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Key expectations from RBI's Monetary Policy Committee meet this week

The first bi-monthly Monetary Policy Committee (MPC) in FY 2019-20 begins on April 2, 2019.  A week back, Federal Open Market Committee (US) in its last bi-monthly meeting changed its stand and announced that there will be no rate hike this year, after announcing previously that two rate hikes will be appropriate in 2019. The Federal Reserve - US Central Bank - reduced expectations on GDP and inflation and forecast a higher unemployment outlook. The forthcoming MPC is expected to take the changed scenario in the largest economy of the world. This MPC assumes special significance as it comes close to the General Elections. The market is keenly watching to see it both in terms of rate decision if any, and policy guidelines relating to regulation and macroeconomic assessments.

Against this background, a few expectations from the Banking and ARC Sectors are enumerated below:

1. Reduction in Cash Reserve Ratio (CRR) from 4% to 3%

Banks have to maintain CRR with the RBI for contingencies though they do not get any interest on these. At present, it is 4%, and there has been no change in the last six years.


  • Over the years, the banking regulations have been scaled up, Basel III is implemented with more rigor and systemic risks have been addressed. Besides, as a first fall back, banks already maintain Statutory Liquidity Ratio (SLR) of 19.5% which are invested in 100% safe Government Securities.
  • Historically, thanks to proactive intervention by authorities, there has never been a crisis of confidence in the safety and soundness of banks to meet their obligations.

Reduction in CRR by 1% will release over Rs 1 lakh crore back to the banking system, and transmission will be across the board and swift.

2. Reduction in Repo rate by at least 25 basis points


  • The Indian economy grew at 6.6% during Oct-Dec 2018, the slowest in the last five quarters
  • Inflation outlook is benign; consumer inflation at 2.57% is much below RBI inflation target of 4%
  • A slowdown of export growth to 2.4% in February 2019
  •  In the last five weeks, the rupee has turned to Asia's best performing currency
  •  In the recent March meeting, the Fed has started being dovish and markets do not expect any further hike in 2019

A reduction in the Repo rate from the current 6.25% to at least 6% will incentivize credit growth and improve private sector investment.

3. Reduction in minimum investment required by ARCs in Security Receipts (SRs) from 15% to 5%


  • The Government of India has liberalized FII/FPI investment, allowing 100% in each tranche of Security Receipts (SRs) issued by Asset Reconstruction Companies (ARCs) subject to directions/guidelines of the RBI. This was made effective from May 12, 2005.  However, in terms of an earlier RBI notification dated August 05, 2014, issued to SC/RCs, ARCs have to invest a minimum of 15% in each class of SRs. This is an anomaly. So while the government allows 100% in SRs, in practice it cannot be more than 85% because of another RBI guideline.
  • Besides, nowadays most of ARC sale transactions are in 100% cash, and banks do not have any risk in their books. In such a scenario, if an eligible investor wants to pump in money, the role of an ARC is similar to that of an Asset Manager. SEBI Guidelines for Alternative Investment Fund (AIF) prescribes only 2.5% investment by the manager.

With these factors in mind, in the cases where banks get 100% clean cash exit while selling bad loans to ARCs, the minimum stipulation of investment by ARCs may be reduced from 15% to 5%.

4. ARCs may be permitted to subscribe to equity and extend interim finance for cases under IBC


ARCs are institutional entities created under a central legislation SARFAESI Act to resolve NPAs. However, in terms of current regulations, they cannot invest in equity (other than through debt conversion) and cannot extend finance to a sick unit (without first acquiring the debt).

It is suggested that for cases under IBC where ARC is a resolution applicant, they may be permitted to invest in equity or extend need-based finance to stressed assets for a successful turnaround.

Congress poll manifesto promises to simplify GST, create a department to help startups

Congress President Rahul Gandhi on Tuesday released his party's manifesto for the 2019 Lok Sabha elections, with focus on jobs, farmers, industry, and women security. The Congress manifesto was released in the presence of UPA Chairperson Sonia Gandhi, former Prime Minister Manmohan Singh, and other party leaders, at Congress headquarters in New Delhi.

Speaking at the event, Rahul Gandhi said if his party was elected to power, its government would give the highest priority to protecting existing jobs and creating new jobs.

"Congress will radically simplify the GST regime with a single moderate rate of tax, zero-rating of exports, and exemption for essential goods and services. We also promise panchayats and municipalities a share of GST revenues," said the manifesto.

If elected to power, the Congress President promises to create an "Enterprise Support Agency" to help entrepreneurs, including start-ups, with all-around business support including counseling, incubation, access to technology, funding, domestic and export markets, and the creation of new products, services, and intellectual property.

Congress proposes to create a new "Ministry of Industry, Services, and Employment", in a bid to underline the link between the growth of the industry and services sectors and rapid creation of jobs.

The Congress manifesto proposes to boost the growth of the manufacturing sector, particularly of MSMEs, through the provision of "world-class infrastructure in industrial hubs and cluster towns" in order to aid the expansion of current units and the creation of new units.

In a bid to boost jobs in the exports sector, the Congress party promises to reward "export-oriented industries" through tax rebates and incentives.

The Congress party promises "regulatory forbearance" for Micro and Small Enterprises. They will be exempt from all applicable laws and regulations (except the Minimum Wages Act and tax laws) for a period of 3 years from 1 April 2019 or, in the case of new businesses, the date of commencement of business. This means freedom from 'Inspector Raj'until they stabilize.

Congress will promote 'Mass Entrepreneurship' and support entrepreneurs to replicate tried and tested models of businesses in order to meet the growing demand for such goods and services, it said.

The main job-creating sectors are construction, textiles, leather, gems and jewelry, entertainment, tourism, and retail businesses. "We will reward businesses that create new jobs by lowering the effective direct tax rates and by lowering contributions to the CSR fund."

Congress proposes to provide "fiscal incentives" to businesses that employ a certain percentage of women.

In a bid to create jobs in the tourism sector, the Congress promises an adequately capitalized "Tourism Development Bank" to provide low-cost, long-term funds for investment in tourism-related businesses. "We will also offer lower rates of corporate and personal income tax on tourism-related business income," it added.

Rahul Gandhi promises to spend 6% of GDP on education if Congress is voted to power

Congress president Rahul Gandhi has said that if Congress voted to power, his government will allocate 6 percent of the total gross domestic product (GDP) on education. Rahul Gandhi was speaking at a public meeting on Sunday in Anantapur, Andhra Pradesh,  

Rahul Gandhi said, "We have decided to dramatically increase the amount of money we spend on education. After coming to power, we will spend six percent of GDP on education."  "We will make sure all our people have access to top quality education. Those who cannot afford education will get a scholarship," he added.

Rahul Gandhi also spoke about farmers during the rally and said, "Millions of farmers are begging before the Government of India to help them. Family after family has to suffer and commit suicide."

"Recently there were elections in northern India and we promised that after coming to power, we will waive off farmers' loan within the 10 days. Within two days of coming to power, we waived off farmers' loan in all three states," the Congress president added.

"We commit that loans of farmers in Andhra Pradesh will be waived off once we come to power in the state. Food processing industries will be set up close to farms. We will give you cold storage facilities and regular increase in the MSP," Gandhi said.

"I understand the difficulty being faced by farmers because of water. I understand what groundnut farmers are facing. As many as 600 farmers committed suicide last year," he said.

Pre-election sops give real estate a leg-up

The government's pre-election bonanza for residential real estate seems to have worked well, resulting in over 10 percent increase in sales in the March quarter besides an upswing in new launches.

Conventionally, the period between the announcements of election dates till the declaration of final results saw the real estate market move with caution as buyers adopted a wait-and-watch policy in anticipation that the newly elected government may offer some sops.

"Interestingly, 2019 is proving to be different. We estimate more than 10 percent increase in sales across the top seven cities in the first quarter of 2019, while new launches are estimated to see over 20 percent rise".

This is largely due to the triple benefits offered by the government in less than just two months of 2019. The government doled out sops in the budget for developers undertaking affordable housing projects as well as measures to boost second home buys. It also reduced the GST rates on both affordable and premium housing, which was further propelled by a decline in home loan rates post RBI's repo rate cut.

Niranjan Hiranandani, co-founder, and MD of Hiranandani Group and President of industry association Naredco said sales had picked up in the last two months following the measures undertaken by the government. "We are seeing that buyer interest is back in the market. Especially the reduction in GST from 12 percent (with input tax credit) to five percent (without ITC) for premium homes is attracting a lot of people", he said.

Puri pointed out that affordable housing was keeping the momentum going with both new supply and sales going up. "Even the leading developers- who were primarily into luxury segment- have launched projects within Rs 80 lakh budget. These projects are seeing good sales traction".

Affordable housing projects have been the biggest beneficiary of sops as not only the GST has been slashed from 8 percent to just one percent but builders also get full tax exemption on profits from projects registered till March 2020. "These sops have pushed sales in affordable housing even further", Puri said.

Fear of external interference in elections! BJP and Congress have got millions of foreign donations

As the Lok Sabha election approaches, the fear has reinforced that foreign interference can take place in Indian elections. Changes in the FCRA Act have made this apprehension stronger. This fear cannot be called in vain because both the BJP and the Congress have got foreign donations of crores of rupees to the big political parties.

The Association for Democratic Reforms (ADR) has received 34 such cases of foreign donations to political parties. Between 2003-04 and 2011-12, 19 cases of BJP and 15 have come in front of Congress. All these funds could be possible due to this because the government had made changes to FCRA 2010 and 1976. Foreign companies such as Indian subsidiary of Vedanta, Dao Chemicals, in this, have received both political parties from Rs 1 lakh to Rs 14.5 crore. In these years, BJP got Rs 19.4 crore from a foreign source and Rs 9.83 crore from Congress.

Why is it necessary to stop such funding

Political parties are considered to be the protector of democracy. They fight elections, form government and make laws. Therefore, the donations given to them are of great significance in terms of the operation of our democracy and the government. The Law Commission had given three major reasons for its reforms in the 2015 election on election reforms, that is why it is necessary to improve the funding system of political parties and bring transparency. The first thing is that money power hinders the system of equality in political parties and reduces the purity of political parties. Rich Candidates and political parties get more chance to win the elections.

Secondly, black money, bribery and transaction corruption have already dominated politics, which helps the candidates run their election campaign. The commission had laid the foundation of this quote by the Supreme Court to strengthen its point of view, "It seems that the source of some electoral fund is without accountable criminal wealth, in return for which they get protection. Similarly, there is black money in business groups, who hope to get higher returns in lieu of commission given on this investment, bribe or contracts. '

Third, uncontrolled or under-controlled electoral funding promotes two types of things. A-industry \ Private institutions use the funds to make sure the rules and regulations are softened. The money used for the funding of By-elections ultimately helps in achieving "favorable policies".

However, it must be kept in mind that it is not so easy to overturn the change that has been brought in the rules. The previous NDA government had tried to completely reverse the order of the Supreme Court in 2002, in this order the Supreme Court had said that all the candidates were given details of their educational and property related details as well as criminal cases filed in the affidavit of the election. Information will also be given. The NDA government first tried to stop it from the ordinance and then brought a bill for it in Lok Sabha, but when it came to knowing to the Supreme Court, it stopped the amendment as unconstitutional.





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