RBI keeps repo rate, CRR unchanged

The Reserve Bank of India (RBI) has decided to hold policy rates again in its fourth bi-monthly monetary policy review, on Tuesday, as widely anticipated.

It kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8 per cent while the cash reserve ratio (CRR) of scheduled banks have been retained at 4 per cent of net demand and time liabilities (NDTL). Consequently, the reverse repo rate under the LAF will remain unchanged at 7 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9 per cent.

RBI also said it would continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system through auctions and continue with daily one-day term repos and reverse repos to smooth liquidity.

The central bank noted that since June, headline inflation has ebbed to levels which are consistent with the desired near-term glide path of disinflation -- 8 per cent by January 2015. “With international crude prices softening and relative stability in the foreign exchange market, some upside risks to inflation are receding. Yet, there are risks from food price shocks as the full effects of the monsoon’s passage unfold, and from geo-political developments that could materialise rapidly,” it added.

RBI said the short term risk around the baseline path of inflation are broadly balanced, though with a slant to the downside but for the medium-term objective (6 per cent by January 2016) the balance of risks is still to the upside, though somewhat lower than in the last policy statement.

“This continues to warrant policy preparedness to contain pressures if the risks materialise. Therefore, the future policy stance will be influenced by the Reserve Bank’s projections of inflation relative to the medium term objective (6 per cent by January 2016), while being contingent on incoming data,” it said.

The key to a turnaround in the growth path of the economy in the second half of the year is a revival in investment activity – in greenfield as well as brownfield stalled projects – supported by fiscal consolidation, stronger export performance and sustained disinflation. With expectations of these conditions remaining broadly unchanged, the projection of growth for 2014-15 is retained at 5.5 per cent within a range of 5 to 6 per cent around this central estimate. The quarterly growth path may slow mildly in Q2 and Q3 before recovering in Q4, RBI noted.

RBI said with liquidity conditions easing, the recourse to ECR has fallen off substantially to about 10 per cent of the outstanding export credit eligible for refinance. Accordingly, in pursuance of the Urjit R. Patel Committee’s recommendation to move away from sector-specific refinance, the access to the ECR is being brought down to 15 per cent of the eligible export credit, thus continuing to give banks room for manoeuvre. This will be in effect from October 10, 2014.

The fifth bi-monthly monetary policy statement is scheduled on Tuesday, December 2, 2014.

Developmental and Regulatory Policies

Banking and Financial Structure- Draft guidelines on Small Banks and Payments Banks as differentiated or restricted banks were placed on July 17, 2014. RBI is going to put together the final guidelines on licensing of these banks by end-November 2014.

With regard to non-banking financial companies(NBFCs), RBI said changes in the regulatory framework for NBFCs will be introduced by end-October 2014 covering prudential regulations on core capital, asset classification and provisioning norms, regulation on deposit acceptance, corporate governance and consumer protection measures. With these changes coming into force, the Reserve Bank will recommence registering new NBFCs.

An Early Warning System (EWS) is being put in place to track banks’ critical financial parameters. Deviations from pre-defined benchmarks would trigger more granular oversight in the form of enhanced off-site monitoring, focused discussions, on-site examination and punitive action, if warranted.

Along with early detection mechanisms for frauds, a Central Fraud Registry is also proposed to be created simultaneously as a searchable centralised database for use by banks.

Moreover, guidelines for declaring borrowers as “non-co-operative” will be put out by end-October 2014.

In order to address operational issues faced by foreign portfolio investors and long term foreign investors, it has been decided to provide extended reporting timings on trade date and an option for T+2 settlements for secondary market OTC trades in government securities for such investors. Detailed guidelines in this regard would be issued by end-November 2014.

In line with its vision of migrating towards electronic payments and a ‘less-cash’ society, the Reserve Bank has been examining the feasibility of standardisation in the operational processes and procedures involved in extension of mobile banking services, and implementation of a pan-India bill payment system (recommended by GIRO Advisory Group (GAG)) facilitating anytime/anywhere payment of a variety of bills and dues. Similarly, the setting up and operationalisation of a system for uploading, accepting, discounting and settlement of the invoices/bills of micro, small and medium enterprises (MSMEs) is also being envisaged to facilitate faster financing for such entities. In this connection, it has been decided to issue policy guidelines for the Bharat Bill Payment System (BBPS), Trade Receivables Discounting System (TReDS) and standardisation of processes in mobile banking services by end-November 2014.

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