RBI's Monetary Policy
Statement for 2012-13
WELCOM ACTION BY RBI
RBI has finally responded to the call for Growth. In its annual Monetary
Policy Statement released today by the RBI Governor, D.Subbarao, RBI has surprised
and pleased many by cutting REPO Rates by 50 basis points. RBI richly deserves
the praise of all, for this far-sighted and timely action. The other measures
for Banking regulation are also detailed here, which deserve EQUAL PRAISE –
since the health of Indian Banking system is uniquely ensured by the efficiency
of RBI’s supervisory Role on them. Government should now respond equally well with measures to control Inflation - from its side.
Here are the details from the RBI Governor’s statement:
Here are the details from the RBI Governor’s statement:
Ø Based on an
assessment of the current macroeconomic situation, RBI has decided to: reduce
the repo rate under the liquidity adjustment facility (LAF) by 50 basis points.
The repo rate will accordingly drop from 8.5 to 8.0 per cent.
Ø Consequent to
this, the reverse repo rate under the LAF, determined with a spread of 100
basis points below the repo rate, gets calibrated to 7.0 per cent. Similarly,
the marginal standing facility (MSF) rate, which has a spread of 100 bps above
the repo rate, stands adjusted to 9.0 per cent.
Ø In order to
provide greater liquidity cushion, RBI has also decided to raise the borrowing
limit of scheduled commercial banks under the marginal standing facility (MSF)
from one per cent to two per cent of their net demand and time liabilities
(NDTL).
Ø These changes
have come into effect immediately after the announcement.
2 Broad Considerations
Behind the Policy Move
Ø First, growth
decelerated significantly to 6.1 % in the 3rd quarter of last year, although it
is expected to have recovered moderately in the 4th quarter. Based on current
assessment, the economy is clearly operating below its post-crisis trend.
Ø Headline WPI
inflation which remained above 9 % for nearly two years has moderated
significantly to below 7 % by March 2012. More importantly, non-food
manufactured products inflation has dropped from a high of 8.4 % in November
2011 to 4.7 % in March 2012, actually coming below 5 % for the first time in
two years.
3 Contours
of Monetary Policy Stance
Ø to adjust the
policy rates to levels consistent with the current growth moderation;
Ø to guard
against risks of demand-led inflationary pressures re-emerging;
Ø to provide
greater liquidity cushion to the financial system.
Guidance
for the period forward :
Ø The reduction
in the repo rate is based on an assessment of growth having slowed below its
post-crisis trend rate which, in turn, is contributing to a moderation in core
inflation. However, it must be emphasised that the deviation of growth from its
trend is modest. At the same time, upside risks to inflation persist. These
considerations inherently limit the space for further reduction in policy
rates.
Ø Moreover, if
subsidies are not contained as indicated in the Union Budget last month, demand
pressures will persist, and will further reduce whatever space there is for
monetary easing. Revisions in administered prices may adversely impact headline
inflation. But the appropriate monetary policy response to this should be based
on whether the higher prices translate into generalized inflationary pressures.
The likelihood of a pass-through of higher administered prices to generalised
inflation depends on the strength of the pricing power in the economy. The
pricing power is currently abating, but the risk of a pass-through cannot be
ignored altogether. Overall, from the perspective of vulnerabilities emerging
from the fiscal and current account deficits, it is imperative for
macroeconomic stability that administered prices of petroleum products are
increased to reflect their true costs of production.
Ø Liquidity
management posed a major challenge for much of last year. However, liquidity
conditions have eased in recent weeks, and are now steadily moving towards the
comfort zone of the Reserve Bank. This is reflected in the decline in banks’
borrowings from the LAF and the behaviour of money market rates. The increase
in the MSF limit to banks that we just announced should provide additional
liquidity comfort. However, should the situation change, appropriate and
proactive steps will be taken with the objective of restoring comfort zone
conditions.
3 Expected
Outcomes
Ø growth will
stabilise around its current post-crisis trend.
Ø risks of
inflation and inflation expectations re-surging will be contained.
Ø the liquidity
cushion available to the system will be enhanced.
Indian
Economy
Ø Turning to
the domestic macroeconomic situation, economic growth decelerated last year,
dropping from 7.7 % in the 1st quarter to 6.9 % in the second quarter and
further down to 6.1 % in the 3rd quarter. This was mainly due to deceleration
in industrial growth. Growth in the services sector held up relatively well. On
the demand side, gross fixed capital formation contracted both in the second
and third quarters of last year.
Ø The Central
Statistics Office (CSO) put out an advance estimate of GDP growth for last year
of 6.9 %. More recent data on industrial production suggest that activity may
have expanded at a slower pace last year.
Ø Looking
ahead, the overall growth outlook for the current year looks a little better
than it was last year. Accordingly, the Reserve Bank’s baseline projection of
GDP growth for the current year is 7.3 %.
Inflation
headline WPI inflation, which remained above 9 % during April-November
2011, moderated to 6.9 % by end-March 2012. This moderation was consistent with
the Reserve Bank’s indicative projection of 7 %.
Food articles inflation continues to be high. Significantly. inflation in protein items is in double
digits, reflecting persistent structural demand-supply imbalances in
protein foods.
Fuel inflation, on the other hand, moderated from over 15 % in Nov-Dec
2011 to 10.4 % in March 2012 even as global crude oil prices rose sharply. This
reflects the absence of a commensurate pass-through to domestic consumers.
Non-food manufactured products inflation decelerated significantly from
8.4 % in November 2011 to 4.7 % in March 2012, on the back of a slowdown in
domestic demand and softening of global non-oil commodity prices.
Even as WPI inflation has softened, inflation as measured by the new
series of consumer price index (CPI) suggests that price pressures are still
high at the retail level.
Looking ahead, based on an assessment of the domestic demand-supply
balance, global trends in commodity prices and the likely demand scenario, the
Reserve Bank’s projection of inflation for March 2013 is 6.5 %.
Risk
Factors
Ø a major risk
to our growth and inflation projections stems from the outlook for global
commodity prices, especially of crude oil. Although upside risks to oil prices
from the demand side are limited, geo-political tensions are a concern. Any
disruption in supplies is likely to lead to further increase in crude oil
prices.
Ø Even though
the Budget has proposed a reduction in the fiscal deficit in the current year,
there are several upside risks. Any slippage in the fiscal deficit will have
implications for inflation.
Ø large
Government borrowing budgeted for 2012-13 has the potential to crowd out credit
to the private sector. If that happens, the supply response required to
accelerate growth could be inhibited.
Ø financing of
the current account deficit will continue to pose a major challenge.
Ø structural
imbalances in protein-rich foods persist, and consequently, food inflation is
likely to remain under pressure.
Financial
inclusion :
There has been significant progress in providing banking services to
villages with population above 2,000. The challenge now is to extend coverage
to all the unbanked villages of the country. Accordingly, it is proposed to
mandate state level bankers’ committees (SLBCs) to prepare roadmaps covering
all unbanked villages of population of less than 2,000, and notionally allot
these villages to banks for providing banking services in a time bound manner.
Measures on Customer service in banks :
Ø banks are
being advised to offer a ‘basic savings bank deposit account’ with certain
minimum common facilities and without the requirement of a minimum balance to
all their customers.
Ø banks will be
mandated not to levy foreclosure charges or pre-payment penalties on home loans
extended on a floating interest rate basis.
Ø banks are
being advised to initiate steps to allot a unique customer identification code
(UCIC) number to all their customers.
Regulation
and supervision:
On Basel III, final guidelines on the implementation of capital
regulations will be issued by end-April 2012, and final guidelines on liquidity
risk management and liquidity standards by end-May 2012.
There has been a significant increase in loans against gold by
non-banking financial companies in the recent period, which has raised several
concerns. This policy contains three measures to regulate this further:
Ø banks should
reduce their regulatory exposure ceiling to a single NBFC, having gold loans to
the extent of 50 per cent or more of its total financial assets, from the
existing 10 % to 7.5 % of bank’s capital funds.
Ø banks should
have an internal sub-limit on their aggregate exposure to all such NBFCs,
having gold loans to the extent of 50 per cent or more of their total financial
assets, taken together.
Ø Reserve Bank
has constituted a Working Group to undertake a detailed study of gold demand,
trends in gold prices and lending by NBFCs against gold.
2 measures
relating to NBFCs.
Ø the draft
guidelines on overseas investment by core investment companies (CICs) will be
placed on the Reserve Bank’s website for public comments by end-April 2012.
Ø it has been
decided to issue the draft guidelines on the regulatory framework for NBFCs by
end-June 2012 based on the recommendations of the Usha Thorat Working Group.
Non-performing
assets of banks : We are mandating banks to put in place a robust
mechanism for early detection of signs of distress and take remedial measures.
Guidelines
on securitisation will be issued by end-April 2012.
2 measures
concerning currency management.
Ø with a view
to address the issue of counterfeit notes in circulation, banks are advised to
ensure that notes received over the counters are re-circulated only after
ensuring their proper authentication through machines.
Ø keeping in
view the extended geographical spread of bank branch network and leveraging on
technology, RBI has decided to channelize the distribution of currency and
coins only through currency chests and bank branches.
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