The Reserve Bank of India (RBI) is not contemplating any change in the recently-announced guidelines that tighten norms governing bank lending to capital market intermediaries such as brokers, Governor Sanjay Malhotra said Monday.
He added that even as the RBI has given its recommendations to the Centre on the flexible inflation targeting framework which is up for review for the next five years starting April, it did not necessarily require tweaking merely because the Ministry of Statistics and Programme Implementation has revised the base year for retail inflation to 2024 and updated item weights in the Consumer Price Index as per latest consumption patterns of households.
On the new norms for bank lending to brokers, Malhotra said, “This has been done after proper consultation with all stakeholders. There is no change that we are contemplating.”
The Governor was speaking at a media briefing after Finance Minister Nirmala Sitharaman addressed the RBI’s central board of directors in the customary post-Budget meeting.
In a notification issued on February 13, the RBI mandated that “all credit facilities to CMIs (capital market intermediaries) shall be provided on a fully secured basis”, implying that for a bank to provide a Rs 100 loan to a broker, the broker must provide collateral equalling that amount.
The RBI also said that lenders cannot provide money to these intermediaries for buying securities on their account, including for proprietary trading or investments — except in certain cases, such as market making in debt and equity as well as warehousing of debt securities.
The RBI has also said that banks can provide a guarantee for proprietary trading as long as it is fully secured by cash, cash equivalents, and government securities. However, at least 50% of the collateral must be in the form of cash.
These norms are set to be effective from April 1.
Citing concerns over the new norms, brokerages have said that they may impact profit margins and reduce trading volumes. Brokers have sought a review of the rules.
On the flexible inflation targeting framework, Malhotra said the RBI has given its comments to the government. As per the framework, the RBI must target a retail inflation rate of 4% in the medium-term in a band of 2-6%. This framework is reviewed every five years and the current target is applicable till March 31. As such, the government must notify the target for the financial year 2026-27 to 2030-31 by April 1.
“We gave our recommendation to the government. So now the government will be examining and very quickly coming out with the target. However, I may mention that merely because of the change in this (revamped) CPI series, will it result in a change (in inflation target)? I don’t think so,” Malhotra said.
He added that while the revisions in methodology, coverage, representativeness and volatility are substantial, they are “not significant enough” to necessitate a policy shift.
In the revamped CPI inflation series, the weight of food in the consumption basket has been reduced sharply from 46% to around 37%, which should make the headline retail inflation rate less volatile.
On bank capital requirements, he said lenders are well capitalised, with an average capital adequacy ratio of around 17% against the regulatory minimum of 11.5%.
Even without fresh capital infusion, banks can sustain credit growth of 10-11% annually over the next five years, he said, noting that foreign investors have invested or committed about Rs 1 lakh crore to the sector in the past year.
Finance Minister Sitharaman cautioned banks against mis-selling financial products, saying they should focus on their core business. When asked about concerns about foreign investment outflows, Sitharaman said global capital funds move based on the macroeconomic performance, policy stability, taxation stability, predictability for businesses and a law-abiding economy, adding that all the fundamentals are fine for India.
“Everyone says that there’s been absolute certainty. We will expect the funds to flow towards such economies like India,” she said.
But, there is “something else, probably strategic, probably global politics” behind the capital flows not moving towards India as much to the extent they should, she added.
Sitharaman said flows should come towards India as there is “every reason for the funds to be attracted towards India”. “But if it doesn’t flow, all of us will have to see what is holding it back,” she said.
Union Minister for Finance and Corporate Affairs Nirmala Sitharaman with Reserve Bank of India (RBI) Governor Sanjay Malhotra during a press conference after RBI central board meeting, at RBI building, in New Delhi. (Source: ANI Photo) 
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