Why in the News?

• The Reserve Bank of India (RBI) began its three-day monetary policy review.
  • There is increasing speculation that the RBI may announce a cut in the Cash Reserve Ratio (CRR) to ease liquidity pressures.

What is Cash Reserve Ratio (CRR)?

• CRR is the percentage of a bank’s total deposits that it must maintain as liquid cash with the Reserve Bank of India (RBI) as a reserve.
• It is a tool used by the RBI to manage inflation and check excessive lending by banks.
  • It serves as a safety net during times of banking stress, ensuring banks have enough liquidity for day-to-day operations.
• As of now, the CRR is set at 4.5% of a bank’s Net Demand and Time Liabilities (NDTL).
• Banks do not earn interest on the amount they maintain as CRR with the RBI.
• CRR Requirements for Different Types of Banks:
  • Scheduled Commercial Banks (SCBs): Includes Public Sector Banks (PSBs), Private Sector Banks (PVBs), Regional Rural Banks (RRBs), Small Finance Banks (SFBs), Payments Banks, Primary (Urban) Co-operative Banks (UCBs), State Co-operative Banks (StCBs), and District Central Co-operative Banks (DCCBs).
  • Non-Scheduled Co-operative Banks & Local Area Banks: They must maintain CRR with themselves or with the RBI.
• Restrictions on CRR Funds
  • Banks cannot lend the funds held as CRR to corporates or individual borrowers.
  • The money held under CRR cannot be used for investment purposes by the bank.
  • No Interest is earned on the funds maintained as CRR by banks with the RBI.

Impacts of Declining CRR on the Economy

• Positive Impacts: 

• • Increased Bank Liquidity: A reduction in CRR frees up more funds for banks, improving credit availability and promoting investment and consumption.
  • Stimulus for Economic Growth: With more funds to lend, businesses can secure loans more easily, boosting economic activity and encouraging growth across sectors.
  • Lower Interest Rates: As banks have more liquidity, they may lower interest rates on loans, making credit cheaper and encouraging investment and consumer spending.

• Negative Impacts: 

• • Potential Inflationary Risks: Increased lending and spending can raise demand, which, if not matched by supply, can lead to inflationary pressures in the economy.
  • Asset Bubbles: Excess liquidity may result in overvalued assets like stocks or real estate, creating the risk of unsustainable price increases and potential market instability.

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Why in the News?

The Reserve Bank of India (RBI) released the “Report on Currency and Finance (RCF)” for the year 2023-24 with the theme – India’s Digital Revolution.

Key Highlights of the RCF:

[1] Digital Revolution

• The RCF emphasizes India’s leading role in the global digital revolution.
• With robust digital public infrastructure (DPI), evolving institutional frameworks, and a tech-savvy population, India has emerged as a frontrunner in this arena.
• Key initiatives such as Aadhaar, the world’s largest biometric-based identification system, and the UPI, a real-time, low-cost transaction platform, have revolutionized service delivery and financial inclusion.

[2] Digitalization in Finance

• The above-discussed initiatives have made retail payments faster and more convenient, while the RBI’s pilot runs of the E-Rupee position India at the forefront of digital currency initiatives.
• The digital lending ecosystem is also vibrant, with the Open Credit Enablement Network and the Open Network for Digital Commerce (ONDC) driving growth.

[3] Remittance Inflows in India

• India continues to lead as the highest remittance recipient globally, with US$ 115.3 billion in 2023, accounting for 13.5% of the world’s total remittances.
• The RCF highlights that more than half of India’s inward remittances in 2021 came from the Gulf countries, with North America contributing 22%.
• The remittance-to-GDP ratio for India has risen from 2.8% in 2000 to 3.2% in 2023, surpassing the gross FDI inflows to GDP ratio of 1.9% in 2023.
• Looking forward, India is poised to remain a leading supplier of labor, with its working-age population expected to rise until 2048, potentially propelling remittances to around $160 billion by 2029.

[4] Smartphones Penetration

• India’s mobile penetration has seen remarkable growth, with internet penetration reaching 55% in 2023 and an increase of 199 million internet users over the past three years.
• The cost per gigabyte of data in India is the lowest globally, at an average of Rs. 13.32 per GB.
• India has one of the highest mobile data consumption rates worldwide, with an average per-user per-month consumption of 24.1 GB in 2023.
• The number of smartphone users in India was about 750 million in 2023, expected to reach 1 billion by 2026. 
• The RCF projects that India will become the second-largest smartphone manufacturer within the next 5 years.

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Why in the News?

The RBI has repatriated over 100 tonnes of gold from the UK to its domestic vaults, the largest transfer since at least 1991.

What are Gold Reserves?

• • A gold reserve is the gold held by a country’s central bank, acting as a backup for financial promises and a store of value.
  • India, like other nations, stores some of its gold reserves in foreign vaults to spread out risk and facilitate international trading.

• India’s Gold Reserves:

• • As of the end of March 2024, the RBI held 822.10 tonnes of gold, with 408.31 tonnes stored domestically.
  • The share of gold in the total forex of India is around 7-8% as of 2023.

Where does the RBI store its gold?

• India’s gold reserves are primarily stored in the Bank of England, which is known for its stringent security protocols.
• The RBI also stores a portion of its gold reserves at the:

1. Bank for International Settlements (BIS) in Basel, Switzerland, and the
2. Federal Reserve Bank of New York in the United States.

Why does the RBI store its gold in foreign banks?

• Convenience: Storing gold overseas makes it easier for India to trade, engage in swaps and earn returns.
• Averting Risks: There are risks involved, especially during times of geopolitical tensions and war.
  • The recent freezing of Russian assets by Western nations has raised worries about the safety of assets kept abroad and the RBI decision to shift a portion of the gold reserve to India could be prompted by these concerns.
• Stable Prices: Unlike fiat currencies, which can be subject to inflation or devaluation due to various economic factors, the value of gold tends to be relatively stable over time, which makes it an attractive asset for central banks to hold as a reserve.

Benefits Offered by Gold Reserves

• Control domestic gold prices: With its big stash of gold, the RBI can help control local gold prices by using some of it in India. Last financial year, the RBI added about 27.47 tonnes of gold to the total reserve, bringing it to 794.63 tonnes.
• Security buffer: The increased gold reserve works as a hedge against any financial crisis and to take measures to control inflation as well as currency devaluation.

Why is the recent move significant?

• Efficiency and Confidence: Bringing gold back to India reduces storage fees and signals confidence in the stability of the Indian economy.
• Logistical Efficiency: Moving gold to India saves on storage fees paid to foreign custodians, such as the Bank of England.
• Diversified Storage: Repatriation ensures diversified storage, enhancing security and reducing dependency on foreign storage.

Has the RBI made similar purchases or transfers of gold in the past?

• RBI started buying gold in 2018 and had previously bought 200 tonnes during the global financial crisis in 2009.
• In the first quarter of 2024, the RBI bought 19 tonnes of gold, surpassing the 16 tonnes purchased throughout 2023.

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Why in the News?

Indian companies “external commercial borrowings” nearly doubled in FY24, reaching $49.2 billion, according to RBI data.

External Commercial Borrowing (ECBs) in India:

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Why in the News?

• The Reserve Bank of India (RBI) recently introduced three significant initiatives: the PRAVAAH portal, the RBI Retail Direct mobile application, and the FinTech Repository.
  • These initiatives aim to streamline regulatory processes, empower retail investors, and provide insights into the fintech sector.

1. PRAVAAH Portal:

• The PRAVAAH portal (Platform for Regulatory Application, VAlidation, and AutHorisation) serves as a centralised web-based platform for individuals and entities to seek regulatory approvals from the RBI.
• Offering features like online application submission and status tracking, the portal covers 60 different application forms across various regulatory departments, ensuring efficiency and transparency in the authorisation process.

2. RBI Retail Direct Mobile App:

• The RBI Retail Direct Mobile App provides retail investors with convenient access to government securities (G-Secs) trading directly from their smartphones.
• Accessible on both Android and iOS platforms, the app simplifies transactions in both primary and secondary markets, empowering retail investors to participate more actively in the securities market.

3. FinTech Repository:

The FinTech Repository aims to provide comprehensive data on Indian fintech firms, facilitating better regulatory understanding and policy formulation in the rapidly evolving fintech landscape.

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Why in the news?

RBI Governor Shaktikanta Das unveiled plans for a pilot program targeting the wholesale segment of Central Bank Digital Currency (CBDC) focusing on commercial papers (CPs) and certificates of deposits (CDs).

About Commercial Papers (CPs) and Certificates of Deposits (CDs)

With inputs from: https://www.indiainfoline.com

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Why in the news?

The RBI has introduced updated guidelines for Asset Reconstruction Companies (ARCs) through a master direction, effective from April 24, 2024.

What is an Asset Reconstruction Company (ARC)?

What are the new guidelines laid out by the RBI?

• Enhanced Capital Requirements:

1. 1. • Minimum Capital Requirement Increase: ARCs are now mandated to maintain a minimum capital requirement of Rs 300 crore, a significant increase from the previous Rs 100 crore stipulation established on October 11, 2022.
      • Transition Period for Compliance: Existing ARCs are granted a transition period to reach the revised Net Owned Fund (NOF) threshold of Rs 300 crore by March 31, 2026.
      • Interim Requirement: However, by March 31, 2024, ARCs must possess a minimum capital of Rs 200 crore to comply with the new directives.

• Supervisory Actions for Non-Compliance:

1. 1. • ARCs failing to meet the prescribed capital thresholds will face supervisory action, potentially including restrictions on undertaking additional business until compliance is achieved.

• Expanded Role for Well-Capitalized ARCs:

1. • Empowerment of Well-Capitalized ARCs: ARCs with a minimum NOF of Rs 1000 crore are empowered to act as resolution applicants in distressed asset scenarios.
   • Investment Opportunities: These ARCs are permitted to deploy funds in government securities, scheduled commercial bank deposits, and institutions like SIDBI and NABARD, subject to RBI specifications. Additionally, they can invest in short-term instruments such as money market mutual funds, certificates of deposit, and corporate bonds commercial papers.
   • Investment Cap: Investments in short-term instruments are capped at 10% of the NOF to mitigate risk exposure.

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Why in the news?

India has simplified the payment mechanism for traders importing pulses from Myanmar, requiring them to use the Rupee/Kyat direct payment system through the Special Rupee Vostro Account (SRVA) through the Punjab National Bank.

What is Special Rupee Vostro Account (SRVA)?

How are the SRVA different from the already existing Rupee Vostro Account?

• The settlement of International trade through Indian Rupees (INR) is an additional arrangement to the existing system of settlement.
• SRVA requires prior approval (of RBI) before opening unlike Rupee Vostro account.

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Why in the news?

To address the rising threat of cyber fraud, the Reserve Bank of India (RBI) is planning to establish a Digital India Trust Agency (DIGITA).

About Digital India Trust Agency (DIGITA)

DIGITA aims to tackle the proliferation of illegal lending apps by verifying and maintaining a register of authenticated digital lending platforms.

Role of DIGITA:

1. Public Register: It will maintain a public register of verified apps, providing transparency and aiding law enforcement agencies in identifying unauthorised platforms.
2. Verification Hub: It will serve as a central agency for vetting digital lending apps, ensuring their authenticity and compliance with regulations.

Regulatory Implications

• Apps lacking the ‘verified’ signature from DIGITA will be deemed unauthorized, enhancing law enforcement efforts against financial crimes in the digital domain.
• Verification processes will promote transparency and accountability within the digital lending sector, curbing fraudulent activities.

Progress made so far

• The RBI has shared a list of 442 digital lending apps with the IT Ministry for whitelisting with Google.
• Google has removed over 2,200 digital lending apps from its PlayStore, aligning with RBI and DFS directives to only allow apps from regulated entities or their partners.

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Why in the news?

Recently, the RBI celebrated its 90th year in Mumbai, marking a significant milestone.

About Reserve Bank of India (RBI)

• The RBI is the central bank and monetary authority of India.
• It was established on April 1, 1935, under the Reserve Bank of India Act, 1934.
• Its idea was incepted from the recommendations of the Hilton Young Commission.
• Sir Osborne Arkell Smith, an Australian, served as the inaugural Governor.
• He was succeeded by Sir C D Deshmukh, the first Indian to hold the position.
• It is a centralized institution for India to effectively regulate its monetary and credit policies.
• RBI had its initial headquarters in Kolkata, later moving permanently to Mumbai in 1937.
• Initially, the RBI operated as a privately owned entity until its full nationalization in 1949.

Functions and Initiatives:

• Monetary Authority: The RBI controls the supply of money in the economy to stabilize exchange rates, maintain a healthy balance of payment, and control inflation.
• Issuer of Currency: Sole authority to issue currency and combat circulation of counterfeit notes.
• Banker to the Government: Acts as a banker to both the Central and State governments, providing short-term credit and financial advisory services.
• Lender of Last Resort: Provides emergency liquidity assistance to banks during crises.
• Custodian of Foreign Exchange Reserves: Manages foreign exchange reserves and administers the Foreign Exchange Management Act, 1999 (FEMA).
• Regulator and Supervisor of Payment and Settlement Systems: Oversees payment and settlement systems in the country, ensuring efficiency and security.
• Credit Control and Developmental Role: Promotes credit availability to productive sectors and fosters financial infrastructure development.

Transformative Reforms initiated by the RBI

• Green Revolution (1960s-1970s): Supported agricultural growth through credit facilities and rural credit accessibility enhancements.
• Banks Nationalization (1969): Aimed at aligning banking sector objectives with national policy goals.
• Priority Sector Lending (1972): Ensures timely credit flow to key sectors of the economy.
• Economic Liberalization (1991): Opened up the economy to global markets, fostering market-oriented growth.
• Unified Payment Interface (UPI), 2016: Enabled seamless and instant transactions across India.
• Inflation Targeting Framework, 2016: Set inflation targets to guide monetary policy decisions.
• Bharat Bill Payment System (BBPS), 2019: Launched an integrated bill payment system for customer convenience.
• Aadhar-based eKYC (2019): Streamlined customer authentication processes for financial institutions.
• Emergency Credit Line Guarantee Scheme (ECLGS), 2020: Provided credit assistance to SMEs affected by the COVID-19 pandemic.
• Central Bank Digital Currency (2022): RBI is actively exploring the issuance of a CBDC known as e₹ (digital Rupee).
• Cryptocurrency Regulation (2022): RBI has maintained a consistent stance against cryptocurrencies, advocating for an outright ban on them (after China and El Salvador imposed the complete ban). In 2020, the Supreme Court of India removed the ban on cryptocurrencies imposed by RBI.
• Payment Vision 2025 Document (2023): The goals and vision of the RBI, are categorised in the Payments Vision 2025 documents into five anchor goalposts – Integrity, Inclusion, Innovation, Institutionalisation and Internationalisation.

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What is the news?

The Reserve Bank of India (RBI) has undertaken rigorous regulatory actions to address lenders’ over-exuberance, enhance compliance culture, and protect customers.

How RBI regulates Lenders in India?

1. Licensing and Regulation:
   • The Banking Regulation Act, 1949 empowers RBI to grant licenses to banks and regulate their operations.
   • Non-Banking Financial Companies (NBFCs) are regulated under the Reserve Bank of India Act, 1934 and governed by guidelines issued by RBI under Section 45-IA of the RBI Act.
2. Prudential Regulations:
   • RBI issues prudential regulations under various Acts, including the Banking Regulation Act, 1949 and the RBI Act, 1934.
   • These regulations include guidelines on capital adequacy (Basel III norms), asset classification, provisioning norms, liquidity management, exposure limits, and risk management practices.
   • Non-compliance with these regulations may attract penalties or other enforcement actions under the relevant Acts.
3. Supervision and Monitoring:
   • RBI conducts supervision and monitoring of banks and NBFCs under Section 35A of the Banking Regulation Act, 1949 and Section 45L of the RBI Act, 1934.
   • It has the authority to conduct on-site inspections, off-site surveillance, and review financial reports to assess compliance with regulatory requirements.
   • RBI may issue directives, guidelines, or corrective actions under Section 35A and Section 45L to address deficiencies identified during supervision.
4. Policy Framework:
   • Monetary policy frameworks are governed by the RBI Act, 1934 and the Reserve Bank of India (RBI) Act, 1934, which empower RBI to formulate and implement monetary policies.
   • RBI’s Monetary Policy Committee (MPC) sets key policy rates such as the repo rate, reverse repo rate, and statutory liquidity ratio (SLR) to regulate credit flow, inflation, and overall economic conditions.
5. Consumer Protection:
   • RBI issues guidelines under the Banking Regulation Act, 1949 and the RBI Act, 1934 to ensure fair practices and consumer protection in banking and NBFC operations.
   • The Banking Ombudsman Scheme, 2006 provides a mechanism for redressal of customer grievances against banks.
   • Violations of consumer protection norms may result in penalties or enforcement actions under the relevant Acts.
6. Financial Stability:
   • RBI’s mandate to maintain financial stability is enshrined in the RBI Act, 1934.
   • It monitors systemic risks, including interconnectedness among lenders, under Section 45J of the RBI Act, 1934, and takes measures to mitigate risks to financial stability.
   • RBI may intervene in the interest of financial stability under Section 45W of the RBI Act, 1934, to prevent disruptions to the functioning of the financial system.

PYQ:

2012: The Reserve Bank of India (RBI) acts as a bankers’ bank. This would imply which of the following?

1. Banks retain their deposits with the RBI.
2. The RBI lends funds to the commercial banks in times of need.
3. The RBI advises the commercial banks on monetary matters.

Select the correct answer using the codes given below:

1. 2 and 3 only
2. 1 and 2 only
3. 1 and 3 only
4. 1, 2 and 3

Practice MCQ:

Consider the following statements regarding ‘Payment Banks’ in India:

1. Payment Banks have the authority to accept demand deposits but are prohibited from issuing credit cards, disbursing loans, offering mutual funds units, and providing insurance products.
2. Unlike scheduled commercial banks, Payment Banks are exempted from the obligation to maintain a cash reserve ratio with the Reserve Bank.
3. Payment Banks are mandated to invest a minimum of 75% of their demand deposit balances in Statutory Liquidity Ratio (SLR) eligible Government securities/treasury bills.

How many of the above statements is/are correct?

1. One
2. Two
3. Three
4. None

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Why in the news-

• Recent actions by both India’s banking regulator RBI and the securities watchdog SEBI have startled the market, exposing various malpractices in the financial sector.

Financial Landscape and its Regulation

[1] Reserve Bank of India (RBI)

• The RBI is the central bank and monetary authority of India.
• It is established on April 1, 1935, under the Reserve Bank of India Act, 1934.
• Its idea was incepted from the recommendations of the Hilton Young Commission.
• It is a centralized institution for India to effectively regulate its monetary and credit policies.
• RBI had its initial headquarters in Kolkata, later moving permanently to Mumbai in 1937.
• Initially, the RBI operated as a privately owned entity until its full nationalization in 1949.

Key Regulatory Functions of the RBI:

(i) Monetary Policy:

• The RBI formulates and implements monetary policies to achieve price stability, economic growth, and financial stability.
• The Monetary Policy Committee (MPC) determines the policy interest rates, such as the repo rate, reverse repo rate, and marginal standing facility rate, based on inflation targeting and growth objectives.
• By adjusting these rates, the RBI influences money supply, credit flow, and interest rates in the economy.

(ii) Banking Regulation and Supervision:

• The RBI regulates and supervises banks and financial institutions to ensure their stability, soundness, and compliance with regulatory norms.
• It issues guidelines, directives, and prudential regulations covering aspects like capital adequacy, asset quality, management effectiveness, and liquidity risk management.
• The RBI conducts regular inspections, audits, and assessments of banks to assess their financial health and adherence to regulations.
• It also intervenes in troubled banks to protect depositors’ interests and maintain financial stability.

(iii) Payment and Settlement Systems:

• The RBI manages and oversees payment and settlement systems to ensure efficiency, safety, and reliability in financial transactions.
• It operates the Real-Time Gross Settlement (RTGS) system for large-value transactions and the National Electronic Funds Transfer (NEFT) system for retail transactions.
• The RBI formulates regulations and standards for payment systems, promotes innovation in payment technologies, and monitors systemically important payment infrastructures to mitigate risks and enhance resilience.

(iv) Financial Markets Regulation:

• The RBI regulates and supervises financial markets, including money, bonds, foreign exchange, and derivative markets, to maintain market integrity and investor confidence.
• It issues guidelines, directives, and regulations governing market participants, intermediaries, and trading activities.
• The RBI monitors market developments, enforces compliance with regulations, and intervenes in markets to address disorderly conditions, liquidity shortages, or excessive volatility.
• It also conducts open market operations (OMOs) to manage liquidity and stabilize interest rates.

[2] Securities and Exchange Board of India (SEBI)

• SEBI is the regulatory authority overseeing India’s securities and commodity markets.
• Established in 1988 as a non-statutory body, SEBI was granted statutory powers with the enactment of the SEBI Act 1992 by the Indian Parliament.
• It operates under the purview of the Ministry of Finance.
• SEBI’s structure includes a chairman nominated by the GoI, members from the Union Finance Ministry, the Reserve Bank of India, and others.
• Its headquarters is in Mumbai, with regional offices in Ahmedabad, Kolkata, Chennai, and Delhi.

Key Regulatory Functions of the SEBI:

(i) Formulating Regulations:

• SEBI formulates regulations, guidelines, and directives to govern various aspects of the securities market.
• This includes regulations related to public issuances, disclosures, insider trading, takeover bids, corporate governance, and investor protection.

(ii) Monitoring Market Participants:

• SEBI regulates and supervises market intermediaries such as stock exchanges, brokers, merchant bankers, portfolio managers, and mutual funds.
• It sets eligibility criteria, registration requirements, and conduct norms for these entities and monitors their compliance with regulations.

(iii) Overseeing Market Infrastructure:

• SEBI oversees the functioning of stock exchanges, clearing corporations, depositories, and other market infrastructure institutions.
• It ensures that these entities maintain adequate systems, procedures, and safeguards to facilitate fair, transparent, and efficient trading and settlement operations.

(iv) Enforcing Securities Laws:

• SEBI enforces securities laws and regulations by conducting inspections, investigations, and enforcement actions against violations.
• It has the authority to impose penalties, suspend licenses, and initiate legal proceedings against individuals or entities found to be engaged in fraudulent or unfair practices.

(v) Regulating Securities Offerings:

• SEBI regulates public offerings of securities, including initial public offerings (IPOs), rights issues, and follow-on public offerings.
• It reviews offer documents, ensures disclosure of material information to investors, and supervises the conduct of issuers, underwriters, and other intermediaries involved in the offering process.

(vi) Monitoring Insider Trading and Market Manipulation:

• SEBI monitors and regulates insider trading, market manipulation, and other fraudulent activities that can undermine market integrity.
• It prohibits insider trading, imposes restrictions on share buybacks and open market operations, and investigates suspicious trading activities to maintain market fairness and transparency.

PYQ:

2015: In the light of Satyam Scandal (2009), discuss the changes brought in the corporate governance to ensure transparency and accountability.

2021: With reference to India, consider the following statements:​

1. Retail investors through demat account can invest in ‘Treasury Bills’ and ‘Government of India Debt Bonds’ in primary market.​
2. The ‘Negotiated Dealing System-Order Matching’ is a government securities trading platform of the Reserve Bank of India. ​
3. The ‘Central Depository Services Ltd.’ is jointly promoted by the Reserve Bank of India and the Bombay Stock Exchange. ​

Which of the statements given above is/are correct?​

1. 1 only ​
2. 1 and 2 only ​
3. 3 only ​
4. 2 and 3 only ​

Practice MCQ:

With reference to the Securities and Exchange Board of India (SEBI), consider the following statements:

1. It was established in 1988 as a non-statutory body.
2. It operates under the Ministry of Corporate Affairs.
3. It consists of a chairman, members from the Union Finance Ministry and the Reserve Bank of India.

How many of the given statements is/are correct?

1. One
2. Two
3. Three
4. None

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In the news

• Nearly two years after introducing a revised regulatory framework for non-banking finance companies (NBFCs), the Reserve Bank of India is set to review the categorisation of NBFCs in 2024.
• Currently, 16 NBFCs are placed in the upper layer.

What are Non-Banking Financial Companies (NBFCs)?

• A NBFC is a company registered under the Companies Act, 1956.
• It engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, and chit business.
• It does NOT include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

How are NBFCs different from Bank?

• NBFCs lends and make investments and hence their activities are akin to that of banks.
• However, there are a few differences as given below:

1. Commercial Banks are regulated under Banking Regulation Act, 1949.
2. NBFC CANNOT accept demand deposits.
3. NBFCs DO NOT form part of the payment and settlement system and cannot issue cheques drawn on itself.
4. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is NOT available to depositors of NBFCs, unlike in case of banks.

Different types/categories of NBFCs registered with RBI

NBFCs are categorized:

1. in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs,
2. non deposit taking NBFCs by their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and
3. by the kind of activity they conduct.

Within this broad categorization the different types of NBFCs are as follows:

Scale-Based Regulation of NBFCs

• Scale-based regulations came into effect in October 2021 and were implemented a year later by RBI.
• There are four layers namely the base layer, middle layer, upper layer and top layer.
• As on September 30, 2023, NBFCs in the base, middle and upper layers constituted 6 per cent, 71 per cent and 23 per cent of the total assets of NBFCs respectively.
• Presently, no NBFC is listed in the top layer.

Here’s a breakdown of the key aspects of the SBR:

1. Base Layer (NBFC-BL)

• The Base Layer primarily comprises non-deposit-taking NBFCs with assets below Rs 1,000 crore.
• It encompasses NBFC Peer to Peer (P2P), NBFC-Account Aggregator (AA), Non-Operative Financial Holding Company (NOFHC), and NBFCs without public funds and customer interface.

1. Middle Layer (NBFC-ML)

• The Middle Layer includes deposit-taking NBFCs and non-deposit-taking NBFCs with assets exceeding Rs 1,000 crore.
• It encompasses NBFCs involved in specific activities such as Standalone Primary Dealers (SPDs), Infrastructure Debt Fund – NBFCs (IDF-NBFCs), Core Investment Companies (CICs), Housing Finance Companies (HFCs), and Infrastructure Finance Companies (NBFC-IFCs).

III. Upper Layer (NBFC-UL)

• The Upper Layer comprises NBFCs identified by RBI as requiring enhanced regulatory requirements based on specific parameters and scoring methodology.
• The top 10 eligible NBFCs in terms of asset size will always be placed in the Upper Layer, irrespective of other factors.

1. Top Layer (NBFC-TL)

• NBFCs in the Upper Layer may be transferred to the Top Layer if RBI perceives a significant increase in potential systemic risk.
• Currently, the Top Layer remains vacant but serves as a precautionary measure for heightened risk situations.

With inputs from: https://rbi.org.in/scripts/PublicationsView.aspx?Id=21580

Practice MCQ:

Q. With reference to the Scale-Based Regulation of Non-Banking Financial Companies (NBFCs), consider the following statements:

1. Higher the layer, least is the regulatory intervention required by the RBI.
2. Currently, no NBFC is listed in the top layer.

Which of the given statements is/are correct?

a) Only 1

b) Only 2

c) Both 1 and 2

d) Neither 1 nor 2

Try this PYQ from CSE 2020:

1. If you withdraw ` 1,00,000 in cash from your Demand Deposit Account at your bank, the immediate effect on aggregate money supply in the economy will be:

(a) to reduce it by ` 1,00,000

(b) to increase it by ` 1,00,000

(c) to increase it by more than ` 1,00,000

(d) to leave it unchanged

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Introduction

• State Bank of India (SBI) is in talks with the Reserve Bank of India (RBI) to reduce the cash reserve ratio (CRR) requirement on green deposits.

What are Green Deposits?

• Definition: Green deposits are fixed-term investments tailored for individuals and entities seeking to support environmentally friendly initiatives.
• ESG Investing: These deposits align with the principles of Environmental, Social, and Governance (ESG) investing, reflecting a growing trend towards sustainable finance.
• Utilization: Funds from green deposits are directed towards projects promoting renewable energy, clean transportation, pollution control, green infrastructure, and sustainable water management.

RBI Framework for Green Deposits

• Preventing Greenwashing: The RBI’s framework ensures transparency in environmental claims associated with green deposits.
• Deposit Options: Banks offer green deposits denominated in rupees, with choices between cumulative or non-cumulative options.
• Applicability: Scheduled commercial banks, small finance banks, non-banking financial companies (NBFCs), and housing finance companies (HFCs) must comply with this framework.
• Eligibility: Both corporate entities and individual customers can invest in green deposits, contributing to environmentally sustainable initiatives.
• Allocation: Funds mobilized through green deposits are directed towards sectors such as renewable energy, waste management, and afforestation.
• Restrictions: Lenders are prohibited from channelling green deposit funds into sectors like fossil fuels, nuclear power, or tobacco.
• Verification: Independent Third-Party Verification is conducted annually to assess the allocation and impact of funds raised through green deposits.
• Oversight: Lenders are required to review the impact of funds lent for green finance activities on an annual basis.
• Penalties: There are no penalties for underutilization of funds raised through green deposits, providing flexibility to financial institutions.

Distinguishing Green Deposits from Normal Deposits

• Project Allocation: Green deposits allocate funds to specific environmentally friendly projects, unlike regular deposits.
• Interest Rates: Interest rates on green deposits are determined by lenders and are currently comparable to those offered on conventional deposits.

Back2Basics: Cash Reserve Ratio (CRR)

• Banks are mandated to maintain a certain portion of their deposits and specific liabilities in liquid cash with the RBI.
• CRR serves as a crucial tool in the RBI’s arsenal for managing liquidity in the economy and acts as a safety net during times of banking stress.
• Currently, banks are required to uphold 4.5% of their Net Demand and Time Liabilities as CRR with the RBI.
• Incremental-CRR was introduced on August 10, 2023, as a temporary measure by RBI to absorb surplus liquidity.
• Banks were required to maintain an I-CRR of 10% on the increase in their Net Demand and Time Liabilities (NDTL) between May 19, 2023, and July 28, 2023.
• It came into effect from the fortnight starting August 12, 2023.
• ICRR is employed during periods characterized by excess liquidity in the financial system.

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Introduction

• The Reserve Bank of India (RBI) imposed additional curbs on Paytm Payments Bank Ltd (PPBL), prohibiting it from operating its mobile wallet after February.
• This article provides insights into what payments banks are, their objectives, features, and the regulatory framework governing them.

Understanding Payments Banks

• Definition: Payments banks are financial institutions similar to regular banks but operate on a smaller scale without engaging in credit risk.
• Origin: The concept of payments banks was recommended by the Nachiket Mor Committee.
• Objective: The primary goal is to advance financial inclusion by providing banking and financial services to unbanked and underbanked areas, catering to migrant laborers, low-income households, small entrepreneurs, and more.
• Legal Framework: Payments banks are registered as public limited companies under the Companies Act 2013 and licensed under Section 22 of the Banking Regulation Act 1949.
• Regulation: They are governed by various legislations, including the Banking Regulation Act, 1949; RBI Act, 1934; Foreign Exchange Management Act, 1999, among others.

Key Features of Payments Banks

• Differentiation: Payments banks are distinct entities, not universal banks.
• Scale: They operate on a smaller scale compared to traditional banks.
• Capital Requirements: Payments banks are required to have a minimum paid-up equity capital of 100 crores.
• Promoter Contribution: The promoter must contribute at least 40% of the paid-up equity capital for the first five years from the commencement of business.

Permissible Activities

• Accept deposits up to Rs. 2,00,000.
• Offer demand deposits in the form of savings and current accounts.
• Invest deposits in secure government securities as Statutory Liquidity Ratio (SLR), accounting for 75% of the demand deposit balance.
• Place the remaining 25% as time deposits with other scheduled commercial banks.
• Provide remittance services, mobile payments/transfers/purchases, ATM/debit cards, net banking, and third-party fund transfers.
• Act as a banking correspondent (BC) for other banks to offer credit and services beyond their capabilities.

Activities Not Permitted

• Loans and Credit Cards: Payments banks cannot issue loans and credit cards.
• Time and NRI Deposits: They are not authorized to accept time deposits or NRI deposits.
• Non-Banking Subsidiaries: Payments banks cannot establish subsidiaries to engage in non-banking financial activities.

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Introduction

• A working group constituted by the Reserve Bank of India (RBI) has presented key recommendations to address challenges related to guarantees extended by State governments.

Understanding ‘Guarantee’

• A ‘guarantee’ involves a legal obligation for a State to make payments on behalf of a borrower, safeguarding investors/lenders from default risks.
• As defined by the Indian Contracts Act (1872), it is a contract involving three parties: the principal debtor, creditor, and surety (State government).
• The ‘guarantee’ acts as a safety net, ensuring payment in case of default by the borrower.

Purpose of ‘Guarantee’ at the State Level

• Sovereign Guarantee: Facilitates concessional loans from bilateral or multilateral agencies to public sector enterprises.
• Project Viability: Enhances project viability for activities with significant social and economic benefits.
• Resource Mobilization: Enables public sector enterprises to secure resources at favorable terms, contributing to lower interest charges.

Fiscal Risks and Working Group Recommendations

• Cash Outflows and Debt: While guarantees may not require upfront cash payments, they pose fiscal risks, leading to unanticipated cash outflows and increased debt during challenging times.
• Complex Estimation: Estimating the quantum and timing of potential costs/cash outflows is challenging due to triggers associated with guarantees.

Recommendations on ‘Guarantee’ Definition and Guidelines

• Broadened Definition: The term ‘guarantee’ should encompass all instruments creating obligations for the guarantor (State) to make future payments on behalf of the borrower.
• Guidelines for Accordance: Government guarantees should not substitute budgetary resources and should adhere to Government of India guidelines.
• Preconditions: Specify preconditions, including the period of guarantee, guarantee fee, government representation on the management board, and audit rights.

Risk Determination, Fee, and Ceiling

• Risk Weight Assignment: States should assign risk weights (high, medium, low) before extending guarantees, considering past defaults.
• Ceiling on Guarantees: A desirable ceiling for incremental guarantees during a year, limiting stress on state governments.
• Guarantee Fee Structure: Reflective of borrower’s project riskiness and activities, with a base fee of at least 2.5% per annum.

Disclosures and Honouring Commitments

• Credit Disclosure: Banks/NBFCs should disclose credit extended to State-owned entities backed by State guarantees for improved credibility.
• Database Establishment: Set up a state-level unit to track and consolidate all guarantees, ensuring proper data compilation.
• Timely Honouring: States must honor guarantees without delay, recognizing the reputational and legal risks associated with defaults.

Conclusion

• The RBI working group’s recommendations aim to fortify fiscal management by introducing standardized practices, enhancing risk assessment, and ensuring transparent disclosures.
• These measures, if implemented, can contribute to better fiscal discipline and mitigate potential risks associated with state government guarantees.

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Central Idea

• The Reserve Bank of India (RBI) recently raised risk weights for unsecured loans, including credit cards, consumer durable loans, and personal loans.
• Risk weights for bank lending to non-banking finance companies (NBFCs) serving this segment were increased to 125% from the existing 100%.

What are Risk Weights?

• Capital Implication: Every rupee lent by a bank has an impact on its capital position.
• Attribution to Risk: Risk weights are assigned to loans and assets based on their nature and associated risk.
• Capital Coverage: Banks must ensure that their capital is sufficient to cover these risk-weighted assets.
• Varying Risk Weights: Different asset classes have varying risk weights. For example, home loans may have risk weights ranging from 50% to 75%, while corporate loans are assigned 100% risk weight.

How does it impact Borrowers?

• Interest Rates: Lower risk weights result in lower interest rates for borrowers. This principle guides the pricing of loans.
• Examples: Home loans generally have lower interest rates due to their lower risk weights, while personal loans and credit cards carry higher interest rates due to their risk profile.

RBI Decision: Concerns about Consumer Loans

• Rising Share: Unsecured loans have seen rapid growth, constituting 10% of the banking system’s portfolio.
• Fastest-Growing Segment: This segment has been the fastest-growing in recent years.
• Unsecured Nature: Loans like consumer durable loans lack income-generating assets, making it challenging to ascertain borrowers’ true repayment capacity.
• Granular Nature: While small-ticket in nature, the significant growth in this segment has raised regulatory concerns.

https://www.thehindubusinessline.com/blexplainer/bl-explainer-what-rbis-increase-in-risk-weights-mean-to-the-borrower/article67554070.ece

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Central Idea

• When you apply for a loan, your credit score becomes a crucial factor. It’s determined by your debt and your history of repayments.
• In a significant move, the Reserve Bank of India (RBI) has issued directives to credit information companies (CICs) regarding the transparency of accessing your Credit Information Report (CIR).

RBI’s Directive on CIR Access

• Notification to Customers: CICs are now mandated to notify customers via SMS or email when banks and non-banking finance companies (NBFCs) access their Credit Information Report (CIR).
• Alerts on Default Information: Credit institutions, including banks and NBFCs, must also send SMS or email alerts to customers when they submit information to CICs regarding defaults or Days Past Due (DPD) on existing credit.
• Implementation Timeline: These new rules are set to take effect within six months.

Understanding Credit Information Companies (CICs)

• CIC Function: CICs maintain and analyze credit information of individuals and businesses, which is provided by banks and NBFCs.
• Credit Scores and Ranks: Based on this data, CICs calculate credit scores for individuals and credit ranks for companies to assess their creditworthiness and credit history.
• Impact on Loan Approval: A high credit score often leads to more favorable loan terms, while a low score, possibly due to previous loan defaults, can hinder loan or credit card approval.

Accessing Your Credit Score

• Payment Requirement: Typically, individuals can obtain their credit scores from CICs for a fee.
• RBI’s Directive: The RBI has now directed CICs to provide a “Free Full Credit Report (FFCR),” which includes the credit score, once every calendar year to individuals whose credit history is available with the CIC.
• Convenient Access: The link to access the FFCR must be prominently displayed on the CIC’s website for easy access.

Data Accuracy Concerns

• Correction of Data: If a customer believes that their credit information is incorrect, they can request a correction.
• Reason for Rejection: Banks and NBFCs are required to inform customers about the reasons for rejecting their data correction requests, facilitating a better understanding of the issues in the CIR.

CIC Accountability and Transparency

• Review of ‘Search & Match’ Logic: CICs must conduct a periodic review, at least semi-annually, of their ‘search & match’ logic algorithm used to generate borrowers’ CIRs.
• Root Cause Analysis: A “root cause analysis” of complaints should identify issues in the algorithm.
• Board Approval: Results and changes resulting from the analysis should be presented to the CIC’s Board of Directors for review.
• Timely Data Ingestion: CICs must ingest credit information data from banks and NBFCs within seven calendar days of receipt.
• Disclosure of Complaints: CICs are required to disclose details of complaints registered against them and credit institutions on their websites.

Conclusion

• RBI’s recent directives aim to enhance transparency, accountability, and consumer empowerment in the credit information ecosystem.
• Customers will receive alerts regarding access to their credit information, and CICs are encouraged to ensure data accuracy and promptly address customer concerns.
• These changes will likely improve the credit assessment process and provide individuals with better control over their financial data.

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Central Idea

• As a $5 billion forex swap between the Reserve Bank of India (RBI) and banks approaches maturity, it signifies the central bank’s strategic move to manage liquidity and mitigate inflationary pressures.

What is RBI’s Forex Swap?

• Forex Tool: The Dollar–Rupee Swap is a forex tool employed by the RBI to exchange its currency with banks for another currency.
• Buy/Sell Swap: It involves two variants: Dollar–Rupee Buy/Sell Swap, where the RBI buys dollars from banks in exchange for Indian Rupees, and then commits to selling the dollars back at a later date.
• Sell/Buy Swap: Conversely, the RBI may sell dollars, thereby withdrawing an equivalent sum in rupees, reducing liquidity in the financial system.
• Risk Mitigation: These swap operations are characterized by predetermined transaction terms, eliminating exchange rate and market risks.

The Strategy behind

• USD 5 Billion Swap: The RBI initiated a USD 5.135 billion swap with banks and aims to repurchase the dollars at the lowest possible premium after a two-year tenor.
• Lower Range Bids: Banks bidding at the lower end of the premium range are more likely to succeed in the auction.

Rationale for RBI’s Action

• Surplus Liquidity: The Indian financial system currently experiences surplus liquidity, amounting to Rs 7.5 lakh crore, necessitating measures to curb potential inflation.
• Traditional Tools: Traditional methods like increasing the repo rate or Cash Reserve Ratio (CRR) can negatively impact the economy and may not lead to complete transmission of monetary policy.
• Previous Toolkit: The RBI used Variable Rate Reverse Repo Auction (VRRR) but encountered under-subscription due to better yields in the cash market.
• Longer-Term Strategy: As a result, the RBI opted for forex auctions as a longer-term liquidity adjustment tool.

Impact of the Swap

• Liquidity Reduction: The primary effect is the reduction of liquidity, which currently stands at an average of Rs 7.6 lakh crore.
• Strengthening Rupee: Increased dollar inflow will strengthen the Indian Rupee, which has already appreciated against the US dollar.
• Inflation Control: The RBI typically tightens liquidity when inflation risks are elevated. Factors contributing to inflation include rising oil prices due to the Russia-Ukraine conflict and foreign portfolio investors withdrawing funds from Indian stocks.

Conclusion

• The RBI’s forex swap strategy emerges as a strategic tool to manage liquidity, stabilize the currency, and control inflationary pressures.
• By reducing system liquidity and strengthening the rupee, the central bank aims to navigate the challenges posed by global events and ensure economic stability in India.

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Central Idea

• The Reserve Bank of India (RBI) has embarked on a mission to revolutionize digital payments in the country by proposing the introduction of Card-on-File Tokenisation (CoFT).
• This move, aimed at enhancing convenience for cardholders, is set to redefine the way Indians engage in online transactions.

Card-on-File Tokenisation (CoFT)

• Card-on-file tokenisation involves replacing actual credit and debit card details with an alternative code known as a “token.”
• This token is unique for a specific combination of card, token requestor, and device.
• Each token is distinct and tailored to the combination of the card, token requestor (the entity facilitating tokenisation), and the merchant (which may or may not be the same as the token requestor).
• The primary advantage of Card-on-File Tokenisation is enhanced security.
• During a tokenised card transaction, the actual card details are not disclosed to the merchant.
• This shields sensitive information from potential security breaches during transaction processing.
• Customers who have not enabled tokenisation will need to manually input their name, 16-digit card number, expiry date, and CVV (Card Verification Value) each time they make an online purchase.

Back2Basics: Card-on-File Transaction

• A Card-on-File transaction occurs when cardholders authorize merchants to securely store their payment information.
• This stored data is then used to bill the cardholders’ accounts for future purchases.
• It simplifies the checkout process for consumers, offering convenience and efficiency.

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Central Idea

• The Reserve Bank of India (RBI) announced the phased discontinuation of the Incremental Cash Reserve Ratio (I-CRR) on September 8, 2023.
• This measure aimed to absorb surplus liquidity created by factors such as the return of Rs 2,000 notes to the banking system.

RBI’s Decision

• RBI conducted a review and decided to discontinue I-CRR in stages.
• The central bank aims to release the impounded amounts gradually to avoid sudden shocks to the system’s liquidity, ensuring orderly money market functioning.

Understanding Cash Reserve Ratio (CRR)

• CRR is a fundamental concept before delving into Incremental Cash Reserve Ratio (ICRR).
• Banks are mandated to maintain a certain portion of their deposits and specific liabilities in liquid cash with the RBI.
• CRR serves as a crucial tool in the RBI’s arsenal for managing liquidity in the economy and acts as a safety net during times of banking stress.
• Currently, banks are required to uphold 4.5% of their Net Demand and Time Liabilities as CRR with the RBI.

Introduction to ICRR

• I-CRR was introduced on August 10, 2023, as a temporary measure by RBI to absorb surplus liquidity.
• Banks were required to maintain an I-CRR of 10% on the increase in their Net Demand and Time Liabilities (NDTL) between May 19, 2023, and July 28, 2023.
• It came into effect from the fortnight starting August 12, 2023.
• The RBI has the authority to implement an additional measure called Incremental Cash Reserve Ratio (ICRR), in addition to the standard CRR.
• ICRR is employed during periods characterized by excess liquidity in the financial system.
• Essentially, ICRR mandates that banks park even more liquid cash with the RBI than what is required under CRR.
• This serves as a means to further manage and control liquidity in the banking system.

Reason for I-CRR

• Excessive liquidity emerged due to factors like the return of Rs 2,000 banknotes, RBI’s surplus transfer to the government, increased government spending, and capital inflows.
• The daily liquidity absorption by RBI in July reached Rs 1.8 lakh crore.
• Managing surplus liquidity was necessary to maintain price and financial stability.

Impact on Liquidity Conditions

• I-CRR was expected to absorb over Rs 1 lakh crore of excess liquidity from the banking system.
• It temporarily shifted the banking system’s liquidity from surplus to deficit on August 21.
• Factors like GST outflows and central bank selling of dollars contributed to tight liquidity.
• However, liquidity conditions reverted to surplus from August 24.
• On September 8, RBI absorbed Rs 76,047 crore of surplus liquidity from the system.

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Central Idea: The Reserve Bank of India (RBI) has introduced a regulatory framework to govern the acceptance of green deposits by banks, ensuring transparency and accountability in their investments.

What are Green Deposits?

• Green deposits are financial products offered by banks that are similar to regular deposits, but the money received is specifically earmarked for environmentally friendly projects.
• These deposits support projects aimed at combating climate change, such as renewable energy initiatives, while avoiding investments in activities that harm the environment, like fossil fuel projects.
• They are part of a broader range of financial products, including green bonds and green shares that enable investors to contribute to environmentally sustainable projects.

Regulatory framework for accepting Green Deposits

• The RBI’s framework mandates that banks establish a set of rules or policies, approved by their respective Boards, to guide the investment of green deposits.
• These rules must be made public on the banks’ websites, ensuring transparency and enabling customers to make informed decisions.
• Banks are required to disclose information on the amount of green deposits received, how these funds are allocated to different green projects, and the environmental impact of such investments.
• To verify the banks’ claims and the sustainability credentials of the projects, a third-party is appointed to conduct independent verification.

Sectors eligible for green deposits

• The RBI has identified a list of sectors classified as sustainable, which are eligible to receive green deposits.
• These sectors include renewable energy, waste management, clean transportation, energy efficiency, and afforestation.
• Banks are prohibited from investing green deposits in sectors considered detrimental to the environment, such as fossil fuels, nuclear power, tobacco, gambling, palm oil, and hydropower generation.

Addressing greenwashing

• Greenwashing refers to the practice of making misleading claims about the positive environmental impact of an activity or investment.
• The RBI’s regulatory framework aims to prevent greenwashing in the banking sector by ensuring that the actual impact of green deposits is accurately represented.
• By requiring transparency, disclosure, and third-party verification, the framework aims to protect customers from deceptive practices and ensure genuine environmental benefits.

Impact and controversies

• Depositors who prioritize environmental concerns may find satisfaction in investing their money in environmentally sustainable products like green deposits.
• However, some critics argue that green investment products may primarily serve to make investors feel good without generating significant environmental benefits.
• Additionally, the range of projects available for investment through green deposits may be limited, posing challenges in achieving broad environmental impact.

Key challenge: Assessing environmental sustainability

• Evaluating the true environmental sustainability of a project can be challenging in a complex world with interconnected systems and second-order effects that are difficult to anticipate.
• It is essential to consider the indirect consequences and long-term effects of actions to determine if a project genuinely contributes to environmental sustainability.
• Uncertainty surrounding the actual environmental impact of green projects highlights the need for rigorous evaluation and ongoing monitoring to ensure the desired outcomes are achieved.

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Central Idea: The RBI has increased its gold reserves by 34.22 tonnes YoY to reach 794.64 tonnes at the end of March 2023, according to the central bank’s data.

What are Gold Reserves?

• Gold reserves refer to the physical gold holdings that a central bank or a country holds as a part of its foreign exchange reserves.
• Central banks may acquire gold reserves through various means, including purchases from other central banks, international organizations, or commercial banks, and from domestic production or importation.
• Gold reserves are typically held in the form of gold bars, which are stored in secure vaults or depositories.

Why Gold?

• Gold is considered a safe-haven asset and has been historically used to back a country’s currency.
• Holding gold reserves is seen as a way to hedge against inflation, currency fluctuations, and other economic uncertainties.

Significance of Gold Reserves

• Economic stability: Gold reserves are often seen as a symbol of economic stability and confidence, especially during times of financial crisis or uncertainty. Holding gold reserves can help central banks to maintain the stability of their currency and the economy.
• Diversification: Gold is considered a safe-haven asset and can provide diversification to a country’s foreign exchange reserves portfolio. Diversification helps to reduce the risks associated with any single asset class.
• Hedge against inflation: Gold is considered an inflation hedge as its value tends to increase during times of high inflation or when the value of a currency is depreciating. Holding gold reserves can help to protect the purchasing power of a country’s currency.
• International transactions: Gold reserves can be used as collateral for loans and international transactions. Countries can also use gold reserves to settle international debts.
• Confidence-building: The level of a country’s gold reserves can be an indicator of the country’s financial strength and stability. High levels of gold reserves can help to build confidence among investors and other countries.

Breakdown of RBI’s gold reserves

• Total: As of March-end 2023, the RBI held 794.64 metric tonnes of gold, including gold deposits of 56.32 metric tonnes.
• Domestic and abroad: Out of the total gold reserves, 437.22 metric tonnes of gold is held overseas in safe custody with the Bank of England and the Bank of International Settlements (BIS), while 301.10 metric tonnes of gold is held domestically.

How much do these gold reserves value?

• In value terms (USD), the share of gold in the total foreign exchange reserves increased from about 7.06% as of September-end 2022 to about 7.81% as of March-end 2023, as per the RBI’s report.
• During the half-year period, the reserves increased from $532.66 billion as of September-end 2022 to $578.45 billion as of March-end 2023.

Back2Basics: Foreign Exchange (Forex) Reserve

• Foreign exchange reserves are important assets held by the central bank in foreign currencies as reserves.
• They are commonly used to support the exchange rate and set monetary policy.
• In India’s case, foreign reserves include Gold, Dollars, and the IMF’s quota for Special Drawing Rights.
• Most of the reserves are usually held in US dollars, given the currency’s importance in the international financial and trading system.
• Some central banks keep reserves in Euros, British pounds, Japanese yen, or Chinese yuan, in addition to their US dollar reserves.

India’s forex reserves cover:

1. Foreign Currency Assets (FCAs)
2. Special Drawing Rights (SDRs)
3. Gold Reserves
4. Reserve position with the International Monetary Fund (IMF)

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Central idea

• The Consumer Confidence Survey was conducted in the first half of March 2023 across 19 cities.
• This article analyses the survey results, released this month, and breaks down the findings under different sections.

What is Consumer Confidence Survey?

• The Reserve Bank of India (RBI) conducts a Consumer Confidence Survey to measure consumers’ perceptions of the prevailing economic situation.
• The survey is conducted across various cities and measures consumer confidence on parameters such as the economy, employment, price, income, and spending.
• The survey consists of questions regarding consumers’ sentiments over various factors in the current situation and future.

Here are a few parameters that help aggregate overall confidence:

1. Spending: The consumer is asked about the willingness to spend on major consumer durables, purchasing vehicles, or real estate. This measures the overall spending scenario on necessities as well as luxuries for the next quarter.
2. Employment: The consumer is asked about current and future ideas on employment situations, joblessness, job security, which reflects the sentiments of the current or expected employment in the country.
3. Inflation: The consumer is asked about interest rates and levels of prices of all goods, tracking the price expected by consumers and their spending on basic necessities.

About the Consumer Confidence Index (CCI)

• CCI is a survey that is conducted every two months to measure how optimistic or pessimistic the consumers are regarding their financial situation.
• The index measures the change in consumer perception on the financial situation in the last year and the future expectations index measures what the consumer thinks about his financial situation in the coming one year.
• The main variables of the survey are: Economic situation, Employment, Price Level, Income and Spending.

Current perceptions of the survey

• The survey estimates current perceptions and a year-ahead expectations on the economy, employment, price, income, and spending.
• The results show that consumer confidence continues to recover from its historic low of mid-2021, but still remains pessimistic at 87.0, a 2.2 point increase from previous results.
• The assessment of inflation conditions improved for the current period reflecting a higher confidence in prevailing economic conditions.
• With regards to spending, sentiments were positive with signs of improvement compared to the last round conducted in January 2023.

What does this imply?

• The survey shows that while consumer confidence is slowly recovering, it still remains pessimistic.
• The survey results indicate positive sentiments on employment and spending, but a marginal dip in the country’s future economic situation.
• Credit growth numbers indicate a rise in consumer spending.
• The upcoming state and general elections could have an impact on the economy, and it remains to be seen how it will play out.

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To improve the distribution of coins among members of the public, the Reserve Bank of India (RBI) is preparing a pilot project on QR code-based Coin Vending Machine (QCVM) in collaboration with a few leading banks.

QR code-based Coin Vending Machine (QCVM)

• The QCVM is a cashless coin dispensation machine which would dispense coins against a debit to the customer’s bank account using Unified Payments Interface (UPI).
• Unlike cash-based traditional Coin Vending Machine, the QCVM would eliminate the need for physical tendering of banknotes and their authentication.
• Customers will also have the option to withdraw coins in the required quantity and denominations in QCVMs.

When will it be launched?

• The pilot project is planned to be initially rolled out at 19 locations in 12 cities across the country.
• Machines will be installed at public places such as railway stations, shopping malls, marketplaces to enhance ease and accessibility.
• Based on the learnings from the pilot tests, guidelines would be issued to banks to promote better distribution of coins using QCVMs.

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