Highlights of Second Quarter Review of Monetary Policy 2009-2010
-Announced on the 27th October 2009
Monetary Policy Stance
On the basis of the above overall assessment, the stance of monetary policy for the remaining period of 2009-10 will be as follows:
Keep a vigil on the trends in inflation and be prepared to respond swiftly and effectively through policy adjustments to stabilise inflation expectations.
Monitor the liquidity situation closely and manage it actively to ensure that credit demands of productive sectors are adequately met while also securing price stability and financial stability.
Maintain a monetary and interest rate regime consistent with price stability and financial stability, and supportive of the growth process.
The Reserve Bank will continue to monitor the price situation in its entirety and will take measures as warranted by the evolving macroeconomic conditions swiftly and effectively.
Monetary Policy Measures
For now, the Reserve Bank has decided to keep the policy repo rate unchanged at 4.75 per cent, the reverse repo rate unchanged at 3.25 per cent and the CRR of banks unchanged at 5 per cent of their NDTL.
The following measures constitute the first phase of ‘exit’:
The statutory liquidity ratio (SLR), which was reduced from 25 per cent of demand and time liabilities to 24 per cent, is being restored to 25 per cent.
The limit for export credit refinance facility, which was raised to 50 per cent of eligible outstanding export credit, is being returned to the pre-crisis level of 15 per cent.
The two unconventional refinance facilities: (i) special refinance facility for scheduled commercial banks; and (ii) special term repo facility for scheduled commercial banks [for funding to mutual funds (MFs), non-banking financial companies (NBFCs), and housing finance companies (HFCs)] are being discontinued with immediate effect.
Further, the liabilities of scheduled banks arising from transactions in collateralised borrowing and lending obligations (CBLO) with Clearing Corporation of India Ltd. (CCIL) would now be subject to the maintenance of the cash reserve ratio (CRR).
Developmental and Regulatory Issues
Let me now turn to development and regulatory issues. While India has been less affected by the crisis than most other countries, there are lessons from the crisis for India too, which include: (i) further strengthening regulation at the systemic and institutional levels; (ii) making our supervision more effective and value adding; and (iii) improving our skills in risk management. Further, we need to actively pursue the challenge of financial inclusion. I will highlight a few actions being taken by us:
Releasing of the first Financial Stability Report for India by December 2009.
Considering the recommendations of the Working Group on the Benchmark Prime Lending Rate (BPLR) system after receiving feedback.
Financial Market Products
Proposal to introduce plain vanilla over-the-counter (OTC) single-name Credit Default Swaps (CDS) for corporate bonds for resident entities subject to appropriate safeguards. The operational framework will be finalised in consultation with market participants.
Permitting recognised stock exchanges to offer currency futures contracts in currency pairs of Rupee-Euro, Rupee-Pound Sterling and Rupee-Japanese Yen, in addition to the existing Rupee-US dollar contracts.
Increasing the provisioning requirement for advances to the commercial real estate sector classified as ‘standard assets’ from 0.4 per cent to 1.0 per cent.
Liberalising the extant branch authorisation policy for domestic non-RRB scheduled commercial banks.
Allowing banks to build up capital for take-out exposures in a phased manner.
Advising banks to augment their provisioning cushions consisting of specific provisions against non-performing assets (NPAs) as well as floating provisions so that their total provisioning coverage ratio, including floating provisions, reaches 70 per cent by September 2010.
Issuing guidelines to private sector and foreign banks with regard to sound compensation policies.
Introducing a category of NBFCs as ‘infrastructure NBFCs’, defined as entities which hold minimum of 75 per cent of their total assets for financing infrastructure projects.
Linking the risk weights of banks’ exposure to infrastructure NBFCs to the credit rating assigned to the NBFC by external credit assessment institutions (ECAIs).
Allowing banks to (i) appoint the additional entities as business correspondents (BC); and (ii) collect reasonable service charges from the customer in a transparent manner for delivering the services through BC.
Advising the lead banks to take steps to draw up a road map by March 2010 to provide banking services through a banking outlet in every village having a population of over 2,000, by March 2011.
Constituting a Working Group to examine the issues involved in the introduction of priority sector lending certificates (PSLCs).
Mandating banks to install note sorting machines in all their branches in a phased manner in terms of a road map to be approved by the Reserve Bank."
>> GO TO PAGE 2
>> GO BACK TO PAGE 1
(Source-Press Statement by Dr. D. Subbarao, Governor on 2nd Quarter Review of Monetary Policy)
Second Quarter Review of Monetary Policy 2009-2010... click here
RBI CREDIT AND MONETARY POLICIES (1999-2010)... click here