FINANCIAL SECTOR

MPC: The monetary policy committee (MPC) was set up by amending the RBI Act of 1934—formal ‘inflation targeting’ commenced with target being 4 per cent (for the next 5 years, till the next revision) with tolerance level of

+/- 2 per cent. Banks switched over to the marginal cost of fund based lending rate (MCLR) from April 2016—this is aimed at better transmission of monetary policy signals from the RBI. Though lending rates didi not fall as much the rate was cut by the RBI.

Liquidity situation: RBI has been managing liquidity through its liquidity management framework (LMF). By late 2016, RBI pumped liquidity through open market operations (OMOs). Post the withdrawal of specified bank notes (SBNs), RBI has mopped the large surplus liquidity through variable reverse repo rate. Government also increased the limit on securities under market stabilisation scheme from Rs. 30,000 crore to Rs. 6 lakh crore. The weighted average call money rate (WACR), on an average had been around policy rate.

Government bills/securities: There was a sharp fall in the 91 days treasury- bill rate in April 2016 owing to 25 bps cut in repo rate. Ten years government security (G-sec) yield however continued to tread high in spite of the rate cut and in fact increased marginally after the rate cut being 6.63 per cent by December 2016.

Banking sector: Banks performance, particularly the PSBs (public sector banks), continued to be subdued—asset quality deteriorating further. The gross non-performing assets (GNPAs) to total advances ratio of scheduled commercial banks (SCBs) increased to 9.1 per cent from 7.8 per cent between March and September 2016. Profit after tax (PAT) contracted on

year-on-year basis in the first half of 2016–17 due to higher growth in risk provisions, loan write-off and decline in net interest income.

Credit growth: Non-food credit (NFC) outstanding grew at sub 10 per cent for all the months except for September 2016. Credit growth to industrial sector remained persistently below 1 per cent (with contraction in August, October and November). Agriculture and personal loans (PL) remained the major contributor to growth in NFC.

Corporate bond market: RBI took measures to strengthen the corporate bond market (accepting many recommendations of the Khan Committee)—

(i) Banks permitted to issue rupee-denominated bonds overseas (masala bonds) for their capital requirements and for financing infrastructure and affordable housing;

(ii) Brokers registered with the SEBI and ‘market makers’ in corporate bond market permitted to undertake repo/reverse repo contracts in corporate debt securities—aimed at promoting secondary market transactions in these bonds;

(iii) Banks allowed to increase the partial credit enhancement they provide for corporate bonds to 50 per cent from 20 per cent—aimed at helping lower-rated corporates to access the bond market;

(iv) Permitting primary dealers to act as market makers for government bonds—aimed at increasing accessibility to retail investors; and

(v) Entities exposed to exchange rate risk allowed to transact up to US$ 30 million.

Stock performance: For the calendar year 2016, Sensex grew by 1.95 per cent and Nifty by 3.0 per cent (as compared to losses registered in 2015). The upward momentum peaked around September 2016 and lost steam thereafter, due to foreign capital outflows. Global and domestic factors had a sizable impact—some of the closely watched developments were the Brexit, the US Presidential elections as well as policy announcements by the US Federal Reserve and the RBI. In addition, other factors which weighed on market sentiment included the policy decisions taken by the OPEC regarding oil production and the appointment of the new governor of the RBI.

Foreign Portfolio Investments: Net foreign portfolio investments turned

negative (for the first time since the meltdown of 2008)—an outflow of Rs. 23079 crore. The outflow was not a phenomenon associated with Indian markets alone as they pulled out of most EMEs (emerging market economies) in a big way due to higher returns in advanced economies.