Letters to the editor dated February 22, 2021

This refers to ‘The changing face of monetary intervention’ (February 22). The change in the approach of MPC not to set interest rates based on CPI inflation but to make the objective hybrid to strike a balance between growth and inflation deviates from the fundamental concept of economic theory. To ensure low interest rate to facilitate smooth government borrowing of ₹12-lakh crore without considering other players will have its own impact on the economy. The first indication is the continued devolvement of long-term bonds (10 years and more) on primary dealers.

There is a virtual tug-of-war between bidders demanding higher yields and the RBI, with the former not convinced with the rate-setting process pursued by the RBI. Also, multiple reference rates set by the RBI send confused signals to the market. For instance, with effect from October 2019, the RBI had mandated that banks link all new floating rate loans to an external benchmark like repo rate, three-month or six-month treasury bill yield, or any other benchmark. If movement of repo rate is not in consonance with bond rates, the interest rate set by banks is bound to get distorted based on their choice of external benchmark.

Chennai

Apropos ‘Farm protests don’t worry the BJP’ (February 22), the opposition did try to leverage the huge mobilisation of farmers, a critical voter segment for political parties, at Delhi border but could not take it to the next level. What is more worrisome is that the farm issue combined with rising petrol prices have not been able to push the ruling party into a corner. This is because the opposition does not look like a united front, as various parties are fighting their own battles rather than join hands for larger causes. As far as main opposition party, the Congress, it seems to have accepted its fate of being on the fringes.

Noida

Almost all nations have now started announcing Covid relief packages following a year-long fight with the pandemic. For instance, US President Joe Biden recently talked about his government’s plans for a fresh relief package and expressed empathy and compassion for the people affected by the pandemic. Such gestures send positive vibes across the board.

Somewhat freed from the pandemic, governments of most countries are now looking to revive their economies and compensate for all the losses caused. The relief package apart, joint strategies, mutual understanding and, above all, multilateral pacts are needed to get the world economy back on track and create more jobs.

Mumbai

The RBI recently circulated a discussion paper on revised regulatory framework for NBFCs. Aligning NBFCs with banks is the right regulatory move as the business models of both are similar. However, NBFCs have a different customer base and have no access to demand deposits which makes their working more difficult.

Some of the changes proposed by the RBI may need some moderation. The minimum tenor of deposits may be reduced to six months for NBFCs as it will help them mobilise short-term funds at lower cost. The ceiling on interest on deposits may be linked to repo rates instead of fixed rates.

NPA classification for NBFC is proposed to be harmonised to 90 days from the present 180 days and NBFCs will find it difficult to cope with this sudden transition. While co-origination of business by banks and NBFCs is to be encouraged the latter should be debarred from financing any borrower who does not have satisfactory dealings with banks.

As the objective is to align NBFCs with banks, one director should have had experience in banks, at least one director should be from an NBFC, and credit committees should compulsorily have one of them. Large NBFCs should follow listing regulations even if there is no public shareholding and prepare themselves for eventual conversion into banks.

Mumbai

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