Reserve Bank of India has liberalized interest rate derivatives rules – News

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A vendor weighs legumes at his stall at a market in Siliguri – AFP

The Reserve Bank of India has given leeway to non-resident and overseas investors to invest Rs1 trillion in Indian bonds; this will relieve the interest rate regime somewhat



By HP Ranina

Released: Sat. 02/19/2022, 4:26 p.m

Question: With geopolitical stock market volatility and rising US interest rates, is it still worthwhile for me to continue with the systematic investment plan I have underwritten with a mutual fund in India? I have also invested in gold exchange traded funds.

Answer: Despite erratic fluctuations in stock prices, retail investors continue to find the Systematic Investment Plan (SIP) attractive. In January 2022, the monthly SIP contribution reached an all-time high of Rs.115 billion. According to the Association to Mutual Fund Industry, retail investor confidence remains buoyant as the Indian economy is expected to grow by around 8.7 percent. Uncertainties arising from global factors such as the US Federal Reserve’s rate hike have been considered by investors who favor SIPs as a way to invest for the long term. Debt mutual funds are also quite popular with investors who are conservative and don’t want to take risks. Fund inflows into the gold ETF were also reported in December 2021, although gold prices are expected to stabilize at current levels. In January of this year, however, gold prices underwent a correction on expectations of a US interest rate hike and rising crude oil prices.

Question: I took out a home loan from an Indian bank. I’m afraid that interest rates will rise and put additional strain on me. I want to know if any concessions for homeowners have been announced in this year’s budget proposals.

Answer: Interest rates were expected to rise after monetary policy was announced by the Reserve Bank of India earlier this month. This has not happened, however, because the Reserve Bank has continued with its accommodative monetary policy, not only leaving interest rates unchanged but also maintaining its accommodative stance. The status quo therefore implies that the cost of home loans and other lending linked to the repo rate will not increase. With the repo and reverse repo rates held at four percent and 3.35 percent, respectively, for the tenth consecutive year, stability in the financial market is assured. The government’s large borrowing program in fiscal 2022-23 may not affect interest rates. The Reserve Bank of India has given leeway to non-resident and overseas investors to invest Rs1 trillion in Indian bonds. That will relieve the interest rate regime somewhat. The Reserve Bank has also liberalized interest rate derivatives rules, which will allow banks to extend hedging products to borrowers.

Question: I believe that certain customs exemptions have been abolished. Won’t this affect India’s trade balance with other countries and slow down economic growth?

Answer: Over the past three decades, several exemptions from tariffs have been granted on capital goods for various sectors such as energy, fertilizers, textiles, leather and food processing. According to the government, these exemptions have hampered the growth of the capital goods sector in India and denied local producers a level playing field. It is therefore proposed to phase out the preferential tariffs for capital goods and project imports and to levy a moderate tariff of 7.5 percent. The tariffs have been calibrated to provide a tiered tariff structure to encourage domestic manufacture of portable devices, audible devices and electronic smart meters. Tariff relief has been granted for parts of transformers for mobile phone chargers and for camera lenses of mobile camera modules. The duty on cut and polished diamonds and precious stones was reduced to five percent.

— HP Ranina is a practicing lawyer specializing in Indian tax and foreign exchange legislation.

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