Money & Banking
RBI keeps repo, CRR unchanged in its first bi-monthly monetary policy

While keeping key rates unchanged, the RBI said despite weak credit off take and the front loading of two rate cuts, transmission of policy rates to lending rates has not taken place


The Reserve Bank of India (RBI), in its first bi-monthly credit policy review on Tuesday has kept repo, reverse repo, cash reserve ratio (CRR) and bank rate unchanged. With repo rate remaining at 7.5%, the reverse repo rate under the liquidity adjustment facility (LAF) will remain unchanged at 7%, and the marginal standing facility (MSF) rate and the bank rate at 9%.
In a statement, RBI Governor Dr Raghuram Rajan said, “Transmission of policy rates to lending rates has not taken place so far despite weak credit off take and the front loading of two rate cuts. With little transmission, and the possibility that incoming data will provide more clarity on the balance of risks on inflation, the Reserve Bank will maintain status quo in its monetary policy stance in this review.”
"For monetary transmission to occur, lending rates have to be sensitive to the policy rate," he added.
"The outlook for growth is improving gradually. Comfortable liquidity conditions should enable banks to transmit the recent reductions in the policy rate into their lending rates, thereby improving financing conditions for the productive sectors of the economy. Along with initiatives announced in the Union Budget to boost investment in infrastructure and to improve the business environment, these factors should provide confidence to private investment and, together with the conducive outlook on inflation, deliver real income gains to consumers and lower input cost advantages to corporates," RBI said in a statement.
With the introduction of the Base Rate on 1 July 2010 banks could set their actual lending rates on loans and advances with reference to the Base Rate. At present, banks are following different methodologies in computing their Base Rate - on the basis of average cost of funds, marginal cost of funds or blended cost of funds (liabilities). Base Rates based on marginal cost of funds should be more sensitive to changes in the policy rates.

In order to improve the efficiency of monetary policy transmission, the Reserve Bank said it will encourage banks to move in a time-bound manner to marginal-cost-of-funds-based determination of their Base Rate. RBI said it would shortly issue detailed guidelines on this.

According to RBI, the Financial Benchmarks India Pvt Ltd, jointly floated by the Fixed Income Money Market and Derivatives Association of India (FIMMDA), the Foreign Exchange Dealers' Association of India (FEDAI) and the Indian Banks' Association (IBA), has been established as an independent benchmark administrator. This administrator will start operations by end-May 2015. Once it starts publishing various indices of market interest rates, the Reserve Bank said it will explore the possibility of encouraging banks to use the indices as an external benchmark for pricing bank products.

Urban cooperative banks can issue credit card
RBI said, with a view to enlarge scope of urban co-operative banks for expanding their business, it decided to allow financially sound and well managed (FSWM) scheduled urban co-operative banks, which are CBS-enabled and having minimum net worth of Rs100 crore, to issue credit cards. RBI will shortly issue detailed guidelines on this.

Similarly, with a view to providing greater freedom to state co-operative banks to expand their business and to provide technology-enabled services to their customers, the central bank said it decided to permit state co-operative banks satisfying certain eligibility criteria to set up off-site ATMs/ mobile ATMs without obtaining prior approval from the Reserve Bank. Detailed guidelines in this regard will be issued separately.

RBI revises borrowing limit for small and marginal farmers and micro enterprises
According to the Reserve Bank, taking into consideration the improvement in the micro-finance institutions (MFI) sector and recommendations of the Nachiket Mor Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, there is a need to revise upwards the limit relating to total indebtedness of the borrower, eligible rural and semi-urban household annual incomes and loan amounts to be disbursed in the first cycle and in subsequent cycles. The revision would be as follows...
  • Total indebtedness of a borrower, excluding educational/ medical expenses, not to exceed Rs1 lakh (raised from the current limit of Rs50,000).
  • Loan disbursed to a borrower with a rural household annual income not exceeding Rs1 lakh (enhanced from Rs60,000) or urban and semi-urban household income not exceeding Rs1.60 lakh (enhanced from Rs1.20 lakh).
  • Disbursement of the loan amount not to exceed Rs60,000 (enhanced from Rs35,000) in the first cycle and Rs1 lakh (enhanced from Rs50,000) in subsequent cycles.
The central bank said it will continue to provide liquidity under overnight repos at 0.25% of bankwise 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 variable rate repos and reverse repos to smooth liquidity.
With no change in key policy rates, the repo rate (the rate at which the RBI lends money to banks) remains at 7.5%. Similarly reverse repo rate (the rate at which the RBI borrows from banks), CRR, and bank rate remains at 6.5%, 4.00% and 8.5%, respectively.
The second bi-monthly monetary policy statement will be announced on 2 June 2015.
Repo Rate.......................7.50%
Reverse Repo Rate.........6.50%
Bank Rate.......................8.50%


RBI unlikely to change repo rate at policy review

In his budget, the finance minister announced the government would sign the Monetary Policy Framework Agreement with the RBI for controlling inflation, which will become a law providing for a monetary policy committee


The Reserve Bank of India (RBI) is widely expected to leave the repo rate, at which it lends to commercial banks, unchanged at 7.50 percent at its first bi-monthly monetary policy review of the new fiscal on Tuesday.
The scheduled review, coming after the first full budget presented by Finance Minister Arun Jaitley proposing changes in the RBI Act, follows two previous unscheduled rate cuts since January which brought the repo rate down from 8 percent by 50 basis points to the existing one. The interest rate cuts this year came after nearly two years.
The banks' cash reserve ratio (CRR) that determines their lending power, which has been at 4 percent since early 2013, is also expected to remain unchanged.
At the time of the last unscheduled cut, the RBI said that "given low capacity utilization and still-weak indicators of production and credit off-take, it is appropriate for RBI to be pre-emptive in its policy action to utilize the available space for monetary accommodation".
Announcing the rate cut in January, RBI Governor Raghuram Rajan said that "the key to further easing are data that confirm continuing disinflationary pressures and sustained high quality fiscal consolidation".
The consumer price index (CPI)-based inflation rose to 5.11 percent in January from 4.28 percent last December.
Moreover, Jaitley has extended the target deadline for controlling fiscal deficit to three percent, reasoning that insistence on a timetable to contain the deficit would harm growth prospects.
In his budget, the finance minister announced the government would sign the Monetary Policy Framework Agreement with the RBI for controlling inflation, which will become a law providing for a monetary policy committee.
The agreement is to "primarily maintain price stability while keeping in mind the objective of growth". It says the RBI will aim to bring retail inflation below six percent by January 2016 and to around four percent by fiscal 2016-17.
The government has also proposed to amend the RBI Act to take away money market regulatory powers from the central bank and bring it under the purview of market regulator the Securities and Exchange Board of India (SEBI).


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