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Mint Street Memos (MSM) is a series of documents that are in the form of brief reports and analysis on contemporary topics, prepared by the staff of RBI and Centre for Advanced Financial Research and Learning (CAFRAL), or drawn from one of the recent publications of the Bank.

July 2019

Impact of Prudential Regulations for Unrated Exposures on the Rating Behaviour of Large Borrowers

Unrated exposures can pose challenges in an accurate assessment of both the creditworthiness of borrowers and the capital levels in banks. The Reserve Bank modified the prudential regulatory guidelines in 2016 to plug the regulatory arbitrage in terms of risk weights between rated and unrated exposures above a specific threshold for the size of bank exposure to the borrower. Exploiting this exposure threshold in a regression discontinuity design, this study shows that the policy had a desired impact in discouraging a switch among the treated group of borrowers from the rated to the unrated category. In aggregate terms, the change in policy resulted in a 50 per cent decline in the treated borrowers' likelihood of switching from rated to unrated categories over quarters; this impact of the change in policy was significantly higher among borrowers of public sector banks than private sector banks.

May 2019

Inflation Forecasts: Recent Experience in India and a Cross-country Assessment

Inflation forecasts are critical for the conduct of a forward-looking monetary policy and play a special role in an inflation-targeting framework by acting as an intermediate target. The analysis in this paper suggests that the episodes of large inflation forecasts errors for India were associated with large and unanticipated shocks emanating from prices of food items, especially perishables such as vegetables. Cross-country evidence suggests that there is a positive correlation of forecast errors with the share of food items in the Consumer Price Index (CPI) basket. Forecasts by the Reserve Bank of India staff generally satisfy the key properties of unbiasedness and efficiency and compare well with those of select central banks.

April 2019

What Drives Automobile Sales? It’s not Credit

In this study, we document the important factors that affect automobile sales growth in India. We find that fuel price movements matter for aggregate growth in automobile sales while credit appears to have no significant impact. The impact of crude prices is also reflected in the market valuation of automobile firms. In addition, we use disaggregated data on vehicle registrations and provide evidence that exogenous policy changes such as vehicle insurance and the maturing of the ride-hailing services segment have generated short-term fluctuations in automobile sales. Overall, we find that the recent slowdown in automobile sales can broadly be explained by high fuel prices and exogenous policy changes.

January 2019

The Impact of Crude Price Shock on India’s Current Account Deficit, Inflation and Fiscal Deficit

The crude price shock in the 1970s sent many economies tumbling down for almost a decade. Four decades later, this shock can still jeopardise those economies which are primarily dependent on crude imports. This study looks at the quantitative impact of crude price shock on India’s three major macro-stability indicators: current account deficit (CAD), inflation and fiscal deficit. We find that if a crude price shock hits the Indian economy, the CAD to GDP ratio will rise sharply irrespective of a higher GDP growth; and a 10 USD/barrel increase in oil price will raise the inflation by roughly 49 basis points (bps) or increase the fiscal deficit by 43 bps (as a percentage of GDP) if the government decides to absorb the entire oil price shock rather than passing it to the end users.

December 2018

Monetary Policy and Yields on Government Securities

Given the key role played by sovereign bond yields in the transmission of monetary policy, this study empirically examines the drivers of government bond yields in India. Policy rate is found to be a key driver of bond yields of short-term securities, and the impact on yields weakens as the tenure of the bonds increases. Estimates in this study suggest that an increase of 100 basis points (bps) in the policy rate could, over time, lead to an increase of around 95 bps in yields of 15-91 days residual maturity Treasury Bills and around 20 bps for 10-year government securities. The size of the government’s borrowing programme, foreign portfolio investments in the domestic bond market and foreign bond yields are also found to move domestic government bond yields, although the impact of these factors differs across maturities.

November 2018

Housing Services in CPI – Measurement Issues

More than one in ten accommodations in urban areas of the country is provided by employer (largely the government). These accommodations, along with privately rented and owner-occupied dwellings are sampled in consumer price index (CPI) to work out the change in price of housing service every month. For the government accommodations, house rent allowance (HRA) foregone is used as the rental cost. This paper discusses that using HRA foregone as a measure of house rent (a) does not capture true movement in price of housing services; and (b) causes substantial disturbance in measurement of monthly changes in headline CPI. To address this issue, this memo suggests alternative ways of measuring house rent in CPI.

September 2018

Finance-Neutral Output Gap: Empirical Estimates for India

This study provides the context, rationale and analytical framework of the finance-neutral output gap (FNOG) of an economy. In the conventional (inflation-neutral) output gap measure, inflation is the sole indicator of the state of the economy; in other words, imbalances in the economy are reflected solely in high or low inflation in this measure. However, in the FNOG, heightened levels of financial variables in the form of excessive credit growth and unsustainable asset market returns are the key sources of imbalances rather than inflation. A comparison of the conventional output gap versus FNOG in the Indian context suggests significant divergence between the two. Latest data suggest that the FNOG in India has closed in recent quarters faster than the conventional output gap due to an acceleration in credit growth and buoyant asset market conditions.

August 2018

How have MSME Sector Credit and Exports Fared?

This study assesses the recent credit dynamics and export performance of Micro, Small and Medium Enterprises (MSMEs). Demonetisation led to a further decline in the already decelerating credit growth of the MSME sector, while GST implementation does not seem to have had a significant impact on overall credit to MSMEs. The growth in credit to MSMEs has recovered since the lows of late 2017 to reach the mid-2015 level. Micro credit to MSMEs, including loans by banks and non-banking financial companies (NBFCs), shows a particularly healthy rate of growth in recent quarters. In contrast to credit growth, MSME exports appear to be affected more by GST implementation vis-à-vis demonetisation.

May 2018

Examining Gross Domestic Product Data Revisions in India

An analysis of data revisions relating to national accounts aggregates in India shows a general bias towards upward revisions in growth rates relative to first releases or advance estimates (AEs). Thus, the AEs need to be supplemented with other high frequency indicators of real sector to arrive at a more realistic assessment of the state of the economy.

April 2018

Impact of Increase in House Rent Allowance on CPI Inflation

This paper studies the impact of increase in house rent allowance (HRA), following recommendations of the 7th Central Pay Commission (CPC), on headline inflation. The HRA increase pushed up measured housing inflation significantly, with a peak impact of about 35 basis points. The impact is seen across most States and Union Territories. So far, the actual impact of the HRA increase on headline consumer price index has turned out to be similar to the ex-ante assessment provided by the Reserve Bank in the Fifth Bi-monthly Monetary Policy Statement, December 2017.

February 2018

Working Capital Constraints and Exports: Evidence from the GST rollout

The implementation and refund delays under the new tax regime of Goods and Services Tax (GST) seem to have led to working capital constraints for firms, which in turn might have hurt their exports in October 2017. We provide evidence supporting this hypothesis using sectoral data on exports and find sectors that have high working capital requirements took the maximum hit during this period. However, various initiatives by the Government of India since then appear to have significantly alleviated exporters’ concerns which got reflected in the exports growth pick up in November and December 2017.

January 2018

Credit disintermediation from banks - Has the corporate bond market come of age?

The significant increase in inflows into mutual funds and their subsequent deployment is altering the scope of disintermediation in India. The study looks at this evolving milieu and its implications for bank intermediation in general and credit portfolio of banks in particular.

December 2017

State Government Yield Spreads – Do Fiscal Metrics Matter?

Spreads of state development loans (SDLs) relative to the yields of central government securities of corresponding maturity appear to be caused by illiquidity and prevailing market conditions. Nevertheless, inter-state variations are hardly observed in market pricing of the loans in primary auctions. This presents little market incentives for state governments to improve their fiscal positions and lower their debt.

November 2017

From Cash to Non-cash and Cheque to Digital: The Unfolding Revolution in India’s Payment Systems

Empirically evaluating the impact of demonetisation on inter-bank payment and settlement systems against the backdrop of progressive use of electronic modes and capping service charges, this study finds that (i) there has been a reduction in the usage of cheques prior to demonetisation; and (ii) since demonetisation, cash transactions have moved in a sustained manner to non-cash mode of payment systems via retail electronic payment systems, point of sale terminals and cheques.

September 2017

Non-Bank Funding Sources and Indian Corporates

The last decade has witnessed growing importance of non-bank funding sources for Indian corporate sector. Over the same time, Indian banking industry has been crippled by the ever-rising Non-Performing Assets (NPAs), which has reduced the effective supply of bank credit. The aim of this study is to understand the link between these two developments.

September 2017

Farm Loan Waivers, Fiscal Deficit and Inflation

Some Indian states have announced farm debt waivers recently, which bear ramifications for the fiscal burden of states over the medium term. Empirical estimates suggest that fiscal deficit can have an inflationary impact. If the combined fiscal deficit for 2017-18 goes up by 40 bps on account of farm loan waivers(both actual and intended), with the budgeted combined fiscal deficit at around 5.9 percent for 2017-18 and inflationary momentum remaining benign, ceteris paribus, this may lead to around 20 bps permanent increase in inflation, starting 2017-18.

Agriculture Loan Bank Accounts – A Waiver Scenario Analysis

Many state governments have announced farm debt waiver schemes with varying features / coverage to provide relief to indebted farmers. This note presents a scenario-based analysis of possible size of debt waiver using account level data on bank credit. The estimates range from ? 2.2 lakh crore to ? 4.2 lakh crore, depending on the extent of coverage under the waiver schemes. In all cases, however, loan waiver by states could adversely impact their fiscal position.

August 2017

Market Reaction to the Banking
Regulation (Amendment) Ordinance, 2017

The stock market reaction to the Banking Regulation (Amendment) Ordinance, 2017 has been positive for banks and their high quality borrowers but negative for distressed firms, suggestive of its potential to rejuvenate banking sector health and to improve capital allocation across firms.

August 2017

Financialisation of Savings into Non-Banking Financial Intermediaries

The study shows that an important positive impact of demonetisation has been to induce a shift towards formal channels of saving by households, particularly into equity/debt oriented mutual funds and life insurance policies. Non-banking financial companies (NBFCs) also seem to have been positively impacted. The challenge, going forward, would be to channelise these funds into productive segments of the economy.

Demonetisation and Bank
Deposit Growth

The study estimates ‘excess’ bank deposit growth following demonetisation employing alternative scenarios. It finds that there appears to have been a significant increase in bank deposits due to demonetisation. If sustained, such gains could have a beneficial impact in the form of financialisation of savings.

2019

2018

2017

Disclaimer- The views and opinions expressed in Mint Street Memos(MSM) are those of the authors and do not necessarily represent the views of the RBI.

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