‘RBI need to cut by 100 bps in one shot’

‘Rate cut should reiterate RBI’s commitment in providing confidence to consumers and small business.’

“I believe RBI missed the trick by not cutting aggressively in one shot last year. Rather piecemeal approach of apologetic 25bps (0.25 per cent) rate cuts was taken,” Amit Kumar Gupta, portfolio manager, Adroit PMS, tells Prasanna D Zore/Rediff.com. The first of a two-part interview.

Do you expect the RBI to get aggressive in cutting interest rates over the next three-four quarters, despite the fact that a similar exercise by the US Fed, has failed to elicit the desired outcome?

These are exceptional circumstances, no doubt. I think Fed decision is being linked to equity markets not able to sustain the bounce which may not be the correct interpretation.

Fed rate cuts and other stimulus measures is a kitchen sink, but confidence building measure for all stakeholders. They are saying we will support the market whatever it takes.

In that aspect, I believe RBI missed the tricks by not cutting aggressively in one shot last year. Rather piecemeal approach of apologetic 25bps (0.25 per cent) rate cuts was taken.

I strongly believe the RBI need to cut by 100 bps in one shot. They have already paused in December and Feb MPC (Monetary Policy Committee) meetings (which are held after every two months to decide upon the direction of interest rates among other things.

They have headroom to cut. They need to get the bond yields synchronised with other global central banks that are at easing path.

Rate cut should not be just a monetary policy tool, but reiterate the RBI’s commitment in providing confidence to consumers and small business.

Food inflation has come down significantly from 13.2 per cent to 10.4 per cent and likely to come down more with good Rabi crop harvesting. Sharp fall in crude has given them extra cushion.

500 bps (5 per cent) buffer between India and US yields is likely to stay as (the US) Fed is committed to keep rates lower for longer.

Forex reserves are sufficient to control any volatility in rupee. They should cut aggressively now.

How is the 2020 financial market meltdown different from the 2008 meltdown? What are the salient features of the current market turmoil?

The sentiment on the street eerily looks similar to the one we saw during 2009, post the collapse of Lehman Brothers. In those days, the rumours of large banks declaring bankruptcy, sovereign defaults, imminent EU breakup, market freeze, sounded absolutely believable.

In India, many depositors transferred money from private banks to public sector banks.

Investors summoned their advisers for details of their liquid fund portfolios. The fixed maturity plans (FMPs) backed by bank CDs (commercial deposits) were pre-redeemed by paying penalties. Capital protected structured products were also called prematurely by incurring material losses.

I don’t think this is anything like we witnessed in 2008-2009. Investors had pumped in huge money during 2004-2008 in Indian equities. This time they are huge net sellers during 2016-2020 period.

The earnings growth fell off the cliff during FY09 to FY11 period leading to de-rating of Indian equities. This time the earnings growth has remained anaemic and has little scope to disappoint materially.

In fact it may surprise on the upside from 2HFY21 (second half of fiscal year 2020-21; that is from Oct 2020) onwards.

India’s economic growth has seen multiple downgrades in past two years, unlike 2008-2010 when the world had great expectations from India’s economy.

Presently, the leverage in Indian stock market is significantly lower than the 2008-2009.

The current turmoil has come out of the blue, has been sudden and there is no one solution to tackle this. Every country has its unique approach depending on the spread.

How hopeful are you about the containment of current global contagion — the Covid-19 as well as the financial meltdown — in the context of measures adopted by the affected countries on both the fronts?

There are no easy answers. China with their super quarantine efforts are still struggling to get everything back up even after 7-8 weeks. It is likely to be worse for many other countries where the virus cases have not yet peaked or just peaking right now.

Social distancing and complete lockdown are the only solutions to avoid spread of the virus.

(The US) Fed (Federal Reserve) delivered a ‘whatever-it-takes’ policy decision approach with cutting rates to nearly zero and starting $700 bn QE (quantitative easing) to counter Covid-19. They also unveiled swap lines on signs of dollar-funding strain, opened the discount window for 90 days and cut reserve requirements.

Almost 40 central banks have cut rates, initiated/resumed QE and taken multiple liquidity measures to stabilise financial markets in this month itself. All this will work for a short time and will buy out time.

Finally, the disease needs to be contained. And how fast it is done depends on the medical solutions. Hopefully, we will get more people tested and quarantined on time.

The US 10-year Treasury yields are up almost a per cent, at around 1.23 per cent, despite the US Fed announcing near zero interest rates?
In addition, despite the US Fed going for another QE programme by announcing buying of US $700 billion of mortgage bonds, the credit markets are still in a tailspin.
How does one explain this behaviour of the credit market?

US 10-year yields have moved 100 bps down and then up, first due to risk aversion and then due to USD shortage as there was a funding squeeze.

Critical issue here is that there is still 15 trillion dollar shortage which is required by global central banks.

Many dollar swap line agreements have been signed by all central banks to cater to this requirement. It is still early stage and we have to see how the virus situation turns up.

With so many liquidity and monetary fiscal measures thrown in by everyone, credit market is in flux right now.

I have been tracking global markets and bond yields for over a decade and some of the yields and bond bids are totally bizarre. But it is clear that if the virus impact goes on too long, it is likely that traders and investors will have 2 options left — cash or USD.

Don’t miss Part 2 on Monday!

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Banks offer new credit lines, expect defaults

To ease pressure due to the coronavirus lockdown, corporate have asked banks and the government for a six-month liquidity line, so that they can pay off their suppliers and employees.

Despite State Bank of India, Bank of India, and Bank of Baroda announcing fresh credit lines for troubled companies, they are expecting a series of defaults by small and medium companies as the financial year draws to an end.

Union Bank and Indian Bank also announced similar measures to increase working capital limits.

Banks are also asking the Reserve Bank of India (RBI) to delay non-performing asset (NPA) classification by three months (from the end of 90 days of non-servicing of loan).

If a loan is not serviced for 90 days, it becomes a bad debt for the bank and provision is made.

To ease pressure due to the coronavirus lockdown, corporates had asked banks and the government for a six-month liquidity line, so that they can pay off their suppliers and employees.

According to Prabal Banerjee, group finance director at Shishir Bajaj-led Bajaj Group, both bond and loan defaults will exponentially rise if the RBI doesn’t allow two-year moratorium on principal payment and six- to one-year moratorium on interest payments.

“The slowdown will have huge ramifications on bank NPAs,” said Banerjee.

Bankers see it as a necessary step, even as it may give rise to concerns around q moral hazard.

Rating agencies are particularly in a fix.

With the financial year ending  on March 31, small- and mid-sized companies are likely to default en masse, while rating agencies will have to mark them in the ‘default’ grade.

The rating agencies are guided by the principle of ‘one day, one rupee’, which says even if the default is for a day, or for a rupee, the issue has to be flagged as ‘default’.

Once the default happens, the ‘default’ rating cannot be withdrawn for at least six months.

“The issue now is that cash flows should be protected, and banks must give loans to companies to keep their cash flow intact, so that they can keep on giving salaries.

“If people don’t get salaries, that would be double whammy for the economy,” said a rating agency executive.

There has been no communication on this issue from the RBI or the capital markets regulator Securities Exchange Board of India, the rating agency executive said.

With deadline looming and faced with redemption pressure, some corporates are withdrawing their liquid funds parked with mutual funds (MF).

According to industry sources, debt MF schemes saw about Rs 1 trillion of investments pulled out at the end of last week.

“With daily operations disrupted, corporates are finding it challenging to access funding from banks and therefore, dipping into liquid investments to meet their working capital and debt obligations,” said a fund manager.

The fear of run on industry assets has prompted MFs to write to the RBI to increase line of credit to Rs 1 trillion through a repo window for corporate bond and commercial papers.

At the end of February, the average investor assets managed in liquid funds – which are largely used by corporates and institutional investors for short-term liquidity needs – stood at  Rs 4.9 trillion.

At a systemic level, liquidity has started to dry up, reflected in the spike in yields in domestic bond markets.

Yields in shorter-tenure debt markets have moved up by 100-150 basis points in the current month.

The squeeze has been tightened by heavy selling by overseas investors, with over Rs 54,000 crore worth of debt securities sold in March.

Photograph: PTI Photo

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How to use ATMs smartly to avoid hassles

As a customer, there are a few things every ATM user needs to know that will help them tackle unfortunate situations, suggests Bindisha Sarang.

There are many things that the banks in India get right; seamless ATM transaction experience is certainly not one of them.

According to Reserve Bank of India’s Annual Report of Ombudsman Schemes released last week, ATM/debit cards related complaints have increased from 24,672 in 2017-2018 to 36,539 in 2018-2019 — a rise of 48 per cent.

While India strives to become a cashless economy someday, the rising trend in complaints is worrisome.

As a customer, there are a few things every ATM user needs to know that will help them tackle unfortunate situations.

Account debited, but cash not dispensed

The biggest culprit according to the RBI report: “Of the total number of ATM / Debit Cards complaints, a significant sub-category was ‘Account debited but cash not dispensed by ATMs’ which accounted for almost 53 per cent of the ATM-related complaints.”

Imagine being in an ATM centre, making a transaction, getting an SMS that the money has been debited, but not getting any cash.

What should be done in such a case? An official of Indian Overseas Bank says, “The customer should give a request at the branch, he can even inform via the bank’s call centre and over the website.”

RBI rules says that banks have to credit this wrongly debited amount into your account within a stipulated time from the date of your complaint.

RBI issues a circular on September 20, 2019, on the harmonisation of Turn Around Time (TAT) and customer compensation in case of failed transactions.

Amitabh Bhatnagar, Head-Business Banking, ATM and Debit Cards, RBL Bank says, “The latest guideline from RBI prescribes a timeline of T+5 for banks to refund the client, where T is the day of the transaction. Beyond this time a daily penalty is levied to the bank of Rs 100 per day. This penalty needs to be paid by the bank to the customer irrespective of customer reporting and or lodging a complaint with the bank. The bank needs to reconcile its records and accounts and ensure payment against the delay is credited in an appropriate time.”

So make sure you get in touch with the bank and let them know regarding the issue, and follow up of you don’t get your money within the time frame.

Charges and strategy

The next thing every ATM user needs to know is regarding the ATM charges.

Mostly the transaction charges for ATM use is linked to the type of bank account one has.

For instance, most high-end accounts come with free unlimited ATM transactions, while other account variants have limits defined concerning free transactions.

Bhatnagar, says, “From a pricing control perspective RBI has defined base number of transaction that a bank must be offered free, for example in the top metros, the floor limit is three free transactions.”

In rural and underbanked areas, the floor limit is higher.

The maximum fee which can be charged is Rs 20 Naveen Kukreja – CEO and Co-founder, Paisabazaar.com: “Debit card users should use digital mode of payment such as e-wallets, internet banking, IMPS and UPI, to the extent possible. This will reduce the use of cash payment, which in turn will decrease the chance of breaching free limits on ATM transactions. Additionally, those having multiple savings accounts should spread their ATM withdrawals across various savings accounts to take advantage of higher cumulative free ATM withdrawals. This would prevent them from exhausting free ATM limits, hence, saving on ATM withdrawal charges.”

With NEFT becoming free of cost post-January 1 2020, you can always transfer funds from one account to another and make the most of free ATM transactions, for cash withdrawal.

Transact safely

Be mindful while using the ATM.

Mayur Joshi, a Pune-based cybersecurity expert, says, “Skimming is seen to be the trending fraud type in 2019 in India. Consumers need to be educated, if anything about the card reader or PIN pad looks different or unusual or seems loose to the touch, or if the consumer sees a sign asking them to swipe their card in a second reader, don’t use it. Don’t even remove it, report it.”

An Indian Overseas Bank official says, “Ensure you do the transaction yourself at an ATM.

“Never write down the PIN, nor share PIN or OTP with anyone.

“And never forget to collect cash and the card after the transaction is done.

“In short, be alert while the transaction is going on, never take help from strangers for using the ATM card or handling your cash.

“Always press the ‘Cancel’ key before moving away from the ATM.”

Rustom Irani, MD and CEO of cash business, Hitachi Payment Services says, “Insert card only when the card reader light is flashing. Always cover the keypad with your hand while entering the PIN. And, always wait till the transaction is fully complete before leaving the ATM.”

Check for any external cameras pointing directly towards the keypad including micro-camera above the PIN pad.

Bhatnagar, says, “Shoulder surfer” can peep at your PIN as you enter it. So stand close to the ATM and use your body and hand to shield the keypad as you enter the PIN.”

In short, see if anyone is looking over your shoulder.

If you are using the ATM for depositing a cheque or card into your ATM, check the credit entry in your account after a couple of days.

And remember that all your old magstripe debit, credit cards will be invalid by December 31 by a new EMV/chip-based card.


Understanding finance doesn’t come naturally to you?

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