International Developments The Bank of Japan held off on expanding stimulus despite pushing back the time frame for hitting its 2% inflation target. It cut its core consumer inflation forecast for end-march 2018 to 1.5% from 1.7%. Bank of England scrapped its plan to cut interest rates and moved to "a neutral stance" ramping up its forecasts for growth and inflation in 2017. It now expects growth at 1.40% in 2017. The Federal Reserve could raise US interest rates relatively soon, said Fed Chairperson Janet Yellen as data underscored her upbeat assessment of the economy. Federal Reserve vice chairman Stanley Fischer said the central bank has almost reached its goals for maximum employment and price stability, strengthening the case for raising interest rates. Federal Reserve officials said the labor market has tightened, with some indicating a rate hike should happen in December, according to minutes of their November meeting. The People's Bank of China said monetary policy should not provide too much liquidity and should prevent pushing up debt and leverage levels. The Bank of Japan received no bids at its first operations to buy bonds at a fixed rate. US GDP rose at a 3.20% annualised rate in the third quarter, the fastest in two years, compared with an initial estimate of 2.90%. Canada's GDP grew 3.50% in the third-quarter. China's trade surplus widened to $49.10 billion in October as exports declined 7.30%. Japan recorded a trade surplus of $4.47 billion in October. The Labor Department said CPI in U.S. rose 0.40% in October following a gain of 0.30% in September. Consumer prices in Japan excluding fresh food dropped 0.40% in October from a year earlier. The Office for National Statistics said U.K.'s annual CPI fell to 0.90% in October from 1% in September. 20
International Developments China's forex reserves decreased $45.70 billion to $3.12 trillion in October. The OPEC agreed on production cuts to boost oil prices. The U.K. must hold a vote in Parliament before starting the two-year countdown to Brexit, a panel of London judges decided. Indian Economy The Government of India withdrew from immediate effect (midnight of November 8, 2016) the legal tender character of the existing and any older series banknotes in the denominations of `500 and `1000. RBI implemented various measures for facilitating the transition. GDP at constant (2011-12) prices in Q2 of 2016-17 is estimated at `9.63 lakh crore, as against `27.62 lakh crore in Q2 of 2015-16, showing a growth rate of 7.30%. Quarterly GVA at Basic Price at constant prices for Q2 of 2016-17 is estimated at `27.33 lakh crore, as against `25.52 lakh crore in Q2 of 2015-16, showing a growth rate of 7.10%. India registered a fiscal surplus of `24,481 crore during October 2016, an increase of 175% over the fiscal deficit of `32,683 crore in October 2015. The fiscal deficit during April-October 2016 accounted for 79.30% of the budgeted estimates of `5,33,904 crore for 2016-17. India's exports advanced 9.59% in October 2016 to $23.53 billion from $21.46 billion in October 2015. Imports rose 8.11% to $33.67 billion from $31.15 billion. The overall trade balance for April-October 2016 was estimated at US$20.82 billion which was 52.91% lower than the deficit of US$44.20 billion during April-October 2015. The Index of Industrial Production grew 0.70% in September 2016 against 3.70% growth in September 2015. The IIP contracted 0.10% in April- September 2016 as against growth of 4.0% in April-September 2015. The eight core industries with a combined weight of 37.90% in the Index of Industrial Production (IIP) grew 6.60% in October 2016 as against 3.80% in October 2015. Cumulative growth for April-October 2016 was 4.90%, as against 2.80% growth in April-October2015. October 2016 on point to point basis were 4.78%, 3.54% and 4.20% (5.54%, 4.28% and 5.00% in October 2015). Inflation rates (final) for Rural, Urban and Combined for September 2016 are 5.04%, 3.64% and 4.39% 21
Indian Economy respectively. The annual rate of inflation, based on monthly WPI, stood at 3.39% (provisional) for October 2016 as compared to 3.57% (provisional) for September 2016 and -3.70% during October 2015. The annual rate of inflation based on final index was higher at 3.85% for August 2016 as compared to 3.74% reported earlier. The y-o-y inflation measured by monthly CPI-IW stood at 3.35% for October 2016 as compared to 4.14% for September 2016 and 6.32% during October 2015. Point to point rate of inflation based on the CPI-AL and CPI-RL decreased from 4.05% and 4.03% in September 2016 to 3.18% and 3.28% in October 2016 respectively. India's holding of US Treasury Securities at the end of September 2016 stood at $122.70 billion vis-à-vis $122.90 billion at the end of August 2016. Direct tax collections up to October 2016 show an increase of 10.60% to `3.77 lakh crore which is 44.50% of the Budget Estimates of direct taxes for FY 2016-17. Indirect tax collections up to October 2016 registered an annual increase of 26.70% to `4.85 lakh crore which was 62.40% of the Budget Estimates of Indirect taxes for FY 2016-17. The Indian mutual fund industry's average assets under management rose to a record `16.28 lakh crore at the end of October, helped by strong inflow in income and equity segments. The quarterly report on Public Debt Management for the second quarter was released. The GST Council decided on a four-tier GST rate regime of 5%, 12%, 18% and 28%, with a cess over the peak rate of 28% on luxury and sin goods for five years to compensate states for any revenue loss. The Draft Model GST Law, Draft IGST Law and Draft Compensation Law which would be considered by the GST Council for approval were placed in the public domain for information. NITI Aayog vice chairman Arvind Panagariya said the government's move to demonetise the economy will help check inflation and there will be a surge in bank deposits. 22
Indian Economy The IMF supported India's efforts to fight corruption through the currency control measures, but stressed taking care to minimise disruptions in the economy. The CMIE estimated the cost of withdrawing high-denomination currency notes to wipe out black money from the country at about `1.28 lakh crore during the 50-day window till December 30. S&P retained India's rating at 'BBB-' with a stable outlook and ruled out any upgrade in two years, citing weak public finances. Moody's affirmed India's sovereign rating at 'Baa3' with a positive outlook as it expects policymakers to continue reforms to achieve balanced growth and reduce the government's debt load. Fitch re-affirmed its "negative" outlook for India's banking sector, saying the financial standing remained "fragile" without bigger capital injections and that the government's action on banknotes could end up having a mixed impact. Fitch Ratings lowered India's GDP growth forecast for this fiscal to 6.90% from 7.40% per cent, saying there will be "temporary disruptions" to economic activity post demonetisation. Moody's said demonetisation is beneficial for the Indian government and banks but implementation challenges of this unprecedented move will disrupt economic activity and weigh on GDP growth for a few quarters. The World Bank advised India to reduce subsidies and import duties to improve competitiveness and become an export powerhouse. RBI announced following measures to manage surplus liquidity conditions due to surge in deposits by applying an incremental cash reserve ratio (CRR) as a purely temporary measure, as under: o The CRR remains unchanged at 4% of outstanding net demand and time liabilities (NDTL); o On the increase in NDTL between September 16, 2016 and November 11, 2016, scheduled banks shall maintain an incremental CRR of 100%, effective the fortnight beginning November 26, 2016. As the incremental CRR is intended to be a temporary measure to drain excess liquidity in the system, it shall be reviewed on December 9, 2016 or even earlier. 23
o RBI has separately revived the Guarantee Scheme to enable deposit of withdrawn bank notes balances with it or at currency chests and get immediate value. This measure should also facilitate banks' compliance with the incremental CRR. Banks reported to RBI that exchange/deposits of old notes effected between November 10-27, 2016 amounted to `8,44,982 crore (exchange amounted to `33,948 crore and deposits amounted to `8,11,033 crore) while the public withdrew `2,16,617 crore from their accounts. Government of India on the recommendation of the RBI, decided to revise the ceiling for issue of securities under the Market Stabilisation Scheme (MSS) to `6,000 billion for 2016-17. RBI instructed Authorized Persons to issue pre-paid instruments to foreign tourists to facilitate exchange transactions in lieu of the withdrawal of the legal tender character of `500 and `1,000. RBI relaxed the norms for withdrawal of cash from bank deposit accounts while imposing limits on withdrawals from PMJDY accounts. RBI permitted banks to include now defunct `500 and `1,000 notes deposited in the currency chests as part of their cash balance in the soiled note category but such deposits will not be reckoned for calculating Chest Balance Limit/Cash Holding Limit. RBI notified various measures to ease the burden on the public/foreign tourists following the withdrawal of legal tender character of bank notes in the denominations of `500/- and `1000/-. No over the counter exchange (in cash) of SBNs were permitted after midnight of November 24, 2016. RBI announced special measures to incentivize electronic payments. RBI notified the guidelines for Chest Guarantee Scheme for SBN Deposits (CGSS) at district level. RBI cautioned the public against misusing the exchange facility given following the withdrawal of legal tender character of the existing bank notes in the denominations of `500/- and `1000/-. RBI set up a Task Force under the Chairmanship of Shri S. S. Mundra for facilitating recalibration and reactivation of ATMs. Banks were cautioned to abide by only those instructions which are either uploaded on RBI's website (www.rbi.org.in) or mailed through the official mail. RBI directed banks to waive levy of ATM charges for all transactions (inclusive 24
of both financial and non-financial transactions) by savings bank customers till December 30, 2016. RBI will conduct a pilot project wherein 10% of the ATMs in the country will be calibrated to dispense `100 banknotes exclusively. RBI started reckoning the market value of collateral securities for the purpose of RBI Repo (including MSF) and Reverse Repo operations and to allow rerepoing of securities received under RBI Reverse Repo operations with effect from November 26, 2016. Oil Bonds issued by Government of India will qualify as eligible securities for Repos, Reverse Repos and Marginal Standing Facility (MSF). RBI removed the margin requirement for the securities provided by RBI as collateral to the successful participants in Reverse Repo operations (including Term Reverse Repos). RBI notified on allocation of banknotes between bank branches. RBI appointed Shri M. Rajeshwar Rao as Executive Director. RBI expanded the fields of specialization or practical experience useful to banking companies to be considered for appointment of director in the banks. RBI notified the revisions in the scheme for stressed assets. RBI notified the revisions in the scheme for sustainable structuring of stressed assets. RBI issued final guidelines on Large Exposure Framework (LEF) to be effective from April 1, 2019. RBI notified the guidelines for computing exposure for counterparty credit risk arising from derivative transactions. RBI notified the final guidelines on capital requirements for bank exposures to central counterparties. RBI clarified on the provisions of hedging in the ECB framework. RBI notified on the definition of 'Infrastructure Lending'. RBI modified the directions relating to IFSC Banking Units (IBUs) regarding permissible activities. RBI expanded the investment basket of eligible instruments for investment by FPIs under the corporate bond route. RBI notified on Foreign Exchange Management (Insurance) Regulations, 2015. 25
RBI permitted banks to raise funds through issuance of rupee denominated bonds overseas within the limit set for foreign investment in corporate bonds. RBI announced draft guidelines for centralised hedging for Indian subsidiaries of non-resident companies. RBI notified the Mortgage Guarantee Companies (Reserve Bank) Directions, 2016. Airtel Payments Bank Limited commenced its operations as a payments bank with effect from November 23, 2016. RBI notified daily release of data on Electronic Payment Systems effective December 02, 2016 till December 31, 2016 with a lag of one day. RBI released the data on sectoral deployment of bank credit for September and October 2016. RBI released the data on overseas direct investment for October 2016. RBI released the data on India's international trade in services for September 2016. RBI released data on ECB/FCCB/RDB for October 2016. RBI released 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks: October2016'. RBI released 'Quarterly BSR-1: Outstanding Credit of Scheduled Commercial Banks for June 2016'. RBI released Working Papers titled Inflation-Forecast Targeting for India: An Outline of The Analytical Framework and Quarterly Projection Model for India: Key Elements and Properties. RBI released Occasional Papers Vol. 35 and 36 - No. 1 & 2: 2014 & 2015. CCIL The daily highest gross volume of USD 130.83 billion was settled on November 30, 2016. FX-CLEAR registered its highest daily volume of USD 1827.50 million on December 7, 2016. The CBLO market recorded the all time daily highest volume of `1,52,243 crore on December 8, 2016. Repo Volumes on the CROMS trading system recorded an all-time high of `1,28,226 crore on December 9, 2016. 26