India – RBI – Annual & Monetary Policy 2018-2019
Resolution of the MPC
On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting held on August 1, 2018, decided to increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.5 per cent. Consequently, the reverse repo rate under the LAF stands adjusted to 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent.
The decision of the MPC is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent while supporting growth.
Developmental and Regulatory Policies
The various developmental and regulatory policy measures announced by RBI on August 1, 2018 are:
Regulation and Financial Inclusion
Extension of MSF to Scheduled Primary (Urban) Cooperative Banks, and extension of LAF and MSF to Scheduled State Cooperative Banks
As part of the Reserve Bank’s continuous efforts in improving the transmission of monetary policy to money market rates, it has been decided to allow access to (i) the marginal standing facility (MSF) to scheduled primary (urban) co-operative banks, complying with the eligibility criteria prescribed for MSF; and, (ii) the liquidity adjustment facility (LAF) and MSF to scheduled state co-operative banks, complying with the eligibility criteria prescribed for LAF / MSF. Detailed guidelines will be issued by the end of September 2018.
Investment in Non-SLR Securities by Primary UCBs
In order to bring further efficiency in price discovery mechanism and as a step towards harmonisation of regulations for urban and rural co-operative banks, the Reserve Bank permitted primary (urban) co-operative banks to undertake eligible transactions for acquisition/sale of non-SLR investment in secondary market with mutual funds, pension/provident funds, and insurance companies. This is in addition to undertaking eligible transactions with scheduled commercial banks and primary dealers. Detailed guidelines will be issued by the end of September 2018.
Co-origination of Loans by Banks and NBFCs for Lending to the Priority Sector
To provide the much-needed competitive edge for credit to the priority sector, all scheduled commercial banks (excluding Regional Rural Banks and Small Finance Banks) can co-originate loans with non-banking financial companies - non-deposit taking- systemically important (NBFC-ND-SIs), for the creation of eligible priority sector assets. The co-origination arrangement should entail joint contribution of credit by both lenders at the facility level. It should also involve the sharing of risks and rewards between the banks and NBFCs for ensuring appropriate alignment of respective business objectives, as per their mutual agreement. Guidelines in this regard will be issued by the end of September 2018.
Review of Foreign Exchange Derivative facilities for Residents
It is now proposed to undertake a comprehensive review of foreign exchange derivative facilities for residents (FEMA 25), in consultation with the Government of India, to, inter alia, reduce the administrative requirements for undertaking derivative transactions, allow dynamic hedging, and allow Indian multinationals to hedge the currency risks of their global subsidiaries from India. Draft circular on the revised guidelines will be released for public comments by the end of September 2018.
Comprehensive Review of Market Timings
The Reserve Bank would set up an internal group to comprehensively review timings for certain market segments (namely, currency futures, over-the-counter (OTC) foreign exchange market, and others) and the necessary payment infrastructure for supporting the recommended revisions to market timings. The proposed group will submit the report by the end of October 2018