Yet another year, marked by the Covid-19 pandemic, has ended. A fortnight back, a sharp drop in the rupee against the dollar must have given the regulator a few anxious moments, but the fall has been arrested\u00a0and the local currency bounced back\u00a0even as foreign fund outflows continue. Meanwhile, the bond yields have been on the rise.<\/p>\n
As the New Year begins, let\u2019s do some crystal ball gazing for the trends and challenges for the financial sector in 2022.<\/p>\n
The Reserve Bank of India (RBI) kept the policy rate unchanged in its last monetary policy of the year in December; its stance remains accommodative.\u00a0The 10-year bond yield dropped from 6.39 per cent to 6.34 per cent after the announcement. But it has been rising since, to touch 6.48 per cent \u2013 up more than half a percentage point since\u00a0the beginning of the 2021.\u00a0It closed at 6.455 per cent on 31 December.<\/p>\n
Though a rate hike may still be a while away, market rates can only go up. The headline inflation could range between 5 and 5.5 per cent\u00a0this year. Technically, it is still within the RBI\u2019s target (4 per cent within a band of +\/- 2 per cent)\u00a0but the goal post seems to have shifted (to 6 per cent). The market will extract the price.<\/p>\n
This means, the cost of government borrowing in FY2023 will rise even though there is delay in the rate hike. In the best case scenario, the size of the borrowing programme\u00a0this year\u00a0could remain the same as in FY2022 \u2013 Rs12.5 trillion \u2013 but it won\u2019t be a cakewalk for the government unless the RBI extends a helping hand.<\/p>\n
Of course,\u00a0things will be different\u00a0if India makes it to the\u00a0global bond indices.\u00a0Its\u00a0inclusion in JPMorgan\u2019s global emerging-market bond index could prompt $25 billion of inflows from foreign investors, a report says. India could be included in two major global bond indices early this year, leading to the flow of foreign money into the bond market, lifting their prices and lowering the borrowing cost of the government. This will also have a positive impact on the stock market, corporate bonds and local currency. The rupee, which traded at 72.27 a dollar in the second half of February\u00a0last year, dropped to 76.31 on December 16,\u00a0before bouncing back to 74.29.<\/p>\n
The repo rate, at which the RBI infuses liquidity, was kept unchanged at 4 per cent in the central bank\u2019s last monetary policy committee meeting for the ninth time in a row, and the reverse repo rate, at which it sucks out liquidity, was at 3.35 per cent. But the RBI has strengthened the normalisation process, which started in October.<\/p>\n
It has been using the variable reverse repo rate (VRRR) auctions to drain out liquidity. The\u00a0amount<\/strong>\u00a0of such auctions has been progressively increased and, from January onwards, liquidity absorption will be undertaken mainly through this route. Simply put, the RBI is making the 3.35 per cent reverse repo rate redundant. All short-term rates have been moving up.<\/p>\n As most global central banks have started tightening, India cannot remain insulated from this trend. First, there will be a reverse repo hike to bridge the gap between the two rates, and a repo hike will follow. Looking at the likely inflation and growth trajectory, there could be a couple of rate hikes this year. The RBI has kept its real GDP growth estimate unchanged at 9.5 per cent for 2021-22. Going beyond securing growth on a sustainable basis, the RBI wants to make it \u201cbroad-based\u201d.<\/p>\n Incidentally, almost every banker has started seeing demand for credit. Till September 2021, credit growth was mute and the banks did not see any demand beyond retail loans. Now, the trend is changing; the corporations have started lifting\u00a0<\/strong>money. The trend will strengthen in the coming months as the fence-sitters are in the process of giving final touches to their investment plans.<\/p>\n Since the December 2015 quarter, when the RBI initiated the asset quality review of banks to clean up their balance sheets, the September 2022 quarter has been the best both for public sector and private banks in terms of earnings. This was possible because of a sharp drop in the provisions for bad loans. Once the great growth picks up, their earnings will only get better.<\/p>\n Most banks could afford to set aside less for bad loans since the bad loan pile has started shrinking, fresh slippages have been arrested and the bulk of such loans has already been provided for. Barring a few exceptions, almost every bank was able to bring down both the gross and net non-performing assets in the September quarter. The scene is far better than what the RBI had estimated. Will the trend continue? Let\u2019s wait and watch. Not all banks will have a good time in 2022.\u00a0The latest health-check report of RBI indicates a rise in bad loans this year.<\/p>\n Some may face an existential crisis as the digital disruption intensifies. Nimble-footed non-banking financial companies (NBFCs) and fintechs will create new markets where many old banks will fear to tread. Unless they change the way they function, these banks run the risk of becoming irrelevant. At the same time, some NBFCs will see their bad loans rise as the RBI has tightened the screws. No more soft-touch regulations; they are being treated almost on a par with commercial banks.<\/p>\n In 2022, we may see the RBI opening the doors for new banks. The licence for both universal and small finance banks has been on tap, and there are a few seekers in the queue. With bank ownership norms fine-tuned, the central bank\u2019s expert committee may give its nod to a few.<\/p>\n Will we see the privatisation of two public sector banks this year, as promised in the February 2021 Budget? The work is on. The government plans to bring down its stake to 26 per cent in these two banks, which are yet to be identified. This may not come in the way of getting investors for these banks, provided the government is willing to step back rather than run them the way it had been doing for over five decades since these banks were nationalised.<\/p>\n Finally, will the cryptocurrency conundrum be solved? Though the RBI would rather allow cryptocurrency over its dead body, the government is under pressure from different quarters to not ban it. All agree that it\u2019s not a currency. Is it an asset? Is it a commodity? Who will be the regulator? Many are asking these questions, while the industry is smartly selling the idea of cryptocurrency to policymakers, gift-wrapping it in its underlying technology, the blockchain.<\/p>\n The RBI, meanwhile, is busy preparing the roadmap for the central bank digital currency \u2013 a wallet that is not a competition to crypto.<\/p>\n","protected":false},"excerpt":{"rendered":" Yet another year, marked by the Covid-19 pandemic, has ended. 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