of held- to-maturity (HTM) benefi t by one more year up to March 31, 2022. During November 2020, G-sec yields moved in a narrow range and hardened marginally by 3 basis points. In December, yields declined marginally as upward pressure on yields due to increase in crude oil prices and profi t booking was more than offset owing to reduced supply pressure as the Reserve Bank decided Source: Bloomberg. not to accept any bids for benchmark paper in 25 Under FAR, certain categories of central government securities were opened fully for non-resident investors without any restrictions, apart from being available to domestic investors as well. 65ANNUAL REPORT 2020-21 retention route (VRR) and FAR. The limit for FPI and approvals for inoculations improved market investments in G-sec under MTF for the year sentiment. The yield on AAA-rated 5-year bonds 2020-21 was set at `3,38,062 crore. During closed at 5.92 per cent for PSUs, FIs and banks; April 2020 - March 2021, FPIs sold G-secs for 6.29 per cent for NBFCs; and 6.14 per cent for `31,104 crore under the general route. However, corporates at end-March 2021. FPIs invested `17,211 crore under the FAR route II.4.19 During 2020-21, the risk premium or during the same period excluding `15,199 crore spread on AAA-rated 5-year bonds (over 5-year that was transferred from the general window G-sec) decreased from 18 bps to (-) 14 bps for to the FAR scheme at the commencement of PSUs, FIs and banks; 107 bps to 23 bps for the latter. Incidentally, the number of securities NBFCs and 104 bps to 8 bps for corporates. included under the FAR scheme increased from The narrowing of spreads was also visible fi ve (with outstanding stock of `4,34,224 crore across the rating segments of corporate bonds. as on April 1, 2020) to twelve securities (with The deployment of several conventional and outstanding stock of `11,79,423 crore as on unconventional tools by the Reserve Bank such March 31, 2021). FPIs also invested `789 crore as Long-term Repo Operations (LTROs), Targeted in G-secs during April 2020 - March 2021 through LTROs (TLTROs) and Special Liquidity Facility the VRR which has a combined investment limit for Mutual Funds (SLF-MF), supplemented with of `1,50,000 crore for G-secs and corporate measures undertaken by the government such bonds. The State Development Loans (SDLs) as special liquidity scheme and partial credit also witnessed FPIs buying for `99 crore during guarantee scheme for NBFCs, helped easing of the same period. liquidity premiums in the corporate bond market. 4. Corporate Debt Market The average daily secondary market turnover in the corporate bond market increased by 25.7 II.4.18 Corporate bond yields largely tracked per cent y-o-y to `10,889 crore in Q1:2020-21, G-sec yields. Financing conditions in the aided by the regulatory requirement of investing corporate bond market, which witnessed a a part of TLTRO funds in the secondary market, brief period of stress during March-April 2020 but witnessed some moderation subsequently. triggered by the outbreak of COVID-19, eased Overall, the average daily turnover decreased to signifi cantly in the remainder of 2020-21, with the `7,671 crore during 2020-21 from `8,532 crore in average yields on AAA-rated 5-year corporate the previous year (Chart II.4.5). bonds falling to its lowest level since 2004. During 2020-21, the AAA-rated 5-year bond II.4.20 Liquidity infusion by the Reserve Bank yields of public sector undertakings (PSUs); played a key role in supporting primary corporate fi nancial institutions (FIs) & banks; NBFCs and bond issuances, which increased by 13.4 per cent corporates softened by 50 bps, 101 bps and 114 to a record `7.8 lakh crore during 2020-21 under bps, respectively, refl ecting the transmission of easy liquidity conditions coupled with softening monetary policy rate cuts to the corporate bond of yields. Corporates mobilised higher resources yields, surplus liquidity conditions and the effect from the bond market to seize the benefi t of lower of targeted measures by the Reserve Bank and costs. Private placements remained the preferred the government. Furthermore, encouraging choice for corporates, accounting for 98.7 per reports on COVID-19 vaccine development cent of total resources mobilised through the bond 66ECONOMIC REVIEW to 24.5 per cent at end-March 2021 from 54.5 per Chart II.4.5: Turnover and AAA-rated 5-Year Yield Spread in Corporate Bond Market cent at end-March 2020. 5. Equity Market II.4.21 After undergoing sharp corrections in Q4:2019-20 amidst the tragic outbreak of COVID-19, the Indian equity market made a strong V-shaped recovery in 2020-21 following decisive monetary and fi scal policy responses, gradual easing of COVID-19 induced lockdown measures and strong FPI infl ows. Furthermore, the sharp rebound in global peers amid stimulus measures by governments and monetary authorities worldwide, coupled with encouraging reports on development of coronavirus vaccine supported Source: SEBI and FIMMDA. the domestic equity market recovery from April 2020. Overall, during 2020-21, the BSE Sensex market. Outstanding corporate bonds increased surged by 68.0 per cent to close at 49,509 while by 11.8 per cent y-o-y to `35.1 lakh crore, i.e., the Nifty 50 increased by 70.9 per cent to close 18.2 per cent of GDP at end-December 2020. at 14,691 on March 31, 2021. India VIX, which Investments by FPIs in corporate bonds decreased captures short-term volatility of Nifty 50, declined to `1.33 lakh crore at end-March 2021 from `1.73 to 20.6 per cent at end-March 2021 after soaring lakh crore at end-March 2020. Consequently, to the unusually high level of 83.6 per cent on utilisation of the approved limit by FPIs declined March 24, 2020 (Chart II.4.6). Chart II.4.6: Equity Market a: Movement in BSE Sensex and Nifty 50 b: India VIX 55,000 17,000 15,500 50,000 14,000 45,000 12,500 40,000 11,000 9,500 35,000 8,000 30,000 6,500 25,000 5,000 Source: BSE and NSE. 67 xednI 02-raM-13 02-rpA-03 02-yaM-13 02-nuJ-03 02-luJ-13 02-guA-13 02-peS-03 02-tcO-13 02-voN-03 02-ceD-13 12-naJ-13 12-beF-82 12-raM-13 xednI BSE Sensex Nifty 50 (RHS)ANNUAL REPORT 2020-21 II.4.22 The Indian equity market commenced the domestic front, the rally was driven by the reports year with a sharp rebound, posting its biggest of dis-engagement between India and China monthly gain in 11 years during April 2020. The over the border dispute, better than expected BSE Sensex surged by 14.4 per cent during corporate earnings results for Q1: 2020-21, the month on the hopes of a second round strong FPI infl ows and announcement of a series of stimulus measures by the government and of growth supportive measures by the Reserve announcement of various liquidity measures Bank. However, the sentiment reversed towards by the Reserve Bank. Encouraging reports of the end of August due to fresh escalation in Indo- COVID-19 drug trials and easing of lockdown China border tensions. Trading turned cautious measures in major economies lifted market ahead of the implementation of new trading norms sentiment. However, the upside in equities was on margin requirements by the Securities and capped by dismal economic data, sharp decline in Exchange Board of India (SEBI). crude oil prices and closure of six debt schemes II.4.24 The markets remained under pressure by a mutual fund. The Reserve Bank responded in September as the unabated rise in COVID-19 quickly, providing a special liquidity facility of cases in Europe triggered fears of a second wave ` 50,000 crore for mutual funds and stemming of infections and associated lockdown measures. a run of redemptions under various mutual fund The BSE Sensex plunged sharply by 1,115 points schemes. The downtrend deepened in May 2020 on September 24, its biggest intra-day fall in in sync with global peers amid escalation in the more than four months, tracking sharp sell-offs US-China diplomatic issues and fear of a second in global equities. However, bullish sentiments wave of coronavirus infections as economies returned to markets in October following opening started lifting lockdowns. The announcement of up of the economy under ‘Unlock 5’ guidelines, the “AatmaNirbhar Bharat ” stimulus package and improvement in the manufacturing purchasing a large policy repo rate cut by the Reserve Bank managers’ index (PMI) for September 2020 and on May 22 provided some breather to domestic strong goods and services tax (GST) collection equities. data for September 2020 - indicating resumption in domestic manufacturing activity. Furthermore, II.4.23 The equity market rebounded in June 2020 upbeat Q2:2020-21 earning results and the with the BSE Sensex posting its best quarterly announcement of a slew of liquidity and regulatory return (18.5 per cent) since 2009, driven by strong measures by the Reserve Bank aided the upswing. global cues amidst re-opening of economies and However, domestic equities witnessed cautious additional stimulus measures by the European trading towards the end of the month following Central Bank (ECB). However, the rally proved uncertainty surrounding the US Presidential transient as bearish sentiment gripped markets elections. following a persistent rise in COVID-19 cases, simmering India-China border tensions and a II.4.25 The Indian equity market rallied to record grim economic outlook for India projected by high levels in November 2020 on the back of various agencies. The recovery resumed in July sharp increase in global equities on positive and August on the back of encouraging reports developments around COVID-19 vaccines on coronavirus vaccine trials and more supportive and expectations that trade wars might ease measures from national authorities globally. On the following US Presidential elections (Box II.4.1). 68ECONOMIC REVIEW Box II.4.1 Is the Bubble in Stock Markets Rational? Prices of risky assets surged across countries to record less compared to money supply and FPI. This assessment high levels during the year on the back of unparalleled levels shows that liquidity injected to support economic recovery of monetary and fi scal stimulus, and the turn in market can lead to unintended consequences in the form of sentiments following positive news on the development infl ationary asset prices and providing a reason that of and access to vaccines and the end of uncertainty liquidity support cannot be expected to be unrestrained and surrounding US election results. The widening gap between indefi nite and may require calibrated unwinding once the stretched asset prices relative to prospects for recovery in pandemic waves are fl attened and real economy is fi rmly real economic activity, however, emerged as a global policy on recovery path. Ev en considering the above expectations concern (BIS, 2020; IMF, 2020). earning growth of the corporates, the stock prices cannot be explained by fundamentals alone. Present valuations, as India’s equity prices also surged to record highs, with in the past, are supported by improved corporate earnings. the benchmark index (Sensex) crossing 50,000 mark on This part of Sensex increase can be seen as rational. January 21, 2021 to touch a peak of 52,154 on February 15, 2021, which represents a 100.7 per cent increase from LOG(SENSEX) = - 6.26 + 0.60*** LOG(M3) + the slump just before beginning of the nationwide lockdown (-1.34) (4.51)*** (i.e., since March 23, 2020) and a 68.0 per cent increase over the year 2020-21. This order of asset price infl ation in 1.46 LOG(CLI) + 0.0005* FPI the context of the estimated 8 per cent contraction in GDP in (1.66)* (1.81)* 2020-21 poses the risk of a bubble. ECM = -0.05 (-4.57)*** Literature on the subject highlights several fundamental Bounds Test: determinants of equity prices, viz., GDP growth, infl ation, F-statistic 4.09 [Critical value at 5 per cent - I(0): 2.79; I(1): and money supply (Tiryaki et al., 2019; Khan and Khan, 3.67] 2018). An autoregressive distributed lag (ARDL) model is Bounds test rejects the null hypothesis of no level relationship estimated by regressing stock prices (Sensex) on money at 5 per cent level. supply (M3, as a proxy of liquidity), the economic outlook LM Test p-value = 0.30, ARCH test p-value = 0.39 (OECD composite lead indicator - CLI) and foreign portfolio *: Signifi cant at 10 per cent level. investments in the secondary equity market for the period ***: Signifi cant at 1 per cent level. April 2005 to December 2020. The results suggest that the Note: Figures in parentheses are t-statistics. stock price index is mainly driven by money supply and FPI investments. Economic prospects also contribute to Another approach to assess stock market valuation is to movement in the stock market, but the impact is relatively compare the price-to-earnings (P/E) ratio with its historical Chart 1: Sensex and P/E Ratio a: Trailing P/E Ratio of Sensex b: Sensex and Equity Risk Premium (ERP) 60,000 9 50,000 8 40,000 7 30,000 6 20,000 5 10,000 4 0 3 Source: Bloomberg and RBI staff calculations. (contd.) 69 xednI 60-raM 70-raM 80-raM 90-raM 01-raM 11-raM 21-raM 31-raM 41-raM 51-raM 61-raM 71-raM 81-raM 91-raM 02-raM 12-raM tnecreP Sensex ERP (RHS)ANNUAL REPORT 2020-21 trend. The deviation of the actual P/E from its long-run trend References: shows that the ratio is overvalued (Chart 1a). Measures 1. International Monetary Fund (2020), ‘Global Financial of dividend yield also signal that markets are getting Stability Report: Bridge to Recovery’, October. overpriced. A decomposition of changes in equity prices indicate that the rise in equity prices during 2016 to early 2. Khan, J., & Khan, I. (2018), ‘The Impact of Macroeconomic 2020 was mainly supported by a decrease in interest rates Variables on Stock Prices: A Case Study of Karachi and Equity Risk Premium (ERP), with increase in forward Stock Exchange’, Journal of Economics and Sustainable earnings expectations contributing to a lesser extent (Chart Development, 9 (13), 15-25. 1b). Thereafter, a spike in ERP on COVID-19 concerns 3. Bank for International Settlements (2020), Annual initially contributed to equity prices declining sharply to Economic Report, BIS. compensate for increased risks. However, equity prices registered an impressive recovery, subsequently, aided by 4. Tiryaki, A., Ceylan, R., and Erdoğan, L. (2019), easing of ERP. Currently, dividend yields have fallen below ‘Asymmetric Effects of Industrial Production, Money their long-term trends. As such, two-way price movements Supply and Exchange Rate Changes on Stock Returns are possible going forward. in Turkey’, Applied Economics, 51(20), 2143-2154. Furthermore, the run-up in domestic equities was India and China at the border, weak global cues sustained by the government’s approval of the over the stretched valuations in US equities and `1.5 lakh crore production-linked incentive (PLI) cautious trading ahead of the Union Budget. scheme for 10 manufacturing sectors and record Reversing the weak momentum towards the end high FPI infl ows. Market sentiment remained of January 2021, the benchmark achieved a fresh exuberant during December 2020 on better than high of 52,154 on February 15, 2021 buoyed by expected GDP data for Q2:2020-21 and upward budgetary proposals, optimistic outlook on revival revision in India’s GDP forecast for 2020-21 by the of GDP growth by the Reserve Bank and positive Reserve Bank and various global agencies. The cues from global markets. However, markets benchmark indices hit record high levels during declined towards the end of the month following the month on upbeat IIP data for October 2020 a surge in the US treasury yields, rise in crude and hopes of a faster global economic recovery oil prices and fresh spikes in COVID-19 cases in after the passage of the US stimulus package and certain Indian states. Markets commenced on an the Brexit trade deal. Markets wilted, however, optimistic note in March 2021 buoyed by release of under reports of a new strain of coronavirus in positive Q3:2020-21 GDP data and encouraging several countries, leading to imposition of fresh reports for February 2021 on auto sales, GST lockdowns and travel restrictions. collections, manufacturing and services PMI. Market ebullience, however, sobered refl ecting II.4.26 Domestic markets remained largely concerns over infl ation and imposition of fresh volatile in January 2021 as investors weighed COVID-induced restrictions in some parts of the the roll-out of coronavirus vaccines in the country country. and upbeat corporate results for Q3:2020-21 against the persistent rise in COVID-19 cases II.4.27 The total market capitalisation of BSE listed across the globe. The benchmark hit 50,000 mark companies scaled to record level of `204.3 lakh in intra-day trade for the fi rst time in history on crore at end-March 2021 registering an increase January 21, 2021 before paring all the gains on of 80 per cent over that of `113.5 lakh crore at concerns over reports of a fresh face-off between end-March 2020. The market capitalisation to 70ECONOMIC REVIEW GDP ratio crossed 100 per cent in January 2021 surge in IPOs during 2020-21 as also the number for the fi rst time in over a decade. There has been a currently in the pipeline (Box II.4.2). Box II.4.2 The Phenomena of Listing Returns in India: Some Exploration Equity markets experienced a roller-coaster ride, Chart 2: Main board IPO Average Listing Returns in rebounding steeply from their March 2020 downturn. The Last 10 Years (Sector-Wise) exuberance witnessed in the secondary market gripped ConsumerStaples 27.5 the primary market, with the year 2020-21 turning out to Health Care 21.4 be an extraordinary one for initial public offers (IPOs) by Industrials 16.5 Indian companies, as 21 out of 29 IPOs have generated Materials 15.4 positive returns for investors on listing (Chart 1). A sector- Information Technology 15.2 wise analysis of 201 IPOs over the last 10 years (2011-12 ConsumerDiscretionary 14.6 to 2020-21) indicates that IPOs from consumer staples and healthcare sectors generated the highest listing gains in Financials 12.7 India (Chart 2). Communication Services 4.3 0 5 10 15 20 25 30 Per cent The underpricing of IPO is one of the most commonly studied Note: Only those sectors with at least five IPOs during last 10-year period are puzzles in the fi eld of corporate fi nance. Underpricing of an considered. Source: Bloomberg and RBI staff calculations. IPO is said to have taken place when the stock generates higher prices on the fi rst day of listing, called the listing IPOs that were listed on the BSE and the NSE during returns. In the literature, information asymmetry is regarded 2011-12 to 2020-21. The following regression model as the root cause of underpricing (Rock, 1986) - a winner’s has been estimated to determine the infl uence of each curse model is at work wherein the issuer deliberately characteristic on the adjusted IPO returns, which are underprices its IPO to attract uninformed investors. Other calculated as the raw IPO returns minus the BSE Sensex reasons are providing compensation to investors by the returns on the IPO listing day (adjusted returns are preferred issuers for undertaking ex-ante uncertainty risk. over raw returns to control for the effect of general market on An attempt has been made to examine the factors IPO performance). underlying the underpricing in IPOs in the Indian context using three sets of variables: market specifi c variables such as oversubscription, lagged market return and lagged volatility; fi rm characteristics such as age, leverage, growth, profi tability and valuation indicators; and IPO specifi c Where, variables such as IPO size. The data relate to the mainboard Adjusted_Rtn = Adjusted IPO returns; Oversubscription = Number of application of shares/ number of shares issued Chart 1: Main board IPO Listing Returns in Last 10 Years by the company; Sensex_lag2mreturn = absolute Sensex (Scrip-Wise) returns in two months preceding the IPO; VIX_lag2mavg = average VIX in two months preceding the IPO; Ln_Age = log of the difference between date of incorporation and IPO listing date; DER = debt to equity ratio; ROE = return on equity; Pat2ygrowth = compounded annual growth rate of profi t after tax in the last 2 years; PE = price-earnings ratio; and Ln_IPOsize = log of size of IPO proceeds. The model also controls for sector specifi c dummies. The coeffi cient of oversubscription rate is found to be positive and highly signifi cant in explaining the IPO’s initial Source: Bloomberg and RBI staff calculations. (Contd.) 71ANNUAL REPORT 2020-21 Table 1: Determinants of IPO Returns Chart 3: Average Main board IPO Listing Returns, (Dependent variable: Adjusted_Rtn) Sensex Returns and IPO Oversubscription Explanatory Variables Coeffi cient 1 2 Oversubscription 0.44** Sensex_lag2mreturn 0.90* VIX_lag2mavg -0.85 ln_Age -2.33 DER 1.7 ROE 0.17 Pat2ygrowth 0.02 PE -0.09 ln_IPO size 6.2 Note: Year-to-date Sensex returns have been used for 2020-21, while for previous *: Signifi cant at 5 per cent level. **: Signifi cant at 1 per cent level. years, average Sensex returns have been used. Source: RBI staff calculations. Source: Bloomberg, BSE, NSE and RBI staff calculations. returns (Table 1) and supports the fi ndings of earlier studies of 71.3 times of IPO issue size. (Leong, 2015). Intuitively, a higher oversubscription rate is a signal to the investors in the secondary market on the References: potential increase in share prices and expected returns 1. Rock, Kevin (1986), ‘Why New Issues are Underpriced’, (Chart 3). The results also show a positive and signifi cant Journal of Financial Economics, Volume 15, Issues relationship between lagged Sensex returns and IPO 1-2, January-February, Pages 187-212. returns, suggesting that IPOs issued during the boom period are relatively more underpriced, which is broadly in line 2. Mike Siew Wei Leong, S. D. (2015), ‘IPO Initial Return and with past studies (e.g., Bhattacharya, 2017). However, the Volatility: A Study in an Emerging Market’. International fi rm specifi c characteristics are found to be not statistically Journal of Business and Finance Research, Vol. 9, No. 3, signifi cant in explaining the price run-ups on the IPO listing 2015, pp. 71-82. day. Further, the negative coeffi cient of the average VIX is 3. Bhattacharya, A. (2017), ‘Innovations in New Venture not statistically signifi cant. Thus, the decadal high average Financing: Evidence from Indian SME IPOs’, Global IPO listing returns of 36 per cent realised during 2020-21 might have been fuelled by an average oversubscription rate Finance Journal, Volume 34, November, Pages 72-88. II.4.28 Barring April and September 2020, FPIs opened during the previous year. Further, retail remained net buyers in the Indian equity market holdings in companies listed on NSE increased to with November witnessing record infl ows of 6.9 per cent as at end-March 2021 from 6.5 per `70,896 crore (Chart II.4.7a). The Indian equity cent as at end-March 2020. In value terms, the market has received a net FPI infl ow of `2.8 lakh retail holdings in NSE listed companies increased crore in 2020-21, as against a net FPI outfl ow of to `13.6 lakh crore at end-March 2021 as against `6,204 crore during the previous year. However, `7.2 lakh crore at end-March 2020 (Chart II.4.7b). mutual funds were net sellers during 2020-21 to Primary Market Resource Mobilisation the tune of `1.2 lakh crore. II.4.29 The direct participation of retail investors II.4.30 The primary segment of the equity in equities witnessed an increase during the year, market witnessed increased activity during 2020- with the opening of 1.43 crore demat accounts 21. Resource mobilisation through initial public during 2020-21, as against 50 lakh demat accounts offers (IPOs), follow-on public offers (FPOs) and 72ECONOMIC REVIEW Chart II.4.7: Investment in Equity a: Net Investment in Equity by Institutional Investors b: Aggregate Retail Holding in Companies listed on NSE Source: Prime Database, NSDL and SEBI rights issues increased by 43.1 per cent to `1.1 per cent to `10.0 lakh crore at end-March 2021 lakh crore during 2020-21 from `76,965 crore in from `6.0 lakh crore at end-March 2020. the previous year (Appendix Table 5). Of these, 6. Foreign Exchange Market `46,060 crore were mobilised through 57 IPO/ II.4.32 In the foreign exchange market, turnover in FPO issues, out of which 27 issues amounting both merchant and the inter-bank segments were to `246 crore were listed on the small and lower than previous year’s levels during the fi rst medium enterprises (SME) platform of the BSE half of the year on account of disruptions related and the NSE. Resource mobilisation through rights issues increased to `64,059 crore during to COVID-19. Turnover returned to previous year’s 2020-21 from `55,642 crore in the previous levels during the latter part of the year with some year. Resource mobilisation through preferential segments (merchant spot and inter-bank swaps) allotment and qualifi ed institutional placement exhibiting higher activity. (QIP) decreased to `1.2 lakh crore during II.4.33 The Indian rupee touched an all-time 2020-21, as against `2.3 lakh crore during the intra-day low of `76.91/USD in April 2020, previous year. with moderate volatility in relation to its peers II.4.31 Net resources mobilised by mutual funds at the height of pandemic. It then traded increased sharply by 146 per cent to `2.15 lakh with an appreciating bias during the rest of crore during 2020-21 due to favourable base effect 2020-21. In the ensuing period, the rupee as mutual funds had witnessed sharp outfl ows, recovered with return of risk appetite for EME largely led by open-ended debt-oriented schemes, currencies following unlocking of economic during March 2020 on concerns over the spread activities but concerns over COVID-19 infections of COVID-19. Equity-oriented schemes witnessed led the rupee to trade sideways in Q1:2020- net redemption of `39,327 crore in 2020-21 as 21. Tracking gains in other EME currencies, the against net mobilisation of `81,597 lakh crore in rupee strengthened in Q2:2020-21, led by robust 2019-20. Assets under management (AUM) of FPI infl ows following optimism over recovery in equity-oriented mutual funds increased by 66.0 economic activity before registering some losses 73ANNUAL REPORT 2020-21 owing to escalation in border tensions in September II.4.35 Forward premia mostly remained anchored 2020. The announcement of development of in short tenors on account of surplus liquidity in COVID-19 vaccines in November 2020 leading the system. However, hardening was witnessed to fl ow of capital towards EMEs, coupled with towards the end of 2020-21 amid surplus dollars improvement in sentiment due to uptick in the and paying interest ahead of the year-end. Longer growth momentum, resulted in gains for the Indian tenors also saw some hardening, tracking the rupee. In Q4: 2020-21, the Indian rupee remained steepened G-sec curve. supported by FPI and merchant-related infl ows. 7. Conclusion However, during the last week of February, the rupee traded with a sharp depreciating bias II.4.36 In sum, the Reserve Bank undertook a slew tracking global risk-off sentiments post sell- of measures to instil confi dence in the fi nancial offs in US bonds triggered by higher infl ation markets and the economy. These measures not expectations and poor auction demand. Overall, only ensured orderly market conditions, but also the Indian rupee gained by 3.5 per cent (based on accelerated the pace of recovery as refl ected in USD/INR closing rates as at end-March 2021 over high frequency economic indicators. The unwinding end-March 2020) but underperformed vis-a-vis its of some of the policy measures undertaken in Asian peers during 2020-21 [Chart II.4.8]. the wake of pandemic warrants a calibrated and gradual approach. Going forward, fi nancial II.4.34 On an average basis, in tandem with market movements would be guided by progress movements in the nominal exchange rates of the in containing the COVID-19 pandemic, especially rupee, the 40-currency nominal effective exchange through administration of vaccines, the pace of rate (NEER) depreciated in 2020-21 (y-o-y). The recovery of the global and the domestic economies 40-currency NEER depreciated by 4.2 per cent, and developments in global liquidity and fi nancial however, the 40-currency real effective exchange conditions. rate (REER) remained almost stable in 2020-21. II.5 GOVERNMENT FINANCES Chart II.4.8: Movement in Rupee, US Dollar, II.5.1 In 2020-21, when general government Crude Oil Price and EM Currency Index fi nances recorded large deviations from budget estimates across the globe, India was no exception. In order to protect lives and livelihoods, and contain the spread of the pandemic, governments unleashed large scale fi scal stimuli of above the line as well as below the line liquidity support measures amounting to around US$ 16 trillion, including US$ 5.7 trillion in the form of quasi fi scal operations and guarantees (Chart II.5.1a). Consequently, fi scal defi cits and debt levels shot up around the world in 2020 refl ecting a large erosion in revenues due to the contraction in output, and increases in spending to Source: Bloomberg and RBI staff calculations. bolster the safety nets. Average overall defi cit as a 74ECONOMIC REVIEW share of GDP reached 11.7 per cent for advanced GDP in 2020. In 2021, fi scal defi cits are expected economies, 9.8 per cent for emerging market to remain elevated but to moderate from peak economies, and 5.5 per cent for low-income levels as revenues recover partly and temporary developing countries. Average public debt in the pandemic-related expenditures come down (IMF, world surged to an unprecedented 97 per cent of 2021)26 (Chart II.5.1b). Chart II.5.1: Fiscal Support, Fiscal Balance and Gross Debt in G-20 Countries a. Support Measures b. Fiscal Balance c. Gross Debt Note: Fiscal balance and gross debt figures are not available for Argentina in 2021. Source: World Economic Outlook, April 2021 and Fiscal Monitor, April 2021, IMF. 26 IMF (2021), ‘Fiscal Monitor - A Fair Shot’, International Monetary Fund, Washington D.C., April. 75ANNUAL REPORT 2020-21 II.5.2 India’s gross debt in 2020-21 was higher of vulnerable sections of the population through than most of the developing countries (except measures like free foodgrains to the poor; direct Brazil and Argentina) in the G-20 group, but lower benefi t transfers to women, senior citizens and than the advanced countries (Chart II.5.1c). India’s poor disabled; and paying both employee and general government fi scal defi cit and gross debt employer contribution to provident fund corpuses ratios are projected to shrink in 2021-22. for organised sector workers. The second set of stimulus measures named AatmaNirbhar Bharat II.5.3 Against this backdrop, sub-sections 2 and Abhiyan 1.0 (May 13-17) focused on providing 3 present the position of Central Government liquidity support through government guarantees fi nances in 2020-21 and 2021-22, respectively. and low interest rate loans to micro, small and Similarly, sub-sections 4 and 5 outline the medium enterprises (MSMEs), non-banking developments in state government fi nances fi nancial companies (NBFCs), microfi nance during 2020-21 and 2021-22. General government institutions (MFIs), housing fi nance companies fi nances are discussed in sub-section 6. The fi nal (HFCs) and power distribution companies section sets out concluding remarks and some (DISCOMs) to help keep them afl oat. Several policy perspectives. structural reforms in sectors like coal, minerals, 2. Central Government Finances in 2020-21 defence production and civil aviation were also II.5.4 In the wake of the pandemic, the Union part of this package, which were expected to have Government announced a series of economic a salutary impact on growth in the long-term. reform measures which cumulatively amounted to II.5.5 Once travel restrictions were eased and `17.2 lakh crore (Table II.5.1). Within a fortnight economic activity started to gain momentum, of COVID-19 being declared a pandemic, i.e., on AatmaNirbhar Bharat Abhiyan 2.0 (October 12) March 26, 2020, the government announced the was announced. It included both consumption- Pradhan Mantri Garib Kalyan Package (PMGKP) based measures in the form of leave travel which focused on protecting lives and livelihoods concession (LTC) cash voucher scheme and interest free loans for government employees and investment measures in the form of increase in Table II.5.1: Fiscal Package Announced by the the capex budget of the Union Government and Union Government interest free loans to state governments for capital (` crore) expenditure. The thrust on capital expenditure was S. No. Scheme Amount continued in the AatmaNirbhar Bharat Abhiyan 1 2 3 3.0 (November 12), which included, inter alia, 1. Pradhan Mantri Garib Kalyan Package 1,70,000 additional outlay for Pradhan Mantri Awas Yojana 2. PM's Health Package 15,000 - Urban, further increase in the capex budget, 3. Revenue Loss due to Tax Relief Measures 7,800 equity infusion in the National Investment and 4. AatmaNirbhar Bharat Abhiyan 1.0 11,02,650 5. PMGKP Anna Yojana Extension 82,911 Infrastructure Fund (NIIF) and a production-linked 6. AatmaNirbhar Bharat Abhiyan 2.0 73,000 incentive (PLI) scheme for 10 identifi ed sectors 7. AatmaNirbhar Bharat Abhiyan 3.0 2,65,080 to boost domestic manufacturing, investment and 8. Total 17,16,441 employment at an estimated cost of `1.5 lakh Source: Press Information Bureau, GoI. crore to the exchequer over the next fi ve years. 76ECONOMIC REVIEW II.5.6 The total fiscal package does not reflect (Table II.5.2). Efforts at improving tax buoyancy the true fiscal cost to the Union Government are not reliant on additional taxation. The budget as it includes below the line items like liquidity also aims at better compliance through use of data support measures as well. Furthermore, the analytics and artificial intelligence. At the same Union Government also undertook expenditure time, the scope of faceless assessment has been rationalisation measures in order to cut down broadened by bringing all pending assessment avoidable outgoes during the year. Thus, the total cases within the purview of the scheme. There expenditure of the Union Government increased has also been a renewed push to disinvestment from `30.4 lakh crore in BE to `34.5 lakh crore in and asset monetisation in the budget through the RE. This also includes the increase in expenditure new public sector enterprise policy, which aims arising on account of on-budgeting of a large part to minimise the presence of central public sector of outstanding loans availed in lieu of subsidies enterprises (CPSEs) and create more space for by the Food Corporation of India (FCI) from the the private sector. Asset monetisation aims at National Small Savings Fund (NSSF), a practice generating new sources of revenue by unlocking which was followed since 2016-17. of value in unutilised or underutilised public 3. Central Government Finances in 2021-22 assets. The government has indicated that it plans II.5.7 The Union Budget 2021-22 has set the to set up a pipeline to monetise 100 government- stage for a strong revival. This is sought to be owned assets over a period of time which may achieved by increasing the buoyancy of tax bring in investment opportunities of `2.5 lakh revenue through improved compliance, and by crore. It also has a strong disinvestment plan. Four increased receipts from monetisation of assets broad strategic areas (atomic energy, space and Table II.5.2: 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 2020-21 2021-22 (RE) (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 8.6 8.2 8.9 Gross Tax Revenue (a+b) 10.7 10.4 10.2 10.0 10.6 11.1 11.2 11.0 9.9 9.7 9.9 a) Direct Tax 5.1 6.0 5.7 5.6 5.4 5.5 5.9 6.0 5.2 4.6 5.0 b) Indirect Tax 5.6 4.4 4.5 4.4 5.2 5.6 5.4 5.0 4.7 5.1 5.0 Net Tax Revenue 7.9 7.6 7.3 7.2 6.9 7.2 7.3 6.9 6.7 6.9 6.9 Non-tax Revenue 2.2 1.8 1.8 1.6 1.8 1.8 1.1 1.2 1.6 1.1 1.1 Non-debt Capital Receipts 0.9 0.3 0.4 0.4 0.5 0.4 0.7 0.6 0.3 0.2 0.8 Total Expenditure 14.5 16.1 14.4 13.3 13.0 12.8 12.5 12.2 13.2 17.6 15.6 Revenue Expenditure 12.1 14.4 12.6 11.8 11.2 11.0 11.0 10.6 11.6 15.4 13.1 Capital Expenditure 2.4 1.7 1.8 1.6 1.8 1.8 1.5 1.6 1.6 2.2 2.5 Revenue Deficit 2.0 5.0 3.5 2.9 2.5 2.1 2.6 2.4 3.3 7.4 5.1 Gross Fiscal Deficit 3.5 6.3 4.9 4.1 3.9 3.5 3.5 3.4 4.6 9.4 6.8 BE: Budget Estimates. RE: Revised Estimates. Note: Going by the principle of using latest available GDP data for any year, GDP used for 2020-21 (RE) is the latest available Second Advance Estimates (released on February 26, 2021). 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. Source: Union Budget Documents. 77ANNUAL REPORT 2020-21 Chart II.5.2: Ministry-wise Breakdown of Capital Chart II.5.3: Sources of Financing Gross Fiscal Deficit Expenditure - 2021-22 (Per cent of Total) Source: Union Budget Documents. Source: Union Budget Documents. defence; power, petroleum, coal and minerals; 4. State Finances in 2020-2127 transport and telecommunications; and fi nancial II.5.9 State fi nances have, in general, shown services) have been identifi ed, where CPSEs will consolidation vis-à-vis budgeted levels over the have a minimal presence. In all other non-strategic last three years - 2017-18 to 2019-2028 - primarily sectors, CPSEs will be either privatised or closed. driven by large cuts in capital expenditure. For II.5.8 In 2021-22, the counter-cyclical fi scal 2020-21, states had budgeted a combined GFD support to the economy is to be maintained through of 2.8 per cent of GDP; more than half of them capital expenditure, which is expected to increase budgeted for revenue surpluses (Table II.5.3). to 2.5 per cent of GDP from an average of 1.7 per COVID-19 undermined these fi scal targets and cent during 2010-20, even as revenue expenditure associated receipts for 2020-21 (BE). ‘Scissor is set to see some contraction over 2020-21 (RE) effects’ - loss of revenues due to demand (Chart II.5.2). The sizeable deviation in gross fi scal slowdown, coupled with higher expenditure defi cit in 2020-21 and 2021-22 has necessitated a associated with the pandemic - are likely to erode quantum jump in market borrowings of the Union state fi nances in 2020-21, with the GFD-GDP Government, which remain the primary source ratio projected at 4.0 per cent, with an upside of fi nancing the defi cit, followed by access to the bias (RBI, 2020)29. The duration of stress on state NSSF (Chart II.5.3). fi nances is contingent upon factors like tenure of 27 Based on the 2020-21 (BE) for all states, and provisional accounts (PA) data retrieved from the Comptroller and Auditor General of India (CAG) website for 23 states (excluding Arunachal Pradesh, Assam, Bihar, Goa and Maharashtra), for the period April 2020 to February 2021. 28 Based on PA data retrieved from CAG website for 27 states, augmented with 2019-20 budget estimates for Delhi, Goa, Jammu and Kashmir and Puducherry. For the fi scal year 2019-20, the consolidated fi scal position of all states, in terms of the GFD-GDP ratio, is at 2.4 per cent in 2019-20 (PA), closer to (but lower than) the BE of 2.6 per cent for 2019-20. 29 RBI (2020), ‘State Finances: A Study of Budgets of 2020-21’, Reserve Bank of India, Mumbai. 78ECONOMIC REVIEW Table II.5.3: Fiscal Position of States (` lakh crore) 2017-18 2018-19 2019-20 (BE) 2019-20 (PA) 2020-21 (BE) 1 2 3 4 5 6 I. Revenue Receipts 23.21 26.21 31.54 26.86 33.27 (13.6) (13.8) (14.9) (12.4) (14.8) II. Capital Receipts 0.40 0.41 0.62 1.35 0.16 (0.2) (0.2) (0.3) (0.6) (0.1) III. Revenue Expenditure 23.40 26.38 31.46 27.89 33.27 (13.7) (13.9) (14.9) (12.9) (14.8) IV. Capital Expenditure 4.31 4.87 6.22 5.46 6.46 (2.5) (2.6) (2.9) (2.5) (2.9) a. Capital Outlay 3.94 4.40 5.81 4.25 5.98 (2.3) (2.3) (2.8) (2.0) (2.7) b. Loans and Advances by States 0.38 0.47 0.41 0.41 0.48 (0.2) (0.3) (0.1) (0.2) (0.2) V. Fiscal Defi cit/ Surplus 4.10 4.63 5.54 5.25 6.26 (2.4) (2.4) (2.6) (2.4) (2.8) VI. Revenue Defi cit/ Surplus 0.19 0.18 -0.08 1.41 0.00 (0.1) (0.1) (-0.0) (0.7) (0.0) Note: 1. Figures in parentheses are per cent of GDP. 2. Data for 2019-20 Provisional Accounts (PA) are accounts fi gures of all states available with CAG, augmented with 2019-20 BE estimates for Delhi, Goa, Jammu and Kashmir and Puducherry. Source: Budget documents of state governments; CAG and MOSPI. lockdown and risks of renewed waves of infections allocations, viz., dearness allowance freeze; all of which make traditional backward-looking tax deferment of part or full salaries and wages; and buoyancy forecasting models unreliable. deduction from salary. Typically, states’ fi scal response to COVID-19 should have refl ected in II.5.10 The provisional accounts (PA) for states a larger increase in revenue expenditure in 2020- for H1:2020-21 (April-September 2020) indicate 21 than budgeted. These spendings, coupled with that their GFD-GDP ratio stood at 3.8 per cent, revenue receipts’ shortfall, are likely to convert substantially higher than the budget estimate of revenue surpluses as budgeted in 2020-21 into 2.8 per cent for the year as a whole. Extending the defi cits. On the capex side, states have a tendency analysis further to include the data for October- February 2020-21, it is found that the revenue to cut back their capital expenditure by almost 0.5 receipts of state governments, after witnessing per cent of GDP, on an average, to meet fi scal a sharp contraction till September 2020 due to responsibility legislation (FRL) - prescribed defi cit the pandemic-induced lockdown, have recovered targets. A similar tendency relative to PA is seen partially with gradual resumption in economic in 2020-21, particularly since states have not activity. During April-February 2020-21, states’ been able to start much capex in H1 because of revenue expenditure growth remained muted as the lockdown (Q1) and monsoons (Q2). Going higher increase in revenue expenditure during the forward, however, states are likely to increase initial months to mitigate the impact of the pandemic capex through investment in healthcare, social was offset by subsequent re-prioritisation of some housing, education and environmental protection 79ANNUAL REPORT 2020-21 to support a more resilient and inclusive recovery. Table II.5.4: State Government Finances Any signifi cant cut in capex by states, driven by 2021-22*: Key Indicators (Per cent of GSDP) funding constraints, may counteract the growth impact of the capex push of the centre. Item 2019-20 2020-21 2020-21 2021-22 (BE) (RE) (BE) 5. State Finances in 2021-22 1 2 3 4 5 II.5.11 As per the information available for 17 Revenue Defi cit 0.0 -0.1 1.5 0.3 state governments, the GFD has been budgeted Gross Fiscal Defi cit 2.1 2.4 4.1 3.2 Primary Defi cit 0.6 1.0 2.4 1.5 at 3.2 per cent of GSDP in 2021-22 as against 4.1 per cent in 2020-21 (RE). This is in line with *: Data pertain to seventeen states that have presented their fi nal budgets for 2021-22. the Fifteenth Finance Commission’s (FC-XV) Source: Budget documents of state governments. recommendation on the revised fi scal roadmap for states. The consolidation over the previous year particularly with respect to grants, which are slated has been sought to be achieved primarily through to rise in the award period (Box II.5.1). enhanced revenue receipts and cut in revenue expenditure while hiking capex (Table II.5.4; 6. General Government Finances Appendix Table 6). II.5.13 As per the latest available information for II.5.12 State fi nances, which have been under 2020-21 - RE for centre and BE for states - the stress on the revenue front, are likely to get some general government defi cit and debt have soared support from the FC-XV’s recommendations, to around 12.6 per cent and 90 per cent of GDP, Box II.5.1 15th Finance Commission Recommendations: A Comparative Analysis The full report of the FC-XV (Chairman: Shri N. K. Singh) commensurate rise in the devolved taxes due to the covering the period 2021-26 was submitted on November 9, proliferation of cesses and surcharges that are excluded 2020 and was placed before the Parliament on February 1, from the divisible pool of union taxes. FC-XV was guided by 2021. There are three aspects to the recommendations in a stability and continuity in tax transfers and has maintained historical context: tax devolution, grants and fi scal roadmap/ the tax devolution ratio (adjusting for the share attributable rules. to Jammu and Kashmir) recommended by its predecessor. As regards the inter se distribution of taxes among states Tax Devolution (horizontal sharing), equity-based criteria have dominated The base of union taxes shareable with the states was in determining the share of individual states since the considerably widened by the Eleventh Finance Commission Eighth Finance Commission (FC-VIII), thus making the (FC-XI) which recommended that all union taxes, excluding tax devolution progressive. In case of the FC-XV, the most cesses and surcharges, should be shareable with states signifi cant change in the criteria for determining the share of (earlier only excise duty and income tax collections were individual states is to move the population census from 1971 shareable). Since then, successive fi nance commissions to 2011. It has introduced a new criterion of demographic have made increments in the devolution ratio, with the performance - the product of the inverse of the total fertility Fourteenth Finance Commission (FC-XIV) making a rate as per 2011 population census, and a state’s population radical departure by recommending a signifi cantly higher in 1971 - to reward states that have successfully brought share in view of the abolition of the planning commission down population growth. The other major change is the re- and cessation of plan grants, thus making tax devolution introduction of the criterion for tax effort that was used by the the primary vehicle for federal transfers. Nevertheless, the increase in devolution ratio did not translate into a (Contd.) 80ECONOMIC REVIEW Xth, XIth and XIIth Finance Commissions, but was done away Chart 1: Grants-in-aid Recommended and with by the XIIIth and XIVth Finance Commissions (Table 1). their Composition Grants-in-Aid The FC-XV has made a signifi cant departure from its predecessor in recommending a historically high share of grants in total transfers. Compositionally, grants to local bodies have the highest share in fi nance commission grants since the FC-XIII, followed by post devolution revenue defi cit grants, both of which have seen their share in total transfers rise consecutively in the last two fi nance commission recommendations. The FC-XV has brought back sector- and state- specifi c grants that were a regular feature till the FC- Source: Finance Commission Reports. XIII; the Union Government has, however, indicated that it will give due consideration to these grants while revisiting NSSF operations from April 1, 2015 (existing obligations the centrally sponsored schemes (Chart 1). on servicing and repayments to be fulfi lled). The FC-XV has made signifi cant relaxations in the fi scal defi cit and Fiscal Roadmap/Rules debt targets in view of the pandemic induced slowdown. Successive fi nance commissions have recommended debt The gross fi scal defi cit (GFD) for the Union Government is and defi cit targets as well as institutional changes to make recommended on an elevated path with the terminal year governments accountable and transparent in the conduct (2025-26) target in the range of 3.5 to 4.5 per cent of GDP of fi scal policy. The FC-XII, the FC-XIII and the FC-XIV and the normal net borrowing limit of state governments has recommended elimination of revenue defi cits and limiting been relaxed to 4 per cent of GSDP in 2021-22 and 3.5 per the fi scal defi cit to GDP ratio to 3 per cent at both levels cent of GSDP in 2022-23, with an additional allowance of of government. As regards institutional measures, FC- 0.5 per cent for the four year period of 2021-22 to 2024-25 XII recommended the creation of a sinking fund for debt conditioned upon improvement in operational and fi nancial repayments and a guarantee redemption fund to safeguard performance of power distribution companies (DISCOMs). It states fi nances from invocation of guarantees, both of which has also made a recommendation to appoint a high-powered have been implemented by the majority of states. The FC- inter-governmental committee to examine the issue of debt XIV recommended exclusion of state governments from sustainability (Table 2). Table 1: Tax Devolution: Vertical Devolution and Horizontal Sharing Criteria FC Period Vertical Devolution Criteria for Horizontal Sharing Between States Tax States’ Need and Cost Disability Equity Performance Devolution Share Population Population Area Forest Infrastructure Income Fiscal Tax Fiscal Demographic Ratio (All / Gross (1971) (2011) Adjusted Cover Distance Distance Capacity Effort Discipline Performance Central Tax Per Distance Taxes) Revenue Capita 1 2 3 4 5 6 7 8 9 10 11 12 13 FC-Xl 29.5 26.6 10.0 - 7.5 - 7.5 62.5 - 5.0 7.5 - (2000-2005) FC-XII 30.5 25.9 25.0 - 10.0 - - 50.0 - 7.5 7.5 - (2005-2010) FC-XIII 32.0 27.9 25.0 - 10.0 - - - 47.5 - 17.5 - (2010-2015) FC-XIV 42.0 34.4 17.5 10.0 15.0 7.5 - 50.0 - - - - (2015-2020) FC-XV 41.0 - - 15.0 15.0 10.0 - 45.0 - 2.5 - 12.5 (2020-2026) Source: EPW Research Foundation; Union Budget 2020-21; Finance Commission Reports and Reddy et al., (2019). (Contd.) 81ANNUAL REPORT 2020-21 Table 2: Fiscal Roadmap / Rules Recommended by Finance Commissions Finance General Government Finances Central Government Finances Finances of State Governments Commission and Tenure Debt and Defi cit Other Targets/ Measures Debt and Defi cit Other Targets/ Debt and Defi cit Other Targets/ Targets Measures Measures 1 2 3 4 5 6 7 FC-XII Debt-GDP ratio Tax-GDP target of 17.6 Long-term debt- Achieve interest Long-term debt-GDP Enactment of FRL (2005-10) of 75 per cent by per cent by 2009-10. GDP ratio to be 28 payments to revenue ratio to be 28 per cent; legislation to defi ne 2009-10. per cent; GFD-GDP receipts ratio of 28 per GFD-GDP ratio of 3 defi cit targets; ratio of 3 per cent; cent by 2009-10. per cent; eliminate creation of sinking fund eliminate revenue revenue defi cit by for future repayments defi cit by 2008-09. 2008-09. of borrowings; creation of guarantee redemption fund to meet requirement of their invocation. FC-XIII Debt-GDP ratio Resource requirement Debt-GDP ratio of Disinvestment receipts Debt-GDP ratio of Amend/enact FRBM (2010-15) of 68 per cent by of states in case of 44.8 per cent by to be kept in a 24.3 per cent by 2014- Acts to build in the 2014-15 macroeconomic shocks 2014-15; eliminate consolidated fund and 15; eliminate revenue fi scal reform path; to be managed through revenue defi cit by not in the public account defi cit by 2014-15. state-specifi c grants additional borrowings by 2014-15. of the centre. to be conditional on the Centre to be devolved compliance. to the states as per the tax devolution formula. FC-XIV Transparent accounting GFD-GDP ratio of Amendment of the GFD-GDP ratio of 3 Exclusion of state (2015-20) for the performance of 3 per cent by 2016- FRBM act to refl ect per cent; additional governments from public sector undertakings 17 and thereafter. the fi scal roadmap, incentive based NSSF operations from (guarantees, off- Eliminate revenue omit the defi nition borrowing up to 0.5 per April 1, 2015 (existing budget borrowings and defi cit by 2019-20. of effective revenue cent of GSDP based obligations on servicing accumulated losses) defi cit and mandate on achieving targets and repayments to be to be made available the establishment of on revenue defi cit, fulfi lled). annually with the budget an independent fi scal interest payments - presentation. council. revenue receipts ratio and debt-GSDP ratio. FC-XV GFD-GDP ratio Restructuring of FRBM In the baseline - Normal limit of net - (2020-26) glide path from 9.3 Act and time-table for scenario, GFD-GDP borrowings to be 4 per cent in 2021-22 defi ning and achieving ratio glide path from per cent in 2021-22, to 6.8 per cent in debt sustainability 6 per cent in 2021- 3.5 per cent in 2022- 2025-26; projected to be examined by a 22 to 4 per cent in 23 and 3 per cent of debt-GDP ratio high-powered inter- 2025-2630; projected GSDP from 2023-24 of 85.7 per cent governmental group. debt-GDP ratio to 2025-26; incentive in 2025-26, after of 56.6 per cent based additional peaking at 89.6 per in 2025-26, after borrowings of 0.5 per cent in 2022-23. peaking at 62.9 per cent of GSDP from cent in 2021-22. 2021-22 to 2024-25. References: 1. Ministry of Finance (2020), ‘Report of the Fifteenth Finance Commission’, Ministry of Finance, Government of India, New Delhi. 2. Reddy, Y. V. and G. R. Reddy (2019), ‘Indian Fiscal Federalism’, Oxford University Press, New Delhi. respectively. These fi gures are likely to go up are likely to pose challenges in fi nancing, once further once the revised estimates of all states private investment picks up (Chart II.5.4; are available. Such high levels of defi cit and debt Appendix Table 7). 30 In the Union Budget 2021-22, the government has proposed to reach a fi scal defi cit level below 4.5 per cent of GDP by 2025-26, with a fairly steady decline over the period. 82ECONOMIC REVIEW on an annual basis after 2003-04. With infl ows of Chart II.5.4: Resource Gap foreign direct and portfolio investment remaining strong, these developments led to a large reserve accretion during the year. II.6.2 Against this backdrop, global economic and fi nancial conditions in which these shifts in external balances occurred are outlined in sub-section 2, followed by a discussion on merchandise trade and invisibles in sub-sections 3 and 4, respectively. An analysis of capital fl ows is provided in sub-section 5, with an assessment of external sustainability in sub-section 6, followed by concluding observations. 2. Global Economic Conditions ROW: Rest of the world. Source: NSO, GoI. II.6.3 The COVID-19 pandemic took a severe toll on global economic activity in H1:2020. 7. Conclusion Global demand plunged following a very sharp II.5.14 In sum, the deterioration in major fi scal compression in consumption and a collapse in indicators in 2020-21 may be attributed to the investment and international commodity prices. pandemic superimposed on a cyclical slowdown in Propelled up by massive policy support by both tax revenues and a counter-pandemic fi scal push governments and central banks, however, major through higher government expenditure. Going economies recorded a sequential pick-up in forward, as growth revives and economy gets Q3:2020. Even as intensifi cation of containment back on track, it is important for the government measures in response to a strong resurgence of to adhere to a clear exit strategy and build fi scal coronavirus infections across various countries buffers, which can be tapped into in events of posed downside risks, progress with vaccines and future shocks to growth. inoculation drives lifted expectations and reduced uncertainty on the global economic outlook as II.6 EXTERNAL SECTOR refl ected in improvement in global economic projections for 2020 by the IMF in January 2021 II.6.1 India’s external sector was impacted by and April 2021 (contraction of 3.5 per cent and 3.3 worsening of both external and domestic demand per cent, respectively) [Chart II.6.1]. With demand conditions amidst the COVID-19 pandemic conditions normalising alongside easing of supply during 2020-21. A recession-driven fall in imports and mobility disruptions in an environment of and favourable terms of trade compressed sustained policy support, a faster economic the merchandise trade defi cit during the year. recovery is expected in 2021. Notwithstanding a fall in remittances driven by deterioration in the economies of source countries, II.6.4 World merchandise trade activity also the compressed trade defi cit is likely to translate appears to be gaining momentum from the into a current account surplus for the fi rst time contraction of 21 per cent in Q2 (Chart II.6.1). 83ANNUAL REPORT 2020-21 Chart II.6.1: Real GDP and World Trade Volume Projections (Y-o-Y Growth) IMF WTO OECD Note: World trade in WTO projection relates to merchandise trade while that in IMF projection pertains to trade in goods and services. Source: WTO, IMF, and OECD. A contraction of 6 per cent in Q3:2020 and an Asia, fared better. After the COVID-19 pandemic expansion of 2 per cent in Q4:2020 has signalled triggered a massive portfolio outfl ow from EMEs the turnaround. Services trade that contracted in March 2020, the rapid and unprecedented 28 per cent in Q2 is taking longer to revive. The response from governments and central banks, WTO’s goods trade barometer recovered from steps by the US Federal Reserve to support dollar 84.5 in August to 103.9 in December 202031 but liquidity, weakening of the US dollar, and the components of trade are since showing some quick recovery in China helped rekindle portfolio signs of deceleration. Since the pandemic, fl ows in Q4:2020. Benefi tting from refl ation trade, travel and tourism have been the most impacted EMEs hosted portfolio infl ows to the tune of US$ sectors due to a sharp cutback in global migration 518 billion during 2020-21 (April-March), of which and imposition of travel restrictions. The impact almost 77 per cent has been into debt markets. of COVID-19 on global remittances, already Boosted by resurgence in capital fl ows and fall discernible in 2020, may extend to 2021, as in US dollar, EME currencies recovered during demand for expatriate workers may not recover April-June 2020 and remained stable thereafter. fully amongst source countries. Starting March 2020, massive purchases by II.6.5 Lockdowns also impacted cross-border central banks and refl ation trade helped suppress investment across greenfi eld projects as well as bonds’ yields globally and the revival in risk cross-border mergers and acquisitions, leading to appetite gave a much-needed impetus to foreign a decline in global foreign direct investment fl ows portfolio investors in acquisitions of EME assets. by 38 per cent in 2020.32 Europe faced a sudden From Q3:2020, a broad-based recovery also set stop, but developing economies, especially in in upon commodity markets. 31 Launched in 2019, WTO’s services trade barometer for December 2020 at 104.7 suggests recovery in services trade. 32 ‘FDI in Figures’, OECD (April 2021); and Investment Trend Monitor, UNCTAD (January 2021). 84ECONOMIC REVIEW 3. Merchandise Trade Table II.6.1: India’s Merchandise Trade II.6.6 Against the backdrop of the collapse in Value in Growth Rate (Y-o-Y) US$ Billion in Per Cent world trade, India’s merchandise exports and imports contracted by 7.3 per cent and 18.0 2018-19 2019-20 2020-21 2018-19 2019-20 2020-21 1 2 3 4 5 6 7 per cent, respectively, during 2020-21. A fall in Exports prices33, combined with a decline in volume by Q1 82.1 80.9 51.3 14.7 -1.4 -36.6 3.5 per cent, pulled down exports. The stringent Q2 81.4 78.2 74.1 9.7 -3.9 -5.3 measures, which were imposed domestically to Q3 80.6 79.1 75.7 4.7 -1.9 -4.3 curb the spread of the pandemic disrupted export Q4 86.0 75.1 89.5 6.7 -12.7 19.2 Annual 330.1 313.4 290.6 8.8 -5.1 -7.3 supply chains, especially in Q1:2020-21. Only Imports pharmaceuticals, agricultural products and iron Q1 128.7 130.1 61.3 12.7 1.1 -52.9 ore could withstand the onslaught of the pandemic Q2 132.9 118.0 88.3 22.8 -11.3 -25.2 (Table II.6.1). A revival gained strength in Q3, on Q3 130.7 116.1 110.5 8.1 -11.2 -4.8 Q4 121.7 110.5 130.9 0.3 -9.2 18.4 the back of growth in non-oil exports (3.1 per cent) Annual 514.1 474.7 389.2 10.6 -7.7 -18.0 (Charts II.6.2a and II.6.2b). Trade Balance Q1 -46.6 -49.2 -9.9 II.6.7 There was a decline in petroleum, oil and Q2 -51.5 -39.7 -14.1 lubricant exports by 37.3 per cent during 2020- Q3 -50.1 -37.1 -34.9 21, refl ecting the effect of a drop in global crude Q4 -35.7 -35.4 -41.4 Annual -184.0 -161.3 -98.6 oil prices. The decline in volume was smaller at 15 Note: Quarterly fi gures will not add up to annual fi gures. per cent. Production wars within OPEC plus and Source: DGCI&S. ensuing supply-demand mismatches triggered the steep fall in oil prices, with settlement prices negative territory on April 20, 2020 while Brent for West Texas Intermediate futures closing in crude prices dipped briefl y below US$ 20 per Chart II.6.2: Moderation in Contraction in Non-Oil Exports and Relative Contribution in Export Growth a: Revival in Total and Non-Oil Exports b: Relative Contribution of Major Sectors to Export Growth in 2020-21 Source: DGCI&S. 33 The data on international prices for exports/imports are sourced from World Bank (pink sheet, Manufacturing UVI), IMF and other sector- specifi c websites providing trend in international prices (e.g., spices, steel, petrochemicals, etc.) which are used as proxies to estimate weighted change in export volume. 85ANNUAL REPORT 2020-21 barrel on April 27, 2020. However, oil price Moreover, Indian pharmaceutical companies dynamics gradually changed during the year with supply around 50 per cent of vaccines globally. supply restraints more rigorously observed by This expertise has been leveraged by Indian OPEC plus, supported by additional voluntary pharma companies to enter into partnerships with production cuts by the OPEC’s largest producers global pharma companies to produce COVID-19 in June 2020 and January 2021. Later in March vaccines. India has been highly dependent on 2021, the production cuts were extended till April China for Active Pharmaceutical Ingredients 2021. (APIs) imports; however, the recent Production- II.6.8 As pointed out earlier, drugs and Linked Incentive (PLI) scheme addresses the pharmaceutical exports maintained positive API concentration risks and aims to make India’s growth during 2020-21, these exports grew by manufacturing process globally competitive with a 18.1 per cent (US$ 24.4 billion) on a y-o-y basis. focus on increasing exports. The pharmaceutical This resilient performance can be attributed to sector has received around one-tenth of the total leveraging existing competencies in generic fi nancial outlay under the PLI scheme and this medicines production. India has a sizeable move is expected to create economies of scale presence in the case of medicine exports, being and strengthen India’s integration with global the third largest exporter globally in volume terms. value chains (Box II.6.1). Box II.6.1 COVID-19 Pandemic - Opportunities and Challenges for Indian Pharmaceutical Exports The COVID-19 pandemic has placed the US$1 trillion global be the leading supplier of the COVID-19 vaccine after the medical exports market at the centre stage of the global US in coming years (Chart 1a to 1c). Indian pharmaceutical growth recovery. The World Health Organisation (WHO) fi rms have already started rolling out COVID-19 vaccine by suggested that a substantial portion of the world population leveraging on existing infrastructure and a skilled labour needs to be vaccinated to develop herd immunity against force. As on March 15, 2021, India had supplied total 586.4 COVID-19. On a conservative estimate of an average price lakh COVID-19 vaccines to 71 countries comprising grants of US$ 8 per vaccine34, export opportunities to the tune of (81.3 lakh), commercial exports (339.7 lakh) and under the US$ 31 to US$ 36 billion are estimated to open up at the COVAX platform (1 65.5 lakh). However, following the second wave and the pressing need to upscale vaccination in India, global level. By undertaking research and development some moderation in its exports is expected in the short-term. (R&D) activity at an unprecedented speed, vaccines have been developed in a record nine months. New ground- In order to analyse the comparative advantage of Indian breaking (mRNA) techniques have also been employed, pharma companies, a panel fi xed effect regression model which reportedly will have the potential to cure many for 67 pharmaceutical fi rms is estimated by using Prowess incurable diseases like cancer and Parkinson’s, opening up database, with exports to sales ratio as an explanatory new revenue streams for the pharma sector. variable and covering the sample period of 2010-11 to 2019-20, following the empirical specifi cation (Rentala et al., India’s pharma sector contributes around 2 per cent to 2017): GDP and 6.6 per cent to total merchandise exports. India is the 12th largest exporter of medical goods in the world and India’s pharma exports grew faster than world exports where the dependent variable (V) is exports by ‘ith’ fi rm as a during the last two decades. Furthermore, India is a major proportion of its sales in the ‘t’ year. X represents a vector supplier to least developed and developing countries. of fi rm-specifi c explanatory variables, viz., imports intensity, According to data analytics company Airfi nity, India would measured as the ratio of the imports of raw materials to (Contd.) 34 Average COVID-19 vaccine price of US$ 8 taken from UNICEF. 86ECONOMIC REVIEW Chart 1: India – A Leading Exporter of Medical Products a: Major Exporters of Medical Products - b: India a Leading Supplier of Medical c: Estimated COVID-19 Vaccine Production (Share in Total) Products - Major Developing Regions Capabilities in 2020 and 2021 Source: ITC TradeMap, Airfinity and Statista. overall purchase of raw material of a fi rm; research and infl uence exports intensity (Table 1). Indian pharmaceutical development intensity, measured by the ratio of research companies spend only around 8-13 per cent of their and development expenditure to sales; leverage ratio, turnover on R&D. Higher R&D expenditure improves product measured as total debt as a percentage of total assets; quality and enhances competitiveness in foreign markets capital intensity, which is measured as net fi xed assets as a (Grossman and Helpman, 1991). India’s pharma export percentage of total sales in the given year; and profi tability, sector relies heavily on imports of Active Pharmaceutical measured by the ratio of profi ts after tax to sales. T and Ingredients (APIs), especially in the case of bulk drugs and t T are time fi xed effects and fi rm fi xed effects to control for this is corroborated by the empirical fi ndings which suggest i conditions in different fi nancial years and in different fi rms, that import intensity is statistically signifi cant. respectively. The government has already taken several initiatives to Empirical fi ndings suggest that, R&D, import intensity, reduce import dependency in certain key drug intermediates capital intensity and profi t after tax are important factors that and APIs. Priority has also been accorded to boost R&D and original design capabilities through the PLI scheme. These Table 1: Export Intensity of India’s actions bode well for raising the export potential of domestic Pharmaceutical Industry pharma companies. Explanatory Variables Dependent Variable: Export Intensity References: 1 2 1. Grazzi, M., Mathew, N., & Moschella, D. (2017), ‘Effi ciency, Profi t after Tax 0.07* Innovation, and Imported Inputs: Determinants of Export (2.87) Performance among Indian Manufacturing Firms’, LEM R&D Intensity 0.69* (3.97) Working Paper Series (No. 2017/09). Capital Intensity 0.03* 2. Grossman, G.M. and Helpman, E. (1991), ‘Trade, (3.38) Knowledge Spillovers, and Growth’, European Economic Leverage -0.02 (1.2) Review. Import intensity 0.10* 3. International Monetary Fund (2021), ‘World Economic (2.93) Outlook Update’, January. No. of Companies 67 Time Fixed Effects YES 4. Rentala, S., Anand, B., & Shaban, M. (2017), Company Fixed Effects YES ‘Determinants of Export Performance: An Empirical R-squared 0.86 Analysis of the Indian Pharmaceutical and Automobile Industries’, International Business Strategy (pp. 241- *: Signifi cant at 1 per cent level. Source: Prowess (CMIE); and RBI staff estimates. 257), Palgrave Macmillan, London. 87ANNUAL REPORT 2020-21 II.6.9 Iron ore exports have shown robust growth II.6.11 In India as well, agricultural exports which of 86.8 per cent on y-o-y basis (US$ 4.9 billion) contracted in Q1:2020-21 rebounded sharply in during 2020-21, posting double-digit growth in all subsequent quarters. The recovery was aided by a months. The growth in iron ore exports was due bumper kharif harvest creating favourable supply to higher export volumes, aided by rising iron ore conditions (Chart II.6.4). prices. In recent years, China has been the major II.6.12 Engineering goods - accounting for export destination, accounting for more than four- around one-fourth of India’s total merchandise fi fths of India’s total iron ore exports. Concerns export basket - contracted sharply in Q1:2020-21 over Brazil’s iron ore supply and ongoing trade as major export destinations imposed lockdowns. tensions between Australia and China have However, there has been a revival from Q2:2020- vacated additional space for India (Chart II.6.3). 21 and a strong rebound in Q4:2020-21, especially As a result, the supply-demand mismatch led to in March 2021. Within this sector, exports of a steep rise in iron ore prices since June 2020 to base metals including iron and steel, copper record levels. and products, zinc and products, and aluminium II.6.10 Agricultural exports also showed resilience and products witnessed positive growth. The in COVID-19 times. According to the WTO, trade in sharp industrial recovery in China and other agricultural products has been more resilient than East Asian economies, which emerged relatively overall trade. Initially, countries focused on ensuring unscathed from COVID-19, led to increased food security by imposing exports restrictions demand for base metal exports from India. On the and stockpiling food products; however, later on, other hand, exports of transport-related goods, there was a switch in policies towards supporting including motor vehicles, ships, auto components agricultural producers and mending supply chains have slumped, thereby pulling down the growth by relaxing export restrictions. of overall engineering goods. The PLI scheme Chart II.6.3: China’s Iron Ore Imports Profile Chart II.6.4: Relative Contribution of Commodities in Agricultural Export Growth Note: Figures in parentheses indicate share in Chinese iron ore imports in 2019. Source: International Trade Centre. Source: DGCI&S. 88ECONOMIC REVIEW Chart II.6.5: Engineering Goods and Gems and Jewellery Exports a: Engineering Goods Exports Growth-2020-21 b: Decomposition of India’s Gems & Jewellery Export Growth Source: DGCI&S. has been introduced for many components of restrictions and the reluctance of Indian exporters engineering goods, including automobile and auto to ship goods on credit owing to the uncertainty components and speciality steel. Furthermore, created by COVID-19 led to a massive slump in PLI schemes for manufacturing of white goods exports of gold jewellery to the UAE. (air conditioners and light emitting diodes), high- II.6.14 As stated earlier, the outbreak of effi ciency solar photovoltaic modules, telecom COVID-19 resulted in severe supply and demand- and networking goods and advance chemistry cell side disruptions, India’s merchandise imports, (ACC) battery are expected to boost electronic which witnessed a slowdown during 2019, goods exports and also support engineering started to recover in January and February 2020. good exports through economies of scale However, with the spread of the pandemic, import (Chart II.6.5a). growth registered the biggest contraction in 30 II.6.13 Gems and jewellery exports, which years in April 2020, contracting by 59.7 per cent were contracting in 2019-20, slumped further in as against a growth of 6.1 per cent in April 2019. 2020-21 due to COVID-19 related demand The contraction was also refl ected in volume and supply disruptions. The contraction was terms. As per the latest available data, imports particularly severe in Q1:2020-21, but export declined to US$ 389.2 billion in 2020-21 from US$ growth fi nally returned into positive territory in 474.7 billion in 2019-20, a decline of 18.0 per cent November 2020 due to revival in demand for (Table II.6.1). The contraction in imports has been pearls and precious stones (Chart II.6.5b). Gold due to price and volume effects, with import volume jewellery, which is the other major component, estimated to have declined by 8.9 per cent35. remains in a deep contractionary mode. The UAE used to be the largest destination of gold jewellery II.6.15 The sectoral composition reveals that exports, accounting for more than 50 per cent of the contraction in imports was broad-based. The India’s total gold jewellery exports. However, travel rolling out of stimulus packages, along with the 35 Refer to footnote in Para II.6.6. 89ANNUAL REPORT 2020-21 Chart II.6.6: Share of Sectors Showing Positive Growth in Import Basket and Relative Contribution in Import Growth a: Sectors with Positive Growth in Import Basket b: Relative Contribution: Imports Source: DGCI&S. gradual easing-up of lockdown measures during declined during the period. Venezuela, which the festival season, resulted in a recovery in was amongst India’s major crude oil suppliers, domestic demand (Chart II.6.6a). Commodity- witnessed a steep decline in its share (0.9 per wise, petroleum, oil and lubricants (POL), transport cent in April-February 2021 compared to 4.6 per equipment, machinery, coal, pearl and precious cent in 2019-20) after the US imposed sanctions. stones and iron and steel are the major sectors By contrast, the UAE, Qatar and the US gained which pulled down import growth during the year share in India’s POL imports (Chart II.6.7). (Chart II.6.6b). II.6.16 India is the world’s third-largest crude oil Chart II.6.7: Share of Trading Partner in India’s Crude Oil Import Basket consumer after the US and China, with an import dependency of nearly 85 per cent, POL plays a critical role in total import payments.36 With the imposition of lockdown and travel curbs, the demand for POL collapsed, and POL import bill fell to US$ 82.4 billion (a decline of 36.9 per cent, y-o-y) during 2020-21 from US$ 130.6 billion in the corresponding period of the previous year. Lower POL imports refl ected a fall in international crude oil prices (Indian basket) by 25.9 per cent (y-o-y) along with an estimated decline in volumes by 13.8 per cent. II.6.17 Iraq and Saudi Arabia remained the largest Source: RBI staff calculations based on DGCI&S data. crude oil suppliers for India, though their share 36 Snapshot of India’s Oil & Gas Data (August 2020), Petroleum Planning & Analysis Cell (PPAC), Ministry of Petroleum & Natural Gas, Government of India. 90 qarI aibarA iduaS EAU ASU rataQ airegiN tiawuK ocixeM alognA namO aissuRECONOMIC REVIEW Chart II.6.8: Gold Imports and Gold Recycling a: Trend in Gold Imports b: Decomposition of Indian Gold Supply *: Domestic supply from local mine production, recovery from imported copper concentrates and disinvestment. Source: RBI staff calculations based on DGCI&S and World Gold Council data. II.6.18 India is one of the biggest consumer of II.6.20 The pandemic deepened the slowdown gold, but it imported its lowest monthly volumes in imports of capital goods - an indicator of in April 2020, refl ecting a signifi cant fall in investment demand in an economy – which demand in the pandemic. However, gold imports, contracted by 28.3 per cent in April-November in value terms, picked up in Q2 and have 2020 vis-à-vis 2.2 per cent a year earlier. All major continued to remain at an elevated level since sub-sectors witnessed a sharp slump, i.e., iron and then. The growth in gold imports has been steel, machine tools, machinery and transport essentially driven by steep rise in global gold equipment. Capital goods imports turned positive prices, though even in volume terms they have from December 2020 as recovery in the Indian recovered to levels seen last year (Chart II.6.8a). economy gained traction (Chart II.6.9). In particular during Q4:2020-21, several factors, ranging from base effect to pre-festival impact Chart II.6.9: Decomposition of Capital Goods Import Growth (Akshaya Tritiya), pent up wedding induced demand contributed to the sharp surge in gold imports. According to a recent report by the World Gold Council, high gold prices supported an increase in global recycling of gold, which spiked sharply in Q2 and Q3:2020 (Chart II.6.8b). II.6.19 Non-oil non-gold imports, which started contracting from Q4:2018-19, witnessed a rebound in growth after seven quarters in Q3:2020-21, particularly in December 2020. Electronic goods, pearls and precious stones and chemicals were major contributors to the Source: RBI staff calculations based on DGCI&S data. expansion during Q4:2020-21. 91ANNUAL REPORT 2020-21 categories. COVID-19 induced global lockdown Chart II.6.10: Top Import Sources for Electronic Goods: Sub-Sectors caused supply-side disruptions due to which the need to diversify source partners has gained utmost importance. Accordingly, the government recently took two major policy initiatives to attract large scale investment in the electronics sector by way of the PLI scheme for large scale electronics manufacturing and the Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS). Several global manufacturing companies are expected to expand their manufacturing base in India. As this sector has strong backward and fo rward linkages, this, in turn, will foster expansion of domestic production capacity and boost exports with induction of newer Note: Data for 2020-21 are till February. technologies under AatmaNirbhar Bharat. Source: RBI staff calculations based on DGCI&S data. II.6.22 During April-February 2020-21, the II.6.21 India’s electronic goods imports registered bilateral trade defi cit with China declined, a marginal contraction of 0.1 per cent to US$ whereas the trade surplus with the US increased. 54.3 billion in 2020-21 from US$ 54.4 billion in Overall, as the decline in imports was larger 2019-20. India is a net importer of electronic than exports, the trade defi cit narrowed to US$ goods, the trade defi cit of the electronic goods 98.6 billion in 2020-21 from US$ 161.3 billion in sector expanded to US$ 43.2 billion in 2020- the corresponding period of last year, refl ecting 21 from US$ 42.7 billion in the previous year37 the impact of both stringent lockdown measures (Chart II.6.10). Destination-wise, China is the and subdued economic activity due to COVID-19 major source partner for almost all the product (Charts II.6.11a and II.6.11b). Chart II.6.11: Decomposition of Trade Balance a: Sources of Changes in India’s Trade Balance Between b: Merchandise Trade Deficit Apr-Feb 2021 and Apr-Feb 2020 Note: A positive ∆ imports implies lower imports and vice versa. T.B: Trade Balance. Source: DGCI&S and RBI staff calculations. 37 India’s dependency on electronic goods imports is high, with around 83 per cent of India’s total trade in electronics goods comprising imports during 2020-21. 92ECONOMIC REVIEW 4. Invisibles II.6.23 Net receipts from invisibles, refl ecting cross-border transactions of services, income and transfers, remained relatively resilient to the global shock on the back of stable services earnings (Chart II.6.12). While demand for software services exports remained strong and remittances receipts improved sequentially in Q2 and Q3, the outgo from primary income account increased with rise in net income payments to overseas investors. II.6.24 The ongoing pandemic and the resultant supply chain disruptions severely impacted world trade in commercial services in 2020 (Chart II.6.13). India’s services exports remained relatively resilient and showed signs of gradual recovery, primarily on the back of robust software exports earnings. Despite global headwinds, software services, accounting for more than 40 per cent of India’s total services exports, witnessed steady growth as major IT companies capitalised on growing global demand for business transformation initiatives to enhance digital presence and migrate to cloud services in Chart II.6.12: Composition of India’s Services Exports 9 8 7 6 5 4 3 2 1 0 2017-18 2018-19 2019-20 Apr.-Dec. Apr.-Dec. 2019-20 2020-21 Source: RBI. 93 PDGfotnecreP Chart II.6.13: Country-wise Export of Services (April-December 2020) Source: WTO and RBI. the aftermath of the world-wide lockdown. Travel and transportation services were severely hit by the imposition of lockdown and travel restrictions world-wide (Chart II.6.14). Among other services, business and fi nancial services, which mainly relates to off-site services, witnessed steady fl ows albeit at a moderated pace. Chart II.6.14: Travel Receipts in Major Travel Destinations in 2020 CommunicationServices Services FinancialServices Business Services Software Services Insurance Transportation Travel Others *: Data pertain to January-September 2020. Source: WTO.ANNUAL REPORT 2020-21 Chart II.6.15: Inward Remittances Across Major Chart II.6.16: Composition of India’s Current Recipient Countries Account Balance 8 6 4 2 1.7 0 -2 -1.8 -2.1 -0.9 -1.2 -4 -6 -8 -10 Source: World Bank. Source: RBI. II.6.25 There was an exodus of migrant workers (Chart II.6.16). After registering a record surplus in from host countries, resulting in a decline in global Q1:2020-21, the current account surplus narrowed remittances fl ows in 2020 (Chart II.6.15). India, in Q2 and turned negative in Q3 as the pace of being the highest recipient of inbound remittances, contraction eased for both merchandise exports recorded a decline of 5.4 per cent in remittances and imports and the trade defi cit widened. Positive fl ows in April-December 2020-21. Although net terms of trade owing to modest crude oil prices remittances rebounded gradually from this initial and a decline in import volume contributed to the setback, fl ows remained below their pre-crisis surplus in April-December 2020-21 (Chart II.6.17). levels. Nevertheless, India remained the largest recipient with a share of 11.8 per cent in global remittances in 2020 (World Bank, May 2021). II.6.26 The income account, primarily refl ecting net cross-border income payments associated with the production process and ownership of fi nancial and other non-produced assets, recorded higher net outfl ows in April-December 2020-21 relative to the preceding year. On account of moderation in gross investment income receipts owing to lower interest earnings on foreign currency assets and higher income payments on debt and non-debt liabilities, the net outgo remained higher on a year-on-year basis. II.6.27 In April-December 2020-21, the current account recorded a surplus of 1.7 per cent of GDP as against a defi cit of 1.2 per cent a year ago 94 PDGfotnecreP Trade Deficit Services Transfers Income CAB 81-7102 91-8102 02-9102 .ceD-.rpA 02-9102 .ceD-.rpA 12-0202 Chart II.6.17: Sources of Incremental Current Account Balance Source: RBI.ECONOMIC REVIEW 5. External Financing Chart II.6.18: Financing of Current Account Deficit II.6.28 Among the major components of fi nancial fl ows, foreign direct and portfolio investment infl ows were large; however, loans in the form of external commercial borrowings, trade credit and banking capital recorded net outfl ows. With the current account in surplus, the accretion to foreign exchange reserves on a BoP basis (excluding valuation changes) was of the order of US$ 83.9 billion in April-December 2020 (Chart II.6.18 and Appendix Table 8). II.6.29 Capital fl ows were dominated by FDI which turned out to be higher than a year ago both in gross and net terms (Table II.6.2). FDI limits were enhanced in the areas of defence Source: RBI. manufacturing to 74 per cent under the automatic Table II.6.2: Foreign Direct Investment Infl ows (US$ billion) route from 49 per cent earlier. There was a steady improvement in the OECD’s FDI restrictiveness 2017-18 2018-19 2019-20 2020-21 index – from 0.244 in 2015 to 0.207 in 2019. The 1 2 3 4 5 expansion of the PLI scheme has the potential 1. Net FDI (1.1 - 1.2) 30.3 30.7 43.0 43.4 to attract foreign companies that are looking to 1.1 Net Inward FDI 39.4 43.3 56.0 54.7 (1.1.1 - 1.1.2) diversify their presence in global supply chains. In 1.1.1 Gross Infl ows 61.0 62.0 74.4 81.7 2020-21, India’s FDI performance was in sharp 1.1.2 Repatriation/ 21.5 18.7 18.4 27.1 Disinvestment contrast to the global FDI.38 India crossed a 1.2 Net Outward FDI 9.1 12.6 13.0 11.3 milestone of cumulative FDI equity infl ows of Source: RBI. US$ 500 billion since April 2000 (Box II.6.2). Box II.6.2 Is FDI COVID-Proof? The unprecedented shock of the global pandemic impacted Among the major economies, India and China are the cross-border movement of capital fl ows, particularly in the only economies that bucked the global trend in FDI infl ows form of foreign direct investment (FDI). Global FDI fl ows (Chart 2). In the case of India, the bulk of these investments declined by 38 per cent in 2020 ( OECD, 2021), to their went into e-commerce and digital platforms, with mega lowest level since 2005 (Chart 1). Lockdowns around the deals in Indian companies mirroring the growing business world not only caused delay in existing investment projects prospects for digital operations worldwide. but also forced global companies to reassess their new (Contd.) projects. 38 OECD (2021), ‘FDI in Figures’ April. 95ANNUAL REPORT 2020-21 Chart 1: Trend in Global FDI Chart 3: Distribution of FDI Equity (Share of Companies) Source: OECD. Source: RBI staff calculations. Even though FDI infl ows were stronger in 2020-21, their the top fi ve FDI deals, FDI infl ows during 2020-21 would distribution was highly skewed (Chart 3). The coeffi cient have declined by about third of their level a year ago. The of variation of FDI fl ows (based on transaction size) was number of FDI transactions declined by 31 per cent during larger during the pandemic period, implying concentration in the pandemic period, while their average size decreased distribution. The lower incidence of transactions points to the marginally (Table 1). underlying weakness in FDI infl ows during the year. Without Going forward, the pipeline of FDI for 2021-22 could be supported by the thrust given to PLI, and domestic growth Chart 2: FDI Inflows during the COVID Period prospects. (% change in 2020 over 2019) Table 1: Number and Size of FDI Transactions (Without Top 5 High Value Transactions) Period Number of Transactions Average Size (US$ Million) 1 2 3 2019-20 19,330 1.8 2020-21 13,278 1.7 Source: RBI; and RBI staff calculations. Reference: Source: OECD. OECD (2021), ‘FDI in Figures’ April. During 2020-21, computer services attracted the of FDI companies and inter-corporate debt largest FDI infl ows (accounting for 43.9 per cent), transactions between affi liated enterprises were followed by transport, manufacturing, retail and also robust, amounting to US$ 15.7 billion during wholesale trade, and fi nancial services. Country- April-December 2020-21. wise, Singapore and the USA remained major II.6.31 Outward FDI recorded a y-o-y decline by sources of FDI equity infl ows (accounting for 55.4 13 per cent to US$ 11.3 billion during 2020-21, per cent of total fl ows), followed by Mauritius, the refl ecting the broad-based decline in FDI fl ows United Arab Emirates, Saudi Arabia, the Cayman across different regions of the world. Singapore, Islands, and the Netherlands (Chart II.6.19 and the USA, Mauritius, the Netherlands and the UK Appendix Table 9). were the major destinations, together accounting II.6.30 Besides equity investment, reinvested for around 73 per cent of India’s outward FDI. earnings (i.e., profi ts deemed to be invested) Business services; manufacturing; restaurants and 96ECONOMIC REVIEW Chart II.6.19: Source Country-wise Inflow of Chart II.6.20: Net Foreign Portfolio Flows to India FDI (Equity) Source: RBI. Source: NSDL and SEBI. hotels; agriculture and mining; and construction II.6.33 Amid falling real yields and large were the top fi ve sectors attracting India’s overseas government borrowings during the year, FPIs direct investment during the year. reduced their exposure in the debt segment, with a utilisation rate of about 28 per cent of the total II.6.32 Portfolio fl ows recovered during the year investment limit of G-sec and state development from their March lows. Notwithstanding a sell- loans as on March 31, 2021. While the utilisation off in the debt segment in Q1:2020-21, large rate of specifi ed government securities available exposures of foreign portfolio investors in the under the ‘fully accessible route’ introduced in equity segment in subsequent quarters took the March 2020 for FPIs was 2.7 per cent, the use of total infl ows to US$ 37.1 billion during 2020-21 the investment limit available under the voluntary (Chart II.6.20). Ample global liquidity driven by retention route was to the tune of 72 per cent, unprecedented monetary easing improved global albeit mainly through corporate bonds. As on fi nancial conditions. Optimism on vaccines and March 31, 2021, FPIs held 24.5 per cent of the fi scal stimulus in the US also triggered risk-on general investment limit in corporate bonds (i.e., sentiments among foreign investors and caused 15 per cent of the outstanding stock), which was surges in capital fl ows in EMEs, including India lower than 54.5 per cent of the limit a year ago. in November-December 2020. These fl ows, however, moderated in Q4:2020-21, in response II.6.34 Around 67 per cent of the FPI infl ows to the high valuations in equities and increased were recorded in top three sectors, viz., fi nancial supplies in bond markets. While the domestic services (39 per cent), software and services equity segment hosted the largest ever net (17 per cent) and oil and gas (11 per cent) infl ows in 2020 (calendar year), the debt segment (Chart II.6.21). Portfolio fl ows to the banking witnessed a record sell-off during the same sector remained encouraging as banks raised period. capital in time to mitigate COVID-19 concerns39, 39 During 2020-21, FPI equity infl ows into banking sector stood at ` 3.88 lakh crore vis-à-vis an outfl ow of ` 2.15 lakh crore a year ago. 97ANNUAL REPORT 2020-21 Chart II.6.21: Change in FPIs’ Exposure in Chart II.6.22: Weighted Average Interest Margin on Equity Market Cumulative ECBs Note: Data for 2020-21 are provisional. Source: NSDL. Source: RBI. with added momentum from government’s than their level a year ago and fi rms pre-paid decision to privatise some state-owned ECBs. As repayments exceeded fresh disbursals banks. Lockdown-induced reliance on digital in view of higher borrowing costs than a year ago transactions in the payments system improved (Chart II.6.22), ECBs recorded net outfl ow of the outlook of IT and IT enabled services. US$ 0.6 billion during 2020-21 vis-à-vis infl ows Among other sectors, investor optimism was of US$ 21.7 billion a year ago (Chart II.6.23). noteworthy in automobiles and auto components and pharmaceuticals and biotechnology sectors. Chart II.6.23: External Commercial Borrowings to As at end-March 2021, assets under custody India (Net) were dominated by US-based portfolio investors followed by Mauritius, Luxembourg, Singapore, and the UK. The limit for FPIs under VRR was increased to `1,50,000 crore in January 2020, and in view of the disruptions caused by COVID-19, FPIs were subsequently allowed additional time of three months to invest 75 per cent of their committed portfolio size. Cumulative FPI investment under VRR (which was introduced in March 2019) was US$ 14.8 billion till March 31, 2021. II.6.35 There was a decrease in external commercial borrowing agreements. Fresh Note: Data for 2020-21 is provisional. Source: RBI. disbursements of ECBs were lower in 2020-21, 98ECONOMIC REVIEW Table II.6.3: Flows under Non-Resident Chart II.6.24: End Use of ECB (2020-21) Deposit Accounts (US$ billion) 2017-18 2018-19 2019-20 2020-21 1 2 3 4 5 1. Non-Resident External (Rupee) Account 7.1 7.3 5.6 8.8 2. Non-Resident Ordinary Account 1.5 1.9 2.0 2.3 3. Foreign Currency Non- Resident(B) Account 1.0 1.1 1.1 -3.8 Non-Resident Deposits (1+2+3) 9.7 10.4 8.6 7.4 Source: RBI. II.6.38 With robust infl ows in Non-Resident (External) Rupee (NRE) account, which constitutes Source: RBI. around 72 per cent of total outstanding NRI deposits, net infl ows into non-resident deposits II.6.36 ECBs raised during the year were mainly accounts were US$ 7.4 billion during 2020-21, utilised for on-lending/sub-lending, followed lower than their level a year ago (Table II.6.3). by infrastructure development, refi nancing of While NRE account and NRO account witnessed earlier borrowings, working capital, new projects, infl ows of US$ 8.8 billion and US$ 2.3 billion, overseas acquisition and refi nancing of rupee loans respectively, FCNR(B) deposits recorded outfl ows (Chart II.6.24). Within ECBs, rupee denominated of US$ 3.8 billion, partly due to weakening of the loans and rupee denominated bonds (RDBs) US dollar. accounted for 6.0 per cent of the total agreement amount as compared with 7.1 per cent a year ago. 6. Vulnerability Indicators Furthermore, the share of hedged loans/bonds II.6.39 India’s external debt at 21.4 per cent of (other than rupee denominated borrowings) stood GDP for end-December 2020 remained lower than lower at 51.3 per cent as compared with 56.7 per that of emerging market peers. At end-December cent a year ago. RDBs recorded net outfl ows of 2020, India’s external debt increased by US$ 5.3 US$ 0.9 billion lower than the outfl ows of US$ 1.3 billion (i.e., 1.0 per cent) from its level at end- billion in the corresponding period last year. March 2020, primarily on account of non-resident II.6.37 External fi nancing requirements for deposits. The increase was also contributed by merchandise imports in the form of short-term valuation loss of US$ 11.4 billion resulting from credit also declined. As repayments exceeded the depreciation of the US dollar against the fresh credit availed by importers, there was net Indian rupee and major currencies (such as euro, outfl ow of US$ 1.8 billion in April-December yen, and SDR). Excluding the valuation effect, 2020-21. Around 36 per cent of the trade credit external debt would have decreased by US$ 6.1 was raised for imports of crude oil, gold, coal and billion instead of increasing by US$ 5.3 billion. copper. Commercial borrowings remained the largest 99ANNUAL REPORT 2020-21 Table II.6.4: External Vulnerability Indicators (End-March) (Per cent, unless indicated otherwise) Indicator 2013 2019 2020 End-Dec 2020 1 2 3 4 5 1. External Debt to GDP Ratio 22.4 19.9 20.6 21.4 2. Ratio of Short-term Debt (original maturity) to Total Debt 23.6 20.0 19.1 18.4 3. Ratio of Short-term Debt (residual maturity) to Total Debt 42.1 43.4 42.4 44.8 4. Ratio of Concessional Debt to Total Debt 11.1 8.7 8.8 9.1 5. Ratio of Reserves to Total Debt 71.3 76.0 85.6 104.0 6. Ratio of Short-term Debt (original maturity) to Reserves 33.1 26.3 22.4 17.7 7. Ratio of Short-term Debt (residual maturity) to Reserves 59.0 57.0 49.6 43.1 8. Reserve Cover of Imports (in months) 7.0 9.6 12.0 18.6 9. Debt Service Ratio (debt service to current receipts) 5.9 6.4 6.5 9.0 10. External Debt (US$ billion) 409.4 543.1 558.2 563.5 11. Net International Investment Position (NIIP) (US$ billion) -326.7 -436.9 -375.2 -340.5 12. NIIP/GDP ratio -17.8 -16.0 -13.9 -12.9 13. CAB/GDP ratio -4.8 -2.1 -0.9 1.7 Note: CAB/GDP ratio in column 5 pertains to April-December 2020. Source: RBI and Government of India. component of external debt, with a share of 36.9 India’s reserves accumulation was to the tune of per cent, followed by non-resident deposits (24.9 US$ 99.2 billion. per cent) and short-term trade credit (17.7 per 7. Conclusion cent). Total debt increased from 20.6 per cent of II.6.41 Going forward, the outlook for India’s GDP at end-March 2020 to 21.4 per cent at end- external sector will continue to be determined by December 2020. Similarly, short-term debt (on pandemic’s impact on demand and supply side residual maturity basis) increased during the year. dynamics, globally and in India. The thrust in the A sizeable accretion in reserves, however, led to budget on easy access to certain raw materials an improvement in other vulnerability indicators augurs well for export recovery. Waning terms such as reserve cover of short-term debt (on of trade gains in view of rising global crude oil residual maturity basis) and imports. India’s net prices and subdued fl ows of remittances may international investment position (NIIP) improved pose downside risks. However, the improvement by US$ 34.6 billion (i.e., fall in net claims of in terms of external vulnerability indicators, non-residents on India) during the same period adequate level of foreign exchange reserves and (Table II.6.4). sound domestic macroeconomic fundamentals II.6.40 The accretion to the reserves, which would help the economy withstand spillovers of reached a historic high of US$ 590.3 billion at global adverse macro-fi nancial shocks. Global end-January 2021 and were at US$ 577.0 billion fi nancial conditions remain easy but can alter at end-March 2021, was driven by robust foreign rapidly. Various reform measures undertaken by portfolio and direct investments, and the current the government have the potential to keep the account surplus in H1:2020-21. In 2020-21, external sector sustainable. 100THE 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 Monetary policy and liquidity operations during 2020-21 were geared towards mitigating the impact of COVID-19 pandemic. The monetary policy committee (MPC) cut the policy repo rate by 115 basis points (bps) during March-May 2020, on top of a cumulative reduction of 135 bps during February 2019 to February 2020. Backed by conventional and unconventional liquidity measures, these actions bolstered financial market sentiments while ensuring orderly market conditions. Interest rates and bond yields declined across market segments and spreads narrowed, with a distinct improvement in monetary transmission. III.1 Monetary policy and liquidity operations III.2 During 2020-21, the Reserve Bank during 2020-21 were geared towards mitigating the undertook several conventional and adverse impact of the unprecedented economic unconventional measures to address liquidity devastation brought by the COVID-19 pandemic on constraints in the face of COVID-19 related the Indian economy. Supply disruptions imposed dislocations. This unprecedented response eased persistent upside price pressures, with infl ation fi nancial stress, unclogged monetary transmission ruling above the upper tolerance band for six and credit fl ows while ensuring fi nancial stability. consecutive months during June-November 2020. With fears of liquidity drying up being dispelled, The monetary policy committee (MPC) maintained fi nancial market sentiments were bolstered while status quo on the policy repo rate during June ensuring orderly market conditions. Interest 2020 to February 2021 after a sizeable cut of 115 rates and bond yields declined across market basis points (bps) during March-May 2020. Given segments and spreads narrowed to pre-COVID the growth-infl ation dynamics, the MPC decided levels. Corporate bond issuances benefi tted from surplus liquidity conditions which enabled record to continue with the accommodative stance as number of issuances at reasonably low costs. long as necessary to revive growth on a durable Despite a signifi cant jump in market borrowings, basis and mitigate the impact of COVID-19 on the the government could raise funds at the lowest economy, while ensuring that infl ation remains weighted average cost in 17 years along with the within the target going forward. These decisions highest weighted average maturity of the stock of were in consonance with the objective of achieving public debt on record. the medium-term target for consumer price index (CPI) infl ation of 4 per cent within a band of +/- 2 III.3 Surplus liquidity conditions, coupled with per cent, while supporting growth. the external benchmark-based pricing of fl oating 101ANNUAL REPORT 2020-21 rate loans, led to a considerable improvement in  Understanding the dynamics of banks’ monetary transmission during 2020-21. Interest holdings of government securities and rates on outstanding loans declined for a majority credit growth to assess the relative roles of the sectors. The external benchmark-linked of crowding out and portfolio re-balancing framework incentivised banks to adjust their term (Para III.6). as well as saving deposit rates to protect their Implementation Status of Goals net interest margins, thereby improving monetary III.6 A number of studies were undertaken transmission. during 2020-21 to strengthen the analytical inputs III.4 Against the above backdrop, Section 2 for the conduct of monetary policy and liquidity presents the implementation status of the agenda management. They included: strengthening set for 2020-21 along with major developments, nowcasting of infl ation with wider information while Section 3 sets out the agenda for 2021-22. system, including commodity price monitoring; Concluding observations are in the last section. augmenting the external sector block of QPM by incorporating capital infl ows dynamics and 2. Agenda for 2020-21: Implementation Status recalibration of the QPM based on recent empirical Goals Set for 2020-21 estimates; analysis of MPC voting pattern; the III.5 In last year’s Annual Report, the impact of LTRO and TLTRO on bond markets; Department had set out the following goals: dynamics of banks’ holdings of government securities and credit growth to assess the relative  Strengthening nowcasting of infl ation roles of crowding out and portfolio rebalancing; with wider information systems, including analysing and forecasting currency demand in commodity price monitoring (Utkarsh) India; evaluating the impact of asset quality of [Para III.6]; banks on credit channel of monetary policy;  Augmenting the external sector block of constructing an economic activity index for India; the quarterly projection model (QPM) by revisiting the determinants of term premium in incorporating capital infl ows dynamics India; examining the pass-through of global food for an improved analysis of external prices to domestic prices in emerging market spillovers and feedback mechanisms, and economies (EMEs); and assessing volatility recalibration of the QPM based on recent spillover from US monetary policy on select EMEs, empirical estimates (Utkarsh) [Para III.6]; including India.  Analysis of MPC voting patterns (Utkarsh) Major Developments [Para III.6]; Monetary Policy  Assessing the effi cacy of the conventional III.7 The COVID-19 pandemic triggered [open market operation (OMO)] and extreme risk aversion and elevated volatility in unconventional [long-term repo operation fi nancial markets, necessitating an advancement (LTRO) and targeted LTRO (TLTRO)] in the MPC’s fi rst two meetings scheduled for monetary policy instruments (Para III.6); March 31, April 1 and 3, 2020 and June 3-5, 2020 and to March 24, 26 and 27, 2020 and May 20-22, 102MONETARY POLICY OPERATIONS 2020, respectively. In the March 2020 meeting, the of 6 per cent. Issues in data reliability, coupled with MPC noted that macroeconomic risks brought on high retail mark-ups amidst the pandemic added by the pandemic, both on the demand and supply uncertainty to the infl ation outlook. Accordingly, sides, could be severe and there was a need to the MPC decided to pause and remain watchful for do whatever necessary to shield the domestic a durable reduction in infl ation to use the available economy from the pandemic. The MPC, therefore, space to support the revival of the economy. voted unanimously for a sizeable reduction in the III.9 The October 2020 policy2 was held in policy repo rate. With a 4 to 2 majority, the repo a setting in which high frequency indicators rate was cut by 75 bps to 4.40 per cent, while suggested recovery of economic activity in 2 members voted for a reduction of 50 bps. All Q2:2020-21, after a record contraction in real GDP members voted unanimously to continue with in Q1:2020-21. Headline CPI infl ation continued the accommodative stance as long as necessary to remain above the upper tolerance threshold as to revive growth and mitigate the impact of price pressures accentuated across food, fuel, and COVID-19 on the economy, while ensuring that core sub-groups due to supply disruptions, high infl ation remained within the target. In the May retail margins, high indirect taxes on petroleum 2020 meeting, with the growth outlook remaining products and higher cost of doing business in the sombre, the MPC decided to reduce the policy post-lockdown period. The rural economy was repo rate by another 40 bps to 4.0 per cent to pre- expected to strengthen further while the recovery emptively use available space to ease fi nancial in urban demand was seen as lagging due to social conditions further to mitigate the adverse impact distancing norms. Moreover, private investment of the pandemic on the economy. Five members and exports were likely to remain subdued. Real voted for a reduction in policy repo rate by 40 bps GDP was projected to contract by 9.5 per cent and one member voted for a reduction of 25 bps. during 2020-21, with GDP growth moving into The MPC also voted unanimously to continue with the positive zone by Q4:2020-21 and placed the accommodative stance set out in its March at 20.6 per cent in Q1:2021-22. CPI headline meeting.1 infl ation was projected to moderate to 5.4-4.5 per III.8 By the time of the August 2020 bi-monthly cent in H2:2020-21 and further to 4.3 per cent review, there was greater clarity on the likely in Q1:2021-22, with risks broadly balanced. The recovery of economic activity in Q2, led by the MPC noted that the revival of the economy from rural economy. However, for the year 2020-21, the unprecedented COVID-19 pandemic assumed real GDP growth was expected to be negative. On the highest priority in the conduct of monetary infl ation, though the release of June CPI was still policy. On the elevated infl ation, the MPC judged not normalised in terms of data coverage, headline that the underlying factors were essentially supply infl ation ruled above the upper tolerance threshold shocks which were likely to dissipate over the 1 For details, see chapter III (Paragraphs III.12 and III.13) of the Annual Report 2019-20, Reserve Bank of India (RBI). 2 On October 5, 2020, the Government of India reconstituted the MPC, with the expiry of the term of earlier external members of the MPC, by onboarding Prof. Ashima Goyal, Professor, Indira Gandhi Institute of Development Research, Mumbai; Prof. Jayanth R. Varma, Professor, Indian Institute of Management, Ahmedabad; and Dr. Shashanka Bhide, Senior Adviser, National Council of Applied Economic Research, Delhi. The October 2020 MPC meeting was the fi rst meeting of these external MPC members. Earlier, w.e.f. the August MPC meeting, Dr. Mridul K. Saggar, Executive Director, Reserve Bank, joined the MPC on his nomination by the Central Board. 103ANNUAL REPORT 2020-21 ensuing months as the economy unlocked, supply status quo on the policy repo rate and continue chains were restored, and activity normalised and with the accommodative stance as set out in its as such these could be looked through in setting October resolution. the monetary policy stance. Accordingly, the III.11 In the run up to the sixth bi-monthly policy MPC voted unanimously to keep the policy repo in February 2021, infl ation moderated sharply rate unchanged. With a vote of 5 to 1, the MPC to 4.6 per cent in December 2020. Taking into also decided to continue with the accommodative account the signifi cant correction in food infl ation monetary policy stance as long as necessary – at on the one hand and the persisting core infl ation least during the current fi nancial year and into the pressures on the other, the projection for CPI next fi nancial year – to revive growth on a durable infl ation was revised to 5.2 per cent in Q4:2020- basis and mitigate the impact of COVID-19 on the 21, 5.2 per cent to 5.0 per cent in H1:2021-22 economy, while ensuring that infl ation remains and 4.3 per cent in Q3:2021-22, with risks broadly within the target going forward. balanced. On the growth outlook, the MPC was of III.10 By the time of the December 2020 the view that rural demand was likely to remain meeting, the economic recovery had progressed resilient on good prospects of agriculture while further, but alongside the intensifi cation of urban demand and demand for contact-intensive infl ationary pressures. The contraction in real GDP services were expected to strengthen with the in Q2:2020-21 was shallower than anticipated, substantial fall in COVID-19 cases and the spread and high frequency indicators suggested that of vaccination. Consumer confi dence was reviving recovery was gaining traction in Q3:2020-21. With and business expectations remained upbeat. a projected positive growth of (+) 0.1 per cent in Taking into account these considerations and Q3:2020-21 and (+) 0.7 per cent in Q4:2020-21, the Union Budget 2021-22 proposals, real GDP real GDP was expected to contract by 7.5 per cent growth was projected at 10.5 per cent in 2021-22 in 2020-21, lower than the contraction of 9.5 per – in the range of 26.2 to 8.3 per cent in H1 and 6.0 cent in the October 2020 assessment. In H1:2021- per cent in Q3. Given the softening in infl ation as 22, the expansion was projected to gather pace also the need for continued policy support to rest at (+) 21.9 per cent to (+) 6.5 per cent, with risks the growth recovery on a fi rmer footing, the MPC broadly balanced. Infl ation pressures, however, unanimously voted for keeping the policy repo turned out to be higher than anticipated, with CPI rate unchanged at 4 per cent and continue with infl ation inching up to 7.6 per cent in October the accommodative stance till the prospects of a 2020 on a broad-based surge in food and core sustained recovery are well secured while closely infl ation and outlook remaining adverse with monitoring the evolving outlook for infl ation. continuing high retail price margins, rising crude T he Operating Framework: Liquidity Management oil prices and stickiness imparted on account of cost-push pressures. Refl ecting these pressures, III.12 The operating framework of monetary the infl ation projections were revised upwards to policy aims at aligning the operating target – 6.8-5.8 per cent in H2:2020-21 and 5.2-4.6 per the weighted average call rate (WACR) – with cent in H1:2021-22, with risks broadly balanced. the policy repo rate through proactive liquidity However, with the signs of recovery far from being management, consistent with the stance of broad-based and dependent on sustained policy monetary policy. In the face of COVID-19 related support, the MPC voted unanimously to maintain stress and the large contraction in output, 104MONETARY POLICY OPERATIONS and in consonance with the monetary policy policy measures augmented system liquidity. The stance, the Reserve Bank undertook several consequent large liquidity surplus was mopped up monetary policy measures, both conventional through overnight fi xed rate reverse repos under and unconventional, during 2020-21, driven by the liquidity adjustment facility (LAF) (Chart III.1b). the goals of (i) improving monetary transmission; III.14 In Q1:2020-21, the expansion in CiC (ii) facilitating and incentivising bank credit fl ows; drained system liquidity by `2.13 lakh crore which (iii) addressing sector-specifi c liquidity constraints was more than offset by liquidity injections through in the face of COVID-19 related dislocations; and (i) targeted long-term repo operations (TLTROs) (iv) reinvigorating markets by easing fi nancial (`87,891 crore), (ii) OMO purchases (`1.2 lakh stress and ensuring fi nancial stability. crore) and (iii) the forex operations (`1.0 lakh Drivers and Management of Liquidity crore). Additionally, the Reserve Bank announced special liquidity facility for mutual funds (SLF- III.13 The concatenation of heightened fi nancial MF) worth `50,000 crore although its utilisation stress, widening spreads, and seizure of market liquidity exacerbated by highly volatile capital was confi ned to only `2,430 crore. Moreover, fl ows on account of the pandemic warranted the Reserve Bank provided special refi nance proactive measures by the Reserve Bank starting facilities for a total amount of `65,000 crore to Q4:2019-20. Total liquidity augmenting measures All India Financial Institutions (AIFIs) comprising announced by the Reserve Bank (up to March (i) `25,000 crore to National Bank for Agriculture 31, 2021) since February 2020 have aggregated and Rural Development (NABARD) for refi nancing to `13.6 lakh crore (6.9 per cent of nominal GDP regional rural banks (RRBs), cooperative for 2020-21). The main drivers of liquidity were the banks and micro fi nance institutions (MFIs); Reserve Bank’s forex operations and expansion (ii) `15,000 crore to Small Industries Development in currency in circulation (CiC) – liquidity injection Bank of India (SIDBI) for on-lending/refi nancing; through the former more than offset the leakage (iii) `10,000 crore to National Housing Bank from the heightened precautionary currency (NHB) for supporting housing fi nance companies demand during the pandemic (Chart III.1a). (HFCs); and (iv) `15,000 crore to Export Import The conventional and unconventional monetary Bank of India (EXIM Bank) to enable it to avail Chart III.1: Drivers and Management of Liquidity a: Drivers b: Management (cid:2)lakh crore (cid:2)lakh crore Net Forex Purchases GoI Cash Balances NetOMOPurchases CRR Change Net LAF Operations Source: RBI. 105ANNUAL REPORT 2020-21 US dollar swap facility for its foreign exchange Chart III.2: Discretionary Liquidity, requirements.3 Overall, the surplus liquidity Autonomous Drivers and Reverse Repo resulted in average daily net absorption under the LAF amounting to `4.72 lakh crore during the quarter. During Q1:2020-21, the Reserve Bank also conducted one special OMO involving simultaneous purchase and sale of securities, which were liquidity neutral, to distribute liquidity more evenly across the yield curve and improve transmission. III.15 In order to encourage banks to deploy surplus funds in investments and loans in productive sectors of the economy, the fi xed rate reverse repo rate under the LAF was reduced Note: Data on forex operations is cumulative since January 2020. by 25 bps (from 4.0 per cent to 3.75 per cent) Source: RBI. without concomitant changes in the MSF and the repo rate on April 17, 2020, thereby widening the March 2020 at the then prevailing repo rate (5.15 asymmetric corridor. per cent) were given an option in September 2020 III.16 In Q2:2020-21, forex purchase operations of reversing these transactions before maturity by augmented system liquidity by `2.1 lakh crore availing fresh funds at the reduced repo rate of 4.0 while the Reserve Bank injected `27,862 crores per cent. Banks repaid `1,23,572 crore under this through OMOs, even as expansion in CiC facility – nearly 98.8 per cent of `1,25,117 crore remained muted (Chart III.2). As a result, surplus availed under the various LTROs. The Reserve liquidity persisted, although the average daily net Bank also conducted fi ve special OMOs during absorption moderated to `3.9 lakh crore during Q2:2020-21. Furthermore, the Reserve Bank the quarter. As part of the AatmaNirbhar Bharat increased the limits under Held-to-Maturity (HTM) package, the Government of India (GoI) approved category from 19.5 per cent to 22 per cent of net a scheme of `30,000 crore to improve liquidity demand and time liabilities (NDTL) in respect of position of NBFCs (including MFIs)/HFCs with a statutory liquidity ratio (SLR) securities acquired view to avoiding any potential systemic risks to the on or after September 1, 2020 to engender orderly fi nancial sector. Under the scheme introduced on market conditions. July 1, 2020, the Reserve Bank provided liquidity III.18 In Q3:2020-21, expansion in currency by subscribing to government guaranteed special demand (`95,181 crore) and the Reserve Bank’s securities issued by a Special Purpose Vehicle forex purchase operations (`2.0 lakh crore) (SPV). were the main drivers of liquidity. In addition, III.17 To reduce the cost of funds, banks that durable liquidity amounting to `89,140 crore was had availed of funds under LTROs in February- injected through OMOs; the Reserve Bank also 3 Subsequently in August 2020, the Reserve Bank provided additional special liquidity facility of `5,000 crore each to the NHB and NABARD at the policy repo rate, taking the total refi nance to AIFIs to `75,000 crore. 106 erorc(cid:2) Reverse Repo Discretionary Liquidity (LTROs, TLTROs and OMOs) ForexOperations GoI CashBalancesMONETARY POLICY OPERATIONS conducted six auctions of special OMOs during in a phased manner beginning November 9, 2020. this period. Consequently, net absorptions under III.20 During Q4:2020-21, amidst very large the LAF rose to `5.33 lakh crore during the surplus liquidity conditions, the Reserve Bank quarter. Banks returned TLTRO funds amounting on January 8, 2021 announced steps to move to `37,348 crore – about 33.1 per cent of the towards normal liquidity management operations total amount of `1,12,900 crore availed – under in a phased manner and accordingly it conducted a scheme similar to the return of LTRO funds. fi ve 14-day variable rate reverse repo (VRRR) To nurture the revival of activity in specifi c auctions of `2 lakh crore each on January 15, sectors that have multiplier effects on growth January 29, February 12, February 26 and March through both forward and backward linkages, the 12, 2021. The liquidity absorbed through the fi xed Reserve Bank announced ‘On tap TLTROs’ with rate reverse repo increased from a fortnightly tenors of up to three years for a total amount of average of `4.3 lakh crore during January 16-29, up to `1,00,000 crore at a fl oating rate linked to 2021 to `4.9 lakh crore during January 30 - March the policy repo rate. Liquidity availed by banks 31, 2021. The Reserve Bank also reiterated its under the scheme is required to be deployed in commitment to provide ample liquidity in the corporate bonds, commercial papers, and non- system. With the paramount objective of reviving convertible debentures issued by entities in the economy, the Reserve Bank announced specifi c sectors over and above the outstanding additional measures on February 5, 2021 which level of their investments in such instruments included (i) allowing lending by banks to NBFCs as on September 30, 2020. The liquidity availed under the TLTRO on Tap scheme for incremental under the scheme can also be used to extend lending to specifi ed stressed sectors; (ii) gradual bank loans to these sectors. Furthermore, as a restoration of the CRR in two phases in a non- special case, the Reserve Bank conducted three disruptive manner to 3.5 per cent effective from OMOs in State Development Loans (SDLs) to March 27, 2021 and 4.0 per cent effective from improve their liquidity and facilitate effi cient pricing May 22, 2021; (iii) extension of relaxation in availing in Q3:2020-21. The Reserve Bank also stressed funds under MSF by dipping into SLR up to 3.0 that fi nancial market stability and the orderly per cent of NDTL until September 30, 2021; and evolution of the yield curve are public goods, the (iv) exemption from CRR maintenance for credit benefi ts of which accrue to all stakeholders in the fl ow to new micro, small, and medium enterprise economy. (MSME) borrowers, for exposures up to `25 lakh III.19 Following the COVID-19 outbreak, per borrower for credit extended up to October 1, staff and IT resources were severely affected 2021. To meet any additional/ unforeseen demand and the thinning out of activity impacted fi nancial for liquidity and to provide fl exibility to the banking market liquidity and increased volatility in the prices system in year-end liquidity management, the of fi nancial products. Accordingly, it was decided Reserve Bank decided to conduct two fi ne-tuning to shorten trading hours for various markets variable rate repo auctions of ` 25,000 crore each regulated by the Reserve Bank effective April 7, on March 26 and March 31, 2021 of 11-day and 2020. Subsequently, with the phased removal of 5-day tenors, respectively. Furthermore, it was lockdown and easing of restrictions on movement decided not to conduct the 14-day VRRR auction of people and resumption of normal functioning of on March 26 to ensure the availability of ample offi ces, it was decided to restore the trading hours liquidity for managing year-end requirements. 107ANNUAL REPORT 2020-21 III.21 During 2020-21, nineteen auctions of through net OMO purchases amounted to operation twists (OTs) were conducted. In March, `3.13 lakh crore during 2020-21. The central the scale of OTs was increased to `15,000 crore bank’s traditional lender of last resort (LOLR) (on March 4) and subsequently an asymmetric function has expanded with the growing OT having a liquidity impact (purchase `20,000 importance of fi nancial markets and the need crore; sales `15,000 crore) was conducted to resolve institution specifi c liquidity problems on March 10, 2021 which elicited favourable from turning into wider systemic strains market response. Overall, the liquidity injected (Box III.1). Box III.1 The Lender of Last Resort Commercial banks undertake maturity transformations terms for access, pricing and collateral and stronger when they fund themselves with shorter-term liquid deposits accountability and governance norms (Hauser, 2016). The and make loans and advances which are relatively less Bank of Japan agrees to LOLR support if, inter alia, there liquid and of longer duration. This exposes them, inter alia, is no alternative to the provision of central bank funds, and to asset-liability mismatches. In the aftermath of the 2008 fi nancial soundness is not impaired (Hiroshi Nakaso, 2014). global fi nancial crisis, therefore, regulators have mandated In India, the Reserve Bank of India can provide emergency that banks have to hold high-quality liquid assets to deal with liquidity assistance to stressed but solvent individual such stresses. banks to foster macroeconomic and fi nancial stability. The The central bank’s regular liquidity operations address troubled fi nancial institution is expected to fi rst exhaust all system-wide liquidity mismatches. In the case of bank- the resources it can obtain from the market and from the specifi c stress events that cannot be mitigated by own Reserve Bank’s regular liquidity facilities (like LAF and liquidity buffers and if in addition, access to system level MSF), before requesting for the LOLR support. The Reserve liquidity is constrained or not available, recourse to the Bank can provide LOLR assistance under the Reserve Bank central bank’s lender of last resort (LOLR) facility can be of India Act, 1934. It typically does so against specifi ed made for a solvent but illiquid bank against good collateral collaterals, preferably the central or state governments’ at a penal rate in line with the Bagehot (1873) principle. With securities, and with appropriate haircuts. The LOLR support the growing role of fi nancial markets, the traditional LOLR is typically provided for short periods of up to 90 days at a function has widened to encompass supporting fi nancial penalty rate above the repo rate. markets to prevent asset fi re sales; central banks are thus In the case of weak commercial banks, the Reserve Bank’s also emerging as market maker of the last resort (MMLR) (Hauser, 2021). In the time of COVID-19, major central endeavour is to strengthen such banks through appropriate banks have expanded eligible counterparties and eased and timely restructuring or mergers and acquisitions, given collateral requirements, and provided support at reduced the paramount objective of fi nancial stability, and then penalty rates (BIS, 2020). provide LOLR support, as needed, to the restructured/ amalgamated entity. Moreover, the Deposit Insurance and A survey of major central banks shows that in the US, Credit Guarantee Corporation (DICGC), a wholly owned the Federal Reserve retains the power to extend discount subsidiary of the Reserve Bank, insures bank deposits up window loans to individual depository institutions facing to `5 lakh. As a result, 98.1 per cent of the deposit accounts funding pressures, or to banks more generally to address are fully covered as on March 31, 2021, as against the broader fi nancial stresses (Fischer, 2016). I n the euro area, international benchmark of 80 per cent. The combination the European Central Bank (ECB) norms for LOLR support of regular liquidity operations, the LOLR support, the pre- require the credit institutions to meet the solvency criteria emptive restructuring/amalgamation of weak banks and (minimum capital requirements or a credible prospect of a liberal deposit insurance cover has fostered fi nancial recapitalisation). LOLR support is usually for less than 12 stability, avoiding commercial bank failures. months at a penalty rate (ECB, 2020). The Bank of England has strengthened safeguards for its LOLR support through Following the outbreak of the COVID-19 pandemic, the better supervisory and resolution frameworks, transparent Reserve Bank of India took a number of conventional and (Contd.) 108MONETARY POLICY OPERATIONS unconventional measures to protect the fi nancial system and 2. Bank for International Settlements (2020), ‘Annual support the real economy, guided by the age-old wisdom Economic Report’, June. summarised in the Bagehot’s dictum (Das, 2020). In its 3. Das, Shaktikanta (2020), ‘Indian Economy at a Crossroad: LOLR role, the Reserve Bank extended emergency support A View from Financial Stability Angle’, Speech at the 7th to a couple of commercial banks facing idiosyncratic stress SBI Banking & Economics Conclave organised by the and special liquidity facilities (SLF) to All India Financial State Bank of India, July. Institutions (AIFIs)4, while also providing and maintaining ample surplus systemic liquidity through open market 4. European Central Bank (2020), ‘Agreement on operations, reduction in the cash reserve ratio, long-term Emergency Liquidity Assistance’. November 9. repo operations (including targeted at stressed sectors and 5. Fischer, Stanley (2016), ‘The Lender of Last Resort issuers) and special liquidity facility for mutual funds. Function in the United States’, Board of Governors of the Overal l, the Reserve Bank is empowered with a Federal Reserve System. comprehensive, effective and independent mandate to perform its LOLR responsibilities in the interest of systemic 6. Hauser, Andrew (2021), ‘From Lender of Last Resort to stability, including resolutions in the form of restructuring/ Market Maker of Last Resort via the Dash for Cash: Why reconstruction, amalgamation and liquidation while Central Banks Need New Tools for Dealing with Market preserving the strength and soundness of its own balance Dysfunction’, Speech at the Bank of England. sheet through a robust economic capital framework. 7. Nakaso, Hiroshi (2014), ‘What the Lost Decades Left for References: the Future’, Keynote Speech at the 2014 International 1. Bagehot, Walter (1873), ‘Lombard Street: A Description Conference held by the International Association of of the Money Market’, H. S. King, London. Deposit Insurers, Asia-Pacifi c Regional Committee. III.22 Bearing testimony to the effectiveness interest rates declined and spreads narrowed of the liquidity operations undertaken and the across market segments (Table III.1). Abundance forward guidance provided during 2020-21, of liquidity in the system, coupled with reductions Table III.1: Financial Markets - Rates and Spread Instrument Interest Rates (per cent) Spread over Policy Rate (bps) As on As on Variation As on As on Variation March 26, 2020 March 31, 2021 (in bps) March 26, 2020 March 31, 2021 (in bps) 1 2 3 (4 = 3-2) 5 6 (7 = 6-5) 3-month CD 7.95 3.28 -467 280 -72 -352 3-month T-bill 5.04 3.27 -177 -11 -73 -62 CP (3-month) 6.74 3.65 -309 159 -35 -194 Corporate Bonds Spread over G-sec yield of corresponding maturity (bps) (i) AAA (1-yr) 7.76 4.15 -361 246 29 -217 (ii) AAA (3-yr) 8.47 5.40 -307 276 22 -254 (iii) AAA (5-yr) 7.84 6.14 -170 141 8 -133 (iv) AA (3-yr) 9.15 6.17 -298 344 99 -245 (v) BBB- (3-yr) 12.29 10.05 -224 658 487 -171 10-yr G-sec 6.22 6.17 -5 - - - Sources: CCIL (F-TRAC), FIMMDA, and Bloomberg. 4 AIFIs that received liquidity support were the National Bank for Agriculture and Rural Development (NABARD), the Small Industries Development Bank of India (SIDBI), the National Housing Bank (NHB) and the Export Import Bank of India (EXIM Bank). Such liquidity support was provided to bolster the liquidity position of these institutions under stressed fi nancial market conditions in the wake of pandemic so that they can continue to support credit fl ow to the real economy. 109ANNUAL REPORT 2020-21 in the policy rate, also induced record issuance Monetary Policy Transmission of corporate bonds, even from entities with the III.24 Monetary transmission – changes in lowest investment rating (BBB-). Overall, the banks’ deposit and lending rates in response to Indian experience suggests that unconventional the changes in the policy repo rate – improved monetary policy measures can be effective even considerably during 2020-21 aided by persistence before conventional monetary policy has reached of systemic surplus liquidity, sluggish credit the zero lower bound. demand and the mandated external benchmark- Operating Target and Policy Rate based pricing of fl oating rate loans to select sectors (Table III.2).5 III.23 During 2020-21, the WACR – the operating target – remained within the corridor on III.25 The external benchmark-based pricing of all days with a downward bias up to October 2020. loans effective October 1, 2019 has also imparted Since then, the WACR and other money market more fl exibility in setting banks’ deposit rates rates traded below the reverse repo rate with the and MCLR-based loans. As the change in the persistence of surplus liquidity engendered by lending rates in case of loans linked to an external large capital infl ows (Chart III.3). benchmark is independent of the change in the deposit rate unlike MCLR-based loan pricing, banks need to cut their deposit rates – both Chart III.3: Policy Corridor and WACR savings and term deposits – to protect their net interest margins (NIMs). The reduction in term deposit rates applies only to fresh term deposits, while the reduction of rates in the case of saving deposits applies across the board. The saving deposit rates of fi ve major banks, which ranged 3.25-3.50 per cent in September 2019, were placed at 2.70-3.00 per cent in March 2021.6 Changes in banks’ saving deposit rates bring about an instantaneous change in the banks’ cost of funds, and in turn, in the MCLR and the lending rates on fresh rupee loans (provided the spread WACR Repo Rate over the MCLR remains relatively stable). Thus, Reverse Repo Rate MSFRate the impact of introduction of external benchmark- Source: RBI. based pricing of loans on monetary transmission 5 The Reserve Bank mandated all scheduled commercial banks (excluding regional rural banks) to link all new fl oating rate personal or retail loans and fl oating rate loans to micro and small enterprises (MSEs) to the policy repo rate or 3-month T-bill rate or 6-month T-bill rate or any other benchmark market interest rate published by Financial Benchmarks India Private Ltd. (FBIL), effective October 1, 2019. It was extended to medium enterprises, effective April 1, 2020. 6 The median saving deposit rate was 3 per cent for domestic banks in March 2021. 110MONETARY POLICY OPERATIONS Table III.2: 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 April 2020 to March 2021 -40 -137 -100 -90 -79 -79 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 (Pre-External Benchmark Period) October 2019 to March 2021 -140 -176 -146 -120 -108 -154 (External Benchmark Period) February 2019 to March 2021 -250 -205 -153 -150 -106 -194 WADTDR: Weighted Average Domestic Term Deposit Rate. WALR: Weighted Average Lending Rate. MCLR: Marginal Cost of Funds-based Lending Rate. Sources: Special Monthly Return VIAB, RBI; and banks’ websites. has encompassed even sectors that are not linked outstanding loans linked to the prevailing MCLR, to external benchmark loan pricing. Unlike in the which is typically of 1-year tenor or to the external previous year when WALR on outstanding loans benchmark, which has a maximum duration of declined at a slower pace than that on fresh 3-months. rupee loans, WALRs on both outstanding and III.26 Across bank groups, the transmission fresh loans declined in tandem during 2020-21 to deposit and lending interest rates has been as banks are required to reset interest rates on uneven (Chart III.4). Foreign banks’ low cost and Chart III.4: Variation in Deposit and Lending Rates of SCBs a: Tightening Phase (June 2018-January 2019) b: Easing Phase (February 2019-March 2021) PSB: Public Sector Banks. PVT: Private Sector Banks. Foreign: Foreign Banks. SCBs: Scheduled Commercial Banks. Source: RBI. 111ANNUAL REPORT 2020-21 lower duration deposits enable them to make quick Table III.4: External Benchmarks of adjustments in response to policy rate changes. Commercial Banks - March 2021 On the other hand, the public sector banks depend Bank Group Policy CD OISMIBOR 3-Month Sector Total more on retail term deposits and face competition Repo T Bill Specific Rate Benchmark* from alternative saving instruments like small 1 2 3 4 5 6 7 8 savings, constraining them from lowering rates PSB (11) 11 - - - - - 11 in sync with the policy rate. Following foreign Private 17 1 - - - 2 20 banks, private sector banks exhibited greater Banks (21)# Foreign 11 1 - 3 6 2 23 transmission in terms of WADTDR. However, Banks (33)# WALR on fresh rupee loans and outstanding SCBs (65)# 39 2 - 3 6 4 54 loans declined more for public sector banks than *: Sector specific benchmarks include MIBOR, OIS, 10-year G-sec, their private counterparts. and CD rates. #: One private sector bank and 10 foreign banks reported nil. Note: Figures in parentheses refer to the number of banks that Sectoral Lending Rates responded to the survey. Source: RBI. III.27 During 2020-21, interest rates on outstanding loans declined for a majority of end-March 2021 (Table III.4). Four banks have the sectors, with sharp declines observed for adopted sector-specifi c benchmarks. professional services and other personal loans (Table III.3). III.29 In the case of loans linked to the policy repo rate, the median spread in respect of fresh External Benchmark rupee loans (i.e., median WALR over the repo III.28 Among the available options for external rate) was the highest for other personal loans, benchmark, majority of banks, i.e., 39 out of 65 followed by MSME loans (Table III.5). Among banks, have adopted the Reserve Bank’s policy the domestic bank-groups, private sector banks repo rate as the external benchmark for fl oating typically charged a higher spread vis-à-vis public rate loans to the retail and MSME sectors as at sector banks. Table III.3: Sector-wise WALR of SCBs (Excluding RRBs) - Outstanding Rupee Loans (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 Mar-20 10.06 9.38 10.53 9.73 8.98 9.90 8.71 10.05 10.59 28.90 12.06 7.31 Jun-20 9.82 9.18 10.27 9.25 8.77 9.67 8.35 10.07 10.35 29.39 11.78 8.07 Sep-20 9.74 8.99 10.05 9.32 8.77 9.53 8.08 9.99 10.08 29.79 11.56 7.55 Dec-20 9.70 8.75 9.84 9.15 8.49 8.52 7.84 9.79 9.87 30.38 11.23 7.38 Mar-21 9.72 8.53 9.77 9.02 8.64 8.45 7.66 9.66 9.59 31.90 10.95 6.76 Variation (Percentage Points) 2020-21 -0.34 -0.85 -0.76 -0.71 -0.34 -1.45 -1.05 -0.39 -1.00 3.00 -1.11 -0.55 $: Other than housing, vehicle, education and credit card loans. Source: Special Monthly Return VIAB, RBI. 112MONETARY POLICY OPERATIONS Table III.5: Loans linked to External (179 bps); during the same period, the decline in Benchmark – Median Spread over Policy WALR on fresh rupee loans across all sectors was Repo Rate: March 2021 lower at 154 bps. (Percentage points) 3. Agenda for 2021-22 Bank Group Personal Loans Loans to III.31 Section 45-ZA of the RBI Act, 1934 requires Housing Vehicle Education Other MSME that the Central Government shall, in consultation Personal Loans with the Reserve Bank, determine the infl ation 1 2 3 4 5 6 target in terms of CPI once in every fi ve years. The Public Sector Department would support the operationalisation Banks 3.6 4.8 4.5 6.8 6.1 of the mandated infl ation target for the 5-year Private Sector Banks 6.3 7.1 7.4 7.8 7.6 period (2021-26) with high quality analysis/ Domestic outlook on infl ation and growth, alternative policy Banks 4.4 5.1 4.8 7.0 6.5 scenarios and liquidity assessment. Against this Source: RBI. backdrop, the Department would undertake the following: III.30 A signifi cant improvement has been observed in the transmission to all new loans  Strengthen nowcasts of food infl ation using customised Agmarknet data sourced sanctioned in respect of sectors where new from Ministry of Agriculture and Farmers fl oating rate loans have been linked to the external Welfare; benchmark. The WALRs on housing, vehicle and other personal loans have declined signifi cantly  Understand the common and idiosyncratic since the introduction of external benchmarks, components of infl ation for a better grasp i.e., during October 2019-March 2021 (Chart III.5). of underlying infl ation; The decline was the sharpest in the case of other  Upgrade GDP nowcasting and forecasting personal loans (181 bps), followed by MSME loans framework using high-frequency data;  Implement the augmented and recalibrated Chart III.5: WALR on Personal Loans and Loans to MSMEs : Variation (October 2019-March 2021) QPM to generate medium-term forecasts and risk assessment (Utkarsh);  Refi ne liquidity forecasting and explore additional tools for liquidity management during 2021-22 and evaluate the Reserve Bank’s liquidity measures on fi nancial markets using event study method;  Examine the behaviour of credit cycles in India; and  Improve data management by a complete migration of submission of returns on sectoral credit, CRR and SLR maintenance by SCBs, interest rates on bank deposits Source: RBI. and loans to XBRL reporting format. 113ANNUAL REPORT 2020-21 4. Conclusion benchmark system of the pricing of loans for specifi ed sectors. III.32 Monetary policy in 2020-21 had to deal with the twin challenge of reviving growth from III.33 The pace of economic recovery in the ravages of COVID-19 while also ensuring 2020-21 turned out to be faster than earlier that infl ation eased from above the upper anticipations. Yet the outlook is weighed down by tolerance band to align with the target. A range several uncertainties, and would depend upon of conventional and unconventional monetary, the evolving trajectory of COVID-19 infections and liquidity measures ensured adequate and vaccinations. A durable recovery will be surplus systemic liquidity to address COVID-19 dependent on continued policy support. Infl ation related stress in the fi nancial markets and were remains a key concern and constrains monetary successful in ensuring a signifi cant softening of policy from using the space available to act in interest rates across the spectrum and narrowing support of growth. Further efforts are necessary of risk spreads to pre-COVID levels and facilitated to mitigate supply-side driven infl ation pressures. large fl ows through the corporate bond market. Monetary policy will monitor closely all threats to Transmission to banks’ deposit and lending rates price stability to anchor broader macroeconomic improved signifi cantly on the back of surplus and fi nancial stability while continuing with the liquidity conditions and the mandated external accommodative stance. 114CRECREDDITI DTEL IDVEREY ALNDI FVINEANCRIAYL IN CALUNSIODN IV FINANCIAL INCLUSION In the face of challenges due to COVID-19 pandemic, ensuring effective credit delivery and expanding the reach of financial inclusion remained a priority for the Reserve Bank. The ongoing efforts under the financial inclusion plans were intensified, including review of priority sector lending guidelines and introduction of co-lending model. The implementation of the recommendations made by the Expert Committee on MSMEs and Internal Working Group to Review Agricultural Credit were the notable developments during the year. E fforts towards financial literacy are being sustained by expanding the reach of Centres for Financial Literacy (CFL) to all blocks in the country and also revising the Financial Awareness Messages Booklet. IV. 1 The Reserve Bank continued its focus on as small enterprise, where the investment in plant strengthening the credit delivery mechanisms to and machinery or equipment does not exceed `10 ensure adequate and timely fl ow of credit to all crore and turnover does not exceed `50 crore. productive sectors of the economy, especially For classifi cation as a medium enterprise, the agriculture and micro, small and medium investment in plant and machinery or equipment enterprises (MSMEs), and also ensuring the should not exceed `50 crore and turnover should availability of banking services to all sections of not exceed `250 crore. the society. The overarching philosophy of the IV. 3 In order to provide greater operational Reserve Bank behind prescribing the priority fl exibility to banks and NBFCs for reaching out sector lending (PSL) target for banks is to enable to priority sector, a revised scheme, renamed as sections of society, which though creditworthy, are co-lending model (CLM) was introduced, effective unable to access the formal banking system, for November 5, 2020. The primary focus of the adequate and timely credit. The PSL guidelines revised scheme is to improve the fl ow of credit were reviewed during the year with an objective to the unserved and underserved sectors of the to harmonise various instructions issued to economy and make available funds to the ultimate commercial banks, small fi nance banks (SFBs), benefi ciary at an affordable cost, considering the regional rural banks (RRBs), urban cooperative comparative advantage of lower cost of funds of banks (UCBs) and local area banks (LABs); align banks and greater reach of NBFCs. these guidelines with emerging national priorities IV. 4 In order to have a planned and structured and bring sharper focus on inclusive development. approach to further fi nancial inclusion, banks have IV. 2 The Government of India notifi ed new been advised to prepare Financial Inclusion Plans defi nition for classifying enterprises as MSMEs, (FIPs). The progress made by banks under FIPs using composite criteria of investment and is reported to the Reserve Bank on a monthly turnover, effective July 1, 2020. As per the revised basis. It was also decided to expand the reach of defi nition, an enterprise is micro where the the CFLs to the entire country by scaling up the investment in plant and machinery or equipment pilot CFL project in a phased manner, in line with does not exceed `1 crore and turnover does not the recommendation of the National Strategy for exceed `5 crore. An enterprise is now classifi ed Financial Inclusion (NSFI). 115ANNUAL REPORT 2020-21 IV. 5 Against this backdrop, the rest of the initiatives taken to strengthen the BC model viz., chapter is organised into three sections. The the BC Certifi cation Programme, the two-tier ToT implementation status of the agenda for 2020- programme and BC Registry. Analysis of the 21 is presented in section 2. It also covers the fi ndings of the survey will be used for necessary performance of credit fl ow to priority sectors and course of action, wherever required. developments with respect to fi nancial inclusion IV. 8 Based on fi nancial literacy survey and and fi nancial literacy. The agenda for 2021-22 inputs from fi nancial sector regulators, the is provided in section 3. The chapter has been National Centre for Financial Education (NCFE) summarised at the end. has developed online fi nancial literacy modules for 2. Agenda for 2020-21: Implementation Status specifi c target groups, viz., entrepreneurs, school children, self-help groups (SHGs), senior citizens Goals Set for 2020-21 and farmers. IV. 6 Last year, the Department had set out the IV. 9 The end-line impact assessment survey following goals: of the pilot project on CFL, which was scheduled • Review of Train the Trainer (TOT) to be undertaken in November 2020, could not programme for capacity building of be carried out due to the disruptions caused by business correspondents (BCs) and BC the COVID-19 pandemic. The survey is now Registry (Utkarsh) [Para IV.7]; scheduled to be completed by September 2021. • Develop online fi nancial literacy modules IV. 10 The Expert Committee on MSMEs had for specifi c target audience (Utkarsh) made 37 broad recommendations. Out of 21 [Para IV.8]; recommendations pertaining to the Reserve Bank, 11 have already been implemented and some are • Complete the end-line impact assessment under consideration. The major recommendations, survey of the pilot project on CFL (Utkarsh) which were implemented, include (i) introduction of [Para IV.9]; video-based Know Your Customer (KYC) norms; • Monitor implementation of the (ii) increase in the threshold limit for regulatory recommendations of the “Expert retail portfolio of banks from `5 crore to `7.5 crore; Committee on MSMEs” and “Internal (iii) creation of Payment Infrastructure Development Working Group to Review Agricultural Fund (PIDF) to provide impetus to acceptance Credit” (Utkarsh) [Para IV.10 - IV.11]; infrastructure to promote digital payments and • Monitor implementation of the National commerce platforms for rural MSMEs; and Strategy for Financial Education (NSFE) (iv) co-lending model for all NBFCs. [Para IV.12]; and IV. 11 The Internal Working Group (IWG) to review agricultural credit had made 29 • Review of guidelines of PSL (Para IV.13). recommendations. Out of 12 recommendations Implementation Status of Goals pertaining to the Reserve Bank, 10 have IV. 7 During 2020-21, a pan-India survey already been implemented. Some of the major was undertaken through regional offi ces of the recommendations, which were implemented Reserve Bank, among bank offi cials and BCs, during the year, are (i) enhancing the sub-target in virtual mode to assess the effi cacy of various of small and marginal farmers under PSL from 8 116CREDIT DELIVERY AND FINANCIAL INCLUSION p er cent to 10 per cent of adjusted net bank credit Table IV.1: Achievement of Priority Sector (ANBC) in a phased manner over a period of three Lending Targets (` Crore) years till 2023-24; (ii) addressing regional disparity Year Public Sector Private Sector Foreign in credit by assigning a higher weights to the Banks Banks Banks incremental priority sector credit in the identifi ed 1 2 3 4 districts where the credit fl ow is comparatively 2019-20 23,14,242 12,72,745 1,67,095 lower; (iii) classifying loans up to `2 lakh to (41.05) (40.32) (40.80) 2020-21 23,79,790 14,04,824 1,73,945 individuals solely engaged in allied activities under (April-December)* (40.98) (39.89) (39.85) sub-target of small and marginal farmers; (iv) *: Provisional data. study on priority sector lending certifi cate (PSLC) Note: Figures in parentheses are percentage to ANBC or credit equivalent of off balance sheet exposure (CEOBE), whichever is for identifying the lending strategies of banks and higher. making it mandatory for RRBs to contribute to Source: Priority sector returns submitted by SCBs. rural infrastructure development fund (RIDF) in the event of PSL shortfall; and (v) review of scale targets by SCBs, as decided by the Reserve Bank of fi nance for crop cultivation. from time to time, they are advised to allocate IV. 12 NCFE is entrusted with the responsibility amounts for contribution to RIDF established with to implement the recommendations laid down in NABARD and other funds with NABARD / NHB / the NSFE for the period 2020-25. The progress SIDBI / Micro Units Development and Refi nance made towards implementation is monitored by Agency (MUDRA). the Technical Group on Financial Inclusion and IV. 15 The total trading volume of PSLCs Financial Literacy (TGFIFL) under the aegis of recorded a growth of 25.9 per cent and stood the Sub-Committee of the Financial Stability and at `5.89 lakh crore in 2020-21 as compared Development Council (FSDC-SC). with 43.1 per cent growth a year ago. Among the four PSLC categories, the highest trading IV. 13 The revised Master Directions on PSL was observed in the case of PSLC-general were issued on September 4, 2020. These Master and PSLC-small and marginal farmer with the Directions, inter alia, encompass guidelines on transaction volumes being `2.26 lakh crore and PSL for all commercial banks, RRBs, SFBs, UCBs `1.98 lakh crore, respectively, for the year ended and LABs, with an objective to harmonise the March 31, 2021. various instructions. Review of Priority Sector Guidelines CREDIT DELIVERY IV. 16 A review of the PSL guidelines was Priority Sector undertaken during the year. As part of the review IV. 14 The priority sector lending for scheduled it was decided to implement an incentive and dis- commercial banks stood at 40.54 per cent in incentive framework by ranking districts based on 2020-21 (as at the end of December 2020). per capita PSL credit. A higher weightage (125 Among bank groups, while public sector banks per cent) will be assigned for incremental priority continued to achieve the prescribed PSL target sector credit in districts with comparatively lower of 40 per cent, a marginal shortfall was observed fl ow of priority sector credit and a lower weightage for private sector banks and foreign banks of (90 per cent) will be assigned for incremental (Table IV.1). As per the extant guidelines, in case priority sector credit in districts with comparatively of shortfall in achieving priority sector targets/sub- higher fl ow of priority sector credit (Box IV.1). 117ANNUAL REPORT 2020-21 Box IV.1 Addressing Regional Disparities in the Flow of Priority Sector Credit Priority Sector Lending (PSL) was formalised in 1972. The will be assigned for incremental priority sector credit in the lending targets were fi rst advised to the banks by the Reserve identifi ed districts where credit fl ow is comparatively lower Bank in 1974. Since then, the underlying philosophy of (per capita PSL less than `6,000), a lower weight (90 per priority sector guidelines has been to facilitate fl ow of credit cent) would be assigned to incremental priority sector credit in identifi ed districts where the credit fl ow is comparatively to such sections of society, which though creditworthy, are higher (per capita PSL greater than `25,000). RRBs, UCBs, unable to access credit from the formal fi nancial institutions. LABs and foreign banks [including wholly owned subsidiary The guidelines have remained purpose/ activity specifi c (WoS)] would be exempted from adjustments of weights since their inception. In order to provide an easier access in PSL achievement due to their currently limited area of to credit to all such sections of society by affecting bank operation/catering to a niche segment. location and lending practices, banking sector in India To operationalise the framework, all districts have been was regulated between the bank nationalisation in 1969 ranked based on per capita credit fl ow to priority sector and and the onset of fi nancial liberalisation in 1990. Findings the same will remain valid for a period of three years, i.e., up suggest that regulation of the Indian banking sector played to year 2023-24 and will be reviewed thereafter. The incentive a key role in directing bank credit towards the poor, and framework is aimed to encourage banks to channelise higher that easier access to bank credit and saving opportunities credit fl ow to the districts, which presently are faced with low was associated with a signifi cant decline in rural poverty credit penetration. With the above framework in place, it is (Burgess, Pande, and Wong, 2005). However, fl ow of credit expected that the issue of regional disparity shall be taken to different regions was uneven on account of various factors cognisance of by banks at their corporate strategy level and and there has been a demand for ensuring parity in the fl ow the banking system would be able to realise the commercial of credit across the different regions of the country. In this benefi t through the incentive structure. regard, the ‘Internal Working Group to Review Agricultural However, regional disparities in credit fl ow are on account Credit’ (Chairman: Shri M. K. Jain), set up by the Reserve of multiple factors and would need a multi-stakeholder Bank in 2019, had fl agged the issue of regional disparity in approach for increasing the fl ow of credit in the underserved credit fl ow to agriculture. areas. The Reserve Bank’s efforts of ensuring higher credit fl ow need to be effectively complimented by central and state The Committee recommended that PSL guidelines should governments in increasing the credit absorption capacity in be re-visited to explore the feasibility of introducing suitable underserved areas for a sustainable change. measures for improving the credit offtake in underserved Reference: regions. Accordingly, PSL guidelines were reviewed and an incentive framework was put in place for banks, effective Burgess, R, Pande, R, and Wong, Grace (2005), ‘Banking April 1, 2021, to address the regional disparities in the fl ow for the Poor: Evidence from India’, Journal of the European of priority sector credit. While higher weight (125 per cent) Economic Association, Volume 3, Issue 2-3. IV. 17 Some of the important changes brought connected agriculture pumps; and loans out under the PSL guidelines after their review are for setting up compressed bio gas (CBG) set out below: plants were included as fresh categories eligible for fi nance under priority sector. • The targets prescribed for “small and marginal farmers” and “weaker sections” • Higher credit limit was specifi ed for Farmers are being increased in a phased manner. Producers Organisations (FPOs)/Farmers • Bank fi nance to start-ups (up to `50 Producers Companies (FPCs) undertaking crore); loans to farmers for installation of farming with assured marketing of their solar power plants for solarisation of grid produce at a pre-determined price. 118CREDIT DELIVERY AND FINANCIAL INCLUSION • In order to improve health infrastructure, housing fi nance companies (HFCs)] based on credit limit for health infrastructure a prior agreement. While NBFCs are required (including Ayushman Bharat) was doubled. to retain a minimum of 20 per cent share of the individual loans on their books, greater operational • The cap on credit was increased under fl exibility under the revised model allows banks to renewable energy category from `15 crore either mandatorily take their share of the individual to `30 crore to ensure unit level business loans originated by the NBFCs in their books as sustainability. per the terms of the agreement, or to retain the • Loans to individuals up to `20 lakh for discretion to reject certain loans after their due education purposes, will be considered as diligence prior to taking in their books. Banks may eligible for priority sector status. claim priority sector status in respect of their share Co-Lending by Banks and NBFCs to Priority of credit while adhering to the specifi ed conditions. Sector Banks and NBFCs are required to formulate board-approved policies for entering into the CLM IV. 18 The circular on co-lending model (CLM) with the objective to make funds available to the was issued on November 5, 2020, with the ultimate benefi ciary at an affordable cost. objective to better leverage the comparative advantages of the banks and NBFCs in a Flow of Credit to Agriculture collaborative effort in respect of all categories of IV. 19 The Government of India (GoI) fi xes the PSL. The primary focus of the revised scheme is to agricultural credit target every year for commercial improve the synergy between banks and NBFCs banks, RRBs and rural co-operative banks. During considering the lower cost of funds from banks 2020-21, against the target of `15 lakh crore, and greater reach of the NBFCs. The scheme banks achieved 75.1 per cent of the target (`11.27 envisages improved fl ow of credit to the unserved lakh crore) as on December 31, 2020, of which and underserved sectors of the economy and commercial banks, RRBs and rural co-operative make available funds to the ultimate benefi ciary banks achieved 78.6 per cent, 74.2 per cent at an affordable cost. While the earlier scheme of and 59.3 per cent, respectively, of their targets co-origination allowed banks to partner with only (Table IV.2). non-deposit taking systemically important NBFCs (NBFCs-ND-SI), the revised scheme allows co- IV. 20 The Kisan Credit Card (KCC) provides lending with all registered NBFCs [including adequate and timely bank credit to farmers 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 2019-2020 9,72,000 10,61,215 2,02,500 1,49,694 1,75,500 1,62,857 13,50,000 13,73,766 2020-2021 10,81,978 8,50,543 2,25,946 1,33,976 1,92,076 1,42,603 15,00,000 11,27,121 (April-December)* *: Data are provisional. While the target for agricultural credit is set for the full year (April 2020 - March 2021), the achievement is given for April 2020 - December 2020. Source: National Bank for Agriculture and Rural Development (NABARD). 119ANNUAL REPORT 2020-21 Table IV.3: Kisan Credit Card (KCC) Scheme Table IV.4: Relief Measures for (Number in Lakh, Amount in ` Crore) Natural Calamities (Number in Lakh, Amount in ` Crore) Year Number of Outstanding Outstanding Operative Crop Loan Term Loan Year Loans Restructured/ Fresh Finance/ KCCs Rescheduled Relending Provided 1 2 3 4 No. of Amount No. of Amount 2019-20 241.50 4,23,587.80 46,555.80 Accounts Accounts 2020-21 275.95 4,12,749.23 47,644.70 1 2 3 4 5 (April-December)* 2019-20 9.04 13,296 10.06 32,639 *: Provisional data. 2020-21 1.40 2,164 10.20 8,560 Source: Public sector banks and private sector banks. (April-December)* under a single window for cultivation and other *: Provisional data. Source: State Level Bankers’ Committees (SLBCs). needs, including for consumption, investment and insurance (Table IV.3). in West Bengal in May 2020. Rajasthan was Relief Measures for Natural Calamities affected by extreme locust attack in May 2020, IV. 21 Currently, the National Disaster while it saw hailstorms in the month of July 2020. Management Framework of the GoI covers 12 Karnataka experienced crop losses due to fl ood in types of natural calamities under its ambit, viz., September 2020, while Maharashtra saw drought cyclone; drought; earthquake; fi re; fl oods; tsunami; in Gadchiroli district in October 2020. Fresh loans hailstorm; landslide; avalanche; cloud burst; pest were provided by banks to the calamity affected attack; and cold wave/frost. Accordingly, the persons during 2020-21, while their past loans Reserve Bank has mandated banks to provide were also restructured/rescheduled by banks relief where the crop loss assessed was 33 per during the same period (Table IV.4). cent or more in the areas affected by these natural Bank Credit to the MSME Sector calamities. The relief measures by banks, inter alia, include restructuring/rescheduling existing loans IV. 22 Increasing credit fl ow to the MSMEs and sanctioning fresh loans as per the emerging has been a policy priority for the Reserve Bank requirement of the eligible borrowers. During and Government. On a year-on-year basis, the 2020-21, natural calamity/riots or disturbances outstanding credit to MSMEs by scheduled were declared by four states, viz., Karnataka, commercial banks increased by 8.9 per cent Rajasthan, West Bengal and Maharashtra. in December 2020 (6.2 per cent a year ago) Cyclone Amphan caused widespread devastation [Table IV.5]. 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 Dec-2019 328.93 7,04,278 23.81 6,35,933 3.07 2,08,134 355.82 15,48,344 Dec-2020 394.48 7,63,109 23.20 6,52,292 5.32 2,70,924 423.00 16,86,325 Source: Priority sector returns submitted by SCBs. 120CREDIT DELIVERY AND FINANCIAL INCLUSION FINANCIAL INCLUSION Table IV.6: Financial Inclusion Plan: A Progress Report National Strategy for Financial Inclusion (NSFI): 2019-24 Particulars Mar Dec Dec 2010 2019 2020$ IV. 23 The NSFI: 2019-24 document lays down 1 2 3 4 Banking Outlets in Villages- several milestones and action plans to be Branches 33,378 54,481 55,073 implemented during the period of strategy with Banking Outlets in Villages two recommendations pertaining to fi nancial >2000*-BCs 8,390 1,28,980 8,51,272 literacy (development of fi nancial literacy modules Banking Outlets in Villages with specifi c target orientation) and consumer <2000*-BCs 25,784 3,83,864 3,85,537 Total Banking Outlets in Villages protection (development of a robust customer - BCs 34,174 5,12,844 12,36,809^ grievance portal) to be implemented during Banking Outlets in Villages - 2020-21. National Centre for Financial Education Other Modes 142 3,473 3,440 (NCFE) has developed relevant modules in the Banking Outlets in Villages form of audio-visual content/booklets for the -Total 67,694 5,70,798 12,95,322 target groups. In order to have a robust grievance Urban Locations Covered Through BCs 447 5,51,327 3,24,345 redressal portal, the Complaint Management BSBDA - Through Branches System (CMS) launched by the Reserve Bank (No. in Lakh) 600 2,558 2,891 acts as a common electronic platform for lodging, BSBDA - Through Branches tracking and redressal status of the grievances. (Amount in Crore) 4,400 90,731 1,25,898 Further, the Reserve Bank has also introduced BSBDA - Through BCs (No. in Lakh) 130 3,409 3,601 Online Dispute Resolution (ODR) system for BSBDA - Through BCs resolving customer disputes and grievances (Amount in Crore) 1,100 62,095 77,163 pertaining to digital payments. BSBDA - Total (No. in Lakh) 735 5,967 6,492 BSBDA - Total (Amount in Financial Inclusion Plan Crore) 5,500 1,52,826 2,03,061 OD Facility Availed in BSBDAs IV. 24 In order to have a planned and structured (No. in Lakh) 2 62 59 approach to fi nancial inclusion, banks have been OD Facility Availed in BSBDAs advised to put in place Financial Inclusion Plans (Amount in Crore) 10 455 500 (FIPs). These FIPs capture banks’ achievements KCC - Total (No. in Lakh) 240 479 490 on parameters such as the number of outlets KCC - Total (Amount in Crore) 1,24,000 7,09,377 6,79,136 (branches and BCs), Basic Savings Bank Deposit GCC - Total (No. in Lakh) 10 200 199 Accounts (BSBDAs), overdraft facilities availed GCC - Total (Amount in Crore) 3,500 1,84,918 1,73,968 in these accounts, transactions in KCCs and ICT-A/Cs-BC-Total Transactions (No. in Lakh)# 270 22,500 35,183 General Credit Cards (GCCs) and transactions ICT-A/Cs-BC-Total Transactions through the Business Correspondents - (Amount in Crore)# 700 6,06,589 8,28,795 Information and Communication Technology *: Village population. ^: Signifi cant increase in numbers is due to (BC-ICT) channel. Th e progress made on these reclassifi cation done by a bank. #: Transactions during the year. $: Provisional data. parameters as at the end of December 2020 is Source: FIP returns submitted by banks. set out in Table IV.6. 121ANNUAL REPORT 2020-21 Assignment of Lead Bank Responsibility IV. 29 As at the end of December 2020, there were 1,478 Financial Literacy Centres (FLCs) IV. 25 The assignment of lead bank responsibility in the country. While 1,48,444 fi nancial literacy to a designated bank in every district was activities were undertaken during 2019-20 (April- undertaken by the Reserve Bank. As at end- March), a total of 45,588 fi nancial literacy activities March 2021, 12 public sector banks and one were conducted by the FLCs during the period private sector bank were assigned lead bank April-December 2020. The restrictions towards responsibility, covering at present 730 districts mass gathering of people at public places have across the country. hampered conduct of physical fi nancial education Universal Access to Financial Services in Every programmes across the country. With a view Village Within 5 Km Radius/Hamlet of 500 to ensure continued dissemination of fi nancial Households in Hilly Areas education programmes across the country, IV. 26 Providing banking access to every village regional offi ces of the Reserve Bank undertook within a 5 km radius/hamlet of 500 households fi nancial education programmes through virtual in hilly areas is one of the key objectives of the mode and also leveraged local cable TV and National Strategy for Financial Inclusion (NSFI) community radio to spread fi nancial awareness for the period 2019-24. As per the status reported messages. by the concerned State/Union Territory Level Revision of F inancial Awareness Messages Bankers’ Committees’ (SLBC/UTLBC) convenor Booklet (FAME) banks, the milestone has been fully achieved in 22 states and 6 UTs as on March 31, 2021. The IV. 30 Recognising the need to develop percentage of coverage of all identifi ed villages/ standardised content to meet the requirements hamlets across the country is 99.87 per cent. of the general audience for fi nancial awareness on important banking aspects, the Reserve Bank FINANCIAL LITERACY developed the FAME booklet in 2016. The contents IV. 27 Developing fi nancial literacy content for of the booklet were disseminated through fi nancial school children is one of the strategic goals of NSFE: literacy programmes and camps organised by 2020-2025. So far 13 state educational boards FLCs and rural branches of banks. Keeping in view have included modules on fi nancial education the changes in the fi nancial services landscape, in their school curriculum. NCFE is in dialogue the content of the booklet was revised to cover with NCERT regarding integration of fi nancial 20 important messages across the four themes education in school curriculum for classes VI-X. of fi nancial competencies, basic banking, digital NCERT is also developing e-Learning resources fi nancial literacy and consumer protection. The on fi nancial literacy wherein NCFE would be revised booklet has been made available in 11 contributing to content development on the basis regional languages and is placed on the Reserve of inputs received from various stakeholders. Bank’s Financial Education website for wider IV. 28 Consequent upon implementation of the dissemination. pilot CFL project in 100 blocks (including 20 CFLs Observing Financial Literacy Week 2021 in tribal blocks), steps were initiated during the year to expand t he reach of CFLs to all blocks in IV. 31 The Financial Literacy Week (FLW) is the country in a phased manner. an initiative of the Reserve Bank to promote 122CREDIT DELIVERY AND FINANCIAL INCLUSION awareness among masses/various sections of • Complete the end-line impact assessment the population on key topics through a focused survey of the pilot project on CFL; and campaign every year. During 2020-21, FLW • Expansion of CFL project by setting was observed between February 8-12, 2021 on up 1,199 CFLs covering 3,592 blocks the theme of “Credit Discipline and Credit from across the country and increase fi nancial Formal Institutions”, with focus on responsible education levels across the country. borrowing, borrowing from formal institutions and timely repayments. During this week banks 4. Conclusion were advised to disseminate the information and IV. 33 In sum, during the year, the Reserve create awareness amongst its customers and Bank implemented the recommendations general public. Further, the Reserve Bank also of the Expert Committee on MSME and the undertook a centralised mass media campaign Internal Working Group on Agricultural Credit to during February 2021 to disseminate essential improve inclusiveness and also enhance fl ow of fi nancial awareness messages on the theme to credit to these sectors. Further, revised Master the general public. Directions on PSL were issued to harmonise the 3. Agenda for 2021-22 various instructions. Co-lending was introduced to improve the fl ow of credit to the unserved IV. 32 The Department would pursue the and underserved sectors of the economy at following goals under Utkarsh towards achieving an affordable cost and scale up of the pilot greater fi nancial inclusion and credit delivery: CFL project was initiated to cover the entire • Implementation of the milestones under country in a phased manner. Going ahead, NSFI:2019-24; the implementation of the recommendations • Monitor implementation of the remaining laid down under the NSFI document and recommendations of the Expert Committee strengthening fi nancial literacy will be the key on MSMEs; areas of focus for the Reserve Bank. 123FINANCIAANLNU AML RAEPRORKT 20E20T-21S AND V FOREIGN EXCHANGE MANAGEMENT The Reserve Bank continued its efforts to further develop and deepen various segments of the financial markets by broadening participation, easing access, improving financial market infrastructure and creating integrated surveillance systems for maintaining market integrity. In response to the pandemic, adequate liquidity in the system remained a dominant objective during the year. Concurrently, measures were undertaken to streamline regulations relating to foreign exchange to align them with the evolving business and economic environment, encompassing liberalisation of the capital account and rationalisation of reporting requirements. V.1 During 2020-21, the Reserve Bank derivative markets. The Department undertook continued to develop fi nancial markets in terms several measures in pursuance of this mandate to of easing access and broadening participation, fulfi l the objectives set for 2020-21. creation of integrated market surveillance systems Agenda for 2020-21: Implementation Status and improving fi nancial market infrastructure. Liquidity management operations involved both Goals Set for 2020-21 conventional and unconventional measures for V.4 The Department had set out the following ensuring the availability of adequate liquidity in the goals for 2020-21: system. Policy measures were also undertaken to facilitate external trade and investments, and to  A framework for exchange of initial alleviate stress due to COVID-19. and variation margin for non-centrally cleared derivative contracts, facilitated by V.2 Against this backdrop, the rest of the chapter is structured into four sections. Measures legislation for bilateral netting of qualifi ed undertaken to develop fi nancial markets are fi nancial contracts as announced in the covered in Section 2. Liquidity management Union Budget 2020-21 (Utkarsh) [Para and foreign exchange market operations are V.5]; the theme of Section 3. In Section 4, the focus  Review of directions on credit default is on measures undertaken to facilitate external swaps (CDS) with a view to broadening trade and payments while promoting orderly the base of CDS writers and simplifying development of the foreign exchange market. operational guidelines in the light of the Concluding observations are set out in the last section. legislation on bilateral netting of qualifi ed fi nancial contracts (Utkarsh) [Para V.6]; 2. FINANCIAL MARKETS REGULATION and DEPARTMENT (FMRD)  Review of the directions on interest rate V.3 The Financial Markets Regulation derivatives with a view to easing access, Department (FMRD) is entrusted with the development, regulation and surveillance of removing segmentation between onshore money, government securities (G-secs), interest and offshore markets and improving rate derivatives, foreign exchange and credit transparency (Para V.7). 124FINANCIAL MARKETS AND FOREIGN EXCHANGE MANAGEMENT Implementation Status of Goals other fi nancial markets. Directions on call, notice and term money, certifi cates of deposit (CDs) and V.5 The Department issued draft directions commercial papers (CPs), and non-convertible on variation margin in September 2020 for public feedback. The passing of the Bilateral Netting of debentures (NCDs) with original maturity of less Qualifi ed Financial Contracts Act in September than one year were comprehensively reviewed 2020 is expected to facilitate the implementation and rationalised. The revised draft directions of exchange of margin. In this regard, regulations were released in early-December 2020 for public under the Foreign Exchange Management Act feedback. The aim is to bring in consistency across (FEMA), 1999 and circular were issued in October products in terms of issuers, investors and other 2020 and February 2021, respectively, to enable participants. the exchange of margin between a resident and V.10 The Department initiated the process of non-resident, for permitted derivative contracts. international settlement of Indian government V.6 Directions on credit derivatives were securities (G-secs) through International Central reviewed in consultation with the concerned Securities Depository (ICSD) in consultation stakeholders, and draft CDS directions were with the Government of India, ICSDs and other issued in February 2021. stakeholders. Clients of ICSDs would be able V.7 Draft directions on rupee interest rate to invest in Indian G-sec without registering derivatives (IRD), proposing that all rupee IRD themselves as foreign portfolio investors (FPIs). transactions of market makers and their related Creation of Integrated Market Surveillance entities globally are to be accounted for in System India, were issued in September 2020 for public feedback. This measure is aimed at encouraging V.11 Considering the importance of surveillance higher non-resident participation, enhancing the systems for fi nancial markets, the Department role of domestic market makers in the offshore decided to implement an information technology market, improving transparency, and achieving (IT)-enabled integrated market surveillance better regulatory oversight. system (IMSS). After obtaining expression of interest (EoI) from interested vendors, a request Major Initiatives for proposal (RFP) was fl oated for which interest Easing Access and Broadening Participation in from two bidders was received, which are the Financial Market being examined from a technical point of view, V.8 Regional Rural Banks (RRBs) have been including surveillance requirements. The IMSS allowed to participate in the call/notice/term would augment the analytics and surveillance money market as both borrowers and lenders, capabilities of the Department. subject to prudential limits and other guidelines Improving Financial Market Infrastructure as prescribed for scheduled commercial banks. This is expected to facilitate more effi cient V.12 With a view to increasing the operational management of liquidity at competitive rates by effi ciency and trading volume in illiquid the RRBs. government securities as also to decrease the V.9 A well-functioning money market is cost of transactions, Clearcorp Dealing Systems a crucial link in the chain of monetary policy (India) Ltd. (CDSL) was authorised to introduce transmission by facilitating pricing and liquidity in a request for quote (RFQ) dealing mode in the 125ANNUAL REPORT 2020-21 Negotiated Dealing System-Order Matching Agenda for 2021-22 (NDS-OM) platform for illiquid government V.16 For the year 2021-22, the Department securities. The RFQ mode is expected to enable proposes the following goals: market participants to directly and simultaneously  Draft directions for implementing the seek/provide quotes from/to multiple counter exchange of initial margin for non-centrally parties through the NDS-OM platform. cleared derivatives (NCCDs) in India shall V.13 The CDSL was authorised to introduce be issued by the second quarter of 2021- FX-Forward in the FX-Retail module of their 22 (Utkarsh); FX-Clear platform to widen access of forex  A government securities lending and derivatives to retail players. The FX-Retail module borrowing mechanism (GSLBM), which was introduced in 2019, with FX-cash/tom/spot will augment the existing market for products, to promote retail access to forex market. ‘special repos’, is expected to be launched V.14 As part of efforts underway to increase by the Clearing Corporation of India Ltd. access to government securities market for retail (CCIL) in the second quarter of 2021-22; investors, the CDSL was granted in-principle and approval to develop an IT-based solution for enabling retail investors to directly access the  Continuing with its efforts towards better aggregation and transparency under the government securities market through their demat accounts. Legal Entity Identifi er (LEI) requirements for reporting of derivative transactions, Ensuring High Standards of Governance and the Unique Transaction Identifi er (UTI) Conduct in OTC Derivative Market framework shall be implemented in India V.15 The comprehensive guidelines on in line with the international progress derivatives were fi rst issued in 2007 to made in this regard. focus on aspects of customer suitability and 3. FINANCIAL MARKETS OPERATIONS appropriateness, governance arrangements DEPARTMENT (FMOD) and risk management for OTC derivatives. The guidelines have been reviewed with a view to V.17 The Financial Markets Operations catering to the growing sophistication of fi nancial Department (FMOD) is entrusted with two primary markets, changes in regulations relating to responsibilities: conduct of liquidity management interest rate and foreign exchange derivatives, operations for maintaining an appropriate level of increasing non-resident participation and in liquidity in the fi nancial system for monetary policy line with international best practices. The draft transmission; and ensuring orderly conditions directions on market-makers in OTC derivatives in the forex market through both onshore and were released in December 2020 for the public offshore operations. feedback. The revised directions seek to promote Agenda 2020-21: Implementation Status effi cient access to derivative markets while Goals Set for 2020-21 ensuring high standards of governance and conduct in OTC derivative business by market- V.18 During the year, the Department had set makers. out the following goals: 126FINANCIAL MARKETS AND FOREIGN EXCHANGE MANAGEMENT  To carry out liquidity management V.21 Banks that had availed funds under operations effectively, including through Long-Term Repo Operation (LTRO) in 2019-20 additional liquidity management tools, in (April-March), and Targeted LTRO (TLTRO) and line with the stance of monetary policy TLTRO 2.0 in 2019-20 and 2020-21, were allowed (Utkarsh) [Para V.19]; to reverse these transactions before maturity and avail new funds at the prevailing lower repo rate. An  To monitor and modulate evolving liquidity aggregate amount of `1,23,572 crore and `37,348 conditions to ensure alignment of the crore was repaid by banks under the LTRO and weighted average call money rate (WACR) TLTRO schemes, respectively. with the policy repo rate (Para V.20-26); V.22 Focusing on revival of activity in specifi c  To conduct foreign exchange operations in sectors by providing suffi cient liquidity, on tap an effective manner to curb undue volatility TLTROs with tenors of up to three years for a total in the USD/INR exchange rate (Para V.30); amount of up to `1.0 lakh crore at a fl oating rate and linked to the policy repo rate were introduced in  To continue policy-oriented research on October 2020, with the facility made available fi nancial markets (Para V.31). up to March 31, 2021 and further extended up to September 30, 2021. Effective December 4, Implementation Status of Goals 2020, it was decided to expand on tap TLTROs to Money Market and Liquidity Management other stressed sectors in synergy with the credit guarantee available under the Emergency Credit V.19 System liquidity continued to be in surplus Line Guarantee Scheme (ECLGS 2.0) of the mode during 2020-21 on account of various government. With effect from February 5, 2021, liquidity augmenting measures undertaken by banks were permitted to provide funds under the the Reserve Bank in the post-COVID-19 period, on tap TLTRO scheme to Non-Banking Financial and large capital infl ows. The Reserve Bank used Companies (NBFCs) for incremental lending to several instruments, viz., term repo, reverse repo, specifi ed stressed sectors. variable rate reverse repo and MSF under the liquidity adjustment facility (LAF), open market V.23 To assuage liquidity pressures on account operations (OMOs), OMOs in state development of advance tax outfl ows, two 56-day term repo loans (SDLs) and special OMOs of simultaneous auctions for a total amount of `1.0 lakh crore were conducted at the existing repo rate in mid- sale and purchase of G-secs. September, involving total liquidity injection to the V.20 With regard to provision of durable liquidity, tune of `1,000 crore. In order to manage year- the Reserve Bank conducted 27 OMO auctions end liquidity pressure, two fi ne-tuning variable during 2020-21 (April-March), which included rate repo operations of 11-day and 5-day tenors combination of outright purchase OMOs, special were conducted in end-March 2021, involving total OMOs and OMO purchase auctions in SDLs (3 liquidity injection to the tune of `500 crore. auctions conducted on October 22, November 5 V.24 As part of the AatmaNirbhar Bharat and December 23, 2020 for aggregate amount of package announced by the Government of India `30,000 crore). During 2020-21, the Reserve Bank (GoI) in May 2020, a scheme was introduced made net purchase of `3,13,295 crore through by the Reserve Bank through a special purpose OMOs. 127ANNUAL REPORT 2020-21 vehicle (SPV) to improve the liquidity position of G-sec Market specifi c fi nancial entities - non-banking fi nancial V.27 The limit under the held-to-maturity (HTM) companies (NBFCs); micro-fi nance institutions category was increased from 19.5 per cent to (MFIs); and housing fi nance companies (HFCs). 22.0 per cent of NDTL until March 31, 2023, An aggregate amount of `7,126 crore (principal in respect of SLR securities acquired between amount) was invested by the Reserve Bank September 1, 2020 and March 31, 2022, to through this scheme. engender orderly market conditions and ensure V.25 The Reserve Bank introduced the congenial fi nancing conditions with a clear glide automated sweep-in and sweep-out (ASISO) path for restoration of HTM limits. facility on its e-Kuber system on August 6, 2020 in order to provide eligible LAF/MSF participants V.28 OMO operations undertaken during the greater fl exibility in managing their end of the day year helped to keep the 10-year G-sec yield cash reserve ratio (CRR) balances. anchored, despite concerns arising from higher V.26 The Reserve Bank decided to allow select government debt supply, higher CPI infl ation RRBs to access the LAF and MSF facilities with and continued foreign portfolio investment (FPI) a view to facilitate better liquidity management. outfl ows in the debt segment (Box V.1). Box V.1 Mitigating COVID-19 Impact on Bond Market through Dynamic Approach in Open Market Operations The Reserve Bank embarked upon a multi-pronged Chart 2: Weighted Average Cut-off Yield and approach to ensure that fi nancial conditions remain Maturity of Issues in Primary Auctions congenial while implementing the enlarged market borrowing programme of the Government of India (GoI) in a non-disruptive manner. The average generic G-sec yields for 5-year and 10-year were at decadal lows (Chart 1), which Chart 1: Generic G-sec Yield (Average) Source: Bloomberg and RBI. facilitated record GoI borrowing at the lowest weighted average yield1 (Chart 2). In the backdrop of surplus system liquidity, liquidity neutral special OMOs (19) were conducted in conjunction with Source: Bloomberg and RBI. (Contd...) 1 Weighted average cut-off yield of primary auctions was considered. 128FINANCIAL MARKETS AND FOREIGN EXCHANGE MANAGEMENT Chart 3: OMO - Gross and Net Purchases2 Chart 4: Change in Generic 10-Year G-sec Yield - July 2020 to Mar 2021 Source: RBI. Source: Bloomberg. outright OMOs (5). The scope of OMOs was further extended Purchase of a mix of liquid and illiquid securities in the to State Development Loans (3) to improve liquidity and OMOs smoothened the distribution of liquidity in specifi c facilitate effi cient pricing therein. During April 2020 - March tenors of the yield curve. Additionally, the Reserve Bank’s 2021, the Reserve Bank made a record gross purchase of support through dynamic usage of OMOs helped retain securities amounting to `5,09,295 crore (`3,02,132 crore appetite of market participants amid continuous supply of through 27 auctions and `2,07,163 crore through other government securities. This not only assured the market operations2) [Chart 3]. The gross and net purchase amount of the Reserve Bank’s support leading to a resilient and stood at `3,78,821 crore and `1,94,396 crore, respectively, stable government securities market, but also engendered during July 2020 - March 2021. congenial conditions for other segments of fi nancial markets that price fi nancial instruments off the government In order to provide effective support to the market, and to securities’ yield curve. The active participation in various avoid disruptive effects on interest rates in the economy, OMOs can be gauged from the fact that the average offer OMOs by Reserve Bank were stepped up both in terms of to cover ratio remained at 5.16 in July 2020-March 2021 as frequency and quantum from September 2020 onwards. against 3.85 in July 2019 - June 2020 period. Consequently, the gross securities purchased through OMOs as a percentage of gross GoI issuances jumped A comparison of change in generic 10-year government bond from 8 per cent in July 2020 to 63 per cent in March 2021, yields of emerging market peers and specifi c developed while in case of the 10-year and above securities, the share markets during July 2020 to March 2021 reveals that Indian jumped from 5 per cent in July 2020 to a high of 59 per yields hardened by around 28 basis points (bps) as against cent in March 2021. This made a pivotal contribution toward hardening of 78 bps for Thailand, 66 bps for South Korea keeping interest rates in alignment with the formulated and 35 bps for China (Chart 4). monetary policy. Foreign Exchange Market V.30 The Reserve Bank intervened in the forex market through operations in the onshore/ V.29 During the year, the rupee traded with a offshore OTC and exchange traded currency generally appreciating bias amidst broad-based derivatives (ETCD) segments in order to maintain weakness in the US dollar on the back of reversal orderly market conditions by containing excessive of risk sentiments, owing to the improvement in volatility in the exchange rate. COVID-19 pandemic situation globally. A record amount of foreign investment infl ows into Indian equity markets also supported the rupee. 2 Both gross and net purchases on trade date basis. 129ANNUAL REPORT 2020-21 Research/Analytical Studies  A complete review of the reporting requirements under various regulations V.31 The Department carried out research/ in order to make reporting aligned with analytical studies on issues such as the specifi c requirements, simple and effi cient relationship between the Reserve Bank’s liquidity (Utkarsh) [Para V.36-40]; operations and money market volumes; effects of the Reserve Bank’s communication on fi nancial  Rationalisation of Overseas Direct markets; volatility in the Indian rupee (INR) market; Investment (ODI) regulations to make the impact of the Reserve Bank’s special open them simpler and more principles-based market operations on G-sec and corporate bond (Utkarsh) [Para V.41]; markets; and liquidity management in the time of  Introduction of late submission fee for COVID-19. delayed reporting of ODI by Indian Parties/ Agenda for 2021-22 Resident Indians (Utkarsh) [Para V.41]; V.32 During the year 2021-22, the Department  Rationalisation of various provisions plans to achieve the following goals: on foreign exchange and currency under Foreign Exchange Management  To carry out liquidity management operations effectively through all available Regulations, 2015, such as export and liquidity management tools, in line with the import of currency; realisation, repatriation stance of monetary policy (Utkarsh); and surrender of foreign exchange; possession; and retention of foreign  To continue to conduct foreign exchange currency unifi ed under a single regulation operations in an effective manner to curb (Para V.42); and undue volatility in the USD/INR exchange rate; and  Conduct of awareness programmes and creation of digital content on an ongoing  To continue policy-oriented research on basis (Utkarsh) [Para V.43). fi nancial markets. Implementation Status of Goals 4. FOREIGN EXCHANGE DEPARTMENT (FED) Liberalisation and Rationalisation of Trade V.33 During the year, the Department continued Guidelines its endeavour to frame simple yet comprehensive, time consistent and principle-based policies to V.35 Automatic caution-listing of the exporters facilitate external trade and payments. Several was discontinued from October 9, 2020 to steps were taken for enhancing ease of doing make the system more exporter friendly. The business, including aligning the regulatory revised system is expected to provide fl exibility framework to the needs of the evolving business to exporters and to improve their negotiating practices and economic environment. power with overseas buyers. Under the revised norms, exporters will be caution-listed by the Agenda for 2020-21: Implementation Status Reserve Bank on the recommendations made by Goals Set for 2020-21 the authorised dealer (AD) banks based on the V.34 The Department had set out the following track record of the exporter or in cases where the goals for 2020-21: exporter had come to the adverse notice of a law 130FINANCIAL MARKETS AND FOREIGN EXCHANGE MANAGEMENT enforcement agency or other serious grounds. recent changes in FEMA regulations on account Similarly, AD banks would make recommendations of rationalisation of various notifi cations, it was to the Reserve Bank for de-caution-listing an decided to carry out a comprehensive review exporter as per a laid down procedure. of the extant reporting requirements under FEMA. Accordingly, an Internal Committee was V.36 AD banks were allowed to regularise formed in January 2020 to review all returns/ cases of dispatch of shipping documents by the reports prescribed under FEMA and recommend exporter directly to the consignee or his agent suggestions for rationalisation. A total number of resident in the country of fi nal destination of goods, 67 returns were reviewed by the Committee with irrespective of the value of export shipment, but respect to their relevance, mode of fi ling, format subject to certain conditions. and frequency. Based on the recommendations V.37 The procedure of write-off of unrealised made by the Committee, 17 returns/reports were export bills was revised whereby AD banks might, discontinued with immediate effect vide circular on the request of the exporter, write-off unrealised dated November 13, 2020. The discontinuation of export bills without any limit, in addition to the the above returns has decreased the total number existing delegated powers. of reports/returns to be submitted under FEMA, V.38 AD banks were permitted to set off thereby reducing the cost of compliance for the outstanding export receivables against outstanding reporting entities and improving thereby the ease import payables of their exporters/importers with of doing business. their overseas group/associate companies, either Rationalisation of Overseas Investment on net or gross basis, through an in-house or Regulations outsourced centralised settlement arrangement, V.41 The review of overseas investment in addition to bilateral settlement. regulations, including a proposal to introduce late V.39 AD banks through whom export proceeds submission fee for delayed reporting of ODI by were originally realised were allowed to consider Indian Parties/Resident Indians, has been initiated requests for refund of export proceeds of goods in consultation with the government. exported from India without insisting on the Authorised Persons and Remittances requirement of re-import of goods where the exported goods have been auctioned or destroyed V.42 The Foreign Exchange Management by the port/customs/health authorities/any other (Export and Import of Currency) Regulations, 2015 accredited agency in the importing country, were amended and the changes were notifi ed on subject to submission of satisfactory documentary August 18, 2020. evidence. Conducting Awareness Programmes and Creation Review of Reporting Requirements under FEMA of Digital Content V.40 The Reserve Bank had earlier prescribed V.43 The conduct of FEMA awareness various reports and forms to be submitted by/ programmes during the year was limited due to through Authorised Persons for the effective COVID-19 pandemic. Regional offi ces, however, administration of FEMA and the rules and conducted some workshops for Authorised regulations framed thereunder. Considering the Persons and FEMA exhibition-cum-townhall latest technological advancements as well as the events during the year. 131ANNUAL REPORT 2020-21 Major Initiatives practice law in India and that foreign law fi rms/ companies or foreign lawyers cannot practice the Skill Development and Necessary IT Systems profession of law in India, AD Category - I banks Upgradation have been directed not to grant any approval to V.44 The Software Platform for External any foreign legal fi rm for setting up an offi ce or Commercial Borrowings and Trade Credits other place of business in India under FEMA for Reporting and Approval (SPECTRA) practicing the legal profession in India. encompassing the complete lifecycle from Measures Undertaken to Alleviate COVID-19 the receipt of application to communication of Related Stress decision and reporting of transactions is under implementation, and is presently in the user V.48 Due to the COVID-19 pandemic and acceptance test phase. considering the diffi culties being faced in submitting returns, external commercial borrowing V.45 The online package for full-fl edged (ECB) returns were allowed to be submitted money changers (FFMCs)/upgraded FFMCs by borrowers through email without chartered (AD Category II) relating to licensing, renewal, accountant (CA)/company secretary (CS) reporting, cancellation and inspection is under certifi cation, till resumption of normal operations. implementation, and is presently in the user Similarly, considering the diffi culties expressed acceptance test phase. by applicants in submitting payment instruments Administration of Foreign Exchange Management for paying compounding amount within 15 days of (Non-Debt Instruments) Rules compounding order during the lockdown, payment of compounding amount beyond time limit was V.46 Amendments were made to the FEMA permitted. 1999 through the Finance Act, 2015 enabling the central government to frame rules for any Customer Service class or classes of capital account transactions V.49 The Department has strengthened its not involving debt instruments, while the communication with stakeholders, especially AD Reserve Bank would continue to regulate capital banks, through frequent updation of frequently account transactions involving debt instruments. asked questions (FAQs) and taking feedback. The Furthermore, the government will make rules Foreign Investment Reporting and Management laying down the instruments to be determined System (FIRMS) application for reporting of as debt instruments. The amendments and the foreign inward investment has been made non-debt instrument (NDI) rules were notifi ed in more robust and user friendly. Furthermore, the October 2019. An amendment notifi cation dated standard operating procedure (SOP) for dealing July 27, 2020 was issued by the government with requests relating to waiver of late submission whereby the Reserve Bank has been entrusted fee (LSF) has been issued to the regional offi ces with the administration of the NDI rules. (ROs). Establishment of Branch Offi ce (BO)/Liaison Agenda for 2021-22 Offi ce (LO)/Project Offi ce (PO) V.50 The Department’s strategy for 2021-22 V.47 Consequent to the Hon’ble Supreme is to focus on consolidating and carrying forward Court’s judgement that advocates enrolled under all the initiatives which were undertaken in the the Advocates Act 1961 alone are entitled to previous year. The emphasis will remain on 132FINANCIAL MARKETS AND FOREIGN EXCHANGE MANAGEMENT ensuring that the FEMA operating framework 5. CONCLUSION is in conformity with the needs of the evolving V.51 In sum, the Reserve Bank undertook macroeconomic environment. Accordingly, the several conventional and unconventional Department has formulated the following strategic measures for liquidity management in the action plan for 2021-22: wake of COVID-19. The Reserve Bank’s asset  Continue rationalisation of the FEMA purchases remained limited to purchases of regulations by consolidating existing risk-free sovereign bonds and, therefore, its regulations of similar subjects, remove unconventional measures did not dilute its hard-coding to obviate frequent issuance balance sheet quality. Hence, it succeeded in of amendment notifi cations and aligning infusing liquidity to unfreeze the markets without defi nitions across notifi cations/regulations; compromising on the core principles of central  Take the exercise of rationalising the banking, that could otherwise have impaired overseas investment regulations forward; market forces and discipline. Further, Reserve Bank’s proactive communication strategy through  Timely completion of ongoing software forward guidance ensured cooperative outcomes. projects, viz., SPECTRA and Authorised The Reserve Bank’s response to the pandemic Person (AP) connect (Utkarsh); illustrated that central banks, ready to walk an  A rationalised master direction for non- extra mile, can aid the recovery process through debt instruments will be issued as Foreign the provision of ample liquidity in the system, while Exchange Management (Non-debt maintaining fi nancial stability, dispelled illiquidity Instruments) Rules have been notifi ed by fears and thereby bolstered market sentiments. the government; and Going forward, unwinding of monetary stimulus  Conduct awareness programmes and through a well-calibrated and sequenced manner create digital content on an ongoing basis is needed to nurture green shoots until recovery (Utkarsh). gains traction. 133REGULATIONAN,N USALU REPPOERTR 202V0-2I1SION AND VI FINANCIAL STABILITY Preserving financial stability while continuing to build a resilient and stable financial system took a centre stage in the year 2020-21, even as alleviating stress in various sectors of the economy and segments of the financial sector assumed importance as the year was marked with ravages of the COVID-19 pandemic. Accordingly, while several regulatory and supervisory measures were undertaken in response to the outbreak of the pandemic to address transient issues, in alignment with the long-term objective, the regulatory and supervisory framework was streamlined across regulated/supervised entities and strengthened, to maintain conformity with global best practices. Harnessing technology for customer services, strengthening fraud detection and consumer protection were also pursued as concurrent objectives. Capacity building of the personnel dealing with supervision, regulation, financial stability and enforcement functions was prioritised. VI.1 The chapter discusses regulatory and for entities to qualify as non-banking fi nancial supervisory measures undertaken during the year company-HFCs (NBFC-HFCs), failing which the to strengthen the fi nancial system and preserve entities were to be treated as NBFC-Investment fi nancial stability. As part of the overall objective and Credit Companies (NBFC-ICCs). Instructions of aligning the regulatory/supervisory framework were also provided for enhancing net owned fund with global best practices, important strides in the (NOF) and for the phased introduction of Liquidity areas of corporate governance, cyber security and Risk Management Framework (LRM) and Liquidity compliance functions in banks were made. Steps Coverage Ratio (LCR). The guidelines also towards developing a robust securitisation and covered loan-to-value (LTV) requirements and levy secondary loan market in India were undertaken. of foreclosure charges. With these changes HFC Regional Rural Banks (RRBs) were provided regulations were harmonised with the regulations additional avenues for liquidity management. for other NBFCs to some extent. With the revised The process of submitting statutory returns and framework, the foundation has been provided for supervisory disclosure by banks witnessed further an orderly growth of the housing fi nance in pursuit automation. of economic and social objectives, especially as the housing construction and housing markets VI.2 In other areas, consequent to transfer of have a multiplier effect on economic activity and job regulation of housing fi nance companies (HFCs) creation. Their sound regulation is, nevertheless, from National Housing Bank (NHB) to the Reserve important as the sector is known to have caused Bank with effect from August 9, 2019, the regulatory booms and bust with ripple effects for the rest of framework for the HFCs was comprehensively the economy. reviewed after a consultation process with the stakeholders and a revised regulatory framework VI.3 The Reserve Bank had reviewed the was put in place in October 2020. As part of guidelines for core investment companies (CICs) this, defi nition of housing fi nance business was earlier in August 2020, taking into account the introduced and principal business criteria were recommendations of the Working Group chaired laid down with timelines for its phased introduction by Shri Tapan Ray. Under the revised guidelines, 134REGULATION, SUPERVISION AND FINANCIAL STABILITY in computing Adjusted Net Worth (ANW), the supervisory function, actions are also being taken direct or indirect capital contribution made by to harness supervisory technology (SupTech). one CIC in another CIC, in excess of 10 per VI.5 In the cooperative banking space, cent of owned funds of the investing CIC, is to amendment in Banking Regulation (BR) Act, be deducted. Given the earlier experience with 1949 (as applicable to cooperative societies) not the opacities of the complex CIC structures only improved Reserve Bank’s regulatory powers evading regulation and supervision, the Reserve over cooperative banks, but also paved the way Bank also addressed the complexity in group for improving the governance and functioning of structures and existence of multiple CICs within UCBs. Other major developments during the year a group by restricting the number of layers of included adoption of a calibrated supervisory CICs within a Group (including the parent CIC) approach for UCBs. to two, irrespective of the extent of direct or VI.6 The rest of this chapter is divided into fi ve indirect holding/control exercised by a CIC in the sections. Section 2 deals with the mandate and other CIC. Several other regulatory guidelines, functions of the Financial Stability Unit (FSU). including those on corporate governance and Section 3 addresses various regulatory measures disclosures were also laid down. undertaken by the Department of Regulation VI.4 During the year, the Reserve Bank (DoR). Section 4 covers several supervisory continued with its endeavour of strengthening measures undertaken by the Department of the supervisory framework of the scheduled Supervision (DoS), and enforcement actions commercial banks (SCBs), urban cooperative carried out by the Enforcement Department (EFD) banks (UCBs) and NBFCs. The Reserve Bank has during the year. Section 5 highlights the role strengthened its off-site supervisory framework played by the Consumer Education and Protection for identifying risks early by using various tools. Department (CEPD) and the Deposit Insurance This has been complemented by creating a and Credit Guarantee Corporation (DICGC) graded supervisory action framework, so as to in protecting consumer interests, spreading enable early stage supervisory action, which is awareness and upholding consumer confi dence. critical to prevent vulnerabilities from escalating The departments have also set out agenda for or becoming acute. Accordingly, the supervisory 2021-22 in their respective sections. Concluding approach of the Reserve Bank is now more forward observations are set out in the last section. looking, root-cause oriented, and incorporating 2. FINANCIAL STABILITY UNIT (FSU) both quantitative and qualitative elements into supervisory assessments. Signifi cant initiatives VI.7 The mandate of the Financial Stability Unit were taken towards furthering specialisation and (FSU) is to monitor the stability and soundness addressing the issue of asymmetry of information of the fi nancial system by examining risks to by way of: a) integration of supervisory functions fi nancial stability, undertaking macro-prudential meant for different supervised entities (SEs); b) surveillance through systemic stress tests, specialisation and reinforcement of supervision undertaking fi nancial network analysis and by through both vertical and horizontal risk disseminating early warning information through assessments, and c) setting up a dedicated College the Financial Stability Report (FSR). It also of Supervisors (CoS) for capacity development. functions as a secretariat to the Sub-Committee While continuing the efforts to strengthen the of the Financial Stability and Development 135ANNUAL REPORT 2020-21 Council (FSDC), an institutional mechanism of VI.11 Macro stress tests indicated a deterioration regulators for maintaining fi nancial stability and in scheduled commercial banks’ (SCBs) asset monitoring macro-prudential regulation in the quality and capital buffers under adverse country. scenarios. The regular macro-stress testing framework of the Department was augmented to Agenda for 2020-21: Implementation Status capture the underlying state of banks’ portfolios Goals Set for 2020-21 under the cover of regulatory forbearances. VI.8 The Department had set out the following VI.12 In its meeting held on August 31, 2020, goals for 2020-21: the FSDC-SC reviewed major developments in  Strengthening the stress testing global and domestic macroeconomic conditions and in fi nancial markets impinging on fi nancial framework/methodology by incorporating stability; and undertook discussions related to evolving best practices (Utkarsh) [Para inter-regulatory coordination and review of the VI.9]; initiatives and activities of National Centre for  Publishing the FSR on a timely basis with Financial Education (NCFE). In the meeting held on state of play analysis (Para VI.10); January 13, 2021, the Sub-Committee, inter alia,  Conducting macro-prudential surveillance discussed scope for improvements in insolvency (Para VI.11); and resolution under the Insolvency and Bankruptcy Code (IBC), 2016, utilisation of data with the  Conducting meetings of the FSDC Sub- Central Know Your Customer (KYC) Records Committee (FSDC-SC) [Para VI.12 - VI.13]. Registry and changes in the regulatory framework Implementation Status of Goals relating to Alternative Investment Funds (AIFs) VI.9 As part of strengthening the stress testing set up in the International Financial Services framework, latest international practices were Centre (IFSC), among others. In these meetings, reviewed. Possible channels of feedback in the the Sub-Committee also reviewed the activities macro-stress environment were identifi ed. of various technical groups under its purview and the functioning of State Level Coordination VI.10 The December 2020 issue of the FSR Committees (SLCCs) in various states/union was published on January 11, 2021, rescheduled territories (UTs). The regulators reaffi rmed their to incorporate the fi rst advance estimates of commitment to continue coordinating on various national income for 2020-21, released by the initiatives and measures to strengthen the fi nancial National Statistical Offi ce on January 7, 2021. sector in the extraordinarily challenging times. The FSR refl ected the collective assessment Impact of COVID-19 Pandemic of the FSDC-SC on the balance of risks around fi nancial stability. The FSR highlighted the active VI.13 The FSU is primarily entrusted with intervention of central banks and fi scal authorities macro-prudential surveillance and the smooth across the world to stabilise fi nancial markets, functioning of the FSDC-SC. The imposition of the risks of spillovers and macro-fi nancial implications, lockdown and challenges in terms of restricted the disconnect between fi nancial markets and real access to databases, information systems and sector activity, profi tability and capital adequacy software were overcome through remote access of banks with some moderation in balance sheet and virtual interactions, including in case of the stress and still subdued bank credit. FSDC-SC meetings. 136REGULATION, SUPERVISION AND FINANCIAL STABILITY Agenda for 2021-22 standardised approach (SA) will also be issued. However, to free up banks and VI.14 In the year ahead, FSU will focus on the supervisors to respond to economic following: impact of COVID-19 pandemic, the Basel  Strengthening the stress testing Committee on Banking Supervision framework/methodology by incorporating (BCBS) has deferred the implementation evolving best practices (Utkarsh); of Basel III standards by one year to  Conducting macro-prudential surveillance; January 1, 2023 (Para VI.17-18).  Publishing the FSR on a timely and Implementation Status of Goals updated basis; and Convergence of the Reserve Bank’s Regulations  Conducting meetings of the FSDC-SC. with Basel III Standards 3. REGULATION OF FINANCIAL VI.17 The Basel committee's oversight body - INTERMEDIARIES the Group of Central Bank Governors and Heads of Supervision (GHOS) - has endorsed a set Department of Regulation (DoR) of measures to provide additional operational Commercial Banks capacity for banks and supervisors to respond to VI.15 The Department of Regulation (DoR) is the immediate fi nancial stability priorities resulting the nodal Department for regulation of commercial from the impact of COVID-19 pandemic on the banks for ensuring a healthy and competitive global banking system. One of the measures banking system, which provides cost effective already endorsed by the GHOS on March 27, and inclusive banking services. The regulatory 2020 was to defer the timeline for implementation framework is fi ne-tuned as per the requirements of of Basel III standards from January 1, 2022 to the Indian economy while adapting to international January 1, 2023. best practices. VI.18 The target date for issuance of draft Basel Agenda for 2020-21: Implementation Status III guidelines on credit, market and operational risk, as also fi nal guidelines on interest rate risk Goals Set for 2020-21 in banking book has been deferred to September VI.16 The Department had set out the following 2021. goals under Utkarsh for regulation of commercial Major Developments banks in 2020-21: Revised Guidelines on Securitisation and Sale of  Convergence of the Reserve Bank’s Loan Exposures Regulations with Basel III Standards: Draft guidelines on credit risk and market VI.19 Draft framework on securitisation, risk would be issued, in conformity with issued on June 8, 2020 for public comments, Basel III standards, along with the fi nal is being examined and the fi nal guidelines will guidelines on Interest Rate Risk in be issued shortly. Aimed at development of a Banking Book (IRRBB); draft guidelines strong and robust securitisation market in India, on minimum capital requirements while incentivising simpler, transparent and for operational risk under Basel III comparable (STC) securitisation structures, 137ANNUAL REPORT 2020-21 the revised guidelines attempt to align the secondary loan market, including standardisation regulatory framework with the Basel guidelines of loan documentation and loan sales platform. on securitisation that have come into force Opening of Current Accounts by Banks effective January 1, 2018. The revisions also take VI.21 With a view to ensuring credit discipline, into consideration the recommendations of the instructions were issued on August 6, 2020 on the Committee on Development of Housing Finance manner of opening of cash credit/overdraft (CC/ Securitisation Market in India (Chair: Dr. Harsh OD) and collection/current accounts with banks Vardhan) and the Task Force on the Development depending upon the aggregate credit exposure of Secondary Market for Corporate Loans (Chair: of the banking system to a borrower. In case of Shri T. N. Manoharan), which were set up by the customers who have not availed any credit facilities Reserve Bank in May 2019. from the banking system, there are no restrictions VI.20 Apart from reviewing the securitisation on opening of such accounts. Further, banks have guidelines, it was also decided to comprehensively been permitted vide circular dated December 14, revisit the guidelines for sale of loan exposures, 2020, to open activity-specifi c accounts without stressed as well as those not in default, which restrictions, if mandated under various statutes/ are currently spread across various circulars, and instructions issued by various regulators including accordingly a draft comprehensive framework for the Reserve Bank. sale of loan exposures was released on June 8, Regulatory Retail Portfolio - Revised Limit for Risk 2020. These guidelines on sale of loan exposures Weight have been specifi c to the asset classifi cation of VI.22 In order to reduce the cost of credit for the the loan exposure being transferred and/or the regulatory retail segment consisting of individuals nature of the entity to which such loan exposure and small businesses (i.e., with turnover of up to is being transferred as well as the mode of `50 crore), as also in harmonisation with the Basel transfer of the loan exposures. A review was guidelines, the threshold qualifying exposure for also necessitated by the need to dovetail the inclusion in this segment was increased from `5 guidelines on sale of loan exposures with the crore to `7.5 crore vide circular dated October Insolvency and Bankruptcy Code (IBC), 2016 12, 2020. Thus, the risk weight of 75 per cent will and the Prudential Framework for Resolution of apply to all fresh exposures and also to existing Stressed Assets, which have been signifi cant exposures where incremental exposure may be developments towards building a robust taken by the banks up to the revised limit of `7.5 resolution paradigm in India in the recent past. crore. This measure is expected to increase the Further, based on the recommendations of the much-needed credit fl ow to the small business above-mentioned task force, it was announced segment. in the Statement on Developmental and RRBs - Liquidity Adjustment Facility (LAF) and Regulatory Policies of December 5, 2019 that Marginal Standing Facility (MSF) the Reserve Bank will facilitate the setting up of a self-regulatory body - Secondary Loan Market VI.23 In order to provide an additional avenue Association (SLMA) - that was then registered on for liquidity management, LAF and MSF were August 26, 2020. SLMA is currently examining extended to scheduled RRBs, subject to meeting the various measures for the development of the certain conditions, on December 4, 2020. 138REGULATION, SUPERVISION AND FINANCIAL STABILITY Amalgamation of the Lakshmi Vilas Bank (LVB) Submission of Statutory Returns by SCBs in Ltd. with DBS Bank India Ltd. Electronic Form on eXtensible Business Reporting Language (XBRL) Live Site VI.24 The fi nancial position of ‘The Lakshmi VI.25 To improve effi ciency of submission Vilas Bank (LVB) Ltd.’ had undergone a steady of statutory returns while doing away with the decline with the bank incurring continuous drudgery of physical submission and cost of losses since 2018, eroding its net worth. logistics involved, thereby reducing carbon Absence of any viable strategic plan, declining footprints, it has been decided to dispense with advances, mounting non-performing assets, the practice of submission of hard copy of Form failure to raise capital or bring a strategic A (CRR) and Form VIII (SLR), with effect from investor, regular outfl ow of liquidity and serious reporting Friday August 28, 2020. The SCBs have governance issues necessitated the Reserve been advised to submit these returns in electronic Bank to take immediate action in the public form on XBRL live site using digital signatures of interest and particularly in the interest of the two authorised offi cials. depositors. Accordingly, on November 17, 2020, Regulatory Response to COVID-19 Pandemic the Central Government imposed moratorium on LVB Ltd. up to December 16, 2020 and the VI.26 The regulatory measures initiated in Reserve Bank superseded the Board of Directors response to the outbreak of pandemic are reviewed and appointed an Administrator. The Central on an ongoing basis. Further, additional measures Government accorded its sanction to the scheme have been taken or existing measures have been of amalgamation and notifi ed the ‘Lakshmi Vilas fi ne-tuned depending upon the prevailing situation Bank Ltd. (Amalgamation with DBS Bank India at the time of such reviews. These measures were Ltd.) Scheme 2020’ on November 25, 2020, broadly in line with the cross-country regulatory which came into effect on November 27, 2020. response to the pandemic (Box VI.1). Box VI.1 COVID-19 Related Regulatory Measures - A Cross-country Perspective During 2020-21, the global central banks and governments respond to the immediate fi nancial stability priorities. The have taken extraordinary measures to mitigate the implementation dates of the Basel III standards, the revised economic and fi nancial spillover risks from the COVID-19 Pillar 3 disclosure requirements and the revised market risk pandemic. Central banks in all geographies responded framework have been deferred by one year to January 1, swiftly and deployed all options available in their toolkit, 2023. Basel Committee on Banking Supervision (BCBS) both conventional and unconventional, to support their amended its transitional arrangements for the regulatory economies. The universally used measures were policy capital treatment of expected credit losses (ECL) accounting rate reductions and provision of domestic and foreign to give countries more fl exibility on the manner of phasing exchange liquidity. Where the banking system is concerned, in ECL on regulatory capital. Some actions in the area of banks in general had higher capital before the onset of the prudential regulation are summarised below: COVID-19 pandemic than what they had before the global Moratorium and Asset Classifi cation Guidance: Many fi nancial crisis (GFC), enabling the authorities to deploy countries (such as Argentina, Brazil, China, India, France, an array of policies to support economic activity, ability of Hong Kong, the United States - US, and the United Kingdom banks to lend and aid recovery. At the Bank for International - UK) provided guidance on restructuring of existing loans Settlements (BIS), a group of central bank Governors and stressed due to the pandemic and also indicated that heads of supervision endorsed a gamut of measures to enhance the operational capacity of banks’ supervisors to (Contd.) 139ANNUAL REPORT 2020-21 loans that were granted a repayment deferral need not be leverage ratio rule to exclude reserves or deposits at regarded as restructured. Some authorities provided that a the central bank from calculation without commensurate moratorium does not trigger automatic loan reclassifi cation recalibration of the minimum leverage ratio requirement. as ‘default’ for supervisory reporting purposes. In some Some countries have also excluded government bond countries like India, the payment moratorium period was holdings from banks’ leverage exposure on a temporary to be excluded from the number of days past due for the basis to facilitate large asset purchase programmes. purpose of asset classifi cation. Restraining Dividend Pay-outs: Measures were taken Basel III Capital and Liquidity Buffers: Many authorities to conserve the capital levels in banks through restrain (such as Australia, Canada, Switzerland, Germany, Euro on dividend distributions and on share buybacks either Area, Japan, Hong Kong, Korea, Mexico, Russia, Singapore, by regulation or strong administrative guidance, imposed the UK, and the US) have encouraged or more forcefully in numerous countries (such as Argentina, Australia, recommended fi nancial institutions to use their capital and Brazil, Canada, Switzerland, Germany, Euro Area, India, liquidity buffers to support lending. The BCBS has also Mexico, Russia, Sweden, Singapore, the UK, and South clarifi ed that a measured drawdown of banks’ Basel III Africa). Some prudential and regulatory authorities buffers is anticipated and appropriate in the current period recommended that banks should suspend the payment of stress. The liquidity buffers like the Liquidity Coverage of dividends and share buybacks until end 2020 or even Ratios (LCR) were temporarily eased in many countries cancel outstanding 2019 dividends (Prudential Regulatory (e.g., India, Indonesia, the UK, Brazil and Sweden). A Authority, the UK). number of jurisdictions (such as Switzerland, Germany, France, Sweden, and the UK) decided to lower or reduce the A summary of cross-country measures is provided in Table countercyclical capital buffer (CCyB) to zero. The UK gave 1. It can be seen that the central banks in the emerging clear guidance that the buffer will remain at that level for at market economies have deployed almost all tools pertaining least 12 months. Some countries reduced the CCyB partially to prudential rules and regulations; and liquidity and lending (Hong Kong). A few others temporarily reduced other types of that the advanced economies central banks employed. capital buffers, such as for domestic systemically important However, the advanced economies central banks have been banks or the capital conservation buffer (CCB). In India, the more prolifi c in the use of asset purchases/sales and forex date of implementation of the last tranche of CCB (0.625 per swaps. Besides these measures, in EU, UK and India, the cent) was deferred. regulatory authorities have allowed delay in submission Leverage: A number of authorities (such as Canada, of different regulatory reports/fi nancial statements during Switzerland, and the US) have temporarily modifi ed the COVID-19 outbreak. Table 1: Measures Taken by Central Banks during COVID-19 Pandemic Type of Tool Prudential Rules and Regulations Liquidity and Lending Asset Purchases/Sales FX Swap Measures Capital Liquidity Payout Liquidity Specialised Government Commercial Corporate USD Swap Requirements Requirements Restrictions Measures Lending Bonds Paper Bond Line 140 decnavdA seimonocE US ✓ ✓ ✓ ✓ ✓ ✓ ✓ EA ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ JP ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ GB ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ CA ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ AU ✓ ✓ ✓ ✓ ✓ ✓ ✓ CH ✓ ✓ ✓ ✓ ✓ tekraM gnigremE seimonocE BR ✓ ✓ ✓ ✓ ✓ ✓ CN ✓ ✓ ✓ ✓ ID ✓ ✓ ✓ ✓ ✓ IN ✓ ✓ ✓ ✓ ✓ ✓ KR ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ MX ✓ ✓ ✓ ✓ ✓ ✓ ZA ✓ ✓ ✓ ✓ ✓ US: United States EA/EU: Euro Area JP: Japan GB: Great Britain CA: Canada AU: Australia CH: Switzerland BR: Brazil CN: China ID: Indonesia IN: India KR: Korea MX: Mexico ZA: South Africa Source: BIS, RBI and other Central Banks’ websites.REGULATION, SUPERVISION AND FINANCIAL STABILITY VI.27 A list of the regulatory measures taken in the queries received on the resolution response to the outbreak of the pandemic, are framework. summarised below. Going forward, the regulatory  MSME Sector - Restructuring of response will continue to be calibrated in response Advances: Existing loans to MSMEs to the evolving situation, based on an assessment where the banks, AIFIs and NBFCs have of the likely economic impact, a review of the aggregate exposure of not more than `25 effi cacy of previous measures and the objective to crore and are classifi ed as 'standard' as preserve soundness: on March 1, 2020, were permitted to be  Distressed Assets Fund - Subordinate restructured without a downgrade in the Debt for Stressed Micro, Small and asset classifi cation. The restructuring has Medium Enterprises (MSMEs): Banks to be implemented by March 31, 2021. A were permitted vide circular dated July 1, circular to this effect was issued on August 2020 to reckon the funds infused by the 6, 2020. promoters in their MSME units through  LTV Ratio for Loans against Gold loans availed under the government’s Ornaments and Jewellery for Non- credit guarantee scheme for subordinate agricultural Purposes: To mitigate the debt for stressed MSMEs as equity/quasi economic impact of the COVID-19 equity from the promoters for purpose of pandemic on households, entrepreneurs debt-equity computation. and small businesses, LTV for loans  Resolution Framework for COVID-19 against pledge of gold ornaments and jewellery for non-agricultural purposes Pandemic Related Stress: Instructions was increased from 75 per cent to 90 per were issued on August 6, 2020 through cent. This enhanced LTV was applicable which a window under the Prudential up to March 31, 2021. Framework on Resolution of Stressed Assets, issued on June 7, 2019, was  Individual Housing Loans - Rationalisation provided enabling the lenders to implement of Risk Weights: As per earlier regulations, a resolution plan in respect of eligible claims secured by residential property corporate exposures without change falling under the category of individual in ownership and personal loans, while housing loans were assigned differential classifying such exposures as standard, risk weights based on the size of the subject to specifi ed conditions. The loan as well as the LTV. Recognising Resolution Framework was to be invoked the criticality of real estate sector in the till December 31, 2020 and the resolution economic recovery, it was decided as a plan had to be implemented within 90 countercyclical measure to rationalise the days (personal loans) and 180 days (other risk weights irrespective of the size of the eligible loans) from the date of invocation. loan amount and accordingly, instructions Further, the recommendations of the were issued to banks on October 16, 2020. expert committee constituted under the The risk weights for all new housing loans framework were issued on September 7, to be sanctioned on or after October 16, 2020. A list of frequently asked questions 2020 and up to March 31, 2022 shall be as (FAQs) was also released based on under (Table VI.1): 141ANNUAL REPORT 2020-21 Table VI.1: LTV Ratio and Risk Weights GDP gap as a main indicator, activation of the buffer was not found to be necessary. LTV Ratio (Per cent) Risk Weight (Per cent)  After a review of earlier instruction, banks 1 2 < 80 35 were advised to not make any dividend > 80 and < 90 50 payment on equity shares from the profi ts pertaining to the fi nancial year ended  Large Exposure Framework (LEF): In March 31, 2020. terms of LEF guidelines dated June 3, Other Initiatives 2019, exposures to Government of India VI.28 Some of the other initiatives during 2020-21 and state governments which are eligible were as follows: for zero per cent risk weight under the Basel III - capital regulation framework  A Discussion Paper on ‘Governance in of the Reserve Bank are exempted from Commercial Banks in India’ was issued LEF limits. On a review and in line with the by the Reserve Bank on June 11, 2020 to Basel guidelines, it was decided to exempt review the framework for governance in the exposures to foreign sovereigns or their commercial banks. Based on the feedback central banks from LEF that attract zero received, a comprehensive review of the per cent risk weight, subject to certain framework has been done, and a Master conditions. Accordingly, instructions were Direction on governance will be issued issued to banks on February 24, 2021. in due course. In the interim, to address Further, the date of applicability of the a few operative aspects received through LEF guidelines to non-centrally cleared such feedback, instructions with regard derivative exposures has been deferred to the Chair and meetings of the board, to September 30, 2021 vide circular dated composition of certain committees of the March 23, 2021. board, age, tenure and remuneration of directors, and appointment of the whole-  In the backdrop of the COVID-19 related time directors (WTDs) has been issued on challenges, the Reserve Bank took April 26, 2021. certain other regulatory measures. The implementation of net stable funding ratio  An Internal Working Group (IWG) was (NSFR) guidelines, which were to come constituted to review the extant guidelines into effect from October 1, 2020 onwards, on ownership and corporate structure were deferred till October 1, 2021. In for Indian private sector banks. The IWG order to aid the recovery process in the has submitted its report with certain backdrop of COVID-19 related stress, recommendations relating to promoters’ the implementation of the last tranche stake, setting up of new banks by large of 0.625 per cent of capital conservation corporate/industrial houses, conversion of buffer (CCB) was also deferred till October large sized NBFCs into banks, conversion 1, 2021. Based on a review and empirical of payments banks (PBs) into small fi nance testing of the countercyclical capital buffer banks (SFBs), initial capital requirement (CCyB) indicators, including the credit-to- for licensing of new banks, Non-Operative 142REGULATION, SUPERVISION AND FINANCIAL STABILITY Financial Holding Company (NOFHC) Agenda for 2020-21: Implementation Status structure for banks and harmonisation in Goals Set for 2020-21 different licensing guidelines. The report VI.31 The Department had set out the following was placed on the Reserve Bank’s website goals for cooperative banks in 2020-21: on November 20, 2020 for comments of stakeholders and members of the public.  Refi nement of the regulatory framework The comments and suggestions received for cooperative banks with a view to are under examination. strengthening the sector and protecting the interest of the depositors and borrowers  The revised guidelines for compensation (Para VI.32); have come into play from April 1, 2020. Its impact on the compensation structure  Bringing out a discussion paper on and practices as well as the performance strengthening the regulatory framework of the banks shall be subject of enhanced for capital adequacy in UCBs (Para VI.33); regulatory and supervisory oversight  Putting in place a Supervisory Action going forward, even while executive Framework (SAF) for the state cooperative compensation practices in banks will be banks (StCBs) and district central evaluated in the context of differentiation cooperative banks (DCCBs) [Para VI.33]; within and between commercial banking and segments.  Faster resolution of weak UCBs which Agenda for 2021-22 are under All-Inclusive Directions (AID) VI.29 For the year ending March 31, 2022, [Para VI.33]. the Department will focus on the following key Implementation Status of Goals deliverables in respect of the commercial banks: Discussion Paper on Policy Framework for  Issuing draft guidelines on capital Consolidation of UCB Sector charge for credit risk (SA), market risk, VI.32 Large number of UCBs are community/ operational risk and output fl oor, as part region-based which hinders the process of of convergence of the Reserve Bank’s mergers among UCBs and consolidation in the regulations with Basel III standards; sector. On a proposal made by the Reserve Bank,  Issue of fi nal guidelines on securitisation the BR Act, 1949 (as applicable to co-operative of assets not in default; and societies) has been amended. Among others,  Issue of fi nal guidelines on transfer of loan the functions of governance, capital, audit and exposures. amalgamation have now been brought under the ambit of the Reserve Bank. An expert committee Cooperative Banks to provide a road map for strengthening the UCB VI.30 The Reserve Bank continues to play a sector leveraging on the amendments, set up in key role in strengthening the cooperative banking February 2021, will be, inter alia, examining the sector by fortifying the regulatory and supervisory prospects of consolidation in UCB sector as one of framework. In this context, the Department took its terms of reference. Further action in the matter several initiatives in 2020-21 in pursuance of the will be taken based on the recommendations of agenda set in the beginning of the year. the committee. 143ANNUAL REPORT 2020-21 Strengthening Regulatory Framework themselves as being at Level III or Level IV based on their digital depth and interconnectedness VI.33 Initiatives in this regard during 2020-21 to the payment systems landscape in terms were as follows: of the circular dated December 31, 2019 on  The amendment in the BR Act, 1949 “Comprehensive Cyber Security Framework for (as applicable to cooperative societies - UCBs” of the Reserve Bank, have been advised to AACS) has brought in signifi cant changes implement the same with effect from September in the statutory provisions applicable on 30, 2021. Instructions to this effect were issued to cooperative banks. The Department is UCBs on August 12, 2020. in the process of amending the extant Submission of Returns under Section 31 of the instructions and issuing new guidelines BR Act, 1949 (AACS) - Extension of time wherever required. VI.35 In view of the diffi culties faced by  The aforesaid amendments in the BR Act cooperative banks in submission of the returns would have implications on enhancing the due to the COVID-19 pandemic, the timeline for ability of UCBs to raise capital. The expert furnishing the returns under section 31 (read committee on UCBs will be examining with section 56) of the Act for the fi nancial year the related issues as one of its terms of ended on March 31, 2020 was initially extended reference. by three months, i.e., till September 30, 2020, and  The draft SAF for StCBs and DCCBs is at was subsequently further extended till December the stage of consultation with National Bank 31, 2020. Circulars to this effect were issued on for Agriculture and Rural Development August 26 and October 13, 2020, respectively. (NABARD), being the supervisor of these Interest Subvention Scheme for MSMEs - banks. Cooperative Banks  Speeding up the resolution of weak VI.36 All cooperative banks were included as UCBs which are under AID is an ongoing Eligible Lending Institutions (ELIs) under the process and the possibilities of using “Interest Subvention Scheme (ISS) for MSMEs amended provisions of the BR Act are 2018” of the Government of India with effect from under examination. March 3, 2020. The ISS for MSMEs 2018 (as Major Developments amended) provides for an interest relief of two per cent per annum to eligible MSMEs on their System-Based Asset Classifi cation – UCBs outstanding fresh/incremental term loan/working VI.34 In order to improve the effi ciency, capital and limited to the extent of `1 crore during transparency and integrity of the asset the period of its validity, subject to the conditions classifi cation process, UCBs with total assets of prescribed in the Scheme. `2,000 crore or above as on March 31, 2020, have Loans and Advances to Directors, Relatives, and been advised to implement the system-based Firms/Concerns asset classifi cation with effect from June 30, 2021. Further, those UCBs with total assets of `1,000 VI.37 UCBs were advised on February 5, crore or above but less than `2,000 crore as on 2021 not to make, provide or renew any loans March 31, 2020 and which have self-assessed and advances or extend any other fi nancial 144REGULATION, SUPERVISION AND FINANCIAL STABILITY accommodation to or on behalf of their directors or alia, the prospects of consolidation in UCB their relatives, or to the fi rms/companies/concerns sector as one of its terms of reference. in which the directors or their relatives are Further action in the matter will be taken interested (collectively called as “director-related based on the recommendations of the loans”). Further, the directors or their relatives committee. or the fi rms/companies/concerns in which the Non-Banking Financial Companies (NBFCs) directors or their relatives are interested shall also not stand as surety/guarantor to the loans and VI.40 NBFCs play an important role in providing advances or any other fi nancial accommodation credit by complementing the efforts of commercial sanctioned by UCBs. banks, providing last mile fi nancial intermediation and catering to niche sectors. The Department is Voluntary Amalgamation of UCBs entrusted with the responsibility of regulating the VI.38 On March 23, 2021, the Reserve NBFC sector. Bank issued Master Direction on voluntary amalgamation of UCBs under the provisions of Agenda for 2020-21: Implementation Status Section 44A, read with Section 56 of the Banking Goals Set for 2020-21 Regulation (BR) Act, 1949 as amended vide BR VI.41 The Department had set out the following (Amendment) Act, 2020 (39 of 2020). The Master goals in respect of NBFCs in 2020-21: Direction lays down the process for the sanction of the Reserve Bank for voluntary amalgamation of  Review of Regulatory Arbitrage between two or more UCBs. Banks and NBFCs - with a view to Agenda for 2021-22 harmonise the regulations of NBFCs with those of banks (Utkarsh) [Para VI.42]; VI.39 The agenda for cooperative banks in 2021-22 would include the following under Utkarsh:  Scale-based Approach to Regulation of NBFCs - with a view to identify a small set  Setting up of an Umbrella Organisation of ‘systemically signifi cant’ NBFCs, which (UO) for UCBs: National Co-operative can potentially impact fi nancial stability Finance and Development Corporation as also to adopt a graded regulatory Ltd. was incorporated on April 18, 2020 as framework for the NBFCs (Para VI.42); a non-government public limited company under the Companies Act 2013, having its  Issuance of Master Directions for HFCs registered offi ce in New Delhi. The process - proposals for defi ning the term housing of enrolment of UCBs as shareholder fi nance, introduction of principal business members of the UO is in progress. The UO criteria, qualifying assets for HFCs and is required to apply to the Reserve Bank classifi cation of HFCs as systemically for obtaining certifi cate of registration as important were placed on the Reserve NBFC; and Bank's website on June 17, 2020 for public  Discussion Paper on Consolidation of comments and, the revised regulations UCB Sector: An expert committee on UCBs were issued based on receipt of comments set up in February 2021 is examining, inter (Para VI.43 - VI.44); and 145ANNUAL REPORT 2020-21  Comprehensive Review of CIC Guidelines Implementation Status of Goals - in view of the failure of a CIC and its Review of Regulatory Arbitrage between Banks adverse impact on the non-banking and NBFCs; and Scale-based Approach to fi nancial sector, the Reserve Bank Regulation of NBFCs constituted a Working Group (WG) to review the regulatory and supervisory framework VI.42 A discussion paper titled ‘Revised of CICs, whose recommendations are set Regulatory Framework for NBFCs - A Scale- to shape the overall policy approach to based Approach’ was issued for public comments CICs (Para VI.45). on January 22, 2021 (Box VI.2). This discussion Box VI.2 Revised Regulatory Framework for NBFCs - A Scale-Based Approach Over the years, NBFC sector has undergone considerable of NBFCs, such as housing fi nance companies (HFCs), evolution. Higher risk appetite of NBFCs has contributed to infrastructure fi nance companies, infrastructure debt funds, their size, complexity and interconnectedness making some standalone primary dealers (SPDs) and core investment of these entities systemically signifi cant, posing potential companies (CICs) will also feature in this layer on the basis threat to fi nancial stability. of their activity. These NBFCs shall be subject to regulatory structure as applicable for NBFC-ND-SI and NBFC-D at In this overall context, the Reserve Bank has released present. However, adverse regulatory arbitrage vis-à-vis a discussion paper on Revised Regulatory Framework banks is proposed to be addressed in order to reduce for NBFCs - A Scale-Based Approach. Aimed at systemic risk spillovers, where required. Though CICs and development of a strong, well governed and resilient SPDs will fall in the middle layer of the regulatory pyramid, NBFC sector, the discussion paper proposes a scale- the existing regulations specifi cally applicable to them, will based regulatory framework, founded on the principle continue to prevail. of proportionality. The degree of regulatory/supervisory interventions will depend on the risk inherent in the The upper layer will consist of only those NBFCs which operation of an NBFC and the extent of spillover risks are specifi cally identifi ed as systemically signifi cant it is likely to pose to the fi nancial system. The proposed among NBFCs, based on a set of parameters, viz., size, regulatory framework would place NBFCs into various interconnectedness, complexity and supervisory inputs. In layers based on the need for differentiated regulations for addition to the regulations applicable to the previous layer, NBFCs falling in each layer. a set of additional regulations will apply to these NBFCs. In view of their large systemic signifi cance and scale of The lowest layer will comprise NBFCs currently classifi ed operations, the regulation of these NBFCs will be tuned as non-systemically important non-deposit taking NBFCs on similar lines as those for banks, while providing for the (NBFC-ND). The threshold for NBFCs falling in the layer unique business model of the NBFCs as also preserving will be raised to `1,000 crore. Additionally, certain NBFCs fl exibility of their operations. Some of the proposed considered to be inherently less risky in their operations will regulatory provisions for these NBFCs include mandatory fall in this layer, including peer-to-peer lending platforms, listing, introduction of common equity tier 1 and certain NBFC-account aggregators, non-operative fi nancial holding aspects of large exposure framework. companies and type I NBFCs. NBFCs in this layer will continue to be governed by extant regulations applicable It is possible that considered supervisory judgment might for NBFC-ND. However, the regulatory framework would push some NBFCs out of the upper layer of the systemically be supplemented by enhanced governance and disclosure signifi cant NBFCs for higher regulation/supervision. These standards. NBFCs will occupy the top layer as a distinct set. Ideally, this top layer of the pyramid will remain empty unless The middle layer will consist of systemically important supervisors take a view on specifi c NBFCs. non-deposit taking NBFCs (NBFC-ND-SI) and deposit taking NBFCs (NBFC-D). In addition, a few other types Source: RBI. 146REGULATION, SUPERVISION AND FINANCIAL STABILITY paper debates the need of revisiting the broad Comprehensive Review of CIC Guidelines principles underpinning the current regulatory VI.45 Based on the recommendations of the framework of NBFCs and examines the Working Group (WG) to review the Regulatory necessity for developing a regulatory framework and Supervisory Framework for CICs (Chairman: for scale-based regulation linked to systemic risk Shri Tapan Ray) and inputs received from contribution of NBFCs. Besides recommending stakeholders, the revised guidelines for CICs were appropriate regulatory measures to create issued on August 13, 2020. The highlights of the a strong and resilient non-banking fi nancial major changes are as under: sector, the extant regulatory areas of arbitrage  Adjusted net-worth to deduct amount between banks and NBFCs have also been representing any direct or indirect capital examined in the paper with a view to harmonise contribution made by one CIC into another the regulations of NBFCs with those of banks, CIC beyond a threshold of 10 per cent of wherever appropriate. own funds of investing in CIC. Issuance of Master Directions for HFCs  The number of layers of CICs within a VI.43 On the basis of review of regulatory group (including the parent CIC) shall framework for HFCs and examination of public be restricted to two, irrespective of the comments on the consultation document released extent of direct or indirect holding/control on June 17, 2020, a revised regulatory framework exercised by a CIC. for HFCs was issued on October 22, 2020. It, inter  The parent CIC in the group or the CIC alia, includes defi nition of ‘principal business’ and with the largest asset size, in case there ‘housing fi nance’; increase in net owned fund (NOF) is no identifi able parent CIC in the group, requirement to `20 crore; restrictions on exposures shall constitute a Group Risk Management to group companies engaged in real estate Committee (GRMC). business; extension of applicable regulations for NBFCs on liquidity risk management framework;  CICs with asset size of more than `5,000 and guidelines on liquidity coverage ratio (LCR), crore, shall appoint a Chief Risk Offi cer securitisation, outsourcing of fi nancial services (CRO). and lending against collateral of gold jewellery/  CICs shall prepare consolidated fi nancial shares and foreclosure charges to HFCs. Further statements (CFS) as per provisions of the harmonisation between regulations of HFCs and Companies Act, 2013. Suitable disclosures NBFCs relating to capital requirement; income have been prescribed for the group entities, recognition, asset classifi cation and provisioning whose accounts are not eligible for such (IRACP) norms; concentration and other consolidation, among others. exposure norms; and deposit acceptance would Major Developments be undertaken in a phased manner over next two years to ensure that the transition is achieved with Extension of Timeline for Finalisation of Audited least disruption. Accounts VI.44 Master Directions for HFCs covering all VI.46 In view of the operational diffi culties posed applicable regulations were issued on February by the ongoing pandemic situation, it was decided 17, 2021. that every NBFC shall fi nalise its balance sheet 147ANNUAL REPORT 2020-21 within a period of three months from the date  Review of regulatory framework applicable to which it pertains or any date as notifi ed by to NBFC-MFIs and harmonising the Securities and Exchange Board of India (SEBI) regulatory frameworks for various for submission of fi nancial results by the listed regulated lenders in the microfi nance entities. A circular in this regard was issued on space; and July 6, 2020.  Comprehensive review of the regulatory Draft Guidelines on Declaration of Dividend by and legal framework of ARCs so as to NBFCs realise their potential in resolving stressed VI.47 Unlike banks, currently there are no assets of the fi nancial sector. guidelines in place with regard to distribution of 4. SUPERVISION OF FINANCIAL dividend by NBFCs. Keeping in view the increasing INTERMEDIARIES signifi cance of NBFCs in the fi nancial system and their inter-linkages with other segments of the Department of Supervision (DoS) fi nancial system, it has been decided to formulate Commercial Banks guidelines on dividend distribution by NBFCs. Different categories of NBFCs would be allowed VI.50 The Department of Supervision (DoS) is to declare dividend as per a matrix of parameters, entrusted with the responsibility of supervising subject to certain conditions. A draft circular in all SCBs (excluding RRBs), Local Area Banks this regard was placed in the public domain on (LABs), PBs, SFBs, Credit Information Companies December 9, 2020, soliciting comments from and all India fi nancial institutions (AIFIs). stakeholders. Agenda for 2020-21: Implementation Status Notifi cation of Alternative Investment Funds (AIFs) Goals Set for 2020-21 as Qualifi ed Buyers VI.51 The Department had set out the VI.48 To ensure uniform treatment for all AIFs, following goals for supervision of SCBs during category I AIFs set up as trusts and registered with 2020-21: SEBI under SEBI (AIF) Regulations, 2012, have  A detailed prescriptive framework will be been notifi ed as qualifi ed buyers under section introduced, covering the roles and authority 2(1)(u) of the Securitisation and Reconstruction of the Chief Compliance Offi cer (CCO) of of Financial Assets and Enforcement of Security a bank, to bring uniformity in approach Interest Act, 2002. besides aligning the expectations on CCO Agenda for 2021-22 with best practices (Utkarsh) [Para VI.52]; VI.49 During 2021-22, the Department will  Assessment of risk and compliance pursue the following goals in respect of NBFCs/ culture and business strategy of SCBs asset reconstruction companies (ARCs): to strengthen the health of the fi nancial  Finalise Scale-based Regulatory system, with special attention to the Framework for NBFCs given the increasing unique risks posed by climate change and signifi cance of NBFCs in the fi nancial implications for the supervisory framework system; (Utkarsh) [Para VI.53 - VI.54]; and 148REGULATION, SUPERVISION AND FINANCIAL STABILITY  The Department will further strengthen and attitudes that may adversely infl uence the the process of collecting supervisory data institution’s risk culture. relating to KYC/anti money laundering Minimum Supervisory Expectations (MSEs) (AML) which would facilitate better risk VI.54 The Department has also prepared discovery, risk assessment and risk- a guidance note for SSMs containing MSEs based supervision (RBS) processes in comprising best practices and standards on risk respect of KYC/AML supervision, and the governance, compliance and internal audit which preparation of a model to risk profi le the the banks are required to follow as a supervisory banks for carrying out risk-based KYC/ fl oor. The SSMs are using these MSEs as a AML inspection (Para VI.55). benchmark to assess the adequacy of assurance Implementation Status of Goals functions in the banks as also to strengthen the assessment of assurance functions in terms of Compliance Function in Banks their robustness, effi cacy and adequacy. VI.52 To bring uniformity in the compliance Risk-Based Approach (RBA) for KYC/AML function/structure of banks as also to align the VI.55 As part of their internal governance supervisory expectations on role of CCO with best structure, banks are required to have a sound risk- practices, the guidelines on compliance function management strategy for addressing the KYC/ in banks have been amended vide circular AML risks. The Reserve Bank, on the lines of dated September 11, 2020. The guidelines are recommendations of Financial Action Task Force aimed at enhancing the independence, authority, (FATF), has developed RBA for supervision from transparency and responsibility of the CCOs; and KYC/AML perspective. A model for generation further provide that the CCO should meet the ‘fi t of risk scores, based on the KYC/AML data & proper’ criteria and that the stature of the CCO submitted by the banks, has also been developed. should be such that the CCO has the ability to A specialised on-site assessment is also being independently exercise judgement and ensure carried out for select banks based on their KYC/ that business functions comply with relevant laws/ AML risk scores/rating. RBA will facilitate better regulations/policies. risk-discovery and improved risk-assessment besides effectively addressing and mitigating the Risk and Compliance Culture Assessment money-laundering and terrorist fi nancing risks in Framework the banking sector. VI.53 Recognising the signifi cance of sound Major Developments risk and compliance culture in building a robust Root Cause Analysis (RCA) internal control framework and for enhancing overall effectiveness of the bank’s operations, VI.56 A special thrust is given from the current the Department has developed a detailed risk supervisory cycle towards carrying out RCA and compliance culture assessment framework which, inter alia, includes a detailed assessment for the guidance of senior supervisory managers of governance, oversight and assurance function, (SSMs). The objective of this framework is to assist business strategy and risk and compliance supervisors in identifying practices, behaviours culture. 149ANNUAL REPORT 2020-21 Supervision of Internationally Active Indian Banks banks is constantly evolving, the Department through Supervisory Colleges has instituted a system of periodic interactions with Chief Information Security Offi cers (CISOs) VI.57 The platform of supervisory colleges of banks. The objective of such meetings is to is being utilised to monitor internationally engage with stakeholders on the ground to get active Indian banks on an ongoing basis. Due a sense of the challenges in a post-pandemic to COVID-19 pandemic induced restrictions, supervisory college meetings were conducted in world characterised by shift in users’ interface virtual mode during which overseas supervisors of with information technology (IT) systems, the these banks actively participated in deliberations. best practices employed by banks and new threats envisaged due to adoption of new Automation of Income Recognition, Asset technological and operating paradigms such as Classifi cation and Provisioning (IRACP) cloud computing and open banking. This new Processes in Banks system is seen as one of the ways in which the VI.58 Banks were advised, vide circular dated dynamics of supervision are changing to a more September 14, 2020, to automate their IRACP adaptive approach to building a cyber-resilient processes. In order to ensure the completeness banking system. and integrity of the automated asset classifi cation Frauds Analysis [classifi cation of advances/investments as non-performing asset (NPA)/non-performing VI.61 The number of frauds reported during investment (NPI) and their upgradation], 2020-21 decreased by 15 per cent in terms provisioning calculation and income recognition of number and 25 per cent in terms of value, processes, banks have been advised to put in vis-à-vis 2019-20 (Table VI.2). The share of PSBs place/upgrade their systems to conform to the in total frauds (both in terms of number and value) prescribed guidelines latest by June 30, 2021. decreased while that of private sector banks Long Form Audit Report (LFAR) – Review increased during the corresponding period. VI.59 Keeping in view the large-scale changes in VI.62 In terms of area of operations, frauds the size, complexities, business model and risks have been occurring predominantly in the loan in the banking operations, a review of the LFAR portfolio (advances category), both in terms of format, in consultation with the stakeholders, number and value (Table VI.3). Though the value including the Institute of Chartered Accountants of frauds reported in advances category for 2020- of India (ICAI), was undertaken and the format of 21, in percentage terms, remained almost same LFAR was revised. The revised guidelines issued as compared to the last year, the incidence of on September 5, 2020, inter alia, require the frauds in advances category, in terms of number, statutory auditors (SAs) to also report on special has come down over the previous year. The share prudential supervisory requirements besides of off-balance sheet (in terms of value) has been reporting on the fi nancial statements. decreasing since 2018-19. Cyber Security Related Developments VI.63 The average time lag between the date VI.60 Appreciating that the environment of of occurrence of frauds and the date of detection cyber security and technology risks facing was 23 months for the frauds reported in 2020-21. 150REGULATION, SUPERVISION AND FINANCIAL STABILITY Table VI.2: Fraud Cases - Bank Group-wise (Amount in ` crore) Bank Group/Institution 2018-19 2019-20 2020-21 Number of Amount Number of Amount Number of Amount Frauds Involved Frauds Involved Frauds Involved 1 2 3 4 5 6 7 Public Sector Banks 3,704 64,207 4,410 1,48,224 2,903 81,901 (54.5) (89.8) (50.7) (79.9) (39.4) (59.2) Private Sector Banks 2,149 5,809 3,065 34,211 3,710 46,335 (31.6) (8.1) (35.2) (18.4) (50.4) (33.5) Foreign Banks 762 955 1026 972 521 3,315 (11.2) (1.3) (11.8) (0.5) (7.1) (2.4) Financial Institutions 28 553 15 2,048 25 6,839 (0.4) (0.8) (0.2) (1.1) (0.3) (4.9) Small Finance Banks 115 8 147 11 114 30 (1.7) (0.0) (1.7) (0.0) (1.6) (0.0) Payments Banks 39 2 38 2 88 2 (0.6) (0.0) (0.4) (0.0) (1.2) (0.0) Local Area Banks 1 0.02 2 0.43 2 0 (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) Total 6,798 71,534 8,703 1,85,468 7,363 138,422 (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. Figures reported by banks & FIs are subject to change based on revisions filed by them. 3. Amounts involved reported do not reflect the amount of loss incurred. Depending on recoveries, the loss incurred gets reduced. Further, the entire amount involved is not necessarily diverted. 4. The dates of occurrence of these frauds are spread over several previous years. 5. The above data is in respect of frauds of `1 lakh and above reported during the period. Source: RBI Supervisory Returns. However, in respect of large frauds of `100 crore  Streamlining the process of data collection and above, the average lag was 57 months for the from all the banks and their off-site same period. assessment and on-site supervision of select banks based on the outcome of Agenda for 2021-22 risk-based model developed for KYC/AML VI.64 The Department has identifi ed the following supervision; and goals for supervision of SCBs in 2021-22:  Enhancement of Fraud Risk Management System including improving effi cacy of  Strengthening the on-site assessment Early Warning Signal (EWS) framework, of oversight and assurance functions strengthening fraud governance and including risk and compliance culture as response system, augmenting the also business strategy/model (Utkarsh); data analysis for monitoring of  Adoption of innovative and scalable transactions, introduction of dedicated SupTech to enhance the effi ciency and market intelligence (MI) unit for frauds effi cacy of supervisory processes by and implementation of automated unique modifying its capacity and capability system generated number for each (Utkarsh); fraud. 151ANNUAL REPORT 2020-21 Table VI.3: Fraud Cases – Area of Operations (Amount in ` crore) Area of Operation 2018-19 2019-20 2020-21 Number of Amount Number of Amount Number of Amount Frauds Involved Frauds Involved Frauds Involved 1 2 3 4 5 6 7 Advances 3,603 64,539 4,608 1,81,942 3,501 1,37,023 (53.0) (90.2) (52.9) (98.1) (47.5) (99.0) Off-balance Sheet 33 5538 34 2445 23 535 (0.5) (7.7) (0.4) (1.3) (0.3) (0.4) Foreign Exchange Transactions 13 695 8 54 4 129 (0.2) (1.0) (0.1) (0.0) (0.1) (0.1) Card/Internet 1,866 71 2,677 129 2,545 119 (27.5) (0.1) (30.8) (0.1) (34.6) (0.1) Deposits 593 148 530 616 504 434 (8.7) (0.2) (6.1) (0.3) (6.8) (0.3) Inter-Branch Accounts 3 0 2 0 2 0 (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) Cash 274 56 371 63 329 39 (4.0) (0.1) (4.3) (0.0) (4.5) (0.0) Cheques/Demand Drafts, etc. 189 34 201 39 163 85 (2.8) (0.1) (2.3) (0.0) (2.2) (0.1) Clearing Accounts, etc. 24 209 22 7 14 4 (0.4) (0.3) (0.2) (0.0) (0.2) (0.0) Others 200 244 250 173 278 54 (2.9) (0.3) (2.9) (0.1) (3.8) (0.0) Total 6,798 71,534 8,703 1,85,468 7,363 1,38,422 (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) Note: 1. Figures in parentheses represent the percentage share of the total. 2. Figures reported by banks & FIs are subject to change based on revisions filed by them. 3. The above data is in respect of frauds of `1 lakh and above reported during the period. 4. The dates of occurrence of these frauds are spread over several previous years. 5. Amounts involved reported do not reflect the amount of loss incurred. Depending on recoveries, the loss incurred gets reduced. Further, the entire amount involved in advances is not necessarily diverted. Source: RBI Supervisory Returns. Urban Cooperative Banks (UCBs)  Integration of core banking solution (CBS) modules of UCBs for all core functions; VI.65 The Department also undertook periodic modules to be automated for effective monitoring of the UCBs during the year to ensure supervision (Utkarsh) [Para VI.68]; the development of a safe and well-managed cooperative banking sector.  Utilising Centralised Repository of Information on Large Credits (CRILC) Agenda for 2020-21: Implementation Status reporting for the UCB sector for enhanced Goals Set for 2020-21 supervisory examination (Utkarsh) [Para VI.66 The Department had set out the following VI.69]; and goals for supervision of UCBs in 2020-21:  Adapting the inspection process of  Introduction of differentiated supervision UCBs to the changing needs of the mechanism for select UCBs (Utkarsh) sector focusing on size and periodicity [Para VI.67]; (Para VI. 67 - VI.69). 152REGULATION, SUPERVISION AND FINANCIAL STABILITY Implementation Status of Goals (negative net worth). Only 2 UCBs with positive net worth are yet to complete CBS implementation. Differentiated Supervision Mechanism for UCBs CRILC Reporting for UCBs VI.67 For UCBs, a calibrated supervisory approach has been adopted. The objectives are VI.69 UCBs with assets of `500 crore and to strengthen the oversight on material institutions above have been brought under CRILC reporting in these segments in a more risk-focused manner, framework with the objective of strengthening off- improve proportionality and economic effi ciency of site supervision and early recognition of fi nancial supervision, and to deploy an appropriate range distress. It has enabled more holistic view of large of tools and technology to achieve the supervisory borrowers of the select large UCBs. Data from objectives (Box VI.3). CRILC returns has been used for identifi cation of supervisory concerns, viz., delinquent borrowers Making UCBs - CBS Compliant and exposures of banks to sensitive sectors. VI.68 1,531 out of 1,536 UCBs (99.67 per cent) This will also enable the Department to prepare have implemented CBS as on March 31, 2021. appropriate analytical reports pertaining to UCB Three out of remaining fi ve UCBs are under AID sector. Apart from review and analysis of CRILC Box VI.3 Changing Paradigm of UCB Supervision – Way Forward UCBs play a key role in furthering the fi nancial inclusion Department of Supervision (DoS) such as implementation agenda of the Reserve Bank and have obvious advantages of core banking solution (CBS) in UCBs, revised CAMELS in terms of servicing people of small means in semi-urban (Capital Adequacy, Asset Quality, Management, Earnings, and urban areas. The UCB sector is unique in the sense that Liquidity and Systems and Control) rating model for UCBs, there is a signifi cant degree of heterogeneity among banks detailed data analytics and assessment of vulnerabilities, in this sector in terms of size, geographical distribution, assessment of cyber risk, centralisation of off-site/eXtensible performance and fi nancial soundness. The sector has unit business reporting language (XBRL) reporting mechanism UCBs, multi-branch UCBs operating within a state and multi- and meetings/interactive sessions with chief executive state UCBs with the area of operation in more than one state. offi cers (CEOs)/directors of weak/vulnerable UCBs. Cooperative banks with their better knowledge of customers The Reserve Bank has announced in the Statement on Developmental and Regulatory Policies of February 5, 2021, and familiarity with the area of operation can attract new about setting up of an expert committee on UCBs involving all customers and retain the existing clientele with their unique stakeholders in order to provide a medium-term roadmap to selling proposition. This may require suitable changes in strengthen the sector, enable faster rehabilitation/resolution outlook, processes, business model and strategy. of UCBs, as well as to examine other critical aspects relating However, cooperative banks are now functioning in a highly to these entities. The committee will suggest effective competitive environment. Entry of more players in the measures for faster rehabilitation/resolution of UCBs, assess banking arena and technology have increased options to potential for consolidation in the sector, consider the need customers and banks have both opportunities to grow and for differential regulations and examine prospects to allow challenges for survival. As banking business becomes more more leeway in permissible activities for UCBs with a view complex and competitive, the need for skilled workforce will to enhance their resilience and draw up a vision document increase, regular investments in IT infrastructure would be for a vibrant and resilient urban cooperative banking sector required and the cost of compliance would also go up. having regards to the principles of cooperation as well as depositors’ interest and systemic issues. The Reserve Bank has taken several measures to enhance supervision of UCB sector under the new unifi ed Source: RBI. 153ANNUAL REPORT 2020-21 data, interactive dashboards have been developed Agenda for 2020-21: Implementation Status and are shared with supervisory teams to help Goals Set for 2020-21 in identifying banks exhibiting signs of incipient VI.73 The Department had set out the following stress. goals for supervision of NBFCs for 2020-21 under Other Initiative Utkarsh: VI.70 The cyber security landscape continues  Steps will be taken to improve effectiveness to evolve with wider adoption of digital banking of the supervision and monitoring of channels, thus necessitating UCBs to manage their NBFCs by (i) ascertaining the quality associated risks effectively. Active collaboration of implementation of Indian Accounting within UCBs and their stakeholders was felt Standards (Ind-AS) and subsequent necessary for sharing and coordinating various regulatory guidance/directions; (ii) measures taken on cyber security aspects. To strengthening MI on NBFCs to assess the this effect, a “Technology Vision Document for movement of fi nancial parameters/market Cyber Security” for UCBs was published which outlook of NBFCs and related parties on envisages to achieve this objective over a period an ongoing basis; (iii) promoting a strong of three years through a fi ve-pillared strategic compliance and risk culture amongst approach ‘GUARD’ - Governance Oversight, Utile NBFCs, and (iv) weeding out NBFCs Technology Investment, Appropriate Regulation not compliant with the Reserve Bank’s and Supervision, Robust Collaboration, directions with respect to maintenance and Developing Necessary IT & Cyber Security of adequate net owned funds (NOF) and Skillset. returns fi ling (Para VI.74 - VI.79). Agenda for 2021-22 Implementation Status of Goals VI.71 The Department has identifi ed the following goals for supervision of UCBs in 2021-22: Implementation of Ind-AS  Conduct IT/cyber security examination of VI.74 Regulatory guidance on implementation scheduled UCBs (Utkarsh); of Ind-AS was issued on March 13, 2020 which covered governance framework for Ind-AS  Developing the risk-based approach for implementation, prudential fl oors for expected KYC/AML supervision of select UCBs; credit loss along with guidance on computation  Strengthening Early Warning System and of regulatory capital and regulatory ratios. stress testing framework for UCBs; and Supervision of NBFCs also covered the quality  Roll out of IT Examination for select UCBs. of implementation of Ind-AS during the current supervisory cycle. Non-Banking Financial Companies (NBFCs) Supervision of NBFCs VI.72 The Department continued to effectively monitor the NBFCs (excluding HFCs) and ARCs VI.75 As part of the strengthened off-site registered with the Reserve Bank with the surveillance mechanism for NBFCs, the structural objective to protect the interests of depositors and liquidity position of deposit taking NBFCs customers, while ensuring fi nancial stability. (NBFC-D) and non-deposit taking systemically 154REGULATION, SUPERVISION AND FINANCIAL STABILITY important NBFCs (NBFC-ND-SI) and CICs is fi nancials is taken up with the management of being assessed every month to identify those SEs. NBFCs/CICs which present signifi cant negative VI.78 For ensuring fi rm implementation of mismatch in any time bucket over subsequent regulations, enhanced interaction with the NBFCs, six months period. Quarterly analytical reports both at central offi ce (CO) and regional offi ce (RO) on fi nancial performance of NBFC sector are levels, is being conducted. This becomes all the prepared indicating trends in asset growth, capital more important in the light of structural changes adequacy, asset quality, profi tability, sectoral credit in the business models of NBFCs that require a and liquidity. dynamic supervisory focus (Box VI.4). VI.76 The early warning framework for banks VI.79 The Department has been identifying the and NBFCs has recently been introduced as part NBFCs that do not comply with the minimum net of the proactive off-site surveillance framework. owned funds (NOF) requirements and has been This framework involved the identifi cation of cancelling the certifi cate of registration (CoR) of statistically signifi cant variables that may provide such NBFCs. early warning signs for banks/NBFCs and also Agenda for 2021-22 a pool of indicators to cover macroeconomic VI.80 The Department has identifi ed the following variables, market indicators, and banking goals for supervision of NBFCs in 2021-22: indicators.  Designing supervisory reporting system VI.77 As part of the 5th pillar of supervision, the under Ind-AS (Utkarsh); Department is having sustained engagement with  Implementation of central fraud registry the senior management of NBFCs, particularly the (CFR) for NBFCs (Utkarsh); larger companies. Any sign of stress, excessive growth in assets, sudden increase in delinquency  Strengthening MI and off-site supervisory or liquidity mismatch and/or deterioration in the assessment of NBFCs; Box VI.4 Structural Changes in Business Models of Non-Banking Financial Companies (NBFCs) and Strengthened Supervision NBFCs play a critical role in fi nancial intermediation and collateralised loan obligations (CLOs), besides increased promoting inclusive growth by providing last-mile access of reliance on FinTech and digital technologies. Thus, the fi nancial services to meet the diversifi ed fi nancial needs of business models of NBFCs are changing world over. less-banked customers. In India, recent credit or market events at certain large Globally, the sector is witnessing some transformative NBFCs followed by liquidity strains and the related fi nancial trends, such as rapid expansion in collective investment stability concerns have resulted in changes in the business vehicles in the sector, increase in cross-border linkages of model as well as enhancement in the supervisory focus for such entities, increased dependence on short-term funding NBFCs. It would be contextual to take stock of the direction and increased recourse to fi nancial innovation such as in which supervisory focus has moved and the changing peer-to-peer lending, crowdfunding, leveraged loans and landscape of the NBFC sector. (Contd.) 155ANNUAL REPORT 2020-21 Strengthening supervision over NBFCs: In the aftermath retail loans and loans to service sector as well as micro, small of liquidity stress post the Infrastructure Leasing & Financial and medium enterprises (MSMEs), from the earlier focus on Services (IL&FS) and Dewan Housing Finance Ltd. (DHFL) corporate sector advances. events, the market funding conditions turned diffi cult for Financial technology (FinTech) based product delivery is NBFCs. While NBFCs with better governance standards, another important development taking place in the NBFC robust business models and effi cient operating practices landscape. The NBFC sector has been in the forefront of did well and could raise funds, others bore the brunt of the adopting innovative FinTech-led delivery of products and market forces. Smaller NBFCs and microfi nance institutions services which are transforming the way one can access (MFIs), which were contributing signifi cantly to the last mile and interact with these services. The scope of operations credit delivery, also got impacted as their funding sources of FinTechs has also broadened, moving to payments, got further squeezed. insurance, stocks, bonds, peer to peer lending, robo-advisers, In response, the Reserve Bank took several calibrated steps regulatory technology (RegTech) and supervisory technology to channel credit fl ow into the NBFC sector and enhanced (SupTech). However, concerns relating to data confi dentiality, supervision to improve the sector’s long-term resilience. robustness of information technology (IT) infrastructure and Some of the specifi c measures initiated by the Reserve cyber security framework, as also conduct of business issues Bank to strengthen the supervision of NBFCs include - need to be evaluated and addressed. conducting scale-based supervision (including introduction Factoring Regulation (Amendment) Bill, 2020, inter alia, of senior supervisory manager approach), inspection of seeks to amend section 3 to widen the scope of fi nanciers government owned NBFCs and core investment companies and to permit all NBFCs to undertake factoring business (CICs); revision and rationalisation of returns and migration and participate on the trade receivables discounting system from computerised off-site monitoring and surveillance platform for discounting the invoices of MSMEs. The bill is system (COSMOS) platform to more advanced eXtensible expected to open up additional business opportunities for business reporting language (XBRL) platform; ensuring NBFCs and may realign the share of factoring business online submission of annual certifi cate by statutory auditors between banks and NBFCs with more number of NBFCs (SAs) of NBFCs on XBRL platform; introducing 11 regional joining the fray. Going forward, a marketplace driven platform languages on the sachet portal for information on ponzi model has the potential to redefi ne the NBFCs by leveraging schemes/unauthorised deposit collection and actively their strengths - customer base, distribution reach and pursuing the fi fth pillar of supervision - engagement with collaboration with varied ecosystems. As a take-off point stakeholders. from being an underwriter for various types of loans, NBFCs can bank upon their strengths and move towards alternate Structural Changes in Business Models of NBFCs: business models hinged upon distribution. NBFCs have come a long way in terms of their scale and diversity of operations. Over the years, the segment has In a nutshell, the NBFC segment has entered into a new grown rapidly with a few of the large NBFCs becoming business landscape wherein it needs to continuously strive comparable in size to some of the private sector banks. The to innovate and add new products to it's toolkit. Core strength sector has also seen advent of many non-traditional players of NBFCs include customer base; strong distribution and leveraging technology to adopt tech-based innovative servicing reach; higher risk appetite; fl exible business model; business models. non-physical points of presence; and faster scale-up and scale-down capability. The NBFCs have also been fast in Liquidity problems, increased asset quality stress and adopting newer technology led processes. Leveraging the COVID-19 fallout along with availability of innovative above, product providers like NBFCs can consider expanding technology has induced NBFCs to reimagine their business into marketplace driven platforms to serve a customer with models. During recent years, there has been a structural multitude of products and services while ensuring customer shift on the asset and liability side of NBFCs’ balance sheets. protection. The Reserve Bank is carefully observing the As the Reserve Bank required NBFCs to adopt a liquidity changing trajectory of their business operations and risk management framework from December 2020, NBFCs associated risks and taking appropriate measures to sustain have been gradually swapping their short-term liabilities with their resilience. long-term borrowings with the aim of maintaining adequate liquidity. Similarly, there has been increasing shift towards Source: RBI. 156REGULATION, SUPERVISION AND FINANCIAL STABILITY  Developing the risk-based approach for for delay in identifying frauds by SEs and KYC/AML supervision of select NBFCs; suggest measures for early detection and timely mitigation of the risks arising out of  Monitoring effectiveness of customer frauds (Para VI.86); services provided by NBFCs; and  Implementation of Integrated Compliance  Roll out of IT Examination for select Management and Tracking System NBFCs. (ICMTS) [Para VI.86]; and Supervisory Measures for All Supervised Entities (SEs)  The Reserve Bank is engaged in interlinking various databases and VI.81 A unifi ed DoS has been operationalised information systems to improve fraud in which the supervision of banks, UCBs and monitoring and detection. Online reporting NBFCs are now being undertaken in a holistic of frauds by NBFCs and the CFR portal manner under one umbrella Department. This will of SCBs, augmented with new features, address inter-institutional issues on regulatory/ will be made operational by January 2021 supervisory arbitrage, information asymmetry and (Para VI.86). interconnectedness. Implementation Status of Goals Agenda for 2020-21: Implementation Status Cyber Security Related Developments Goals Set for 2020-21 VI.83 The Department has conducted IT VI.82 The Department had set out the following examinations (on-site as well as off-site modes) supervisory goals for 2020-21: in 53 SEs during July 2020 to March 2021.This  Under the aegis of the standing committee includes 44 SCBs, four Primary UCBs, two PBs, on cyber security, a pro-active cyber one NBFC, one CIC and one fi nancial institution immunity surveillance framework will be (FI). introduced for SEs to automate data fl ow VI.84 The standing committee on cyber security from the SEs to the Reserve Bank for better has set up a sub-group to discuss the feasibility analysis, cyber simulation/assessment of setting up “Sectoral Security Operations Centre exercises in collaboration with Reserve (SoC)” for the REs of the Reserve Bank, which Bank Information Technology (ReBIT) and would, among other things, seamlessly pull logs/ the industry, prompt supervisory/regulatory events/alerts from the SoC of REs for further intervention, besides prescribing certain baseline requirements for various other analysis. Web crawling/cyber recon exercises critical service providers (CSPs), Master through external agencies was conducted on pilot Directions on IT practices (governance basis with select REs. Currently, work on extending and related) and digital banking security this to other REs is being undertaken. expectations for the banking sector (Para VI.85 The Department collects risk indicator VI.83 - VI.85); data from SEs through various returns, off-site  A study on the large value frauds with submissions and compliance status. Based on the involvement of select banks, NBFCs, the submissions of SEs, those that are found UCBs and domain experts will be vulnerable or not compliant with extant instructions undertaken for recognising the causes are advised to take necessary actions. 157ANNUAL REPORT 2020-21 Strengthening Database and Information System have been carried out in the current CFR portal of SCBs, which have been VI.86 Initiatives in this regard during 2020-21 implemented w.e.f. April 1, 2021. were as follows:  Online fraud reporting system for NBFCs  Keeping in view the delays observed in has been developed and the deployment detection of large frauds by SEs, it was and on boarding of NBFCs to the online planned to undertake a study of large system will be effected after the completion frauds with the involvement of a group of ongoing infrastructure related transition, comprising select banks, NBFCs, UCBs security testing and the issue of relevant and experts to detect the causes and guidelines/notifi cations. suggest measures to improve the systems.  Reserve Bank had mandated risk based The group submitted its report on April 30, internal audit (RBIA) for commercial banks 2021. in 2002. Considering the importance of  ICMTS is an end-to-end workfl ow internal audit function as a third line of automation application, envisaged to defence and in a move to harmonise the strengthen the compliance by the SEs guidelines across all SEs, large UCBs and and assist in the timely and continuous NBFCs were brought within the RBIA net monitoring of compliance of the time bound during the year. circulars/instructions/advisories issued by  Further, in order to strengthen the audit various departments such as DoS and systems in SEs and to ensure that SAs DoR. The application will also facilitate are appointed in a timely, transparent planning of inspection/scrutiny of SEs and and effective manner by all SEs, the subsequent compliance of observations Department issued harmonised guidelines with inbuilt facility to raise alerts for on appointment of statutory central reminders and notifi cations. Phase-wise auditors (SCAs)/SAs of commercial banks implementation of various modules of the (excluding RRBs), UCBs and NBFCs application is in progress. (including HFCs). These guidelines provide necessary instructions regarding  The Department has proposed a unifi ed the number of auditors, their eligibility fraud reporting format common to all criteria, tenure and rotation, while ensuring commercial banks (including select FIs), the independence of auditors. UCBs and NBFCs, which will enable Major Developments consolidation of reports pertaining to fraud data reported by all such reporting Dedicated Risk Specialist Division entities and facilitate interlinking of various VI.87 A dedicated horizontal risk function, viz., databases and information systems. It is Risk Specialist Division (RSD) was created in being developed and implemented as part the process of unifi cation of supervision function. of the ensuing centralised information The RSD has been working towards developing management system (CIMS) project. specialisation in major risk areas, both fi nancial Meanwhile, certain augmentations to and non-fi nancial, and contributing towards risk optimise and accelerate search queries discovery. 158REGULATION, SUPERVISION AND FINANCIAL STABILITY Strengthening Risk-Based Supervision risk and market risk are assessed. Stress testing methodology adopted for UCBs is also based on VI.88 The supervisory framework for commercial single factor sensitivity analysis. This framework banks, NBFCs and UCBs has been harmonised covers models for assessing resilience against with the broad supervisory architecture of the shocks to credit risk, concentration risk, interest unifi ed Department. This has been done while rate risk that incorporates stress to the loan book keeping in view the size of these entities in matters as well as the trading book, in addition to liquidity related to fi nancial stability as also other non- stress test based on LCR method. fi nancial parameters. For this purpose, a calibrated supervisory approach has been adopted. The VI.90 Quarterly proactive off-site vulnerability objectives are to improve proportionality and assessment exercises are carried out for banks, economic effi ciency of supervision by optimal use NBFCs, SFBs and UCBs using the tool kits like data of supervisory resources, strengthen the oversight analytics, early warning systems, identifi cation of on material institutions in a more risk-focused vulnerable borrowers, stress testing, vulnerability manner, and to deploy an appropriate range of on cyber security parameters and through different tools and technology to achieve the supervisory thematic analysis. objectives. VI.91 Several thematic studies were conducted Off-site Supervision during the year to provide inputs to the Top Management for proactive policy interventions in VI.89 The Department took several initiatives to the areas of concern. further strengthen identifi cation of vulnerable SEs and ensure immediate follow-up on the identifi ed VI.92 The scope of MI has widened with the vulnerabilities. This was guided by proactive off- inclusion of banks, NBFCs and UCBs under unifi ed supervisory structure and the work site supervision mechanisms, viz., macro-stress further expands with the inclusion of entities in tests; early warning mechanisms; and identifi cation unregulated space. A dedicated MI section has of vulnerable SEs through quarterly proactive off- been constituted under the unifi ed DoS, as a site surveillance exercise for banks, NBFCs, SFBs tool for effective off-site supervision. A system and UCBs. The macro-stress testing exercise for of informal/unstructured meetings with various banks follows a top-down approach and includes stakeholders has been put in place to get useful credit risk stress test (using three panel data information on SEs. The MI unit complements the econometric models linking the real and fi nancial quarterly assessment reports prepared for banks, sectors), a reverse stress test to assess liquidity SFBs, UCBs and NBFCs. risk, a new stress test to analyse large exposures at the system level, and a new duration-based stress VI.93 A standing committee on analytics test for interest-rate risk (IRR) that incorporates has been constituted to guide the Department stress to the loan book as well as the trading regarding adoption of industry standards and book. Stress testing analysis for NBFCs is based best practices in the fi elds of data intelligence/ on single factor sensitivity analysis to assess the business analytics and risk modelling so as to resilience of the sector to shocks in different types improve the quality of overall analytical inputs of risk. Resilience to shocks in credit risk, credit and to strengthen and scale up the predictive and concentration risk, sectoral credit risk, liquidity prescriptive analytics. 159ANNUAL REPORT 2020-21 Capacity Development and Skill Enhancement Enforcement Department (EFD) VI.94 As part of the measures to further VI.96 The Enforcement Department (EFD) strengthen supervision over REs, the Reserve was set up in April 2017 to enforce regulations Bank had set up a CoS to augment and reinforce uniformly across banks, with the objective of supervisory skills among its regulatory and engendering compliance by REs, within the supervisory staff both at entry level and on a overarching principles of ensuring fi nancial continuous basis. This was done to facilitate the stability, public interest and consumer protection. development of unifi ed and focused supervision The enforcement policy and framework approved by providing training and other developmental by the Board for Financial Supervision (BFS) inputs to the concerned staff. While the CoS was emphasises the need to be objective, consistent functioning in a limited way in virtual mode since and non-partisan in undertaking enforcement. May 2020, it has since been fully operationalised Enforcement in respect of cooperative banks with a full-time Director supported by an Academic and NBFCs was also brought under the scope of operations of the Department with effect from Advisory Council (AAC) since January 2021.The October 3, 2018. full-fl edged operationalisation of the CoS in both virtual and physical mode will further enhance the Agenda for 2020-21: Implementation Status quality of oversight of SEs by augmenting and Goals Set for 2020-21 ensuring a consistent pool of skilled resources. VI.97 The Department had set out the following Agenda for 2021-22 goals for 2020-21: VI.95 The Department proposes to achieve  A formal feedback process for DoS on the following goals for supervision of all SEs in areas most prone to violations to facilitate 2021-22: effective compliance testing would be  Integrate supervisory data structure for put in place (Utkarsh). For this purpose, the Reserve Bank’s REs by reviewing based on the experience gained since and consolidating the present scattered its inception, the Department would carry framework of returns (Utkarsh); out an analysis of the violations and their modus operandi (Para VI.98);  Strengthening cyber security monitoring mechanism for SEs (Utkarsh);  The enforcement policy and process would be reviewed in the wake of reorganisation of  Implementation of central fraud registry for regulatory and supervisory departments, NBFCs (Utkarsh); including work processes at ROs to  Issuing of guidelines on IT governance, ensure consistency in enforcement action risk, controls and assurance practices; and (Utkarsh) [Para VI.99]; and  The CoS, under guidance of AAC,  The enforcement work pertaining to will plan and develop curricula of all imposition of monetary penalties on programmes based on identifi ed areas HFCs by the Reserve Bank, to the extent where skill building/up-skilling are provided for under the National Housing required, benchmark the programmes with Bank (NHB) Act, 1987, would be brought international standards/best practices and under EFD in a phased manner (Para develop appropriate teaching methods. VI.100). 160REGULATION, SUPERVISION AND FINANCIAL STABILITY Implementation Status of Goals addendum to the existing policy was not considered immediately necessary. The Department would be VI.98 During the year, post resumption of near undertaking enforcement action against HFCs in normal offi ce functioning, the Department carried accordance with the existing policy. out analysis of the areas that are most prone to violations and the modus operandi. The results Other Initiative of the analysis have been shared with the DoS. VI.101 During July 2020-March 2021, the A formal arrangement for sharing of feedback Department undertook enforcement action against has also been put in place to facilitate effective 54 REs and imposed an aggregate penalty of compliance testing. `19.41 crore for non-compliance1 with provisions/ VI.99 In pursuance of the objective to contravention of certain directions issued by the ensure consistency in enforcement action, Reserve Bank from time to time through various the Department had online interaction with circulars (Table VI.4). the ROs to review work processes and with a Agenda for 2021-22 view to understand challenges and constraints VI.102 During the year ahead, the Department faced by them in undertaking enforcement. proposes to achieve the following goals: Necessary clarifi cations/guidance on issues have been provided. Further, training sessions  Implementation of the EFD’s business were also organised to impart greater clarity process application and database of on the enforcement process so as to move to enforcement actions (Utkarsh); consistency in enforcement action.  Review of enforcement policy and VI.100 As regards HFCs, while enforcement standard operating procedures (SOPs); actions were sought to be undertaken by applying and examining undertaking of enforcement the existing policy mutatis mutandis, framing of a specifi c policy was contemplated as an addendum Table VI.4: Enforcement Actions thereto, once Reserve Bank’s regulatory framework (July 2020-March 2021) for such institutions was fully devised and brought Regulated Entity No. of Penalties Total Penalty (` crore) into force. DoR has since reviewed the regulations 1 2 3 and issued revised regulatory framework for HFCs Public Sector Banks 3 4.50 on October 22, 2020 and thereafter on February Private Sector Banks 2 4.72 17, 2021 issued the Master Directions for HFCs. Cooperative Banks 39 2.14 Foreign Banks 2 4.00 Based on the clarity that has emerged on the role Payments Banks 1 1.00 of the Reserve Bank under the NHB Act, and as Small Finance Banks - - the existing enforcement policy already provided NBFCs 7 3.05 for the principles and matrices to be applied Total 54 19.41 and processes to be adopted for undertaking -: Nil. Source: RBI. enforcement action against HFCs, the need for an 1 Illustratively, some of them include marketing/distribution of mutual fund/insurance products by banks; exposure norms and IRAC norms; Reserve Bank of India (frauds classifi cation and reporting by commercial banks and select FIs) Directions, 2016; NBFC-ND-SI and NBFC-D directions on fair practices code applicable to NBFCs; and Master Circular on Board of Directors-UCBs. 161ANNUAL REPORT 2020-21 action against credit information  Implementing the Internal Ombudsman companies (non-bank and non-NBFC); (IO) scheme for select NBFCs (Utkarsh) [Para VI.106];  Review of existing practices and (business) processes to identify bottlenecks affecting  Examining, for implementation, the timeliness in enforcement action and recommendations of the in-house improving coordination with DoS and DoR, committee on convergence of the for ensuring undertaking of enforcement ombudsman schemes, including the role action within the fi xed timelines; of consumer education and protection (CEP) cells (Utkarsh) [Para VI.107];  Increased interaction and trainings aimed at improving consistency in decisions  Using artifi cial intelligence (AI) to enhance the effi cacy of the Complaint Management across ROs and putting in place an System (CMS) of the Reserve Bank (Para arrangement for sharing of information VI.108); and across EFD, ROs as also with CO; and  Instituting a disincentive cum incentive  Improving coordination with NABARD and framework to encourage banks to improve putting in place a coordination mechanism their grievance redress mechanism (Para with NHB to facilitate effectual undertaking VI.109). of enforcement action against HFCs. Implementation Status of Goals 5. CONSUMER EDUCATION AND PROTECTION Strengthening Financial Education and Awareness for the Public Consumer Education and Protection Department (CEPD) VI.105 CEPD undertook intensive awareness through a series of multi-media campaigns on the VI.103 The Consumer Education and Protection ombudsman schemes of the Reserve Bank, safe Department (CEPD) frames policy guidelines to digital banking (covering threats like phishing/ ensure protection of the interest of customers of vishing, dubious links/emails/QR codes and SMS REs in line with global best practices; undertakes spoofi ng) and regulations on limited liability of oversight of the functioning of the ombudsman customers in fraudulent digital transactions in schemes of the Reserve Bank; and creates public coordination with Department of Communication awareness on safe banking practices, extant (DoC). Additionally, a series of messages were regulations on customer service and protection, displayed through tickers/scrolls on the Reserve and avenues for redress of customer complaints. Bank’s website and the CMS webpage on Agenda for 2020-21: Implementation Status safe digital banking during the lockdown. The banking ombudsmen conducted 154 awareness Goals Set for 2020-21 programmes among the members of public during VI.104 The Department had set out the following the year, mostly through the digital mode on goals for 2020-21: account of pandemic related restrictions. Of these,  Strengthening fi nancial education and 34 awareness programmes were conducted in awareness for the public (Utkarsh) [Para educational institutions. Further, a framework VI.105]; for education from the perspective of consumer 162REGULATION, SUPERVISION AND FINANCIAL STABILITY Box VI.5 Framework for Education from a Consumer Protection Perspective A framework for fi nancial education with a specifi c focus basis of their vulnerability and defi ciency of information; on consumer protection has been developed, based on the (ii) content for fi nancial education on consumer protection guidance of the G-20 high level principles (HLP) on fi nancial aligned to the needs of the target groups; (iii) multi-pronged consumer protection (Principle 5: Financial Education and delivery channels with maximum outreach to the intended Awareness)2; the Organisation for Economic Cooperation people; (iv) coordination with various entities/departments/ and Development-International Network on Financial stakeholders to facilitate fi nancial awareness from the Education (OECD-INFE) HLP on national strategies for consumer protection perspective; and (vi) a multi-mode fi nancial education; and the OECD-INFE guidelines on mapping of the impact of the initiatives for estimating fi nancial education in schools. their effectiveness, identifying areas for improvement and determining the extent to which the framework achieved its The framework lays down a strategy to empower objectives. consumers of regulated entities (REs), covering the following aspects, viz., (i) target groups classifi ed on the Source: RBI. protection was developed to extend awareness on Examining, for Implementation, the consumer protection issues among various target Recommendations of the In-house Committee groups (Box VI.5). on Convergence of the Ombudsman Schemes, including the Role of CEP Cells Implementing the IO Scheme for Select NBFCs VI.107 The Banking Ombudsman Scheme (BOS), VI.106 The IO, at the apex of the internal launched in 1995, has served as a fl agship alternate grievance redress mechanism of an entity, grievance redress mechanism for the redress of independently reviews the resolution provided customer complaints against banks received by by the entity in the case of wholly or partially the Reserve Bank. Subsequently, the ombudsman rejected complaints. The IO scheme is already scheme for NBFCs and the ombudsman scheme in operation in the case of banks (2018) and for digital transactions were launched in 2018 non-bank system participants (2019). The and 2019, respectively. The three ombudsman proposal to extend the IO scheme to all NBFCs schemes are administered by CEPD. The in-house covered under the Ombudsman Scheme for committee, set up to review the ombudsman NBFCs (OSNBFC), 2018, was examined and it framework and suggest measures to improve its was concluded that considering the diversity in effi cacy, submitted its report in May 2020. The the size and business profi le of NBFCs and the committee made wide-ranging recommendations, number of complaints received by NBFCs, the IO which included: (i) convergence of the three scheme may be extended to NBFCs based on ombudsman schemes into an integrated “Reserve identifi ed thresholds. The proposed IO scheme Bank of India Ombudsman Scheme”; (ii) expanding for NBFCs will improve the internal grievance the ambit of this scheme to all REs presently not redress mechanism of the NBFCs covered. covered under the existing schemes to provide a 2 Principle 5 states, inter alia, that fi nancial education and awareness should be promoted by all relevant stakeholders and clear information on consumer protection, rights and responsibilities should be easily accessible by consumers. 163ANNUAL REPORT 2020-21 single window for grievance redress; (iii) covering quantitative and qualitative aspects of Reserve all complaints except those in the ‘negative list’; Bank’s grievance redress mechanism and (iv) subsuming CEP Cells within the ombudsman improve the effi ciency of CMS. To start with, AI will framework; (v) setting up a Centralised Receipt equip CMS to fi lter out certain non-maintainable and Processing Centre (CRPC) for receipt and complaints at the time of lodgement. Going initial processing of complaints under the ‘One forward, AI will also serve as a decision support Nation - One Jurisdiction’ approach; (vi) reducing tool, apart from helping to refi ne data analytics the turnaround time (TAT) for the redress of and root cause analysis (RCA) of the complaints. complaints; and (vii) introducing delegation by Instituting a Disincentive cum Incentive Framework appointing a deputy ombudsman. The following to Encourage Banks to Improve their Grievance major recommendations have been accepted for Redress Mechanism implementation: VI.109 With a view to strengthen and improve a. Convergence of the three ombudsman the effi cacy of the internal grievance redress schemes (Banking Ombudsman Scheme, mechanism of banks, and to provide better 2006; Ombudsman Scheme for NBFCs, customer service, a comprehensive framework 2018 and Ombudsman Scheme for Digital has been put in place comprising certain Transactions, 2019) into an integrated measures. The measures include, inter alia, ombudsman scheme; enhanced disclosures on customer complaints b. Setting up a Centralised Receipt and by the banks and the Reserve Bank; recovering Processing Centre (CRPC) and moving the cost of complaints’ redress from banks when towards a ‘One Nation – One Ombudsman’ maintainable complaints are higher than their approach; peer-group averages; intensive review of grievance c. Inclusion of REs not presently covered redress mechanism; and supervisory/regulatory under the ombudsman schemes in a actions against banks that fail to improve their phased manner; redress mechanism in a time bound manner. d. Doing away with the grounds of complaints, Major Developments including a defi nition of ‘defi ciency in Grievance Redress during the Pandemic customer service’ and incorporating a VI.110 The functioning of the ombudsman and detailed ‘negative’ or ‘exclusions’ list for CEP Cells continued uninterrupted and effi ciently, rejection of a complaint; even during the pandemic induced lockdown by e. Delegation of power for the closure of leveraging the 24X7 availability of CMS and the complaints; and end-to-end digitisation of the grievance redress f. Updating CMS for incorporating mechanism. the recommendations accepted for Undertaking RCA of the Major Areas of implementation. Complaints Using AI to Enhance the Effi cacy of CMS of the VI.111 The RCA of the major areas of complaints Reserve Bank was conducted by the ombudsmen offi ces, CEP VI.108 Work on implementing AI in CMS was Cells and banks for the period ended June 2020 initiated during the year to effectively address the and the fi ndings were consolidated and analysed. 164REGULATION, SUPERVISION AND FINANCIAL STABILITY Follow-up actions included advising banks to, VI.114 The number of registered insured (a) improve safety of the digital transactions banks stood at 2,058 as on March 31, 2021, through transaction pattern analysis and effective comprising 139 commercial banks (including 43 velocity checks; (b) ensure suitability in the issue of RRBs, 2 LABs, 6 PBs and 10 SFBs) and 1,919 credit cards and independently assess the credit co-operative banks (34 StCBs, 347 DCCBs and risk involved, especially in the case of students 1,538 UCBs). With deposit insurance in India and those without independent fi nancial means; covering all deposits up to `5 lakh, the number of fully protected accounts (247.8 crore) at end- (c)enhance customer protection through effective implementation of KYC norms as specifi ed in March 2021 constituted 98.1 per cent of the total the extant instructions; (d) implement regulations number of accounts (252.6 crore), as against the international benchmark of 80 per cent. In terms of related to senior citizens and differently abled amount, the total insured deposits of `76,21,258 customers, as also limiting the liability of customers crore as at end-March 2021 constituted 50.9 per in unauthorised electronic banking transactions; cent of assessable deposits of `1,49,67,776 crore, and; (e) strengthen awareness efforts. as against the international benchmark of 20 - 30 Agenda for 2021-22 per cent. At the current level, insurance cover is around 4.0 times of per capita income in 2020-21. VI.112 The Department proposes the following agenda under Utkarsh for 2021-22: VI.115 The DICGC builds up its Deposit  Formulation of a policy/scheme for Insurance Fund (DIF) from premia received from insured banks, interest income from investments handling complaints not covered under the and cash recovery out of assets of failed banks ombudsman schemes; adjusting for expenditure by way of payment of  Efforts for inclusion of safe banking claims of depositors and related expenses, net practices in educational curriculum; and of taxes. This fund is available for settlement  Extension of the IO scheme to NBFCs, of claims of depositors of banks taken into fi nancially sound and well managed UCBs liquidation/amalgamation. As per the un-audited and RRBs. data, size of the DIF stood at `1,29,936 crore as on March 31, 2021, yielding a reserve ratio of Deposit Insurance and Credit Guarantee 1.70 per cent. Corporation (DICGC) VI.116 Five cooperative banks and one LAB were VI.113 Deposit insurance plays an important liquidated during the year 2020-21. As per the role in maintaining the stability of the fi nancial un-audited data, the Corporation has processed system by assuring the protection of small claims amounting to `993 crore during 2020-21 with depositors thereby ensuring public confi dence a view to ensuring payment to insured depositors in the fi nancial system. The Deposit Insurance of liquidated banks under the prevailing pandemic and Credit Guarantee Corporation (DICGC) is situation. Of `993 crore, the Corporation has a wholly owned subsidiary of the Reserve Bank settled claims amounting to `564 crore in respect of India (RBI) constituted under the DICGC Act, of nine co-operative banks during 2020-21. An 1961. Deposit insurance provided by the DICGC amount of `330 crore has been settled in case of covers all insured commercial banks, including one cooperative bank in April 2021. However, the LABs, PBs, SFBs, RRBs and co-operative banks. net outgo of funds towards settlement of claims 165ANNUAL REPORT 2020-21 from the Corporation was also lower as there was arising from fi nancial intermediation by banks is a recovery of ` 568 crore during 2020-21. There addressed through regulation and supervision, was an amalgamation of a private sector bank and central bank emergency liquidity and deposit a foreign bank during 2020-21. insurance, with the fi rst element, i.e., regulation and supervision acting as the fi rst line of defence VI.117 Deposit insurance constitutes an integral part of the fi nancial safety net across the world. in safeguarding fi nancial stability, emergency The positive impact of deposit insurance on liquidity from the central bank to banks being fi nancial stability and the moral hazard associated an intermediate/transitional pillar and deposit with pricing of deposit insurance have gained insurance maintaining the confi dence of the public importance in recent times (Box VI.6). The risk in the banking system. Box VI.6 Deposit Insurance Pricing - Mitigating Moral Hazard through Risk-based Premium (RBP) In order to maintain an adequate level of deposit insurance, adequately capitalised; or less than adequately capitalised the DICGC collects premium from member fi nancial (Garnett et al., 2020). institutions either at a fl at rate or a differentiated rate on the In India, several committees, including the Narasimham basis of an individual bank’s risk profi le. Although fl at rate Committee on Banking Sector Reforms (1998) and the premium systems have the advantage of being relatively Capoor Committee on Reforms in Deposit Insurance in easy to understand and administer, they do not take into India (RBI, 1999) have recommended RBP. The Committee account the level of risk that a bank poses to the deposit on Credit Risk Model (2006) constituted by the DICGC and insurance system and can be perceived as unfair in that the Committee on Differential Premium Systems (2015) also the same premium rate is charged to all banks regardless recommended RBP but could not operationalise it as the of their risk profi le [International Association of Deposit roll out was linked with hike in deposit insurance cover. With Insurers (IADI), 2011]. The primary objective of a differential effect from February 4, 2020, deposit insurance cover was premium system is to provide incentives for banks to avoid increased to `5 lakh from the earlier limit of `1 lakh. With a excessive risk taking and introduce more fairness into view to mitigating the impact of the hike in the cover in case premium assessment processes. Keeping this objective in of failure of banks, the premium rate was also increased to 12 view, many jurisdictions are transiting towards RBP, with the paise per `100 of deposits from April 1, 2020 from 10 paise Federal Deposit Insurance Corporation (FDIC) being among earlier. The introduction of RBP in order to address the issue the earliest to adopt the practice (1993). The IADI’s Annual of moral hazard inherent in fl at rate premium is a natural Survey conducted in 2020 reveals that 60 DIS use fl at rate corollary. The Internal Committee on RBP (Chairman: Shri premium, 41 DIS use RBP, while 9 DIS use a combination V. G. Venkata Chalapathy) undertook the risk assessment of both the systems. of banks, primarily based on CAMEL parameters and The literature on pricing of deposit insurance identifi es recommended the introduction of RBP. Recommendations different approaches for determining RBP, viz., the option of the Internal Committee are currently under consideration pricing model; expected loss pricing method; bucketing for their implementation. approach; and deposit insurance fund size estimation. In References: order to estimate bank risk and to set deposit insurance premiums, regulators in many jurisdictions use a 1. Garnett, E., Henry L.V., Hoople, D.& Mihalik, A. (2020), ‘A combination of qualitative indicators along with CAMEL History of Risk-Based Premiums at the FDIC’, FDIC Staff (Capital, Asset Quality, Management, Earnings, and Study, January. Liquidity) indicators (IADI, 2020). In the case of FDIC 2. IADI (2011), ‘General Guidance for Developing Differential for instance, an insured institution’s assessment rate is Premium Systems’, October. based primarily on two measures of risk: capital levels and supervisory ratings. The capital measure assigns 3. IADI (2020), ’Evaluation of Differential Premium Systems institutions to one of three capital groups: well capitalised; for Deposit Insurance’, August. 166REGULATION, SUPERVISION AND FINANCIAL STABILITY 6. CONCLUSION policy arbitrage. Measures to harness technology for effi cient customer services and effective fraud VI.118 In sum, additional regulatory measures detection were also put in place. Implementing were adopted, apart from extending the existing IO scheme in select NBFCs, moving towards ones, in response to the disruptions in the fi nancial ‘One Nation - One Ombudsman’ approach to system owing to COVID-19 pandemic. Steps were improve the effi cacy of ombudsman schemes taken for increasing credit fl ow to corporates and instituting a comprehensive framework to and small business segment. Measures were strengthen grievance redress mechanism refl ected also undertaken to strengthen regulatory and the resolve to ensure consumer protection. As supervisory framework of SCBs, cooperative banks such, strengthening regulation and supervision and NBFCs in line with the global best practices, in several small and big steps continues to be and also with an objective to bring them under in focus and this will contribute to bolstering the uniform enforcement framework to minimise the system stability. 167ANNUAL REPORT 2020-21 VII PUBLIC DEBT MANAGEMENT During the year, a major challenge in the aftermath of COVID-19 pandemic was the management of debt both for the central and state governments. In this milieu, the Reserve Bank took conventional and unconventional measures in order to maintain the orderly market conditions along with ensuring that the financial needs of the governments are met, while keeping in mind the major objectives of cost minimisation, risk mitigation and market development. Supported by these measures, the weighted average cost of government borrowings through primary issuances of central government dated securities during 2020-21 was at 17-year low of 5.79 per cent despite a 141.2 per cent jump in net market borrowings of the central government. VII.1 The Internal Debt Management and buyback operations along with Department (IDMD) of the Reserve Bank is reissuances of securities to augment entrusted with the responsibility of managing liquidity in Government of India (GoI) the domestic debt of the central government securities (G-sec) market and facilitate by statute vide Sections 20 and 21 of the RBI fresh issuance (Para VII.5 - VII.7); Act, 1934, and of 28 state governments and • Ease of doing business in the G-sec market two union territories (UTs) in accordance with – hiving off servicing of compensation bilateral agreements as provided in Section bonds issued in physical forms to state 21A of the said Act. Further, short-term credit treasuries (Utkarsh) [Para VII.8]; is provided up to three months to both central and state governments/UTs in the form of • Complete the process of mirroring of gilt Ways and Means Advances (WMA) to bridge account in e-Kuber; examine the feasibility temporary mismatch in their cash fl ows, as of marking lien by banks for loans against laid down in terms of Section 17(5) of the G-sec in the Reserve Bank’s e-Kuber RBI Act, 1934. portal; and review guidelines on subsidiary general ledger (SGL)/constituent VII.2 The remainder of the chapter is arranged subsidiary general ledger account (CSGL) in three sections. Section 2 presents the [Para VII.9]; implementation status in respect of the agenda for 2020-21. Section 3 covers major initiatives to be • Introduction of Separate Trading of undertaken in 2021-22, followed by a summary in Registered Interest and Principal last section. Securities (STRIPS) in State Development Loans (SDLs) (Utkarsh) [Para VII.10]; 2. Agenda for 2020-21: Implementation Status • Explore the possibilities for optimising Goals Set for 2020-21 the market borrowings; develop the VII.3 The Department had set out the following methodology for building up of liquidity goals for 2020-21: buffer for better cash management; and • Consolidation of debt through calendar- consolidation of public debt data (including driven, auction-based switches data on market borrowings, valuations and 168PUBLIC DEBT MANAGEMENT special securities) in the Reserve Bank’s VII.7 During the year 2020-21, new securities data warehouse (Para VII.11); ranging from 2 to 40 year tenors were issued with the objective of catering to different investor needs. • Undertake best practices in data reporting Floating Rate Bonds (FRBs) were also issued to improve quality and veracity of data during the year in order to broaden the investor (Para VII.12); and base. The share of FRBs in total issuances during • Conduct capacity building programmes for 2020-21 was 6.51 per cent as against 8.5 per cent sensitising the state governments about a year ago. the prudent measures of cash and debt VII.8 A review has been undertaken to hive off management (Para VII.13). servicing of compensation bonds (CBs) to state Implementation Status of Goals treasuries. VII.4 During 2020-21, the market borrowing VII.9 In continuation of efforts to facilitate programme was conducted following the debt interoperability of government securities management strategy of minimising cost, risk depositories, the Reserve Bank had decided to mitigation and market development. Amidst modify its government securities registry (the heightened uncertainty created by the COVID-19 PDO-NDS system) to include constituent details pandemic and its effects on domestic and global in the Constituent Subsidiary General Ledger economy and the fi nancial markets, the Reserve (CSGL) accounts. Accordingly, an upgrade in Bank successfully managed the combined gross e-Kuber system to capture the G-sec holding market borrowings of the central and the state details of constituents (entities maintaining governments, which increased by 61.3 per cent to securities accounts with CSGL holders), facilitate `21,69,140 crore during the year. settlement of G-sec transactions directly in the VII.5 The Reserve Bank continued its policy of constituent accounts and also enable lien-marking passive consolidation by way of reissuances and for constituent accounts in e-Kuber, is under active consolidation through buyback/switches. process. During 2020-21, 162 out of 178 issuances of G-sec VII.10 As announced in the Reserve Bank’s were re-issuances (91.0 per cent) as compared Monetary Policy Statement on Developmental with 185 re-issuances out of 194 issuances (95.4 and Regulatory Policies on August 7, 2019 to per cent) in the previous year. introduce STRIPS/reconstitution facility in SDLs, VII.6 The active form of fi scal consolidation Financial Benchmark India Pvt. Ltd. (FBIL) was through switching of short-term G-sec with long- advised to work on a methodology for constructing term is generally conducted on third Monday zero coupon yield curve for SDLs for implementing of every month. Accordingly, 95.9 per cent of STRIPS in SDLs, for which the work is underway. the switches budgeted for the fi scal 2020-21, VII.11 The study on optimisation of market amounting to `1,53,418 crore, were completed borrowings and developing methodology for during 2020-21, as against `1,64,803 crore in the building up of liquidity buffer for better cash previous year. management is completed. The consolidation 1 Excludes issuance of FRBs of `19,953.68 crore made through switch auctions. 169ANNUAL REPORT 2020-21 of public debt data is currently going on under increased initially by `4.20 lakh crore, which the Reserve Bank’s revamped data warehouse was further increased twice during the year, i.e., project. fi rst, `1.10 lakh crore under the special window given to states and UTs towards shortfall in goods VII.12 The reports relating to public debt and services tax (GST) compensation cess, and are being linked to source data, and data second, `80,000 crore during the announcement inconsistency, if any, across various reports is of the Union Budget for the year 2021-22. Net being addressed. market borrowings through dated G-sec increased VII.13 Capacity building programmes for by 141.2 per cent as compared with previous sensitising state governments about the prudent year. Net market borrowings through dated G-sec measures of cash and debt management were fi nanced 61.8 per cent of the centre’s budgeted conducted for fi ve states, viz., Chhattisgarh, Goa, gross fi scal defi cit (GFD) as against 50.8 per cent Himachal Pradesh, Manipur, and Nagaland. in the previous year. The net market borrowings through dated securities and Treasury Bills Other Initiative (T-Bills) taken together also increased in 2020-21 VII.14 As announced in the Reserve Bank’s (Table VII.1). Monetary Policy Statement on Developmental Debt Management Operations and Regulatory Policies on February 5, 2021, to increase retail participation in government VII.16 Notwithstanding the volatility in the bond securities market, it is planned to provide retail market, the weighted average yield (WAY) of investors with the facility to open their gilt G-sec issuances during the year declined by 106 securities account directly with the Reserve Bank basis points (bps) as compared to the WAY of the (‘Retail Direct’) and provide online access to previous year, thus falling to its lowest since 2004- the government securities market for managing 05. The weighted average coupon on the entire their government securities portfolio. The user- outstanding debt stock also decreased by 44 bps. friendly online ‘Retail Direct’ portal will have The weighted average maturity (WAM) of primary facilities for participation in primary auction Table VII.1: Net Market Borrowings of the under the non-competitive segment as well in Central Government the secondary market on NDS-OM. It is expected (Amount in ` crore) that the initiative will encourage greater retail Item 2017-18 2018-19 2019-20 2020-21 participation in government securities market 1 2 3 4 5 through improvement in ease of access to the Net Borrowings (i to iv) 4,98,891 4,58,337 5,11,500 13,75,654 (i) Dated Securities@ 4,48,410 4,22,737 4,73,972 11,43,114 market. (ii) 91-day T-Bills 31,886 -46,542 -9,600 10,713 (iii) 182-day T-Bills 1,436 32,931 38,354 -18,743 Debt Management of the Central Government (iv) 364-day T-Bills 17,159 49,211 8,774 2,40,570 VII.15 During 2020-21, the gross market @: Without adjusting for buyback and switches. After adjusting for borrowing2 through dated G-sec was higher by buyback and switches, net borrowings during 2020-21 stood at `11,46,739 crore, `4,73,990 crore in 2019-20, `4,23,269 crore in 93.0 per cent as compared with the previous 2018-19 and `4,10,260 crore in 2017-18. year. The planned market borrowing of GoI Source: RBI. 2 Includes `1.1 lakh crore borrowed by GoI for providing back-to-back loans to states and UTs towards GST compensation cess shortfall. 170PUBLIC DEBT MANAGEMENT Table VII.2: Market Loans of Central Government - A Profi le* (Yield in Per cent/Maturity in Years) Years Range of Cut Off Yield 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 8.50 6-30 14.66 10.23 8.08 2015-16 - 7.54-8.10 7.59-8.27 7.88 6-40 16.03 10.50 8.08 2016-17 6.85-7.46 6.13-7.61 6.46-7.87 7.15 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 7.77 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 3.79-5.87 5.15-6.53 4.46-7.19 5.79 1-40 14.49 11.31 7.27 -: Not applicable. @: Residual maturity of issuances and fi gures are rounded off. *: Excluding special securities. ^: Excluding switch auction. #: Including switch auction. Source: RBI. issuances (excludes issuances under switch also aided in easing of yields. The 10-year yield auction) was 14.49 years as compared with 16.15 softened by 81 bps in Q1. In Q2:2020-21, the years in previous year. The weighted average G-sec yields hardened mainly due to the rise in maturity (WAM) of the outstanding debt increased crude oil prices and higher CPI infl ation fi gures from 10.72 years to 11.31 years primarily due to for June and July. Certain policy measures issuances of longer tenor security in the switch announced by the Reserve Bank towards end auctions in 2020-21 (Table VII.2). of August, viz., hike in held-to-maturity (HTM) limit for banks, term repo operations and special VII.17 Partial devolvement on Primary Dealers OMOs, helped in easing of the yields. The 10- (PDs) took place on fi fteen instances amounting year yield rose by 14 bps in Q2. The Q3:2020-21 to `1,30,562 crore during 2020-21 as compared saw softening of the yields with the 10-year yield with two instances for `3,606 crore in 2019-20. easing by 15 bps aided by certain policy measures, No bid was accepted on four instances due to viz., introduction of on-tap TLTROs, extended the market conditions prevailing then, for a total dispensation of enhanced HTM limit for banks, notifi ed amount of ` 39,000 crore. OMOs, and MPC’s forward guidance suggesting VII.18 The yields on G-sec declined during continuance of accommodative monetary policy the year with the 10-year yield softening by 37 stance. During Q4:2020-21, yields spiked following bps mainly due to the monetary and liquidity the Union Budget announcement of larger than measures taken by the Reserve Bank to tackle expected government borrowings and tracking the stress induced by the COVID-19 pandemic. the sharp rise in US treasury yields and higher Yields declined sharply in Q1:2020-21 as the crude oil prices. However, the cancellation of the Reserve Bank cut the policy repo rate by 40 last scheduled G-sec auction for 2020-21 resulted bps and undertook various liquidity augmenting in some easing of the yields towards the end of measures in the wake of the pandemic. Decline March 2021. The 10-year yield rose by 45 bps in in US treasury yields and fall in crude oil prices Q4 to end the year at 6.34 per cent (Chart VII.1). 171ANNUAL REPORT 2020-21 Treasury Bills Chart VII.1: FBIL Semi Annualised Par Yield Curve VII.20 Short-term cash requirements of the central government are met through issuance of T-Bills. The net short-term market borrowing of the government through T-Bills (91, 182 and 364 days) increased to `2,32,540 crore during 2020- 21 from `37,528 crore in the previous year. Ownership of Securities VII.21 Commercial banks remained the largest holders of government securities (including T-Bills and SDLs) accounting for 37.3 per cent as at end- March 2021, followed by insurance companies (25.7 per cent), the Reserve Bank (10.4 per cent) and provident funds (9.8 per cent). The Source: FBIL. share of the foreign portfolio investors (FPIs) was 1.2 per cent. The other holders of government VII.19 During 2020-21, about 49.0 per cent of the securities (including T-Bills and SDLs) include market borrowings were raised through issuance mutual funds, state governments, fi nancial of dated securities with a residual maturity of institutions (FIs) and corporates. 10 years and above, as compared with 54.2 Primary Dealers per cent in the previous year. Further, the 30- year and 40-year tenor securities were issued/ VII.22 The number of primary dealers (PDs) reissued during the year with the objective of stood at 21 [14 Bank-PDs and 7 Standalone catering to the demand from long-term investors PDs (SPDs)] at end-March 2021. The PDs have such as insurance companies and pension funds the mandate to underwrite primary auctions of (Table VII.3). dated G-sec while they have a target of achieving 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 3,91,990 28.6 5 -9.99 Years 1,57,000 27.5 1,79,000 25.2 3,07,405 22.4 10-14.99 Years 98,000 17.2 1,37,000 19.3 3,76,766 27.5 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 2,94,162 21.5 Total 5,71,000 100.0 7,10,000 100.0 13,70,324 100.0 -: Nil. Note: Figures in the columns might not add up to the total due to rounding off of numbers. Source: RBI. 172PUBLIC DEBT MANAGEMENT bidding commitment and success ratio in respect Chart VII.2: GoI Cash Balance Position of primary auctions of Treasury Bills (T-Bills)/cash management bills (CMBs). The PDs individually achieved the stipulated minimum success ratio of 40 per cent in primary auctions of T-Bills with an average success ratio of 57.10 per cent in H1: 2020-21(April-September 2020) and 60.13 per cent in H2:2020-21 (October 2020-March 2021). The share of PDs in auctions of T-Bills/CMBs was 68.89 per cent during 2020-21 as compared with 71.67 per cent in the previous year. The commission paid to PDs, excluding GST, for underwriting primary auctions of dated G-sec during 2020-21 was `454.64 crore as compared with `41.04 crore in the previous year. Source: RBI. Sovereign Gold Bond (SGB) Scheme VII.23 The Reserve Bank in consultation with days during the same period previous year. The the GoI issued twelve tranches of SGB for an highest amount of WMA/OD resorted to by the aggregate amount of `16,049 crores (32.35 central government was `2,24,078 crore on May tonnes) during 2020-21. A total of `25,702 crore 3, 2020. The central government issued CMBs of (63.32 tonnes) has been raised through the `80,000 crore of 84-days tenor to tide over short- scheme since its inception in November 2015. term mismatches in cash fl ows during 2020-21. Cash Management of the Central Government Despite COVID-19 pandemic situation, the cash balance of the centre was comfortable throughout VII.24 The central government started the year the year (Chart VII.2). 2020-21 with a cash balance of `55,573 crore. In the beginning of the fi nancial year, the WMA limit Investments under Foreign Central Bank Scheme of the centre was fi xed at `1,25,000 crore for the VII.25 Under the Foreign Central Bank (FCB) fi rst half of 2020-21. In the wake of the evolving scheme, the Department invests in Indian macroeconomic conditions, and to tide over G-sec on behalf of select FCBs and multilateral the stress situation arisen due to the outbreak development institutions in the secondary G-sec of the COVID-19 pandemic, the Reserve Bank, market. Total volumes transacted on behalf of in consultation with the GoI, increased the limit these institutions stood at `3,120 crore (face for WMA to `2,00,000 crore for the remaining value) during 2020-21 as compared with `4,500 part of the fi rst half of the fi nancial year. Further, crore in the previous year. the WMA limit for the second half was set at `1,25,000 crore. The central government Debt Management of State Governments resorted to WMA for 63 days during 2020- VII.26 Following the recommendation of the 14th 21 vis-à-vis 189 days in the previous year and Finance Commission (FC) to exclude states from went into overdraft (OD) for 9 days vis-à-vis 52 the National Small Savings Fund (NSSF) fi nancing 173ANNUAL REPORT 2020-21 facility (barring Delhi, Madhya Pradesh, Kerala and Following the policy of passive consolidation, four Arunachal Pradesh), market borrowings of states states (viz., Maharashtra, Tamil Nadu, Punjab and have been increasing over the last few years. The Madhya Pradesh) undertook re-issuances during share of market borrowings in fi nancing gross 2020-21. The average inter-state yield spread on fi scal defi cit (GFD) of states consequently rose to 10 year fresh issuances was 10 bps in 2020-21 as 89.5 per cent in 2020-21 (BE) from 74.9 per cent compared with 6 bps in the previous year. in 2019-20 (RE). Cash Management of State Governments VII.27 The gross and net market borrowings VII.29 The recommendations of the Advisory of states were higher than the previous year Committee on WMA scheme for state governments owing to the COVID-19 induced macroeconomic (Chairman: Shri Sumit Bose) set WMA limit at conditions. The gross market borrowings of states `32,225 crore for all states/UTs together until the stood at 97.5 per cent of the amount indicated next review in 2020-21. In order to provide greater in the quarterly indicative calendar for market comfort to state governments in undertaking borrowings by the state governments. There were COVID-19 containment and mitigation measures, 742 issuances in 2020-21, of which 56 were re- and to enable states to plan their market issuances (636 issuances in 2019-20, of which borrowings, as an interim measure, the Reserve 114 were re-issuances) [Table VII.4]. Bank had announced an increase in WMA limit VII.28 The weighted average cut-off yield (WAY) of the states/UTs by 60 per cent over and above of SDL issuances during 2020-21 was lower at the level as on March 31, 2020, which remained 6.55 per cent than 7.24 per cent in the previous valid till March 31, 2021. The Advisory Committee year. The weighted average spread (WAS) of SDL on WMA to state governments (Chairman: issuances over comparable central government Shri Sudhir Shrivastava) has submitted its report securities was 52.72 bps in 2020-21 as compared in March 2021. Based on the recommendations with 55.02 bps in the previous year. In 2020-21, of the Committee, the Reserve Bank has decided twenty one states and two union territories issued to retain the interim limit of WMA (at `51,560 dated securities of tenors other than 10 year, crore for all States/UTs) till September 30,2021. ranging from 1.5 to 35 year. Eight states rejected Relaxation in the overdraft (OD) scheme has all the bids in one or more of the auctions. been given by the Reserve Bank to state Table VII.4: Market Borrowings 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 1,47,039 Gross Sanction under Article 293(3) 4,82,475 5,50,071 7,12,744 9,69,525 Gross Amount Raised during the Year 4,19,100 4,78,323 6,34,521 7,98,816 Net Amount Raised during the Year 3,40,281 3,48,643 4,87,454 6,51,777 Amount Raised during the Year to Total Sanctions (per cent) 86.9 87.0 89.0 82.4 Outstanding Liabilities (at the end of period) # 24,29,892 27,78,536 32,65,989 39,25,555 #:Including Ujwal DISCOM Assurance Yojana (UDAY) and other special securities. Source: RBI. 174PUBLIC DEBT MANAGEMENT governments/UTs to tide over mismatches in to avail of a special drawing facility (SDF) at a cash fl ows by increasing the number of days for discounted rate from the Reserve Bank against which a state/UT can be in OD continuously to their incremental annual investment in CSF and 21 working days from 14 working days, and in a GRF. Outstanding investment by states in the CSF quarter to 50 working days from 36 working days, and GRF as on March 31, 2021 was `1,27,208 effective from April 7, 2020, till March 31, 2021. crore and `8,405 crore, respectively, as against Eighteen states/UTs availed the Special Drawing `1,30,431 crore and `7,486 crore at end-March Facility (SDF), fi fteen states/UTs resorted 2020. Total investment and disinvestment in to WMA and eight states/UTs availed OD in CSF/GRF during 2020-21 were `17,900 crore 2020-21. and `18,264 crore, respectively. A review of the CSF/GRF schemes is underway to make it more VII.30 Over the years, states have been attractive for states. accumulating a sizeable cash surplus in the form of intermediate treasury bills (ITBs), which, 3. Agenda for 2021-22 however, entail a negative carry cost of 520 bps, VII.32 In the Union Budget 2021-22, the gross difference between the average borrowing cost market borrowings through dated securities of states (6.55 per cent) and the average rate of for the year 2020-21 was revised upward from return on ITBs (1.35 per cent), as on March 31, `7,80,000 crore (BE) to `12,80,000 crore (RE), 2021. The outstanding investments of states in however, actual gross borrowings for the year ITBs and auction treasury bills (ATBs) increased 2020-21 stood at `12,60,324 crore. This is in during the year 2020-21 (Table VII.5). addition to `1.10 lakh crore borrowed under Investments in Consolidated Sinking Fund (CSF) / the special window for states and UTs towards Guarantee Redemption Fund (GRF) GST compensation cess shortfall. Gross market borrowings for 2021-22 through dated securities VII.31 The Reserve Bank manages two reserve are projected at `12,05,500 crore, about 12.0 per fund schemes on behalf of state governments cent lower than `13,70,324 crore in 2020-21. Net - the consolidated sinking fund (CSF) and the market borrowings (including short-term debt and guarantee redemption fund (GRF). So far, repayment of Post Offi ce Life Insurance Fund) are twenty four states and one UT, i.e., Puducherry budgeted at `9,67,708 crore, fi nancing 64.2 per have set up the CSF. Currently, eighteen states cent of GFD in 2021-22. are members of the GRF. States are permitted VII.33 During the year 2021-22, the market Table VII.5: Investments in ITBs and ATBs by borrowing programme is proposed to be State Governments/UT conducted with the following strategic milestones (Amount in ` crore) so as to achieve the overall goals of debt Item Outstanding as on March 31 management: 2016-17 2017-18 2018-19 2019-20 2020-21 1 2 3 4 5 6 • Consolidation of debt through calendar 14-Day(ITBs) 1,56,050 1,50,871 1,22,084 1,54,757 2,05,230 driven, auction-based switch operations ATBs 36,603 62,108 73,927 33,504 41,293 along with reissuance of securities to Total 1,92,653 2,12,979 1,96,011 1,88,261 2,46,523 augment liquidity in the G-sec market and Source: RBI. facilitate fresh issuances; 175ANNUAL REPORT 2020-21 • Improve overall liquidity in G-sec market for better control, monitoring and by enhancing role of PDs in market making management information system (MIS) (Utkarsh); purposes; • Permit retail investors to open gilt securities • Implementation of STRIPS/reconstitution account directly with the Reserve Bank facility in SDLs (Utkarsh); under the ‘Retail Direct’ scheme in order • Hiving-off of servicing of compensation to encourage greater retail participation bonds issued in physical forms to state through improvement in ease of access to treasuries (Utkarsh); the government securities market; • Operationalisation of Society for Worldwide • Developing a module in e-Kuber for Interbank Financial Telecommunication capturing gilt level data to improve the (SWIFT) module for transactions with existing market infrastructure for the FCBs to smoothen the investment and government securities market besides disinvestment instructions from FCBs in a enabling primary and secondary market secured manner (Utkarsh); and settlement directly at the gilt account level for facilitating effective monitoring and • Conduct capacity building programmes surveillance of the market (Utkarsh); for sensitising the state governments about prudent practices in cash and debt • Review of the SGL/CGSL guidelines for management. gilt module development and gilt account settlement; 4. Conclusion • Review of value free transfer guidelines; VII.34 Overall, during 2020-21, combined gross market borrowings of centre and states • Review of operational guidelines on GoI were conducted successfully in line with the savings bond in order to account for online guiding principles of debt management. The subscriptions as well as incorporating Reserve Bank also announced a number better system of risk management; of measures to manage the stress on the • Continuing efforts to enhance quality of fi nances of both central and state governments data and consolidating data on public debt; in the wake of the COVID-19 pandemic. Going • Automating monitoring of GoI’s consent ahead, smooth completion of the government to states for open market borrowings borrowing programme for the year 2021-22 and (OMBs) – developing a centralised system consolidation of government debt will be the key in e-Kuber to record these consents areas of focus of the Reserve Bank. 176CURRENCY MANAGEMENT VIII CURRENCY MANAGEMENT The thrust of currency management during the year was to make available adequate quantity of clean notes in circulation. The year witnessed a higher than average increase in banknotes in circulation primarily due to precautionary holding of cash by the public induced by the COVID-19 pandemic, and its prolonged continuance. The Reserve Bank continued its efforts towards upgrading the infrastructure for currency management. VIII.1 The Reserve Bank’s currency `20, `50, `100, `200, `500 and `2,000. Coins in management function is guided by the goal of circulation comprise 50 paise and `1, `2, `5, `10 ensuring adequate supply of clean banknotes of and `20 denominations. various denominations in the economy. During Banknotes the year, when the precautionary demand for cash surged in the economy with the onset of VIII.4 The value and volume of banknotes the COVID-19 pandemic, the Reserve Bank in circulation increased by 16.8 per cent and endeavoured to meet the increased demand for 7.2 per cent, respectively, during 2020-21 as banknotes. Concerted efforts were made to ensure against an increase of 14.7 per cent and 6.6 per that Currency Chests (CCs) remain adequately cent, respectively, witnessed during 2019-20. stocked with all denominations of banknotes in In value terms, the share of `500 and `2,000 order to maintain timely supply of fresh banknotes banknotes together accounted for 85.7 per cent across the country. of the total value of banknotes in circulation as on March 31, 2021, as against 83.4 per cent as VIII.2 Against this backdrop, the rest of the on March 31, 2020. In volume terms, `500 chapter is organised into fi ve sections. The next denomination constituted the highest share at section presents the important developments in 31.1 per cent followed by `10 denomination currency in circulation during the year. Section 3 banknotes which constituted 23.6 per cent of the covers the implementation status of agenda for total banknotes in circulation as on March 31, 2020-21 and section 4 presents the work profi le 2021 (Table VIII.1). Whereas the share of `500 of Bharatiya Reserve Bank Note Mudran Private denomination banknotes in the total volume of Ltd. (BRBNMPL), a wholly owned subsidiary of the banknotes showed an increasing trend from 19.8 Reserve Bank. Section 5 sets out the agenda for per cent as on March 31, 2019 to 25.4 per cent 2021-22, while concluding observations are set as on March 31, 2020 and to 31.1 per cent as on out in the last section. March 31, 2021, the share of `10 denomination 2. Developments in Currency in Circulation banknotes in the total volume showed a declining VIII.3 Currency in Circulation (CiC) includes trend from 28.7 per cent as on March 31, 2019 to banknotes and coins. Presently, the Reserve Bank 26.2 per cent as on March 31, 2020 and to 23.6 issues notes in denominations of `2, `5, `10, per cent as on March, 31, 2021. 177ANNUAL REPORT 2020-21 Table VIII.1: Banknotes in Circulation (end-March) Denomination (`) Volume (pieces in lakh) Value (` crore) 2019 2020 2021 2019 2020 2021 1 2 3 4 5 6 7 2 and 5 1,13,025 1,12,203 1,11,728 4,372 4,331 4,307 (10.4) (9.7) (9.0) (0.2) (0.2) (0.2) 10 3,12,598 3,04,022 2,93,681 31,260 30,402 29,368 (28.7) (26.2) (23.6) (1.5) (1.3) (1.0) 20 87,127 82,994 90,579 17,425 16,599 18,116 (8.0) (7.2) (7.3) (0.8) (0.7) (0.6) 50 86,015 86,009 87,524 43,007 43,004 43,762 (7.9) (7.4) (7.0) (2.0) (1.8) (1.5) 100 2,00,738 1,99,021 1,90,555 2,00,738 1,99,021 1,90,555 (18.5) (17.2) (15.3) (9.5) (8.2) (6.7) 200 40,005 53,646 58,304 80,010 1,07,293 1,16,608 (3.7) (4.6) (4.7) (3.8) (4.4) (4.1) 500 2,15,176 2,94,475 3,86,790 10,75,881 14,72,373 19,33,951 (19.8) (25.4) (31.1) (51.0) (60.8) (68.4) 2,000 32,910 27,398 24,510 6,58,199 5,47,952 4,90,195 (3.0) (2.4) (2.0) (31.2) (22.6) (17.3) Total 10,87,594 11,59,768 12,43,671 21,10,892 24,20,975 28,26,863 Note: 1. Figures in parentheses represent the percentage share in total volume/value. They may not add up to 100 due to rounding-off of numbers. 2. Figures may not add up to total due to rounding-off of numbers. Source: RBI. March 31, 2021, coins of `1, `2 and `5 together Coins constituted 83.8 per cent of the total volume VIII.5 The total value of coins in circulation of coins in circulation, while in value terms, these increased by 2.1 per cent in 2020-21, while the denominations accounted for 77.6 per cent total volume increased by only 1.0 per cent. As on (Table VIII.2). Table VIII.2: Coins in Circulation (end-March) Denomination Volume (pieces in lakh) Value (` crore) (`) 2019 2020 2021 2019 2020 2021 1 2 3 4 5 6 7 Small coins 1,47,880 1,47,880 1,47,880 700 700 700 (12.3) (12.1) (12.0) (2.7) (2.7) (2.6) 1 5,03,260 5,08,878 5,12,597 5,033 5,089 5,126 (41.8) (41.8) (41.7) (19.5) (19.3) (19.1) 2 3,31,540 3,35,158 3,37,863 6,631 6,703 6,757 (27.6) (27.5) (27.5) (25.6) (25.5) (25.1) 5 1,71,510 1,75,992 1,79,360 8,575 8,800 8,968 (14.2) (14.4) (14.6) (33.2) (33.5) (33.4) 10 49,050 50,130 51,391 4,905 5,013 5,139 (4.1) (4.1) (4.2) (19.0) (19.1) (19.1) 20 - - 896 - - 179 - - (0.1) - - (0.7) Total 12,03,240 12,18,038 12,29,988 25,844 26,305 26,870 -: Not Applicable. Note: 1. Figures in parentheses represent the percentage share in total volume/value. They may not add up to 100 due to rounding-off of numbers. 2. Figures may not add up to total due to rounding-off of numbers. Source: RBI. 178CURRENCY MANAGEMENT Currency Management Infrastructure Table VIII.3: Currency Chests and Small Coin Depots (as at end-March 2021) VIII.6 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 offi ces, currency chests State Bank of India 1,679 1,432 and small coin depots spread across the country. Nationalised Banks 1,151 886 As on March 31, 2021, the State Bank of India Private Sector Banks 210 173 accounted for the highest share (55.0 per cent) in Cooperative Banks 5 5 the currency chests network (Table VIII.3). Foreign Banks 4 3 Regional Rural Banks 4 4 Indent and Supply of Currency Reserve Bank of India 1 1 VIII.7 The indent of banknotes was lower by 9.7 Total 3,054 2,504 per cent in 2020-21 than that of a year ago. The Source: RBI. supply of banknotes was also marginally lower by 0.3 per cent during 2020-21 than in the previous Disposal of Soiled Banknotes year (Table VIII.4). VIII.9 The disposal of soiled banknotes was VIII. 8 During 2020-21, the indent and supply initially affected due to the COVID-19 pandemic of coins were lower by 11.8 per cent and 4.7 per and was expedited during the latter part of the cent, respectively, from their levels in the previous year 2020-21. Despite efforts, the year as a whole year (Table VIII.5). still witnessed a 32 per cent decline in the disposal Table VIII.4: Indent and Supply of Banknotes by BRBNMPL and SPMCIL (April to March) (pieces in lakh) Denomination (`) 2018-19 2019-20 2020-21 Indent Supply Indent Supply Indent Supply 1 2 3 4 5 6 7 5 - - - 60 - - 10 39,200 42,892 14,700 14,702 2,840 2,846 20 460 2,096 12,500 13,390 48,750 38,520 50 42,330 40,401 24,000 23,431 14,000 13,887 100 63,300 64,075 33,000 32,708 40,000 37,270 200 26,150 27,301 20,500 19,588 15,000 15,106 500 1,16,920 1,14,679 1,46,300 1,19,996 1,06,000 1,15,672 2,000 470 467 - - - - Total 2,88,830 2,91,911 2,51,000 2,23,875 2,26,590 2,23,301 -: Not Applicable. SPMCIL: Security Printing and Minting Corporation of India Ltd. Note: Figures in the columns may not add up to the total due to rounding-off of the numbers. Source: RBI. 179ANNUAL REPORT 2020-21 Table VIII.5: Indent and Supply of Coins by Mints (April to March) (pieces in lakh) Denomination (`) 2018-19 2019-20 2020-21 Indent Supply Indent Supply Indent Supply 1 2 3 4 5 6 7 1 20,000 25,550 1,000 1,093 1,000 1,000 2 10,000 12,860 8,000 7,993 9,500 6,718 5 11,320 6,779 10,000 9,984 11,000 10,995 10 20,000 16,132 12,000 11,565 5,500 5,852 20 - - 3,000 458 3,000 5,061 Total 61,320 61,321 34,000 31,093 30,000 29,626 -: Not Applicable. Source: RBI. of soiled banknotes as compared to the previous Table VIII.7: Number of Counterfeit Notes year (Table VIII.6). Detected (April-March) (number of pieces) Counterfeit Banknotes Year Detection at the Detected at Total VIII.10 During 2020-21, out of the total Fake Reserve Bank Other Banks Indian Currency Notes (FICNs) detected in the 1 2 3 4 2018-19 17,781 2,99,603 3,17,384 banking sector, 3.9 per cent were detected at the (5.6) (94.4) (100.0) Reserve Bank and 96.1 per cent by other banks 2019-20 13,530 2,83,165 2,96,695 (4.6) (95.4) (100.0) (Table VIII.7). 2020-21 8,107 2,00,518 2,08,625 (3.9) (96.1) (100.0) Table VIII.6: Disposal of Soiled Banknotes Note: 1. Figures in parentheses represent the percentage share (April-March) in total. (pieces in lakh) 2. Data do not include counterfeit notes seized by the police and other enforcement agencies. Denomination (`) 2018-19 2019-20 2020-21 Source: RBI. 1 2 3 4 VIII.11 Compared with the previous year, there 2000 6 1,768 4,548 was an increase of 31.3 per cent in counterfeit 1000 22 0 0 500 154 1,645 5,909 notes detected in the denomination of `500 200 1 318 1,186 [Mahatma Gandhi (New) Series]. However, there 100 37,945 44,793 42,433 was a decline in counterfeit notes detected in 50 8,352 19,070 12,738 other denominations (Table VIII.8). 20 11,626 21,948 10,325 10 65,239 55,744 21,999 Expenditure on Security Printing Up to 5 591 1,244 564 VIII.12 The total expenditure in curred on security Total 1,23,935 1,46,530 99,702 printing during July 1, 2020 to March 31, 2021 Note: Figures in the columns may not add up to the total due to rounding-off of the numbers. was `4,012.1 crore as against `4,377.8 crore in Source: RBI. the previous year (July 2019 to June 2020). 180CURRENCY MANAGEMENT Table VIII.8: Denomination-wise Counterfeit banknotes through explanatory videos Notes Detected in the Banking System and animation; (April-March) o Informative material on exchanging (number of pieces) banknotes/note refund rules; and Denomination (`) 2018-19 2019-20 2020-21 o Interactive games and posters. 1 2 3 4 2 and 5 - 22 9 Implementation Status of Goals 10 345 844 304 20 818 510 267 Automation of Banknote Handling Process 50 36,875 47,454 24,802 VIII.14 In order to upgrade the infrastructure and 100 2,21,218 1,68,739 1,10,736 200 12,728 31,969 24,245 processes for currency management, the Reserve 500 (MG Series) 971 11 9 Bank is in the process of engaging a consultant to 500 [MG (New) Series] 21,865 30,054 39,453 get the technical assistance required for inducting 1,000 717 72 2 2,000 21,847 17,020 8,798 modern technology and automating the processes Total 3,17,384 2,96,695 2,08,625 of banknote handling, in a green-fi eld facility on a pilot basis. This is expected to automate receipt, -: Nil. Source: RBI. storage, processing and destruction of banknotes; foster economies of scale; make the currency 3. Agenda for 2020-21: Implementation Status management function more effi cient; and also fulfi l Goals Set for 2020-21 the objective of clean note policy of the Reserve Bank (Box VIII.1). VIII.13 Last year, the Department had set out the following goals: Microsite for Banknotes (cid:129) Automation of banknote handling process VIII.15 The development of the microsite, (Utkarsh) [Para VIII.14] which will host basic information on features of banknotes and information relating to currency o Upgrade the infrastructure and management is in progress. The microsite processes for currency management shall provide a platform to the public to access by inducting modern technology. information on banknotes such as information on (cid:129) Microsite for banknotes (Para VIII.15) design and security features through 360-degree o Continue the process of designing view of the banknotes, various multimedia (videos and developing a microsite to host and animation) and interactive games, with simple basic information on features of and effi cient navigation. banknotes and information relating to Other Major Activities currency management – information on banknotes will be presented Procurement of New Security Features for Indian through various multimedia with Banknotes simple and effi cient navigation; VIII.16 The Reserve Bank is actively involved o Displaying 360-degree view of the in taking the process of procurement of security design and security features of features for banknotes forward. 181ANNUAL REPORT 2020-21 Box VIII.1 Automation of Banknote Handling Process The issuance and management of currency is enshrined in and processing of banknotes, which brought about effi ciency the preamble of the Reserve Bank. In order to ensure the in operations, ensured process integrity and improved availability of clean and fi t notes in adequate quantities in security. Such countries include France, Germany, Hungary, the system, the Reserve Bank manages the issuance and Japan, USA, to name a few. distribution of good quality genuine notes and retrieval of In India, the Reserve Bank has initiated the process of mutilated/soiled notes from the circulation thereof through automating banknote handling procedure, as a pilot project around 3,054 Currency Chests (CCs) operated by the in a green-fi eld facility, involving the following work: scheduled banks under an agency agreement with the Reserve Bank. (cid:129) Receipt, storage, retrieval, processing of banknotes received from CCs and destruction of soiled banknotes The banknotes in circulation have been growing along in an automated manner; with the rise in digital payments. The volume of banknotes (cid:129) Identifi cation of mutilated/ counterfeit/ defective/ imperfect in circulation has doubled in the last decade, from notes during automated processing of the banknotes on 5,654.9 crore pieces in 2009-10 to 11,597.7 crore pieces Currency Verifi cation and Processing Systems (CVPS), in 2019-20 and reached 12,436.7 crore pieces as on online and offl ine shredding and briquetting of soiled March 31, 2021. Further, with the increase in banknotes in banknotes in a mechanised and secure manner and circulation commensurate increase in the requirement for soiled notes processing is anticipated. further disposal of the briquettes; and (cid:129) Automated receipt and storage of fresh banknotes This has necessitated a relook at the present system of cash received from the printing presses, retrieval and management and a need is felt to automate the handling of despatch of the fresh banknotes to the identifi ed Issue banknotes by adopting modern technology, which is in line Offi ces/CCs. with the leading global practices. This automation can generate economies of scale, make the Globally, many central banks/monetary authorities have currency management function more effi cient and enhance proactively adopted suitable re-engineering of their currency the objective of clean note policy of the Reserve Bank for the management processes and have set up separate facilities benefi t of public. to automate handling of banknotes. These countries have since reaped economic benefi ts due to automated handling Source: RBI. Integration of Currency Management Functions 4. Bharatiya Reserve Bank Note Mudran Private with Core Banking Solution (e-Kuber) Ltd. (BRBNMPL) VIII.17 With the implementation of phase I and VIII.19 BRBNMPL is a wholly owned subsidiary phase II of the Currency Management Module of the Reserve Bank, which is playing a crucial (CyM) in e-Kuber; the accounting of currency role in the indigenisation of banknote production transactions is refl ected in the Reserve Bank’s processes. The captive Ink Manufacturing Unit books in near real time basis. Some ancillary (IMU), which was set up by BRBNMPL within its functionalities of Phase III of CyM module are under Mysuru press premises, has an installed capacity various stages of development/implementation. to manufacture 1,500 metric tonnes (MT) of Offset, Introduction of Varnished Banknotes - Field Trial Intaglio, Numbering and Colour Shift Intaglio Inks (CSII) per annum in two shift operations. While VIII.18 The Reserve Bank is in the process of introducing varnished banknotes in `100 the production of Offset, Intaglio and Numbering denomination on a fi eld trial basis with a view to inks commenced from August 2018 and that of elongate the life of the banknote. CSII from March 2019, the entire requirement of 182CURRENCY MANAGEMENT Offset, Intaglio, Numbering and CSII for the year (cid:129) Augmentation of disposal of soiled notes; 2019-20 onwards has been met by the in-house and manufacturing unit of BRBNMPL. BRBNMPL (cid:129) Establishment of a state-of-the-art facility is also supplying CSII to the two currency for conducting cutting edge research to printing presses of Security Printing and Minting test robustness of security features of Corporation of India Ltd. (SPMCIL). During 2020, currency notes and introduction of new with the installation of in-house varnish making security features. plant, the company has become self-suffi cient 6. Conclusion in different type of varnishes required including VIII.21 In sum, during the year 2020-21, the varnish for CSII. This marks a signifi cant step Reserve Bank remained focused on strengthening towards backward integration and achieving the currency management infrastructure, its ultimate goal of complete indigenisation of enhancing public awareness on different features banknote production processes. of Indian banknotes and making adequate 5. Agenda for 2021-22 quantity of clean notes available to the public. Going ahead, the Reserve Bank’s endeavour VIII.20 During the year, the Department will focus would be to enhance the lifespan of banknotes, on the following: automate the handling and processing of notes, (cid:129) Procurement of new Shredding and and rationalise the available infrastructure for Briquetting Systems (SBS) [Utkarsh]; maximum utilisation. 183IX PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY With rapid advancement of technology and advent of new developments and innovations in the payments ecosystem, the Reserve Bank enhanced its focus on safety and security of payment systems. In addition, the Reserve Bank continued its efforts to nurture efficiency, innovation, competition, customer protection and financial inclusion. Implementation of round-the-clock RTGS within a short timeline was a momentous milestone in this journey. Going ahead, the Reserve Bank’s endeavour would be to promote innovation in the financial sector by leveraging on technology for a sustainable Information and Communication Technology (ICT) infrastructure designed for operational excellence with focus on resilience, reliability, security, integrity and cost efficiency. IX.1 During the year, the Department of These departments have also set out an agenda Payment and Settlement Systems (DPSS) for 2021-22. The chapter has been summarised at continued to work towards the planned the end. development of payment systems as guided by the 2. DEPARTMENT OF PAYMENT AND Reserve Bank’s Payment and Settlement Systems SETTLEMENT SYSTEMS (DPSS) Vision 2019-2021 document. The Reserve Bank’s primary focus was to (i) facilitate digital penetration; IX.3 Guided by the Reserve Bank’s Payment (ii) introduce innovative payment options; and Settlement Systems Vision 2019-2021 (iii) ensure smooth operations notwithstanding the document, various initiatives were undertaken by disruptions caused by the COVID-19 pandemic; the department during the year in t he payments and (iv) organise consumer awareness campaigns ecosystem wit h continued emphasis on safety, on digital payments, which are the building blocks security, effi ciency, innovation, competition, to achieve the objective of a “less-cash” society. customer protection and fi nancial inclusion. The Department of Information Technology (DIT), The focus was to facilitate digital penetration in its swift response to unprecedented challenges by enhancing acceptance infrastructure across due to COVID-19 pandemic and to keep pace the country and introducing innovative payment with the fast-changing technology landscape, options to deepen the reach of payment systems. adopted a proactive approach by leveraging on Efforts were also directed towards ensuring technology. The Reserve Bank continued its smooth functioning of all the payment systems efforts to graduate its ICT infrastructure to next notwithstanding disruptions in movement of generation applications with an inbuilt architecture resources and access to infrastructure caused for operational excellence, resilience, scalability by the COVID-19 lockdown with varying intensity and security. and duration across various locations in the IX.2 Against this backdrop, the following country. A few initiatives were customised keeping section covers developments in the sphere of in view social distancing and minimal-contact payment and settlement systems during the year requirements of the pandemic while making digital and also takes stock of the implementation status payments. The Reserve Bank undertook focused of the agenda for 2020-21. Section 3 provides campaigns to improve consumer awareness various measures undertaken by the DIT during on digital payments and put in place measures the year vis-à-vis the agenda set for 2020-21. to ensure that the consumer grievances are 184PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY addressed seamlessly in a timebound manner. year (-1.2 per cent) got further amplifi ed and The journey towards “less-cash” continued during witnessed a drop of 13.4 per cent, mainly due to the year with a rapid growth in digital payments lower growth observed in the large value payment observed with the gradual relaxation in lockdown system, viz., Real Time Gross Settlement (RTGS) imposed due to COVID-19. system and decrease in transactions of paper- based instruments. The decline in value of Payment Systems transactions in RTGS is largely attributable to the IX.4 The payment systems recorded a robust subdued economic activity. The share of digital growth of 26.2 per cent in terms of volume during transactions in the total volume of non-cash retail 2020-21 on top of the expansion of 44.2 per payments increased to 98.5 per cent during 2020- cent in the previous year. In terms of value, the 21, up from 97.0 per cent in the previous year contractionary trend which started in the previous (Table IX.1). Table IX.1: Payment System Indicators – Annual Turnover (April-March) Item Volume (Lakh) Value (` Crore) 2018-19 2019-20 2020-21 2018-19 2019-20 2020-21 1 2 3 4 5 6 7 A. Settlement Systems CCIL Operated Systems 36 36 28 11,65,51,038 13,41,50,192 16,19,43,141 B. Payment Systems 1. Large Value Credit Transfers – RTGS 1,366 1,507 1,592 13,56,88,187 13,11,56,475 10,55,99,849 Retail Segment 2. Credit Transfers 1,18,481 2,06,506 3,17,852 2,60,90,471 2,85,62,857 3,35,22,150 2.1 AePS (Fund Transfers) 11 10 11 501 469 623 2.2 APBS 14,949 16,766 14,373 86,226 99,179 1,12,747 2.3 ECS Cr 54 18 0 13,235 5,145 0 2.4 IMPS 17,529 25,792 32,783 15,90,257 23,37,541 29,41,500 2.5 NACH Cr 8,834 11,290 16,450 7,29,673 10,43,212 12,32,714 2.6 NEFT 23,189 27,445 30,928 2,27,93,608 2,29,45,580 2,51,30,910 2.7 UPI 53,915 1,25,186 2,23,307 8,76,971 21,31,730 41,03,658 3. Debit Transfers and Direct Debits 4,914 7,525 10,456 5,24,556 7,19,708 8,72,552 3.1 BHIM Aadhaar Pay 68 91 161 815 1,303 2,580 3.2 ECS Dr 9 1 0 1,260 39 0 3.3 NACH Dr 4,830 7,340 9,630 5,22,461 7,18,166 8,68,906 3.4 NETC (Linked to Bank Account) 6 93 650 20 200 913 4. Card Payments 61,769 72,384 57,841 11,96,888 14,34,814 12,93,822 4.1 Credit Cards 17,626 21,773 17,641 6,03,413 7,30,895 6,30,414 4.2 Debit Cards 44,143 50,611 40,200 5,93,475 7,03,920 6,62,667 5. Prepaid Payment Instruments 46,072 53,318 49,392 2,13,323 2,15,558 1,97,695 6. Paper-based Instruments 11,238 10,414 6,704 82,46,065 78,24,822 56,27,189 Total – Retail Payments (2+3+4+5+6) 2,42,473 3,50,147 4,42,229 3,62,71,303 3,87,57,759 4,15,12,514 Total Payments (1+2+3+4+5+6) 2,43,839 3,51,654 4,43,821 17,19,59,490 16,99,14,234 1471,12,363 Total Digital Payments (1+2+3+4+5) 2,32,602 3,41,240 4,37,118 16,37,13,425 16,20,89,413 14,14,85,173 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. 185ANNUAL REPORT 2020-21 cent during the year. At the end of March 2021, Chart IX.1: Digital Payments Y-o-Y Growth the NEFT facility was available through 1,75,283 75 branches of 225 banks. 55 IX.7 During 2020-21, the number of card payment transactions carried out through credit 35 cards and debit cards decreased by 19.0 per cent 15 and 20.6 per cent, respectively. This resulted in a decrease in value of credit card transactions by -5 13.7 per cent and debit card transactions by 5.9 per cent during the same period. Prepaid Payment -25 Instruments (PPIs) recorded contraction in volume -45 by 7.4 per cent during the year as against a growth of 15.7 per cent a year ago, while the transaction value at 1.97 lakh crore was lower by 8.3 per cent Source: RBI. vis-à-vis last year. The number of Points of Sale (PoS) terminals increased by 6.5 per cent to 47.20 lakh and the number of Bharat Quick Response IX.5 The nationwide lockdown due to COVID-19 (BQR) codes deployed increased by 76.0 per cent pandemic resulted in decline in payments during to 35.70 lakh as at end-March 2021. Further, the its initial phase. However, the value and volume of number of ATMs marginally increased by 2.0 per payments subsequently picked up with the gradual cent from 2.34 lakh at end-March 2020 to 2.38 relaxations in lockdown (Chart IX.1). lakh at end-March 2021. Digital Payments Authorisation of Payment Systems IX.6 Amongst the electronic modes of IX.8 Payments System Operators (PSOs) payments, the number of transactions undertaken using RTGS increased by 5.7 per cent during comprise PPI issuers, Cross-border Money the year, with value amounting to `1,056 lakh Transfer Service Scheme operators, White crore, resulting in a decline in value by 19.5 per Label ATM (WLA) operators, Trade Receivables cent from the previous year, mainly on account of Discounting System (TReDS) platform operators, reduction in large value transactions of corporates ATM networks, Instant Money Transfer Service in line with slowdown in economic activity. At providers, Card Payment Networks and Bharat the end of March 2021, the RTGS facility was Bill Payment Operating Units (BBPOUs), besides available through 1,75,947 branches of 227 Clearing Corporation of India Ltd. (CCIL) and banks. Transactions through National Electronic National Payments Corporation of India (NPCI) Funds Transfer (NEFT) system rose by 12.7 per [Table IX.2.] 186 tnecreP 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 02-guA 02-tcO 02-ceD 12-beF 12-raM DigitalPaymentsVolume DigitalPaymentsValuePAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY Table IX.2: Authorisation of Payment System (cid:129) Improving Customer Convenience Operators (as at end-March) o Online Dispute Resolution (ODR): A (Number) phased approach to implementing an Entities 2020 2021 ODR system across various payment 1 2 3 systems is proposed to be undertaken, A. Non-Banks – Authorised PPI Issuers 43 36 beginning with implementation for WLA Operators 8 4 failed transactions for all authorised Instant Money Transfer Service Providers 1 1 payment systems (Utkarsh) [Para BBPOUs 9 8 TReDS Platform Operators 3 3 IX.16]; Cross-border Money Transfer Service Scheme 9 9 Operators o Self-Regulatory Organisation: A Card Networks 5 5 framework for creation of a Self- ATM Networks 2 2 Regulatory Organisation (SRO) B. Banks – Approved for engaging with the regulator/ PPI Issuers 62 56 BBPOUs 39 42 supervisor and also responsible for Mobile Banking Providers 540 566 setting and enforcing rules for the ATM Networks 3 3 PSOs as announced in the Reserve Note: Validity period of Certificate of Authorisation (CoA) granted Bank’s Statement on Developmental to three non-bank PPI issuers was not extended. One PPI issuer voluntarily surrendered while three non-bank PPI issuers are under and Regulatory Policies of February 6, the process of voluntarily surrendering their CoA. The CoAs of two 2020, will be formalised (Para IX.17); WLAOs were revoked, one WLAO ceased operation and one WLAO is under the process of voluntarily surrendering the CoA along with and one BBPOU. Consequent upon amalgamation of six public sector banks, the number of bank PPIs have reduced. o Pan-India Cheque Truncation System: Source: RBI. All Express Cheque Clearing System (ECCS) centres will be merged with Agenda for 2020-21: Implementation Status the Cheque Truncation System (CTS) Goals Set for 2020-21 grids to facilitate cheque collection services by banks (Para IX.18). IX.9 Last year, the Department had set out the following goals: (cid:129) Ensuring Affordable Cost (cid:129) Encouraging Healthy Competition o Legal Entity Identifi er (LEI): The o Offl ine Payment Systems: Offl ine use of LEI to identify payment payments through mobile devices system participants, agents and and stored value component on cards distributors in respect of cross- will be made available to boost digital border services, particularly for large payment modes, and a pilot scheme value payments, including expanding will be tested to gain experience for the implementation across all the a fuller roll-out of the scheme (Para identifi ed segments will be explored IX.11). (Para IX.23). 187ANNUAL REPORT 2020-21 (cid:129) Increasing Confi dence Enabling Posting of Settlement Files of Payment Systems on All Days of the Week o Digital Payments Index: The Reserve Bank in its Statement on IX.13 With the operationalisation of RTGS on Developmental and Regulatory 24x7 basis, the Reserve Bank permitted NPCI Policies of February 6, 2020 to post additional settlement fi les of payment announced that the Reserve Bank systems operated by them for settlement on would construct and periodically weekends as well as holidays with effect from publish a composite “Digital Payments January 3, 2021. This measure helped to Index (DPI)” [Para IX.25]. reduce build-up of settlement and default risks Implementation Status of Goals in ancillary payment systems and enabled better management of funds by member banks, which IX.10 In the ‘Payment and Settlement Systems in India: Vision 2019-2021’, DPSS had identifi ed four in turn enhanced the overall effi ciency of the goal-posts, viz., competition, cost, convenience, payments ecosystem. and confi dence, for achieving its vision. Maintenance of Escrow Account with Scheduled Encouraging Healthy Competition Commercial Banks Offl ine Payment Systems IX.14 The Reserve Bank permitted authorised IX.11 Th e Reserve Bank allowed authorised non-bank PPI issuers and Payment Aggregators PSOs – banks and non-banks – to conduct a (PA) to maintain an additional escrow account pilot scheme for offl ine payment solutions using in a different scheduled commercial bank. This cards, wallets or mobile devices for remote or measure has helped diversify risk and address proximity payments to encourage technological business continuity concerns. innovations that enable offl ine digital transactions. Inter-Regulatory and Intra-Regulatory Co- The availability of such options to make offl ine ordination payments is expected to boost the use of digital payments, which are constrained by the absence IX.15 The Reserve Bank set up two separate of, or erratic, internet connectivity, especially committees, i.e., (i) Inter-Regulatory Committee in remote areas. Post completion of the pilot comprising sectoral regulatory authorities, viz., scheme, the Reserve Bank shall decide on Securities and Exchange Board of India (SEBI), implementing offl ine payment systems based on Insurance Regulatory and Development Authority the experience gained. of India (IRDAI), Telecom Regulatory Authority Framework for Authorisation of Pan-India Umbrella of India (TRAI), Ministry of Electronics and Entity for Retail Payments Information Technology (MeitY) and Department IX.12 The Reserve Bank released a framework, of Telecommunications (DoT); and (ii) Intra- stipulating eligibility criteria, scope and governance Regulatory Committee comprising various structure for entities interested in setting up a regulatory and supervisory departments of the pan-India umbrella entity for retail payments. The Reserve Bank. The committees are expected applications for authorisation were required to be to ensure co-ordinated approach to regulation, submitted till February 26, 2021, which was remove frictions and ease system operator/ extended by a month till March 31, 2021. customer comfort. 188PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY Improving Customer’s Convenience (URRBCH) and migrated to CTS grids. Further, to leverage the availability of CTS and provide Online Dispute Resolution (ODR) uniform customer experience irrespective of IX.16 The Reserve Bank advised authorised location of bank branch, banks were advised to PSOs to implement an ODR system for disputes ensure that all their branches participate in image- and grievances related to failed transactions in based CTS by September 30, 2021. their respective payment systems by January 24x7 Availability of RTGS System 1, 2021. The ODR system was conceptualised as a rule-based technology-driven customer- IX.19 The Reserve Bank made available the friendly mechanism for resolving customer RTGS system 24x7 on all days of the year from grievances and disputes with zero or minimal 00:30 hours on December 14, 2020. India has manual intervention. This will provide a quick, become one of the few countries across the world affordable and accessible dispute resolution where RTGS system operates round the clock system for customers. With the possibility of throughout the year. Round the clock availability customer grievances increasing in line with the of RTGS has provided extended fl exibility to manifold increase in digital transactions, the businesses for effecting payments and enabled ODR system will eliminate the requirement of introduction of additional settlement cycles in additional manpower at PSOs to handle disputes ancillary payment systems. / grievances. Digital Payment Transactions – Streamlining QR Self-Regulatory Organisation (SRO) Code Infrastructure IX.17 The Reserve Bank released a framework IX.20 The Reserve Bank mandated that existing for recognition of SRO for PSOs on October proprietary QR codes shall migrate to interoperable 22, 2020. SRO shall set and enforce rules and QR codes by March 31, 2022 and there shall not standards relating to the conduct of member be further issuance of proprietary QR codes. entities in the industry, with the aim of protecting the These measures are expected to strengthen the customer and promoting ethical and professional acceptance infrastructure and enhance customer standards, including addressing larger concerns, convenience due to interoperability and augment such as protecting customers, furthering training system effi ciency. and education and striving for development of Card Transactions in Contactless Mode – members, the industry and the ecosystem as a Relaxation in Requirement of Additional Factor of whole. Authentication (AFA) Pan-India Cheque Truncation System (CTS) IX.21 The Reserve Bank enhanced the per IX.18 In its Statement on Developmental and transaction limit permitted for contactless Regulatory Policies of February 6, 2020, the transactions (also known as tap and pay Reserve Bank announced that a pan-India CTS transactions) using Near Field Communication would be made operational. Accordingly, all 1,219 enabled EMV chip cards without the need for AFA ECCS clearing houses across the country closed from `2,000 to `5,000. The COVID-19 pandemic their cheque clearing operations voluntarily in had underlined the benefi ts of contactless terms of Regulation 25 of the Uniform Regulations transactions and the limits were enhanced and Rules for Bankers Clearing Houses keeping in mind the suffi cient protection available 189ANNUAL REPORT 2020-21 to consumers. The enhanced limits were effective points every year for digital payments across the from January 1, 2021. country during 2021-23. An Advisory Council under the chairmanship of Deputy Governor-in- Processing of e-Mandates for Recurring Charge of DPSS, consisting of representatives Transactions from card networks, card payment industry, IBA IX.22 The Reserve Bank advised that and NABARD, was set up to manage and govern processing of recurring transactions (domestic the PIDF. and cross-border) using cards/PPIs/UPI under Increasing Customer Confi dence arrangements/practices not compliant with the extant framework for such transactions shall not Digital Payments Index (DPI) be continued beyond September 30, 2021. IX.25 The Reserve Bank constructed and Ensuring Affordable Costs published a composite DPI to effectively capture the extent of digitisation of payments across the Legal Entity Identifi er (LEI) country (Box IX.1). IX.23 LEI number facilitates unique identifi cation Positive Pay System for CTS of the parties involved in fi nancial transactions worldwide, thereby, improving quality and IX.26 In order to augment customer safety in accuracy of fi nancial data systems and ensuring cheque payments and reduce instances of fraud better risk management post the global fi nancial occurring on account of tampering of cheque crisis. In India, LEI is being rolled out in a phased leaves, the Reserve Bank announced a concept manner for participants in the over the counter of Positive Pay Mechanism for all cheques of (OTC) derivative and non-derivative markets as value `50,000 and above. Under this mechanism, also for large corporate borrowers. The Reserve cheques are processed for payment by the Bank decided to introduce the LEI number for drawee bank based on information passed on by all payment transactions of value `50 crore and its customer at the time of issuance of cheque. above, undertaken by entities (non-individuals) Positive Pay System was implemented from using centralised payment systems, viz., RTGS January 1, 2021. and NEFT. Perpetual Validity for CoA Issued to PSO Operationalisation of PIDF IX.27 The Reserve Bank decided to grant IX.24 The Reserve Bank operationalised PIDF authorisation for all PSOs (both new and existing) in January 2021 to encourage acquirers to deploy on a perpetual basis, subject to the usual payment acceptance infrastructure in tier-3 to tier- conditions. For existing authorised PSOs, grant of 6 centres and north eastern states. The Reserve perpetual validity shall be examined as and when Bank contributed `250 crore to the initial corpus the CoA becomes due for renewal subject to their of PIDF and the card networks and card issuing adherence to specifi ed conditions. While allowing banks have contributed around `200 crore. the perpetual authorisation, the Reserve Bank Further, recurring contribution on half yearly basis has relied on the robust system for monitoring would be made by card networks and card issuing performance of regulated entities through onsite banks based on the outstanding cards. The inspection and offsite surveillance and monitoring scheme envisages creation of 30 lakh new touch mechanism. The measure shall reduce licensing 190PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY Box IX.1 Reserve Bank of India – Digital Payments Index (RBI-DPI) In the recent past, the payments ecosystem in India has Table 1: Broad Parameters under RBI-DPI witnessed many developments, resulting in a bouquet Parameters Weight Indicators of payment systems and platforms, payment products (Per cent) and services, which are available for consumers for 1 2 3 undertaking digital payments, be they individuals, fi rms, corporates, governments or other economic agents. 1. Payment 25 Internet users, mobile users, Aadhaar Enablers numbers, bank accounts, digital To ensure continued progress and also understand the payment facilitators, and payment impediments and areas that require focused attention, the system members. Reserve Bank delineates its Payment System Vision at 2. Payment 10 Payment and other instruments issued, triannual intervals, releases periodic data/statistics relating Infrastructure customer registrations for mobile and to payment systems performance and undertakes surveys, - Demand- internet banking, and FASTags. apart from participating in discussions/meetings of global side Factors standard setting bodies like Financial Stability Board (FSB) 3. Payment 15 Physical and digital payment and Committee on Payments & Market Infrastructures Infrastructure acceptance points, and payment (CPMI). - Supply-side intermediaries. Factors In this continuum, it is imperative to measure and track digital 4. Payment 45 Volume and value of various payment payments growth and impact over time by constructing a Performance systems, unique users in such composite index covering the entire gamut of the payment systems, cheque transactions, cash ecosystem in the country. Accordingly, the DPI has been withdrawals using cards, and cash conceived, by adopting scientifi c tools based on statistical estimates. and empirical data for its construction. Theoretically, index 5. Consumer 5 Consumer awareness and education score is a technique of measuring changes in a variable or Centricity initiatives, declines, complaints, group of related variables with respect to time, geographical frauds, and system downtime. location or other characteristics. It measures the relative Source: RBI. changes in a variable or group of variables over a previous period known as the base period. Keeping in mind the signifi cant developments in the The DPI constructed by the Reserve Bank (RBI-DPI), payments landscape in recent times (period post is a fi rst-of-its kind index and is envisaged as a score to demonetisation and payment systems vision 2021), March measure the diffusion and deepening of digital payments 2018 has been taken as the base period (i.e., RBI-DPI across the country. To capture this, the RBI-DPI has fi ve score for March 2018 is set as 100). The DPI for March broad parameters, which, in turn have sub-parameters 2019 and March 2020 worked out to 153.47 and 207.84, and indicators, with appropriate weights for each of them respectively, indicating appreciable growth. Going forward, to signify their relative importance in the digital payments the RBI-DPI shall be published on semi-annual basis from ecosystem as shown below (Table 1). March 2021 onwards with a lag of 4 months. uncertainties and enable PSOs to focus on revocation or non-renewal, voluntary surrender, their business as also to optimise utilisation of and rejection of application submitted for grant of regulatory resources. CoA. This concept will also be applicable to any new entity, which is set-up by promoters involved Authorisation of Entities for Operating a Payment in any of the above categories. This measure shall System – Introduction of Cooling Period inculcate discipline and encourage submission IX.28 The Reserve Bank introduced the of applications by serious players as also ensure concept of cooling period in certain situations like effective utilisation of regulatory resources. It was 191ANNUAL REPORT 2020-21 decided that the cooling period shall be for one Supervision of Payment Systems year from the date of revocation/non-renewal/ IX.31 During 2020-21, onsite inspection/off-site acceptance of voluntary surrender/rejection of assessments of 32 entities, viz., CCIL, 26 PPI application, as applicable and during this period issuers, one ATM Network, one WLA operator, entities shall be prohibited from submission of and three TReDS platform operators was carried applications for operating any payment system out by the Reserve Bank under Section 16 of the under the Payment and Settlement Systems PSS Act. (PSS) Act. Inspection of CCIL Guidelines on Regulation of Payment Aggregators IX.32 The Reserve Bank conducted the onsite (PAs) and Payment Gateways (PGs) inspection of CCIL under Section 16 of the PSS Act. CCIL was assessed against the 24 Principles IX.29 In terms of extant instructions issued by the for Financial Market Infrastructures (PFMIs) Reserve Bank on regulation of PAs and PGs, PAs formulated by the Committee on Payments and cannot store customer card credentials within their Market Infrastructures-International Organisation database or the server [i.e. Card-on-File (COF)]. of Securities Commissions (CPMI-IOSCO). As Similarly, their on-boarded merchants cannot Central Counterparty (CCP), CCIL was rated store the payment data of their customers. As a ‘Observed’ for 17 principles and ‘Broadly Observed’ one-time measure, the Reserve Bank extended for three, while four were ‘Not Applicable’ to it. As the timeline by six months till December 31, 2021 Trade Repository (TR), CCIL was rated ‘Observed’ for implementing the aforesaid instructions by for 10 principles, ‘Broadly Observed’ for one, while non-bank PAs. 13 were ‘Not Applicable’. Other Developments Developments in CCIL UPI/RuPay International Outreach Initiatives IX.33 During the year, despite facing challenges due to the COVID-19 pandemic, CCIL managed IX.30 The Reserve Bank continued its efforts its operations smoothly. There was no disruption towards global outreach of its payment systems, in operations even during the power outage in including remittance services. In view of the Mumbai on October 12, 2020. CCIL fi nalised potential of UPI to provide for stronger bilateral implementation of extended clearing membership business and economic partnership with other structure in rupee derivatives and forex forward jurisdictions, the Reserve Bank had written to segments and revised intra-month additional other central banks highlighting the features of contribution to default fund when stress loss UPI as an effi cient and secure system, which can exceeds specifi c threshold of pre-funded be used to transform retail payment mechanisms resources. CCIL improved risk management globally and at the same time promote fi nancial further by fi xing lower limits based on internal inclusion. The Reserve Bank also participated rating and stepping up haircut rates for weaker in regional outreach programmes organised by entities; and also extended the FX-Retail platform the Bank for International Settlements (BIS), by introducing booking and cancelling facility for where the possibility of leveraging UPI system to forward contracts for bank customers besides facilitate cross-border transactions was presented operationalising ‘Request for Quote’ (RFQ) module to participants. on negotiated dealing system (order matching). 192PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY e-Baat Programmes and Awareness Campaigns booklet captures the transformation of India in the sphere of payment and settlement systems IX.34 The Reserve Bank has been conducting and describes, inter-alia, the legal and regulatory electronic banking awareness and training environment underpinning the digital payments (e-BAAT) programmes regularly for the benefi t systems, various enablers, payment options of cross-section of customers/bankers/students/ available to consumers and extent of adoption. public. The aim of these programmes was to educate the masses to move their focus of payments FinTech-related Activities from physical presence of money to electronic IX.38 The Indian FinTech industry as it stands money payments through various forms. During today is the result of unique concoction of India’s July 2020-March 2021, 178 e-BAAT programmes technological enablers, regulatory interventions, were conducted by the regional offi ces, in which business opportunities as well as certain fi nancial literacy on electronic payment systems, other unique characteristics, which have led their benefi ts and issues related to cyber security to the establishment of the third largest start- were explained to the participants consisting of up ecosystem in the world1. As the COVID-19 bank staff, customers, students and the common pandemic continued to create uncertainty, stress man. has emerged for some FinTechs, while some IX.35 The Reserve Bank advised all authorised others gained from new business opportunities PSOs and their participants to undertake targeted the pandemic provided. However, as the broader multilingual campaigns by way of SMSs and economy shifts from “respond” to “recover”, new advertisements in print and visual media to employment opportunities may be created by educate their users on safe and secure use of some FinTechs (Box IX.2). digital payments. Reserve Bank Innovation Hub IX.36 Aarogya Setu is a mobile application IX.39 The Reserve Bank in its Statement on developed by the Government of India to connect Developmental and Regulatory Policies of August essential health services with the people of India 6, 2020, announced that Reserve Bank Innovation in the fi ght against COVID-19 pandemic. In order Hub (RBIH) will be set up to promote innovation to spread awareness about the Aarogya Setu app across the fi nancial sector by leveraging on to the general public, the Reserve Bank advised technology and creating an environment which all authorised PSOs to display a banner on it on would facilitate and foster innovation. Accordingly, their website and app, to encourage maximum RBIH has been incorporated as a Section 8 downloads. company under the Companies Act, 2013, with Payment Systems Booklet registered offi ce at Hyderabad. In order to guide IX.37 The Reserve Bank released a Booklet and manage RBIH, the Reserve Bank had set up on Payment Systems covering the journey of a Governing Council (GC) with Shri Senapathy payment and settlement systems in India during (Kris) Gopalakrishnan, co-found er and former co- the second decade of the millennium, viz., from chairman of Infosys as the fi rst Chairperson and the beginning of 2010 till the end of 2020. The other members comprising of industry stalwarts 1 Start-up India portal, Government of India. 193ANNUAL REPORT 2020-21 Box IX.2 FinTech Activity in India: Funding and Employment Trends during COVID-19 Over the past year, COVID-19 pandemic has brought to fore Table 1: Panel Data Estimation Results the crucial role of technology amidst widespread adoption of social distancing and work-from-home culture. While many Dependent Variable: Model 1 Coeffi cient Model 2 Coeffi cient Employee Count (Std. Error) (Std. Error) economic and fi nancial indicators continued to slide into negative territory throughout 2020, the enthusiasm towards 1 2 3 start-ups did not wane drastically. Many in fact believe that Funds Raised 0.00000741*** 0.00000715*** this Black Swan event would lead to a creative disruption, (Current Quarter) (0.00000124) (0.00000124) with a reorientation of investment towards new ideas. Funding Round Stage Data from Tracxn show that despite the global economic Seed -90.8 (131.2) -90.7 (131.2) slowdown, US$ 56.1 billion were invested into the FinTech Series A -164.1 (140.3) -149.7 (140.6) sector globally during 2020-21 (April-March), as compared Series B -217.1 (154.4) -199.5 (154.7) with US$ 84.8 billion in 2019 and US$ 77.8 billion in 2018. Series C -45.5 (174.6) -36.7 (174.9) The US and Canada continued as the leading geographies Series D -206.6 (217.9) -198.4 (218.5) for new companies, followed by Europe. Series E 596.5 (425.5) 857.2** (409.9) In 2020-21, nearly US$ 3 billion was invested in Indian Series F 6199.6 *** (506.3) 6277.2*** (501.4) FinTech (approximately US$ 4.5 billion last year), indicating Series G -3832.0*** (1354.5) -3491.7*** (1343.7) a tempering of investor sentiment due to the economic Annual Revenue 0.00000142 0.00000179* slowdown [Chart 1, (Tracxn, 2021)]. Nevertheless, monthly (0.000000917) (0.000000924) trends indicate a revival of investor sentiment as the Sector - Insurance 200.0* (105.9) economic shock of the pandemic wears off. Sector - Finance and -251.8*** (122.7) Accounting Besides promoting fi nancial inclusion, FinTech can also Constant 433.2 (385.4) 166.9 (367.5) provide impetus to growth and employment (Phillippon, No. of observations 158 158 2017, Sahay et al., 2020). Empirical analysis of employment trends in Indian FinTech using random-effect Wald chisq. (p-value) 794.5 (0.000) 802.3 (0.000) panel data model provides some interesting perspectives Note: (Table 1). With appropriate controls for company scale and 1. Sample Period: 2018Q4 - 2020Q3. funding stage, it is seen that the amount of funds raised 2. Both specifi cations control for the start-ups' highest stage of funding is an important determinant of employee count. Also, reached. more mature fi rms in later funding stages are more likely 3. Hausman test and Breusch-Pagan LM test support the Random Effects specifi cation. 4. *, **, ***: indicate the statistical signifi cance at 1 per cent, 5 per cent and 10 per cent, respectively. Chart 1: FinTech Funding in India 5. Start-ups tend to raise equity in successive pitches or rounds (Seed, 1400 45 Series A, B, C and so on), which broadly follow the growth/scale of the business, and serve the needs of the business in that stage. Early 40 1200 rounds may be used to establish a foothold in the market, while later 35 1000 rounds can be used for expansion. 30 Source: RBI staff estimates. 800 25 600 20 15 to have higher employment strength. An assessment of 400 10 the operational domains indicates that online insurance 200 5 providers are more probable to have higher employee 0 0 count (due to the need for on-ground staff of surveyors), while highly specialised FinTechs such as those in the accounting technology domain are more likely to operate with very few highly skilled employees. (Contd.) 194 )noilliMDSU( tnuomA 81-raM 81-yaM 81-luJ 81-peS 81-voN 91-naJ 91-raM 91-yaM 91-luJ 91-peS 91-voN 02-naJ 02-raM 02-yaM 02-luJ 02-peS 02-voN 12-naJ 12-raM seinapmoc forebmuN Numberof Companies Funding Source: Tracxn, 2021PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY With start-ups expected to create jobs for a burgeoning and an opportunity to expand operations, as the general public is aspirational youth segment, these results provide two policy expected to emerge out of the crisis more comfortable with takeaways. First, while it is important to freely channelise using new technology (NPCI, 2021). productive investment into the start-ups, preferential policies may help in the growth of sub-sectors that have References: potential for low and semi-skilled job creation. Second, it is 1 NPCI (2021), ‘Digital Payments Adoption in India, 2020’, important not only to have an ecosystem that promotes new January 14. entrepreneurial ventures, but also one that helps in capacity building of domestic start-ups and handholds/nudges them 2 Phillippon, T. (2017), ‘The FinTech Opportunity’, BIS to scale up. Working Paper No. 655, August. While FinTech fi rms initially suspended operations during 3 Sahay, R., von Allmen, U., Lahreche, A., Khera, P., the lockdown due to the uncertain impact of COVID-19 on Ogawa, S., Bazarbash, M., and Beaton, K. (2020), their risk and business models, the stress started to diminish ‘The Promise of Fintech: Financial Inclusion in the later in the year and considerable optimism remains about Post COVID-19 Era’, Monetary and Capital Markets the sector. Their operations do not directly depend on Departmental Paper Series No. 20/09, IMF. movement of goods and people, and they are more suited for work-from-home culture. The pandemic has also presented 4 Tracxn (2021), Database accessed on May 5, 2021. and from academia. The setting up of the RBIH is entities are still testing their products. The delay a continuation of the efforts of the Reserve Bank in completion of the test phase for these entities to keep up with technological evolution in the was on account of technical glitches, operations fi nance space, with a more active involvement and issues, disruptions, and inconveniences due to intention of shaping an organised evolution rather COVID-19 pandemic. than passively adapting to random changes. IX.41 To encourage innovation and broaden the The RBIH is expected to create an eco-system eligibility criteria for the applicants to participate for idea generation and development, through in RS, the modifi ed ‘Enabling Framework’ was collaboration with tech innovators, as well as the published on December 16, 2020. The net worth academia. requirement was reduced from the existing `25 Regulatory Sandbox (RS) – Cohorts – Test Phase lakh to `10 lakh. Partnership Firms and Limited Liability Partnerships were also permitted to IX.40 The Enabling Framework for Regulatory participate in the RS. Sandbox (RS) was placed on the website on August 13, 2019, followed by the announcement IX.42 To foster innovations capable of recasting of ‘Retail Payments’ as the theme of the fi rst the cross-border payments landscape, the second cohort. The testing of the products of six entities cohort under the RS with ‘Cross Border Payments’ selected under the fi rst cohort commenced as its theme was announced on December 16, from November 16, 2020. Four of the entities 2020. A total of 27 applications was received have completed the ‘Test Phase’, and the fi nal under the second cohort. These applications are assessment of the results of the testing process is being scrutinised as per the approved standard being undertaken quantitatively and qualitatively operating procedure. Further, it was also decided based on the mutually agreed test scenarios that the theme for next cohort shall be ‘MSME and expected outcomes and adherence to the Lending’ in order to foster innovation in lending to conditions stipulated for testing. The remaining two MSMEs. 195ANNUAL REPORT 2020-21 RegTech Solutions for Effective and Focused viz., SEBI, IRDAI, International Financial Services Regulations Centres Authority (IFSCA) and Pension Fund Regulatory and Development Authority (PFRDA) IX.43 The Reserve Bank has entered into and one representative each from the Ministry of Cooperation Agreement (CoA) on FinTech Finance and MeitY. During its fi rst meeting held in with International Finance Corporation (IFC) March 2021, it was decided that fi nancial sector –- a member of the World Bank Group (WBG). regulators shall co-ordinate and share information Under the scope of CoA, among others, IFC will among members on their innovation initiatives. provide knowledge/advisory support on RegTech/ Further, members also agreed to suggest models SupTech initiatives. Further, an exploratory survey on Inter-Operable RS mechanism for hybrid was conducted among a few Regulated Entities products/services to facilitate framing of standard (REs) in order to assess the level and extent operating procedure (SOP). of RegTech adoption as well as to understand existing/potential use of RegTech by REs, risks Agenda for 2021-22 and challenges faced and the expectations of IX.46 The proposed action items under the goal- REs from the regulators. The survey has given fair posts identifi ed in the ‘Payment and Settlement insight into the level of adoption of RegTech in the Systems in India: Vision 2019-21’ are set out country. below: IX.44 The Reserve Bank has joined the Global Encouraging Healthy Competition Financial Innovation Network (GFIN), a network (cid:129) Review of Membership to Centralised of over 50 organisations committed to support Payment Systems: The Reserve Bank fi nancial innovation. GFIN has three work streams, shall initiate discussion to develop a namely (i) “Collaboration”, which focuses on how framework for settlement risk management to help regulators in collaborating and sharing with increased participation of non-banks of experiences of innovation, (ii) “Cross-Border in centralised payment systems. Testing”, which focuses on running cross-border testing of innovative products and services, and (iii) Improving Customer Convenience “RegTech and Lessons Learned”, which focuses (cid:129) On Offl ine Payment Solutions: The Reserve on sharing RegTech knowledge, collaborating on Bank had announced that pilot schemes areas of mutual interest such as potential cross for offl ine payment solutions would be jurisdictional effi ciency. Participation in any of the conducted till March 31, 2021. Based on above three work streams of GFIN will help in the experience gained through these pilot enhancing the FinTech related activities in India. schemes, the Reserve Bank shall decide Inter - Regulatory Technical Group on FinTech on implementing offl ine payment solutions in the country; IX.45 An Inter-Regulatory Technical Group on FinTech (IRTG on FinTech) has been constituted (cid:129) National Settlement Services for Card under the aegis of Sub-Committee of the Financial Schemes: The Reserve Bank shall explore Stability and Development Council (FSDC-SC). the possibility of facilitating settlement of The Group is chaired by Chief General Manager card transactions processed by various (CGM) of DPSS with representatives at the level card payment networks through the of the CGM from other fi nancial sector regulators, accounts of card payment networks 196PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY maintained with the Reserve Bank. landscape, adopted a proactive approach by Settlement of card transactions in Reserve leveraging on technology. Its effects were felt in Bank books shall increase confi dence in business continuity under pandemic as well as card transactions; in effi ciency upgradation of normal business processes within as well outside the Reserve Ensuring Affordable Cost Bank. The Reserve Bank lined up a slew of (cid:129) Review of Corridors and Charges for measures and implemented environmentally Inbound Cross-Border Remittances: The sustainable products and practices, which make Reserve Bank will examine the role that the workplaces paperless, collaborative and the payment services providers (PSPs) energy-effi cient. A sustainable Information and can play to ensure friction free remittances Communication Technology (ICT) infrastructure, at lower cost. which is adaptive to changing technologies, was Increasing Confi dence driven by the need for operational excellence (cid:129) Geo-tagging of Payment System Touch through focus on resilience, reliability, security, Points: The Reserve Bank has established integrity and cost effi ciency. a framework to capture the location IX.48 The Reserve Bank continued its efforts and business details of commercial to graduate its ICT systems to next generation bank branches, ATMs and business applications with an inbuilt architecture for high- correspondents (BCs). It is envisaged to availability, scalability, enhanced security and extend a similar framework to capture and performance. The security and privacy, which are maintain information about PoS terminals embedded into the design and architecture of IT and other payment system touch points as systems and practices, are the guiding principles. well; IX.49 The uninterrupted functioning of the ICT (cid:129) Third Party Risk Management and infrastructure of the Reserve Bank during the System-wide Security: The Reserve Bank pandemic time including the critical payment shall examine the need for a separate applications NEFT and RTGS; core banking regulatory framework for outsourcing solution e-Kuber; treasury operations for money arrangements by non-bank payment and forex market; and debt management for service providers, given the current trend the governments (centre and states) indicates of outsourcing arrangements and the need the resilience and buoyancy of the Department. for security control and clarity of roles and The major milestones achieved during the year responsibilities of the regulated entities. included support in rapid digitisation of fi nancial 3. DEPARTMENT OF INFORMATION services through facilitation of RTGS 24x365; TECHNOLOGY (DIT) disbursement of domestic defence pension IX.47 The Department of Information Technology payments through e-Kuber; and implementation (DIT), in its swift response to unprecedented of paperless offi ce with recently launched “Sarthi” challenges due to COVID-19 pandemic and to (i.e., Electronic Document Management System) keep pace with the fast-changing technology application. 197ANNUAL REPORT 2020-21 Major Initiatives this development, the country is now ready to be a part of the world, where fi nancial systems are RTGS 24x365 integrated and not dependent on time zones. IX.50 The RTGS system operated by the Treasury Single Account (TSA) system Reserve Bank of India went live on 24x365 basis at the stroke of midnight of December 14, 2020 IX.51 Following the recommendation of (Box IX.3). While India is already recognised as Expenditure Management Commission (EMC) for the leader in retail payment systems, the launch curtailing the cost of government borrowings and of 24x365 RTGS makes India a leader in the large enhancing effi ciency of fund fl ows to Autonomous value payment systems across the world. With Bodies (ABs)/Sub-Autonomous Bodies (Sub-ABs), Box IX.3 RTGS 24x365, Including Lessons from the Country Experience RTGS system, a large value electronic fund transfer system, Lessons from the Country Experience enables transfer of funds between any two RTGS enabled India is one of the very few countries offering RTGS on bank accounts on real time basis. RTGS, which began its 24x365 basis. Two other countries having near 24x365 operations on March 26, 2004 with a soft launch involving service are Mexico and South Africa. RTGS system of four banks, now has membership of 242 participants. South Africa known as South African Multiple Option Since its inception in 2004, RTGS has undergone many Settlement (SAMOS) system was designed for large-value changes with a signifi cant one being adoption of ISO 20022 interbank transactions, which was developed to bring messaging standards in 2013. RTGS operational timings domestic interbank settlement practices. The SAMOS were increased at regular intervals with the last extension system has been operating 24x365 since its inception on implemented on August 26, 2019 by making the RTGS March 9, 1998. It moved to same-day settlement in August, system available between 7:00 AM and 7:45 PM. Before 2004. The system closes at midnight and moves to the next commencing round the clock operations, RTGS system was business day, while instructions are received throughout handling 6.35 lakh transactions daily for a value of `4.17 the day. On public holidays and Sundays, the system lakh crore. allows for retail batch settlements. In order to enable banks After successful launch of NEFT on 24x365 basis in to manage the fi nal liquidity position for each day, a window December 2019 and smooth operation since then, it was of 25 minutes is allocated between 16:30 and 16:55. felt that, to support the ongoing efforts aimed at global integration of Indian fi nancial markets, facilitate India’s efforts Mexico operates Interbanking Electronic Payment System to develop international fi nancial centres and provide wider (SPEI), a large-value funds transfer system in which payment fl exibility to domestic corporates and institutions, participants can make transfers among themselves or RTGS system should also be available round the clock. their customers. The system began operating on August Accordingly, Reserve Bank announced in its Statement on 13, 2004. Participants are not allowed to incur overdrafts Developmental and Regulatory Policies of October 9, 2020, of their accounts. The central bank administers the that the RTGS will be available round the clock on all days of accounts of Mexican fi nancial agents through Account the year. All this culminated with the launch of RTGS 24x365 Holders Service System (SIAC), which is used to provide from December 14, 2020. After the launch, there was slight liquidity to participants. Only banks registered in Mexico increase in average daily volume on week days. On March can avail collateralised intraday overdrafts in the SIAC 30, 2021, RTGS system handled all time high of 11.40 lakh system. The SPEI system operates between 19:00 hours customer and inter-bank transactions. RTGS system is at to 17:35 hours. present available on all days including Saturdays, Sundays and National Holidays and at all times except for the time Source: RBI, BIS and Banco de México (Central Bank of taken to complete the end-of-day activity around midnight. Mexico). 198PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY Treasury Single Account (TSA) was implemented to bring enhanced productivity, effi cient record with phase wise expansion since August 1, 2020. management and a less-paper environment. The Reserve Bank functions as the primary The application is accessible from anywhere banker in TSA. The assignment accounts of ABs through a secure remote access tool, which and Sub-ABs are opened in e-Kuber to receive facilitated remote working during the COVID-19 different categories of grants-in-aid and incurred pandemic time. expenditure against the assigned limit. TSA Agenda for 2020-21: Implementation Status facilitates just-in-time fund release to ABs/Sub- Goals Set for 2020-21 ABs and operates on straight through process (STP) with integration between e-Kuber and IX.55 Last year, the Department had set out the Public Financial Management System (PFMS) of following goals: Controller General of Accounts (CGA). (cid:129) Next Generation Structured Financial Pension Disbursement for Defence Pensioners Messaging System (NGSFMS): The proposed NGSFMS will revamp the IX.52 The Reserve Bank integrated existing Structured Financial Messaging Comprehensive Pension Package (CPP) of System (SFMS) platform and simplify defence pensioners with e-Kuber from September the architecture, bringing in scalability 7, 2020 and facilitated automatic credit of monthly and fl exibility and at the same time pension through the enhanced e-Payment module promoting enterprise framework of in e-Kuber. message communication among internal Implementation of Advanced Mail Gateway and applications such as RTGS, core banking Exchange Scan Solutions solution (CBS) of banks and NEFT IX.53 An advanced mail gateway solution that (Utkarsh) [Para IX.56]; provides protection for the Mail Messaging System (cid:129) Augmentation and Modernisation (MMS) against traditional and targeted attacks of Infrastructure Security Layer: from outside through correlated intelligence was Consolidation, augmentation and implemented. Further, an exchange specifi c automation of security layers, comprising security solution to protect against targeted internal and perimeter fi rewalls and phishing and ransomware attacks by using intrusion management solution [i.e., predictive machine learning, document exploit governance, risk management and detection, custom sandbox analysis of suspicious compliance (GRC)] will be undertaken to fi les and Uniform Resource Locators (URLs) was enhance cyber resilience and strengthen also implemented. security of the Reserve Bank (Para IX.57); Sarthi - E lectronic Document Management (cid:129) Next Generation Wireless Technology Wifi - System (EDMS) 6 Across the Reserve Bank: The adoption IX.54 During the year, the Reserve Bank of new emerging technology Wifi -6 will introduced its Electronic Document Management be initiated across the Reserve Bank for System, named as Sarthi, to facilitate and upgradation of the Wi-fi infrastructure automate the various facets of document wherein new access points (available with processing and management in a safe and next generation wireless technology, i.e., secure manner. The implementation is expected Wifi -6) will be deployed (Para IX.58); and 199ANNUAL REPORT 2020-21 (cid:129) Reserve Bank as Aggregator for Tax Next Generation Wireless Technology Across the Information Network (TIN2.0): The Reserve Bank Central Board of Direct Taxes (CBDT) is IX.58 The Betaar Sanchar Seva (BSS) Sanchar implementing a new payment system, project was successfully implemented during the i.e., Tax Information Network (TIN2.0), COVID-19 induced lockdown at Central Offi ce while subsuming the erstwhile Online Tax Building (COB) and other selected offi ce locations Accounting System (OLTAS) in the new (including four metros) of the Reserve Bank. This system. The new system in e-Kuber will has improved the overall operational effi ciency, facilitate the Reserve Bank’s functions visibility and reliability of internet service across both as the collecting bank and as an offi ces. The platform also provides an alternate aggregator for amounts received by the channel to meet day-to-day business requirements authorised agency banks (Para IX.59). and acts as a backup for the wired internet network Implementation Status of Goals in case of any exigencies. Next Generation Structured Financial Messaging Reserve Bank as Aggregator for Tax Information System (NGSFMS) Network IX.56 The Reserve Bank of India upgraded the IX.59 The Reserve Bank is in the process of Structured Financial Messaging System (SFMS) integration of e-Kuber system with Tax Information in August 2020. SFMS is the messaging system Network (TIN 2.0) of Central Board of Direct Taxes used for both NEFT and RTGS managed by the (CBDT) and the Public Financial Management Reserve Bank. The upgraded SFMS version offers System (PFMS) of Controller General of Accounts simplifi ed architecture, best industry practices in (CGA) for implementation of Pratayaksh Kar application framework, modular approach for Lekhankan Pranali (PRAKALP). The new system much needed fl exibility for any future changes, in e-Kuber will facilitate the Reserve Bank to and enhanced security features, to name a few. function both as the collecting bank through over- Augmentation and Modernisation of Infrastructure the-counter (OTC) as well as NEFT/RTGS modes Security Layer and as an aggregator for amounts received by the IX.57 Security Controls were augmented by authorised agency banks. implementing secure remote access capability Agenda for 2021-22 to access the Reserve Bank’s applications from outside of offi ce premises. The solution offers IX.60 The Department’s goals for 2021-22 security checks at multiple levels through user under Utkarsh are set out below: multifactor authentication, endpoint authentication (cid:129) Next Generation Data Centre: Examination and health check, and secure access tunnel of the feasibility of next generation through a secure network gateway. Further, data centre and preparation of detailed next generation antivirus solution with predictive prototype plan to cater to the Reserve machine learning and behaviour analysis has also Bank’s ICT roadmap for coming years; been implemented during the year to enhance endpoint and email security controls of the (cid:129) Upgradation of Non-IT Physical Reserve Bank. Infrastructure at Data Centres: The 200PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY rejuvenating non-IT infrastructure of its 4. CONCLUSION existing data centres is underway. Optimal IX.61 In sum, the Reserve Bank continued capacity planning and energy effi ciency is its efforts to develop state-of-the-art payment a major driving factor for the project, which and settlement systems in the country and includes invigorating non-IT infrastructure enhance the digital payment experience of the at data centres; and consumers, while ensuring adequate security (cid:129) Implementation of Next-Generation measures. These initiatives have facilitated e-Kuber: e-Kuber is performing key smooth transition towards a less cash society with fi nancial services and operations of the improved transaction effi ciency and a delightful Reserve Bank with/for various stakeholders digital experience. Amidst diffi culties arising such as government, banks and other from the COVID-19 pandemic, efforts were also market participants. The system is being made for the smooth functioning of the payment refreshed to improve the functionalities by system. Further, the Reserve Bank focused on leveraging on technological developments enhancements in the IT infrastructure for internal and will facilitate enhanced automation users also contributing to improved effi ciency. of processes, fl exibility of integration It also helped expand coverage for government with external and internal systems, ease transactions using digital technologies. Going of change management, enhanced ahead, strengthening the payments ecosystem, modularity, reporting with comprehensive enhancing awareness, and ensuring facilitation of real time dashboards, front end digital payments across the length and breadth of improvements for enhancing productivity the country will be the key areas of focus of the and robust controls. Reserve Bank. 201COMMUNICATION, INTERNATIONAL ANNUAL REPORT 2020-21 X RELATIONS, RESEARCH AND STATISTICS During the year, the Reserve Bank adopted innovative means of communication, virtual meetings, web-conferencing and social media in response to the logistical constraints imposed by the pandemic. Economic and statistical policy analysis and research were reoriented, and information management systems were fortified. In the international arena, India took over the Chair of the BRICS, completed the SAARCFINANCE Chair and co-chaired the G-20’s Framework Working Group (FWG). Effective cash management and sound management of foreign exchange reserves in pandemic conditions were concurrent priorities. Several legislative initiatives/ amendments were undertaken to ensure a sound and efficient financial system. X.1 In the wake of the pandemic, the strategy and processes. Section 3 discusses the Reserve Bank took recourse to virtual platforms Reserve Bank’s international relations, including to broaden its reach to the public. In spite of with international organisations and multilateral logistical challenges, relations with international bodies. Section 4 dwells on the activities of the organisations and multilateral bodies were further Reserve Bank as a banker to governments and strengthened. With heightened precautionary banks. Section 5 reviews the conduct of foreign demand for currency, concerted efforts were exchange reserves management. Section 6 sets made to provide effective cash management out research activities, including statutory reports services to central and state governments by and frontline research publications. Section integrating their systems with that of e-Kuber. 7 profi les the activities of the Department of Risk management practices for foreign exchange Statistics and Information Management (DSIM). management were strengthened to counter Section 8 presents the activities of the Legal pandemic induced volatility in global fi nancial Department. Concluding observations are given markets and asset prices. Policy-oriented in the last section. research was undertaken, and the timely release 2. COMMUNICATION PROCESSES of the fl agship publications was ensured. The information management system was further X.3 The functioning of the Department of strengthened through establishment of the Data Communication (DoC) is driven by two-way Science Lab (DSL) and initiation of processes communication with the public, anchored by leading up to building a Public Credit Registry the objectives – transparency, clarity, precision, (PCR). A number of amendments to/introduction timeliness and credibility in the dissemination of legislations pertaining to the Reserve Bank of the Reserve Bank policies. The strategic of India Act and Banking Regulation Act were objectives of building the public confi dence undertaken during the year. and anchoring their expectations, guided the X.2 Against this backdrop, the rest of the dissemination of policy developments/initiatives chapter is structured into eight sections. The and their rationale through multiple channels such next section presents major initiatives of the as the Reserve Bank’s website, media interface, Reserve Bank with regard to its communication informal workshops, and social media. 202COMMUNICATION, INTERNATIONAL RELATIONS, RESEARCH AND STATISTICS X.4 In the past, central banks around the world from the central banks both in normal and crisis witnessed a signifi cant shift in the nature and time and they supplement monetary policy medium of their public communication. Since the communications contributing to awareness of 2008-09 global fi nancial crisis (GFC), transparency, challenges that the central banks face and the accountability and timely dissemination had strategy they adopt. Such communications bring in become the hallmark of communication, which greater engagement of public and make it easier were put under test during the COVID-19 for central banks to achieve their goals. However, pandemic. Communications on fi nancial stability in times of crisis, such as the pandemic, these are now an integral part of communications challenges became huge (Box X.1). Box X.1 Central Bank Communication during Pandemic Central banks use communication as an important tool to avoid any premature withdrawal of liquidity and avoid improve the effectiveness of their policies and regulations. premature tightening of monetary policy. Stakeholders read The nature and channels of communication, which have the actions of the central banks from their communication, been constantly evolving, underwent a major shift in the action and signals (Shaktikanta Das, 2021) wake of the COVID-19 pandemic. Modes Focus Areas The channels of communication also underwent a change in the pandemic when structured communication was As the successive shifts in economic condition were supplemented by informal, unstructured communication sudden, highly irregular and non-linear, the focus of central using non-traditional modes like social media platforms, bank communication during the pandemic shifted to: (a) layering of messaging customised to specifi c target groups reinforcing the intent and rationale for multiple measures and use of multimedia to reach out directly to the masses. taken in the backdrop of pandemic; (b) providing some Transparency, simplicity and proactiveness in communication forward guidance on policy measures, especially when reinforced trust and paid off during the peak of the crisis. The committed for an extended period; (c) giving reassurance Reserve Bank took out regular public awareness campaigns on fi nancial stability by providing real-time assessment to through Twitter and Facebook and monitored the feedback dispel any misgivings; (d) management of expectations of on these campaigns. It has also created a Social Media economic agents to contain any panic reaction, which may Command Centre (SMCC) for social media monitoring and exacerbate the problem; (e) covering the range of markets listening. and activities beyond the specifi ed mandate to assure on coordinated approach by all public authorities; (f) sensitising Amidst the increasing reliance on work from home (WFH) the common citizens about the safeguards in digital environment, digital modes of communication got a fi llip. banking as more people shifted to digital transactions; and Speaking engagements of central bank governors were (g) increased frequency of communication, in the face of seamlessly disseminated through livestreaming on social heightened uncertainties. media. The trust in direct communication from major central banks on social media was refl ected in an increase in their Central bank governors generally led from the front during social media account followers. For example, the number of the pandemic in announcing the measures with rationale, followers of Reserve Bank’s Twitter handle surpassed one giving their assessment of economic conditions and million mark during this period. Many central banks joined building confi dence on fi nancial stability conditions, and international organisations in creating focused portals on simultaneously ensuring that the regular work of improving COVID-19 resources, sharing of experiences, especially the resilience of the fi nancial system also continues. In view about the production and dissemination of regular releases. of the COVID-19 related restrictions, direct communique from the highest level on digital platforms with members of Checking Frauds and Disinformation public, market participants and other stakeholders became As information technology platforms served well for the mainstay. Almost all central banks communicated their supporting business continuity and smooth functioning commitment to support the process of economic revival, (Contd.) 203ANNUAL REPORT 2020-21 during the COVID-19 related social restrictions, central banks supplemented their regular information fl ow by seeking impressed upon fortifying public confi dence in digital banking public perception and directly listening to representatives to support the fi nancial landscape. Central banks used their of the public. Direct communication from the central bank social media handles extensively for educating people on struck the right chord with people and helped in upholding safe digital banking practices. These efforts came handy trust and ensuring credibility during the pandemic. The for fi nancial education as mischiefs by certain fraudulent Reserve Bank took out regular public awareness campaigns entities engaged in phishing, fi nancial frauds and other through Twitter and Facebook and monitored the feedback cybercrimes surged during the lockdown. Rising episodes of on these campaigns. disinformation and rumours on social media platforms about Key Takeaway fi nancial entities as well as nature of transactions like the link between banknotes and coronavirus were quelled by Thus, as central banks across countries responded central bank’s campaigns. Some of them issued statements unprecedently to mitigate the impact of the COVID-19 in March 2020 focusing on three messages: (i) banknotes pandemic, direct and more frequent communication paid do not pose a particular risk of infection, (ii) the cash supply off and helped in supporting the measures to dampen the is secure, and (iii) retailers should continue to accept cash. adverse impact and stabilise the markets in highly uncertain times. Listening Reference: As fl ow of detailed economic data suffered during the pandemic, a quick and realistic assessment of pressure Shaktikanta Das, Governor, Reserve Bank of India in an points was warranted. Subsequently, central banks interview with the Times of India, March 8, 2021. X.5 Given the multiple equilibria that prevail by widening the reach of the public awareness in the market, it is not only important to make efforts through use of vernacular languages for public aware of the facts but also to guard the social media campaigns; and by remaining against any miscommunications that result in connected with the regional media to facilitate self-fulfi lling prophecies that lead to inferior informed reporting, with the underlying objective equilibriums. Confi dence needs to be restored so of ensuring greater transparency and building that expectations stabilise. These considerations accountability and credibility among the members guided the overall communication policy of of public for their better understanding. This in turn, the Reserve Bank during 2020-21, which was helped in demystifying the rationale for central characterised by vulnerable, uncertain, complex bank’s mandate, governance, policies, operations and ambiguous (VUCA) times. In pursuit of and outcomes, thus reducing the uncertainty and this objective, the Reserve Bank deployed facilitating a public dialogue that could anchor technology and social media to the forefront in the expectations and foster better policies. communication strategy. Agenda for 2020-21: Implementation Status X.6 The Department, therefore, disseminated Goals Set for 2020-21 the Reserve Bank’s policies through website and X.7 Last year, the Department had set out the social media; enhanced awareness about the following goals under Utkarsh: Reserve Bank’s policies through need-based formal and informal virtual media workshops; and • Conduct workshops/sessions for the deepened its engagement with the multi-lingual media on important regulatory and banking and multi-cultural society. This was facilitated related issues (Para X.8); 204COMMUNICATION, INTERNATIONAL RELATIONS, RESEARCH AND STATISTICS • Deepen its engagement with the society website for more effective and engaging through public awareness programmes communication with all stakeholders through best and social media presence (Para X.9 - in class digital experience platform (DXP) was X.12); and undertaken. • In line with international experience, Dissemination through Social Media efforts will be made to create a ‘Social X.11 As organisations moved towards digital Media Command Centre’ for social media communication and online work environment in monitoring and listening (Para X.13). a big way with the onset of the pandemic, social Implementation Status of Goals media became a major mode of communication. Communication Policy Accordingly, the number of followers of the Reserve Bank’s Twitter handle @RBI surpassed X.8 The Reserve Bank’s communication the one million mark touching 1.15 million as on policy was updated to embrace the technological March 31, 2021, signifying the largest following advancements, changes in modes of among the central banks of the world. The Reserve communication and other developments. The Bank’s YouTube channel, which was widely used updated policy includes the objectives, target for telecasting live monetary policy announcements, audience, channels and tools of communication publishing speeches and interviews of the policy and operational practices, and subsumes Reserve Bank’s top management, and fi nancial the guidelines for regional level communication. education, had over 76,100 subscribers as on Though the social distancing norms impacted March 31, 2021. some activities, the Department resorted to virtual and physical workshops for media during January- Enhancing Public Awareness Outreach using February 2021 and conducted informal briefi ngs Social Media Platforms through the year. X.12 As digital transactions increased manifold Target-specifi c Communication in the COVID-19 period, the need for increasing X.9 Tailored communication was initiated with fi nancial literacy and spreading awareness an objective to reach out to different age / interest among people on various aspects like digital banking, nomination facility, facilities for senior groups. For instance, separate tab was created on citizens and cyber security was felt. During the the home page of the Reserve Bank’s website for year, the Reserve Bank actively used its second ease of access to all COVID-19 related measures Twitter handle and Facebook page @RBIsays to undertaken by the Reserve Bank. Tailored ensure wider dissemination of public awareness communication of public interest was released messages in Hindi, English and eleven regional through social media and placed under the languages. New social media creatives on public 'RBI Kehta Hai’ page of the Reserve Bank’s awareness were put out at least once every website and YouTube channel. month during 2020-21. The 'RBI Kehta Hai’ RBI Website 2.0 microsite is regularly updated with material on X.10 During the year 2020-21, the work on public awareness campaigns as and when they development of a redesigned Reserve Bank’s are released via television, newspapers, digital 205ANNUAL REPORT 2020-21 Table X.1: List of Themes for Public Awareness Campaigns Period Campaign October - November 2020 1. Nomination and settlement facility - newspapers, TV, radio, hoardings, websites, and SMS. December 2020 - January 2021 2. Safe digital banking (cyber security) - newspapers, TV, radio, hoardings, and websites. February 2021 3. Release of e-posters and audio-visual spots in TV and radio during the fi nancial literacy week 2021, on three themes, viz., (i) timely repayment and building credit history, (ii) borrowing from formal institutions only, and (iii) responsible borrowing. March 2021 4. A multi-media campaign on convenience of digital banking - newspapers, TV, radio, hoardings, cinema theatres, websites, and SMS. 5. A campaign on safe digital banking – cyber security during the digital payments awareness week, in print, digital, and hoarding. 6. A campaign on setting limits on cards on TV and radio. and social media platforms (Tables X.1 - X.3). interesting look and structure the content in an Further, the microsite was revamped to give it an easy to access manner. Table X.2: Release on Social Media Period Messages/Posts July 2020 1. Graphics Interchange Formats (GIFs) in 13 languages on safe digital transaction - Identity theft. 2. GIFs in 13 languages on safe digital transaction - Not to respond to unsolicited calls/links. 3. GIFs in 13 languages on safe digital transaction - UPI based payment links. 4. GIFs in 13 languages on safe digital transaction – Prevent Installation of malicious apps. August 2020 5. GIFs in 13 languages on safe digital transaction – not to share personal details over phone/email/SMS. 6. Post on highlights of bi-monthly monetary policy announcement by the Reserve Bank Governor. 7. Post on celebrating independence by transacting safely from home . September 2020 8. Caution post regarding safe digital transactions - not to share card credentials. 9. Caution post regarding safe digital transactions - using secure websites for online transactions. 10. Post on customer’s limited liability in case of fraudulent transaction in account. 11. Awareness messages for public on various themes with Shri Amitabh Bachchan, Brand Ambassador . October 2020 12. Awareness messages on various themes in 13 languages with Shri Amitabh Bachchan. November 2020 13. Two posters on nomination and settlement facility. December 2020 14. Social media post on highlights of monetary policy announcement by the Reserve Bank Governor. 15. Social media caution post against unauthorised digital lending platforms/mobile apps. 16. Twitter poll followed by Twitter and Facebook (FB) post in 13 languages on the theme - timely repayment of loan instalments. January 2021 17. Twitter poll followed by Twitter and FB post in 13 languages on the themes - nomination and settlement facility, fi ctitious offers, limited liability and setting limits. February 2021 18. Social media post on highlights of monetary policy announcement by the Reserve Bank Governor. 19. Financial literacy week posters and video links on the themes – credit from formal sources, responsible borrowing, and timely repayment. March 2021 20. Release of a video on cyber security on Twitter and FB. 21. Twitter poll followed by Twitter and FB post in thirteen languages on each of the three themes - risk vs returns, complaining on Sachet Portal, notifying the bank in case of card getting compromised/stolen, and registering mobile number and email with bank. 22. Post on Twitter and FB about the temporary exhibition on Indian banknotes at the RBI Museum, Kolkata. 206COMMUNICATION, INTERNATIONAL RELATIONS, RESEARCH AND STATISTICS Table X.3: List of High Impact Programmes Agenda for 2021-22 Channels Duration X.16 During 2021-22, the Reserve Bank’s communication channels would be further 1. Doordarshan and All October 2020 - March 2021 India Radio strengthened, and e fforts will be made towards 2. Kaun Banega Crorepati September 2020 - December 2020 the following goals under Utkarsh: (KBC) 2020 3. Indian Premier League September 2020 - November 2020 • To open for public a new section of the 2020 Reserve Bank Museum, which will be 4. India-Australia Cricket November 2020 - January 2021 dedicated to the functions and working of Series 2020 the Reserve Bank; 5. India-England Cricket March 2021 Series 2021 • To revamp the Reserve Bank’s website with improved information architecture; X.13 The Reserve Bank created a Social • To continue to conduct virtual/physical Media Command Centre (SMCC) for social media workshops/ sessions for the regional monitoring and listening. media on important regulatory and banking Other Initiatives related issues; and X.14 Extensive efforts were made to collaborate • To use public awareness programmes, with fact-checking portals, social media handles social media presence and other channels of the central government, among others, to of communication to further deepen highlight proper perspective and understanding of engagement with the society. topical issues and to obviate any misinformation 3. INTERNATIONAL RELATIONS regarding banking, certain fi nancial entities, the Reserve Bank’s measures and other issues of X.17 Despite challenges posed by the interest. pandemic during 2020-21, the Reserve Bank further strengthened economic and fi nancial The RBI Museum relations, particularly with international X.15 The RBI Museum located at Kolkata tells organisations (IOs) and multilateral entities. the stories of money, gold and the genesis of The International Department (ID) engaged the Reserve Bank through its artefacts, exhibits, in steering several bilateral and multilateral technology and games. The Museum was dialogues through virtual means. reopened on January 18, 2021 after being closed for visitors during a major part of the year owing Agenda for 2020-21: Implementation Status to COVID-19 pandemic. Efforts are underway to Goals Set for 2020-21 enable a virtual tour of the Reserve Bank Museum X.18 The Department had set out the following for those who are unable to visit the Museum goals for the year 2020-21: in person. During the year, the Reserve Bank launched its second Facebook page under the title • Follow up on issues relating to the @therbimuseum to ensure wider dissemination international fi nancial architecture (IFA), of information related to the Reserve Bank, the including the 16th General Review of Quotas Indian economy, the Reserve Bank Museum as (GRQ), Bilateral Borrowing Agreements well as fi nancial literacy messages to the public. (BBAs) and New Arrangements to Borrow 207ANNUAL REPORT 2020-21 (NAB) of the IMF (Utkarsh) [Para X.19 - NAB; extension of 2016 Note Purchase Agreement X.20]; (NPA) by one year; and India’s participation in the 2020 NPA. • Article IV consultations with the IMF (Utkarsh) [Para X.21]; X.21 In view of the pandemic, the Article IV engagement with the IMF was deferred. However, • Completion of its activities as the the Department hosted an IMF staff visit held in SAARCFINANCE Chair, including swap the virtual format. The IMF Article IV consultations, support, capacity building, and joint a surveillance exercise under the IMF’s Articles of research (Utkarsh) [Para X.22 - X.24]; Agreement, is now likely to take place in July 2021. • Strengthening cooperation amongst the Other contributions of the Department included BRICS central banks through the BRICS provision of inputs for the IMF’s Annual Report Bond Fund (BBF), the Contingent Reserve on Exchange Arrangements and Exchange Arrangement (CRA) and other initiatives, Restrictions (AREAER), and its participation in with India taking over the BRICS Chair in Macroprudential Policy Survey and other IMF and 2021 (Utkarsh) [Para X.25 - X.26]; World Bank surveys. • Intensifi cation of engagement with the G20 BRICS, SAARC and Bilateral Cooperation in the run-up to taking over the Presidency X.22 In its capacity as the SAARCFINANCE in 2023 (Para X.27); and (SF) Chair, the Reserve Bank undertook various • Providing inputs for activities relating to initiatives (Box X.2). The 40th and the 41st Governors’ bi-monthly BIS Board and SAARCFINANCE Governors’ Group Meetings other meetings, meetings of the Committee (SFGGMs) were organised in November 2020 and on the Global Financial System (CGFS), March 2021, respectively, in a virtual format, with and the Financial Stability Board (FSB) the inauguration of the SAARCFINANCE Sync, a [Para X.28 - X.30]; closed user group secure communication portal amongst SAARC central banks. Implementation Status of Goals X.23 The Reserve Bank organised two virtual IMF and IFA Related Issues webinars on ‘Artifi cial Intelligence and Central X.19 The Department participated in the Banking’, and ‘The Promise of FinTech: Financial meetings of the G20 International Financial Inclusion in the Post COVID-19 Era’. The annual Architecture Working Group (IFA WG), and SF database (SFDB) Working Group meeting in provided inputs on capital fl ows to the emerging July 2020 focused on improving the quality of the markets and developing economies (EMDEs) and database and supporting research. Efforts were on the issues relating to the global fi nancial safety made to identify and close data gaps in the SF net. database during its technical meetings. X.20 The Department provided inputs to X.24 Under the capacity building initiative, Reserve Bank management during the Annual the SF scholarship for 2021 was offered to four Fund-Bank meetings held virtually in October offi cials, including offi cials from the Ministry of 2020 on the early warning exercise; global policy Finance, Afghanistan; the Bangladesh Bank; agenda; IMF governance reforms; doubling of the Maldives Monetary Authority and the Nepal 208COMMUNICATION, INTERNATIONAL RELATIONS, RESEARCH AND STATISTICS Box X.2 SAARCFINANCE and RBI Initiatives The SAARCFINANCE (SF) is a network of central bank Two new initiatives were operationalised by the Reserve Governors of the SAARC region, which was instituted on Bank. First, the ‘Directory of the Retired Resource Persons’ September 9, 1998, with a view to establishing dialogue on was launched, which offers a pool of experts on 14 central macroeconomic policies of the region and sharing mutual bank activities including monetary policy; macro-economic research; fi nancial inclusion; and payment systems. Second, experiences and ideas. The Reserve Bank of India’s SF the fi nancial inclusion platform was created as a repository Chair from October 2019 to October 2020 was extended till of information on fi nancial inclusion and literacy initiatives March 2021 because of the COVID-19 pandemic. in the SAARC countries, which will develop a knowledge A key deliverable completed during the year was the network in the area. development of the SAARCFINANCE Sync (SF Sync) with A r evised Framework of Currency Swap Arrangement for the following features: SAARC countries 2019-22 was put in place. Swap support was provided to Bhutan, Maldives and Sri Lanka, amounting • It will track the developments under the various SF to an aggregate of USD 1 billion since February 2020. initiatives; The Reserve Bank is leading a joint SF collaborative study • The logistics support, conduct of events, seminars, and on FinTech and fi nancial Inclusion. The maiden issue of the meetings will be co-ordinated through this portal; annual SF e-Newsletter was released in March 2021. • The portal will enable researchers to share not only The focus area of the RBI Chair was the use of technology documents but also actively engage in real time dialogues in central banking functions. The Reserve Bank’s SF Chair culminated in the SF Governors’ Symposium on March 2, on collaborative studies; and 2021 with a keynote session on ‘SupTech use in central • The data and document repository section will build the banks’ and a panel discussion on ‘Cyber security in central archives in the SF Sync. banks’ (Chart 1). Chart 1: Timeline of Events under the Reserve Bank’s SF Chair SF Webinar S agig rn ei en mg eo nf tS ww ia tp h R SFe v Si csi ho on l ao rf s t hh ipe Launching of o I b Dnn y ec cNlF u i R 2n s 0i Ba o 2n n 0c hia ol sted 4 G M1 r as ot ruS 2F p 0 G M 2o 1ev ee tr inn gors’ RMAB Scheme for Financial Inclusion Jan 2020 H Mi ag yh 2e 0r 2S 0tudies S agig rn ei en mg eo nf tS ww ia tp h P Nl oa vtf 2o 0rm 20 R S C R OA h MB cA a tI A it R 2r Ba 0C fk r 1Fi o 9n I mNg A o Cve Er A o a I Fnn en cS bd lFF u i F 2 n sS 0i iT nu o 2er a n 0cv ne h cy ia l H o S C Juhn eig na n'h C r eti r O nl a 2e gV l 0v BI 2e bD 0al y D S T M -w n e e1 S a e9 k cme tF eh: s ab P t' i nb ni in no ia a ca gl si r acr e la h y Gn o d r so t eu dp C JuB lS yL 202 C M S30 2 eo en pod e tr tS d i 2F ni 0n g 2a 0tors’ 4 G N0 r oot vh u S 2pF 0 M 2G 0eo ev te inrn gors’ R C S Ntoe ouv l vl di a s 2ybi 0o o Mn 2r o 0a o dtf i a vS e liF t ies T A W o C a d P Je ann uo as oc nds n rm‘h r ii D dns 2k An pt a eg 0s 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RR RRRRRRR RRRRRO IIIIIIII IIIIIIIII IIIIIII IIII sCCCCCCCCCC CCCCC CC CCI EEEEEEE wDDDDDDG GGRRRR RRR RRRRRRRRRRRR NNNNNNNN NNNNNNNNNNNNNNNNNNN NNTTTTTT I IIIIIIIIIIIII IIIIIIIAA O LLLLLLLN eTN IIIII IIIII IIIII AAAAAR IIIIO OOOOOOOOOOOOO OOOOOOOHHHHHHHHHH HHH HHH HHH HHAAAAAAKKKKKKTTT TT TTTTTTTTTTTTEEEEE NNNNN NNNNN NNNNNE EEGGGGG CCCCLLLLLL CCCC CCCCCCCCCCCCCCCCCCCCC CCNNNNBBBI rO TTTTTC A RRRRRR N NNNNNNNNNNNNN NNNNNNNNNE CCCCCC S NNNNNNNAAAAAAEEEEEE GGGG GGGGGGGG GG GGG vLLLLLLLL LLLLLLLLLLLLLLLLLLLLLL LLRRRRRRRRRR RRR RRRRCCC CCSS SS SSSSSSSS SS SSSSSSOOO CCCCIIIIIC CCCIP aTS CCCCCC OOOOO HHHHHHHUA UUUUUUUUUUUUUUUUU UUUUUUUUOOOOOOBBBBBB se H HH HHHHH HH HHHHHHH EEEEEEE EEEEEOO OO SSSSSSSSS SSSSSSSSSSSSSSSSS LLLLA AA PRRCCCCCCIE 0KKKKKKK KKKK KK KKKKK HHHHHH NNNNNOPL SSSSSSSSSSSSSSSSSS SSSSSSSSF OOOOOOWWWWWW SSSSSSSS SSSS UUUUuUUUUUUUUU UUUUUUUUUUUUP PP AA AAAAAA AAAAAA AAAALL LR AAAAAARRRRRR BNNNNNNNNNN NN NNNN aI bP IIIIIIIIIIIIIIIIIIII IIIIIIIN EEEEEEE EEEEEE E SSSSI RRRRRRAA AAL L FTT PPPPPPPPP PPPPPPPPPPPPPPRR RRRR RRRCCCRRRCC RRRCPPPPPPA SSSSSSEEEEEEEN LLLLLL OOOOOOOOOOOOOOOOOOOO OOOOOOON OOOOOO OO OOOO OO laO AAAAAAA AAAAAA AAA A i IAA AA IIII IICC CCC CAAAAAAAAAAAT SSSSSSS PPPPPPPPP PPPPPPPPPPPPPPEEEEEEII IIII IIIOOOIIIOO IIIOO sUUUUUUUUUUCA NNNNNNNNNNNNNNNNNNNN NNNNN OOOOOO nWWWWWW W WWWW WWWWWC NN NNNN NNNNNN NNN hRRRRRRR R RRRR RRR RRR BBB BBTTTTTTTII II IICCCCCCCDDDDDDDEEEEEE OOOOOOOOO OOOOOOOOOOOOOOPPPPPPPLLLLLL eNOO lO ATT TT e NNNNN sL kIIIIII GG GG GGGGGG GGGG CCC CCCC CC CCC CCCT OOO O SSSSSSSSSSSSSSSSSSS SSSSSLLLL LLLL LLLL LAAAAAAIIIIIGGGGGGLLLLL RRRRRRRRR RRRRRRRRRRRRRRPPPPPPP dOOOOOOII IUCOO NTTTTTN EEEE EEEE EEEE E H HH HHHH UUUUUUUUUUUUUUUUUUUU UUUUUEE ERRRRRAAAAAARR RR R SSSSS CEEEEEE TTTTTTTTT TTTTTTTTTTTTTTOOOOOOO oCCCCKK KKKKK KKKK 2bNNNNNNSI IIIIIPP C DDDD DDDDD DDDD DSS S i PPPPP PPPPPPPPPPPPPPP PPPPPAA BBBBBBCCEECECCCEEE UUUUA AA AA A HS OOO yF OOOOSNN NNNNN NNNN fRRRRRCCC CCCC SSSSSSSSS SSSSSSSSSSSSSSCCCCCCCI EEE IGGGG GGGGG GGGGGG GG SSSSSSCCCCCCT TTT T TTTTT TTTTTTTTTTTTTTT TTTTTOLL OOOOOOHHHHHHU PPPPAA OOOFF FF F TTTTTLLLLOOO OOOOO OO OOOOO OOOO HHHHHHHHH HHHHHHHHHHHHHHRR IAAAAAA I II I EEEEE EEEEEEEEEEEEEE EEEEEEEE EEEEEE EEEEEE EE OOOOOOO lII II I TTTTNP n SRRRRR LRII dLLLLFFFFFPPO OO WW WWWWW WWWWPPPPPPAA LL LLLLL AAAAAAAAA AAAAAAAAAAAAAAACCCCCC CCCCCNN NN CCCCC CCCCCCCCCCCCCCCC CCCCNN EEEEOOOOO AAAAP IIIII CCCCCCCCCCC CCAAAAAA I I dELL LLLLLL AAAAATT IN NN RRRRRRRRR RRRRRRRRRRRRRRROOOOO OOOOOS NNNNNAA AA A HHHHH HHHHHHHHHHHHHHHH HHHN CCCCCCC LL LLLLL LLLL NTTTTTTT BO BBBPPPPPPP AAAAAAAAAAA AAARAA AAAAAAI CCCCC eiIIIIIIIII IIIIIIIIIIIIIII U 1LLLLL LLLLLNN NNN NEE EEEEE EEEEAAAAAAAOO N HHHH GLLL IIII oCaNNNNNNNNN NNNNNNNNNNNNNNNNNNEEEEEEE PPPPPPPPP PPP OOOOAAR RRRRRRRRRRRRRRRRRRB RRBBBBBBBBB R RRRIIIIOOOOOLLLLL LLLLLDD DDDDD DDDDPUU NNNNNC CC CTTTNNN RRRRRR LAAAAAAAAA AAAAATT GGGGGGG GGGGGGGGGGGGGGGGGGT RRRR EEEEEEEEEEE EEEEEEEEEEEOOOOOOOOOO RRRRAAAAA AAAAAT NNNNGG GGGGG GGGGSS IIII II I UCCCCC II CCCCCCC CCCCCCCAAAAAA SSSSSSSSSSS SSSSSSSSSSSSSS AAAAEEEA AA AR RRRRRRRR EEEEBBBBB BBBBBE OO FKKKKKKK KKKKKKKKKKKKKKKKKK II EE EEEEE EEEE SIIIIITTTTTT IIIIIII IIIIIIICCC EEEEEEEEEEE EEEEEEEEEEEEEESSS TTTT eSSSSOOCLL LL AAAAAAAAAAAAOOOOO OOOOOTTTTTTT TTTTTTTT ANN NNNNNNNNNNNNNN NNNNNNNNNIIIII IAAAAAAAAAAA AAAAAAAAAAAAAACC CCCCC CCCC IIIIAOOO EEEETTTTTTNN OOOOOOH OLLL IIIIIII II IIIIII FRRRFFRR RRRRROOOO tOOOO OOOOOOOOOOOOOOOOOO OEEEEEEE EEEEEEE AA AAAAA AAAA RRRRRRRRRRR RRRRRRRRRRRRRRRR AAAAIIIIIIIO III NNNN NfAAAAA AAAAAI NNNNOOOOOOOOO WWWW WWWWWWWWWWWWWWWWWW WWW SSSSSSS SSSSSSSSSS NNNPP PPPPP PPPP CCCCCCCCCC CCCCCCCCCCCCCCC RRRRNPTTTTT TTTTT e N NNNNNNNNN A AAA AAAAAASSS SA HHHH HH CCCCNC LLLLLLLL LLLEIII I-C CCCCOO O U UN EEEEEEEE EEE R L N tn CCCC CC CCCCRI IIP DDDDDDDD DDDN N PUCAT TT OOOO OO OOOOeP TV GGGGGGGG GGG T SII IIC CA wLL LL LLLLLLE EEo EOICI EEEEEEE EEEO OO LL LL LLLLLLO lLS SS C e R s0 CCCCCCC CCCAA AA AAAAAA O ON N HIT l FFFC 1 AAAAAAA AAAN BB BB BBBBBBe P P III|SS RS 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r S ek uw n no a t tn p rf i o er s , a Rt a U jad sta hip au nr, E v S wJu a wx il tl t i ay he d p n i2 Mt s0 ayi M g2 o o0 rn Af e to ehf me t h ene t R D R PN eeoo ir rtlv el i si r cn o2 etg n0 do s2 ro Ry0 u e ot s fo o f u rce S c S SD a Fe ce n hl c e Sd e c c2 mi ht d0 i oo a e2 n lt0 ae ro s s f hf o ipr P S a P a IF nn ne e ra docb d dp itu a e e 'C2 Rr 'r c0 i os t et2 ny i to o,1 as n D nu il ’‘ a m ; PC ‘t S ay a e ub y rP m pe r Tr i e ev na c tc h sy ’ in Feb 2020 Commencement of Collaborative study on ‘FinTech and Financial Inclusion’ Source: RBI. 209ANNUAL REPORT 2020-21 Rastra Bank to pursue doctoral studies in India. Central Bank Deputies’ (FCBD) meetings. The The Reserve Bank shared technical know-how Reserve Bank also participated in the meetings with offi cials from central banks of Sri Lanka, of G20 Framework Working Group (FWG) and Nepal and Bhutan on ‘data compilation and its other focus groups, Infrastructure Working analysis during COVID-19 pandemic’ in January Group (IWG), and Global Partnership on Financial 2021. Papers covering areas of SupTech, retail Inclusion (GPFI). The G20 Italian Presidency has payments, cyber security, data and consumer converted the earlier Sustainable Finance Study protection, prepared by the Reserve Bank, were Group into Sustainable Finance Working Group circulated to SAARC central banks in February (SFWG) as part of its focus on Green Agenda. 2021. The SF collaborative study on ‘comparison The Government of India (GoI) and the Reserve of fi nancial sector regulatory regimes’, co-led by Bank are both represented on the SFWG. Sri Lanka and India, was presented at the 41st BIS Activities SFGGM in March 2021. X.28 The Department continued to provide X.25 During the period under review, the BRICS support and analytical inputs to top management central banks successfully conducted the third on a host of cross-cutting thematic issues BRICS CRA test run. This has further enhanced discussed at the Bank for International the operational readiness of the CRA. To augment Settlements (BIS) bi-monthly meetings, especially the analytical capacity under the CRA, the BRICS on COVID-19 induced policy responses and central banks produced the BRICS Economic medium-term challenges for the EMDEs. The Bulletin in 2020, an annual document. The Department also made contributions and provided operational and governance aspects of the BBF support to top management for various other were mapped and efforts were made to take the meetings of BIS committees, especially the CGFS. initiative forward. Co-operation on information security and payment systems among the BRICS FSB Initiatives on Global Financial Regulation members was fostered by the BRICS Rapid X.29 The Financial Stability Board (FSB) is Information Security Channel (BRISC) and BRICS responsible for promoting international fi nancial Payments Task Force (BPTF), respectively. stability through assessment of vulnerabilities X.26 India took over the BRICS Chair on January affecting the global fi nancial system. The 1, 2021. Under the various BRICS workstreams, Department provided inputs for formulating India’s 16 meetings of the technical groups were held stance in the FSB on issues relating to the global from January to March 2021. The fi rst BRICS fi nancial system and associated risks to fi nancial Deputies meeting and the BRICS CRA Standing stability. Committee meeting were held in February and X.30 The Department organised the second March 2021, respectively. conference of the FSB’s Regional Consultative G20 and its Working Groups Group (RCG) for Asia, with India as its co-chair. It X.27 Indian G20 Presidency has been acted as a nodal agency for the FSB for sharing of postponed to 2023 in agreement with other G20 information on policy responses to the pandemic members. The Department provided inputs for by India. The Department also contributed to the the virtual G20 Finance Ministers and Central F SB’s ongoing evaluation of the effects of ‘too-big- Banks' Governors (FMCBG), and Finance and to-fail’ (TBTF) reforms and coordinated furnishing 210COMMUNICATION, INTERNATIONAL RELATIONS, RESEARCH AND STATISTICS of data for the FSB’ s annual monitoring exercise Agenda for 2021-22 to assess global trends and risks from non-bank X.34 In 2021-22, the Department will focus on fi nancial intermediation and provided inputs in the following: surveys steered by the FSB on LIBOR transition, • Follow up on issues relating to the IFA WG, crisis preparedness, and implementation of including the 16th GRQ, Bilateral Borrowing reforms in OTC derivatives. Agreement (BBA) and New Arrangements Other Activities to Borrow (NAB) of the IMF (Utkarsh); X.31 The seventh review of the trade policies • Successful completion of the IMF Article and practices of India under the aegis of the WTO IV surveillance by the IMF Mission to India was conducted in January 2021. The Department (Utkarsh); actively participated in the Trade Policy Review • Continue to support the SAARC countries (TPR) mechanism of the WTO by providing timely through the swap facility (Utkarsh); responses to the questions raised by member countries on India’s Secretariat Report (SR) and • Continue to deliver under various initiatives Government Report (GR). It also worked closely including BBF, CRA and BRISC under the with the World Bank Finance, Competitiveness BRICS Chair (Utkarsh); and and Innovation (FCI) Global Practice team. • Strengthen its engagement with the G20 X.32 The Reserve Bank continued its active in the run-up to taking over the Presidency engagement with the IMF’s South Asia Regional in 2023. Training and Technical Assistance Centre 4. GOVERNMENT AND BANK ACCOUNTS (SARTTAC) and the South East Asian Central X.35 The Department of Government and Bank Banks (SEACEN) Centre. S everal of its offi cers Accounts (DGBA) oversees the functions of the participated in the webinars/training courses Reserve Bank as banker to banks and banker organised by the SEACEN and the SARTTAC to governments, besides formulating internal during July 2020 to March 2021. The Reserve accounting policies of the Reserve Bank. Bank was also represented at the Mid-Year Steering Committee meeting of the SARTTAC Agenda for 2020-21: Implementation Status held virtually on January 19, 2021. The Reserve Goals Set for 2020-21 Bank continued to extend support for the research X.36 Last year, the Department had set out the initiatives of the G24 and G30. following goals under Utkarsh: X.33 Biannual consultation under the bilateral • Integrating the central government’s swap arrangement (BSA) between India and systems with Reserve Bank’s core banking Japan was held in October 2020. The second solution – e-Kuber – for direct collection of annual Senior Level Dialogue (SLD) between their e-receipts and making e-payments the Bank of Japan (BoJ) and the Reserve Bank (Para X.37 - X.38); of India was held in November 2020, focusing on economic and fi nancial market conditions as also • Integrating remaining state governments’ retail payment services. systems with e-Kuber (Para X.39); 211ANNUAL REPORT 2020-21 • Putting in place an effi cient reporting enabled through integration of Indian Customs system for Non-GST transactions (Para Electronic Gateway (ICEGATE) system of Central X.40); Board of Indirect Taxes and Customs (CBIC) with e-Kuber. This is in addition to the central excise • Putting in place dashboard for government and service tax, which are being collected through transactions (Para X.41); and this mode since July 1, 2019. • Integrating remaining state governments X.38 The Treasury Single Account (TSA) for online memorandum of error (MoE) resolution process for reconciliation of system for e-payment by central government GST transactions (Para X.42). autonomous bodies was operationalised for a total of 16 autonomous bodies and their Implementation Status of Goals sub-autonomous bodies through leveraging Integrating the Central Government’s Systems on the existing integration of Public Financial with e-Kuber for Direct Collection of their Management System (PFMS) with e-Kuber e-Receipts and Making e-Payments (Box X.3). The Offi ce of Controller General of X.37 Collection of central government taxes Defence Accounts was on-boarded to e-Kuber for such as customs, integrated goods and services making pension payments of defence pensioners tax (IGST), and compensation cess directly using NEFT/RTGS by way of integration of the into the government accounts with the Reserve SPARSH [System of Pension Administration Bank through NEFT/RTGS payment modes was (Raksha)] system with e-Kuber. Box X.3 Treasury Single Account System for e-Payment by Central Government Autonomous Bodies Based on the announcement made in the Union Budget integration of Public Financial Management System (PFMS) 2014-15, the Government of India (GoI) had set up the of Offi ce of Controller General of Accounts and e-Kuber Expenditure Management Commission (EMC) to look into system of the Reserve Bank. The important features under various aspects of expenditure reforms to be undertaken the TSA system are as under: by the government. The EMC, headed by Dr. Bimal Jalan, i. The Reserve Bank functions as primary banker to the former Governor of the Reserve Bank, recommended inter- concerned Ministries/Departments without involvement alia, that the GoI may gradually bring all autonomous bodies of any agency bank; (ABs) under the TSA System in order to minimise the cost of government borrowings and to enhance effi ciency in fund ii. The ABs and sub-ABs are required to open ‘assignment fl ows to ABs. accounts’ with the Reserve Bank and expenditure from these accounts is incurred subject to the availability of The TSA system for ABs is intended to avoid keeping limits; government funds idle in the bank accounts and to manage the cash fl ow of the government effi ciently. The iii. These accounts of AB and sub-ABs are treated as ‘just-in-time’ principle for release of funds enhances the government accounts by tagging them to the respective effi ciency of fund fl ows to ABs under the TSA system, ministry/department of GoI and transactions (debits/ while ensuring better cash management as it facilitates credits) are automatically included in the calculation of drawdown of funds from government account as and GoI cash position; when required, and also helps in avoiding accumulation iv. All transactions in the accounts of ABs and sub- of unutilised grants with ABs, thereby decreasing the cost ABs, including assignment of limits and processing of on borrowed funds. e-payments to the ultimate benefi ciary, are processed The TSA framework was operationalised by the GoI, in through PFMS – e-Kuber integration; consultation with the Reserve Bank, leveraging on the (Contd.) 212COMMUNICATION, INTERNATIONAL RELATIONS, RESEARCH AND STATISTICS v. The limits assigned to ABs and sub-ABs can be expand the TSA system in two phases effective from August changed (added or withdrawn) dynamically. Successful 1, 2020 and October 1, 2020 to bring more ABs and their processing of e-payment instructions reduces the sub-ABs under the ambit of TSA. Currently, a total of 16 available assignment limit and returns, if any, add to ABs, along with nearly 900 sub-ABs are onboarded for TSA the assignment limit to that extent in the books of the system. Since the implementation of phase I on August 1, Reserve Bank; 2020 till March 31, 2021, a net amount of `32,325 crore has been assigned as limit by the GoI and `31,351 crore has vi. All assignment limits expire at the end of the fi nancial been spent by ABs/sub-ABs. Going forward, considering its year; and benefi ts, the TSA system may expand in terms of number of vii. All the payments are made only through electronic entities as well as coverage of various types of payments, modes and there are no physical payments from the including payments from different ministries/departments to account of the ABs maintained with the Reserve Bank. a particular AB/sub-AB and its accounting and processing Necessary notifi cations at specifi ed intervals are sent by thereof. A TSA Helpdesk has also been put in place by the e-Kuber to PFMS electronically. Reserve Bank with a view to ensure timely redressal of technical and operational issues. The Department of Economic Affairs, Ministry of Finance, issued an Offi ce Memorandum dated May 12, 2020 to Source: RBI. Integrating Remaining State Governments’ integrated with e-Kuber, was commenced but Systems with e-Kuber is yet to be completed due to COVID-19 related lockdown issues. X.39 During the year, while one state government from the North East and one union Integrating Remaining State Governments for territory were newly on-boarded for e-payments, Online Memorandum of Error (MoE) Resolution two state governments have taken up testing and Process for Reconciliation of GST Transactions are expected to be soon on-boarded to e-Kuber X.42 During the year, the online MoE process for e-payments. Two other state governments was extended to seven state governments for have expressed willingness and are examining reconciliation of GST transactions. While three the technical requirements for integration. state governments have completed the testing Putting in Place an Effi cient Reporting System for and are expected to go live shortly, eleven more Non-GST Transactions state governments are in various stages of testing. X.40 A system of automated dispatch of Other Initiatives standardised system generated reports was put in X.43 Several areas were identifi ed to bring in place for the state governments that are already improvements in processing, reconciliation and integrated with e-Kuber. Regional offi ces of the reporting of government transactions including Reserve Bank were provided necessary facility Application Programming Interface (API) web- to monitor the status of transactions of respective based reconciliation system, providing reports governments integrated with the Reserve Bank’s and management information system (MIS) e-Kuber. in machine consumable formats and enabling Putting in Place Dashboard for Government reporting by agency banks of electronic receipt Transactions collection using new payment modes. X.41 The process for putting in place a X.44 The work related to integration of all dashboard facility to governments, which are stakeholder systems with e-Kuber for facilitating 213ANNUAL REPORT 2020-21 collection of direct taxes through Tax Information (cid:129) A utomation of daily position processing of Network 2.0; enabling payment of pension to government balances in e-Kuber; and defence pensioners residing in Nepal; provision of • Putting in place an automated process account validation; and Aadhaar-based payments of agency commission calculation and were also taken up during the year. payment to agency banks. X.45 Necessary arrangements were made in 5. MANAGING FOREIGN EXCHANGE the case of newly formed union territory (UT) of RESERVES Ladakh as well as the merged UTs of Dadra & Nagar Haveli and Daman & Diu to facilitate smooth X.47 The Department of External Investments transition of accounting ownership at government and Operations (DEIO) continued with the level. investment objectives of safety, liquidity and return in that order for managing foreign exchange Agenda for 2021-22 reserves (FER). On a year-on-year basis FER X.46 For 2021-22, the Department proposes increased by 20.8 per cent in March 2021 as the following agenda under Utkarsh: against an increase of 15.7 per cent in the • Pursuing the on-going agenda of corresponding period of the previous year. integration of central and state government X.48 The negative/low interest rate systems with e-Kuber for e-payments and environment, which is expected to persist in the e-receipts; times to come, is posing challenges to the central • Providing dashboard facility to banks across the globe, for effectively managing governments for self-monitoring of FER without compromising the strategic e-receipts and e-payments transactions; objectives of deployment of FER (Box X.4). Box X.4 Challenges to Forex Reserves Management in a Low Yield Environment Interest rates in most advanced economies have been on a bond yields in USA have fallen from the high of 15.8 per declining trend over the last four decades and reached their cent in 1981 to below 1 per cent in 2020. Many advanced historic low in many countries in 2020 (Chart 1). The 10-year economies like Euro zone, Japan and Switzerland have had negative policy rates and sovereign bond yields for years Chart 1: 10-Year Soverign Bond Yields (Nominal) now. This ultra-low for long interest rate environment is a refl ection of structural changes in the global economy and fi nancial markets, which can be better understood by decomposing nominal rates into two parts - real interest rates and infl ation/ expected infl ation. While real rates have been declining for the last few decades, low infl ation has become a norm over the last decade, despite the efforts of many advanced economies’ central banks to lift infl ation to their targets (Charts 2 and 3). The declining trend in real rates can be attributed to factors relating to decline in potential growth rates, demographic Source: Bloomberg. (Contd.) 214COMMUNICATION, INTERNATIONAL RELATIONS, RESEARCH AND STATISTICS Chart 2: 10-Year Sovereign Inflation Indexed Chart 3: Headline Inflation Bond Yields (Real) 5 4 3 2 1 0 -1 -2 -3 -4 factors, income inequality, and demand for safer assets. traditional approaches for the management of reserves The structural changes in these factors have led to decline to maintain and augment returns, but also evaluate if this in equilibrium real rates and they are expected to remain could be accomplished by investment in safe assets as that low in the medium to long term. Some of the reasons for is a necessary characteristic of reserve assets. Subject the historically low infl ation environment are: cross border to safety, they can also explore increasing the duration of supply-chain integrations, lower commodity prices, low their portfolios, adopting asset diversifi cation by investing in wage growth, declining infl ation expectations, and declining new asset classes, new currencies and markets, relaxation velocity of money. of credit quality requirements, and active management of This low yield environment makes it an arduous task for asset their gold stocks. However, the optimum mix of reserve managers in general and reserve managers in particular, management strategies would have to consider the risk to generate reasonable returns from their portfolios given appetite, investment priorities, skill sets, and overall their risk appetite. The huge and increasing pile of negative objectives of the reserve management. yielding debt across the developed world has accentuated References: this problem and presented challenges for capital preservation. This situation has been further exacerbated 1. Kiley, M. T. (2019), ‘The Global Equilibrium Real Interest by the COVID-19 pandemic, which has resulted in major Rate: Concepts, Estimates, and Challenges’, Finance losses to the real economies across the world and led to and Economics Discussion Series, Federal Reserve unprecedented expansionary monetary and fi scal policies. Board, Washington, D.C. The structural low yield environment is expected to persist 2. Lane, Philip R. (2019), ‘Determinants of the Real for a considerable time in the future. Reserve managers, Interest Rate’, Speech at the National Treasury therefore, face the challenge of looking beyond the Management Agency, Dublin, November 28. X.49 The Reserve Bank continued to purchase Department continued its normal activities and gold as a diversifi cation strategy while scaling also ensured timely implementation of all best up the forex swap and repo operations and practices for FER management and enhancement exploring the possibilities of new products. During of systems security as well as furthering existing the COVID-19 pandemic led lockdown, the business continuity arrangements. 215 tnecreP 5991 0002 5002 0102 5102 0202 30 25 20 15 10 5 0 -5 Germany UnitedStates UnitedKingdom tnecreP 0791 5791 0891 5891 0991 5991 0002 5002 0102 5102 0202 UnitedStates Germany Japan UnitedKingdom Note:Yields of 10 year inflation indexed bonds Source: Bloomberg. Source: Bloomberg.ANNUAL REPORT 2020-21 Agenda for 2020-21: Implementation Status Agenda for 2021-22 Goals Set for 2020-21 X.54 For 2021-22, the Department will focus on X.50 Last year, the Department had set out the the following goals: following goals: • Continue to explore new asset classes, • An e nhanced risk management framework new jurisdictions/ markets for deployment (Utkarsh) [Para X.51]; of foreign currency assets (FCA) for portfolio diversifi cation and in the process • Dedicated research inputs (Utkarsh) [Para X.52]; and tap advice from external experts, if required; • Effective diversifi cation of reserves through gainful deployment without compromising • Leverage IT in the form of contemporary the safety of investments (Para X.53). treasury management solution for FER management (Utkarsh); and Implementation Status of Goals X.51 During the year, the Department • Roll-out system based daily computation enhanced the quantitative approach for of weighted average cost for assets. reviewing risk management framework for 6. ECONOMIC AND POLICY RESEARCH reserves management. Further, the existing risk management practices were constantly X.55 As the knowledge centre and think-tank of reviewed, especially in view of the evolving global the Reserve Bank, the Department of Economic and macro-economic scenario overshadowed by the Policy Research (DEPR)1 undertakes professional pandemic. research with a view to providing analytical inputs X.52 An internal market research unit was and management information system (MIS) structured for dedicated research input in the services for policy formulation. The Department Department. generates primary data and is also the repository and disseminator of secondary data on the Indian X.53 Steps were taken for diversifi cation of economy. The Department is also responsible for reserves by scaling up operations in forex swaps the Reserve Bank’s statutory reports, frontline and repo markets, acquisition of gold and exploring research publications, collaborative research with new markets/products, while adhering to the safety external experts and technical support to various and liquidity standards. Effective diversifi cation of operational departments and technical groups/ reserves through gainful deployment in existing committees constituted by the Reserve Bank from currencies and products without compromising the safety of investments was ensured, especially time to time. in the low yielding interest environment. 1 The Strategic Research Unit (SRU), which was set up on February 1, 2016 to undertake research and analysis of topics across various verticals of the Reserve Bank, has now been subsumed in DEPR with effect from October 1, 2020. 216COMMUNICATION, INTERNATIONAL RELATIONS, RESEARCH AND STATISTICS Agenda for 2020-21: Implementation Status within the Reserve Bank as well as with outside scholars [Para X.64]. Goals Set for 2020-21 Implementation Status X.56 Last year, the Department had set out the following goals: X.57 New models for forecasting infl ation were • Alternative models for improving infl ation developed, with one of them titled “An Alternative and growth projections (Utkarsh) [Para Measure of Economic Slack to Forecast Core X.57]; Infl ation”, being published in the RBI Occasional Papers. An extensive data collection exercise, • A study on municipal fi nances (Utkarsh) based on budgetary data of more than 200 [Para X.57]; municipal corporations, is currently underway. • Release of data on bilateral trade in X.58 Data on India’s bilateral trade in services services (Utkarsh) [Para X.58]; on ultimate country basis (based on Foreign • Studies on spillover effects of non- Exchange Transactions Electronics Reporting deliverable forward (NDF) market on System) was shared with the Ministry of Commerce onshore forex market in India; rural- and Industry. urban infl ation dynamics; determinants of discretionary spending of states; and X.59 During 2020-21, the Department relationship between volatility index (VIX) published 60 research papers/articles, of which and stock index (Para X.59); 22 were published outside the Reserve Bank in international and domestic journals. In addition, • Revival of the Report on Currency and 12 working papers were posted on the website Finance with the theme “Reviewing the during the year. The published studies covered Monetary Policy Framework” (Para X.60); a wide range of issues, including trend infl ation; • Release of the History of the Reserve price discrimination in over-the-counter currency Bank, Volume-5 for the period spanning derivatives; bank capital and monetary policy 1997 to 2008 (Para X.61); transmission; public debt sustainability; fi nancial • Enabling public access to the Central stress measurement; and combination of infl ation Library’s digitised contents (Para X.62); forecasts. • Development of a document management X.60 The Report on Currency and Finance software for management of digital records with the theme of “Reviewing the Monetary Policy in the Archives (Para X.63); Framework” was released in February 2021. The • Tracking real time economic outlook/ Report addressed the issues of goals, processes, sentiment based on machine learning operating procedures and open economy tools (Utkarsh) [Para X.64]; dynamics under the fl exible infl ation targeting • In-depth micro-analysis of the impact of framework. policy reforms, e.g., green fi nance in India X.61 The work relating to publication of the (Utkarsh) [Para X.64]; and History of the Reserve Bank, Volume-5 for • Deepening collaboration with other the period spanning 1997 to 2008 is nearing operational and research departments completion for its release during 2021-22. 217ANNUAL REPORT 2020-21 X.62 In order to ensure wider dissemination X.66 The DEPR Study Circle, an in-house and easy access to the public, the Central Library discussion forum, and the Central Library organised uploaded digitised publications of the Reserve 44 online seminars / presentations / workshops Bank, including Annual Reports, Bulletins and during the year on diverse research themes. The Staff Studies up to 1997 on the Reserve Bank’s Department also conducted online interviews for website (www.rbi.org.in). selecting candidates for the Scholarship Scheme for Faculty Members from academic institutions. X.63 The work of developing a document management software for storing, searching, Agenda for 2021-22 retrieval and sharing of digitised documents X.67 The Department’s agenda for 2021-22 will available in the RBI Archives has been assigned to focus on the following goals: the Reserve Bank Information Technology Private • Increase in the number of research Ltd. (ReBIT) and the work is in progress. studies for publication in the Reserve Bank X.64 A nowcasting model for GDP growth using Occasional Papers and Working Papers machine learning tools (e.g., neural networks (Utkarsh); and random forest techniques) was presented in • Forward-looking agricultural commodity the monetary policy strategy (MPS) meetings of price sentiment analysis, based on December 2020 and February 2021. An article newspaper coverage, through big data on green fi nance in India was published in the applications (Utkarsh); Reserve Bank’s monthly bulletin of January 2021. The Department also collaborated both within and • Development of an in-house expertise for outside the Reserve Bank on several research data compilation under the KLEMS [capital projects, including over-the-counter currency (K), labour (L), energy (E), material (M) derivatives, fi scal austerity in emerging market and services (S)] project; and economies, and structural transformation of jobs • Conduct of an Itinerant Exhibition on the from manufacturing to services. fi rst fl oor of the Reserve Bank Museum at Kolkata. Other Initiatives 7. STATISTICS AND INFORMATION X.65 During the year, the Department continued MANAGEMENT compilation and dissemination of primary statistics on monetary aggregates; balance of payments; X.68 The Department of Statistics and external debt; effective exchange rates; combined Information Management (DSIM) aims to compile, government fi nances; household fi nancial savings; analyse and disseminate macro-fi nancial statistics and fl ow of funds on established timelines and and to provide statistical support and analytical quality standards. To deal with the post-COVID data inputs through data management, applied gaps, new high frequency indicators of economic statistical research and forward-looking surveys to activity were combined with conventional indicators the Reserve Bank. In pursuit of these objectives, to generate alternative aggregate measures that the DSIM maintains a centralised database for the helped assess the impact of the pandemic on the Reserve Bank at par with international standards, economy and also the pace of normalisation. manages the centralised submission of returns 218COMMUNICATION, INTERNATIONAL RELATIONS, RESEARCH AND STATISTICS through the eXtensible Business Reporting portal for SCBs, UCBs and NBFCs to Language (XBRL) platform, undertakes structured assist them in taking informed decisions surveys relating to enterprises and households as on providing credit (Para X.74); and inputs for monetary policy formulation and actively • To extend the Consumer Confi dence engages in statistical and analytical research. Survey (CCS) to all urban centres, Agenda for 2020-21: Implementation Status analogous to the Infl ation Expectations Goals Set for 2020-21 Survey of Households (IESH) (Para X.75). X.69 Last year, the Department had set out the Implementation Status of Goals following goals: X.70 Under the Centralised Information • To make Centralised Information Management System (CIMS) project, installation Management System (CIMS) fully of IT infrastructure at the Reserve Bank’s data operational (Utkarsh) [Para X.70- X.71]; centres was completed with a delay due to COVID-19 related restrictions. The control and • To set up advanced analytic environments function specifi cation documents were fi nalised in a Granular Data Access Lab (GDAL) and testing of system-to-system integration was and Data Science Lab (DSL) [Utkarsh] successfully done with major banks. [Para X.70- X.71]; X.71 Data migration from the existing • To establish an element-based repository exploratory Hadoop environment to CIMS Hadoop in a phased manner following Statistical Data and Metadata eXchange (SDMX) environment was completed. standards, leading to operationalisation X.72 Development of the Public Credit Registry of a metadata driven data maintenance (PCR) system was initiated. The draft PCR Bill and dissemination system (Utkarsh) [Para was peer reviewed. X.70- X.71]; X.73 The Data Science Lab (DSL) started its • To develop an end-to-end system for a operations in January 2020 and has commenced Public Credit Registry (PCR) (Utkarsh) working on data analytics projects for the Central [Para X.72]; Offi ce Departments of the Reserve Bank using • To operationalise the DSL (Utkarsh) [Para statistical and machine learning algorithms. Big X.73]; data analytical tools were employed to extract relevant information from online print media for • To undertake policy-related research in research activities relevant to the Bank, viz., the areas of modelling, nowcasting and forecasting of macroeconomic indicators, media sentiment on macroeconomic parameters. including the use of web-crawling, artifi cial X.74 A state-of-the-art common wireframe intelligence (AI), machine learning (ML), (prototype) has been developed for liberalised and big data analytics (Utkarsh) [Para remittance scheme (LRS), central repository of X.73]; information on large credit (CRILIC) and central • To develop a state-of-the-art single fraud registry (CFR) under CIMS and is being searchable Central Fraud Registry (CFR) refi ned. 219ANNUAL REPORT 2020-21 X.75 Pilot rounds of the Consumer Confi dence X.78 Despite COVID-19 related disruptions, the Survey (CCS) are now being conducted in six Department brought out its regular publications, cities (viz., Bhubaneshwar, Chandigarh, Jammu, viz., Handbook of Statistics on the Indian Nagpur, Raipur and Ranchi) where the Infl ation Economy, 2019-20; Statistical Tables Relating to Expectations Survey of Households (IESH) is Banks in India, 2019-20; Basic Statistical Returns conducted. of SCBs in India (BSR1, BSR2 and BSR7); Weekly Statistical Supplement (WSS); and the ‘Current Other Initiatives Statistics’ portion of the Reserve Bank’s Bulletin in X.76 Electronic Data Submission Portal (EDSP) a timely manner during the year. was modifi ed with enhanced security features for Agenda for 2021-22 facilitating International Banking Statistics (IBS) X.79 Going ahead, the Department will focus data submission since June 2020. on the following goals: X.77 In view of COVID-19 related disruptions • Work towards making CIMS an advanced and risks involved in physical surveys, household analytic environment fully operational surveys were conducted telephonically and migrate all databases to the new (Box X.5). The results of a forward looking quarterly centralised system (Utkarsh); ‘Bank Lending Survey (BLS)’ and ‘Services and Infrastructure Outlook Survey (SIOS)’ were • Follow SDMX standards for metadata disseminated under the guidance of the Bank’s driven maintenance and dissemination Technical Advisory Committee on Surveys (TACS). system (Utkarsh); Box X.5 Surveys during COVID-19 Pandemic According to a survey conducted by the United Nations households with telephonic surveys to provide continuity Statistics Division (UNSD) and the World Bank, over 95 per and most of its training of reporting entities and cent of National Statistical Offi ces (NSOs) had partially or investigators were also on online platforms (RBI, 2020). fully stopped face-to-face data collection in May 2020 (UN, The proportion of interviews verifi ed through audio and 2021). Some national agencies witnessed major disruption telephonic verifi cation were increased to compensate for in their regular surveys on household fi nance, travel and the inability to conduct on-spot verifi cations or fi eld visits. other domains. Many central banks grappled with these After the lockdown related restrictions were eased, the novel challenges by focusing on alternative data sources reliance on telephonic channels in household surveys has and tweaking of survey questionnaires during the lockdown been gradually reduced. period, however, many businesses could not be contacted, and the response rate of the Reserve Bank’s forward-looking References: enterprise surveys came down drastically (US, 2020). 1 UN (2021), ‘Planning and Implementing Household Regular survey rounds were supplemented by follow-up Surveys under COVID-19’, Technical Guidance Note by surveys in mid-March 2020. Also, given the unprecedented the Inter-Secretariat Working Group, December 2020. situation, the survey questionnaires included an additional block to assess the outlook on critical parameters for two 2 US (2020), ‘Monitoring the State of Statistical more quarters (in addition to the current and the ensuing Operations under the COVID-19 Pandemic - Survey of quarter). National Statistical Offi ces’, May, July and October. The Reserve Bank temporarily substituted its computer- 3 RBI (2020), ‘Results of Forward Looking Surveys’ aided personal interview (CAPI) based surveys of (Bi-monthly Press Releases). 220COMMUNICATION, INTERNATIONAL RELATIONS, RESEARCH AND STATISTICS • Implement a scalable end-to-end system • Automate its workfl ow process and for PCR in a phased manner starting with function, which in turn will enhance SCBs (Utkarsh); research, e-discovery and data analytics (Utkarsh) [Para X.82]; • Revise the reporting systems for International Banking Statistics (IBS) as • Provide a guidance note f or its Central per the revised guidelines of the Bank for Public Information Offi cers to discharge International Settlements (BIS); their functions more effectively and expeditiously, keeping in view the • Expand the scope of data collection Department’s responsibilities as a mechanism and analytical work in secretariat to the Appellate Authority the domain of Big data for providing under the Right to Information Act (RTI supplementary information relevant to the Act), 2005 (Utkarsh) [Para X.83]; Reserve Bank; and • Proactively perform its functions in • Put in place a system to collect monthly close coordination with the operational data on economic classifi cation of departments of the Reserve Bank [Para international credit/debit card transactions. X.84 - X.86]; and 8. LEGAL ISSUES • Manage litigation on behalf of the Reserve X.80 The Legal Department is an advisory Bank [Para X.87 - X.96]. department established for examining and advising on legal issues, and for facilitating the Implementation Status of Goals management of litigation involving the Reserve X.82 The work relating to the development of Bank. The Department vets circulars, directions, a software package for automating the activities regulations, and agreements for various of the Department has been entrusted to the departments of the Reserve Bank with a view to Reserve Bank Information Technology Private Ltd. ensuring that the decisions of the Reserve Bank (ReBIT). The modalities for development of the are legally sound. The Department provides the proposed software package were fi nalised and secretariat to the First Appellate Authority under the statement of work (SoW) was also signed with the Right to Information Act and represents in the ReBIT. Development of the software in this regard hearing of cases before the Central Information is currently under progress. Commission, with the assistance of operational X.83 The preparation of the guidance note for departments. The Department also extends legal its central public information offi cers to discharge support and advice to the Deposit Insurance and their functions under RTI Act, 2005 more effectively Credit Guarantee Corporation (DICGC), CAFRAL, and expeditiously was completed during the year. and other RBI-owned institutions on legal issues, litigation and court matters. X.84 Several important legislations/regulations concerning the fi nancial sector were brought in/ Agenda for 2020-21: Implementation Status amended during the year. The Banking Regulation Goals Set for 2020-21 (Amendment) Act, 2020 received the assent of X.81 Last year, the Department had set out the the President of India on September 29, 2020. following goals for 2020-21: The Amendment Act was deemed to have come 221ANNUAL REPORT 2020-21 into force on June 26, 2020, except section 4, the challenge faced by the country on account which, in so far as it relates to primary cooperative of COVID-19 and the resultant diffi culties that banks, be deemed to have come into force on are faced by litigants across the country in June 29, 2020. Further, vide notifi cation dated fi ling proceedings within the period of limitation December 23, 2020, central government has prescribed under the general law of limitation or announced April 1, 2021 as the date on which the under special laws. The Court also examined the provisions of section 4 of the Banking Regulation extension of the period of validity of negotiable (Amendment) Act, 2020 shall come into force for instruments such as cheques and bank drafts. state cooperative banks and central cooperative Subsequently, the Court vide order dated July banks. 10, 2020, observed that the period in respect of such negotiable instruments is prescribed X.85 The Bilateral Netting of Qualifi ed Financial by the Reserve Bank under Section 35A of the Contracts Act, 2020 received the assent of the Banking Regulation Act,1949 and hence it would President of India on September 28, 2020 and not be appropriate to interfere with the period, was brought into force with effect from October 1, particularly, since the entire banking system 2020 with an objective to ensure fi nancial stability functions on the basis of that period. and promote competitiveness in Indian fi nancial markets, by providing enforceability of bilateral X.88 A writ petition (Gajendra Sharma v. Union netting of qualifi ed fi nancial contracts and for of India & Ors.) was fi led under Article 32 of the matters connected therewith or incidental thereto. Constitution of India before the Supreme Court X.86 International Financial Services against the Reserve Bank’s circular dated March Centres Authority Act, 2019 was notifi ed by the 27, 2020 stating that it is ultra vires, to the extent Government of India (GoI) vide its notification it charges interest on the loan amount during the dated September 29, 2020. The effective date moratorium period. During the pendency of the for the provisions of section 13 and section 33 of petition, the central government granted various the said Act was fi xed as October 1, 2020. The reliefs for benefi t of waiver of interest up to `2 International Financial Services Centres Authority crore in eight categories and the Reserve Bank (IFSCA) notifi ed the International Financial also issued a circular dated October 26, 2020 Services Centres Authority (Banking) Regulations, to all commercial banks, all primary cooperative 2020 on November 18, 2020 for banking and banks and all-India fi nancial institutions and all investment activities in the International Financial non-banking fi nancial companies advising them Services Centres and adopted the directions/ to follow the scheme dated October 23, 2020 circulars/guidelines issued by the Reserve Bank announced by the Government of India. The apex under Banking Regulation (BR) Act,1949; Reserve court then disposed of the petition vide order of India (RBI) Act, 1934 and FEMA, 1999 to be dated November 27, 2020. applicable for the banking units concerned. X.89 In a batch of petitions related to loan X.87 The Hon’ble Supreme Court vide order moratorium seeking extension of moratorium dated March 23, 2020 directed to take suo period and waiver of interest before the Hon’ble motu cognizance2 of the situation arising out of Supreme Court challenging the Reserve Bank’s 2 Suo Motu Writ (C) No. 3/2020 (Cognizance of Extension of Limitation). 222COMMUNICATION, INTERNATIONAL RELATIONS, RESEARCH AND STATISTICS circulars dated March 27, 2020 and August 6, X.92 The ‘Lakshmi Vilas Bank (LVB) Ltd. 2020, the apex court vide interim order dated (Amalgamation with DBS Bank India Ltd.) September 3, 2020 held that the accounts, which Scheme, 2020’ issued vide notifi cation dated 25 were not declared non-performing assets (NPA) November 2020, was challenged through several till August 31, 2020, shall not be declared NPA till petitions fi led across various High Courts by the further orders. The apex court heard the matter shareholders. As the Reserve Bank and DBS on several dates and vide a fi nal order dated India Ltd. have fi led Transfer Petitions before the March 23, 2021 disposed the matters stating Supreme Court, the High Courts have adjourned that it cannot interfere with the economic policy the matters. decisions on the ground that either they are X.93 In the matter of Big Kanchipuram not suffi cient or effi cacious and/or some more Cooperative Town Bank Ltd. v. Union of India & reliefs should have been granted. However, with Another; and Vellur Cooperative Urban Bank Ltd. reference to the scheme for grant of ex-gratia v. Union of India & Another, two writ petitions were payment of difference between compound interest fi led before the Madras High Court challenging and simple interest, the Court observed that there the constitutional validity of certain sections of is no justifi cation shown to restrict the relief of not the Banking Regulation Amendment Act, 2020. charging interest on interest with respect to the The Court vide interim order dated July 20, 2020 loans up to `2 crore only and that too restricted refused to stay the Act and the matter is pending to the categories specifi ed therein. The Court for hearing. granted relief in respect of charging of interest on interest/compound interest/penal interest for X.94 The Telangana High Court in its decision the period during the moratorium from any of the dated December 10, 2020 on the matter of Rajesh borrowers. Agarwal vs RBI & Others held that the compliance with principles of natural justice has to be read into X.90 In the case of Piyush Bokaria v. RBI, a clause 8.9.4 and 8.9.5 of the Master Directions writ petition was fi led before the Madras High on classifi cation and reporting of fraud by banks Court challenging the master circular on Basel III and select Financial Institutions (FIs), 2016. capital regulations issued by the Reserve Bank vide circular dated July 1, 2015. After hearing the The petition was fi led, inter alia, challenging the submissions of the Reserve Bank, the Court vide Reserve Bank’s Master Directions on fraud dated its order dated September 30, 2020 upheld the July 1, 2016 and also the action classifying the validity of the said circular. account as ‘fraud’ being violative of principles of natural justice. X.91 In the matter of reconstruction of Yes Bank and write off of additional tier-1 bonds related X.95 In the matter of Jeewan Holdings Private cases, several writ petitions were fi led before Ltd. & Another v. U nion of India & Another, a various High Courts challenging the decision petition was fi led before High Court of Delhi of the Administrator of Yes Bank, to write down challenging the order of the Appellate Authority such bonds issued by the Yes Bank. As Yes Bank (Ministry of Finance, Government of India), has already fi led a Transfer Petition before the which upheld the decision of the Reserve Bank Supreme Court, the High Courts have adjourned cancelling the Certifi cate of Registration (CoR) the matters, pending the decision of the Supreme granted to the petitioner company along with the Court. Reserve Bank’s order of cancellation. The Co urt 223ANNUAL REPORT 2020-21 in its judgement dated October 23, 2020 observed 9. CONCLUSION that the statutory framework does not mandate an X.98 During the year gone by with the opportunity of personal hearing. It was also held by challenging macroeconomic environment the court that the respondents can claim no vested along with severe threat to human lives and right to carry on business without complying with livelihood, the Reserve Bank undertook a host of the condition of license or the directions issued by conventional and unconventional policy measures the Reserve Bank. to deal with the pandemic-induced situation, which X.96 In the case of Shakun Holdings Private fostered congenial fi nancing conditions in the Ltd. v. Union of India & Others, the High Court economy without jeopardising fi nancial stability. Further, forward guidance gained prominence of Shimla in its judgement dated July 22, 2020 in the Reserve Bank’s communication strategy observed that the cancellation of CoR for non- to realise cooperative outcomes. Going ahead, achievement of net owned fund (NoF) was proper the major focus of the Reserve Bank in the and dismissed the petition of the applicant. functional areas covered in the chapter will be Agenda for 2021-22 as follows: further strengthening communication X.97 In 2021-22, the Department will continue channels and economic and fi nancial international to focus on the following goals: relations; automating daily position processing of government balances in e-Kuber; continuing to • Proactively perform its functions in explore portfolio diversifi cation through new asset close coordination with the operational classes/markets for forex reserve management; departments of the Reserve Bank; and sharpening economic and statistical policy • Take efforts to automate its workfl ow analysis and research; making CIMS fully process and function, keeping in view the operational; rolling out PCR in a phased manner; importance of use of technology in legal and expanding the scope of data collection operations, particularly, in a situation like mechanism and analytical work in the domain of COVID-19 pandemic. big data. 224GOVERNAGNOVCERENA,N CHE, HUUMMAN ARESNOU RRCEES ASNDO URCES XI ORGANISATIONAL MANAGEMENT AND ORGANISATIONAL MANAGEMENT The Reserve Bank continued its endeavour to enhance the human resources skillset even during the pandemic through various innovative in-house and external training programmes conducted via virtual mode using cloud- based video applications. Several measures were initiated during the year for strengthening the risk monitoring and internal audit mechanism in the Reserve Bank. In response to the COVID-19 pandemic, the critical business processes were secured to ensure business continuity and smooth functioning of the Reserve Bank’s time-sensitive critical activities, while ensuring the safety and health of its human resources. XI.1 This chapter discusses three critical a structured process has been put in place during aspects of the Reserve Bank - governance, human the year for formulation of risk tolerance limits resources management and risk monitoring, (RTLs) and risk reporting framework as per the risk apart from covering the activities of departments tolerance statement articulated by the Committee dealing with internal audit, corporate strategy and of the Central Board (CCB) of the Reserve Bank. budgeting, Rajbhasha and Premises. The chapter On a pilot basis, the RTLs for departments reviews the major developments, evaluates their overseeing currency management and payment outcomes during 2020-21 vis-a-vis the goals set and settlement systems have been formulated. at the beginning of the year and sets out priorities Towards the phased implementation of the risk for 2021-22. tolerance framework, the process of review of the existing risk tolerance limits in line with internally XI.2 In pursuance of the goals set for 2020- articulated risk tolerance stance is currently 21, human resources were strengthened through underway for some of the market departments. new recruitments, and in-house and external trainings. In response to the pandemic, online and XI.4 The targeted convergence of the risk- e-Learning modes were relied upon extensively. ratings assessed under risk-based internal audit The RBI Academy conducted a number of webinars (RBIA) and risk ratings determined as per risk during the year, some of them in collaboration with assessment methodology for operational risk external agencies, viz., IMF South Asia Regional (RAM-OR) was accomplished by the Inspection Training and Technical Assistance Center (IMF Department during the year. With a view to SARTTAC) and World Bank, on themes ranging enhance the effective internal control environment across the impact of COVID-19 on regulation and for managing the implementation of projects in supervision to the emerging areas like the Big Data the Reserve Bank in a timely and cost-effective and FinTech. Further, workshops on Managing manner, pilot project audit of an IT project was Extreme Business Uncertainty and Leadership conducted successfully during the year. The Foundation and Crucial Conversations for the outbreak of COVID-19 necessitated the invocation senior offi cers of the Reserve Bank were also of the business continuity plan (BCP), prepared by organised. the Corporate Strategy and Budget Department XI.3 Under the enterprise-wide risk (CSBD) for all regional offi ces/business units. management (ERM) framework adopted in 2012, The premptive crisis management initiatives 225ANNUAL REPORT 2020-21 undertaken by the Reserve Bank ensured 2. GOVERNANCE STRUCTURE uninterrupted 24X7 services for the payment XI.7 The Central Board of Directors is entrusted systems of the country in particular, and the with the governance functions of the Reserve Bank banking system in general. in accordance with the Reserve Bank of India XI.5 Alongside, the Rajbhasha Department (RBI) Act, 1934. It comprises the Governor as the prepared department-specifi c terminologies for Chairperson, Deputy Governors and Directors certain departments and constituted an inter- nominated by the Central Government. There are institution committee comprising bankers and four Local Boards, one each for the Northern, eminent scholars to update the banking glossary Southern, Eastern and Western areas, to advise to promote the use of Hindi. The Premises the Central Board on matters referred to them and Department pursued its mandate of creating, perform duties delegated by the Central Board. maintaining and upgrading the Reserve Bank’s Members of the Local Boards are also appointed infrastructure. Generation of renewable energy by the Central Government in accordance with the through solar power generation plants, rain water RBI Act, 1934. harvesting systems, sewage treatment and waste water treatment systems were installed at various XI.8 The Central Board is assisted by three offi ces and residential colonies under the Reserve Committees: the Committee of the Central Board Bank’s ‘Green Initiative’. (CCB); the Board for Financial Supervision (BFS); and the Board for Regulation and Supervision XI.6 The chapter is organised into nine sections. of Payment and Settlement Systems (BPSS). The developments relating to the governance These Committees are headed by the Governor. structure of the Reserve Bank are set out in Section In addition, the Central Board also has fi ve Sub- 2. Section 3 delineates the initiatives undertaken by the Human Resource Management Department Committees: the Audit and Risk Management (HRMD) during the year in the areas of human Sub-Committee (ARMS); the Human Resource resources. Developments relating to enterprise- Management Sub-Committee (HRM-SC); the wide risk management framework are presented Building Sub-Committee (B-SC); the Information in section 4. The activities of the Inspection Technology Sub-Committee (IT-SC) and the Department during the year are discussed in Strategy Sub-Committee (S-SC). These sub- section 5. The functioning of the CSBD, which committees are typically headed by an external coordinates and develops strategies and annual Director. action plans for the Reserve Bank, are covered Meetings of the Central Board and CCB in section 6. The activities and accomplishments of the Rajbhasha and Premises departments are XI.9 The Central Board held fi ve meetings presented in sections 7 and 8, respectively. The during the transition year1 July 2020 to March chapter has been summarised at the end. 2021. 1 With change in the Reserve Bank’s accounting year to April-March from 2020-21 onwards, the fi rst year of Reserve Bank’s transition year was of only nine months (July 2020 - March 2021). 226GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT XI.10 The CCB held 35 meetings during July XI.16 The Central Government nominated Shri 2020 to March 2021, 26 of which were held as Ajay Seth, Secretary, Department of Economic e-meetings and nine through video conferencing. Affairs, Ministry of Finance, Government of India, The CCB attended to the current business of the as Director on the Central Board of Reserve Bank Reserve Bank, including approval of its Weekly of India with effect from April 24, 2021 and until Statements of Affairs. further orders vice Shri Tarun Bajaj. XI.11 The Western and Eastern Area Local Executive Directors Boards held two meetings during July 2020 - XI.17 Executive Directors Dr. Rabi N. Mishra and March 2021. The Northern Area Local Board held three meetings during July 2020 - March 2021. Smt. Nanda S. Dave superannuated on August The Standing Committee of the Central Board 31, 2020; Smt. Lily Vadera on October 29, 2020 functioning in lieu of Southern Area Local Board and Smt. Indrani Banerjee on November 27, (for want of quorum), held two meetings during 2020. Shri M. Rajeshwar Rao sought voluntary July 2020 - March 2021. The details of participation retirement from the Reserve Bank’s service w.e.f. of Directors/Members in meetings of the Central October 8, 2020 to take up the position of Deputy Board, its Committees and Sub-Committees, Governor. Dr. Mridul K. Saggar was promoted as Local Boards and Standing Committee of the Executive Director on July 1, 2020; Shri Saurav Central Board in lieu of Local Board/s are given in Sinha and Shri Vivek Deep on September 1, 2020; Annex Tables XI.1-5. Shri Jayant Kumar Dash on October 12, 2020 and Central Board/Local Boards Shri R. Subramanian, Shri Rohit Jain and Shri XI.12 The Central Government appointed Shri Radha Shyam Ratho on December 11, 2020. Shri M. Rajeshwar Rao as Deputy Governor, Reserve T. Rabi Sankar sought voluntary retirement from Bank of India for a period of three years with the Reserve Bank’s service w.e.f. May 3, 2021 to effect from the date of assumption of office or take up the position of Deputy Governor. Shri Jose until further orders whichever is earlier. Shri Rao J. Kattoor was promoted as Executive Director on assumed office on October 9, 2020. May 4, 2021. XI.13 The term of Shri B. P. Kanungo as Deputy Governor, Reserve Bank of India ended on April 3. HUMAN RESOURCE DEVELOPMENT 2, 2021. INITIATIVES XI.14 The Central Government appointed Shri T. XI.18 The Reserve Bank has a wide canvas Rabi Sankar as Deputy Governor, Reserve Bank of operations, requiring a robust set of internal of India for a period of three years with effect from capabilities to fulfill its mandate. The Human the date of joining the post or until further orders, Resource Management Department (HRMD) whichever is earlier. Shri T. Rabi Sankar assumed plays the role of an enabler and a facilitator, office on May 3, 2021. enhancing staff efficiency, and creating an XI.15 The terms of three Central Board Directors atmosphere of teamwork by tapping potential Dr. Ashok Gulati, Shri Manish Sabharwal and Dr. capabilities of employees, necessary for their Prasanna Kumar Mohanty ended on February 8, effectiveness at work. During the year, the 2021. The term of Central Board Director Shri Dilip Department continued to focus on the four pillars S. Sanghvi ended on March 10, 2021. viz., Training & Organisational Development, 227ANNUAL REPORT 2020-21 Performance Management, Organisational Implementation Status of Goals Structure & Operations plus Staff Engagement XI.20 Select aspects of performance appraisal and carried out various activities pertaining to system were proposed to be modifi ed with a training, recruitment (including review of select view to having in place a more holistic system recruitment related processes) and staff welfare, covering soft skills apart from quantifi able aspects. apart from taking up the challenge of maintaining Induction training for offi cers in Grade ‘B’, taken business continuity amidst the pandemic. Major on board through the direct recruitment channel, developments in these and other areas undertaken was revamped and a more focused schedule during the year are highlighted below, along with was put in place. The Golden Jubilee Scholarship status of implementation of agenda set for 2020- Scheme was modifi ed to usher in greater focus 21 as also agenda for 2021-22. and accountability. Agenda for 2020-21: Implementation Status XI.21 To ensure continued focus on building specialisation in regulatory and supervisory fi elds, Goals Set for 2020-21 due support was extended towards setting up of XI.19 Last year, the Department had set out the College of Supervisors (CoS) for offi cers attached following goals under Utkarsh: to supervisory/regulatory departments.  Reviewing the performance appraisal XI.22 Design for a comprehensive competency system and the current training policy management framework was worked out during (Para XI.20); the year (Box XI.1).  Continuing the process of providing aid for Major Developments setting up of specialised supervisory and In-house Training regulatory cadre (Para XI.21); and XI.23 The skill and knowledge development  Designing a competency mapping initiatives focused on strengthening technical and framework for select category of offi cers behavioural skills so as to facilitate personal growth (Para XI.22). and improve effectiveness at work. A number of Box XI.1 Competency Management Framework for the Reserve Bank The Competency Management Framework describes the person-job fi t. The framework includes competencies desired knowledge, skills, aptitude, and personality traits that and their description, behavioural indicators at different make up the profi le of a successful central banker in his or profi ciency levels, assessment models for mapping her respective functional role. It provides an understanding competencies in offi cers, and processes for periodic review of, and consistent approach to, measuring performance and updating of competencies. across various functions. The roll out of the framework across the Reserve Bank is envisaged to be completed in 2021. The framework, among other purposes, would primarily serve to optimise human resources by aiding in better Source: RBI. 228GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT Table XI.1: Programmes Conducted at Reserve Bank’s Training Establishments Training Establishment 2018-19 (July-June) 2019-20 (July-June) 2020-21 (July-March) 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 22 546 21 476 25 840 (38) (2) RBSC, Chennai 152 3,125 110 2,826 89 3,629 (499) (85) (72) CAB, Pune 179 5,542 126 3,891 183 10,308 (51) (37) (45) ZTCs (Class I) 116 2,271 92 1,667 135 3,682 ZTCs (Class III) 76 1,877 94 2,648 104 4,568 ZTCs (Class IV) 46 1,158 30 604 11 417 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. programmes were conducted during the year polls/quizzes and simulation exercises. To by the Reserve Bank’s Training Establishments further enhance the e-Learning initiatives of the (TEs) and Zonal Training Centres (ZTCs) towards Reserve Bank, the Academy procured around achieving these objectives (Table XI.1). Several 800 licenses for self-paced simulation modules of these training programmes were conducted and e-Learning modules related to behavioural through online mode in the pandemic-induced skills. These modules will help in training environment during the year. employees in core competencies identifi ed by the Reserve Bank. RBI Academy Training at External Institutions XI.24 The Academy continued to work closely with the user departments to better understand XI.25 The Reserve Bank deputes its offi cers to their training needs and customise the training attend specifi c training programmes, seminars programmes accordingly to make them more and conferences in India and abroad in order effective. With the focus shifting to online mode to tap expertise available in external institutes due to pandemic, the Academy conducted a (Table XI.2). Class III and IV employees are also number of webinars during the year, including deputed for training in external institutions in the impact of COVID-19 on regulation and India. It was, however, decided that, due to the supervision (in collaboration with IMF SARTTAC), pandemic, such deputations would only be made and Big Data and FinTech (in collaboration with for attending online training programmes till the the World Bank). In addition, workshops on situation normalises. Managing Extreme Business Uncertainty and Study Schemes Leadership Foundation & Crucial Conversations for the senior offi cers of the Reserve Bank were XI.26 Eight offi cers of the Reserve Bank availed also organised. Major initiatives undertaken of the schemes for pursuing higher studies during the year to make online programmes overseas in addition to three offi cers deputed more effective included greater use of Learning under the Reserve Bank’s Golden Jubilee Scheme Management System (LMS), conduct of live during the year. 229ANNUAL REPORT 2020-21 Table XI.2: Number of Offi cers Trained in representing offi cers and workmen employees. External Training Institutions Regional offi ces, too, kept their communication in India and Abroad channels open with local units of these recognised Year Trained in India Trained Abroad Associations/ Federations. (External Institutions) Superannuation Benefi ts 1 2 3 XI.29 Based on successful conclusion of 2018 -19 952 378 discussions with Government of India, it was 2019 - 20 696 139 2020 - 21* 194 258 decided to allow one last option to employees/ retired employees/eligible family members of *: Online mode. Note: Figures for 2020-21 relate to July 2020-March 2021, while deceased employees who had enrolled with those for previous years pertain to July-June. Source: RBI. contributory provident fund (CPF) scheme to switch over to the Reserve Bank’s pension Other Initiatives scheme, subject to certain conditions. Accordingly, 552 serving employees, 1,453 retired employees Grants and Endowments and 162 family members of deceased employees XI.27 As part of its mission to promote research, exercised the option to join the Reserve Bank’s training and consultancy in the banking and pension scheme. fi nancial sector, during July 2020-March 2021, Recruitments and Staff Strength the Reserve Bank provided fi nancial support amounting to `18.0 crore to the Indira Gandhi XI.30 During 2020 (January-December), the Institute of Development Research (IGIDR), Reserve Bank recruited a total of 61 employees Mumbai; `2.8 crore to the Centre for Advanced in various cadres (Table XI.3). The recruitment Financial Research and Learning (CAFRAL), activities, which were held up on account of the Mumbai, `0.8 crore to London School of pandemic, could restart in the second half of Economics (LSE) India Observatory and IG Patel 2020. As such, most of the employees recruited as Chair, `0.5 crore to the Indian Institute of Bank part of processes initiated during 2020 joined the Management (IIBM), Guwahati and `0.4 crore to Reserve Bank during January-March 2021. The National Institute of Bank Management (NIBM), Reserve Bank also reviewed select aspects of its Pune. processes pertaining to recruitment of offi cers in Grade ‘B’ (DRs) during the year. During the period Industrial Relations XI.28 Industrial relations in the Reserve Bank Table XI.3: Recruitments by the Reserve Bank in 2020* remained harmonious during the year. The pandemic necessitated adoption of the virtual Category of which: mode to hold discussions with the recognised Total SC ST OBC 1 2 3 4 5 Associations/Federations of offi cers and Class I 9 2 - 1 employees/workmen on various matters related to Class III 7 4 - 1 service conditions and welfare measures for the Class IV 45 - - 32 employees. During July 2020-March 2021, HRMD, Total 61 6 - 34 Central Offi ce, held six meetings with central *January - December. -: Nil. Source: RBI. units of the recognised Associations/Federations, 230GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT 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 2019 2020 2019 2020 2019 2020 2019 2020 2020 1 2 3 4 5 6 7 8 9 10 11 12 Class I 6,670 6,121 1,051 976 435 413 1,147 1,159 15.95 6.75 18.93 Class III 3,264 3,051 487 468 199 191 892 866 15.34 6.26 28.38 Class IV 3,522 3,104 877 724 291 249 682 672 23.32 8.02 21.65 Total 13,456 12,276 2,415 2,168 925 853 2,721 2,697 17.66 6.95 21.97 *: End December. Source: RBI. January to March 2021, a further 442 employees XI.33 During 2020 (January-December), one were recruited with 195 being in Class I and 247 meeting was held between the management and in Class III. representatives of the All India Reserve Bank Scheduled Castes/Scheduled Tribes and the XI.31 The total staff strength of the Reserve Buddhist Federation to discuss issues relating Bank as on December 31, 2020 was 12,276, to the implementation of the Reserve Bank’s a reduction of 8.8 per cent from a year ago reservation policy. A meeting was also held with (Table XI.4). As on March 31, 2021, total staff the representatives of the Other Backward Class strength stood at 12,406. (OBC) Association. XI.32 The total strength of ex-servicemen in the Prevention of Sexual Harassment of Women at Reserve Bank stood at 940 as at end December the Workplace 2020, while the total number of differently abled employees stood at 302 (Table XI.5). While no XI.34 A formal grievance redressal mechanism ex-servicemen and persons with benchmark for prevention of sexual harassment of women disabilities (PWBD) were recruited during the year at the workplace has been in place since 1998. 2020, during January-March 2021, three PWBD It was strengthened with the issue of a new were recruited in Class I. comprehensive set of guidelines in 2014-15 Table XI.5: Total Strength of Ex-Servicemen and PWBD* Category Ex- PWBD (Persons with Benchmark Disabilities) Servicemen (ESM) Visually Impaired (VI) Hearing Impaired (HI) Orthopedically Handicapped (OH) Intellectual Disabilities** 1 2 3 4 5 6 Class I 230 34 - 108 - Class III 171 35 7 60 4 Class IV 539 9 - 45 - *: End December 2020. -: Nil. **: As per Rights of Persons with Disability Act, 2016, intellectual disability is a condition characterised by signifi cant 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 ‘specifi c learning disabilities’ and ‘autism spectrum disorder’. Source: RBI. 231ANNUAL REPORT 2020-21 in accordance with the Sexual Harassment of to workers directly employed on a regular basis Women at Workplace (Prohibition, Prevention and by catering contractors in staff canteens/offi cers’ Redressal) Act and Rules, 2013. During January- lounges under the Service Contract Model was December 2020, two complaints were resolved, of also facilitated. Following release of vaccination which one was received during the half year ended protocol by Government of India, arrangements December 2019. No complaint was received were made with hospitals to vaccinate employees during January-March 2021. Several awareness and their dependant family members. The situation programmes on the subject were organised at continues to be closely monitored with proportion various Regional Offi ces for sensitising the staff, of employees of the Reserve Bank permitted including the newly recruited and contractual to work from home, being suitably regulated in employees and vendors. The Internal Committee accordance with the government’s guidelines and members were also deputed for various the prevailing situation. workshops/training programmes organised by the Agenda for 2021-22 Reserve Bank’s training establishments as well as NGOs empaneled with Ministry of Women and XI.37 The roadmap for the year would include Child Development, Government of India. the following milestones for the Department: Right to Information (RTI)  To develop a pool of domain experts to represent Reserve Bank’s (India’s) XI.35 The Reserve Bank received 15,558 views in international/multi-lateral requests for information and 1,225 appeals under meetings including having an appropriate the RTI Act during July 1, 2020 - March 31, 2021. succession plan in place for international Two training programmes on the RTI Act were also meetings/ conferences to ensure continuity conducted by the Zonal Training Centre, Chennai in knowledge of meetings (Utkarsh); and Kolkata during the year.  Review and reframe the organisational Response to COVID-19 Pandemic structure to effectively implement all XI.36 Initiatives undertaken at the onset of strategies (Utkarsh); pandemic in March 2020 were carried forward  To continue its efforts to lend sharper focus with suitable modifi cations based on evolving to its training and development related ground realities in order to ensure staff welfare endeavours. A learning management and maintain business continuity. Responding system is envisaged to be introduced to the call of Government of India to support in the Reserve Bank, with e-Learning people affected by any kind of emergency or material procured from reputed vendors to distress situation, like the one posed by the facilitate implementation of the concept of COVID-19 pandemic, employees of the Reserve blended learning; and Bank contributed a total of `7.3 crore to the PM CARES Fund. In line with Government of India  To take steps to enhance effi ciency of guidelines, contractual/outsourced personnel on recruitment policies, particularly at offi cer duty during the period of lockdown were treated level, with suitable changes carried out on duty irrespective of their presence in offi ce in consultation with the Reserve Bank and paid accordingly. Payment of minimum wages Services Board. 232GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT 4. ENTERPRISE-WIDE RISK MANAGEMENT phased implementation of the risk tolerance framework, the process of review of the existing XI.38 The enterprise-wide risk management risk tolerance limits, in line with internally (ERM) framework was adopted by the Reserve articulated risk tolerance stance, is currently Bank in February 2012 to develop an integrated underway for some of the market departments. assessment for the management of risk exposures, marking a move from a ‘silo-based’ approach Development of Portfolio-based Credit Value at to a ‘whole-of-business’ perspective on risk Risk/Expected Shortfall (VaR/ES) Model management. The Risk Monitoring Department XI.41 A portfolio-based credit value at risk/ (RMD) is the nodal Department for the formulation expected shortfall (VaR/ES) model was envisaged and operationalisation of ERM in the Reserve to be developed as an additional risk monitoring/ Bank. reporting tool. The background work has since Agenda for 2020-21: Implementation Status been completed for the same. However, the fi nal modelling and parameterisation would be Goals Set for 2020-21 done post completion of the review of the risk XI.39 Last year, the Department had set out the tolerance framework for the concerned business following goals: departments.  Review of the existing risk tolerance Development of Stress Testing Framework framework (Utkarsh) [Para XI.40]; XI.42 The development of a stress testing  A portfolio-based credit value at risk/ framework is serving as an additional tool for expected shortfall (VaR/ES) model monitoring, and would be taken up post completion would be developed as an additional of the review of the risk tolerance framework for risk monitoring/ reporting tool, with the the concerned business departments. objective of facilitating effective oversight of credit risk (Utkarsh) [Para XI.41]; and Other Initiative  A stress testing framework would be Chief Information Security Offi cer developed for robust assessment of the XI.43 The Chief Information Security Offi cer Reserve Bank’s credit risk (Para XI.42). (CISO) is responsible for: (a) defi ning information Implementation Status of Goals security risk management framework; (b) Review of the Existing Risk Tolerance Framework articulating and overseeing the adherence to the information security policy; (c) recommending XI.40 The risk tolerance statement articulated suitable security technology solutions to address by the Committee of the Central Board (CCB) the identifi ed risks; (d) providing necessary advice provides an overarching guidance for setting the in support of implementation of the requirements; risk tolerance limits (RTLs). A structured process (e) managing detection, response and recovery has been put in place for formulation of RTLs operations to mitigate threats; and (f) coordinating and risk reporting framework. On a pilot basis, the RTLs for departments overseeing currency the information security related issues within the management and payment and settlement organisation as well as with relevant external system have been formulated. As part of the agencies. 233ANNUAL REPORT 2020-21 XI.44 Information security function in the Reserve Agenda for 2020-21: Implementation Status Bank follows three lines of defence adopted from Goals Set for 2020-21 the enterprise risk governance models accepted XI.47 Last Year, the Department had set out the as a global best practice. The operational teams of following goals: business owner departments and DIT form the fi rst line of defence, viz., implementation. CISO plays  Implementing project audit for all the a major role in the second line of defence which identifi ed high value IT and non-IT projects performs a pro-active role in the assessment and of the Reserve Bank (Utkarsh) [Para overseeing function of information security risk. XI.48]; The Inspection Department forms the third line of  Enhanced convergence with risk-rating defence, viz., assurance. as per risk assessment methodology for Agenda for 2021-22 operational risk (RAM-OR) with respect to XI.45 For the year, the following goals for the RBIA (Utkarsh) [Para XI.49]; Department have been proposed:  Leveraging on AMRMS data mining,  Roll-out of RTLs for other operational analytics and management information areas (Utkarsh); system (MIS) reporting dashboards capabilities for effective risk assurance to  Quantifi cation of IT and cyber risk the ARMS and top management (Utkarsh) (Utkarsh); and [Para XI.50];  Review of the risk assessment  Knowledge and capacity building through methodology for operational risk. training programmes (Utkarsh) [Para 5. INTERNAL AUDIT / INSPECTION XI.51]; and XI.46 The Inspection Department of the  Implementing the revised risk rating and Reserve Bank examines, evaluates and reports scoring methodology across the Reserve on internal control and governance processes and Bank (Para XI.52). provides risk assurance to the top management Implementation Status of Goals and the Central Board under risk-based internal audit (RBIA) framework. The Department also XI.48 In pursuit of the goals set for the year, the monitors the functioning of the concurrent audit Department conducted a pilot project audit of an (CA) system and control self-assessment audit IT project successfully with a view to promote an (CSAA) in the Reserve Bank. The RBIA, CA effective internal control environment for managing and CSAA functions are performed through an the implementation of projects in the Reserve automated system named audit management Bank in a timely and cost-effective manner as and risk monitoring system (AMRMS). The per the project plan. The primary objective of the Department acts as secretariat to the Audit project audit is to assess, evaluate and provide and Risk Management Sub-Committee (ARMS) an independent, objective assessment regarding of the Central Board and also to the Executive execution of the project by evaluating the project Directors’ Committee (EDC) in overseeing the plan, nature and extent of responsibilities, authority internal audit function. and accountability of the project management 234GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT team, use of resources, timely completion and Agenda for 2021-22 delivery of the project. XI.53 During the year, the Department will focus XI.49 The Department has also achieved the on the following: targeted convergence of the risk-ratings assessed  Implementing full-fl edged project audit under RBIA and risk ratings determined as per the for all the identifi ed high value IT and RAM-OR during the year. non-IT projects of the Reserve Bank to XI.50 While the automation of RBIA and CA assess effective management of cost, functionality in AMRMS were achieved during time and deliverables and to ensure that previous year, the Department focused on the management of projects are in-sync automation of CSAA functionality and completed with the established project objectives the same successfully during the year. Automation (Utkarsh); through AMRMS provides facilities like planning  Endeavour to achieve full convergence and conduct of audit; uniformity and standardisation with risk-rating as per RAM-OR with risk- in audit reporting; submission, processing and ratings assessed under RBIA (Utkarsh); monitoring of compliances; data analytics and and reporting dashboards on Key Performance Indicators (KPIs), documentation and record  Implementing the revised risk rating and scoring methodology across the Reserve management, and alerts in an integrated manner. Bank from January 2022 after making This has created synergy among the internal audit suitable changes in the AMRMS package operations, risk management and risk assurance and testing it under parallel run mode functions by bringing in enhanced internal audit during the second half of the year 2021. effi cacy, operational effi ciency, confi dentiality, spontaneous reporting, paper-less environment 6. CORPORATE STRATEGY AND (reduced carbon foot print) and straight-through- BUDGET MANAGEMENT processing (STP). XI.54 The Corporate Strategy and Budget XI.51 The Department also endeavoured to Department (CSBD) coordinates and formulates enhance knowledge and capacity building by the Reserve Bank’s strategies, prepares its creating awareness among all the users through annual budget and monitors its expenditure with several trainings/workshops on automation a view to ensuring budgetary discipline. The in AMRMS covering all the Central Offi ce Department also formulates and executes the departments, regional offi ces and training Reserve Bank’s business continuity plan (BCP) establishments of the Reserve Bank. for its critical operations and acts as the nodal Department for external institutions funded by XI.52 The revised risk rating and scoring model the Reserve Bank. has already been formulated and this will be implemented from January 2022 after making XI.55 CSBD, being the nodal Department suitable changes in the AMRMS package. The for business continuity management (BCM) model will be tested under parallel run mode framework of the Reserve Bank, played a key during the second half of the year 2021. role in facilitating smooth functioning of its time- 235ANNUAL REPORT 2020-21 sensitive critical activities together with other  Renewal of the memoranda of essential activities during COVID-19 pandemic. understanding (MoUs) with IGIDR and The country-wide invocation of BCP for all CAFRAL with the goal of enhancing the regional offi ces/business units was handled with collaboration with these institutes (Para enhanced recourse to technology with dexterity. XI.60). The Reserve Bank’s proactive crisis management Implementation Status of Goals initiatives have borne ample dividend by ensuring XI.58 In compliance with the directions of the uninterrupted 24X7 services for the payment Strategy Sub-Committee of the Central Board, a system of the country in particular, and the banking key performance indicator (KPI) framework has system in general. been put in place to evaluate fulfi lment of various XI.56 With the alignment of the Reserve Bank’s milestones and goals under ‘Utkarsh 2022’ accounting year with the government’s fi nancial (Box XI.2). The work on development of a dashboard year (April-March), the budget estimate for the for centralised monitoring of implementation of transition year 2020-21 was prepared for a period strategic goals/milestones has been taken up. of nine months (July 2020 to March 2021). In order The dashboard will also work as an early warning to improve the utilisation of the capital expenditure system for lagging milestones. vis-à-vis the budgeted estimate, a capital expenditure buffer was set up with the approval XI.59 In pursuance of the goals set for the of the Committee of the Central Board (CCB). year, steps were taken to strengthen the internal The Expenditure Rules 2018 were amended to governance of external funded institutes through reinforce the internal fi nancial controls under appointment of directors and timely fi lling up of the expenditure framework of the Reserve Bank. vacancies arising on the boards and their sub- The expenditure rules have also been mapped committees. in bill payment module of e-Kuber to strengthen XI.60 A Memorandum of Understanding (MOU) the fi nancial discipline and improve management was executed between the Reserve Bank and information system (MIS). IGIDR, which requires IGIDR to move in the Agenda for 2020-21: Implementation Status direction of fi nancial self-suffi ciency in the long- run. Goals Set for 2020-21 Agenda for 2021-22 XI.57 Last Year, the Department had set out the following goals: XI.61 The Department’s agenda for the year includes the following:  Operationalising a dashboard to implement the key performance indicators-based  Operationalising ‘Utkarsh’ dashboard (KPIs) framework for monitoring and with an inbuilt early warning system for assessing the implementation of strategic potential non-achievement of strategic goals/milestones (Utkarsh) [Para XI.58]; goals/milestones;  Strengthening of internal governance of  Conducting a mid-term review of the external funded institutes (EFIs) [Para strategy framework ‘Utkarsh 2022’ by the XI.59]; and Strategy Sub-Committee; 236GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT Box XI.2 The Strategic Framework of the Reserve Bank The Reserve Bank articulated a formal strategic system, changed the contours of banking in many ways. management framework in April 2015 and re-affi rmed its While some changes will be short-lived, there will be many core purpose, values and vision statements with a view to which will permanently alter the way banking services are delineating its strategic objectives in contemporary terms delivered and used. The shift to the digital mode of working and providing a framework and backdrop against which its and the growing competition from FinTech companies bring policies could be formulated. Subsequently, a need was new challenges and opportunities for the banking system. felt to have a medium-term dynamic strategy framework Under the guidance of the Strategy Sub-Committee, all that could capture and respond to the rapidly emerging departments have reviewed their strategies in the light dynamics of the economic, social and technological of COVID-19 pandemic. Departments have pro-actively ecosystem of the time. Responding to this need, Utkarsh monitored the impact of COVID-19 pandemic on the 2022, the medium-term strategic framework of the Reserve banking services and have taken measures to counter Bank was launched in July 2019. disruptions and ensure business continuity, cyber security The implementation of Utkarsh 2022 is steered as a and uninterrupted operations of the payment system. The medium-term strategy by a high-level Strategy Sub- challenges arising out of COVID-19 have also been handled Committee of the Central Board of Directors of the Reserve effectively by banks and other fi nancial institutions. Bank, comprising of three Central Board Directors, Deputy Strategy plays a crucial role in shaping the future of an Governor and Executive Director-in-Charge of Corporate organisation, while also helping it in fulfi lling its core mission Strategy and Budget Department (CSBD) and CGM, CSBD. and vision. Even as we are beginning to emerge from Though the unprecedented COVID-19 pandemic posed the shadows of COVID-19, the Reserve Bank’s strategic challenges in achieving the set milestones, 169 out of 226 framework recognises that new threats and opportunities milestones have been fully implemented as at end-March can suddenly materialise. The Reserve Bank’s strategic 2021, with over a year left for the goal implementation. framework therefore strives to be dynamic, evolving and Fulfi lment of strategic milestones under Utkarsh 2022 and responsive to emerging threats and opportunities. their sustenance are monitored through a Key Performance Since its launch in July 2019, Utkarsh 2022 has run Indicator (KPI) framework. The KPI framework is useful half its course by March 2021. Having survived a global in capturing early warning signals for potential non- pandemic without the slightest interruption in delivery achievement of milestones. The milestones have further of banking and payments services across the country is been grouped as input, process, output and outcome no mean achievement. But complacency is the last thing milestones to capture all dimensions of the Reserve Bank’s one can afford in such testing times. The Strategy Sub- working and function. Committee, therefore, is set to have a mid-course review The sudden and rapid spread of the COVID-19 pandemic of Utkarsh 2022 in 2021. The exercise will provide much in March 2020, and the resultant country-wide lockdown needed feedback on what worked well and what did not, put to test the resilience of Utkarsh 2022. The changes and provide crucial inputs on where to turn the radar in engendered by the lockdown in the modes of operation of looking out for the future. most functions of the Reserve Bank, as also the banking Source: RBI.  Rationalising additional budget sanction  Putting in place a BCM framework for and automating the process. pandemic; and 237ANNUAL REPORT 2020-21 7. RAJBHASHA  Conducting Hindi workshops for senior offi cers at ROs/CODs in order to update XI.62 The Rajbhasha Department has been them with the latest instructions/guidelines entrusted with the responsibility to sensitise regarding use of Hindi (Para XI.68); and stakeholders for ensuring compliance to the provisions of the Offi cial Language Policy of the  Conducting a lecture series on banking Government of India. Accordingly, the Department topics in Hindi (Para XI.68). has ensured compliance with the requirements Implementation Status of Goals of bilingualisation; imparting training of Hindi XI.64 Currently, banking glossary is being language to staff members to increase the use of updated. Rajbhasha Department has constituted Hindi in correspondence and internal work; and an inter-institution committee comprising bankers encouraging and motivating stakeholders to carry and eminent scholars to update the banking out their work in Hindi through various incentive glossary. The fi rst meeting of the committee was schemes. The Department has performed on- site and off-site monitoring for compliance of the held on March 2, 2021. The work of updation is Offi cial Language Policy to review the progress. expected to be completed in next two years (by The Department also ensures the compliance December 2022). of the orders of the President of India on Offi cial XI.65 Annual programme r egarding use of Language, targets of the annual programme as Hindi issued by Department of Offi cial Language, well as assurances given to the Committee of Ministry of Home Affairs was circulated to Parliament on Offi cial Language during their visits all regional offi ces (ROs) and Central Offi ce and directions received from the Government of departments (CODs) for implementation. CODs India from time to time. and ROs have achieved various targets set by the Agenda for 2020-21: Implementation Status government. Goals Set for 2020-21 XI.66 To promote the use of Hindi, preparation of department-specifi c terminologies was completed XI.63 Last Year, the Department had set out the for some departments including Regulation, following goals: Foreign Exchange, Economic Research and  Updating banking glossary (Para XI.64); Policy, Premises, Legal, Currency Management  Implementation of annual programme and Protocol & Security. regarding use of Hindi and other guidelines XI.67 With a view to enhance creativity in issued by the Government of India from Hindi among staff members, a Hindi magazine time to time (Para XI.65); competition has been introduced for ROs from  Preparation of department-specifi c 2020-21. Accordingly, magazine published by ROs terminologies to promote the use of Hindi during 2020-21 will be evaluated during 2021-22. (Para XI.66); XI.68 A total number of 12 Hindi workshops  Commencing Hindi magazine competitions were conducted during July 2020-March 2021 for the regional offi ces (ROs) in order for senior offi cers at various ROs/CODs. Also, to enhance creativity in Hindi among four lectures, viz., ‘Payments and Settlement employees (Para XI.67); Systems’, ‘Important Aspects of RBI Annual 238GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT Report 2019-20’, ‘An Overview of Regulation of published in bilingual form and are available on the NBFCs’ and ‘Financial Stability Report – Jan 2021’ Reserve Bank’s website. Apart from, Rajbhasha were organised in Hindi under “Vyakhyan Manch” Samachar, covering the progressive use of Hindi for Rajbhasha offi cers. in the Reserve Bank, the Hindi journal ‘Banking Chintan Anuchintan’ was published by the Major Developments Department. XI.69 During July 2020-March 2021, 118 staff- Compliance of Assurances Given to the Committee members passed the Pragya 2 examination and of Parliament on Offi cial Language 159 passed the Parangat 3 examination. Staff- members of CODs and ROs were trained to work XI.72 The Committee of Parliament on Offi cial in Hindi on computers. CODs and ROs observed Language regularly visits Reserve Bank’s Central ‘Hindi Day’ by organising Hindi Samaroh and Offi ce and ROs to review the progress made in seminars on diverse banking topics and conducted the use of Hindi. The Reserve Bank’s Central various competitions and programmes to create a Offi cial Language Implementation Committee conducive environment for the use of Hindi. monitors the compliance of the assurances given to the Committee. During the year, concerted Training efforts were made to focus on expenditure on XI.70 In pursuance of the Reserve Bank’s advertisement in Hindi, training more staff for vision statement “Utkarsh 2022” to enhance Parangat, fi lling up vacant posts in Rajbhasha the skillset of human resources for current and cadre, and attending the meetings of Town Offi cial emerging challenges, one batch of Rajbhasha Language Implementation Committee (TOLIC) by offi cers was imparted training on general banking the Offi cers-in-Charge of the ROs. by Zonal Training Centre, Kolkata. Another training programme was organised by Rajbhasha XI.73 Draft and Evidence Sub-committee of Department on various aspects of ‘Rajbhasha Committee of Parliament on Offi cial Language has Inspections’ for one batch of Rajbhasha offi cers reviewed the use of Hindi in Delhi Regional Offi ce in order to increase the effi cacy of Rajbhasha on November 17, 2020 under the aegis of TOLIC, inspections. Further, an online training programme Delhi and the progress was found satisfactory. for Rajbhasha offi cers on ‘Latest Banking Integrated Rajbhasha Reporting System Concepts Useful in Translation’ was organised by XI.74 Integrated Rajbhasha Reporting System RBSC, Chennai. (IRRS), a package for collecting, processing, Publications reporting and storing of data related to use of XI.71 The statutory publications of the Reserve Hindi in the Reserve Bank, was inaugurated in Bank, viz., Annual Report, Report on Trend and September 2020 and made live. Various reports Progress of Banking in India, Monetary Policy such as quarterly progress report, annual Report and other publications like the Financial report, Hindi Advisory Committee report, annual Stability Report, Weekly Statistical Supplement assessment report, TOLIC report and roster of and monthly Reserve Bank of India Bulletin were Hindi knowledge are being generated through this 2 The examination is conducted for those who do not have working knowledge of Hindi. 3 The highest examination to acquire profi ciency in Hindi. 239ANNUAL REPORT 2020-21 package. IRRS package has created a conducive 8. PREMISES DEPARTMENT environment for ‘less paper’ and automated XI.76 The vision of the Premises Department is workfl ows. to provide ‘best in class’ and environment-friendly Agenda for 2021-22 physical infrastructure by integrating architectural excellence and aesthetic appeal with green ratings XI.75 During the year, the Department plans to in the Reserve Bank’s premises while ensuring focus on the following: the highest level of cleanliness.  To publish a booklet on ‘Rajbhasha Agenda for 2020-21: Implementation Status Policy: An Introduction’ and disseminate it to increase awareness among staff Goals Set for 2020-21 members; XI.77 Last year, the Department had set out the  To prepare Annual Work Plan for following goals: implementation of Offi cial Language  Green rating certifi cation from GRIHA/ Policy in accordance with the annual IGBC4 for at least one offi ce and fi ve programme and other instructions issued existing residential buildings in addition by the Government of India and circulate it to all the new building projects (Utkarsh) as a ready reckoner to all the ROs/CODs; [Para XI.78];  To organise programmes on Rajbhasha  Attaining 3.0 per cent of power consumption Policy for senior offi cers of the Reserve from renewable sources (Utkarsh) [Para Bank; XI.78];  To impart training to Rajbhasha offi cers  Attaining 2.5 per cent of energy savings on Rajbhasha inspection to increase the (Utkarsh) [Para XI.78]; effi cacy of Rajbhasha inspections;  Attaining 5.0 per cent of water  To organise region-wise review meeting conservation/savings (Utkarsh) [Para for all the three regions (i.e., A, B and XI.78]; C) with the Rajbhasha offi cers posted in  Digitising inventory and assets tracking in ROs/ CODs to strengthen the monitoring association with Reserve Bank Information system regarding use of Hindi; Technology Private Ltd. (ReBIT) [Utkarsh]  To monitor application softwares and (Para XI.78); materials uploaded on the Reserve Bank’s  Completion of the residential projects website/EKP to ensure bilingualisation; at Chennai, Mumbai and Delhi and and construction of boundary walls at Agartala,  To strengthen the translation system Imphal and Ranchi (Para XI.79); by arranging training programmes on  Commencing construction of offi ce translation for Rajbhasha offi cers; and also premises at Naya Raipur and residential organising meetings of Translation Review projects at Dehradun, Kharghar in Navi Committee at regular intervals. Mumbai and Jammu (Para XI.79); and 4 Green Rating for Integrated Habitat Assessment (GRIHA)/Indian Green Building Council (IGBC). 240GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT  Reviewing and revising the contract energy effi cient and Bureau of Energy Effi ciency architecture5 and implementation of the (BEE) star rated equipment, and replacement of project management tools6 for monitoring conventional taps with sensor-based taps played of the projects (Para XI.80). a role in achieving the targets, the steep increase in energy savings and conservation of water was Implementation Status of Goals mainly due to the restricted offi ce working hours XI.78 In 2020-21, developments were inspired on account of COVID-19 induced lockdowns / by the vision, as the Department endeavoured restrictions during April to December 2020.The to fulfi ll the goals set out in these areas. Several process of digitising inventory and fi xed asset of the goals set under Utkarsh have been tracking in association with ReBIT and thereby surpassed by the Department. As against the implementation of Fixed Asset Management goal for obtaining relevant green rating from System was completed in 72 per cent of ROs by GRIHA/IGBC for at least one existing offi ce end of March 2021. While the pace of work was building and fi ve existing residential buildings, hampered in some ROs due to the COVID-19 green rating from IGBC has been received for related lockdown, limited availability of vendors total of three offi ce buildings and ten residential also played its part in non-completion of this buildings during January 2020-January 2021. work. No new building has come up during the period XI.79 Construction of residential projects at under review. Against the target of achieving 3.0 Chennai (Anna Nagar), Mumbai (Chembur) and per cent of base year (year ended June 2018) Delhi (Hauz Khas) were affected by the COVID-19 power consumption from renewable sources related lockdown. However, Chennai and Delhi by all Reserve Bank’s premises, aggregate projects are in an advanced stage of completion. energy generation from renewable sources was The construction of boundary walls for Reserve at 4.2 per cent in January 2021. Reserve Bank Bank’s offi ce plots at Imphal and Agartala has achieved energy saving of 30.1 per cent as been completed as targeted. Expenditure against the target of 2.5 per cent by January sanction has been granted for construction 2021 over the annual consumption in the base of boundary wall on the Ranchi offi ce plot and year ended June 2018. Water conservation/ the work is scheduled to be executed in 2021- savings stood at 21.5 per cent in January 2021 22. The Dehradun residential project is at an (y-o-y) over the consumption in the base year advanced stage of planning and approval, while ended June 2018 as against the target of 5.0 tender documents are under examination for the per cent. While improvement in the performance Jammu residential project. All these projects are of central air-conditioning operation and other expected to take off in 2021-22. electrical equipment by implementing the recommendations of energy audit, replacement XI.80 Reviewing and revising the contract of conventional lights with LED lights in a phased architecture for projects on ‘Deposit’ work basis manner, replacement of old equipment with has been completed and implementation of the 5 Refers to the framework covering planning to completion of construction projects. 6 These are software solutions that help in monitoring and effi ciently managing the projects. 241ANNUAL REPORT 2020-21 project management software is presently under Other Initiatives user acceptance test environment and is expected XI.84 Additional offi ce premises were taken to go live in 2021-22. on lease for Ahmedabad and Ranchi offi ces Major Developments and land was acquired from the respective state governments for construction of offi ce premises Construction Activities at Panaji, Goa, and for offi ce and residential XI.81 The structure of the institutional building premises at Aizawl, Mizoram. for Centre for Advanced Financial Research and Learning (CAFRAL) at Mumbai has been XI.85 The Department is having on its record completed. The remaining structural work and around 23,000 drawings and tracings of plans of fi nishing works are in progress. The construction various offi ces. All the drawings and tracings have of offi ce building at Dehradun has started. been digitised and e-indexed for easy access and effi cient record management. Preventive Measures against COVID-19 XI.86 A web-based platform named GREEN XI.82 The Department took a number of (Generation of Renewable Energy, Energy measures in Central Offi ce building for the safety Conservation and Neer Conservation) has of the employees who attended offi ce during the been developed in consultation with ReBIT for COVID-19 induced lockdown, including provision consolidation and analysis of Utkarsh data and of Minimum Effi ciency Reporting Value-13 (MERV- information on other green initiatives and energy/ 13) fi lters and ultra violet germicidal irradiation (UVGI) assemblies in all the air handling units water audit received from the ROs with an aim (AHUs). to improve energy effi ciency/conservation. User acceptance test (UAT) of the platform is under Green Initiatives (Other than Targeted under progress. Utkarsh) XI.87 Presently all the tenders beyond `5 lakh XI.83 The Reserve Bank has been generating are being invited through e-tendering using the renewable energy through solar power plants MSTC portal. During the year, 770 e-tenders installed at various offi ces and residential were fl oated by the CODs, ROs and TEs. colonies. During July 2020-March 2021, solar Further, in order to bring more transparency in power plants have been installed at 18 residential sale of material (scrap and obsolete material), colonies. Consequently, 26 offi ce premises and an agreement was entered into with MSTC Ltd. 44 residential premises had such solar power and guidelines were issued to all ROs/TEs for plants by end of March 2021, with solar power conducting sales of goods/scraps for `5 lakh and generation capacity enhanced from 2,034 kWp (kilowatts Peak) [June 2020] to 2,504 kWp (March above in a single transaction by e-auction also on 2021). Rain water harvesting systems have been the MSTC portal. installed at 17 offi ces and 40 residential buildings Agenda for 2021-22 and sewage treatment plants at 3 offi ces and 11 XI.88 For the year 2021-22, the Department has residential buildings for conservation and effi cient set the following goals: management of water resources. Organic waste converters have also been installed at 11 offi ces  Achieve and improve upon the targets set and 43 residential premises. under Utkarsh for January 2022; 242GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT  Takeover residential projects at Chennai 9. CONCLUSION (Anna Nagar) and Delhi (Hauz Khas) XI.89 In sum, this chapter provides a snapshot which are nearing completion; of the developments in the areas of governance  Commence construction of offi ce and human resources, and also the measures premises at Naya Raipur, residential adopted during the year for strengthening the projects at Dehradun and Jammu and risk monitoring and internal audit mechanism in residential-cum-ZTC project at Mumbai the Reserve Bank. HRMD conducted various (Kharghar); skill enhancing programmes for the staff during the year in virtual mode using cloud-based video  Construct boundary walls at Shillong and applications. Compliance with the statutory Ranchi Offi ce plots; provisions of the Offi cial Languages Act of the  Shift from UAT to production environment Government of India was ensured by the Rajbhasha for implementation of enterprise project Department, while the Premises Department management software for monitoring continued with its efforts to provide environment major projects; friendly physical infrastructure. The departments have evaluated their goals set for the year and  Implement GREEN data platform for online set out agenda for 2021-22. With the outbreak of consolidation and analysis of Utkarsh data COVID-19, the critical business processes were and information on other green initiatives secured to ensure business continuity and smooth and energy/water audit received from the functioning of the Reserve Bank’s time-sensitive ROs; and critical activities, while ensuring the safety and  Continue with green initiatives. health of its human resources. 243ANNUAL REPORT 2020-21 Annex Table XI.1: Attendance in the Meeting of the Central Board of Directors during July 1, 2020 – March 31, 2021 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) 5 5 B. P. Kanungo^ 8(1)(a) 5 5 Mahesh Kumar Jain 8(1)(a) 5 5 Michael Debabrata Patra 8(1)(a) 5 5 M. Rajeshwar Rao* 8(1)(a) 4 4 Prasanna Kumar Mohanty@ 8(1)(b) 3 3 Dilip S. Shanghvi# 8(1)(b) 4 4 Revathy Iyer 8(1)(b) 5 5 Sachin Chaturvedi 8(1)(b) 5 4 Natarajan Chandrasekaran 8(1)(c) 5 5 Ashok Gulati@ 8(1)(c) 3 3 Manish Sabharwal@ 8(1)(c) 3 3 Satish Kashinath Marathe 8(1)(c) 5 5 Swaminathan Gurumurthy 8(1)(c) 5 5 Debasish Panda 8(1)(d) 5 5 Tarun Bajaj 8(1)(d) 5 5 ^: Deputy Governor till April 2, 2021. *: Deputy Governor w.e.f. October 9, 2020. @: Director till February 8, 2021. #: Director till March 10, 2021. 244GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT Table XI.2: Attendance in the Meeting of the Committees of the Central Board during July 1, 2020 - March 31, 2021 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) 35 33 B. P. Kanungo^ 8(1)(a) 35 33 Mahesh Kumar Jain 8(1)(a) 35 33 Michael Debabrata Patra 8(1)(a) 35 35 M. Rajeshwar Rao* 8(1)(a) 21 21 Prasanna Kumar Mohanty@ 8(1)(b) 11 11 Dilip S. Shanghvi# 8(1)(b) 13 13 Revathy Iyer 8(1)(b) 12 11 Sachin Chaturvedi 8(1)(b) 12 12 Natarajan Chandrasekaran 8(1)(c) 12 6 Ashok Gulati@ 8(1)(c) 11 7 Manish Sabharwal@ 8(1)(c) 10 9 Satish Kashinath Marathe 8(1)(c) 12 10 Swaminathan Gurumurthy 8(1)(c) 11 1 Tarun Bajaj 8(1)(d) 26 26 ^: Deputy Governor till April 2, 2021. *: Deputy Governor w.e.f. October 9, 2020. @: Director till February 8, 2021. #: Director till March 10, 2021. II. Board for Financial Supervision (BFS) Shaktikanta Das Chairman 9 9 Mahesh Kumar Jain Vice-Chairman 9 9 B. P. Kanungo^ Member 9 9 Michael Debabrata Patra Member 9 6 M. Rajeshwar Rao* Member 6 6 Ashok Gulati# Member 7 6 Satish Kashinath Marathe Member 9 9 Sachin Chaturvedi Member 9 9 ^: Deputy Governor till April 2, 2021. *: Deputy Governor w.e.f. October 9, 2020. #: Member till February 8, 2021. III. Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) Shaktikanta Das Chairman 2 2 B. P. Kanungo^ Vice-Chairman 2 2 Mahesh Kumar Jain Member 2 2 Michael Debabrata Patra Member 2 2 M. Rajeshwar Rao* Member 1 1 Natarajan Chandrasekaran Member 2 1 Manish Sabharwal# Member 1 1 ^: Deputy Governor till April 2, 2021. *: Deputy Governor w.e.f. October 9, 2020. #: Member till February 8, 2021. 245ANNUAL REPORT 2020-21 Table XI.3: Attendance in the Meeting of the Sub-Committees of the Board July 1, 2020 – March 31, 2021 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) Revathy Iyer Chairperson 6 6 Ashok Gulati^ Member 4 3 M. Rajeshwar Rao* Member 3 3 B. P. Kanungo@ Invitee 6 6 Mahesh Kumar Jain Invitee 6 6 Michael Debabrata Patra Invitee 6 6 ^: Member till February 8, 2021. *: Member w.e.f. October 9, 2020. @: Invitee till April 2, 2021. II. Building Sub-Committee (BSC) Dilip S. Shanghvi* Chairman 2 2 Prasanna Kumar Mohanty^ Member 1 1 Mahesh Kumar Jain Member 2 2 *: Chairman till March 10, 2021. ^: Member till February 8, 2021. III. Human Resource Management Sub-Committee (HRM-SC) Manish Sabharwal* Chairman 2 2 Dilip Shanghvi# Member 2 2 Mahesh Kumar Jain Member 2 2 *: Chairman till February 8, 2021. #: Member till March 10, 2021. IV. Information Technology Sub-Committee (IT-SC) Manish Sabharwal^ Chairman 4 4 Sachin Chaturvedi Member 4 3 B. P. Kanungo@ Member 4 3 ^: Chairman till February 8, 2021. @: Member till April 2, 2021. V. Strategy Sub-Committee Prasanna Kumar Mohanty^ Chairman 2 2 Manish Sabharwal# Member 2 2 Revathy Iyer Member 2 2 B. P. Kanungo@ Member 2 2 Mahesh Kumar Jain Member 2 2 Michael Debabrata Patra Member 2 2 M. Rajeshwar Rao* Member 1 1 ^: Chairman till February 8, 2021. #: Member till February 8, 2021. @: Member till April 2, 2021. *: Member w.e.f. October 9, 2020. 246GOVERNANCE, HUMAN RESOURCES AND ORGANISATIONAL MANAGEMENT Table XI.4: Attendance in the Meetings of Local Boards during July 1, 2020 to March 31, 2021 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) 2 2 Sunil Mitra*, EALB Section 9(1) 2 2 Dilip S. Shanghvi#, WALB Section 9(1) 2 2 V. R. Bhanshali*, WALB Section 9(1) 2 2 Revathy Iyer, NALB Section 9(1) 3 3 R. N. Dubey, NALB Section 9(1) 3 3 Prasanna Kumar 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 quorum. #: Director till March 10, 2021. *: Member till February 8, 2021. Table XI.5: Attendance in the Meeting of Standing Committee of the Central Board of Directors in lieu of Local Board/s during July 1, 2020 to March 31, 2021 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 @: Chairman till February 8, 2021. Note: Meetings held in lieu of Southern Area Local Board. 247XII THE RESERVE BANK’S ACCOUNTS FOR 2020-21 The year 2020-21 is significant for the change in the accounting year of the Reserve Bank to April - March (earlier July - June). Due to this transition, the accounting year 2020-21 was of nine months only, i.e., July 2020 - March 2021. Thus, data presented in the chapter are for a period of nine months for 2020-21 as compared to twelve months for the previous year(s). The Balance Sheet size of the Reserve Bank, nevertheless, increased by 6.99 per cent for the year ended March 31, 2021, mainly reflecting its liquidity and foreign exchange operations. While income for the year decreased by 10.96 per cent, the expenditure decreased by 63.10 per cent. The year ended with an overall surplus of `99,122 crore as against `57,127.53 crore in the previous year, representing an increase of 73.51 per cent. XII.1 The balance sheet of the Reserve Bank the liability side, the increase was due to increase plays a critical role in the functioning of the country’s in Deposits, Notes Issued and Other Liabilities economy, largely refl ecting the activities carried by 26.85 per cent, 7.26 per cent and 43.05 per out in pursuance of its currency issue function as cent, respectively. Domestic assets constituted well as monetary policy and reserve management 26.42 per cent while the foreign currency assets objectives. The key fi nancial results of the Reserve and gold (including gold deposit and gold held in Bank’s operations during the year 2020-21 (July - India) constituted 73.58 per cent of total assets as March) are set out in the following paragraphs. on March 31, 2021 as against 28.75 per cent and 71.25 per cent, respectively, as on June 30, 2020. XII.2 The size of the balance sheet increased by `3,72,876.43 crore, i.e., 6.99 per cent from XII.3 A provision of `20,710.12 crore was made `53,34,792.70 crore as on June 30, 2020 to and transferred to Contingency Fund (CF). No `57,07,669.13 crore as on March 31, 2021. The provision was made towards Asset Development increase on the asset side was mainly due to Fund (ADF). The trends in income, expenditure, increase in foreign and domestic investments by net disposable income and the surplus transferred 11.48 per cent and 13.75 per cent, respectively. On to the Government are given in Table XII.1. Ta ble XII.1: Trends in Income, Expenditure and Net Income (Amount in ` crore) Item 2016-17 2017-18 2018-19 2019-20 2020-21 1 2 3 4 5 6 a) Income 61,818.05 78,280.66 1,93,035.88 1,49,672.46 1,33,272.75 b) Total Expenditure1 31,154.932 28,276.663 17,044.154 92,540.935 34,146.756 c) Net Income (a-b) 30,663.12 50,004.00 1,75,991.73 57,131.53 99,126.00 d) Transfer to Funds7 4.00 4.00 4.00 4.00 4.00 e) Surplus Transferred to the Central Government (c-d) 30,659.12 50,000.00 1,75,987.73 57,127.53 99,122.00 Note: 1. Includes provision towards CF and ADF. 2. Includes a provision of `50 crore towards capital contribution in the Reserve Bank’s subsidiary ReBIT and a provision of `13,140 crore towards transfer to CF. 3. Includes a provision of `14,189.27 crore towards transfer to CF. 4. Includes a provision of `63.60 crore towards transfer to ADF. 5. Includes a provision of `73,615 crore towards transfer to CF. 6. Includes a provision of `20,710.12 crore towards transfer to CF. 7. An amount of `1 crore 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 fi ve years. 248THE RESERVE BANK’S ACCOUNTS FOR 2020-21 XII.4 Changes in the fi nancial statements XII.4.2 In addition to the above, following changes effective from 2020-21: have also been incorporated from 2020-21: XII.4.1 Based on the recommendations of Expert (a) Unit of presentation of the fi nancial Committee to review the extant Economic Capital statements has been changed from Framework (ECF) of the Reserve Bank (Chairman: ‘Rupees billion’ to ‘Rupees crore’. Dr Bimal Jalan), formed in 2018, following changes (b) Gold coin and Bullion: The nomenclature have been effected from the current year 2020-21: of ‘Gold coin and Bullion’ forming part (a) Accounting year: The accounting year of Assets of Banking Department (BD) of the Reserve Bank has been changed and ‘Gold Coin and Bullion (as backing from ‘July - June’ to ‘April - March’. This for Note issue)’ forming part of Assets of year being the year of transition, is of nine Issue Department (ID) has been changed months only (July 2020 - March 2021). to ‘Gold - BD’ and ‘Gold - ID’, respectively. (b) Presentation of Risk Provisions The above changes have been notifi ed and Revaluation Accounts: The Risk by Government of India vide its Gazette Provisions (CF and ADF) and the balances Notifi cation dated November 11, 2020. in the Revaluation Accounts which formed Also, the numbering of schedules has part of the balance sheet head ‘Other changed due to the changes indicated Liabilities and Provisions’, are now shown in XII. 4.1(b) above. as distinct balance sheet heads. XII.5 The Independent Auditors’ Report, the (c) Balance sheet head - ‘Other Liabilities Balance Sheet and the Income Statement for the and Provisions’: The nomenclature has year 2020-21 along with the schedules, statement been changed to ‘Other Liabilities’. of Signifi cant Accounting Policies and supporting Notes to Accounts are as follows: 249ANNUAL REPORT 2020-21 INDEPENDENT AUDITORS’ REPORT To, The President of India Report on Audit of Financial Statements of Reserve Bank of India 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 March 31, 2021 and the Income Statement for the year ended on that date (hereinafter referred to as “Financial Statements”), which have been audited by us. This year being year of transition is of nine months (from July 1, 2020 to March 31, 2021). In our opinion and to the best of our information and according to explanations given to us and as shown by the books of accounts of the Bank, the Balance Sheet read with Signifi cant 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 (“the RBI Act, 1934”) and Regulations framed there under so as to exhibit true and correct view of the state of affairs of the Bank as on March 31, 2021 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 fi nancial statements, and we have fulfi lled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is suffi cient and appropriate to provide a basis for our opinion on the fi nancial 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 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 the 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 RBI Act, 1934 and Regulations framed thereunder and the accounting policies and practices followed by the Bank. This responsibility also includes maintenance of adequate auditing 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. As per the RBI Act, 1934, the Bank can be liquidated only by the Central Government by order and in any other manner as it may direct. Also, while the fundamental basis of preparation of Financial Statements of the Bank are based on provisions of the RBI Act, 1934 and Regulations framed thereunder, the Management has adopted the accounting policies and practices which refl ects its continuity as a Going concern. Those charged with governance are also responsible for overseeing the Bank’s fi nancial 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 250THE RESERVE BANK’S ACCOUNTS FOR 2020-21 can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to infl uence the economic decisions of users taken on the basis of these fi nancial statements. 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 suffi cient 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 fi nancial control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Management.  Conclude on the appropriateness of the basis of accounting adopted by the Management and to see whether the accounting policies and information refl ects it to be a going concern and based on the audit evidence obtained, whether a material uncertainty exists related to use of the basis of accounting. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ 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 auditors’ report. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and signifi cant audit fi ndings, including any signifi cant defi ciencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. Other Matters The audit of the fi nancial statements of the Bank for the year ended June 30, 2020, was carried out and reported jointly by M/s Prakash Chandra Jain & Co. and M/s Haribhakti & Co., LLP, Chartered Accountants, vide their unmodifi ed audit report dated August 14, 2020, 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 fi nancial information. Our opinion is not modifi ed 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 G. M. Kapadia & Co. Chartered Accountants Chartered Accountants (ICAI Firm Registration No. 002438C) (ICAI Firm Registration No. 104767W) Pratibha Sharma Atul Shah Partner Partner Membership No. 400755 Membership No. 039569 UDIN:21400755AAAABG4540 UDIN:21039569AAAAHP8880 Place: Mumbai Date: May 21, 2021 251ANNUAL REPORT 2020-21 RESERVE BANK OF INDIA BALANCE SHEET AS ON MARCH 31, 2021 (Amount in ` crore) Liabilities Schedule 2019-20 2020-21 Assets Schedule 2019-20 2020-21 Capital 5.00 5.00 Assets of Banking Department (BD) Reserve Fund 6,500.00 6,500.00 Notes, Rupee Coin, Small Coin 6 12.59 12.02 Other Reserves 1 232.00 234.00 Gold - BD 7 1,42,874.67 1,43,582.87 Deposits 2 11,75,859.89 14,91,537.70 Investments-Foreign-BD 8 10,23,399.50 12,29,940.41 Risk Provisions Investments-Domestic-BD 9 11,72,027.28 13,33,173.90 Contingency Fund 2,64,033.94 2,84,542.12 Bills Purchased and Discounted 0.00 0.00 Asset Development Fund 22,874.68 22,874.68 Loans and Advances 10 3,22,207.95 1,35,118.91 Revaluation Accounts 3 11,24,390.72 9,24,454.99 Investment in Subsidiaries 11 1,963.60 1,963.60 Other Liabilities 4 1,05,321.81 1,50,657.97 Other Assets 12 36,732.45 37,014.75 Liabilities of Issue Department Assets of Issue Department (ID) (As backing for Notes Issued) Notes Issued 5 26,35,574.66 28,26,862.67 Gold - ID 7 1,13,145.92 1,04,140.13 Rupee Coin 784.83 743.40 Investments-Foreign-ID 8 25,21,643.91 27,21,979.14 Investments-Domestic-ID 9 0.00 0.00 Domestic Bills of Exchange and 0.00 0.00 other Commercial Papers 26,35,574.66 28,26,862.67 Total Liabilities 53,34,792.70 57,07,669.13 Total Assets 53,34,792.70 57,07,669.13 Charulatha S. Kar T. Rabi Sankar M. Rajeshwar Rao M. D. Patra M. K. Jain Shaktikanta Das Chief General Manager-in-Charge Deputy Governor Deputy Governor Deputy Governor Deputy Governor Governor 252THE RESERVE BANK’S ACCOUNTS FOR 2020-21 RESERVE BANK OF INDIA INCOME STATEMENT FOR THE YEAR ENDED MARCH 31, 2021 (Amount in ` crore) INCOME Schedule 2019-20 2020-21 Interest 13 1,09,333.40 69,057.09 Other Income 14 40,339.06 64,215.66 Total 1,49,672.46 1,33,272.75 EXPENDITURE Printing of Notes 4,377.84 4,012.09 Expenditure on Remittance of Currency 87.19 54.80 Agency Charges 15 3,876.08 3,280.06 Employee Cost 8,928.06 4,788.03 Interest 1.34 1.10 Postage and Telecommunication Charges 116.74 105.46 Printing and Stationery 20.03 17.00 Rent, Taxes, Insurance, Lighting, etc. 136.39 122.24 Repairs and Maintenance 87.72 76.49 Directors’ and Local Board Members’ Fees and Expenses 2.02 0.36 Auditors’ Fees and Expenses 6.00 4.90 Law Charges 9.22 8.57 Depreciation 206.11 200.09 Miscellaneous Expenses 1,071.19 765.44 Provisions 73,615.00 20,710.12 Total 92,540.93 34,146.75 Available Balance 57,131.53 99,126.00 Less: (a) Contribution to: i) National Industrial Credit (Long Term Operations) Fund 1.00 1.00 ii) National Housing Credit (Long Term Operations) Fund 1.00 1.00 (b) Transferable to NABARD: i) National Rural Credit (Long Term Operations) Fund1 1.00 1.00 ii) National Rural Credit (Stabilisation) Fund1 1.00 1.00 (c) Others Surplus payable to the Central Government 57,127.53 99,122.00 1. These funds are maintained by the National Bank for Agriculture and Rural Development (NABARD). Charulatha S. Kar T. Rabi Sankar M. Rajeshwar Rao M. D. Patra M. K. Jain Shaktikanta Das Chief General Manager-in-Charge Deputy Governor Deputy Governor Deputy Governor Deputy Governor Governor 253ANNUAL REPORT 2020-21 SCHEDULES FORMING PART OF BALANCE SHEET AND INCOME STATEMENT (Amount in ` crore) 2019-20 2020-21 Schedule 1: Other Reserves (i) National Industrial Credit (Long Term Operations) Fund 29.00 30.00 (ii) National Housing Credit (Long Term Operations) Fund 203.00 204.00 Total 232.00 234.00 Schedule 2: Deposits (a) Government (i) Central Government 100.27 5,000.15 (ii) State Governments 42.48 42.48 Sub total 142.75 5,042.63 (b) Banks (i) Scheduled Commercial Banks 4,37,616.68 6,51,748.12 (ii) Scheduled State Co-operative Banks 5,207.87 8,893.19 (iii) Other Scheduled Co-operative Banks 7,138.21 9,848.31 (iv) Non-Scheduled State Co-operative Banks 2,472.18 4,560.21 (v) Other Banks 18,413.73 23,817.12 Sub total 4,70,848.67 6,98,866.95 (c) Financial Institutions outside India (i) Repo borrowing - Foreign 0.00 9,038.44 (ii) Reverse Repo Margin - Foreign 0.00 120.51 Sub total 0.00 9,158.95 (d) Others (i) Administrators of RBI Employee PF A/c 4,549.26 4,302.70 (ii) Depositors’ Education and Awareness Fund 33,114.46 39,264.25 (iii) Balances of Foreign Central Banks 1,680.01 1,226.67 (iv) Balances of Indian Financial Institutions 2,347.06 1,439.68 (v) Balances of International Financial Institutions 351.39 522.50 (vi) Mutual Funds 1.35 1.35 (vii) Others 6,62,824.94 7,31,712.02 Sub total 7,04,868.47 7,78,469.17 Total 11,75,859.89 14,91,537.70 Schedule 3: Revaluation accounts (i) Currency and Gold Revaluation Account (CGRA) 9,77,141.23 8,58,877.53 (ii) Investment Revaluation Account-Foreign Securities (IRA-FS) 53,833.99 8,853.67 (iii) Investment Revaluation Account-Rupee Securities (IRA-RS) 93,415.50 56,723.79 (iv) Forward Exchange Forward Contracts Valuation Account (FCVA) 0.00 0.00 Total 11,24,390.72 9,24,454.99 Schedule 4: Other Liabilities (i) Provision for Forward Contracts Valuation Account (PFCVA) 5,925.41 6,127.35 (ii) Provision for payables 2,599.61 3,240.73 (iii) Gratuity and Superannuation Fund 25,639.39 28,497.67 (iv) Surplus Payable to the Central Government 57,127.53 99,122.00 (v) Bills Payable 2.46 4.36 (vi) Miscellaneous 14,027.41 13,665.86 Total 1,05,321.81 1,50,657.97 Schedule 5: Notes Issued (i) Notes held in the Banking Department 12.52 11.98 (ii) Notes in circulation 26,35,562.14 28,26,850.69 Total 26,35,574.66 28,26,862.67 254THE RESERVE BANK’S ACCOUNTS FOR 2020-21 2019-20 2020-21 Schedule 6: Notes, Rupee Coin, Small Coin (i) Notes 12.52 11.98 (ii) Rupee Coin 0.06 0.03 (iii) Small Coin 0.01 0.01 Total 12.59 12.02 Schedule 7: Gold (a) Banking Department (i) Gold 1,39,376.67 1,43,582.87 (ii) Gold Deposit 3,498.00 0.00 Sub Total 1,42,874.67 1,43,582.87 (b) Issue Department 1,13,145.92 1,04,140.13 Total 2,56,020.59 2,47,723.00 Schedule 8: Investments - Foreign (i) Investments - Foreign - BD 10,23,399.50 12,29,940.41 (ii) Investments - Foreign - ID 25,21,643.91 27,21,979.14 Total 35,45,043.41 39,51,919.55 Schedule 9: Investments - Domestic (i) Investments - Domestic - BD 11,72,027.28 13,33,173.90 (ii) Investments - Domestic - ID 0.00 0.00 Total 11,72,027.28 13,33,173.90 Schedule 10: Loans and Advances (a) Loans and Advances to : (i) Central Government 0.00 0.00 (ii) State Governments 4,624.47 3,382.79 Sub total 4,624.47 3,382.79 (b) Loans and Advances to: (i) Scheduled Commercial Banks 2,85,576.86 90,252.18 (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 22,123.19 25,425.56 (vi) Others 9,883.43 6,905.32 Sub total 3,17,583.48 1,22,583.06 (c) Loans and Advances to Financial Institutions outside India: (i) Repo Lending - Foreign 0.00 9,129.72 (ii) Repo Margin - Foreign 0.00 23.34 Sub total 0.00 9,153.06 Total 3,22,207.95 1,35,118.91 Schedule 11: Investment in Subsidiaries/ Associates (i) Deposit Insurance and Credit Guarantee Corporation (DICGC) 50.00 50.00 (ii) Bharatiya Reserve Bank Note Mudran (P) Ltd. (BRBNMPL) 1,800.00 1,800.00 (iii) Reserve Bank Information Technology (P) Ltd. (ReBIT) 50.00 50.00 (iv) National Centre for Financial Education (NCFE) 30.00 30.00 (v) Indian Financial Technology & Allied Services (IFTAS) 33.60 33.60 Total 1,963.60 1,963.60 255ANNUAL REPORT 2020-21 2019-20 2020-21 Schedule 12: Other Assets (i) Fixed Assets (net of accumulated depreciation) 815.60 923.46 (ii) Accrued income (a + b) 34,535.74 34,643.53 a. on loans to employees 347.32 355.37 b. on other items 34,188.42 34,288.16 (iii) Swap Amortisation Account (SAA) 0.00 0.00 (iv) Revaluation of Forward Contracts Account (RFCA) 0.00 0.00 (v) Miscellaneous 1,381.11 1,447.76 Total 36,732.45 37,014.75 Schedule 13: Interest (a) Domestic Sources (i) Interest on holding of Rupee Securities 70,303.70 59,824.79 (ii) Net Interest on LAF Operations -13,052.75 -17,957.86 (iii) Interest on MSF Operations 148.75 12.38 (iv) Interest on Loans and Advances 3,557.17 1,709.00 Sub total 60,956.87 43,588.31 (b) Foreign Sources (i) Interest Income from Foreign Securities 33,025.03 23,059.63 (ii) Net Interest on Repo/ Reverse Repo Transactions 9.41 9.83 (iii) Interest on Deposits 15,342.09 2,399.32 Sub total 48,376.53 25,468.78 Total 1,09,333.40 69,057.09 Schedule 14: Other Income (a) Domestic Sources (i) Exchange 0.00 0.00 (ii) Discount 734.57 964.16 (iii) Commission 2,431.24 2,073.97 (iv) Rent Realized 8.63 5.19 (v) Profi t/ Loss on sale and redemption of Rupee Securities 1,252.43 5,193.94 (vi) Depreciation on Rupee Securities inter portfolio transfer -9.38 -8.12 (vii) Amortisation of premium/ discount of Rupee Securities 1,680.95 846.48 (viii) Profi t/ Loss on sale of Bank’s property 1.39 1.38 (ix) Provision no longer required and Miscellaneous Income 248.74 -108.38 Sub total 6,348.57 8,968.62 (b) Foreign Sources (i) Amortisation of premium/ discount of Foreign Securities -2,741.55 -6,715.95 (ii) Profi t/ Loss on sale and redemption of Foreign Securities 6,738.82 11,348.84 (iii) Exchange gain/ loss from Foreign Exchange transactions 29,993.22 50,629.18 (iv) Miscellaneous Income 0.00 -15.03 Sub total 33,990.49 55,247.04 Total 40,339.06 64,215.66 Schedule 15: Agency Charges (i) Agency Commission on Government Transactions 3,787.55 2,611.05 (ii) Underwriting Commission paid to the Primary Dealers 60.90 642.95 (iii) Sundries (Handling charges and turnover commission paid to banks for Relief/ 6.26 6.30 Savings Bonds subscriptions; SBLA etc.) (iv) Fees paid to the External Asset Managers, Custodians, Brokers, etc. 21.37 19.76 Total 3,876.08 3,280.06 256THE RESERVE BANK’S ACCOUNTS FOR 2020-21 S TATEMENT OF SIGNIFICANT ACCOUNTING The RBI Act, 1934 requires that the assets of POLICIES FOR THE YEAR ENDED MARCH 31, the Issue Department shall consist of gold coins, 2021 gold bullion, foreign securities, rupee coins and rupee securities to such aggregate amount as is (a) General not less than the total of the liabilities of the Issue 1.1 Among other things, the Reserve Bank of Department. The RBI Act, 1934 requires that the India was established under the Reserve Bank of liabilities of the Issue Department shall be an India Act, 1934 (the RBI Act, 1934) “to regulate the amount equal to the total of the amount of the issue of Bank notes and the keeping of reserves currency notes of the Government of India and with a view to securing monetary stability in India Bank notes for the time being in circulation. and generally to operate the currency and credit (b) Signifi cant Accounting Policies system of the country to its advantage”. 2.1 Convention 1.2 The main functions of the Reserve Bank are: - a) Issue of Bank notes and circulation of The fi nancial statements are prepared in coins; accordance with the RBI Act, 1934 and the notifi cations issued thereunder and, in the form, b) Acts as monetary authority and prescribed by the Reserve Bank of India General formulates, implements and monitors Regulations, 1949. These are based on historical the monetary policy; cost except where it is modifi ed to refl ect revaluation c) Regulation and supervision of the and/ or amortisation. The accounting policies fi nancial system; followed in preparing the fi nancial statements are d) Regulation and supervision of the consistent with those followed in the previous year payment and settlement systems; unless otherwise stated. e) Acts as manager of foreign exchange; 2.2 Revenue Recognition f) Maintaining and managing the country’s a) Income and expenditure are recognised on foreign exchange reserves; accrual basis except penal interest charged from the banks which is accounted for only g) Acting as the banker to banks and the when there is certainty of realisation. Dividend governments; income on shares is recognised on accrual h) Acting as the debt manager of the basis when the right to receive the same is governments; established. i) Developmental functions to support b) Balances unclaimed and outstanding for more national objectives. than three clear consecutive accounting years 1.3 The RBI Act, 1934 requires that the issue of in certain transit accounts including Drafts Bank notes should be conducted by the Reserve Payable Account, Payment Orders Account, Bank in an Issue Department which shall be Sundry Deposits Account- Miscellaneous, separated and kept wholly distinct from the Remittance Clearance Account, Earnest Banking Department, and the assets of the Issue Money Deposit Account and Security Deposit Department shall not be subject to any liability Account are reviewed and written back other than the liabilities of the Issue Department. to income. Claims, if any, are considered 257ANNUAL REPORT 2020-21 and charged against income in the year of to Maturity’ securities (such as investments payment. in notes issued by the International Monetary Fund and bonds issued by India c) Income and expenditure in foreign currency Infrastructure Finance Company (IIFC), are recorded at the exchange rates prevailing UK which are valued at cost) are marked- on the last business day of the week/ month/ to-market as on the last business day of year, as applicable. each week and month. Unrealised gains/ d) Exchange gains/ losses on sale of foreign losses on revaluation are recorded in the currencies and gold are accounted for using ‘Investment Revaluation Account - Foreign the weighted average cost method for arriving Securities’ (IRA-FS). Credit balance in IRA- at the cost. FS is carried forward to the subsequent year. 2.3 Gold & Foreign Currency Assets and Debit balance, if any, at the end of the year Liabilities in IRA-FS is charged to the CF and the same is reversed on the fi rst working day of the Transactions in gold and foreign currency assets following accounting year. and liabilities are accounted for on settlement date basis. Foreign T-Bills and Commercial Papers are carried at cost as adjusted by amortisation a) Gold of discount/ premium. Premium or discount Gold (including gold deposits) is revalued on on foreign securities is amortised daily. the last business day of each week and month Profi t/ loss on sale of foreign securities at ninety (90) per cent of the London Bullion is recognised with respect to the book Market Association (LBMA) gold price in US value. On sale/ redemption of foreign dated dollar and Rupee-US dollar market exchange securities, valuation gain/ loss in relation rate on the valuation days. Unrealised to the securities sold/ redeemed, lying in valuation gains/ losses are accounted for in IRA-FS, is transferred to Income Account. the Currency and Gold Revaluation Account c) Forward/ Swap Contracts (CGRA). Forward contracts entered into by the Reserve b) Foreign Currency Assets and Liabilities Bank are revalued on a half yearly basis. All foreign currency assets and liabilities While mark-to-market net gain is credited to (excluding foreign currency received under the ‘Foreign Exchange Forward Contracts swaps that are in the nature of repos Valuation Account’ (FCVA) with contra debit and contracts where the rates are fi xed to ‘Revaluation of Forward Contracts Account’ contractually) are translated at the market (RFCA), mark-to-market net loss is debited exchange rates on the last business day of to FCVA with contra credit to the ‘Provision each week and month. Unrealised gains and for Forward Contracts Valuation Account’ losses arising from such translation of foreign (PFCVA). On maturity of the contract, the currency assets and liabilities are accounted actual gain or loss is recognised in the for in the CGRA. Income Account and the unrealised gains/ Foreign securities, other than Treasury Bills losses previously recorded in the FCVA, (T-Bills), Commercial Papers and certain ‘Held RFCA and PFCVA are reversed. At the time 258THE RESERVE BANK’S ACCOUNTS FOR 2020-21 of half yearly revaluation, the balance in resultant gain/ loss is booked in Income FCVA and RFCA or PFCVA as on that day is Account. reversed and fresh revaluation is done for all 2.4 Transactions in Exchange Traded Currency the outstanding forward contracts. Derivatives (ETCD) Debit balance in FCVA, if any, on the The ETCD transactions undertaken by the Reserve balance sheet date, is charged to the CF Bank as part of its intervention operations are and reversed on the fi rst working day of the marked-to-market on daily basis and the resultant following year. The balance in the RFCA and gain/ loss is booked in income account. PFCVA represents the net unrealised gains and losses, respectively, on valuation of the 2.5 Domestic Investments forward contracts. a) Rupee securities and oil bonds except those In the case of swaps at off-market rates mentioned in (d) are marked-to-market as that are in the nature of repo, the difference on the last business day of each month. between the future contract rate and the The unrealised gains/ losses on revaluation rate at which the contract is entered into is is accounted for in ‘Investment Revaluation amortised over the period of the contract and Account-Rupee Securities’ (IRA-RS). Credit recorded in the Income Account with contra balance in IRA-RS is carried forward to the in ‘Swap Amortisation Account’ (SAA). The following accounting year. Debit balance, amounts recorded in the SAA are reversed on if any, at the end of the year in IRA-RS is maturity of the underlying contracts. Further, charged to the CF and the same is reversed the amounts received under these swaps are on the fi rst working day of the following not subject to periodic revaluation. accounting year. On sale/ redemption of rupee securities/ oil bonds, valuation gain/ While FCVA forms part of ‘Revaluation loss in respect of rupee securities and oil Accounts’, PFCVA forms part of ‘Other bonds sold/ redeemed, lying in IRA-RS, Liabilities’ and RFCA and SAA form part of is transferred to Income Account. Rupee ‘Other Assets’. securities and oil bonds are also subjected to d) Repurchase Transactions daily amortisation. The Reserve Bank participates in the foreign b) Treasury Bills are valued at cost. Repurchase transactions (Repo and Reverse Repo) as part of the Reserve Management c) Investments in shares of subsidiaries are operations. The Repo transactions are valued at cost. treated as borrowing of foreign currencies d) Oil bonds and rupee securities earmarked and are shown under ‘Deposits’, whereas for various staff funds (like Gratuity and Reverse Repo transactions are treated as Superannuation, Provident Fund, Leave lending of foreign currencies and are shown Encashment, Medical Assistance Fund) and under ‘Loans and Advances’. Depositors’ Education and Awareness Fund e) Transactions in Interest Rate Futures (IRF) (DEA Fund) are treated as ‘Held to Maturity’ and are held at amortised cost. The IRF transactions undertaken under Reserve Management operations are e) Transactions in domestic investment are marked-to-market on daily basis and the accounted for on settlement date basis. 259ANNUAL REPORT 2020-21 2.6 Liquidity Adjustment Facility (LAF) Repo/ e) Individual items of computer software costing Reverse Repo and Marginal Standing Facility `1 lakh and above are capitalised and (MSF) depreciation is calculated on monthly pro- rata basis at applicable rates. Repo transactions under LAF and MSF are treated as lending and are accordingly being shown under f) Depreciation is provided on half year-end ‘Loans and Advances’, whereas Reverse Repo balances of fi xed assets on monthly pro- transactions under LAF are being treated as rata basis. In case of additions/ deletions deposits and shown under ‘Deposit-Others’. of assets other than land and building, depreciation is provided on monthly pro- 2.7 Fixed Assets rata basis including the month of addition/ a) Fixed Assets are stated at cost less deletion of such assets. depreciation except art and paintings and (g) Depreciation on subsequent expenditure: freehold land which are held at cost. i. Subsequent expenditure incurred on an b) Depreciation on fi xed assets, other than existing fi xed asset which has not been land and buildings, acquired and capitalised fully depreciated in the books of accounts, during the year (from July 01 to March 31) would be reckoned on a monthly pro-rata is depreciated over the remaining useful basis from the month of capitalisation and life of the principal asset; effected on a half yearly basis at prescribed ii. Subsequent expenditure incurred on rates depending upon the useful life of the modernisation/ addition/ overhauling assets applied. of an existing fi xed asset, which has c) Depreciation on the following fi xed assets already been fully depreciated in the (costing more than `1 lakh) is provided on a books of accounts, is fi rst capitalised straight-line basis depending on the useful and thereafter depreciated fully in life of an asset in the following manner: the year in which the expenditure is incurred. Asset Category Useful life (Rate of (h) Land and building: The accounting treatment Depreciation) in respect of land and building is as follows: Electrical Installations, UPS, Motor 5 years Vehicles, Furniture, Fixture, CVPS/ SBS (20 per cent) Land Machines, etc. Computers, Servers, Micro-processors, 3 years i. Land acquired on leasehold basis for a Printers, Software, Laptops, e-book (33.33 per cent) period of more than 99 years is treated reader/ i-Pad, etc. as if it is on a perpetual lease basis. d) Fixed Assets, costing up to `1 lakh (except Such leases are considered as freehold easily portable electronic assets like laptop/ properties and accordingly not subjected e-book reader) are charged to income in the to amortisation. year of acquisition. Easily portable electronic ii. Land acquired on lease up to 99 years is assets, such as laptops, etc. costing more amortised over the period of the lease. than `10,000 are capitalised and depreciation is calculated on monthly pro-rata basis at the iii. Land acquired on a freehold basis is not applicable rate. subject to any amortisation. 260THE RESERVE BANK’S ACCOUNTS FOR 2020-21 Buildings eligible employees and these contributions are charged to Income Account in the year to i. The life of all buildings is assumed as which it relates. thirty years and depreciation is charged on a ‘straight-line’ basis over a period b) Other liability on account of long-term of thirty years. In respect of buildings employee benefi ts is provided based on an constructed on lease hold land (where actuarial valuation under the ‘Projected Unit the lease period is less than thirty years) Credit’ method. depreciation is charged on a ‘straight-line’ basis over the lease period of the land. NOTES TO ACCOUNTS ii. Impairment of buildings: For assessment XII.6 LIABILITIES OF THE RESERVE BANK of impairment, buildings are classifi ed into two categories, as under: XII.6.1 Capital a. Buildings which are in use but have The Reserve Bank was constituted as a private been identifi ed for demolition in shareholders’ bank in 1935 with an initial paid- future or will be discarded in future: up capital of `5 crore. The Reserve Bank was The value in use of such buildings nationalised with effect from January 1, 1949 is the aggregate of depreciation and its entire ownership remains vested with for the future period up to the date the Government of India. The paid-up capital it is expected to be discarded/ continues to be `5 crore in terms of Section 4 of demolished. The difference between the RBI Act, 1934. the book value and aggregate of depreciation so arrived at is charged XII.6.2 Reserve Fund as depreciation. The original Reserve Fund of `5 crore was created b. Buildings which have been in terms of Section 46 of the RBI Act, 1934 as discarded/ vacated: These contribution from the Central Government for the buildings are shown at realisable currency liability of the then sovereign government value (net selling price-if the asset taken over by the Reserve Bank. Thereafter, an is likely to be sold in future) or amount of `6,495 crore was credited to this fund scrap value less demolition cost from out of gains on periodic revaluation of gold (if it is to be demolished). If the up to October 1990, taking it to `6,500 crore. The resultant amount is negative, then fund has been static since then as the unrealised the carrying value of such buildings gain/ loss on account of valuation of gold and is shown at `1. The difference foreign currency is since being booked in the between the book value and Currency and Gold Revaluation Account (CGRA) realisable value (net selling price)/ which appears under ‘Revaluation Accounts’. scrap value less demolition cost is charged as depreciation. XII.6.3 Other Reserves 2.8 Employee Benefi ts This includes National Industrial Credit (Long a) The Reserve Bank contributes monthly at Term Operations) Fund and National Housing a determined rate to Provident Fund for the Credit (Long Term Operations) Fund. 261ANNUAL REPORT 2020-21 a) National Industrial Credit (Long Term Administrator of RBI Employees’ Provident Fund, Operations) Fund Depositors’ Education and Awareness Fund (DEA Fund), amount outstanding against Reverse Repo, This fund was created in July 1964, in terms Medical Assistance Fund (MAF), etc. of Section 46C of the RBI Act, 1934 with an initial corpus of `10 crore. The fund witnessed Total deposits increased by 26.85 per cent from annual contributions from the Reserve Bank `11,75,859.89 crore as on June 30, 2020 to for fi nancial assistance to eligible fi nancial `14,91,537.70 crore as on March 31, 2021. institutions. Since 1992-93, a token amount a. Deposits – Government of `1 crore is being contributed each year to the Fund. The balance in the fund stood at The Reserve Bank acts as the banker to the `30 crore as on March 31, 2021. central government in terms of Sections 20 and 21 and as banker to the state governments b) National Housing Credit (Long Term by mutual agreement in terms of Section 21A Operations) Fund of the RBI Act, 1934. Accordingly, the central This fund was set up in January 1989 in and the state governments maintain deposits terms of Section 46D of the RBI Act, 1934 with the Reserve Bank. The balances for extending fi nancial accommodation to held by the central and state governments the National Housing Bank (NHB). The initial were `5,000.15 crore and `42.48 crore, corpus of `50 crore has been enhanced by respectively, as on March 31, 2021 as annual contributions from the Reserve Bank compared to `100.27 crore and `42.48 thereafter. From the year 1992-93, only a crore, respectively, as on June 30, 2020. The token amount of `1 crore is being contributed increase in the deposit of central government each year. The balance in the fund stood at is due to requirement of maintenance of a `204 crore as on March 31, 2021. higher minimum balance in their accounts as Note: Contribution to other Funds on March 31. There are two other Funds constituted in b. Deposits – Banks terms of Section 46A of the RBI Act, 1934, Banks maintain balance in their current viz., National Rural Credit (Long Term accounts with the Reserve Bank towards Operations) Fund and National Rural Credit maintenance of the Cash Reserve Ratio (Stabilisation) Fund which are maintained (CRR) requirement and for keeping the by National Bank for Agriculture and Rural working funds to meet payment and Development (NABARD) for which a token settlement obligations. The deposits held amount of `1 crore each is set aside and by banks increased by 48.43 per cent from transferred to NABARD every year. `4,70,848.67 crore as on June 30, 2020 to XII.6.4 Deposits `6,98,866.95 crore as on March 31, 2021. These represent the balances maintained The increase in this head is on account with the Reserve Bank, by the central and of restoration of CRR in a phased manner, state governments, banks, All India Financial with the banks required to maintain CRR at Institutions, such as Export Import Bank (EXIM 3.5 per cent of NDTL at end March 2021, Bank), NABARD, etc., Foreign Central Banks, as compared to CRR requirement of 3.0 per International Financial Institutions, balances in cent of NDTL as on June 30, 2020. 262THE RESERVE BANK’S ACCOUNTS FOR 2020-21 c. Deposits – Financial Institutions Outside charge to CF is reversed on the fi rst working India day of the following year. Further, an amount of `20,710.12 crore was provided towards The balance under the head was `9,158.95 CF. Accordingly, the balance in CF as on crore as on March 31, 2021 as against Nil as on June 30, 2020. March 31, 2021 was `2,84,542.12 crore as compared to `2,64,033.94 crore as on June d. Deposits - Others 30, 2020. ‘Deposits - Others’ consists of balances of b. Asset Development Fund (ADF) Administrator of RBI Employees Provident Fund, balance in Depositors’ Education and ADF was created in 1997-98 and the balance Awareness Fund (DEA Fund), balances therein represents provision specifi cally made of Foreign Central Banks, Indian and till date towards investments in subsidiaries International Financial Institutions, Medical and associate institutions and meet internal Assistance Fund, amount outstanding under capital expenditure. No provision was made Reverse Repo, etc. The amount under towards ADF in the year 2020-21. The ‘Deposits - Others’ increased by 10.44 per balance in ADF remains as `22,874.68 crore cent from `7,04,868.47 crore as on June 30, as on March 31, 2021 (Table XII.2). 2020 to `7,78,469.17 crore as on March 31, 2021 primarily due to increase in reverse Table XII.2: Balances in Risk Provisions repo deposits with the Reserve Bank. (` crore) As on Balance in Balance Total CF and XII.6.5 Risk Provisions CF in ADF ADF as Percentage There are two risk provisions of the Reserve to Total Assets Bank viz., Contingency Fund (CF) and Asset 1 2 3 4=(2+3) 5 Development Fund (ADF). The provision made June 30, 2017 2,28,206.53# 22,811.08 2,51,017.61 7.6 towards these funds are made in terms of section June 30, 2018 2,32,107.76@ 22,811.08 2,54,918.84 7.05 47 of the RBI Act, 1934. The details are as under: June 30, 2019 1,96,344.35$ 22,874.68 2,19,219.03 5.34 June 30, 2020 2,64,033.94* 22,874.68 2,86,908.62 5.38 a. Contingency Fund (CF) March 31, 2021 2,84,542.12^ 22,874.68 3,07,416.80 5.39 This is a specifi c provision meant for meeting # Increase in CF is the net impact of provision of `13,139.62 crore and charging of the debit balance of IRS and FCVA amounting to unexpected and unforeseen contingencies, `6,585.55 crore as on June 30, 2017. including depreciation in the value of @ Increase in CF is the net impact of provision of `14,189.27 crore and charging of the debit balance of IRA-FS amounting to securities, risks arising out of monetary/ `16,873.59 crore as on June 30, 2018. exchange rate policy operations, systemic $ The decline in the CF is due to writing back of excess provision of risks and any risk arising on account of the `52,637 crore as on June 30, 2019. * Increase in CF is the net impact of provision of `73,615 crore and special responsibilities enjoined upon the charging of the debit balance in the FCVA amounting to `5,925.41 crore as on June 30, 2020. Reserve Bank. As on March 31, 2021, an ^ Increase in CF is the net impact of provision of `20,710.12 crore amount of `6,127.35 crore was charged to and charging of the debit balance in the FCVA amounting to `6,127.35 crore as on March 31, 2021. CF on account of debit balance of FCVA. The 263ANNUAL REPORT 2020-21 XII.6.6 Revaluation Accounts c. Investment Revaluation Account–Rupee Securities (IRA-RS) The unrealised marked-to-market gains/ losses are recorded in the revaluation heads,0 viz., Rupee securities and oil bonds (with Currency and Gold Revaluation Account (CGRA), exception as mentioned under Signifi cant Investment Revaluation Accounts (IRA) and Accounting Policy) held as assets of the Foreign Exchange Forward Contracts Valuation Banking Department are marked-to-market Account (FCVA). The details are as under: as on the last business day of each month a. Currency and Gold Revaluation Account and the unrealised gains/ losses arising (CGRA) therefrom are booked in IRA-RS. The balance in IRA-RS decreased from `93,415.50 crore The major sources of market risk faced by as on June 30, 2020 to `56,723.79 crore the Reserve Bank are currency risk, interest as on March 31, 2021 due to sale of rupee rate risk and movement in gold prices. securities and hardening of yields at the Unrealised gains/ losses on valuation of longer end of the yield curve leading to MTM Foreign Currency Assets (FCA) and Gold are losses on few securities held by the Reserve not taken to the Income Account but instead Bank during the year. accounted for in the CGRA. Net balance in CGRA, therefore, varies with the size of the d. Foreign Exchange Forward Contracts asset base, its valuation and movement in the Valuation Account (FCVA) exchange rate and the price of gold. CGRA Marking-to-market of outstanding forward provides a buffer against exchange rate/ gold contracts as on March 31, 2021 resulted in a price fl uctuations. It can come under pressure net unrealised loss of `6,127.35 crore, which if there is an appreciation of the rupee was debited to the FCVA with contra credit vis-à-vis major currencies or a fall in the price to PFCVA. As per the extant policy, the debit of gold. When CGRA is not suffi cient to fully balance of `6,127.35 crore in FCVA was meet exchange losses, it is replenished from the CF. During 2020-21, the balance in CGRA adjusted against the CF on March 31, 2021 decreased from `9,77,141.23 crore as on and reversed on the fi rst working day of the June 30, 2020 to `8,58,877.53 crore as on following year. Accordingly, the balance in March 31, 2021 mainly due to appreciation FCVA was Nil on March 31, 2021. of rupee and the fall in the international price XII.6.7 Other Liabilities of gold. ‘Other Liabilities’ increased by 43.05 per cent b. Investment Revaluation Account-Foreign from `1,05,321.81 crore as on June 30, 2020 securities (IRA-FS) to `1,50,657.97 crore as on March 31, 2021, The foreign dated securities are marked-to- primarily due to increase in surplus payable to the market on the last business day of each week Government of India. and month and the unrealised gains/ losses i. Provision for Forward Contracts Valuation arising therefrom are transferred to the IRA- Account (PFCVA) FS. The balance in IRA-FS decreased from `53,833.99 crore as on June 30, 2020 to Marked-to-market net loss on outstanding `8,853.67 crore as on March 31, 2021. forward contracts was credited to PFCVA as 264THE RESERVE BANK’S ACCOUNTS FOR 2020-21 Table XII.3: Balances in CGRA, FCVA, PFCVA, IRA-FS and IRA-RS (` crore) As on CGRA FCVA PFCVA IRA-FS IRA-RS 1 2 3 4 5 6 June 30, 2017 5,29,944.69 0.00 2,963.11 0.00 57,089.90 June 30, 2018 6,91,640.97 3,261.92 0.00 0.00 13,285.22 June 30, 2019 6,64,479.74 1,303.96 0.00 15,734.96 49,476.26 June 30, 2020 9,77,141.23 0.00 5,925.41 53,833.99 93,415.50 March 31, 2021 8,58,877.53 0.00 6,127.35 8,853.67 56,723.79 explained above. The balance in PFCVA as after adjusting the expenditure, provision on March 31, 2021 was `6,127.35 crore, as for CF and contribution of `4 crore to four against `5,925.41 crore as on June 30, 2020. statutory funds, the surplus transferable to the Government of India for the year 2020- The balances in Revaluation Accounts and 21 amounted to `99,122 crore (including Provision for Forward Contracts Valuation Account (PFCVA) for the last fi ve years is `493.92 crore as against `632.17 crore given in Table XII.3. in the previous year payable towards the difference in interest expenditure borne by the ii. Provision for Payables Government, consequent on conversion of This represents the year end provisions made special securities into marketable securities). for expenditure incurred but not defrayed iv. Bills Payable and income received in advance/ payable, if any. The balance under this head increased The Reserve Bank provides remittance by 24.66 per cent from `2,599.61 crore as facilities for its constituents through issue on June 30, 2020 to `3,240.73 crore as on of Demand Drafts (DDs) and Payment March 31, 2021. Orders (POs) (besides electronic payment mechanism). The balance under this head iii. Surplus Transferable to the Government of India represents the unclaimed DDs/ POs. The amount outstanding under this head Under Section 47 of the RBI Act, 1934 after increased from `2.46 crore as on June 30, making provisions for bad and doubtful debts, 2020 to `4.36 crore as on March 31, 2021. depreciation in assets, contribution to staff and superannuation funds and for all matters v. Miscellaneous for which provisions are to be made by or This is a residual head representing items under the Act or that are usually provided such as interest earned on earmarked by bankers, the balance of the profi ts of the securities, amounts payable on account of Reserve Bank is required to be paid to the leave encashment, medical provisions for central government. Under Section 48 of employees, global provision, etc. The balance the RBI Act, 1934 the Reserve Bank is not under this head decreased from `14,027.41 liable to pay income tax or super tax on any crore as on June 30, 2020 to `13,665.86 of its income, profi ts or gains. Accordingly, crore as on March 31, 2021. 265ANNUAL REPORT 2020-21 XII.6.8 Liabilities of Issue Department - Notes 661.41 metric tonnes as on June 30, 2020. Issued The increase is on account of addition of 33.90 metric tonnes of Gold during the year. The liabilities of Issue Department refl ect the quantum of currency notes in circulation. Section Of 695.31 metric tonnes as on March 31, 34 (1) of the RBI Act, 1934 requires that all bank 2021, 292.30 metric tonnes is held as backing notes issued by the Reserve Bank since April for notes issued and shown separately as 1, 1935 and the currency notes issued by the an asset of Issue Department. The balance Government of India before the commencement 403.01 metric tonnes as on March 31, of operations of the Reserve Bank, be part 2021 as compared to 369.11 metric tonnes of the liabilities of the Issue Department. The on June 30, 2020 is treated as an asset of ‘Notes Issued’ increased by 7.26 per cent from Banking Department (Table XII.4). The value `26,35,574.66 crore as on June 30, 2020 to of gold held as asset of Banking Department `28,26,862.67 crore as on March 31, 2021. The increased by 0.50 per cent from `1,42,874.67 increase is on account of the continued efforts crore as on June 30, 2020 to `1,43,582.87 of Reserve Bank to supply adequate quantity crore as on March 31, 2021, on account of of banknotes to meet the transactional needs addition of 33.90 metric tonnes of gold during of the public. Also, an amount of `10,719.37 the year. crore, representing the value of Specifi ed Bank iii) Bills Purchased and Discounted Notes (SBNs) not paid was transferred to ‘Other Liabilities’ as on June 30, 2018. In terms of Gazette Though the Reserve Bank can undertake Notifi cation issued by Government of India on May purchase and discounting of commercial bills 12, 2017, the Reserve Bank has made payments under the RBI Act, 1934, no such activity to the extent of `2.68 crore towards exchange was undertaken in 2020-21. Consequently, value of SBNs to eligible tenderers during the year there was no such asset in the books of the ended March 31, 2021. Reserve Bank as on March 31, 2021. XII.7 ASSETS OF THE RESERVE BANK iv) Investments - Foreign - Banking Department (BD) XII.7.1 ASSETS OF BANKING DEPARTMENT The Foreign Currency Assets (FCA) of the i) Notes, Rupee Coin and Small Coin Reserve Bank include: (i) deposits with This head represents the balances of bank notes, one-rupee notes, rupee coins of `1, 2, Table XII.4: Physical Holding of Gold 5, 10 and 20 and small coins kept in the vaults As on As on of the Banking Department to meet the day June 30, 2020 March 31, 2021 to day requirements of the banking functions Volume in Volume in conducted by the Reserve Bank. The balance metric tonnes metric tonnes as on March 31, 2021 was `12.02 crore as 1 2 3 Gold held for backing notes 292.30 292.30 against `12.59 crore as on June 30, 2020. issued (held in India) Gold held as asset of Banking 369.11 403.01 ii) Gold - Banking Department (BD) Department (held abroad) As on March 31, 2021, the Reserve Bank held Total 661.41 695.31 695.31 metric tonnes of gold as compared to 266THE RESERVE BANK’S ACCOUNTS FOR 2020-21 other central banks (ii) deposits with the v) Investments - Domestic - Banking Bank for International Settlements (BIS) Department (BD) (iii) deposits with commercial banks overseas Investments comprise Dated Government (iv) investments in foreign T-Bills and Rupee Securities, State Development securities and (v) Special Drawing Rights Loans, Treasury Bills and Special Oil Bonds. (SDR) acquired from the Government of The Reserve Bank’s holding of domestic India. securities increased by 13.75 per cent, from The FCA is refl ected under two heads in the `11,72,027.28 crore as on June 30, 2020 to Balance Sheet: (a) ‘Investments-Foreign-BD’ `13,33,173.90 crore as on March 31, 2021. shown as an asset of Banking Department The increase was mainly on account of and (b) ‘Investments-Foreign-ID’ shown as an liquidity management operations conducted asset of Issue Department. by way of net purchase of government securities amounting to `1,92,821 crore Investments - Foreign - ID are the FCA, (Face Value). eligible as per Section 33(6) of the RBI Act, A part of Investments - Domestic - BD is 1934, used for backing of Notes Issued. The also earmarked for various staff funds and remaining of FCA constitutes ‘Investments- DEA Fund as explained in para 2.5(d). As o n Foreign-BD’. March 31, 2021, `75,776 crore (Face Value) The position of FCA for the last two years is was earmarked for staff funds and DEA Fund given in Table XII.5. taken together. Table XII.5: Details of Foreign Currency Assets (FCA) (` crore) Particulars June 30, 2020 March 31, 2021 1 2 3 I Investments - Foreign - BD* 10,23,399.50 12,29,940.41 II Investments - Foreign - ID 25,21,643.91 27,21,979.14 Total 35,45,043.41 39,51,919.55 *: includes Shares in BIS and SWIFT and SDRs transferred from GoI valued at `11,155.96 crore as on March 31, 2021 compared to `11,211.13 crore as on June 30, 2020. Notes: 1. The Reserve Bank has agreed to make resources available under the IMF’s New Arrangements to Borrow (NAB). Effective January 01, 2021, the size of IMF’s NAB has been doubled. India’s commitment under NAB stands at SDR 8.88 billion (`92,015.21 crore/ US$12.58 billion). As on March 31, 2021, compared to SDR 4.44 billion (`46,258.89 crore/ US$6.13 billion) as on June 30,2020. As on March 31,2021, investments amounting to SDR 0.13 billion (`1,316.32 crore/ US$0.18 billion) have been made under the NAB. 2. The Reserve Bank has agreed to invest up to an amount, the aggregate of which shall not exceed US$5 billion (`36,559 crore), in the bonds issued by India Infrastructure Finance Company (UK) Limited. As on March 31, 2021, the Reserve Bank has invested US$1.86 billion (`13,621.79 crore) in such bonds. 3. During the year 2013-14, the Reserve Bank and Government of India (GoI) entered into a MoU for transfer of SDR holdings from GoI to the Reserve Bank in a phased manner. As on March 31, 2021, SDR 1.05 billion (`10,847.81 crore/ US$1.48 billion) were held by the Reserve Bank. 4. With a view to strengthening regional fi nancial and economic cooperation, the Reserve Bank has agreed to offer an amount of up to US$2 billion both in foreign currency and Indian rupee under the SAARC Swap Arrangement to SAARC member countries. As on March 31, 2021, Swap with Bhutan and Maldives, amounting to US$0.20 billion (`1,454.19 crore) and US$0.25 billion (`1,827.92 crore), respectively, is outstanding. 5. The nominal value of foreign securities posted as collateral and margin in repurchase and IRF transactions was `9,171.35 crore / US$ 1.25 billion and the nominal value of those received under reverse repurchase transactions was `8,688.75 crore / US$ 1.21 billion as on March 31, 2021. 267ANNUAL REPORT 2020-21 vi) Loans and Advances to repayments of Long Term Repo Operations (LTRO), Targeted LTRO a) Central and State Governments (TLTRO) 1.0 and TLTRO 2.0 by These loans are extended in the form of banks during the year ( July 2020 - Ways and Means Advances (WMA) and March 2021). Overdraft (OD) to the central government and in the form of WMA, OD and Special  Loans and Advances to NABARD: Drawing Facility (SDF) to the state The Reserve Bank can extend governments in terms of Section 17(5) loans to NABARD under Section of the RBI Act, 1934. The WMA limit, in 17 (4E) of the RBI Act, 1934. The case of the central government, is fi xed balance under this head increased from time to time in consultation with from `22,123.19 crore as on June the Government of India and in case 30, 2020 to `25,425.56 crore as on of the state governments, the limits are March 31, 2021. fi xed based on the recommendations of Advisory Committee/ Group constituted  Loans and Advances to others for this purpose. There were no loans and The balance under this head advances lying outstanding to the central represents loans and advances to government as on June 30, 2020 as well National Housing Bank (NHB) and as on March 31, 2021 as the central liquidity support provided to Primary government was in surplus on both the Dealers (PDs). The balance under days whereas loans and advances to this head decreased by 30.13 per state governments decreased by 26.85 cent from `9,883.43 crore as on per cent from `4,624.47 crore as on June 30, 2020 to `6,905.32 crore June 30, 2020 to `3,382.79 crore as on as on March 31, 2021 primarily due March 31, 2021. to decrease in loans and advances b) Loans and Advances to Commercial, to NHB. Co-operative Banks, NABARD and others c) Loans and Advances to Financial Institutions outside India  Loans and Advances to Commercial and Co-operative Banks: These  The balance under the head was include amounts outstanding `9,153.06 crore as on March 31, 2021 against Repo under Liquidity as against Nil as on June 30, 2020. Adjustment Facility (LAF) and vii) Investment in Subsidiaries/ Associates Marginal Standing Facility (MSF) and special liquidity facility to banks. Total holding of the Reserve Bank in its The amount outstanding decreased subsidiaries/ associate institutions amounted from `2,85,576.86 crore as on June to `1,963.60 crore as on March 31, 2021, 30, 2020 to `90,252.18 crore as same as that in the previous year. The details on March 31, 2021 primarily due are given in Table XII.6. 268THE RESERVE BANK’S ACCOUNTS FOR 2020-21 Table XII.6: Holdings in Subsidiaries/ Associates in 2020-21 Subsidiaries/ Associates Amount (` crore) Per cent Holding as on March 31, 2021 1 2 3 a) Deposit Insurance and Credit Guarantee Corporation (DICGC) 50.00 100 b) Bharatiya Reserve Bank Note Mudran (P) Ltd. (BRBNMPL) 1,800.00 100 c) Reserve Bank Information Technology (P) Ltd. (ReBIT) 50.00 100 d) National Centre for Financial Education (NCFE) 30.00 30 e) Indian Financial Technology & Allied Services (IFTAS) 33.60 100 Total 1,963.60 viii) Other Assets Exchange. The Reserve Bank holds 695.31 metric tonnes of gold, of which 292.30 metric tonnes are ‘Other Assets’ comprises fi xed assets (net held as backing for notes issued as on March of depreciation), accrued income, balances 31, 2021 (Table XII.4). The value of gold held as held in (a) Swap Amortisation Account backing for notes issued decreased by 7.96 per (SAA) (b) Revaluation of Forward Contracts cent from `1,13,145.92 crore as on June 30, 2020 Account (RFCA) and miscellaneous assets. to `1,04,140.13 crore as on March 31, 2021. Miscellaneous assets comprise mainly Consequent upon the increase in notes issued, loans and advances to staff, amount spent Investments-Foreign-ID held as its backing on projects pending completion, security increased by 7.94 per cent from `25,21,643.91 deposit paid, etc. The amount outstanding crore as on June 30, 2020 to `27,21,979.14 crore under ‘Other Assets’ increased by 0.77 per as on March 31, 2021. The balance of Rupee cent from `36,732.45 crore as on June 30, Coins held by the Issue Department decreased by 2020 as compared to `37,014.75 crore as on 5.28 per cent from `784.83 crore as on June 30, March 31, 2021. 2020 to `743.40 crore as on March 31, 2021. a. Swap Amortisation Account (SAA) XII.8 FOREIGN EXCHANGE RESERVES As on March 31, 2021, the balance in XII.8.1 The Foreign Exchange Reserves (FER) SAA is NIL as there were no outstanding comprises FCA, Gold, Special Drawing Rights contracts of swaps which were in nature (SDRs) holdings and Reserve Tranche Position of repo at off market rate. (RTP). The SDR holdings acquired from b. Revaluation of Forward Contracts Government of India (GoI) form part of Reserve Account (RFCA) Bank’s balance sheet and is included under ‘Investments-Foreign-BD’. The SDR holdings RFCA had NIL balance as on March 31, remaining with GoI and the RTP, which represents 2021. India’s quota contribution to IMF in foreign XII.7.2 ASSETS OF ISSUE DEPARTMENT currency, is not a part of Reserve Bank’s balance The eligible assets of the Issue Department held sheet. The position of FER as on June 30, 2020 as backing for notes issued consist of Gold, Rupee and March 31, 2021 in Indian Rupees and the Coin, Investments–Foreign ID, Government of US dollar, which is the numéraire currency for our FER, is furnished in Tables XII.7 (a) and (b). India Rupee Securities and Domestic Bills of 269ANNUAL REPORT 2020-21 Table XII.7(a): Foreign Exchange Reserves (Rupee) (` crore) Components As on Variation June 30, 2020 March 31, 2021 Absolute Per cent 1 2 3 4 5 Foreign Currency Assets (FCA) 35,17,514.26^ 39,24,167.84# 4,06,653.58 11.56 Gold 2,56,020.59@ 2,47,723.00* -8,297.59 -3.24 Special Drawing Rights (SDR) 10,923.25 10,863.73 -59.52 -0.54 Reserve Tranche Position (RTP) in IMF 34,111.66 36,198.01 2,086.35 6.12 Foreign Exchange Reserves (FER) 38,18,569.76 42,18,952.59 4,00,382.83 10.49 ^ : Excludes (a) SDR Holdings of the Reserve Bank amounting to `10,901.23 crore, which is included under the SDR holdings, (b) Investment of `14,067.55 crore in bonds issued by IIFC (UK), and (c) `1,427.73 crore lent to Bhutan and `1,132.64 crore lent to Maldives under a Currency Swap arrangement made available for SAARC countries. # : Excludes (a) SDR Holdings of the Reserve Bank amounting to `10,847.81 crore, which is included under the SDR holdings, (b) Investment of `13,621.79 crore in bonds issued by IIFC (UK), and (c) `1,454.19 crore lent to Bhutan and `1,827.92 crore lent to Maldives under a Currency Swap arrangement made available for SAARC countries @: Of this, Gold valued at `1,13,145.92 crore is held as an asset of Issue Department and Gold valued at `1,42,874.67 crore is held under asset of Banking Department. *: Of this, Gold valued at `1,04,140.13 crore is held as an asset of Issue Department and Gold valued at `1,43,582.87 crore is held under asset of Banking Department. Table XII.7(b): Foreign Exchange Reserves (USD) (US$ billion) Components As on Variation June 30, 2020 March 31, 2021 Absolute Per cent 1 2 3 4 5 Foreign Currency Assets (FCA) 465.83* 536.69** 70.86 15.21 Gold 33.90 33.88 -0.02 -0.06 Special Drawing Rights (SDR) 1.45 1.49 0.04 2.76 Reserve Tranche Position (RTP) in IMF 4.52 4.92 0.40 8.85 Foreign Exchange Reserves (FER) 505.70 576.98 71.28 14.10 * : Excludes (a) SDR Holdings of the Reserve Bank amounting to US$1.44 billion, which is included under the SDR holdings, (b) US$1.86 billion invested in bonds of IIFC (UK) and (c) BTN equivalent to US$0.19 billion equivalent of INR currency lent to Bhutan and US$0.15 billion lent to Maldives under a Currency Swap arrangement made available for SAARC countries. ** : Excludes (a) SDR Holdings of the Reserve Bank amounting to US$1.48 billion, which is included under the SDR holdings, (b) US$1.86 billion invested in bonds of IIFC (UK) and (c) BTN equivalent to US$0.20 billion equivalent of INR currency lent to Bhutan and US$0.25 billion lent to Maldives under a Currency Swap arrangement made available for SAARC countries. ANALYSIS OF INCOME AND EXPENDITURE (vi) Depreciation on Rupee Securities inter portfolio transfer (vii) Rent Realised (viii) XII.9 INCOME Profi t or loss on sale of the Reserve Bank’s XII.9.1 The components of Reserve Bank’s property and (ix) Provisions no longer required income are ‘Interest’, and ‘Other Income’ including and Miscellaneous Income. Certain items of (i) Discount (ii) Exchange (iii) Commission income such as interest on LAF repo, Repo in (iv) Amortisation of Premium/ Discount on Foreign foreign security and exchange gain/ loss from and Rupee Securities (v) Profi t/ Loss on Sale and foreign exchange transactions are reported on net Redemption of Foreign and Rupee Securities basis. 270THE RESERVE BANK’S ACCOUNTS FOR 2020-21 Table XII.8: Earnings from Foreign Sources (` crore) Item Variation 2019-20 2020-21 Absolute Per cent 1 2 3 4 5 Foreign Currency Assets (FCA) 35,45,043.41 39,51,919.55 4,06,876.14 11.48 Average FCA 31,10,365.72 38,49,940.15 7,39,574.43 23.78 Earnings from FCA (interest, discount, exchange gain/ loss, capital gain/ loss on securities) 82,367.02 80,715.82 (-) 1,651.20 (-) 2.00 Earnings from FCA as per cent of average FCA 2.65 2.10 (-) 0.55 (-) 20.75 Earnings from Foreign Sources Earnings from Domestic Sources XII.9.2 The income from foreign sources XII.9.3 The net income from domestic sources decreased by 2.00 per cent from `82,367.02 crore decreased by 21.91 per cent from `67,305.44 in 2019-20 to `80,715.82 crore in 2020-21. The crore in 2019-20 to `52,556.93 crore in rate of earnings on foreign currency assets was at 2020-21 mainly on account of (a) decrease in interest income on holding of Rupee Securities 2.10 per cent in 2020-21 as compared with 2.65 and (b) increase in net interest outgo on interest per cent in 2019-20 (Table XII.8). under LAF/ MSF due to absorption of surplus liquidity in the banking system (Table XII.9). Table XII.9: Earnings from Domestic Sources (` crore) Variation Item 2019-20 2020-21 Absolute Per cent 1 2 3 4 5 Earnings (I+II+III+IV) 67,305.44 52,556.93 -14,748.51 -21.91 I. Earnings from Rupee Securities and Discounted Instruments i) Interest on holding of Rupee Securities 70,303.70 59,824.79 -10,478.91 -14.91 ii) Profi t on sale and redemption of Rupee Securities 1,252.43 5,193.94 3,941.51 314.71 iii) Depreciation on Rupee securities inter portfolio transfer -9.38 -8.12 1.26 -13.43 iv) Amortisation of premium/ discount on Rupee securities and Oil Bonds 1,680.95 846.48 -834.47 -49.64 v) Discount 734.57 964.16 229.59 31.26 Sub total (i+ii+iii+iv+v) 73,962.27 66,821.25 -7,141.02 -9.65 II. Interest on LAF/ MSF i) Net Interest on LAF Operations -13,052.75 -17,957.86 -4,905.11 -37.58 ii) Interest on MSF operations 148.75 12.38 -136.37 -91.68 Sub total (i+ii) -12,904.00 -17,945.48 -5,041.48 -39.07 III. Interest on Other Loans and Advances i) Government (Central & States) 2,313.51 264.04 -2,049.47 -88.59 ii) Banks & Financial Institutions 1,174.83 1,400.63 225.80 19.22 iii) Employees 68.83 44.33 -24.50 -35.59 Sub total (i+ii+iii) 3,557.17 1,709.00 -1,848.17 -51.96 IV. Other Earnings i) Exchange 0.00 0.00 0.00 0.00 ii) Commission 2,431.24 2,073.97 -357.27 -14.69 iii) Rent realised, Profi t or Loss on sale of Bank’s Property, Provisions no longer required 258.76 -101.81 -360.57 -139.35 and miscellaneous Sub total (i+ii+iii) 2,690.00 1,972.16 -717.84 -26.69 271ANNUAL REPORT 2020-21 XII.9.4 Interest on holding of Rupee Securities XII.9.9 Interest on loans and advances decreased by 14.91 per cent from `70,303.70 a. Central and State Government: crore in 2019-20 to `59,824.79 crore in 2020-21 on account of the current accounting year being Interest income on Ways and Means of nine months as compared to the twelve months Advances (WMA)/ Overdraft (OD) extended period for 2019-20. to central and state governments decreased by 88.59 per cent from `2,313.51 crore XII.9.5 The net interest income from Liquidity during 2019-20 to `264.04 crore in 2020- Adjustment Facility (LAF)/ Marginal Standing 21. Of the total, interest income received Facility (MSF) operations decreased from from the Centre on account of WMA/ OD `(-)12,904 crore in 2019-20 to `(-)17,945.48 crore decreased by 99.89 per cent from `2,130.51 in 2020-21 due to absorption of surplus liquidity in the banking system leading to net interest outgo crore in 2019-20 to `2.28 crore in 2020-21 under LAF/ MSF. The higher banking system and interest income received from the States surplus was due to pro-active liquidity management on account of WMA/ OD/ Special Drawing operations carried out by the Reserve Bank to Facility (SDF) increased by 43.04 per cent augment system-level liquidity and to channelise from `183 crore in 2019-20 to `261.76 crore liquidity to specifi c sectors facing funding in 2020-21. The net decreased earning was constraints on account of disruptions caused due on account of signifi cantly lower utilisation of to COVID-19 pandemic. WMA/ OD facility by the central government XII.9.6 Profi t on Sale and Redemption of Rupee in 2020-21. Securities increased from `1,252.43 crore in b. Banks & Financial Institutions: Interest on 2019-20 to `5,193.94 crore in 2020-21 primarily loans and advances to banks and fi nancial on account of higher sale operations amounting institutions increased by 19.22 per cent from to `1,84,425 crore (Face Value) in 2020-21 `1,174.83 crore in 2019-20 to `1,400.63 as compared to `42,111 crore (Face Value) in crore in 2020-21. 2019-20. c. Employees: Interest on loans and advances XII.9.7 Amortisation of Premium/ Discount of to employees decreased by 35.59 per cent Rupee Securities and Oil Bonds: The premium/ from `68.83 crore in 2019-20 to `44.33 crore discount on Rupee Securities and oil bonds held in 2020-21. by the Reserve Bank, are amortised on daily basis during the period of residual maturity. The net XII.9.10 Commission: The commission income income from premium/ discount on amortisation decreased by 14.69 per cent from `2,431.24 crore of Rupee Securities decreased by 49.64 per cent in 2019-20 to `2,073.97 crore in 2020-21. This from `1,680.95 crore in 2019-20 to `846.48 crore is mainly due to the net effect of a) increase in in 2020-21. management commission received for servicing XII.9.8 Domestic- Discount: The income from outstanding central and state governments loans holding of discounted instruments [T-Bills and including savings bonds, Government Securities, Cash Management Bills (CMBs)] increased from T-Bills and CMBs and b) shortened period of `734.57 crore in 2019-20 to `964.16 crore in accounting year (nine months in 2020-21 against 2020-21. twelve months in 2019-20). 272THE RESERVE BANK’S ACCOUNTS FOR 2020-21 XII.9.11 Rent realised, Profi t or Loss on sale of iii) Agency Charges/ Commission Bank’s Property, Provisions no longer required a. Agency Commission on Government and miscellaneous income: Earnings from these Transactions income heads decreased from `258.76 crore in The Reserve Bank discharges the 2019-20 to `(-)101.81 crore in 2020-21. function of banker to the government XII.10 EXPEND ITURE through a large network of agency bank XII.10.1 The Reserve Bank incurs expenditure in branches that serve as retail outlets for the course of performing its statutory functions government receipts and payments. The by way of agency charges/ commission, printing Reserve Bank pays commission to these of notes, expenditure on remittance of currency agency banks at prescribed rates. The besides staff related and other expenses. The agency commission paid on account total expenditure of the Reserve Bank decreased of government business decreased by 63.10 per cent from `92,540.93 crore in 2019- by 31.06 per cent from `3,787.55 20 to `34,146.75 crore in 2020-21 (Table XII.10). crore in 2019-20 to `2,611.05 crore in 2020-21. The decrease of `1,176.50 i) Interest Payment crore is primarily on account of the current During 2020-21, an amount of `1.10 crore year being of nine months compared to was paid as interest to Dr. B. R. Ambedkar 2019-20. Further, some amount of Fund (set up for giving scholarship to wards reduction in agency commission paid of staff) and Employees Benevolent Fund. could also be attributed to transactions being done directly by the governments ii) Employee Cost through integration of government The total employee cost for the year 2020-21 systems with the Reserve Bank’s e-Kuber decreased by 46.37 per cent from `8,928.06 as well as some impact on number of crore in 2019-20 to `4,788.03 crore in government transactions on account of 2020-21. The decrease was due to net impact COVID-19 pandemic related situation. of decrease in Reserve Bank’s expenditure b. Underwriting Commission paid to towards accrued liabilities of various Primary Dealers superannuation funds in 2020-21 and also the current accounting period being of nine The Reserve Bank paid total underwriting months. commission of `60.90 crore to Primary Table XII.10: Expenditure (` crore) Item 2016-17 2017-18 2018-19 2019-20 2020-21 1 2 3 4 5 6 i. Interest Payment 0.92 0.97 1.16 1.34 1.10 ii. Employee Cost 4,620.82 3,848.51 6,851.07 8,928.06 4,788.03 iii. Agency Charges/ Commission 4,051.77 3,903.06 3,910.21 3,876.08 3,280.06 iv. Printing of Notes 7,965.23 4,912.52 4,810.67 4,377.84 4,012.09 v. Provisions 13,189.62 14,189.27 63.60 73,615.00 20,710.12 vi. Others 1,326.57 1,422.33 1,407.44 1,742.61 1,355.35 Total (i+ii+iii+iv+v+vi) 31,154.93 28,276.66 17,044.15 92,540.93 34,146.75 273ANNUAL REPORT 2020-21 Dealers during 2019-20 as compared c. Sundries to `642.95 crore during 2020-21. The This includes the expenses incurred on underwriting commission increased handling charges, turnover commission signifi cantly during the year, specially paid to banks for Relief/ Savings during September 2020–October 2020 Bonds subscriptions and Commission and then steeply during February 2021– paid on Securities Borrowing and March 2021, mainly on account of market Lending Arrangement (SBLA), etc. conditions and increased quantum of The commission paid under this head government borrowing, refl ected in increased from `6.26 crore in 2019-20 to higher risk of devolvement at 9.53 per `6.30 crore in 2020-21. cent of the gross borrowings (0.51 per cent in 2019-20). The central government d. Fees paid to the External Asset gross borrowing fi gure of `12,00,000 Managers, Custodians, Brokers, etc. crore for the year 2020-21, announced Fees paid for custodial and broker on May 08, 2020, was further enhanced services decreased from `21.37 crore in by `1,10,000 crore on October 15, 2020 2019-20 to `19.76 crore in 2020-21. to meet the GST Compensation Cess shortfall, and then again by `80,000 crore iv) Printing of Notes on February 01, 2021. The increased The supply of notes during the year 2020-21 usage of devolvement resulted in sharp at 2,23,301 lakh pieces was 0.26 per cent spikes in underwriting commissions lower than that of the year 2019-20 (2,23,875 during September 2020-October 2020 lakh pieces). The expenditure incurred on and during February 2021- March 2021. printing of banknotes decreased by 8.35 The long-standing issue of payment of per cent from `4,377.84 crore in the year Service Tax (ST)/ Goods and Services 2019-20 to `4,012.09 crore during the year Tax (GST) on underwriting commission 2020-21. to PDs was resolved during the v) Provisions year. Accordingly, the current year’s expenditure also includes the legacy In 2020-21, a provision of `20,710.12 crore ST/ GST of `159.92 crore, reimbursed was made towards transfer to CF. to PDs towards the underwriting vi) Others commission paid to them for the period July 2012 to November 2020, while all Other expenses consisting of expenditure underwriting commission paid to PDs on remittance of currency, printing and with effect from December 2020 included stationery, audit fees and related expenses, GST component (the GST amount miscellaneous expenses, etc., decreased from December 2020-March 2021 was by 22.22 per cent from `1,742.61 crore in `56.72 crore). 2019-20 to `1,355.35 crore in 2020-21. 274THE RESERVE BANK’S ACCOUNTS FOR 2020-21 XII.11 CONTINGENT LIABILITIES XII.13 PREVIOUS YEAR’S FIGURES XII.11.1 Total contingent liabilities of the XII.13.1 Figures for the previous year have been Reserve Bank amounted to `953.63 crore. The rearranged, wherever necessary, and converted main component of it being partly paid shares, in Rupees crores (from Rupees billion) to make denominated in SDR, of Bank for International them comparable with the current year. Settlements (BIS) held by the Reserve Bank. The XII.14 AUDITORS uncalled liability on partly paid shares of the BIS XII.14.1 The statutory auditors of the Reserve as on March 31, 2021 was `924.43 crore. The Bank are appointed by the central government balances are callable at three months’ notice by a in terms of Section 50 of the RBI Act, 1934. The decision of the BIS Board of Directors. accounts of the Reserve Bank for the year 2020-21 XII.12 PRIOR PERIOD TRANSACTONS were audited by M/s Prakash Chandra Jain & Co., XII.12.1 For the purpose of disclosure, prior period Mumbai and M/s G. M. Kapadia & Co., Mumbai, as transactions of `1 lakh and above only have been the Statutory Central Auditors and M/s Ray & Ray, considered. The prior period transactions under Kolkata, M/s Subramanian & Co. LLP, Chennai expenditure and income amounted to `145.98 and M/s S. K. Mittal & Co., New Delhi as Statutory crore and `0.31 crore, respectively. Branch Auditors. 275ANCNUHALR REOPONRTO 20L20O-21GY OF ANNEX I MAJOR POLICY ANNOUNCEMENTS: MARCH 2020 TO MARCH 20211 Date of Policy Initiative Announcement Monetary Policy Department March 27, 2020 (cid:129) The policy repo rate was reduced by 75 basis points (bps) to 4.4 per cent. The reverse repo rate was reduced by 90 bps to 4.0 per cent creating an asymmetrical corridor2. (cid:129) 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. (cid:129) 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. (cid:129) 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 (cid:129) The reverse repo rate was reduced by 25 bps to 3.75 per cent. (cid:129) Special refi nance 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 (cid:129) The policy repo rate was reduced by 40 bps to 4.0 per cent. (cid:129) The reverse repo rate was reduced by 40 bps to 3.35 per cent. (cid:129) 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. August 6, 2020 (cid:129) The policy repo rate kept unchanged at 4.0 per cent. (cid:129) The Monetary Policy Committee (MPC) decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that infl ation remains within the target going forward. September 28, 2020 On March 27, 2020, banks were allowed to avail funds under the marginal standing facility (MSF) by dipping into the statutory liquidity ratio (SLR) by up to an additional one per cent of net demand and time liabilities (NDTL), i.e., cumulatively up to 3 per cent of NDTL. This facility, initially available up to June 30, 2020, was extended on June 26, 2020, up to September 30, 2020. This relaxation was further extended on September 28, 2020, for a period of six months, i.e., up to March 31, 2021, to provide comfort to banks on their liquidity requirements and to enable them to meet liquidity coverage ratio (LCR) 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 refi nancing regional rural banks (RRBs), cooperative banks and micro fi nance institutions (MFIs); `15,000 crore to SIDBI for on-lending/refi nancing; and `10,000 crore to NHB for supporting housing fi nance companies (HFCs). Advances under this facility were provided at the Reserve Bank’s policy repo rate. 276CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS Date of Policy Initiative Announcement October 9, 2020 The MPC decided to continue with the accommodative stance as long as necessary - at least during the current fi nancial year and into the next fi nancial year - to revive growth on a durable basis and mitigate the impact of COVID-19 on the economy, while ensuring that infl ation remains within the target going forward. February 5, 2021 The cash reserve ratio (CRR) of all banks was reduced by 100 basis points to 3 per cent of their NDTL, effective the reporting fortnight beginning March 28, 2020 for a period of one year ending March 26, 2021. It was decided to gradually restore the CRR in two phases in a non-disruptive manner on February 5, 2021. Accordingly, banks were required to maintain the CRR at 3.50 per cent of their NDTL, effective the reporting fortnight beginning March 27, 2021 and 4 per cent of their NDTL, effective the fortnight beginning May 22, 2021. The enhanced access of funds under the MSF by dipping into SLR up to 3 per cent of NDTL was extended for a further period of six months, i.e., up to September 30, 2021, with a view to providing comfort to banks on their liquidity 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 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. July 2, 2020 New criteria for classifying an enterprise under Micro, Small and Medium Enterprises (MSME) sector was announced to facilitate credit fl ow to such enterprises. August 21, 2020 Clarifi cation was issued regarding new defi nition of MSMEs. September 4, 2020 Master Directions were issued for Priority Sector Lending (PSL) targets and their classifi cation. September 18, 2020 Modifi cations in guidelines announced regarding DAY-NRLM (Deendayal Antyoday Yojana - National Rural Livelihoods Mission). November 5, 2020 Guidelines were issued on co-lending by banks and Non-Banking Financial Companies (NBFCs) to priority sector. December 4, 2020 Measures were announced to expand the reach of the Centre for Financial Literacy (CFL) project from 100 blocks currently to every block in the country in a phased manner by March 2024. Financial Markets Regulation Department March 27, 2020 (cid:129) AD Category-I banks in India which operate international fi nancial 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. (cid:129) The timeline for implementation of legal entity identifi er (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 specifi ed 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. 277ANNUAL REPORT 2020-21 Date of Policy Initiative Announcement 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 fi nancial year 2020-21 were announced. May 18, 2020 (cid:129) 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. (cid:129) 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 diffi culties 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. December 4, 2020 With a view to widen the participant base in the money markets, Regional Rural Banks (RRBs) have been permitted to access call/notice and term money markets. February 15, 2021 Directions were issued to give effect to the provisions in the regulations [Foreign Exchange Management (Margin for Derivative Contracts) Regulations, 2020] which enabled exchange of margin for Over the Counter (OTC) derivative contracts between a person resident in India and a person resident outside India. February 26, 2021 With a view to further promoting investments in corporate bonds by foreign portfolio investors (FPIs), it was notifi ed that FPI investments in non-convertible debentures (NCDs)/bonds which are under default, either fully or partly, in the repayment of principal on maturity or principal instalment in the case of amortising bond were exempted from minimum residual maturity requirement, short-term investments limit and investor limit under the medium-term framework. March 31, 2021 Investment limit for FPIs in corporate bonds under the medium-term framework for 2021-22 was notifi ed. Also, investment limits for FPIs in Government Securities (G-secs) and State Development Loans (SDLs) that were applicable for 2020-21 would be retained for 2021-22 until further advice. Financial Markets Operations Department 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 fi rst such auction was conducted on March 16, 20206. March 27, 2020 The Reserve Bank announced conducting targeted long-term repo operations (TLTROs) at a fl oating 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 fi rst such TLTRO auction was conducted on March 27, 2020. 6 This measure was announced as fi nancial markets worldwide were facing intense selling pressures on extreme risk aversion due to the spread of COVID-19 infections. 278CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS Date of Policy Initiative Announcement March 30, 2020 Taking into account the impact of disruptions caused by COVID-19, it was decided to extend the window timings of fi xed rate reverse repo and MSF operations as an interim measure so as to provide eligible market participants with greater fl exibility 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 classifi ed 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 fi rst 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 classifi ed 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 fi rst such SLF- MF auction was conducted on April 27, 2020. April 30, 2020 It was decided to extend regulatory benefi ts 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. July 1, 2020 (cid:129) To improve liquidity position of NBFCs (including Micro-Finance Institutions - MFIs)/Housing Finance Companies (HFCs), the Government of India approved scheme of `30,000 crore was notifi ed. (cid:129) NBFCs (including MFIs)/HFCs, meeting certain fi nancial parameters, were given access to liquidity to avoid any potential systemic risks to the fi nancial sector. (cid:129) The Reserve Bank injected liquidity through back-to-back funding by subscribing to government guaranteed special securities issued by a special purpose vehicle (SPV) - a trust set up by SBI Capital Markets Ltd. (SBICAP), in the form of a special liquidity scheme (SLS). August 6, 2020 In order to optimise human resource deployment in the context of disruptions caused by COVID-19 and to provide eligible Liquidity Adjustment Facility (LAF)/Marginal Standing Facility (MSF) participants greater fl exibility in managing their end of the day cash reserve ratio (CRR) balances, the Reserve Bank introduced the Automated Sweep-in and Sweep-out (ASISO) facility in its e-Kuber system. August 31, 2020 (cid:129) Banks were given an option of repaying the funds availed under the Long-Term Repo Operations (LTROs) scheme before maturity. Subsequently, banks reversed LTRO funds amounting to `1,23,572 crore out of total of `1,25,117 crore. (cid:129) Two 56-day term repo auctions for a total amount of `1,00,000 crore at fl oating rates (repo rate) were announced to be conducted on September 11 and September 14, 2020 to assuage liquidity pressures on account of advance tax outfl ows. October 9, 2020 (cid:129) With a view to increase the focus of liquidity measures on revival of activity in specifi c sectors, the Reserve Bank announced on tap Targeted LTRO (TLTRO) scheme. Accordingly, it was decided to conduct on tap TLTRO of up to three years tenor for a total amount of up to `1,00,000 crore at a fl oating rate (repo rate) with end-use guidance. Investments under on tap TLTRO qualifi ed for held-to- maturity (HTM) portfolio and were exempted from large exposure framework. The scheme has been extended up to September 30, 2021. 279ANNUAL REPORT 2020-21 Date of Policy Initiative Announcement (cid:129) As announced in the Statement on Developmental and Regulatory Policies, banks were given an option of repaying the funds availed under TLTRO and TLTRO 2.0 before maturity. The scheme was notifi ed on October 21, 2020. Subsequently, TLTRO and TLTRO 2.0 funds amounting to `37,348 crore were repaid by banks. (cid:129) The Reserve Bank decided to enhance the size of OMOs to `20,000 crore in order to assure the market of maintaining comfortable liquidity conditions in line with monetary policy stance. (cid:129) In order to impart liquidity to SDLs and facilitate effi cient pricing, it was decided to conduct OMOs in SDLs as a special case during 2020-21. Accordingly, three OMOs in SDLs amounting to `30,000 crore were conducted since October 2020. December 4, 2020 The on tap TLTRO scheme announced on October 9, 2020 was expanded to cover 26 stressed sectors (as identifi ed by the Kamath Committee and in sync with the credit guarantee available under the Emergency Credit Line Guarantee Scheme (ECLGS 2.0) of the Government), in addition to the fi ve sectors identifi ed on October 21, 2020. January 8, 2021 It was decided to restore normal liquidity management operations in a phased manner. Accordingly, the Reserve Bank began conducting the 14-day variable rate reverse repo auction from January 15, 2021 onwards. February 5, 2021 As announced in the Statement on Developmental and Regulatory Policies on February 5, 2021, banks were permitted to provide funds to NBFCs under the on tap TLTRO scheme. March 25, 2021 (cid:129) The Reserve Bank announced two fi ne tuning variable rate repo auctions of `25,000 crore each on March 26, 2021 and March 31, 2021 in order to meet any additional/unforeseen demand for liquidity and to provide fl exibility to the banking system in year-end liquidity management. As a special case, standalone primary dealers were allowed to participate in these auctions, along with other eligible participants. (cid:129) Furthermore, as a one-time measure, it was decided not to conduct 14-day variable rate reverse repo auction on March 26, 2021 in order to ensure the availability of ample liquidity to manage year-end requirements. Foreign Exchange Department 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 fi fteen 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). 280CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS Date of Policy Initiative Announcement 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. August 11, 2020 The Foreign Exchange Management (Export and Import of Currency) Regulations, 2015 were amended, and changes were notifi ed. October 9, 2020 In order to make the system more exporter friendly and equitable, it was decided to discontinue with automatic caution-listing of exporters. However, caution-listing based on case-specifi c recommendations of the authorised dealer (AD) bank, will continue to be done by the Reserve Bank. November 13, 2020 With a view to improve the ease of doing business and reduce the cost of compliance, the existing forms and reports prescribed under Foreign Exchange Management Act (FEMA), 1999 were reviewed by the Reserve Bank, and consequently, 17 reports were discontinued. November 17, 2020 The guidelines on compounding of contraventions under FEMA, 1999 were reviewed and revised. November 23, 2020 AD category - I banks were directed not to grant approvals to any branch offi ce, project offi ce, liaison offi ce or other place of business in India under FEMA for the purpose of practicing legal profession in India. December 4, 2020 With a view to further enhance the ease of doing business and quicken the approval process, more powers have been delegated to the AD category - I banks (AD banks) with respect to export of goods and services. February 16, 2021 In order to deepen the fi nancial markets in International Financial Services Centres (IFSCs) and provide an opportunity to resident individuals to diversify their portfolio, on a review, resident individuals were permitted to make remittances under liberalised remittance scheme (LRS) to IFSCs established in India. Department of Regulation: Commercial Banks March 17, 2020 (cid:129) On account of inclusion of affordable housing under the harmonised master list (HML) for infrastructure sub-sectors by GoI, the defi nition 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 defi nition would include housing loans, eligible to be classifi ed 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 defi nition in the HML. (cid:129) Banks were permitted to treat investment fl uctuation reserve (IFR), being at least 2 per cent built up out of profi t 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 clarifi cation 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 benefi ts 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. 281ANNUAL REPORT 2020-21 Date of Policy Initiative Announcement March 27, 2020 (cid:129) 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-specifi ed 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. (cid:129) The implementation of net stable funding ratio (NSFR), was deferred by six months from April 1, 2020 to October 1, 2020. (cid:129) 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 fi nancing and exemption from classifi cation of special mention account (SMA) and non-performing assets (NPA) on account of implementation of the above reliefs. (cid:129) 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 specifi cally 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 modifi ed 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 fi nancial service activities, which do not require any commitment of own fund, after three years of commencement of business of SFBs. Some clarifi cations were also provided on promoters and paid up equity capital. 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 (cid:129) Based on the review of certain instructions regarding appointment of managing director and chief executive offi cer (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 offi ce 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. 282CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS Date of Policy Initiative Announcement (cid:129) 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 (cid:129) 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. (cid:129) 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 notifi cation dated March 31, 2020. The amendment pertains to small accounts, opened for customers unable to furnish offi cially 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 benefi t transfer (DBT) amounts to the benefi ciaries’ accounts and allow the benefi ciaries 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 (cid:129) 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 classifi cation 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 suffi cient 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. (cid:129) 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. (cid:129) 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 profi ts pertaining to the fi nancial year ended March 31, 2020 until further instructions. This restriction shall be reviewed on the basis of the fi nancial position of banks for the quarter ending September 30, 2020. (cid:129) 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. 283ANNUAL REPORT 2020-21 Date of Policy Initiative Announcement April 20, 2020 Master Direction on KYC was updated regarding internal risk assessment by regulated entities (REs) relating to money laundering/terrorist fi nancing to further align the Reserve Bank’s instructions to the provisions of fi nancial 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 identifi ed 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 specifi c 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 diffi culties 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 specifi cally 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 (cid:129) With a view to facilitate greater fl ow of resources to corporates that faced diffi culties 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. (cid:129) 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 fi nancial stress to the real economy, and ensuring the continuity of viable businesses and households on continuous economic disruption due to extension of lockdown. (cid:129) 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. 284CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS Date of Policy Initiative Announcement (cid:129) To alleviate genuine diffi culties 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 fi nancial 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. July 1, 2020 Banks were permitted to reckon the funds infused by the promoters in their MSME units through loans availed under the credit guarantee scheme for subordinate debt for stressed MSMEs scheme (where credit facilities are backed by a guarantee from credit guarantee fund trust for micro and small enterprises), as equity/quasi equity from the promoters for debt-equity computation. August 6, 2020 (cid:129) A window for resolution of COVID-19 related stress, applicable to all commercial banks (including small fi nance banks, local area banks and regional rural banks), all primary (urban) co-operative banks/state co-operative banks/district central co-operative banks, NBFCs (including housing fi nance companies) and All India Financial Institutions (AIFIs) was issued to facilitate revival of real sector activities which were under fi nancial stress, due to economic fallout on account of the COVID-19 pandemic, subject to certain conditions. The resolution framework was to be invoked till December 31, 2020 and had to be implemented within 90 days of invocation in respect of personal loans and 180 days of invocation for other eligible loan exposures. Also, a one-time restructuring of loans to MSMEs without an asset classifi cation downgrade, was extended to viable MSME entities, where the borrower’s account was a ‘standard asset’ as on March 1, 2020 and the aggregate exposure of banks and NBFCs was not more than `25 crore. The restructuring had to be implemented by March 31, 2021, subject to certain conditions. (cid:129) Detailed instructions were issued to banks for computation of capital charge for market risk for their investments in debt mutual fund/exchange traded fund, resulting in substantial capital savings for banks, under Basel III capital regulations. (cid:129) Loan-to-value ratio (LTV) was temporarily increased from 75 per cent to 90 per cent till March 31, 2021 for loans against gold ornaments and jewellery for non-agricultural end-uses. Fresh gold loans sanctioned on and after April 1, 2021 shall attract LTV ratio of 75 per cent as hitherto. (cid:129) With an aim to improve credit discipline, guidelines were issued that stipulated conditions on the opening and operation of current accounts, cash credit (CC) accounts and overdraft (OD) accounts by banks. In respect of existing current and CC/OD accounts, banks were to ensure compliance with the instructions by November 5, 2020. The timeline for ensuring such compliance was extended till December 15, 2020 vide circular dated November 2, 2020. On a review, banks were permitted to open specifi c accounts which are stipulated under various statutes and instructions of other regulators/regulatory departments, without any restrictions vide circular dated December 14, 2020. The circular also provided an indicative list of such permitted accounts and a set of frequently asked questions (FAQs) clarifying certain issues to ensure smooth and uniform implementation of these guidelines. 285ANNUAL REPORT 2020-21 Date of Policy Initiative Announcement September 1, 2020 It was decided to allow banks to hold under HTM category, SLR securities acquired on or after September 1, 2020 up to an overall limit of 22 per cent of NDTL, up to March 31, 2021, which shall be reviewed thereafter. September 3, 2020 (cid:129) Exclusion of “Westpac Banking Corporation” from the Second Schedule to the Reserve Bank of India Act, 1934. (cid:129) Cessation of “Westpac Banking Corporation” as a banking company within the meaning of sub- section (2) of Section 36A of Banking Regulation Act, 1949. (cid:129) Cessation of “Aditya Birla Idea Payments Bank Limited” as a banking company within the meaning of sub-section (2) of Section 36A of Banking Regulation Act, 1949. September 7, 2020 The fi ve key ratios/parameters recommended by the Expert Committee constituted by the Reserve Bank (Chairperson: Shri K. V. Kamath) to be factored in by the lending institutions while fi nalising a resolution plan in respect of eligible borrowers under COVID-19 related stress, and the respective thresholds for 26 sectors were notifi ed. In respect of other sectors, lending institutions were permitted to make their own internal assessment, subject to certain conditions. September 29, 2020 (cid:129) Considering the potential stress on account of COVID-19, banks were advised to defer the implementation of certain prudential norms. (cid:129) Implementation of phase-in of the last tranche of capital conservation buffer (CCB) of 0.625 per cent was deferred from September 30, 2020 to April 1, 2021, which, subsequently (on February 5, 2021), was further deferred by six months to October 1, 2021. (cid:129) Implementation of net stable funding ratio (NSFR) of Basel III framework on liquidity standards deferred from October 1, 2020 to April 1, 2021, which, subsequently was further deferred by six months to October 1, 2021. September 30, 2020 Exclusion of “Allahabad Bank”, “Andhra Bank”, “Corporation Bank”, “Oriental Bank of Commerce”, “United Bank of India” and “Syndicate Bank” from the Second Schedule to the Reserve Bank of India Act, 1934, and cessation as banking companies, w.e.f. April 1, 2020. October 12, 2020 (cid:129) The dispensation of overall limit of SLR holding in HTM of 22 per cent (as against the earlier 19.5 per cent) in respect of SLR securities acquired between September 1, 2020 and March 31, 2021 was extended up to March 31, 2022 from March 31, 2021. It was also decided to restore the enhanced HTM limit to 19.5 per cent in a phased manner, beginning from the quarter ending June 30, 2022. (cid:129) As per the extant Reserve Bank’s instructions, the exposures included in the regulatory retail portfolio of banks are assigned a risk weight of 75 per cent, with a prescribed maximum aggregated retail exposure of `5 crore to one counterparty. The threshold of `5 crore was increased to `7.5 crore in respect of all fresh as well as existing exposures where incremental exposure may be taken by the banks up to the revised limit of `7.5 crore. The instruction is applicable to all SCBs, including small fi nance banks (SFBs) and excluding local area banks (LABs) and RRBs. October 16, 2020 As a countercyclical measure, it was decided to rationalise the risk weights for all new individual housing loans, irrespective of the amount, to be sanctioned on or after October 16, 2020 and up to March 31, 2022. Risk weight will be 35 per cent for LTV ratio less than or equal to 80 per cent and 50 per cent for LTV ratio above 80 per cent but less than or equal to 90 per cent. October 20, 2020 Ten amalgamated RRBs were included, and 21 erstwhile RRBs were excluded from the Second Schedule to the Reserve Bank of India Act, 1934, respectively. 286CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS Date of Policy Initiative Announcement October 27, 2020 All lending institutions were advised to be guided by the provisions of the scheme announced by Government of India for grant of ex-gratia payment of difference between compound interest and simple interest for six months (March 1, 2020 to August 31, 2020) to borrowers in specifi ed loan accounts. December 4, 2020 (cid:129) In order to provide an additional avenue for liquidity management to RRBs, LAF and MSF were extended to scheduled RRBs, subject to fulfi lling certain criteria. (cid:129) It was further decided that banks shall not make any dividend payment on equity shares from the profi ts pertaining to 2019-20. December 18, 2020 Regulated Entities (REs) have been uploading the know your customer (KYC) data pertaining to all individual accounts opened on or after January 1, 2017 on the Centralised KYC Registry (CKYCR) in terms of the provisions of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005. As the CKYCR is now fully operational for individual customers, it was decided to extend the CKYCR to Legal Entities (LEs). Accordingly, REs shall upload the KYC data pertaining to accounts of LEs opened on or after April 1, 2021, on the CKYCR. January 19, 2021 List of domestic systemically important banks (D-SIBs) was released. SBI, ICICI Bank, and HDFC Bank were identifi ed as D-SIBs and they continue as D-SIB under the same bucketing structure as in the 2018 list of D-SIBs. January 27, 2021 Pursuant to the rating business of CRISIL Ltd. being transferred to CRISIL Ratings Ltd., a wholly owned subsidiary of CRISIL Ltd., banks were advised that they may use the ratings of the CRISIL Ratings Ltd. for the purpose of risk weighting of their claims for capital adequacy purposes. The rating-risk weight mapping for the long-term and short-term ratings assigned by CRISIL Ratings Ltd. will be the same as was in the case of CRISIL Ltd. and there is no change in the rating symbols, earlier assigned by CRISIL Ltd. February 5, 2021 (cid:129) It was decided to gradually restore the CRR in two phases in a non-disruptive manner. Accordingly, banks were required to maintain the CRR at 3.50 per cent of their NDTL effective from the reporting fortnight beginning March 27, 2021 and 4.00 per cent of their NDTL effective from fortnight beginning May 22, 2021. (cid:129) The facility of MSF relaxation which was initially available up to June 30, 2020 was extended in phases up to March 31, 2021, was extended for a further period of six months, i.e., up to September 30, 2021. This facility, would provide comfort to banks on their liquidity requirements and also enable them meet their Liquidity Coverage Ratio (LCR) requirements. This facility allowed banks to avail of funds under the MSF by dipping into their SLR up to an additional one per cent of NDTL, i.e., cumulatively up to 3 per cent of NDTL. (cid:129) SCBs were allowed to deduct the amount equivalent to credit disbursed to ‘New MSME borrowers’ from their NDTL for calculation of the CRR. ‘New MSME borrowers’ were defi ned as those MSME borrowers who have not availed any credit facilities from the banking system as on January 1, 2021. This exemption will be available only up to `25 lakh per borrower disbursed up to the fortnight ending October 1, 2021, for a period of one year from the date of origination of the loan or the tenure of the loan, whichever is earlier. 287ANNUAL REPORT 2020-21 Date of Policy Initiative Announcement (cid:129) It was decided to extend the dispensation of enhanced HTM ceiling of 22 per cent of NDTL in respect of SLR eligible securities until March 31, 2023 and to include securities acquired between April 1, 2021 and March 31, 2022. It was also decided that the enhanced HTM limit shall be restored to 19.5 per cent in a phased manner, beginning from the quarter ending June 30, 2023. Earlier, the Reserve Bank had increased the limits under HTM category from 19.5 per cent to 22 per cent of NDTL in respect of SLR eligible securities acquired between September 1, 2020 and March 31, 2021, available until March 31, 2022. February 17, 2021 Banks are required to make additional provisions and maintain additional capital for borrowers who have unhedged foreign currency exposure (UFCE) depending upon the likely impact of the UFCE on the earnings before interest and depreciation (EBID) of such borrowers. The guidelines mandate that information on UFCE may be obtained by banks from entities on a quarterly basis, on self- certifi cation basis, and preferably should be internally audited by the entity concerned. In respect of listed entities, due to restrictions in disclosure pending fi nalisation of accounts, banks were allowed to use the UFCE position of the immediate preceding quarter. February 23, 2021 Inclusion of “Fino Payments Bank Limited" in the Second Schedule of the Reserve Bank of India Act, 1934. February 24, 2021 In terms of large exposure framework (LEF) guidelines dated June 3, 2019, exposures to the Government of India and state governments are exempt from LEF limits. Exposures to foreign sovereigns/central banks were subject to single counterparty limit of 20 per cent of the bank’s available eligible capital base at all times. On a review, to bring it in line with Basel guidelines which permits exemption of all sovereign exposures from LEF, it was decided to exempt exposures to foreign sovereigns or their central banks from applicability of LEF that are subject to a zero per cent risk weight (foreign sovereigns/central banks with a rating of AA- or higher) and, denominated in the domestic currency of that sovereign and met out of resources of the same currency. March 12, 2021 Certain changes were effected in the data format for furnishing of credit information by lenders to credit information companies (CICs) to capture the credit information on restructuring due to COVID-19. The same is in line with the Reserve Bank’s guidelines dated August 6, 2020, that provided lenders a window under the prudential framework to implement a resolution plan in respect of eligible borrowers impacted on account of the COVID-19 pandemic and also provided for credit reporting by the lending institutions to CICs in respect of such borrowers to refl ect the “restructured” status of the account. March 23, 2021 On a review of instructions issued on March 23, 2020 relating to LEF, it was decided that non-centrally cleared derivatives exposures will continue to be outside the purview of exposure limits till September 30, 2021. March 30, 2021 In exercise of the powers conferred by section 4(a) of the Bilateral Netting of Qualifi ed Financial Contracts Act, 2020, the Reserve Bank notifi ed (a) “derivatives”; and (b) “repo” and “reverse repo” transactions as a qualifi ed fi nancial contract. Accordingly, select instructions contained in circulars issued on Basel III capital regulations, Basel III framework on liquidity standards - NSFR - fi nal guidelines, prudential norms on income recognition, asset classifi cation and provisioning (IRACP) pertaining to advances and prudential guidelines on capital adequacy and market discipline - new capital adequacy framework (NCAF) were modifi ed/amended appropriately. 288CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS Date of Policy Initiative Announcement Department of Regulation: Cooperative Banks 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 fulfi lment of conditions stipulated by the Reserve Bank and additional conditions, if any, imposed by NABARD. August 12, 2020 To improve the effi ciency, transparency and integrity of the asset classifi cation process, UCBs depending on their asset size, were advised to implement the system-based asset classifi cation with effect from June 30 or September 30, 2021, as the case may be. August 26, 2020 In view of the diffi culties faced by UCBs in submission of the returns under Section 31, read with Section 56, of the Banking Regulation Act, 1949 due to the ongoing COVID-19 pandemic, the timeline for the furnishing of the returns for the fi nancial year ended on March 31, 2020 was extended by three months, i.e., till September 30, 2020. October 7, 2020 All co-operative banks were included as eligible lending institutions under the Interest Subvention Scheme for MSMEs (2018) with effect from March 3, 2020. October 13, 2020 Further extension till December 31, 2020 was given to all co-operative banks for submission of the returns under Section 31, read with Section 56, of the Banking Regulation Act, 1949. February 5, 2021 Urban cooperative banks (UCBs) were advised to refrain from extending loans and advances or any other fi nancial accommodation to or on behalf of their directors or their relatives, or to the fi rms/ companies/concerns in which the directors or their relatives are interested. Loans to staff directors; loans to directors on the boards of salary earners' UCBs as extended usually to members; normal employee-related loans to Managing Directors/Chief Executive Offi cers of UCBs and loans against government securities, fi xed deposits and life insurance policies standing in their own name have been excluded. Important terms such as ‘advances’, ‘interested’, ‘substantial interest’, ‘control’ and ‘major shareholding’ have been clearly defi ned in the revised instructions. March 23, 2021 The Reserve Bank, in exercise of powers conferred by Section 35A and Section 44A read with Section 56 of the Banking Regulation Act, 1949, as amended vide Banking Regulation (Amendment) Act, 2020 (39 of 2020), issued the Master Direction on voluntary amalgamation of UCBs. Department of Regulation: NBFCs March 13, 2020 Guidelines related to specifi c 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 classifi cation 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 fi nance companies (HFCs). June 17, 2020 A draft framework reviewing the extant regulations applicable to HFCs was released for public comments. 289ANNUAL REPORT 2020-21 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. July 1, 2020 Guidelines related to special liquidity scheme for NBFCs/HFCs were issued. July 6, 2020 It was decided that every NBFC shall fi nalise its balance sheet within a period of three months from the date to which it pertains or any date as notifi ed by Securities and Exchange Board of India (SEBI) for submission of fi nancial results by listed entities. July 10, 2020 Guidelines related to exemption from registration as NBFC for alternative investment fund (AIF) were issued. July 16, 2020 Fair practices code for asset reconstruction companies (ARCs) was issued which provided a set of principles for ARCs to encourage them to follow fair practices while dealing with stakeholders. July 24, 2020 It was decided that the unrealised gains/losses on a derivative transaction undertaken by Indian Accounting Standards (Ind AS) implementing NBFCs/ARCs for hedging may be offset against the unrealised losses/gains recognised in the capital (either through profi t or loss or through other comprehensive income) on the corresponding underlying hedged instrument. If after such offset and netting with unrealised gains/losses on other fi nancial instruments, there are still net unrealised gains, the same should be excluded from the regulatory capital. August 13, 2020 To address complexity as also multiple leveraging in the group and to strengthen risk management, corporate governance practices and transparency through disclosures, the revised guidelines for core investment companies (CICs) were issued. October 22, 2020 Revised regulatory framework for HFCs was issued wherein ‘principal business’ and ‘housing fi nance’ were defi ned; net owned fund (NOF) was increased to `20 crore; restrictions were prescribed for exposures of HFCs to group companies engaged in real estate business; regulations on liquidity risk management and LCR, securitisation, outsourcing, lending against gold and shares, foreclosure charges, etc., as applicable to NBFCs, were extended to HFCs. February 12, 2021 It was decided that while investors in existing NBFCs holding their investments prior to the classifi cation of the source or intermediate jurisdiction/s as Financial Action Task Force (FATF) non-compliant, may continue with the investments or bring in additional investments as per extant regulations so as to support continuity of business in India, new investors from or through non-compliant FATF jurisdictions, whether in existing NBFCs or in companies seeking certifi cation of registration (COR), will not be allowed to directly or indirectly acquire ‘signifi cant infl uence’ in the investee, as defi ned in the applicable accounting standards. Fresh investment (directly or indirectly) from such jurisdictions in aggregate should be less than the threshold of 20 per cent of the voting power (including potential voting power) of the NBFC. February 17, 2021 Master Directions for HFCs were issued which compile revised regulatory framework issued by the Reserve Bank for HFCs and instructions issued by National Housing Bank (NHB) to HFCs. 290CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS Date of Policy Initiative Announcement Department of Supervision March 16, 2020 In the context of COVID-19 outbreak, banks/fi nancial institutions were advised regarding an indicative list of measures to be taken by them as part of their operational and business continuity plans. August 21, 2020 Banks were advised to avoid frequent and repeated ad-hoc/short review/renewal of credit facilities without justifi able reasons. Banks were also advised to capture all the data relating to regular as well as ad-hoc/short review/renewal of credit facilities in their core banking systems/management information systems and make the same available for scrutiny as and when required by any audit or inspection by Auditors/Reserve Bank. September 5, 2020 Keeping in view the large-scale changes in the size, complexities, business model and risks in the banking operations, a review of the Long Form Audit Report (LFAR) formats, in consultation with the stakeholders, including the Institute of Chartered Accountants of India (ICAI), was undertaken and the format of LFAR was revised. The revised guidelines, inter alia, require the statutory auditors to accord special emphasis on continuous monitoring of classifi cation of accounts into standard, Special Mention Account (SMA), sub-standard, doubtful or loss as per Income Recognition and Asset Classifi cation (IRAC) norms by the system, preferably without manual intervention, correct recognition of income, and adequacy of provision thereof. September 11, 2020 To bring uniformity in approach besides aligning the expectations on chief compliance offi cer (CCO) with best practices, the guidelines on compliance function in banks were amended. The circular is expected to enhance the independence, authority, transparency and responsibility in the workings of CCOs with special focus on requirement of board approved compliance policy, ensuring independence of CCO by prescribing minimum tenure, guidelines for transfer, removal, eligibility criteria, along with selection process, among others. September 14, 2020 Banks were advised to automate their income recognition, asset classifi cation and provisioning processes. In order to ensure the completeness and integrity of the automated asset classifi cation (classifi cation of advances/investments as NPA/NPI and their upgradation), provisioning calculation and income recognition processes, banks have been advised to put in place/upgrade their systems to conform to the prescribed guidelines latest by June 30, 2021. September 24, 2020 Document on ‘Technology Vision for Cyber Security’ for Urban Co-operative Banks-2020-2023 published which envisages to enhance the cyber security posture of the urban co-operative banking sector against evolving IT and cyber threat environment through a fi ve-pillared strategic approach ‘GUARD’ - Governance Oversight, Utile Technology Investment, Appropriate Regulation and Supervision, Robust Collaboration, and Developing Necessary IT & Cyber Security Skillset. January 7, 2021 (cid:129) The introduction of risk-based internal audit (RBIA) system was mandated for all scheduled commercial banks (except regional rural banks) vide circular dated December 27, 2002. In order to bring uniformity in approach followed by the banks, as also to align the expectations on internal audit function with the best practices, the aforesaid circular was further supplemented vide circular dated January 7, 2021 on the subject. (cid:129) Revised guidelines were issued on norms for eligibility, empanelment and appointment of statutory branch auditors in public sector banks (PSBs) from 2020-21 and onwards. As per the revised guidelines, banks were required to ensure a minimum coverage of 90 per cent of fund based and 90 per cent of non-fund-based credit related exposures under statutory audit. Earlier, PSBs were required to cover all branches above `20 crore and one fi fth of the remaining branches under branch audit to cover 90 per cent of outstanding advances. The concept of compulsory rest for two years for audit fi rms located in specifi ed centres, after completion of four years of continuous audit, was also done away with. 291ANNUAL REPORT 2020-21 Date of Policy Initiative Announcement February 3, 2021 The Reserve Bank had mandated RBIA for commercial banks in 2002. Considering the importance of internal audit function as a third line of defence and in a move to harmonise the guidelines across all supervised entities (SEs), large UCBs and NBFCs were brought within the RBIA framework during the year. The entities have to implement the RBIA framework by March 31, 2022, and have been asked to constitute a committee of senior executives, to be entrusted with the responsibility of formulating a suitable action plan. February 18, 2021 Master Direction on Digital Payment Security Controls was issued providing necessary guidelines for the regulated entities (scheduled commercial banks, small fi nance banks, payment banks and credit card issuing NBFCs) to set up a robust governance structure and implement common minimum standards of security controls for channels like internet, mobile banking, card payments, among others. While the guidelines will be technology and platform agnostic, it will create an enhanced and enabling environment for customers to use digital payment products in more safe and secure manner. Consumer Education and Protection Department April 3, 2020 The Consumer Education and Protection cells at the Reserve Bank’s regional offi ces and all subordinate offi ces 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. January 27, 2021 Issuance of a comprehensive framework for strengthening and improving the effi cacy of the internal grievance redress mechanism of the banks, comprising of (i) enhanced disclosures on customer complaints by the banks and the Reserve Bank, (ii) monetary disincentive in the form of recovery of cost of redress of complaints from banks when maintainable complaints are comparatively high, and (iii) intensive review of grievance redress mechanism of banks and supervisory action against banks that fail to improve their redress mechanism in a time bound manner. Internal Debt Management Department 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 fi scal 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 fl exibility to state governments to tide over their cash-fl ow 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. 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 fi rst half of the fi nancial year 2020-21 (April 2020 to September 2020) will be revised from `1,20,000 crore to `2,00,000 crore. 292CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS Date of Policy Initiative Announcement May 22, 2020 In the light of the COVID-19 pandemic and the consequent stress created on state government fi nances, 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. September 29, 2020 (cid:129) Measures were announced with a view to provide greater comfort to state governments/union territories (UTs) in undertaking COVID-19 containment and mitigation measures, to enable them to plan their market borrowings, and to provide greater fl exibility to them to tide over their cash- fl ow mismatches. (cid:129) Increase in ways and means advances (WMA) limit of the states/UTs by 60 per cent over and above the level as on March 31, 2020, that was made available till September 30, 2020, was extended further till March 31, 2021. (cid:129) Relaxation in the overdraft (OD) regulations wherein, the number of days for which a state/UT can be in OD continuously was increased from 14 working days to 21 working days, and 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, that was made available till September 30, 2020, was extended further till March 31, 2021. September 30, 2020 The WMA limit for the Government of India for the second half of 2020-21 was fi xed at `1,25,000 crore, an increase of 257 per cent over the previous year, with a view to facilitate better cash management and planning the market borrowings to tide over the situation arising out of COVID-19. February 5, 2021 In order to increase retail participation in government securities and to improve ease of access, the Reserve Bank announced to provide retail investors with the facility to open their gilt securities account directly with the Reserve Bank (‘Retail Direct’) and provide online access to the government securities market - both primary and secondary. 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 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. July 22, 2020 (cid:129) Released the ‘Report of the Committee for Analysis of QR (Quick Response) Code’ (Chairman: Prof. D. B. Phatak, Professor Emeritus, IIT, Bombay) that was constituted to review the prevalent system of QR codes in India for facilitating digital payments and submit recommendations. 293ANNUAL REPORT 2020-21 Date of Policy Initiative Announcement August 6, 2020 (cid:129) Payment System Operators (PSOs) were mandated to introduce Online Dispute Resolution (ODR) systems for digital payments in a phased manner. (cid:129) Pilot scheme was announced for authorised PSOs - banks and non-banks - to provide offl ine payment solutions using cards, wallets or mobile devices for remote or proximity payments, for a limited period. August 18, 2020 Framework for authorisation of pan-India umbrella entity for retail payments was released. September 25, 2020 Mechanism of positive pay for cheque truncation system (CTS) was announced for all cheques of value- `50,000 and above to further augment customer safety in cheque payments. October 22, 2020 (cid:129) Framework was prescribed for recognition of a Self-Regulatory Organisation (SRO) for PSOs. (cid:129) Measures were prescribed for streamlining QR codes for digital payment transactions to reinforce the acceptance infrastructure, provide better user convenience, promote interoperability and enhance system effi ciency. November 17, 2020 (cid:129) Non-bank prepaid payment instrument (PPI) issuers and payment aggregators (PAs) were provided the facility to maintain one additional escrow account with a different scheduled commercial bank (SCB) at the discretion of the PPI issuer/PA. (cid:129) Establishment of Reserve Bank Innovation Hub (RBIH) to promote innovation across the fi nancial sector, by leveraging on technology and creating an environment which would facilitate and foster innovation, was announced. (cid:129) Testing phase of the shortlisted applicants of the regulatory sandbox (RS) for fi rst cohort on retail payments commenced. December 4, 2020 (cid:129) In order to reduce build-up of settlement and default risks, enable better management of funds by member banks and to enhance overall effi ciency of the payments ecosystem, it was decided to allow settlement fi les of payment systems [viz., Aadhaar Enabled Payment System (AePS), Immediate Payment Service (IMPS), National Electronic Toll Collection (NETC), National Financial Switch (NFS), RuPay, Unifi ed Payments Interface(UPI)] to be posted to the Reserve Bank on all days of the year. (cid:129) Guidelines were announced in connection with making the real time gross settlement (RTGS) system available round the clock on all days from December 14, 2020. (cid:129) The per transaction limit for relaxation of additional factor of authentication for contactless card transactions as well as e-mandate based transactions was enhanced from `2,000 to `5,000. (cid:129) Guidelines were issued to grant authorisation for all PSOs (both new and existing) on a perpetual basis, subject to the usual conditions, under Payment and Settlement Systems Act (PSS Act), 2007. (cid:129) The concept of cooling period was introduced in certain situations for authorisation of entities operating payment systems under the PSS Act, 2007. December 16, 2020 (cid:129) Opening of the second cohort under the RS with theme of ‘Cross Border Payments’ was announced. The theme for third cohort was also announced as ‘MSME Lending’. (cid:129) Updated ‘Enabling Framework for the RS’ was announced wherein the net worth requirement was reduced from the existing `25 lakh to `10 lakh and partnership fi rms and limited liability partnerships (LLPs) were also permitted to participate therein. 294CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS Date of Policy Initiative Announcement December 24, 2020 Testing of four entities shortlisted for ‘Test Phase’ of fi rst cohort on ‘Retail Payments’ under the RS commenced. January 1, 2021 (cid:129) A composite Digital Payments Index (DPI) was introduced to capture the extent of digitisation of payments across the country. January 5, 2021 (cid:129) Framework was introduced for operationalisation of payments infrastructure development fund (PIDF) scheme to enhance acceptance infrastructure across the country. (cid:129) Use of legal entity identifi er (LEI) system for all payment transactions of value `50 crore and above undertaken by entities (non-individuals) using centralised payment systems, effective April 1, 2021, was announced. January 25, 2021 Booklet covering the journey of payment and settlement systems in India during the second decade of the millennium, viz., from the beginning of 2010 till the end of 2020 was released. February 5, 2021 (cid:129) It was announced that the major payment system operators would be required to facilitate setting-up of a centralised industry-wide 24x7 helpline for addressing customer queries in respect of various digital payment products and give information on available grievance redress mechanisms by September 2021. Going forward, the facility of registering and resolving the customer complaints through the helpline shall be considered. (cid:129) It was announced that guidelines to manage the attendant risks in outsourcing and ensure that a code of conduct is adhered to while outsourcing payment and settlement related services will be issued to operators and participants of authorised payment systems. March 15, 2021 Guidelines were issued for extending cheque truncation system across all bank branches in the country. March 31, 2021 (cid:129) One-time extension was provided, till December 31, 2021 to PAs and merchants on-boarded by them to put in place necessary measures to ensure customer card credentials are not stored within their database or server. (cid:129) Timeline was extended till September 30, 2021 for stakeholders to migrate to the new framework for processing and registering e-mandates for recurring online transactions using cards/wallets/ UPI. 295CHROANNNOULALO RGEPYOR OT 2F02 0M-21AJOR POLICY ANNEX II ANNOUNCEMENTS TO MITIGATE THE IMPACT OF COVID-19: MARCH 2020 TO MARCH 20211 Date of Policy Initiative Announcement A. Government of India (GoI) 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 artifi cial 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 fi ling income tax/GST returns, payments under Vivad se Vishwas scheme and various corporate matters. • Bank charges for digital trade transactions for trade fi nance 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 fi nancial 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 fi ght 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. (cid:129) Jan Dhan women account-holders would be given an ex-gratia of `500 per month for three months. • Direct benefi t 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 fi ghting COVID-19. • The fi rst 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. • State governments will be directed to utilise the 'welfare fund for building and other construction workers' to provide support to construction workers. 1 The list is indicative in nature and details for government related measures and those of Reserve Bank's are available on their respective websites. 296CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS ON COVID-19 Date of Policy Initiative Announcement • 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 Offi cers and Government of India departments of the procedure to redress grievances pertaining to COVID-19 expeditiously. • Benefi t 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 fi eld of exports and imports procedures. April 2, 2020 New features of e-NAM platform introduced to help fi ght against COVID-19. April 3, 2020 Advance release of central government’s fi rst 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. • 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. 297ANNUAL REPORT 2020-21 Date of Policy Initiative Announcement 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 benefi ciaries 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 (AatmaNirbhar 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. • Defi nition of MSMEs would be revised to extend benefi ts to larger number of fi rms. • 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 fi nancial companies (NBFCs)/housing fi nance companies (HFCs)/microfi nance 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 fi nal 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 fi ling of income tax return and payment under Vivad se Vishwas scheme were further extended. 298CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS ON COVID-19 Date of Policy Initiative Announcement May 14, 2020 • Free foodgrains will be provided to migrants who are not benefi ciaries of National Food Security (AatmaNirbhar 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 benefi ts (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 refi nance 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 (AatmaNirbhar 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 fi sheries 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 (AatmaNirbhar Bharat gasifi cation/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. • Infrastructure development of `50,000 crore will be undertaken in coal sector. 299ANNUAL REPORT 2020-21 Date of Policy Initiative Announcement • 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 notifi ed; 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 effi ciently leading to reduction in fl ying 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 (AatmaNirbhar 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 notifi ed; fresh initiation of insolvency proceedings will be suspended up to one year; COVID-19 related debt will be excluded from the defi nition 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 notifi ed; 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. • 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 specifi c reforms, leading to extra resources of `4.28 lakh crore. • MGNREGA allocation for 2020-21 will be increased by `40,000 crore. 300CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS ON COVID-19 Date of Policy Initiative Announcement May 23, 2020 Notifi cation 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 & fi sheries by banks, which have become due or shall become due between March 1, 2020 and August 31, 2020 with continued benefi t 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. July 6, 2020 The World Bank and the Government of India signed US$ 750 million agreement for the micro, small, and medium enterprises (MSMEs) emergency response programme to support increased fl ow of fi nance into the hands of MSMEs, severely impacted by the COVID-19 crisis. July 13, 2020 Export policy related to textile raw material for masks and coveralls was amended whereby non- woven fabric of 25-70 Grams per Square Metre (GSM) and melt blown fabric of any GSM exported against specifi c harmonised system (HS) codes were prohibited for export. All other non-woven fabrics with GSM other than 25-70 GSM were made freely allowed for export. July 17, 2020 The Prime Minister’s AatmaNirbhar Bharat Abhiyan stimulus package, inter alia, set up `1 lakh crore agriculture infrastructure fund to strengthen the farm-gate infrastructure. The guidelines for the implementation of the scheme were issued by the Department of Agriculture, Cooperation and Farmers Welfare (DAC&FW) to all states/union territories (UTs). July 21, 2020 Notifi cation on exports of personal protection equipment was amended whereby exports of surgical drapes, isolation aprons, surgical wraps and X-rays gowns were removed from the prohibition list. July 28, 2020 Government amended the export policy of 2/3 ply surgical masks, medical goggles from prohibited to restricted category and exports of face shield were made free. Also, a monthly export quota of four crore units per month was fi xed for 2/3 ply surgical masks and 20 lakh units per month for medical goggles for issuing export licenses to eligible applicants. August 4, 2020 By amending notifi cation dated March 24, 2020, all ventilators including any artifi cial respiratory apparatus, oxygen therapy apparatus or any other breathing appliance/device were made free for export. 301ANNUAL REPORT 2020-21 Date of Policy Initiative Announcement August 6, 2020 The second instalment of the COVID-19 emergency response and health system preparedness package amounting to `890.3 crore was released to 22 states/UTs. August 17, 2020 Partial Credit Guarantee Scheme (PCGS) 2.0 was extended with greater fl exibility in response to emerging demands. August 18, 2020 Amended notifi cation dated July 13, 2020 whereby only melt blown fabric of any GSM exported against specifi c HS codes was prohibited for export. All other non-woven fabrics of any GSM (including 25-70 GSM) were made freely allowed for exports. August 25, 2020 Exports of 2/3 ply surgical masks, medical coverall of all classes and categories were amended from restricted to free. Medical goggles continue to remain in a restricted category with a monthly quota of 20 lakhs units, and Nitrile/Nitrile Butadiene Rubber (NBR) gloves continue to remain prohibited. The export policy of N-95/Filtering Facepiece 2 (FFP 2) masks or its equivalent masks was revised from the prohibited to restricted category. September 1, 2020 • The Prime Minister’s AatmaNirbhar Bharat Abhiyan stimulus package, inter alia, set up `15,000 crore Animal Husbandry Infrastructure Development Fund (AHIDF). The guidelines for the implementation of the scheme were issued by the Department of Animal Husbandry and Dairying. • A limit was imposed on total rewards under the Merchandise Exports from India Scheme (MEIS). Total reward which may be granted to an Import Export Code (IEC) holder under the scheme shall not exceed `2 crore per IEC of exports made during September 1, 2020 to December 31, 2020. Any IEC holder who has not made any exports for a period of one-year preceding September 1, 2020 or any new IECs obtained on or after September 1 would not be eligible for submitting any claim under MEIS. In addition, MEIS scheme is withdrawn w.e.f. January 1, 2021. The above ceiling will be subject to further downward revision to ensure that the total claim under MEIS during September 1, 2020 to December 31, 2020 does not exceed the prescribed allocation by the government, which is `5,000 crore. September 4, 2020 In light of the changing technology and new types of fi nished leather, the government revised fi nished leather norms to facilitate export of new types of leathers. September 14, 2020 Prohibition of exports of all varieties of onions was announced. September 23, 2020 Government of India enacted three labour codes on ‘Industrial Relations’, ‘Social Security’ and ‘Occupational Safety, Health and Working Conditions’. Code on ‘Wages’ was enacted earlier thus merging 29 labour laws in to four codes. September 30, 2020 Goods and services tax (GST) taxpayers were granted relief in implementation of e-invoice. October 1, 2020 Extended the duty drawback scheme on supply of steel by steel manufacturers through their service centres/ distributors/dealers/stock yards. October 6, 2020 Amended notifi cation dated August 25, 2020 whereby exports of N-95/FFP-2 masks or its equivalent amended from restricted to free category making all types of masks freely exportable. October 9, 2020 Allowed exports of Bangalore rose onions and Krishnapuram onions up to quantity of 10,000 metric tonnes (MTs) each up to March 31, 2021. 302CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS ON COVID-19 Date of Policy Initiative Announcement October 12, 2020 • Leave travel concession (LTC) cash voucher scheme was announced. (AatmaNirbhar Bharat • Special festival advance scheme was revived as a one-time measure to stimulate demand, for Abhiyan 2.0) both gazetted and non-gazetted employees. • Special interest free 50-year loan of `12,000 crore to be issued to states for capital expenditure. • Additional budget of `25,000 crore, in addition to `4.13 lakh crore given in the Union Budget 2020- 21, was provided for capital expenditure. October 15, 2020 • A special window of borrowing was announced for states, under which the estimated GST compensation cess shortfall of `1.1 lakh crore would be borrowed by the GoI in appropriate tranches, and passed on to states as back-to-back loans in lieu of GST compensation cess release. • Exports of alcohol-based hand sanitiser in containers with dispenser pump allowed to be freely exportable making exports of alcohol-based hand sanitiser in any form/ packaging freely exportable. October 22, 2020 Exports of Nitrile/NBR gloves revised from prohibited to restricted category. October 23, 2020 Government of India has announced the scheme for grant of ex-gratia payment of difference between compound interest and simple interest for six months to borrowers in specified loan accounts (March 1, 2020 to August 31, 2020). October 24, 2020 • The due dates for furnishing of income tax returns and audit reports were extended in view of the challenges faced by taxpayers due to the outbreak of COVID-19. • The due dates for filing GST annual return and reconciliation statement for 2018-19 was extended from October 31, 2020 to December 31, 2020. October 27, 2020 The last date for making payment without additional amount under Vivad Se Vishwas scheme was extended from December 31, 2020 to March 31, 2021. October 29, 2020 Exports of onion seeds were prohibited. November 2, 2020 The Union Government extended the Emergency Credit Line Guarantee Scheme (ECLGS) by one month till November 30, 2020, or till such time that an amount of `3 lakh crore is sanctioned under the scheme, whichever is earlier. November 12, 2020 • Production linked incentive (PLI) worth `1.46 lakh crore to 10 major sectors, which include (AatmaNirbhar Bharat advance cell chemistry battery, electronic/technology products, automobiles & auto components, Abhiyan 3.0) pharmaceuticals drugs, telecom & networking products, textile products, food products, high efficiency solar photo-voltaic (PV) modules, white goods (air conditioners - ACs and LED lights), and specialty steel. • To provide ease of doing business in construction sector and relief to contractors whose money otherwise remains locked up, performance security on contracts has been reduced from 5-10 per cent to 3 per cent. It will also extend to ongoing contracts and public sector enterprises. Earnest deposit money (EMD) for tenders will be replaced by bid security declaration. The relaxations in the general financial rules will be in force till December 31, 2021. • `10,200 crore additional budget stimulus was provided for capital and industrial expenditure on domestic defence equipment, industrial infrastructure and green energy. • AatmaNirbhar Bharat Rozgar Yojana scheme was launched to incentivise job creation during COVID-19 recovery. 303ANNUAL REPORT 2020-21 Date of Policy Initiative Announcement • ECLGS 2.0 was launched for healthcare sector and 26 stressed sectors with credit outstanding of above `50 crore and up to `500 crore as on February 29, 2020 stressed due to COVID-19, among other criteria. These entities/borrower accounts shall be eligible for additional funding up to 20 per cent of their total outstanding credit as a collateral free guaranteed emergency credit line (GECL), which would be fully guaranteed by National Credit Guarantee Trustee Company Ltd. (NCGTC). The loans provided under ECLGS 2.0 will have a fi ve-year tenor, with a 12-month moratorium on repayment of principal. The scheme was extended till March 31, 2021. • `18,000 crore additional outlay was provided for Pradhan Mantri Awaas Yojana - Urban. • Income tax relief was announced for developers and home buyers. • `6,000 crore equity investment in debt platform of National Investment and Infrastructure Fund (NIIF) was announced, to help NIIF provide a debt of `1.1 lakh crore for infrastructure projects by 2025. • `65,000 crore was provided for subsidised fertilisers to support agriculture. • Additional outlay of `10,000 crore was provided for Pradhan Mantri Garib Kalyan Rozgar Yojana in order to boost rural employment. • `900 crore was provided to Department of Biotechnology for research activities related to COVID-19 vaccine development. • GoI announced `3,000 crore support to EXIM Bank for promoting project exports under Indian Development and Economic Assistance Scheme (IDEAS). This will help EXIM Bank facilitate lines of credit for development assistance activities and promote exports from India. • Export prohibition of specifi ed 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, fi remen, divers and mountaineers, gas masks, tarpaulin, polyvinyl chloride (PVC) conveyer belt and biopsy punch. November 26, 2020 The Government of India decided to extend ECLGS 1.0 to entities under ECLGS which had a total credit outstanding of up to `50 crore as on February 29, 2020, but were previously ineligible owing to their annual turnover exceeding `250 crore. December 16, 2020 Extension of deadline for states to complete citizen centric reforms in various sectors to be eligible for reform linked benefi ts. December 18, 2020 Government allocated 8,424 metric tonnes raw value to exports of raw sugar to the US under tariff- rate quota (TRQ) up to September 30, 2021. December 22, 2020 Revised export policy for medical goggle and Nitrile/NBR gloves from restricted to free category. December 28, 2020 Exports of all onion varieties, including Bangalore rose and Krishnapuram onions were allowed with effect from January 1, 2021. December 30, 2020 The due dates for furnishing of income tax returns, tax audit reports, declaration under Vivad Se Vishwas scheme, completion of proceedings under various direct taxes and Benami Acts, payment of self-assessment tax by small and middle-class tax-payers, and furnishing of annual return under section 44 of the Central Goods and Services Tax Act, 2017 for 2019-20 were extended. 304CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS ON COVID-19 Date of Policy Initiative Announcement February 1, 2021 • The Union Budget 2021-22 was presented with key focus on health and well-being. The key (Union Budget announcements include: 2021-22) • Launching a new centrally sponsored scheme Pradhan Mantri AatmaNirbhar Swasth Bharat Yojana with an outlay of about `64,180 crore over 6 years. • Mission Poshan 2.0, an integrated nutrition support programme, was launched. • `35,000 crore was provided for the development and manufacturing of the COVID-19 vaccine. • Roll out of Made-in-India pneumococcal vaccine across the country. • `2.87 lakh crore over fi ve years towards the Jal Jeevan Mission (Urban). (cid:129) Urban Swachh Bharat Mission 2.0 to be implemented with a total fi nancial allocation of around `1.42 lakh crore over a period of fi ve years during 2021-26. • Announcements relating to introduction of the National Nursing and Midwifery Commission Bill, clean air, vehicle scrapping policy, etc., were made. • An outlay of `2.24 lakh crore was budgeted for health and wellbeing in 2021-22 (BE) as against 2020-21 (BE) of `94,452 crore (an increase of 137 per cent). • To create fi rst ever national database of migrant labour to provide platform for workers and employers, and for the government to implement specifi c programmes for such labourers. • Ministry of Labour & Employment has envisaged development of a ‘National Database of Unorganised Workers’ (NDUW) seeded with Aadhaar. The project will enrol all unorganised workers, including migrant workers. • Social security benefi ts to be extended to gig and platform workers for the fi rst time. `11,674.1 crore is earmarked for social security schemes for workers. This is an increase from the previous allocation of `8,725.1 crore and revised estimates of `11,670.1 crore. • ‘One Nation One Ration Card’ will benefi t migrant workers, construction workers and textile workers. Benefi ciaries can claim their ration anywhere in the country. • Minimum wages and coverage under the Employees State Insurance Corporation will be applicable for all categories of workers. Women workers allowed in all categories, including night- shifts with adequate protection. • Compliance burden on employers will be reduced with single registration and licensing, and online returns. • Proposed amendment to Apprenticeship Act to enhance opportunities for youth. `3,000 crore for realignment of existing national apprenticeship training scheme (NATS) towards post-education apprenticeship, training of graduates and diploma holders in engineering. • The proposal to create a permanent institutional body that would purchase investment grade debt securities both in stressed and normal times and help in the development of the bond market. This would instil confi dence amongst the participants in the corporate bond market during times of stress and generally enhance secondary market liquidity. • Proposal to set up a development fi nance institution (DFI) with a corpus of `20,000 crore. • Proposal to set up a national asset monetization pipeline for monetizing public assets. 305ANNUAL REPORT 2020-21 Date of Policy Initiative Announcement March 31, 2021 • The last date for the intimation of Aadhaar number and linking thereof with permanent account number (PAN) was extended to June 30, 2021. • The time-limits for passing of consequential order for direction issued by the dispute resolution panel (DRP) and processing of equalisation levy statements were extended to April 30, 2021. • The validity of ECLGS was extended up to June 30, 2021 or till guarantees for an amount of `3 lakh crore are issued. • ECLGS 3.0 was introduced to cover business enterprises in hospitality, travel and tourism, leisure and sporting sectors that meet specifi ed criteria. Last date of disbursement under the ECLGS has been extended to September 30, 2021. • Foreign Trade Policy (FTP), 2015-20 was extended for 6 months till September 2021. B. Reserve Bank of India Monetary Policy Department 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 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 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, 20204. • Increase in marginal standing facility (MSF) borrowing from 2 per cent of statutory liquidity ratio (SLR) to 3 per cent effective March 28, 20205. 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 refi nance facilities for a total amount of `50,000 crore were provided to NABARD, SIDBI and NHB to enable them to meet sectoral credit needs6. 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. 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 Announced in view of the exceptionally high volatility in domestic fi nancial markets, to provide comfort to the banking system. 6 This comprised `25,000 crore to NABARD for refi nancing regional rural banks (RRBs), cooperative banks and micro fi nance institutions (MFIs); `15,000 crore to SIDBI for on-lending/refi nancing; and `10,000 crore to NHB for supporting housing fi nance companies (HFCs). Advances under this facility were provided at the Reserve Bank’s policy repo rate. 306CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS ON COVID-19 Date of Policy Initiative Announcement • 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. August 6, 2020 • The policy repo rate kept unchanged at 4.0 per cent. • The Monetary Policy Committee (MPC) decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that infl ation remains within the target going forward. September 28, 2020 On March 27, 2020 banks were allowed to avail funds under the marginal standing facility (MSF) by dipping into the statutory liquidity ratio (SLR) by up to an additional one per cent of net demand and time liabilities (NDTL), i.e., cumulatively up to 3 per cent of NDTL. This facility, initially available up to June 30, 2020, was extended on June 26, 2020 up to September 30, 2020. This relaxation was extended on September 28, 2020 for a further period of six months, i.e., up to March 31, 2021, to provide comfort to banks on their liquidity requirements and to enable them to meet liquidity coverage ratio (LCR) requirements. October 9, 2020 The MPC decided to continue with the accommodative stance as long as necessary - at least during the current fi nancial year and into the next fi nancial year - to revive growth on a durable basis and mitigate the impact of COVID-19 on the economy, while ensuring that infl ation remains within the target going forward. February 5, 2021 The cash reserve ratio (CRR) of all banks was reduced by 100 basis points to 3 per cent of their NDTL, effective the reporting fortnight beginning March 28, 2020 for a period of one year ending March 26, 2021. It was decided to gradually restore the CRR in two phases in a non-disruptive manner on February 5, 2021. Accordingly, banks were required to maintain the CRR at 3.50 per cent of their NDTL, effective the reporting fortnight beginning March 27, 2021 and 4 per cent of their NDTL, effective the fortnight beginning May 22, 2021. The enhanced access of funds under the MSF by dipping into SLR up to 3 per cent of NDTL was extended for a further period of six months, i.e., up to September 30, 2021, with a view to providing comfort to banks on their liquidity 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 identifi er (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. 307ANNUAL REPORT 2020-21 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). November 2, 2020 Following the graded roll-back of the lockdown and easing of restrictions on movement of people and functioning of offi ces, the trading hours for Reserve Bank regulated fi nancial markets were partially restored from 10 AM-2 PM to 10 AM-3.30 PM. Financial Markets Operations Department 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 market7. The fi rst 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 fi rst 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 fi rst such TLTRO operation was conducted on March 27, 2020. March 30, 2020 Extension of the window timings of fi xed rate reverse repo and MSF operations as an interim measure so as to provide eligible market participants with greater fl exibility 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 classifi ed 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 fi rst 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 classifi ed 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 fi rst such SLF-MF auction was conducted on April 27, 2020. April 30, 2020 It was decided to extend regulatory benefi ts 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. 7 This measure was announced as fi nancial markets worldwide were facing intense selling pressures on extreme risk aversion due to the spread of COVID-19 infections. 308CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS ON COVID-19 Date of Policy Initiative Announcement July 1, 2020 The Government of India approved scheme of `30,000 crore to improve liquidity position of non- banking fi nancial companies (NBFCs) (including micro-fi nance institutions -MFIs)/housing fi nance companies (HFCs) was notifi ed. NBFCs (including MFIs)/HFCs, meeting certain fi nancial parameters, were given access to liquidity to avoid any potential systemic risks to the fi nancial sector. Under the scheme, the Reserve Bank injected liquidity through back-to-back funding by subscribing to government - guaranteed special securities issued by a Special Purpose Vehicle (SPV) in the form of Special Liquidity Scheme (SLS), a trust set up by SBI Capital Markets Ltd. (SBICAP). August 6, 2020 In order to optimise human resource deployment in the context of disruptions caused by COVID-19 and to provide eligible liquidity adjustment facility (LAF)/Marginal Standing Facility (MSF) participants greater fl exibility in managing their end of the day CRR balances, the Reserve Bank introduced the Automated Sweep-In and Sweep-Out (ASISO) facility in its e-Kuber system. August 31, 2020 • Banks were given an option of repaying the funds availed under the Long-Term Repo Operations (LTROs) scheme before maturity. Subsequently, banks reversed LTRO funds amounting to `1,23,572 crore out of total of `1,25,117 crore. • Two 56-day term repo auctions for a total amount of `1,00,000 crore at fl oating rates (repo rate) were announced to be conducted on September 11 and September 14, 2020 to assuage liquidity pressures on account of advance tax outfl ows. October 9, 2020 • With a view to increase the focus of liquidity measures on revival of activity in specifi c sectors, the Reserve Bank announced the on tap Targeted LTRO (TLTRO) scheme. Accordingly, it was decided to conduct on tap TLTRO of up to three years tenor for a total amount of up to `1,00,000 crore at a fl oating rate (repo rate) with end-use guidance. Investments under on tap TLTRO qualifi ed for held-to-maturity (HTM) portfolio and were exempted from large exposure framework. The scheme has been extended up to September 30, 2021. • As announced in the Statement on Developmental and Regulatory Policies, banks were given an option of repaying the funds availed under the TLTRO and TLTRO 2.0 before maturity. The scheme was notifi ed on October 21, 2020. Subsequently, TLTRO and TLTRO 2.0 funds amounting to `37,348 crore were repaid by banks. • The Reserve Bank decided to enhance the size of OMOs to `20,000 crore in order to assure the market of maintaining comfortable liquidity conditions in line with monetary policy stance. • In order to impart liquidity to state development loans (SDLs) and facilitate effi cient pricing, it was decided to conduct OMOs in SDLs as a special case during 2020-21. Accordingly, three OMOs in SDLs amounting to `30,000 crore were conducted since October 2020. December 4, 2020 The on tap TLTRO scheme announced on October 9, 2020 was expanded to cover 26 stressed sectors (as identifi ed by the Kamath Committee and in sync with the credit guarantee available under the Emergency Credit Line Guarantee Scheme (ECLGS 2.0) of the government), in addition to the fi ve sectors identifi ed on October 21, 2020. February 5, 2021 As announced in the Statement on Developmental and Regulatory Policies on February 5, 2021, banks were permitted to provide funds to NBFCs under the on tap TLTRO scheme. 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 fi fteen months from the date of export, for the exports made up to or on July 31, 2020. 309ANNUAL REPORT 2020-21 Date of Policy Initiative Announcement 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 fi nancing and exemption from classifi cation 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-specifi ed 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 classifi cation 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 suffi cient 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. • 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. 310CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS ON COVID-19 Date of Policy Initiative Announcement • 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 profi ts pertaining to the fi nancial year ended March 31, 2020 until further instructions. This restriction shall be reviewed on the basis of the fi nancial 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 diffi culties 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 specifi cally 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 fl ow of resources to corporates that faced diffi culties 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 fi nancial 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 diffi culties 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. 311ANNUAL REPORT 2020-21 Date of Policy Initiative Announcement 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. August 6, 2020 • A window for resolution of COVID-19 related stress (applicable to all commercial banks (including small fi nance banks, local area banks and regional rural banks), all primary (Urban) co-operative banks/state co-operative banks/ district central co-operative banks, NBFCs (including housing fi nance companies) and all India fi nancial institutions - AIFIs) was issued to facilitate revival of real sector activities which were under fi nancial stress due to economic fallout on account of the COVID-19 pandemic, subject to certain conditions. The resolution framework was to be invoked till December 31, 2020 and had to be implemented within 90 days of invocation in respect of personal loans and 180 days of invocation for other eligible loan exposures. An Expert Committee (Chairperson: Shri K. V. Kamath) was constituted on August 7, 2020 to make recommendations to the Reserve Bank on the required fi nancial parameters to be factored in the resolution plans, with sector specifi c benchmark ranges for such parameters. The committee submitted its report to the Reserve Bank on September 4, 2020. • In view of the need to support viable MSME entities on account of the fallout of COVID-19, the scheme of one-time restructuring of loans to MSMEs without an asset classifi cation downgrade, was extended where the borrower’s account was a ‘standard asset’ as on March 1, 2020 and the aggregate exposure of banks and NBFCs was not more than Rs.25 crore. The restructuring had to be implemented by March 31, 2021, subject to certain conditions. September 7, 2020 The fi ve key ratios/parameters recommended by the Expert Committee constituted by the Reserve Bank (Chairperson: Shri K. V. Kamath) to be factored in by the lending institutions while fi nalising a resolution plan in respect of eligible borrowers under COVID-19 related stress, and the respective thresholds for 26 sectors were notifi ed. In respect of other sectors, lending institutions were permitted to make their own internal assessment, subject to certain conditions. September 29, 2020 • Considering the potential stress on account of COVID-19, banks were advised about deferment of phase-in of the last tranche of capital conservation buffer (CCB) of 0.625 per cent from September 30, 2020 to April 1, 2021 which, subsequently, was further deferred by six months to October 1, 2021. CCB is not applicable to small fi nance banks (SFBs), payment banks (PBs), regional rural banks (RRBs) and local area banks (LABs). • On account of continuing stress in the light of COVID-19 pandemic, it was decided to further defer the implementation of NSFR of Basel III framework on liquidity standards from October 1, 2020 to April 1, 2021. Later, on February 5, 2021, in view of the continuing stress on account of COVID-19, the implementation of NSFR was further deferred by six months from April 1, 2021 to October 1, 2021. October 12, 2020 The dispensation of overall limit of SLR holding in HTM of 22 per cent (as against the earlier 19.5 per cent) in respect of SLR securities acquired between September 1, 2020 and March 31, 2021 was extended up to March 31, 2022 from March 31, 2021. It was also decided to restore the enhanced HTM limit to 19.5 per cent in a phased manner, beginning from the quarter ending June 30, 2022. 312CHRONOLOGY OF MAJOR POLICY ANNOUNCEMENTS ON COVID-19 Date of Policy Initiative Announcement October 27, 2020 All lending institutions were advised to be guided by the provisions of the scheme announced by Government of India for grant of ex-gratia payment of difference between compound interest and simple interest for six months (March 2020 to August 2020) to borrowers in specifi ed loan accounts. December 4, 2020 In view of the ongoing stress and heightened uncertainty on account of COVID-19, it was considered imperative that banks continue to conserve capital to support the economy and absorb losses. In order to further strengthen the banks’ balance sheets, while at the same time support lending to the real economy, it was decided that banks shall not make any dividend payment on equity shares from the profi ts pertaining to 2019-20. February 5, 2021 • On a review of monetary and liquidity conditions and as announced in the Statement on Developmental and Regulatory Policies of February 5, 2021, it was decided to gradually restore the CRR in two phases in a non-disruptive manner, which was earlier, reduced by 100 basis points to 3 per cent of NDTL effective from the reporting fortnight beginning March 28, 2020 and available for a period of one year ending March 26, 2021. Accordingly, banks are required to maintain the CRR at 3.50 per cent of their NDTL effective from the reporting fortnight beginning March 27, 2021 and 4 per cent of their NDTL effective from fortnight beginning May 22, 2021. • It was decided to extend the dispensation of enhanced HTM ceiling of 22 per cent of NDTL in respect of SLR eligible securities until March 31, 2023 and to include securities acquired between April 1, 2021 and March 31, 2022. It was also decided that the enhanced HTM limit shall be restored to 19.5 per cent in a phased manner, beginning from the quarter ending June 30, 2023. March 12, 2021 Certain changes were effected in the data format for furnishing of credit information by lenders to Credit Information Companies (CICs) to capture the credit information on restructuring due to COVID-19. The same is in line with the Reserve Bank’s guidelines dated August 6, 2020, that provided lenders a window under the prudential framework to implement a resolution plan in respect of eligible borrowers impacted on account of the COVID-19 pandemic and also provided for credit reporting by the lending institutions to CICs in respect of such borrowers to refl ect the “restructured” status of the account. Department of Supervision March 16, 2020 Banks and fi nancial institutions were advised regarding an indicative list of measures to be taken by them as part of their operational and business continuity plans. July 8, 2020 Time lines were extended for submission of various supervisory returns which became due during July 1, 2020 to July 31, 2020. Consumer Education and Protection Department April 3, 2020 The consumer education and protection cells at the Reserve Bank’s ROs and all subordinate offi ces 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 fi scal 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 fl exibility to state governments to tide over their cash-fl ow 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. 313ANNUAL REPORT 2020-21 Date of Policy Initiative Announcement 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 fi rst half of the fi nancial 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. September 29, 2020 • With a view to provide greater comfort to state governments in undertaking COVID-19 containment and mitigation measures, and to enable them to plan their market borrowings, the increase in WMA limit of the states/UTs by 60 per cent over and above the level as on March 31, 2020, that was made available till September 30, 2020, was extended further till March 31, 2021. • In order to provide greater fl exibility to state governments to tide over their cash-fl ow mismatches, the relaxation provided in the overdraft (OD) regulations wherein the number of days for which a state/UT can be in OD continuously was increased from 14 working days to 21 working days, and 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, that was made available till September 30, 2020, was extended further till March 31, 2021. September 30, 2020 The WMA limit for the Government of India for the second half of 2020-21 was fi xed at `1,25,000 crore, an increase of 257 per cent over the previous year, with a view to facilitate better cash management and planning the market borrowings to tide over the situation arising out of COVID-19. 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. December 4, 2020 The per transaction limit for relaxation of additional factor of authentication for contactless card transactions was enhanced from `2,000 to `5,000. February 26, 2021 Timeline was extended till March 31, 2021 for submission of application to set up pan-India umbrella entity for retail payments. March 31, 2021 • One-time extension was provided, till December 31, 2021, to payment aggregators (PAs) and merchants on-boarded by them to put in place necessary measures to ensure customer card credentials are not stored within their database or server. • Timeline was extended till September 30, 2021 for stakeholders to migrate to the new framework for processing and registering e-mandates for recurring online transactions using cards/wallets/ Unifi ed Payments Interface (UPI). 314APPENDIX TABLES APPENDIX TABLE 1: MACROECONOMIC AND FINANCIAL INDICATORS Item Average Average 2018-19 2019-20 2020-21 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 6.5 4.0 -8.0 I.2 Real GVA at basic prices (% change)* 7.7 6.3 5.9 4.1 -6.5 I.3 Foodgrains Production (Million tonnes) 213.6 246.4 285.2 297.5 303.3 I.4 a) Food Stocks (Million tonnes) 18.6 50.1 72.7 74.0 77.2 b) Procurement (Million tonnes) 39.3 61.3 77.7 79.2 97.2 c) Off-take (Million tonnes) 41.5 57.0 65.9 62.2 83.3 I.5 Index of Industrial Production (% change)** 11.2 4.6 3.8 -0.8 -8.6 I.6 Index of Eight Core Industries (% change) 5.9 4.9 4.4 0.4 -7.0 I.7 Gross Domestic Saving Rate (% of GNDI at current prices)* 33.6 33.9 30.1 30.9 - I.8 Gross Domestic Investment Rate (% of GDP at current prices)* 35.2 38.0 32.7 32.2 - II. Prices II.1 Consumer Price Index (CPI) Combined (average % change) - - 3.4 4.8 6.2 II.2 CPI-Industrial Workers (average % change) # 5.0 10.3 5.4 7.5 5.0 II.3 Wholesale Price Index (average % change) # 5.5 7.1 4.3 1.7 1.3 III. Money and Credit III.1 Reserve Money (% change) 20.4 12.1 14.5 9.4 14.2 III.2 Broad Money (M3) (% change) 18.6 14.7 10.5 8.9 11.8 III.3 a) Aggregate Deposits of Scheduled Commercial Banks (% change) 20.2 15.0 10.0 7.9 11.4 b) Bank Credit of Scheduled Commercial Banks (% change) 26.7 16.7 13.3 6.1 5.6 IV. Financial Markets IV.1 Interest rates (%) a) Call/Notice Money rate 5.6 7.2 6.3 5.4 3.4 b) 10 year G-sec yield 7.0 8.0 7.7 6.7 6.0 c) 91-Days T-bill yield - - 6.6 5.5 3.3 d) Weighted Average cost of Central Government Borrowings - - 7.8 6.9 5.8 e) Commercial Paper 7.7 8.4 7.6 6.6 4.2 f) Certificate of Deposits## 8.9 8.2 7.3 5.9 4.3 IV.2 Liquidity (` lakh crore ) a) LAF Outstanding~ - - -1.5 2.6 4.1 b) MSS Outstanding~~ - - 0.0 0.0 0.0 c) Average Daily Call Money Market Turnover 0.2 0.3 0.4 0.3 0.2 d) Average Daily G-sec Market Turnover### 0.1 0.2 0.4 0.6 0.4 e) Variable Rate Repo$ - - 1.639 0.895 0.005 f) Variable Rate Reverse Repo$ - - 0.0 1.2 0.0 g) MSF$ - - 0.943 0.020 0.001 V. Government Finances V.1 Central Government Finances (% of GDP)& a) Revenue Receipts 10.0 9.2 8.2 8.3 7.9 b) Capital Outlay 1.6 1.6 1.5 1.5 1.7 c) Total Expenditure 14.9 15.0 12.3 13.2 17.6 d) Gross Fiscal Deficit 3.7 5.4 3.4 4.6 9.4 V.2 State Government Finances&& a) Revenue Deficit (% of GDP) 0.3 -0.1 0.1 0.7 1.5 b) Gross Fiscal Deficit (% of GDP) 2.7 2.3 2.4 2.4 4.1 c) Primary Deficit (% of GDP) 0.3 0.6 0.8 0.9 2.4 315ANNUAL REPORT 2020-21 APPENDIX TABLE 1: MACROECONOMIC AND FINANCIAL INDICATORS (Concld.) Item Average Average 2018-19 2019-20 2020-21 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 9.1 -5.0 -15.9 b) Merchandise Imports (% change) 32.3 9.7 10.3 -7.6 -27.6 c) Trade Balance/GDP (%) -5.5 -9.1 -6.7 -5.5 -3.2 d) Invisible Balance/GDP (%) 5.2 5.8 4.6 4.6 4.9 e) Current Account Balance/GDP (%) -0.3 -3.3 -2.1 -0.9 1.7 f) Net Capital Flows/GDP (%) 4.7 3.8 2.0 2.9 2.7 g) Reserve Changes [(BoP basis) (US $ billion) -40.3 -6.6 3.3 -59.5 -83.9 [(Increase (-)/Decrease (+)] VI.2 External Debt Indicators&&& a) External Debt Stock (US$ billion) 156.5 359.0 543.1 558.2 563.5 b) Debt-GDP Ratio (%) 17.8 20.9 19.9 20.6 21.4 c) Import cover of Reserves (in Months) 14.0 8.5 9.6 12.0 18.6 d) Short-term Debt to Total Debt (%) 13.6 21.3 20.0 19.1 18.4 e) Debt Service Ratio (%) 8.3 5.6 6.4 6.5 9.0 f) Reserves to Debt (%) 113.7 84.8 76.0 85.6 104.0 VI.3 Openness Indicators (%)@ a) Export plus Imports of Goods/GDP 30.7 41.0 31.6 27.8 24.9 b) Export plus Imports of Goods & Services/GDP 41.3 53.2 44.0 39.7 37.4 c) Current Receipts plus Current Payments/GDP 47.1 59.4 49.8 45.6 43.9 d) Gross Capital Inflows plus Outflows/GDP 37.3 50.4 38.2 39.6 46.1 e) Current Receipts & Payments plus Capital Re-ceipts & 84.4 109.8 87.9 85.2 89.9 Payments/GDP VI.4 Exchange Rate Indicators a) Exchange Rate (Rupee/US Dollar) End of Period 43.1 51.1 69.2 75.4 73.5 Average 44.1 51.2 69.9 70.9 74.2 b) 40-Currency REER (% change) 3.1^ 0.8 -5.0 2.6 0.3 c) 40-Currency NEER (% change) 1.7^ -4.9 -5.6 0.6 -4.2 d) 6-Currency REER (% change) 5.7^ 2.3 -5.9 3.3 -1.8 e) 6-Currency NEER (% change) 2.6^ -5.1 -7.2 0.8 -6.8 - : Not Available. P: Provisional. * : Data are at 2011-12 base year series. ** : Data are at 2011-12 base year series for column 2 and 3. # : Base year for WPI is 2011-12=100 for annual data and 2004-05=100 for average of 5 years inflation. Base for CPI-IW is 2001=100 till August 2020 and 2016=100 from September 2020 onwards. ## : 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 2020-21 are revised estimates. && : Upto 2019-20 data pertains to all States and Union Territories (UT) with legislatures, while for 2020-21 data are for 17 States/UTs. Data for 2019-20 are provisional accounts and for 2020-21 are revised estimates. @ : Data in columns 6 are provisional and pertain to April-December 2020. &&&: Data for 2020-21 are provisional and pertain to end-December 2020. ^ : Average of period 2005-06 to 2007-08. Note : Base year for 6- and 40-currency NEER/REER indices is 2015-16=100. REER figures are based on Consumer Price Index. 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. 316APPENDIX TABLES APPENDIX TABLE 2: GROWTH RATES AND COMPOSITION OF REAL GROSS DOMESTIC PRODUCT (At 2011-12 Prices) (Per cent) Sector Growth Rate Share Average 2018-19 2019-20 2020-21* 2018-19 2019-20 2020-21* 2013-14 to 2020-21 1 2 3 4 5 6 7 8 Expenditure Side GDP 1. Private Final Consumption Expenditure 5.0 7.6 5.5 -9.0 56.3 57.1 56.5 2. Government Final Consumption Expenditure 6.3 6.3 7.9 2.9 10.2 10.6 11.8 3. Gross Fixed Capital Formation 3.7 9.9 5.4 -12.4 32.0 32.5 30.9 4. Change in Stocks 8.4 27.2 -39.7 -3.5 1.9 1.1 1.1 5. Valuables -7.2 -9.7 -14.2 -38.0 1.4 1.1 0.8 6. Net Exports -11.7 11.8 -16.8 72.5 -3.0 -3.4 -1.0 a) Exports 1.8 12.3 -3.3 -8.1 20.9 19.4 19.4 b) Less Imports -0.1 8.6 -0.8 -17.6 23.9 22.8 20.4 7. Discrepancies -63.1 -61.8 -15.5 -112.5 1.2 1.0 -0.1 8. GDP 4.9 6.5 4.0 -8.0 100.0 100.0 100.0 GVA at Basic Prices (Supply Side) 1. Agriculture, forestry and fishing 3.7 2.6 4.3 3.0 14.8 14.8 16.3 2. Industry 4.3 5.0 -2.0 -7.4 23.2 21.8 21.6 of which : a) Mining and quarrying 1.6 0.3 -2.5 -9.2 2.6 2.4 2.4 b) Manufacturing 4.5 5.3 -2.4 -8.4 18.3 17.1 16.8 c) Electricity, gas, water supply and other utility 6.1 8.0 2.1 1.8 2.3 2.3 2.5 services 3. Services 5.5 7.1 6.4 -8.4 62.0 63.4 62.1 of which : a) Construction 2.3 6.3 1.0 -10.3 8.0 7.8 7.5 b) Trade, hotels, transport, communication and 5.0 7.1 6.4 -18.0 19.9 20.3 17.8 services related to broadcasting c) Financial, real estate and professional services 7.0 7.2 7.3 -1.4 21.3 22.0 23.2 d) Public Administration, defence and other services 5.9 7.4 8.3 -4.1 12.7 13.3 13.6 4. GVA at basic prices 4.9 5.9 4.1 -6.5 100.0 100.0 100.0 *: Second advance estimates of national income for 2020-21. Source: National Statistical Office (NSO). 317ANNUAL REPORT 2020-21 APPENDIX TABLE 3: GROSS SAVINGS (Per cent of GNDI) Item 2016-17 2017-18 2018-19 2019-20 1 2 3 4 5 I. Gross Savings 30.9 31.7 30.1 30.9 1.1 Non-financial corporations 11.6 11.6 10.7 10.6 1.1.1 Public non-financial corporations 1.1 1.4 1.3 1.4 1.1.2 Private non-financial corporations 10.5 10.2 9.4 9.2 1.2 Financial corporations 2.2 2.2 1.9 2.8 1.2.1 Public financial corporations 1.4 1.4 0.9 1.5 1.2.2 Private financial corporations 0.9 0.9 1.0 1.3 1.3 General Government -0.8 -1.2 -1.5 -1.8 1.4 Household sector 17.9 19.0 19.0 19.3 1.4.1 Net financial saving 7.3 7.5 7.1 7.8 Memo: Gross financial saving 10.4 11.9 11.1 11.0 1.4.2 Saving in physical assets 10.2 11.2 11.7 11.2 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: NSO. 318APPENDIX TABLES APPENDIX TABLE 4: INFLATION, MONEY AND CREDIT (Per cent) Inflation Consumer Price Index (All India)# Rural Urban Combined 2018-19 2019-20 2020-21 2018-19 2019-20 2020-21 2018-19 2019-20 2020-21 1 2 3 4 5 6 7 8 9 10 General Index (All Groups) 3.0 4.3 5.9 3.9 5.4 6.5 3.4 4.8 6.2 Food and beverages 0.7 4.8 7.1 0.7 8.1 7.7 0.7 6.0 7.3 Housing … … … 6.7 4.5 3.3 6.7 4.5 3.3 Fuel and light 6.0 1.1 0.3 5.2 1.7 7.1 5.7 1.3 2.7 Miscellaneous 6.3 5.1 5.7 5.4 3.7 7.5 5.8 4.4 6.6 Excluding Food and Fuel 5.7 4.1 5.5 5.9 4.0 5.6 5.8 4.0 5.5 Other Price Indices 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 1. Wholesale Price Index (2011-12=100)* All Commodities 7.4 5.2 1.3 -3.7 1.7 2.9 4.3 1.7 1.3 Primary Articles 9.8 9.8 2.2 -0.4 3.4 1.4 2.7 6.8 1.6 of which: Food Articles 9.9 12.3 5.6 2.6 4.0 2.1 0.3 8.4 3.1 Fuel and Power 10.3 7.1 -6.1 -19.7 -0.3 8.2 11.5 -1.8 - 8.0 Manufactured Products 5.4 3.0 2.6 -1.8 1.3 2.7 3.7 0.3 2.7 Non-Food Manufactured Products 4.9 2.7 2.7 -1.8 -0.1 3.0 4.2 -0.4 2.2 2. CPI- Industrial Workers (IW) (2001=100)** 10.4 9.7 6.3 5.6 4.1 3.1 5.4 7.5 5.0 of which: CPI- IW Food 11.9 12.3 6.5 6.1 4.4 1.5 0.6 7.4 5.8 3. CPI- Agricultural Labourers (1986-87=100) 10.0 11.6 6.6 4.4 4.2 2.2 2.1 8.0 5.5 4. CPI- Rural Labourers (1986-87=100) 10.2 11.5 6.9 4.6 4.2 2.3 2.2 7.7 5.5 Money and Credit 2012-13 2013-14 2014-15 2015-16 201617^ 2017-18 2018-19 2019-20 2020-21^^ Reserve Money (RM) 6.2 14.4 11.3 13.1 -12.9 27.3 14.5 9.4 14.2 Currency in Circulation 11.6 9.2 11.3 14.9 -19.7 37.0 16.8 14.5 17.2 Bankers’ Deposits with RBI -10.0 34.0 8.3 7.8 8.4 3.9 6.4 -9.6 0.8 Currency-GDP Ratio$ 12.0 11.6 11.6 12.1 8.7 10.7 11.3 12.0 14.7 Narrow Money (M1) 9.2 8.5 11.3 13.5 -3.9 21.8 13.6 11.2 16.3 Broad Money (M3) 13.6 13.4 10.9 10.1 6.9 9.2 10.5 8.9 11.8 Currency-Deposit Ratio 15.7 15.1 15.2 16.0 11.0 14.4 15.4 16.3 17.3 Money Multiplier (Ratio)## 5.5 5.5 5.5 5.3 6.7 5.8 5.6 5.5 5.4 GDP-M3 Ratio$## 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.0 Scheduled Commercial Banks Aggregate Deposits 14.2 14.1 10.7 9.3 11.3 6.2 10.0 7.9 11.4 Bank Credit 14.1 13.9 9.0 10.9 4.5 10.0 13.3 6.1 5.6 Non-food Credit 14.0 14.2 9.3 10.9 5.2 10.2 13.4 6.1 5.5 Credit-Deposit Ratio 77.9 77.8 76.6 77.7 72.9 75.5 77.7 76.4 72.7 Credit-GDP Ratio$ 52.9 53.4 52.4 52.6 50.9 50.4 51.5 51.0 56.4 # : 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 2012-13 and 2011-12=100 for the period 2013-14 to 2020-21. ** : Base for CPI-IW is 2001=100 till August 2020 and 2016=100 from September 2020 onwards. ## : Not expressed in per cent. ^ : March 31, 2017 over April 1, 2016 barring RM and its components. ^^ : Data pertain to March 26, 2021. $ : 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. 319ANNUAL REPORT 2020-21 APPENDIX TABLE 5: CAPITAL MARKET - PRIMARY AND SECONDARY (Amount in ` crore) Item 2019-20 2020-21 (P) Number Amount Number Amount 1 2 3 4 5 I. PRIMARY MARKET A. Public and Rights Issues 1. Private Sector (a+b) 107 80,493.0 90 1,07,867.9 a) Financial 38 17,335.8 26 31,395.9 b) Non-Financial 69 63,157.2 64 76,472.0 2. Public Sector (a+b+c) 3 11,455.9 5 12,485.2 a) Public Sector Undertakings 2 1,115.1 2 1,262.9 b) Government Companies … … … … c) Banks/Financial Institutions 1 10,340.8 3 11,222.3 3. Total (1+2, i+ii, a+b) 110 91,948.9 95 1,20,353.1 Instrument Type (i) Equity 76 76,964.9 78 1,10,118.3 (ii) Debt 34 14,984.0 17 10,234.8 Issuer Type (a) IPOs 58 21,285.6 55 31,029.7 (b) Listed 52 70,663.28 40 89,323.4 B. Euro Issues (ADRs and GDRs) … … … … C. Private Placement 1. Private Sector (a+b) 1,474 3,28,142.5 1,764 4,33,946.5 a) Financial 1,286 2,29,298.6 1,480 2,82,355.3 b) Non-Financial 188 98,843.9 284 1,51,591.3 2. Public Sector (a+b) 244 3,51,255.8 216 3,82,435.6 a) Financial 156 2,13,037.3 138 2,55,149.9 b) Non-Financial 88 1,38,218.5 78 1,27,285.7 3. Total (1+2, i+ii) 1,718 6,79,398.3 1,980 8,16,382.1 (i) Equity 13 51,216.4 30 74,738.4 (ii) Debt 1,705 6,28,181.9 1,950 7,41,643.7 D. Qualified Institutional Placement 13 51,216.4 30 74,738.4 E. Mutual Funds Mobilisation (Net)# 87,300.8 2,14,743.0 1. Private Sector 24,059.4 1,42,377.9 2. Public Sector 63,241.4 72,365.1 II. SECONDARY MARKET BSE Sensex: End-Period 29,468.5 49,509.2 Period Average 38,756.7 40,826.4 Price Earnings Ratio@ 17.8 34.4 Market Capitalisation to GDP ratio (%) 55.8 104.3 Turnover Cash Segment 6,60,896.0 10,45,089.6 Turnover Equity Derivatives Segment 2,62,268.6 3,50,60,169.1 NSE Nifty 50: End-Period 8,597.8 14,690.7 Period Average 11,488.0 12,016.9 Price Earnings Ratio@ 19.4* 33.2* Market Capitalisation to GDP ratio (%) 55.2 103.6 Turnover Cash Segment 89,98,811.1 1,53,97,910.0 Turnover Equity Derivatives Segment 34,45,32,891.8 64,36,18,108.3 …: Nil. P: Provisional (for 2020-21). #: Net of redemptions. @: As at end of the period. *: Price Earnings Ratio of Nifty 50 for 2019-20 and 2020-21 are not comparable due to change in calculation methodology by NSE w.e.f. March 31, 2021. Source: SEBI, NSE, BSE, CSO, various merchant bankers and RBI Staff Calculations. 320APPENDIX 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 48.6 49.9 2019-20 1.6 3.3 0.3 4.6 50.9 52.3 2020-21 (RE)# 5.9 7.4 3.9 9.4 62.6 63.9 2021-22 (BE) 3.1 5.1 1.5 6.8 61.6 62.5 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 0.8 0.1 -1.6 2.4 25.2 25.2 2019-20 (PA) 0.9 0.7 -1.1 2.4 … … 2020-21 (RE) 2.4 1.5 -0.1 4.1 … … 2021-22 (BE) 1.5 0.3 -1.4 3.2 … … … : Not Available. RE: Revised Estimates. BE: Budget Estimates. PA: Provisional Accounts. @ : 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. # : Going by the principle of using latest GDP data for any year, GDP used for 2020-21 is the latest available Second Advance Estimates. In view of this principle, the fiscal indicators as per cent of GDP given in this table may at times marginally vary from those published earlier. * : Data for 2020-21 (RE) and 2021-22 (BE) are for 17 states only. Note: 1. Negative sign (-) indicates surplus in deficit indicators. 2. GDP figures used in this table are on 2011-12 base, which are the latest available estimates. Source : Budget documents of the central and state governments, Comptroller and Auditor General of India. 321ANNUAL REPORT 2020-21 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 5,040.7 5,875.9 6,470.3 1.1 Developmental 2,201.3 2,537.9 2,635.1 2,882.8 3,486.5 3,818.4 1.1.1 Revenue 1,668.3 1,878.4 2,029.0 2,224.4 2,708.2 2,920.5 1.1.2 Capital 412.1 501.2 519.4 596.8 694.3 794.6 1.1.3 Loans 121.0 158.3 86.7 61.6 84.0 103.3 1.2 Non-Developmental 1,510.8 1,672.6 1,812.5 2,078.3 2,295.1 2,556.5 1.2.1 Revenue 1,379.7 1,555.2 1,741.4 1,965.9 2,172.0 2,421.6 1.2.1.1 Interest Payments 648.1 724.4 814.8 894.5 969.3 1,091.6 1.2.2 Capital 127.3 115.8 69.4 111.0 121.2 133.0 1.2.3 Loans 3.8 1.6 1.7 1.3 2.0 2.0 1.3 Others 48.5 55.4 68.4 79.7 94.3 95.4 2 Total Receipts 3,778.0 4,288.4 4,528.4 5,023.4 5,779.4 6,524.5 2.1 Revenue Receipts 2,748.4 3,132.2 3,376.4 3,797.7 4,338.2 4,828.1 2.1.1 Tax Receipts 2,297.1 2,622.1 2,978.1 3,278.9 3,548.0 3,951.7 2.1.1.1 Taxes on commodities and services 1,441.0 1,652.4 1,853.9 2,030.1 2,157.1 2,436.9 2.1.1.2 Taxes on Income and Property 852.3 965.6 1,121.2 1,246.1 1,386.7 1,510.3 2.1.1.3 Taxes of Union Territories 3.9 4.1 3.1 2.8 4.2 4.5 (Without Legislature) 2.1.2 Non-Tax Receipts 451.3 510.1 398.3 518.8 790.3 8,76.4 2.1.2.1 Interest Receipts 35.8 33.2 34.2 36.3 33.3 30.9 2.2 Non-debt Capital Receipts 59.8 69.1 142.4 140.3 129.5 232.2 2.2.1 Recovery of Loans & Advances 16.6 20.9 42.2 44.7 62.5 18.3 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 1,102.7 1,408.2 1,410.0 3A Sources of Financing: Institution-wise 3A.1 Domestic Financing 939.7 1,046.7 989.2 1,097.2 1,403.3 1,405.4 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 708.6 429.6 844.4 710.1 885.2 ----- 3A.2 External Financing 12.7 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 1,097.2 1,403.3 1,405.4 3B.1.1 Market Borrowings (net) 673.3 689.8 794.9 795.8 962.4 1,105.6 3B.1.2 Small Savings (net) 80.0 35.0 71.2 89.0 213.4 213.4 3B.1.3 State Provident Funds (net) 35.3 45.7 42.4 51.0 42.9 42.5 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 17.4 96.5 -54.3 3B.1.7 Others 158.4 287.3 49.7 96.0 55.3 59.1 3B.2 External Financing 12.7 18.0 7.9 5.5 4.9 4.6 4 Total Disbursements as per cent of GDP 27.3 27.7 26.4 26.6 28.9 28.8 5 Total Receipts as per cent of GDP 27.4 27.9 26.5 26.5 28.4 29.0 6 Revenue Receipts as per cent of GDP 20.0 20.3 19.7 20.0 21.3 21.5 7 Tax Receipts as per cent of GDP 16.7 17.0 17.4 17.3 17.4 17.6 8 Gross Fiscal Deficit as per cent of GDP 6.9 6.9 5.8 5.8 6.9 6.3 …: Not Available. RE: Revised Estimates. BE: Budget Estimates. Note : 1. GDP data is based on 2011-12 base. 2. The revision of general government fiscal data will be undertaken in the month of October after all states present their final budget and they are tabulated, consolidated and disseminated by the Reserve Bank through its annual publication - 'State Finances: A Study of Budgets'. Accordingly, any revision of fiscal indicators as ratio to GDP due to revision in GDP will also be undertaken at that time. Source : Budget Documents of the central and state governments. 322APPENDIX TABLES APPENDIX TABLE 8: INDIA’S OVERALL BALANCE OF PAYMENTS (US$ million) 2016-17 2017-18 2018-19 2019-20 2020-21* 1 2 3 4 5 6 A. CURRENT ACCOUNT 1 Exports, f.o.b. 2,80,138 3,08,970 3,37,237 3,20,431 2,05,174 2 Imports, c.i.f. 3,92,580 4,69,006 5,17,519 4,77,937 2,65,378 3 Trade Balance -1,12,442 -1,60,036 -1,80,283 -1,57,506 -60,204 4 Invisibles, Net 98,026 1,11,319 1,23,026 1,32,850 92,554 a) ‘Non-Factor’ Services of which : 68,345 77,562 81,941 84,922 64,996 Software Services 70,763 72,186 77,654 84,643 66,171 b) Income -26,302 -28,681 -28,861 -27,281 -27,060 c) Private Transfers 56,573 62,949 70,601 76,217 55,331 5 Current Account Balance -14,417 -48,717 -57,256 -24,656 32,350 B. CAPITAL ACCOUNT 1 Foreign Investment, Net (a+b) 43,224 52,401 30,094 44,417 69,676 a) Direct Investment 35,612 30,286 30,712 43,013 40,819 b) Portfolio Investment 7,612 22,115 -618 1,403 28,857 2 External Assistance, Net 2,013 2,944 3,413 3,751 7,174 3 Commercial Borrowings, Net -6,102 -183 10416 22,960 -6,362 4 Short Term Credit, Net 6,467 13,900 2,021 -1,026 -1,784 5 Banking Capital of which : -16,616 16,190 7,433 -5,315 -16,642 NRI Deposits, Net -12,367 9,676 10,387 8,627 7,903 6 Rupee Debt Service -99 -75 -31 -69 -57 7 Other Capital, Net$ 7,559 6,213 1,057 18,462 -1,151 8 Total Capital Account 36,447 91,390 54,403 83,180 50,854 C. Errors & Omissions -480 902 -486 974 693 D. Overall Balance [A(5)+B(8)+C] 21,550 43,574 -3,339 59,498 83,897 E. Monetary Movements (F+G) -21,550 -43,574 3,339 -59,498 -83,897 F. IMF, Net 0 0 0 0 0 G. Reserves and Monetary Gold (Increase -, Decrease +) -21,550 -43,574 3,339 -59,498 -83,897 of which: SDR allocation 0 0 0 0 0 Memo: As a ratio to GDP 1 Trade Balance -4.9 -6.0 -6.7 -5.5 -3.2 2 Net Services 3.0 2.9 3.0 3.0 3.4 3 Net Income -1.1 -1.1 -1.1 -1.0 -1.4 4 Current Account Balance -0.6 -1.8 -2.1 -0.9 1.7 5 Capital Account, Net 1.6 3.4 2.0 2.9 2.7 6 Foreign Investment, Net 1.9 2.0 1.1 1.5 3.7 * : Data in Column 6 are provisional and pertains to April-December 2020. $ : 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. 323ANNUAL REPORT 2020-21 APPENDIX TABLE 9: FOREIGN DIRECT INVESTMENT FLOWS TO INDIA: COUNTRY-WISE AND INDUSTRY-WISE (US$ million) Source/Industry 2016-17 2017-18 2018-19 2019-20 2020-21 (P) 1 2 3 4 5 6 Total FDI 36,317 37,366 38,744 42,629 52,545 Country-wise Inflows Singapore 6,529 9,273 14,632 12,612 15,908 US 2,138 1,973 2,823 3,401 13,204 Mauritius 13,383 13,415 6,570 7,498 4,491 UAE 645 408 853 323 4,071 Saudi Arabia 12 125 27 89 2,815 Cayman Islands 49 1,140 863 3,496 2,558 Netherlands 3,234 2,677 2,519 5,295 2,138 Japan 4,237 1,313 2,745 2,308 1,794 France 487 403 375 1,167 810 UK 1,301 716 1,211 1,125 779 Germany 845 1,095 817 443 626 Spain 213 243 109 83 425 South Korea 466 293 982 777 400 Luxembourg 99 243 251 252 267 Belgium 172 213 56 388 246 Taiwan 12 112 24 44 219 Switzerland 502 506 280 140 188 Others 1,993 3,218 3,607 3,188 1,604 Sector-wise Inflows Computer Services 1,937 3,173 3,453 4,104 23,050 Transport 891 1,267 1,019 2,333 7,584 Manufacturing 11,972 7,066 7,919 8,153 6,739 Retail & Wholesale Trade 2,771 4,478 4,311 4,914 2,960 Financial Services 3,732 4,070 6,372 4,326 2,728 Communication Services 5,876 8,809 5,365 6,838 2,314 Business Services 2,684 3,005 2,597 3,684 1,750 Construction 1,564 1,281 2,009 1,937 1,746 Electricity and Other Energy Generation, Distribution & Transmission 1,722 1,870 2,427 1,906 989 Education, Research & Development 205 347 736 528 963 Miscellaneous Services 1,816 835 1,226 443 671 Real Estate Activities 105 405 213 564 401 Restaurants and Hotels 430 452 749 2,546 278 Mining 141 82 247 217 186 Trading 0 0 0 0 0 Others 470 226 102 137 187 P: Provisional. Note: Includes FDI through approval and automatic routes only. Source: RBI. 324