How RBI Generated a ₹ 99,122 Crore Surplus for the Government

On May 21, the central board of directors of the Reserve Bank of India (RBI) approved the transfer of Rs 99,122 crore as surplus to the central government for the accounting period of nine months ending March 31, 2021 (July 2020-March 2021). 

This transfer to the government has raised a few issues. Let’s look at them point wise. But before we do that, I want to make a disclaimer here. This is a complicated topic and to make sure that I am able to explain it in simple English, I have left out a few details. At the cost of repetition, the idea is to explain the issues at hand, than get all the details right. So, to everyone who understands this inside out, apologies in advance.

Here we go. 

1) The RBI’s accounting year was from July to June, different from the April to March period that the central government follows. From 2021-22 onwards, the accounting year of the RBI will be the same as that of the government. Given this, the last accounting year of the RBI was for the period of nine months from July 2020 to March 2021, as it moved to the government’s accounting year.

Despite this shortening in the accounting year, the RBI surplus to the government has jumped big time. The surplus transferred to the government from July 2019 to June 2020, had stood at Rs 57,128 crore, for a period of full 12 months. Clearly, there has been a huge jump in the surplus transferred to the government, once we consider the fact that the last accounting year of the RBI was just nine months long.

2) The annual budget of the central government presented by the finance minister Nirmala Sitharaman on February 1, had assumed that the central government would earn Rs 53,511 crore as way of dividend/surplus from the RBI, the nationalised banks and the financial institutions (read the Life Insurance Corporation of India). A few months later, the surplus transferred just by RBI is much more than Rs 53,511 crore. So what gives?

3) Let’s first try and understand how the RBI managed to generate such a huge surplus, which was unexpected (or at least not made public) up until the budget was presented earlier this year. From July 2020 to March 2021, the RBI gross sold a total of $85.2 billion of its foreign exchange.

An accounting change made in 2019, thanks to the Bimal Jalan Committee report, now allows the RBI to pass a part of the profit made from selling foreign exchange, to the government as a surplus. The earlier system was different (for the sake of simplicity we won’t go there).

There is a certain weighted average price at which RBI has bought these dollars over the years. The RBI doesn’t reveal this detail. As per Ananth Narayan, Senior India Analyst at the Observatory Group, this weighted average stood at Rs 55.70, from July 2019 to June 2020.

It would be fair to say the weighted average would be a little higher in the last accounting year, more towards Rs 58-60 to a dollar. The RBI would have sold these dollars, from July 2020 to March 2021, at Rs 72-75 to a dollar, and thus made a profit of around Rs 15 for every dollar sold.

A part of this profit has been passed on to the central government as a surplus. So far so good.

4) While at the aggregate level, everything looks fine, if we start to look at the detailed data, this doesn’t pass the basic smell test. Take a look at the following graph, which basically plots the total gross dollars sold by the RBI every month from July 2020 to March 2021.

Source: Centre for Monitoring Indian Economy. 

The above chart makes for a very interesting reading. Close to 60% of the dollars sold during  the accounting year were sold in the last two months ($50.5 billion of the total $85.2 billion). More than 77% of the dollars sold during the year were sold in the last three months ($65.9 billion of the total $85.2 billion). 

What does this tell us? It tells us that the RBI sold a lot of dollars after the finance minister had presented the budget. And a good chunk of the surplus given to the government was probably thus generated. If I was a gossip columnist, I would have definitely speculated, whether one of the secretaries in the FinMin dialled RBI for more money, around the time the budget was presented.

5) As mentioned earlier, the facts stated above don’t pass the basic smell test. The RBI at various points of time needs to sell dollars in order to manage the dollar rupee exchange rate. While the RBI sold $65.9 billion from January to March, it also bought $61.8 billion during the same period. On the whole, this wouldn’t have made much of a difference in moving the foreign exchange market in a particular direction, when it comes to dollar rupee exchange rate.

Take a look at the following chart, which plots the dollar rupee exchange rate from January 2021 to March 2021.

Source: Yahoo Finance.

As can be seen from the above chart, the dollar rupee exchange rate moved within a narrow  range of Rs 72.4-73.6, for the first three months of 2021.

So what does this really mean? The RBI sold lots of dollars after the finance minister’s budget speech, not because that was what was required in the foreign exchange market, but in order to generate an accounting surplus for a cash-starved government. If I were to put it in very simple terms, the RBI led by Shaktikanta Das, resorted to jugaad.

6) The way things stand the RBI is not allowed to directly finance the expenditure by printing money and handing it over to the government to spend. Hence, over the last couple of years, it has been resorting to different ways to do so. Selling and buying dollars in order to generate an accounting profit is one such way. 

If I were to be slightly flippant here I would ask a rhetorical question – Is RBI a central bank or is it a government sponsored hedge fund?

Another way of financing the government has been printing money and buying existing government bonds from banks and other financial institutions.

While this move does not hand over money to the government directly, it does ensure that the supply of money in the financial system goes up, and the newly created money can be used by banks and financial institutions to buy fresh government bonds. Hence, this is indirect monetisaton of the government’s fiscal deficit or the difference between what it earns and what it spends.

To conclude, while nothing can stop a central bank from printing money, the tactic of selling dollars in order to generate a profit depends on how much the rupee depreciates against the dollar. While the weighted average cost of the dollars that the RBI currently has, is less than Rs 60 to a dollar, it will only rise in the years to come.

Hence, for enough profit to be generated through this route, the rupee needs to depreciate against the dollar. But that’s where atma nirbharta will come in and limit the RBI’s hand. Strong nations have strong currencies, at least that’s the idea in the heads of the politicians who run the current government.

कोरोना काल में छोटू बाबू की बड़ी शादी

शाम के पौने सात बजे थे. बिजली कटी हुई थी. पूरी गली में अँधेरा छाया हुआ था. 
पर प्रोफेसर पी के श्रीवास्तव का घर दूधिया रोशनी में समझो नहा सा रहा था. उनके बड़े बेटे छोटू की शादी थी. 
अमूमन तो छोटे बेटे का नाम छोटू रखा जाता है. पर यहां हुआ ऐसा था कि जब छोटू पैदा हुआ तो वो इतना छोटा था कि लोगों ने उसका नाम छोटू रख दिया. भाई मोहल्ले का भी कुछ हक़ तो बनता ही था प्रोफेसर साहब पर. 
खैर फ़िलहाल छोटू को रहने दीजिये, काम की बात करते हैं. 
पूरी गली में अँधेरा था तो प्रोफेसर सब घर टिमटिमा कैसे रहा था? उसके लिए आपको प्रोफेसर साहब के छोटे साले लल्लन को धन्यवाद देना पड़ेगा. लल्लन जी ने पीछे के फेज से बिजली खींच ली थी. अगर बिजली खींचने में कोई यूनिवर्सिटी पीएचडी वगैरह देती है तो लल्लन को तो ज़रूर मिलना चाहिए. 
“बहुत बढ़िया बिजली खींचे हो लल्लन,” प्रोफेसर साहब ने लल्लन से कहा. 
लल्लन ने इसका जवाब अजीब तरह से मुस्कुरा के दिया. ये वैसी ही मुस्कराहट थी जो मिडिल एज्ड भारतीय आदमियों में अक्सर पायी जाती है, जब वो कुछ कहना चाहते हैं पर कह नहीं पाते हैं. 
“क्या हुआ?” प्रोफेसर साहब ने पुछा. वो समझ गए कि लल्लन कुछ कहना चाह रहा है. 
“जीजाजी वो व्यवस्था हो गयी है ना?” लल्लन ने एकदम लजा लजा के पुछा, जैसे की किसी की शादी में पहली बार दारु पीने वाले हों. 
“हाँ, आखरी वाली कार में सब रखवा दिया है. ओल्ड मोंक, वैट 69, सब कुछ.” 
“और चखना वगैरह?”
“उसका भी बंदोबस्त हो गया है. समधी जी को गाडी का नंबर दे दिया है. जैसे ही हम लोग बरातघर पहुंचेंगे, सेवा शुरू हो जाएगी. चिल्ली चिकन वगैरह सब.” 
इससे पहले की लल्लन कुछ कह पाते, कमरे में, छोटू, बड़े ही गुस्सैल मूड में घुसा. 
अब थोड़ा सा आपको दूल्हे राजा के बारे में भी बता दे. 
छोटू दिल्ली यूनिवर्सिटी से पढ़े थे. पिताजी का बहुत अरमान था कि आईएएस अफसर बने. दो एटेम्पट दे चुके थे. दूसरी बार mains भी क्लीयर हुआ था. इंटरव्यू में वो थोड़ा लड़खड़ा गए थे. पैनल में दो लेडीज़ थी और उनके सामने छोटू जी ने एकदम चुप्पी साध ली थी. 
खैर, mains क्लीयर करने के बाद, पूरे मोहल्ले में उनका बहुत नाम हो गया था. लोग छठवीं-सातवीं के बच्चों को लेकर छोटू के पास करियर एडवाइस मांगने आते थे. 
इन सब चीज़ों से ज़्यादा मैरिज मार्किट में छोटू का वैल्यू बहुत बढ़ गया था. इस साल mains क्लीयर अगले साल कलेक्टर भी बनेगा, पंडित ये बोल बोल कर रिश्ते फिक्स करने की कोशिश कर रहा था. 
प्रोफेसर साहब ने ये सोचा की अभी छोटू का वैल्यू ऊपर है, इसलिए उसे भंजा लेना चाहिए. क्या पता कलेक्टर बने या न बने? प्रोफेसर साहब ने तो शहर के सबसे बड़े आईएएस कोचिंग सेंटर वाले से भी बात कर रखी थी. अगर तीसरा एटेम्पट भी बेकार गया तो छोटू को वहां लगवा देंगे. 
और छोटू की उम्र भी हो रही थी. ऐसे तो तीस साल के थे पर सर्टिफिकेट पर 27 की उम्र थी. इसकी वजह से शादी में प्रॉब्लम भी हो गयी थी. जिस लड़की से बात चल रही थी, उसकी उम्र सर्टिफिकेट पर 28 थी. फिर बातों बातों में पता चला की लड़की असल में 29 की है और मामला सुलझ गया. 
छोटू जी बहुत गरम थे. 
“पापा, आप भी कौन से बैंड वाला लेकर आ गए हैं.”
“क्यों, जमाल बैंड है. हमारी शादी में भी यहीं बजाया था.” 
इससे पहले की छोटू कुछ कह पाता लल्लन बीच में कूद पड़े. 
“क्या बढ़िया बढ़िया गाना बजाता है. आज मेरी यार की शादी है. मेरी देश की धरती सोना उगले, उगले हीरे मोती…” 
“सब पुराना गाना है,” छोटू ने कहा. 
“अरे क्या पुराना है. यही सब गाना पर तो नागिन डांस होता है. अब क्या हम लोग तुमरा शादी में नागिन डांस भी नहीं करेंगे,” लल्लन ने थोड़ा गरम होकर जवाब दिया. 
“पापा, पर दोस्त सब कैसे नाचेगा. वो लोग को ई सब गाना नहीं बुझायेगा.”
“क्या करें फिर?” प्रोफेसर साहब ने पुछा. 
“एक ठो डीजे बुला ले?”
“डीजे?” प्रोफेसर साहब थोड़ी सोच में पड़ गए. “किसको बुलाओगे?”
“अरे पीछे वाली गली मैं पुट्टुवा रहता है ना? 
“कौन पुट्टु? वो जो चार बार एटेम्पट दिया?”
“हाँ वही पापा।”
“डीजे बन गया है आजकल वो?”
“हाँ पापा, बहुत जोरदार बजाता है. डीजे वाले बाबू मेरा गाना चला दे. डीजे वाले बाबू मेरा गाना चला दे.” 
“अच्छा बुला लो.”
प्रोफेसर साहब की इतनी कहने कि देर थी और छोटू उछलते कूदते हुए कमरे से बाहर निकल गया. 
उसके निकलते ही प्रोफेसर साहब ने लल्लन से कहा: “जाओ देखो तुम्हारी दीदी तैयार है कि नहीं.”
“हाँ जीजाजी,” कहकर लल्लन कमरे से निकल गया. 
प्रोफेसर साहब ने अपना मोबाइल फ़ोन निकाला और समधी को फ़ोन लगाया. 
“बस आपका ही इंतज़ार कर रहे हैं,” समधी जी ने जवाब दिया. 
“अच्छा, थोड़ी सी समस्या हो गयी है.”
“क्या समस्या?”  समधी जी ने घबरा कर पुछा, आखिर लड़की की शादी का मामला था.  
“अरे छोटू बाबू को अब डीजे भी चाहिए.”
“तो इस में क्या है. बुला लीजिये. एक ही बार तो हमारी बेटी से शादी करेगा. तो थोड़ा नाच गाना तो होगा ही.”
“धन्यवाद्,” प्रोफेसर साहब ने जवाब दिया.
“अरे आपका बेटा हमारा बेटा।” 
“हम लोग एक घंटे में पहुँच जाएंगे,” ये कहकर प्रोफेसर साहब ने फ़ोन काट दिया. 
प्रोफेसर साहब का फ़ोन काटते ही समधी जी उठे और अपनी पत्नी को खोजते हुए निकले. 
“अरे रश्मी, खाने का 50 प्लेट और कम करना पड़ेगा.”
“काहे?” पत्नी ने थोड़ा इर्रिटेट होकर पुछा. 
“छोटू बाबू को डीजे चाहिए.”
“भाई हम आरबीआई में केवल क्लर्क थे, नोट छापने की मशीन आरबीआई के पास है हमारे पास नहीं.”
आधे घंटे बाद. 
छोटू की बारात रोड पर है बरातघर की तरफ, कछुए की रफ़्तार से बढ़ रही है. 
डीजे वाले बाबू तेरा गाना चला दे, बार बार बज रहा है. एक बार डीजे बजा रहा है. एक बार जमाल बैंड. दोनों में प्रतिस्पर्धा चल रही है. 
लल्लन नागिन डांस करने में लगे हुए हैं. पर तोंद इतने निकल गयी है कि कम्बख्त हाथ ज़मीन नहीं छू पा रहे हैं. 
इतने में धमाका टीवी के रिपोर्टर राजू जो वहां से गुज़र रहे हैं, बारात में इतने सारे लोग देख कर चकित रह गए हैं. कोरोना काल में सरकार ने बारात में परमिशन तो केवल 50 लोगों की दी है. पर यहाँ तो कम से कम 200 लोग चल रहे हैं. 
रिपोर्टर राजू माइक लेकर अपने कैमरामैन के साथ जल्दी जल्दी दूल्हे के घोड़े की तरफ भागे. 
छोटू टीवी रिपोर्टर को देखकर बहुत  खुश होता है, घोड़े से नीचे उतरता है उससे बात करने के लिए.
“कितने लोगों का बारात है?” रिपोर्टर राजू पूछता है. 
“अब सर, डेढ़ दू सौ लोग तो जइबे करेगा न बरात में,” मुँह में गुटका दबाये हुए, छोटू जवाब देता है. 
“और अगर इसकी वजह से कोरोना फैल गया तो कौन ज़िम्मेवार होगा?” रिपोर्टर राजू पूछता है. 
“कोरोना वरोना कुछ नहीं है.”
“अरे होता तो इतना बड़ा बड़ा रैली करते नेताजी.” 
“और हम अंग्रज़ी अखबार पढ़ते हैं. अभी अभी इंडियन एक्सप्रेस में भल्ला और भसीन ने लिखा कि रैली से कोरोना नहीं फैलता है.”
राजू का सर घूमने लगा. 
“जब रैली से कोरोना नहीं फैलता है तो बारात से कैसे फैलेगा?”
राजू का सर और भी घूमने लगा. 
“सब पप्पू का साज़िश है. वही फैला रहा है ये सब नेगेटिविटी. ज़रा पॉजिटिव बात कीजिये सब अच्छा होगा.”
राजू का सर पूरी तरह से घूम जाता है और अपने कैमरामैन से कहता है: “ज़रा माइक धरो.”
और इसके बाद वो छोटू को पीटने लगता है. 
बारात नाचने में मस्त है, जैसी की शादी न हो मैय्यत में आये हो, और सब के सब लगाए हुए हों. 
जब तक बारात को समझ आता है क्या हो रहा है, लाइव टीवी पर छोटू पिट चूका होता है. 
इस कहानी का अंत यहाँ से इंस्पायर्ड है. 

Everybody Loves a Good Interest Rate Cut…Except the Savers

My main life lesson from investing: self-interest is the most powerful force on earth, and can get people to embrace and defend almost anything – Jesse Livermore.

Late in the evening of March 31, the department of economic affairs, ministry of finance, put out a press release saying that the interest rates on small savings schemes for the period April to June 2021, have been cut.

The social media got buzzing immediately. And almost everyone from journalists to economists to analysts praised the decision. It was seen as yet another effort by the government to push down interest rates further.

With the state of the economy being where it is, lower interest rates are expected to perk up economic growth. People are expected to borrow and spend more. Corporates are expected to borrow and expand. At lower interest rates individuals who have already taken on loans will see their EMIs go down, leaving more cash in hand, and they are likely to spend that money, helping the economy grow.

That’s how it is expected to work, at least in theory. Hence, everybody loves a good interest rate cut… except the savers.

On April 1, the social media woke up to the finance minister Nirmala Sitharaman’s tweet announcing that “interest rates of small savings schemes… shall continue to be at the rates which existed in the last quarter of 2020-2021.” She further said that the order had been issued by oversight and would be withdrawn.

Later in the day, the department of economic affairs put out a press release to that effect.

The fact that lower interest rates are good for the economy is only one side of the story. They also hurt the economy in different ways. People who are dependent on interest income for their expenditure (like the retired senior citizens) see their incomes fall and have to cut down on their expenditure. This impacts private consumption negatively. 

While this cannot be measured exactly, it does happen. Also, a bulk of India’s household savings (close to 84% in 2019-20) are made in fixed deposits, provident and pension funds, life insurance policies and small savings schemes. Lower interest rates bring down the returns of all these products and this negatively impacts many savers.

As the economist Michael Pettis writes about the relationship between interest rate and consumption in case of China, in The Great Rebalancing:

“Most Chinese savings, at least until recently, have been in the form of bank deposits…Chinese households, in other words, should feel richer when the deposit rate rises and poorer when it declines, in which case rising rates should be associated with rising, not declining, consumption.”

The same logic applies to India as well, with lower interest rates being associated with declining consumption, at least for a section of the population.

This is not to say that interest rates should be higher than they currently are (that is a topic for another day), nonetheless the fact that lower interest rates impact savers and consumption negatively is a point that needs to be made and it rarely gets made. I made this point in a piece I wrote for, yesterday. 

Also, borrowing is not just about lower interest rates. It is more about the confidence that the borrower has in his economic future and the ability to keep paying the EMI over the years. I wrote about this in the context of home loans, a few days back.

This leaves us with the question that why doesn’t anyone talk about the negative side of low interest rates. The answer lies in the fact that they don’t have an incentive to do so. Let’s try and look at this in some detail.

1) Fund managers: Fund managers love lower interest rates because it leads a section of the savers, in the hope of earning a higher return, to move their savings from bank fixed deposits to mutual funds and portfolio management services which invest in stocks. In the process, their assets under management go up. More money coming into the stock market also tends to push up stock prices.

All in all, this ensures that fund managers increase their chances of making more money and hence, they love lower interest rates because their acche din continue.

2) Analysts: Analysts love lower interest rates because it leads a section of the savers, in the hope of earning a higher return, to move their savings from bank fixed deposits to stocks. In order to buy stocks, they need to open a demat account with a brokerage. When the new investors buy stocks, the brokerage earns commissions.

Further, it also means that the interest cost borne by corporates on their debt goes down, leading to higher profits. The stock market factors this in and stock prices go up. Given this, analysts have an incentive to love interest rate cuts.

3) Corporates: Do I need to explain this? Lower interest rates lead to a lower interest outflow on debt that a corporate has taken on and hence, higher profits or lower losses for that matter. This explains why corporate honchos are perpetually asking the Reserve Bank of India to cut the repo rate or the interest rate at which it lends to banks.

4) Banks: Banks love lower interest rates simply because at lower interest rates the value of the government bonds they hold goes up. Interest rates and bond prices are inversely related. Higher bond prices mean higher profits for banks or lower losses in case of a few public sector banks. This is why bankers almost always come out in support of interest rate cuts.

This also explains why the bankers hate the idea of small savings schemes offering higher returns than fixed deposits. Lower interest rates on small savings schemes pushes the overall interest rates in the financial system downwards. 

5) Economists: Most economists are employed by stock brokerages, mutual funds, banks, corporates or think tanks. As explained above, stock brokerages, mutual funds, banks and corporates, all benefit from lower interest rates. If your employer benefits from something, you also benefit in the process. Hence, your views are in line with that.

When it comes to think tanks, many are in the business of manufacturing consent for corporates. Their economists act accordingly. 

6) Journalists: With the media being dependent on corporate advertising as it is, it is hardly surprising that most journalists love interest rate cuts. Further, the main job of anchors on business news channels is to keep people interested in the stock market because that is what brings in advertising. And this can only happen, if stock prices keep going up. In this environment, anything, like interest rate cuts, that drives up stock prices, is welcomed.

Of course, some mainstream TV news channels also run propaganda for the government. So, in their case every government decision needs to be justified. That is their incentive to remain in the good books of the government.

7) Government: The central government will end up borrowing close to Rs 25 lakh crore during 2020-21 and 2021-22. Hence, even a 1% fall in the interest rate at which it borrows, will help it save Rs 25,000 crore. It clearly has an incentive in loving low interest rates. 

The point is everyone mentioned above tends to benefit if interest rates keep going down or continue to remain low. Further, they are organised special interests with direct access to the mainstream media. The savers though many more in number aren’t organised to put forward their point of view.

Also, it is easier to do the math around the benefits of interest rate cuts and low interest rates than its flip side. As economist Friedrich Hayek said in his Nobel Prize winning lecture, there is a tendency to simply disregard those factors which “cannot be confirmed by quantitative evidence” and after having done that to “thereupon happily proceed on the fiction that the factors which they can measure are the only ones that are relevant.”

That’s the long and the short of it. 

10 Things You Need to Know About Indian Real Estate in 2021

If you are the kind who follows the business media closely, you would probably be thinking that for the last few months all people have done across India is buy homes to live in. But is that really true? The short answer is no, though sales did pick up during October to December 2020, in comparison to the three month period before that. But whether that was pent up demand or genuine demand coming back, only time will tell.

A thriving real estate sector really helps the overall economy grow at a fast pace. But given the mess that the Indian real estate sector has been in for many years, and the fact that the deep state of Indian real estate won’t allow market forces to work to help clean it up, that isn’t really going to happen.

Let’s look at the issue in more detail.

1) As per the annual roundup of residential real estate published by PropTiger Research, sales in 2020 contracted by 47% to 1.83 lakhs across eight large cities (Delhi NCR, Mumbai, Pune, Ahmedabad, Chennai, Bengaluru, Hyderabad, Kolkata).

In short, 2020 was a bad year for real estate. Having said that, sales during October to December 2020 picked up and 58,914 units were sold, which was 68% more in comparison to the number of units sold during July to September 2020. In comparison to October to December 2019, sales were down 27%, during the period.

Of course, the real estate sector wants us to believe that demand is back and all is well with the sector. Nevertheless, this jump in sales can be because of pent up demand. Whether it sustains in the months to come remains to be seen. This is an important caveat to keep in mind.

2) More than half of these sales have happened in Mumbai and Pune. The reason offered for this is the cut in stamp duty carried out by the state government. The Maharashtra government cut the stamp duty applicable on real estate transactions from 5% to 2%. This was applicable until December 31, 2020.

The stamp duty cut driving up builder sales, is true to some extent. Given that the price of an apartment in a city like Mumbai runs into crores, even a 3% saving on the price runs into a decent amount of money. But more than the stamp duty cut, a substantial drop in prices, especially for homes priced at more than Rs 2 crore, is the main reason for the sales in the city picking up.

Independent real estate expert Vishal Bhargava has pointed this out in the past in his columns (Those who like to follow Mumbai’s real estate scene, should seriously read all that Vishal writes).

Of course, you haven’t read about this in the mainstream media simply because the mainstream media depends on advertisements from real estate companies and needs to keep driving the notion that real estate prices don’t fall, over and over again. (Another reason you need to support my work).

One reason for a fall in prices is the fact that businessmen who run small and medium enterprises have been facing a tough time since covid broke out. And they are looking at alternate avenues to raise money to keep their businesses going. This includes selling the real estate assets they have accumulated in the past. There is some distress sale as well.

Also, other than Mumbai and Pune, the other six cities account for less than half the sales. This tells us clearly that real estate sales in these cities are at best sluggish.

3) The clearest trend in the PropTiger data is that 48% of the sales have been for apartments selling at a price of less than Rs 45 lakh. What this tells us is that high prices remain the biggest challenge of owning a home in India. It also tells us that while home prices haven’t really fallen, on the whole across India, despite the lower demand, the demand that remains is primarily at the lower end of the price spectrum. Hence, the market has corrected itself in its own way, despite home prices not coming down in absolute terms. This is an important lesson that the real estate industry needs to learn.

Also, 74% of the sales have happened for home prices of less than Rs 75 lakh.

4) As far as prices are concerned, the PropTiger report points out: “Weighted average prices for new launched projects across the top-eight cities remained stagnant in the past few quarters, with prices moving in close ranges.”

This is something that is also reflected in Reserve Bank of India’s 10 city house index, though the cities tracked by this index are not the same as the cities tracked by PropTiger.

Source: Centre for Monitoring Indian Economy.

The cities tracked by the RBI’s 10-city house index are Mumbai, Delhi, Chennai, Kolkata, Bengaluru, Ahmedabad, Lucknow, Kanpur, Jaipur and Kochi. The index tells us that the average one-year return of owning real estate in India during the period July to September 2020, stood at 1.13%. This is the lowest since the index came into existence. The index also tells us that the return on real estate during 2020 has been marginally negative.

What this means is, and as I have often said in the past, Indian real estate is going through a time correction and not a price correction. The inflation seen over the last two years has been around 6% per year on an average. This means in real terms, the prices have already corrected by more than 12%, over a two year period.

5) This trend is likely to continue given the huge amount of inventory that remains piled up with builders. The overall inventory stock is at 7.18 lakh units across eight cities as per PropTiger. It has come down from 7.91 lakh units in 2019, simply because builders aren’t launching as many new projects as they used to.

Having said that, with the sales slowing down, at the current sales pace it will take around 47 months to clear the remaining inventory. Even though all this inventory is not ready to move in, a significant portion is. Also, it is worth remembering that the prospective buyers have a choice when it comes to buying a home. Over the years, investors across the country have ended up buying a huge number of homes in the hope of a price appreciation. Many of these homes have remained locked and are available for sale.

As Bhargava wrote in a recent column: “Resale transactions are traditionally 2/3rd of the market.” Even if this proportion were to come down, resale transactions of locked homes will continue to form a significant chunk of the market, making it difficult for builders to cut down their inventory quickly. Also, even if builders don’t offer ready to move in homes, there is a significant supply that will keep coming in from individuals who have bought real estate as an investment over the years.

6) Homes priced below Rs 45 lakh form 48% of the inventory. What does this tell us? It tells us that the real demand for homes is at a price even below Rs 45 lakh, probably below Rs 25 lakh. This is something that the builders need to keep in mind. It may not work in a city like Mumbai, where land available is limited and expensive, but it will definitely work for the other seven cities that PropTiger tracks and other parts of India, where cities can expand in all directions and land is really not an issue.

7) It is worth remembering here that builders have benefitted because of the Reserve Bank of India allowing banks and non-banking finance companies, to restructure commercial real estate loans.

As former RBI governor Urjit Patel writes in Overdraft—Saving the Indian Saver:

“In February 2020, ‘living dead’ borrowers in the commercial real-estate sector – under a familiar guise (‘a ghost from the past’, if you will) viz., ad hoc ‘restructuring’ – have been given a lifeline. It is estimated that over one-third of loans to builders are under moratorium.”

Patel does know a thing or two about banks and lending and hence, needs to be taken seriously. It remains to be seen for how long will the RBI continue supporting the builders. The longer, the RBI supports the builders, the longer they can hold on to a significant price cut. This also means that inventory will take longer to clear and home prices will continue to stagnate. It is all linked.

8) At a macro level this means that the ability of real estate to create jobs for the unskilled and the semi-skilled, will continue to remain limited. It is also worth remembering that real estate as a sector can have a huge multiplier effect on the overall economy.

The real estate sector has forward and backward linkages with 250 ancillary industries. This basically means that when the real estate sector does well, many other sectors, right from steel and cement to furnishings, paints, etc., do well.

If this were to happen, the Indian economy would really benefit in the post-covid times. But sadly it won’t, given that the deep state of Indian real estate which includes, builders, banks and politicians, will make sure that the sector is continued to be treated with kids gloves and any problems which could lead to a price cut, are kicked down the road. Trying to maintain the status quo in the sector is not helping the Indian economy.

9) Dear reader, some of you by now must be like all this gyan is fine, but tell me one simple thing, should I buy home or should I hold on to my money. The answer as always is, it depends. It is worth remembering here, that what we can possibly do with our money is a very individual thing.

If you are looking to buy a home to live in and have the capacity to pay an EMI and arrange for a down-payment, then this is a good time as any to buy a home. Owning a house has its own set of advantages. Parents and in-laws feel you have settled in life. There is no danger of the landlord acting cranky. And once you have children it gives them some kind of stability with friends, activities as well as the school they go to. Of course, address proofs don’t need to change, every time you move house.

Having said that do keep in mind that we live in tough times and the negative economic impact of covid is yet to go away. Also, there can be further cycles of the spread of the virus. Before taking on a home loan, ensure that you have some money in the bank to be able to continue paying the EMI in case you lose your source of income.

When it comes to investing in a house, it continues to remain a bad idea on the whole. Of course, there will always be some good opportunities and some distress sales happening.

10) Finally, everyone who makes a living out of selling real estate will spend 2021 trying to tell us that demand is coming back, people are buying homes, new trends are springing up and all is well.

As PropTiger points out:

“By making bare the limitations involved in other investment assets, the pandemic has forced people to rethink their investment strategies, tilting it in favour of home ownership.”

This is basically rubbish which has been written well. Why would anyone in their right mind during tough economic times, invest a large part of their savings and/or take on a large loan to buy an illiquid asset?

Some people who can afford it, may have definitely bought new homes in order to adjust to the new reality of work from home, but beyond that the proposition that PropTiger is making, remains a difficult one to buy.

If it were true, some of the massive amount of easy money that is currently floating around in the financial system, would have gone into real estate as well. But given that sales have crashed 47% during 2020 tells us that it clearly hasn’t.

In fact, the outstanding home loans of banks between March 2020 and November 2020 have gone up by just Rs 44,463 crore. This is around two-fifths of the increase (38.7% to be precise) in outstanding home loans of Rs 1,14,636 crore seen between March 2019 and November 2019. This is despite the fact that home loan interest rates have come down to as low as 7%.

So, people are generally being careful when it comes to buying a home by taking on a loan and that is the right strategy to follow at this point of time.

Why RBI’s Monetary Policy Has Been a Bigger Flop Than Bombay Velvet

Mere paas kothi hai na car sajni,
Kadka hai tera dildar sajni.
— Rajkavi Inderjeet Singh Tulsi, Ravindra Jain, Kishore Kumar, Asha Bhonsle and Ashok Roy, in Chor Machaye Shor.

Okay, I didn’t have to wait for the Reserve Bank of India’s monetary policy declared today, to write this piece. I could have written this piece yesterday or even a month back. But then the news cycle ultimately determines the number of people who end up reading what I write, and one can’t possibly ignore that.

A few hours back, the Monetary Policy Statement was published by the RBI, after the monetary policy committee (MPC) met on 2nd, 3rd and 4th December. The MPC of the Reserve Bank of India (RBI) has the responsibility to set the repo rate, among other things. The repo rate is the interest rate at which the RBI lends to banks, and which to some extent determines the interest rates set by commercial banks for the economy as a whole.

The MPC has been driving down the repo rate since January 2019, when the rate was at 6.5%. The rate had been cut to 5.15% by February 2020, around the time the covid pandemic struck.

By May 2020, the MPC had cut the repo rate further by 115 basis points to an all-time low of 4%. One basis point is one hundredth of a percentage. The idea behind the cut was two-fold.

In the aftermath of the covid pandemic as the economic activity crashed, the tax collections of the government crashed as well, leading to a situation where the government’s borrowing requirement jumped from Rs 7.8 lakh crore to Rs 12 lakh crore.

The massive repo rate cut would help the government to borrow more at lower interest rates. The yield or the return on a ten-year government of India bond in early February was at 6.64%. Since then it has fallen to around 5.89% as of December 4. The government of India borrows by selling bonds. The money that it raises helps finance its fiscal deficit or the difference between what it earns and what it spends.

The second idea was to encourage people to borrow and spend more and businesses to borrow and expand, at lower interest rates. Take a look at the following chart. It plots the average interest at which banks have given out fresh loans over the years.

Source: Reserve Bank of India.

The data on average interest at which banks have given out fresh loans is available for a period of a little over six years, starting from September 2014 and up to October 2020. It can be seen from the above chart that the interest rates in the recent months, have been the lowest in many years. But has that led to an increase in lending by banks, that’s the question that needs to be answered?

As of October 2020, the total outstanding non-food credit of banks by economic activity, had gone up by 5.6% in comparison to October 2019. Banks give loans to the Food Corporation of India and other state procurement agencies to buy rice, wheat and a few other agricultural products directly from farmers. Once we subtract these loans out from the overall loans given by banks that leaves us with non-food credit by economic activity.

Also, it needs to be mentioned here that this is how banking data is conventionally reported, in terms of the total outstanding loans of banks.

When you compare this with how other economic data is reported, it’s different. Let’s take the example of passenger cars.

When passenger car sales are reported, what is reported is the number of cars sold during a particular month and not the total number of cars running in India at that point of time. In case of banks, precisely the opposite thing happens.

What is conventionally reported is the total outstanding loans at any point of time and not the loans given incrementally during a particular period. So, the total outstanding non-food credit of Indian banks by economic activity, as of October end 2020 stood at Rs 92.13 lakh crore. This increased by 5.6% over October 2019.

The way this data is reported does not tell us the gravity of the situation that the banks are in. That comes out when we look at just incremental loans from one year back. The way to calculate this is to take total outstanding loans as of October 2020 and subtract that from outstanding loans of banks as of October 2019. The difference is incremental loans for October 2020. Similarly, the calculation can be done for other months as well.

Let’s take a look incremental loans data over the last three years.


As can be seen the above chart, the incremental loans every month in comparison to the same month last year, have been falling since late 2018, just a little before the RBI started cutting the repo rate. In October 2020, they stood at Rs 4.83 lakh crore, a three-year low.

What does this mean? It means that as the MPC of the RBI has gone about cutting the repo rate, the incremental loans given by banks have gone down as well. This is the exact opposite of what economists and central banks expect, that as interest rates fall, borrowing should go up.

And this has been happening from a time before the covid-pandemic struck. Covid has only accentuated this phenomenon. This also leads to the point I make often that for people to borrow more, just lower interest rates are not enough.

The main point that encourages people and businesses to borrow more is the confidence in their economic future. While the government will try and blame India’s currently economic problems totally on covid, it is worth mentioning here that India’s economic growth has seen a downward trend since March 2018. The economic growth for the period January to March 2018 had stood at 8.2% and has been falling since, leading to a lesser confidence in the economic future, both among individuals and corporates.

In fact, if we compare the situation between March 27, 2020, when covid first started spreading across India, and November 6, 2020, the total outstanding non-food credit of banks has grown by just Rs 2,221 crore (yes, you read that right, and this is not a calculation error).

During the same period, the total deposits of banks have grown by Rs 8.13 lakh crore or 6%. The incremental credit deposit ratio between March 27 and November 6, is just 0.27%. We can actually assume it be zero, given that it is so close to zero. Al these deposits have primarily been invested in government bonds.

Basically, on the whole, the banks have been unable to lend any of the deposits they have got from the beginning of this financial year. Only one part of banking is in operation. Banks are borrowing, they are not lending.

What does this tell us? It tells us that banking activity in the country has collapsed post covid, despite the RBI cutting the repo rate to an all-time low-level of 4%, where it’s 361 basis points lower than the latest rate of retail inflation of 7.61%. Other than cutting the repo rate, the RBI has also printed a lot of money and pumped it into the financial system, to drive down interest rates.

But despite that people and businesses are not borrowing. RBI’s monetary policy has been an even bigger flop than Anurag Kashyap’s Bombay Velvet, Raj Kapoor’s Mera Naam Joker and Satish Kaushik’s Roop ki Rani Choron ka Raja. (I name three different films so that readers of different generations all get the point I am trying to make here).

In the monetary policy statement released a few hours back, there is very little mention of this, other than:

“A noteworthy development is that non-food credit growth accelerated and moved into positive territory for the first time in November 2020 on a financial year basis .”

The governor’s statement has some general gyan like this:

“In response to the COVID-19 pandemic, the Reserve Bank has focused on resolution of stress among borrowers, and facilitating credit flow to the economy, while ensuring financial stability.”

No explanations have been offered on why the monetary policy has flopped. The current dispensation at India’s central bank is getting used to behaving like the current government.

It is important to understand here why monetary policy has been such a colossal flop this year. The answer lies in what the British economist John Maynard Keynes called the paradox of thrift. When a single individual saves more, it makes sense, as he prepares himself to face an emergency where he might need that money.

But when the society as a whole saves more, as it currently is, that causes a lot of damage because one’s man spending is another man’s income. As we have seen bank deposits during this financial year have gone up Rs 8.13 lakh crore or 6%. On the whole, people are cutting down on their spending and saving more for a rainy day.

The psychology of a recession at play and not just among those people who have been fired from their jobs or seen a fall in their income. It is obvious that such people are cutting down on their spending. But even those who haven’t faced any economic trouble are doing so.

They are doing so in the fear of seeing a fall in their income or losing their job and not being able to find a new one. When the individuals are cutting down on their spending, it doesn’t make much sense for businesses to borrow and expand. In fact, the overall bank lending to the industry sector has contracted by Rs 4,624 crore between October 2019 and October 2020.

Typically, in a situation like this, when the private sector is not in a position to spend, the government of the day steps in. The trouble is that the current government is not in a position to do so as tax revenues have collapsed this year. There other fears at play here as well.

In the midst of all this, Dinesh Khara, the chairman of the State Bank of India told the Business Standard, that bank lending rates “have actually bottomed”. Given that banks have barely lent anything this year, it makes me sincerely wonder what Mr Khara has been smoking. Clearly, it makes sense to avoid that.

To conclude, monetary policy should not get the kind of attention it gets in the business media, simply because, it is dead, and it has been dying for a while. The trouble is, there are one too many banking correspondents and even more central bank watchers, including me, who need to make a living.

And very few among us, are likely to ask the most basic question—why monetary policy is not working.

Le jayenge le jayenge dilwale dulhaniya le jayenge
— Rajkavi Inderjeet Singh Tulsi, Ravindra Jain, Kishore Kumar, Asha Bhonsle and Ashok Roy, in Chor Machaye Shor.