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Reserve Bank of India has liberalised rules on interest rate derivatives

A vendor weighs pulses at his stall in a market in Siliguri - AFP
A vendor weighs pulses at his stall in a market in Siliguri - AFP

The Reserve Bank of India has given non-residents and foreign investors headroom to invest Rs1 trillion in Indian bonds; this will take some pressure off the interest rate regime

By H. P. Ranina

Published: Sat 19 Feb 2022, 4:26 PM

Question: With the stock markets being volatile in view of geopolitical considerations and US interest rates going up, is it still worthwhile for me to continue with the systematic investment plan which I have subscribed to with a mutual fund in India? I also have investments in gold exchange traded funds.

Answer: Despite erratic fluctuations in equity share prices, retail investors still find the systematic investment plan (SIP) attractive. In January 2022, the monthly SIP contribution was at an all time high figure of Rs115 billion. According to the Association to Mutual Fund Industry, confidence of retail investors continues to remain buoyant as the Indian economy is expected to grow by about 8.7 per cent. Uncertainties arising from global factors like the interest rate hike by the U.S. Federal Reserve Bank have been factored in by investors who prefer SIPs as an avenue for long term investments. Debt funds have also been fairly popular with investors who take a conservative view and do not have an appetite for taking risks. Inflow of funds into the gold ETF has also been reported in December 2021, though gold prices are expected to stabilise at current levels. However, in January this year the gold prices have seen a correction on the anticipation of US interest rate hike and surging crude oil prices.

Question: I have taken a housing loan from an Indian bank. I am worried that the interest rates will go up and put an additional burden on me. I want to know whether any concessions have been announced for house owners in this year’s budget proposals.

Answer: It was expected that interest rates would go up after the monetary policy was announced earlier this month by the Reserve Bank of India. However, this has not happened because the Reserve Bank has continued with its benign monetary policy and not only left the rates unchanged but also retained its accommodative stance. The status quo therefore implies that the cost of home loans and other borrowings which are linked to the repo rate will not go up. With the repo and reverse repo rates being maintained at four per cent and 3.35 per cent respectively for the tenth successive policy, stability in the financial market is assured. The government’s large borrowing programme during the financial year 2022-23 may not impact the interest rates. The Reserve Bank of India has given non-residents and foreign investors headroom to invest Rs1 trillion in Indian bonds. This will take some pressure off 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 that certain customs duty exemptions have been removed. Will this not affect India’s trade balance with other countries and slow down economic growth?

Answer: Over the past three decades several customs duty exemptions have been granted to capital goods for various sectors like power, fertilizer, textiles, leather, and food processing. According to the government, these exemptions have hindered 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 the concessional rates of customs duty for capital goods and project imports, and levy a moderate tariff of 7.5 per cent. Customs duty rates have been calibrated to provide a graded rate structure to encourage domestic manufacturing of wearable devices, hearable devices, and electronic smart meters. Duty concessions have been given to parts of transformers for mobile phone chargers and to camera lens of mobile camera module. Customs duty on cut and polished diamonds and gem stones has been reduced to five per cent.

— H. P. Ranina is a practicing lawyer, specialising in tax and exchange management laws of India.

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