RBI First Bi-Monthly Policy 2017-18: Highlights

Introduction

Reserve Bank of India (RBI) has released its First Bi-Monthly Monetary Policy Rates for 2017-18.The First Bi-monthly policy has been released based on the assessment of the Monetary Policy Committee of the Reserve Bank of India (RBI).

As per RBI’s report, “the decision of Monetary Policy Committee (MPC) is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for Consumer Price Index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth”.

RBI has made the following announcements:

• Repo Rate remains unchanged at 6.25%.
• Reverse Repo Rate has been increased to 6.00% from earlier rate of 5.75% thereby reducing the corridor between repo and reverse repo to 25 bps from the existing 50 bps. The essential aim seems to be ensuring a sharper focus on the keeping overnight rates (especially the overnight call money rate) aligned to the repo rate.
• Marginal Standing Facility (MSF) rate have been reduced to 6.50%.
• Bank Rate also got reduced to 6.50% from earlier rate of 6.75%.
• Cash Reserve Ratio (CRR) remains unchanged at 4.00%.

Key Takeaways

• RBI projects the Gross Value Added (GVA) growth to strengthen to 7.4% in the financial year 2017-18 from 6.70% in 2016-17, with risks evenly balanced and 8.1% in FY19.
• Narrows policy rates corridor due to increased liquidity, post demonetization.
• Economic indicators point to modest improvement in microeconomic outlook.
• Retail inflation in first half seen at 4.5%, 5% in second half.
• Risk evenly balanced around inflation trajectory; upside risk from uncertainty about monsoon.
• Upside risk to inflation from GST, poor monsoon, pay commission award.
• All six MPC members voted in favor of RBI monetary policy.

The next meeting of the Monetary Policy Committee will be held on June 5 and 6.

Reduction on Debit Card Charges

RBI is going to provide new guidelines on payment through
debit cards and also on MDR (Merchant Discount Rate).According to new guidelines, RBI favours to limit MDR, 0.25% upto Rs.1000 & 0.5% from Rs 1000-2000.
There is no limitation on MDR for payments through credit card.

RBI will give clear guidelines on ‘Banking Outlets’.

These are addressed for the places where banking services are not available till now.

NEFT Transfers

Transfer of amount through NEFT is going to speed up further.For that to be done, NEFT settlement clearance is reduced from 1 hour to 30 minutes ; so as to strengthen the NEFT system.

Non-Performing Assets

RBI has also assured that, It is going to take new steps to redress the problem of Non-Performing Assets, and negotiations are going on with the government to ameliorate current methods.

Infrastructure and Real Estate

• RBI has permitted banks to invest in Real Estate Investment Trusts (RIET’S) and Infrastructure Investment Trusts. Currently, banks are allowed to invest in mutual funds, Venture Capital Fund (VCF) and also in equities.
• These are the major essence of the first bi-monthly monetary policy review in 2017.

Some common terms of policy rates:

Repo Rate – It was introduced in December, 1992 by RBI. It is the rate at which RBI lends short term money to commercial banks against securities.
Reverse Repo Rate – It was introduced in November, 1996. It is the rate at which RBI borrows money from commercial banks.
Statutory Liquidity Ratio – It is the amount which a commercial bank is required to maintain in the form of cash, gold or government approved securities (bonds) before approving credit to its customers. SLR is used to control inflation and promote growth.
Marginal Standing Facility – It is the rate at which scheduled banks can borrow funds from RBI overnight. In MSF, banks can use the securities under ‘SLR’ to get loans from RBI.
Bank Rate – The rate at which RBI buys or rediscounts bills of exchange or other commercial papers for long term is known as Bank Rate. It is also called rediscount rate.
Cash Reserve Ratio – The share of net demand and time liabilities that banks must maintain as cash balances with the Reserve Bank is known as Cash Reserve Ratio. If RBI increases CRR, the available amount with banks comes down, RBI uses it to drain out excessive money from the banks.
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