RBI Restricts Variations- Waits for Shift in Governance

The RBI on April 1, 2014 announced the first bi-monthly monetary policy, though no significant amendments have been made in comparison to the previous measures. I will discuss the prominent elements and then would come to a conclusion. The Repo rate remains unchanged at 8 percent. The Cash Reserve Ratio too remains unaltered at 4 percent, policy repo rate under LAF at 8 percent, and marginal standing facility and bank rate at 9 percent. However the liquidity provided under 7-days and 14-days term repos has been enhanced from 0.5 percent of NDTL to 0.75 percent. In the same context, liquidity provided under overnight repos under the LAF has been trimmed down from 0.5 percent of bank-wise NDTL to 0.25 percent.

The measures of the RBI concentrate at maintaining the economy on a disinflationary route wherein it is likely to hit 8 percent CPI inflation by January 2015 and 6 percent by January 2016. The GDP growth is projected to be around 5.5 percent for the FY 2014-15 promising little increase from below 5 percent during the FY 2013-14. This recovery would be contingent to the trust of consumers in the investment domain with improvements in the industrial sector. With uncertainty of south-west monsoon, the enhancement delivered by the agriculture sector in 2013 may fade. Discussed hereunder are the policy frameworks for different sectors of the economy. Post consulting the EC, the RBI can announce in-principle approval of new licenses. Modules like on-tap licensing and differentiated bank licenses can be introduced which will also embrace mergers in the banking sector.

By the end of May this year, draft framework for dealing with D-SIBs (Domestic Systematically Important Banks) is anticipated to be released. By the same time, Liquidity Risk Monitoring tools and guidelines related to Basel III Liquidity Coverage Ratio can also be expected. Guidelines would soon be issued that would facilitate banks to extend partial credit enhancements to corporate bonds. It is suggested that under the supervisory review of the RBI, banks must work to toughen governance standards to contain increasing NPAs. It is proposed to introduce, for Primary Dealers, a robust market making scheme wherein specific securities would be allocated to them. Plus, performance of Primary Dealers would be under review.

Foreign investment would be eased along with trouble-free KYC norms for opening of bank accounts by foreign portfolio investors. To allow Foreign Institutional Investors hedge their currency risk with use of exchange traded currency futures in the domestic exchanges, the RBI is in consultation with SEBI. Refined guidelines would be in place for commercial banks with a view to overcome the challenge of cash management of Business Correspondents. MSEs can expect some favors as banks have been asked to review their credit and loan policies for this sector. To encourage consumer protection, effective guidelines are proposed to be implemented in view of domestic as well as international best practices.

Now, what are the expectations from the upcoming bi-monthly policy review scheduled in June 2014? Definitely, RBI which has maintained status-quo with repo rates and bank rates would align the policies in view of the political environment then. The prevailing economic and political conditions do not permit rate cuts, however the picture would change, rather advance with the formation of a stable union government. Also, the industrial policies and bold decisions of the new government can allow RBI to reconsider bank rates. A lot would also depend upon the climatic and monsoon conditions that would affect the agricultural sector either adversely or favorably. Lastly, I would conclude with a view that the central bank must also tighten the handling of NPAs by banks which has been a prominent drawback in the efficiency of the banking sector.

85 thoughts on “RBI Restricts Variations- Waits for Shift in Governance

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    NPAs accumulation is due to the inefficiency of the Public Sector Banks. The banking system needs to be toned up and NPAs must be recovered because their total value is beyond imagination of a common Indian.

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