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RBI ……. RBI Clap! Clap!! Clap!!!

Sounds familiar? How about this?

Sachiiiiiiiiin…………Sachiiiiiiiiiiin Clap! Clap!! Clap!!!

Sachiiiiiiiiin…………Sachiiiiiiiiiiin Clap! Clap!! Clap!!!

With one more run to yet another century, Sachin takes his batting stance to face a menacing looking bowler for the last ball of the over. The mood in the jam-packed stadium is electric! As the bowler begins his run-up to bowl to arguably the world’s best batsman, the crowd roars in anticipation. Fingers remain tightly crossed. Decibel levels shoot up to unbearable heights. Every soul in the stadium expects — no, wants! — that one run desperately. The ball is bowled. Good length. The crowd is in frenzy! And the batting maestro puts up a solid defence getting no run. Suddenly it seemed like the stadium was haunted. Eerie silence. Over ends. The little master has to wait to get strike again. The crowd is disappointed, having to postpone their celebrations to another over.

Familiar scene? The situation was similar for the last couple of days in banking circles. All and sundry waited with bated breath for Governor Urjit Patel to reduce the RBI’s policy rates. For an extensive period, banks have borne the brunt of the demonetisation initiative. Every hand in the bank was instructed to directly or indirectly aid the smooth exchange and/or withdrawal of currency notes. Bank employees have struggled hard to cater to the unprecedented rush at their counters.

 

The ordeal at the banks

RBIPrimary lending activities had gone down to almost a trickle. Fingers had swollen owing to counting currency notes for long hours. Bank managements fretted over the slump in business activities. Over and above this, the additional cash reserve ratio (CRR) imposed by the RBI had effectively tied their hands. All they prayed for was a let up in the repo rates and an unshackling of the additional CRR. And they waited with bated breath. And crossed fingers. And the feel-good opinions being belted out on business news channels.

The cry for reduction in SLR and CRR was gaining momentum over the past one week. Experts opined that the time was ripe for the rates to be reduced to give some relief to banks gasping for breath. However, the Monetary Policy Committee (MPC) of the RBI clearly had other ideas. The MPC, a group of six members, of which three are nominated by the Government of India, is responsible for fixing the benchmark policy interest rates. The purpose is to achieve the inflation rate target. The decision within the MPC is taken on a majority vote, wherein, each member has one vote. The Governor of RBI has the casting vote in case of a tied opinion.

 

Highlights of the policy

  • Interest rates have been left untouched in the policy that was issued.
  • The withdrawal of the temporary 100% hike in the CRR, which was intended to absorb the extra liquidity created by demonetisation, was announced to start in the fortnight beginning December 10, 2016.
  • The policy repo rate under the Liquidity Adjustment Facility (LAF) has been retained at 6.25%.
  • The reverse repo rate under the LAF also remains unchanged at 5.75%.
  • The Marginal Standing Facility (MSF) and the Bank Rate also remain constant at 6.75%.
  • The objective of the MPC is to achieve CPI inflation at 5% and medium term target at 4% while supporting growth.
  • The outlook for Gross Value Added (GVA) for FY 2017 is expected to be lower by 50 basis points (one basis point equals 0.01%) at 7.10%, instead of the earlier estimate of 7.60%.
  • The incremental CRR of 100% imposed by the RBI on November 29, on the increase in net demand and time liabilities between September 16 and November 11, has been totally withdrawn.
  • The MPC members were unanimous in their decision. They were of the view that it would be prudent to wait and watch the implications of global macroeconomic factors before recommending any change in the policy repo rates.
  • There is a visible upward pressure on inflation owing to firming of international crude prices as the Organisation of Petroleum Exporting Countries (OPEC) decides to cut output.
  • The RBI continues to maintain a hawkish outlook, ensuring the prevention of overheating of the economy.
  • The release of funds owing to lifting of the additional CRR was as good as a rate cut, as it enabled banks to invest in Government securities, thereby earning income.
  • Gov. S.S. Mundra stated that there was an uptick in the overall stressed assets in loans by Banks in Q2. However, the increase in NPA has decelerated as recoveries have been better.
  • Around Rs 11.50 lakh crore notes have come back to the RBI owing to the demonetisation exercise.
  • There is no intent by the RBI to pay any special dividend to the Government of India owing to extinguishing of the cancelled currency notes, as it would have no implication on the RBI’s balance sheet.
  • Governor Patel stated that the monetary policy does not react to a transitory phenomena. Speaking at a press conference, he clarified that the limits currently imposed on cash withdrawals by the public from banks is not a permanent feature. The RBI is constantly monitoring the situation and changes can be expected in future depending on developments. He was categorical in assuring that the money deposited in banks is safe.

The announcement evoked a mixed response among the banking fraternity; the RBI succeeded in keeping the bankers guessing again. Stock markets reacted sharply even as the policy statement was being read out. Bank Nifty dropped 1%. However, owing to the revoke of the additional CRR mentioned above, it is expected that lending rates may fall in the near future. Over to the Banks now!

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