In today's Finshots, we talk about a few things the RBI had shared with us yesterday. It's quite interesting folks. So do read on...


The Story

Let’s start with RBI's prognosis on the movement of high-frequency indicators

When you make policy decisions, you wouldn’t want to wait for data. You’d take anything that’s available so long as you can get them on a frequent basis. These data sets are generally referred to as high-frequency indicators and they can offer us some pretty decent insights.

Look at the electricity data and you can tell if large industries are in production mode. Look at the number of tractors sold last month and it tells you whether farmers are confident about the future. Look at the fertiliser sales data and you can glean insights about the harvest next season. Look at toll collection and you can tell if trucking activity has resumed. Look at the railways' data and you’ll know if supply chains are intact.

Bottom line — They can tell us so much about what’s happening in the economy even when the statisticians haven’t put out the growth numbers yet (which is only done once every quarter). And while high-frequency indicators have collapsed in the recent past, RBI thinks they finally seem to be levelling off. Maybe this is a turning point.

Who knows?

On Inflation

The RBI has a mandate. And the mandate centres on a rather simple premise — price stability. Although the RBI governor and the committee also focus on other things including growth, it’s inflation that’s core to RBI’s agenda.

They stand guard and monitor the prices of fruits and pulses and mobile data and closely analyze the numbers to see if there’s an aberration — a quick spike in prices or a precipitous drop that could have catastrophic consequences elsewhere. And right now it seems as if they are slightly concerned.

After all supply disruptions have been commonplace post-COVID-19 and the fallout seems to have pushed food prices higher. Even though the previous harvest was bountiful by all accounts, you have to remember that this stuff has to reach the mandis and the retail stores before end consumers can get their hands on it. If it doesn’t, you’re going to see some variation in prices. And since trucking took a back seat once the lockdown was imposed, food prices did escalate a bit.

The RBI also thinks we might have to worry about cost-push inflation. Usually, prices increase when producers have to worry about higher production costs. This might happen when people have to borrow at ridiculously high-interest rates to keep the operations going. But interest rates have been pretty modest for a while now and it seems production costs are trending upwards simply because labour is hard to come by. People are going home. They are switching jobs. It’s a mess. Maybe, it will take a while before costs can normalize. But until then, the RBI doesn’t want to do anything that might push prices even further. They will wait. They will watch and they will act once prices moderate. Which, by the way, they think will happen soon enough considering we are expecting a really good monsoon this year.

On Restructuring

The RBI is also very particular about defaults. When borrowers fail to meet their repayment obligations, the Reserve Bank mandates banks to classify these loans appropriately — to reflect its true nature. Even if the borrower works with banks to renegotiate terms and restructure the loan, banks, in most cases have to downgrade the loans and tell investors that they might not receive the principal and interest in full.

However, considering the exceptional circumstances, the RBI is willing to offer some leeway. If certain borrowers aren’t able to meet their repayment obligations and want to restructure their loans, the banks can work with their clients and offer them some extra leeway without downgrading the loan, subject to certain conditions.

MSMEs can also avail a similar benefit. But they’ve had this scheme in place for a while now. So it’s simply an extension of sorts.

Oh, and there was also that bit about gold loans. Right now banks that offer gold loans are extremely dependant on the collateral backing the loan — the gold itself. The margin of safety here ultimately depends on the value of all the gold the bank holds as security. Academics define this using the Loan-To-Value (LTV) ratio — a metric that tells you about the collateral in conjunction with the loan book. For instance, a bank has an LTV of 75% if they have gold worth ₹100 backing loans worth ₹75.

But think about what happens when the LTV increases, to say 90%. They can offer loans worth ₹90 for the same amount of gold. And so, the RBI increased the permissible LTV on gold loans to 90% (from 75%) because people might need to borrow a lot from banks right now.

However, do bear in mind — if the value of the collateral backing the loans falls precipitously, then that margin of safety disappears rather quickly. So you’ve got to be careful with this.

Anyway, the RBI had a lot more to say. But perhaps it's prudent to wrap this story now with some poignant words from the governor himself —

At this juncture, the war against COVID-19 is most intense, and the world is bracing up for a second wave as it cautiously opens up. The pandemic poses a challenge of epic proportions, but our collective efforts, intrepid choices, innovations and true grit will eventually take us to victory. As Mahatma Gandhi had said, “Patience and perseverance, if we have them, overcome mountains of difficulties”. The challenges of today will only strengthen our resilience and self-belief. We shall remain alert and watchful and collectively do whatever is necessary to revive the economy and preserve financial stability. Courage and conviction will conquer Covid-19.

Until then, the Dark Knight will hopefully stand guard.

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