As widely expected, RBI has kept policy rates unchanged in its first Bi-monthly Monetary Policy Statement 2014-15 announced on April 1. Thus, repo rate remains at 8 per cent, reverse repo rate at 7 per cent, marginal standing facility (MSF) rate and Bank Rate at 9 per cent, and CRR at 4 per cent. However, the ceiling on fund access to RBI under short-term LAF has been reduced from 0.5 per cent of bank’s NDTL to 0.25 per cent, with immediate effect. Simultaneously, the liquidity provided under 7-day and 14-day repos has been increased from 0.5 per cent to 0.75 per cent of bank’s NDTL.

The ‘first bi-monthly’ Monetary Policy Statement by Dr. Raghuram Rajan, RBI Governor, which takes the place of earlier annual policy statements, differs from them in some major respects.

  • The policy statement is termed ‘first bi-monthly’ policy statement, instead of earlier annual policy statements made at the start of the new fiscal.
  • Though the policy statement includes GDP projection, it does not give resultant assessed working estimates on likely growth rate in bank credit, deposit and broad money.
  • The policy statement focuses on combined CPI, as against WPI as glide path inflation indicator for monetary policy stance. By the way, CPI released by MoSPI, though more comprehensive than CPI numbers released by Labour Bureau, does not have data points before 2010.

Policy stance
The RBI’s policy stance will be to keep the economy on a disinflationary glide path that is intended to hit 8 per cent CPI inflation by January 2015 and 6 per cent by January 2016. Additional policy tightening in the near term is not anticipated, unless inflation goes off the intended float path, adjusted for a possible downward statistical pull on CPI inflation exerted by base effects of high inflation rates during June-November 2013.

Projections
Real GDP growth is projected to pick up from a little below 5 per cent in 2013-14 to a range of 5 to 6 per cent in 2014-15 with downside risks to the central estimate of 5.5 per cent. Lead indicators do not point to any sustained revival in industry and services as yet, and the outlook for agricultural sector is contingent upon timely arrival and spread of the monsoon. Easing of domestic supply bottlenecks and progress on implementation of stalled projects already cleared should brighten up the growth outlook, as would stronger anticipated export growth as the world economy picks up.

Other policy announcements
RBI has initiated to move from overnight “guaranteed-access” windows for liquidity management to progressively conduct liquidity management through term repos, which would probably help evolve market-based benchmarks for pricing various financial products and also improve efficiency in cash/treasury management.

RBI is finalising in consultancy with SEBI modalities for allowing FIIs to hedge their currency risk by using exchange traded currency futures in the domestic exchanges. As a further step towards encouraging longer term flows, investments by FPIs in G-Secs will henceforth be permitted only in dated securities of residual maturity of one year and above, and existing investment in Treasury Bills will be allowed to taper off on maturity/sale. The overall limit for FPI investment in GSecs remains unchanged at $30 billion.

Transitional period for full implementation of Basel III Capital Regulations for banks has been extended up to March 31, 2019, instead of as on March 31, 2018.

The apex bank has suggested that banks should allow borrowers to prepay floating rate term loans without any penalty. Also, banks should not levy penal charges for non maintenance of minimum balance in ordinary savings bank accounts as also for non-maintenance of minimum balances in any inoperative account.

Banks should limit the liability of customers in electronic banking transactions in cases where banks are not able to prove customer negligence.


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