As expected, the monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Friday increased the repo rate by 50 basis points (bps) to 5.90%. Consequently, the standing deposit facility (SDF) rate stands adjusted to 5.65% and the marginal standing facility (MSF) rate and the bank rate to 6.15%. The MPC also decided by a majority vote to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target in the future while supporting growth.
In a statement, Shaktikanta Das, governor of RBI, says, "Today, inflation is hovering around 7%, and we expect it to remain elevated at around 6% in the second half (H2) of FY2022-23. Liquidity remains surplus, with average daily net absorption of Rs1.1 lakh crore under the liquidity adjustment facility (LAF) in September 2022. As government expenditure picks up on the back of high goods and services tax (GST) and direct tax collections, the system liquidity will go up further. Thus, even as the nominal policy repo rate has been raised by 190 bps so far, including today's increase, the policy rate adjusted for inflation trails the 2019 levels. The overall monetary and liquidity conditions, therefore, remain accommodative and hence, the MPC decided to remain focused on the withdrawal of accommodation."
In MPC's view, inflation is likely to be above the upper tolerance level of 6% through the first three quarters of 2022-23, with core inflation remaining high. It says, "The outlook is fraught with considerable uncertainty, given the volatile geopolitical situation, global financial market volatility and supply disruptions. Meanwhile, domestic economic activity is holding up well and is expected to be buoyant in H2 of FY22-23, supported by festive season demand amidst consumer and business optimism."
MPC is of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, restrain the broadening of price pressures and preempt second round effects. MPC expects this action to support medium-term growth prospects.
RBI governor also announced releasing a discussion paper on expected loss (EL) based approach for loan loss provisioning by banks and securitisation of stressed assets framework (SSAF).
Banks currently follow the incurred loss approach for provisioning on their loan assets, whereby provisions on loan assets are made after the stress has materialised. "A more prudent and forward looking approach is the expected loss based approach, which requires banks to make provisions based on an assessment of probable losses. As a step towards converging with globally accepted prudential norms, we will issue a discussion paper on the proposed transition for stakeholder comments," Mr Das says.
In September last year, RBI issued a revised framework for the securitisation of standard assets. It has now decided to introduce a framework for the securitisation of stressed assets. RBI governor says, "This will provide an alternative mechanism for securitisation of non-performing assets (NPAs), in addition to the existing asset reconstruction company (ARC) route. A discussion paper (DP) on the proposed framework is being issued for feedback from stakeholders."
RBI also decided to rationalise internet banking facilities for customers of regional rural banks (RRBs) and regulate offline payment aggregators.
At present, an internet banking facility is provided to customers of RRBs, who fulfil certain criteria. Mr Das says, "Keeping in view the need to promote the spread of digital banking in rural areas; these criteria are being rationalised. The revised guidelines will be issued separately."
In March 2020, RBI brought, under its regulations, online payment aggregators (PAs), who were designated as payment system operators (PSOs). "It is now proposed to extend these regulations to offline PAs, who handle proximity or face-to-face transactions. Keeping in view the similar nature of activities undertaken by online and offline PAs, it is proposed to apply the current regulations to offline PAs as well. This measure is expected to bring in synergy in regulation covering activities and operations of PAs apart from convergence on data collection and storage standards. Detailed instructions will be issued separately," RBI governor says.