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

A seller weighs pulses on his stall in a market in Siliguri – AFP

The Reserve Bank of India gave non-residents and foreign investors the opportunity to invest Rs 1 trillion in Indian bonds; this will reduce pressure on the interest rate regime



By HP Ranina

Published: Sat 19 Feb 2022, 16:26

Question: In a context of stock market volatility given geopolitical considerations and rising US interest rates, is it still worthwhile for me to continue the systematic investment plan I have subscribed to with a mutual fund in india? I also have investments in gold exchange traded funds.

Answer: Despite the erratic fluctuations in stock prices, retail investors still find the Systematic Investment Plan (SIP) attractive. In January 2022, SIP’s monthly contribution was at a record high of Rs 115 billion. According to the Association to Mutual Fund Industry, retail investor confidence continues to remain strong as India’s economy is expected to grow by around 8.7%. Uncertainties arising from global factors such as the US Federal Reserve raising interest rates have been taken into account by investors who prefer SIPs as a means of long-term investment. Debt funds have also been quite popular with investors who are conservative and risk averse. Inflows into the gold ETF were also reported in December 2021, although gold prices are expected to stabilize at current levels. However, in January of this year, gold prices suffered a correction due to expectations of higher interest rates in the United States and soaring crude oil prices.

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

Response: Interest rates were expected to rise following the monetary policy announcement earlier this month by the Reserve Bank of India. However, this did not happen because the Reserve Bank continued its supportive monetary policy and not only left rates unchanged but also maintained its dovish stance. The status quo therefore implies that the cost of home loans and other borrowing linked to the repo rate will not increase. With the repo and reverse repo rates being maintained at 4% and 3.35% respectively for the tenth successive policy, the stability of the financial market is ensured. The government’s large borrowing program in fiscal year 2022-23 may not affect interest rates. The Reserve Bank of India has given non-residents and foreign investors the opportunity to invest Rs 1 trillion in Indian bonds. This will relieve some pressure on the interest rate regime. The Reserve Bank has also liberalized rules on interest rate derivatives, which will allow banks to extend hedging products to borrowers.

Question: I believe some duty exemptions have been removed. Won’t this affect India’s trade balance with other countries and slow down economic growth?

Answer: Over the past three decades, several duty exemptions have been granted to 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 deprived local producers of a level playing field. It is therefore proposed to phase out preferential tariff rates for imports of capital goods and projects, and to levy a moderate duty of 7.5 per cent. Customs duty rates have been calibrated to provide a graduated rate structure to encourage domestic manufacturing of wearables, hearing aids and electronic smart meters. Tariff concessions have been granted to transformer parts for mobile phone chargers and the camera lens of the mobile camera module. Customs duties on cut and polished diamonds and precious stones have been reduced to 5%.

— HP Ranina is a practicing lawyer specializing in India’s tax management and foreign exchange laws.


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