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Bi-monthly Monetary Policy Review: Rates Unchanged
Dec 03, 2015

In line with expectations, RBI governor Raghuram Rajan kept the Repo rate unchanged at 6.75%. The Cash Reserve Ratio (CRR) has also been unchanged at 4 per cent. In its fifth bi-monthly policy review of this fiscal, RBI said, inflation is expected to broadly follow the path set out in the September review with risks slightly on the downside.

Key Points

  • The Reserve Bank will follow developments on commodity prices, especially food and oil, even while tracking inflationary expectations and external developments.

  • The implementation of the Pay Commission proposals, and its effect on wages and rents, will also be a factor in the Reserve Bank's future deliberations, though its direct effect on aggregate demand is likely to be offset by appropriate budgetary tightening as the Government stays on the fiscal consolidation path.

  • In the meantime, since the rate reduction cycle that commenced in January, less than half of the cumulative policy Repo rate reduction of 125 bps has been transmitted by banks.

  • The median base lending rate has declined only by 60 bps.

  • Banks have been given more powers and flexibility to deal with the bad loans, which have crossed 6 per cent as of June quarter.

  • RBI kept the growth projection for 2015-16 unchanged at 7.4 per cent with a mild downside bias. Inflation is expected to broadly follow the path set out in the September review with risks slightly to the downside.

  • The gross NPAs of the public sector banks rose to 6.03 per cent as of June 2015 from 5.20 per cent in March 2015. Total stressed advances (NPAs plus standard restructured accounts) rose to 10.7 per cent as of September 2015 and is likely to settle down at 10.3 per cent by March next.

  • RBI, which is set to achieve its target of getting inflation down at 6 per cent by January 2016 and is aiming to reduce the number further to 5 per cent by March 2017, will monitor developments on the commodity prices, including food and oil and external developments in its future policy formulations.

The Reserve Bank will shortly finalise the methodology for determining the base rate based on the marginal cost of funds, which all banks will move to. The Government is examining linking small savings interest rates to market interest rates. These moves should further help transmission of policy rates into lending rates. In addition, the on-going clean-up of bank balance sheets will help create room for fresh lending.

On the banking sector reforms underway and already completed under the P.J. Nayak Committee report, which was submitted 15 months back, RBI said a number of actions have already taken place, such as splitting the posts of chairmen and MDs/CEOs of banks, appointing some from the private sector etc. There is also a process underway to appoint new bank board members who are typically more professional.

In August, the government had launched a seven-point agenda to revive the state-run banks, which included a Rs 70,000-crore capital infusion over the next four years, starting with Rs 25,000 crore this year, apart from steps to de-stress the banks of NPAs by introducing governance reforms.


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