Conventionally speaking, the economic development of a nation is in many ways a function of the vibrancy of its debt market as it is a great avenue for capital raising by both public and private sector enterprises, thus reducing the need for direct government intervention, by saying other measures like printing more money or other forms of pump “priming”. Also, printing currency can be hyper-inflationary without real benefits in the long run. The depth of bond markets in the USA for instance is reflected in comparatively deeper participation from retail investors. In India, the bond markets for decades,never really evolved, thereby restricting the growth of the capital markets. But after the Modi government took charge, the bond market has seen many radical changes for the better in the last few years, including rationalisation of the 10-year yield curve.
In the past, under successively insipid and incompetent Congress regimes,lack of transparency, mispricing of bond instruments, information asymmetry, lack of asset securitization avenues, and lack of data sanity, have been the key concerns of investors, leading to a lack of depth in the corporate debt market in India, with very few takers for corporate credit. The market which was largely driven by one-to-one negotiations on pricing of most debt instruments, is now moving towards a comprehensive, price discovery mechanism. The real key to efficient debt discovery is largely about making it more accessible and the institutionalisation of debt, something the Modi government has persistently worked at.
While the Indian equity markets already went through the phase of transformation on the back of unbelievable levels of liquidity, debt markets were still thin in terms of depth and liquidity,for the longest time. Things have significantly improved in the last few years. As the resource requirements for the nation increase, debt has an integral role to play in reaching the GDP target of $5 trillion. It is precisely with this aim to embolden and empower India’s debt markets that, Prime Minister Narendra Modi introduced the RBI’s Retail Direct Scheme, on November 12, 2021.
The two schemes, the Retail Direct Scheme and the Integrated Ombudsman Scheme, will ease access to the government securities’ market for retail investors, deepen India’s debt market and improve customer experience. Under the “RBI Retail Direct Scheme”, investors will be able to easily open and maintain their government securities’ accounts online with the RBI for free. The scheme places India in a list of select few countries offering such a facility.
The Reserve Bank-Integrated Ombudsman Scheme (RB-IOS) is aimed at fast-tracking and resolving customer complaints against entities regulated by the central bank. The central theme of RB-IOS is based on “One Nation-One Ombudsman” with one portal, one e-mail address and one postal address, for the customers to lodge their complaints.
Retail Direct Scheme, will give a new dimension to the concept of inclusivit by bringing within its fold, the middle class, employees, small businessmen and senior citizens, who can participate in the government securities’ market, irrespective of the size of their savings, in a well regulated, financially hassle-free, safe and secure environment. In the last seven years, India has jumped over nineteen times in terms of digital transactions. Thanks to Unified Payments’ Interface (UPI), India has become the world’s leading country in terms of digital transactions which crossed 4 billion in number and over Rs 7.7 lakh crore in terms of value, for the first time ever in a single month, in October 2021. Today our banking system is operational 24 hours, 7 days, and 12 months anytime, anywhere in the country. Against this vibrant backdrop, it is even more important to ensure seamless customer experience and that is precisely what the RB-IOS initiative seeks to achieve.
The Indian government securities’ market for decades, suffered from lack of depth and liquidity, required to encourage greater participation from retail investors. The secondary market was also characterised by relatively lower volume of trades, vis-a-vis global peers. The bulk of the trading remained concentrated in a few securities and a few maturity buckets. Further, the lack of seamless integration of the bond market infrastructure with the securities’ market infrastructure, resulted in prohibitive costs. However, in the last few years, a number of sweeping changes were initiated by the Modi government to make the debt markets vibrant. The results are now increasingly visible. For instance, the corporate bond market which is currently 16-18% of GDP, is slated to rise to 22-24% of GDP by 2024-25.
At present, the RBI faces the challenge of managing the government’s massive borrowing programme at a cheaper cost. The rise in global crude oil prices and commodity prices are translating into higher input costs, leading to a broad-based rise in headline inflation of virtually every major economy, worldwide. While the RBI has placed greater priority on reviving growth, as recovery gains momentum and demand picks up, it would have to change its accommodative stance and move towards lumpy interest rate hikes, at some point in the future. Hence, deepening and broadening of India’s G-Sec market assumes even greater significance, and the decision to allow retail participation in the government bond market couldn’t have come at a better time. Rising rates could make it challenging for the RBI to keep in check, the overall cost of the government’s borrowing programme. Of course, calibrated Repo rate increases will certainly happen going forward like the recent 40 basis point hike. But within the overall ambit of calibrated rate hikes in the future, which the RBI possibly foresaw last year itself, allowing greater access to retail investors to widen the investor base was a brilliantly well-timed and much needed move. In the recent past, the RBI has sought to widen the investor base by allowing greater foreign investor participation in government bonds. A ‘fully accessible route’ for investment by foreign investors was opened, under which certain specified securities were opened for them without any restrictions. Direct retail participation in government securities is a massive financial sector reform, in India’s march towards becoming a US $5 trillion economy.
Till seven years back, banking, pension, insurance, everything used to be the exclusive preserve of a few, in India. Common citizens of the country, poor families, farmers, small traders-businessmen, women, dalits and the deprived, backward classes, had little access to all these facilities. The people who had the responsibility of taking these facilities to the poor,particularly the likes of an inept and corrupt Congress Party which ruled the country for the longest time,never really paid any attention to last-mile delivery. Before PM Modi took charge, in many semi-urban and rural areas, there was no bank branch, no staff, no internet, no awareness and the political dispensation of that period (Congress led UPA) was oblivious to the issues plaguing the masses. Lack of transparency was the biggest hurdle but now with PM Modi at the helm, transparency and accountability, have been reinforced.
To further strengthen the banking sector, in July last year, the Modi government decided to bring all urban cooperative and multi-state cooperative banks under the supervision of the RBI. Due to this, the governance of these banks is improving and trust in the system is getting stronger among lakhs of retail depositors. In the last seven years, NPAs were recognized without obfuscation. The focus was on resolution and recovery, public sector banks (PSBs), were recapitalized and banking consolidation was carried out in the right earnest. Thus far, cooperative banks had been under the thumbs of politicians, who misused their positions as bank heads to extend credit to those who had little intention to repay, leading to massive financial frauds. With regulatory changes in 2020 however and RBI now in control, the Modi government has sought to protect Rs 4.84 lakh crore held by over 8.6 crore depositors, in over 1540 cooperative institutions. The 1540 banks which include over 1482 urban cooperative banks and 58 multi-State cooperative banks, will enable RBI’s writ to apply on these cooperative banks, just as it applies to other scheduled banks in the country. This is a huge reform, since the RBI, till now, did not have adequate powers to control the cooperative banks, which came under the purview of the respective State governments. In view of this, depositors were at risk if there were any irregularities, but all that is now in the past.
For example, the net worth of multi-state Punjab and Maharashtra Cooperative (PMC) Bank had turned negative in 2019 following financial irregularities, especially, misreporting on loans extended to real estate developers.
The RBI had to intervene due to the fraud running into crores of rupees, restricting depositors’ withdrawal and barring the bank from either lending or accepting deposits.
Following this, the Modi government introduced a Bill in Parliament to amend the Banking Regulation Act to give RBI more regulatory powers over cooperative banks.
In Maharashtra, the NCP and the Congress have a stake or a say, directly or indirectly, in many cooperative banks. However, PM Modi took the brave and bold decision of bringing many cooperative banks under RBI purview, caring little for the protests by vested political parties, who were clearly miffed with this move. Modi does what he does, guided by the India First approach, political compulsions be damned. That is also precisely why he is both a great reformer and an innovator.
In July last year, another massive step was taken to protect retail deposit holders in banks, with the deposit insurance limit being increased from Rs 1 lakh to Rs 5 lakh. This covers 98.3% of all deposit accounts and 50.9% of all deposits in terms of value. Just compare this with what prevails globally, where only 80% of deposit accounts are insured, with merely 20%-30% of deposit values covered. The Deposit Insurance premium normally paid by banks to the DICGC was also raised from 10 paise for every Rs 100 deposit, to 12 paise and a limit of 15 paise was imposed. This was an enabling provision however and an increase in the premium payable will be determined based on consultations with the RBI and relevant stakeholders including the government.
The Deposit Insurance Credit Guarantee Corporation Bill 2021, was in fact a landmark one for many reasons. Normally, it takes about 8-10 years, after complete liquidation of the bank,for depositors to access their own money if a bank gets into trouble and runs into liquidation due to irregularities, fraud, or other reasons. Now, however, even if there’s a moratorium, this (90-day) measure will set in. The country’s deposit insurance law will mandatorily return up to Rs 5 lakh of savings of retail depositors, within 90 days of the central bank’s imposition of a moratorium on the said bank’s operations.
In many developed economies, the bond market is much larger than the equity market. For instance, the size of the global bond market was $106 trillion in 2019, of which the USA alone accounted for a solid $41 trillion. Coming to India and its bond market’s composition, the Indian government securities’ market is 2.7 times that of the corporate bond market. Hence the “RBI Retail Direct Scheme”, is a very well-timed move that will not only lead to greater financialisation of small savings and further widen the ambit of government bonds, but more importantly, in the long run, it can become a significant avenue for powering infrastructure growth, given that infrastructure is a capital guzzling sector and needs committed, long term capital. The relevance of a healthy bond market that was ignored for the longest time by erstwhile dispensations is finally getting its due under the Modi government, in more ways than one.
Many developed economies have long allowed individuals to invest in bonds, which usually offer smaller returns than other investments but are seen as a far safer bet.
Globally, analysts remain uncertain about the appetite for low-interest long-term government bonds at a time when interest rates are poised to rise as global central banks tighten monetary policy to combat rising inflation. India as managed the yield curve far better than global peers, without a sharp rise in bond yields, which were largely stable in the 6% to 6.36% range, for the most part of 2021. True, India’s 10-year bond yield hit 7.47% before cooling off a bit,after the unexpected Repo rate hike on May 4, 2022. But the recent surge in India’s bond yields was largely expected, given the rise in March 2022 CPI to 6.95%. The moot point is the fact that the RBI has done a commendable job in managing the growth versus inflation conundrum. And full marks to PM Modi for giving a wide berth to the RBI, with no unwanted interference.
The Monetary Policy Committee (MPC) at its meeting on May 4, 2022, decided to increase the policy Repo rate under the liquidity adjustment facility (LAF) by 40 basis points to 4.40% with immediate effect. Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.15% and the marginal standing facility (MSF) rate, and the Bank Rate to 4.65%. The MPC also decided to remain accommodative while focusing on withdrawal of accommodation, to ensure that inflation remains within the target going forward, while supporting growth. These decisions align to achieve the medium-term target for consumer price index (CPI) inflation of 4%, within a band of +/- 2%, while supporting growth. The decision to raise cash reserve ratio (CRR) by 50 basis points to 4.5%, to suck out excess liquidity of Rs 87000 crore will hold the banking system in good stead, going forward, given the rise in inflationary expectations.
The USA, for instance, saw its 10-year bond yields gyrating from a low of 0.318% in March 2020 to as high as 1.74% in October 2021, to a high of 3.14% in May 2022, on the back of tightening by the US Fed. Volatility in the yield curve distorts inflationary expectations and other related parameters. Stability in the yield curve, on the other hand, lends a good deal of predictability in managing growth, inflation, borrowing costs and the fiscal deficit. To that extent, the Modi government’s decision to widen and deepen India’s debt markets is an excellent move and perfectly timed, to navigate the post-Covid, global economic landscape.
The writer is an Economist, National Spokesperson of the BJP and the Bestselling Author of “The Modi Gambit”. Views expressed are the writer’s personal.