RBI expresses its view on economy through changes in monetary policy which is known as Annual Policy Statement. The policy is released every year in April and is reviewed every quarter.
Reserve Bank of India Governor D. Subbarao has released its annual monetary Policy statement on April 20, 2010 for the year 2010-11. This was followed by the first quarter review of monetary policy for 2010-11 on July 27, 2010. On September 16, 2010, the Mid-Quarter Monetary Policy Review has been released.
Cash reserve ratio (CRR):
CRR is the percentage of cash deposits that banks have to maintain with RBI.
The RBI had hiked the CRR by 75 points in January 2010. This absorbed Rs. 36000 Crores from the system. In the Annual Policy 2010-11 the CRR was increased by an increase of 25 basis points from 5.75 to 6.0 percent has taken effect from April 24. This sucked out Rs. 12500 Crores from the banks.
This affects the bank in the form of increased cost of funds because they have to keep more money for negligible returns on it. The banks pass on this cost to their customers and thus loans become dearer.
It must be noted down that RBI had slashed frequently the CRR during 2008 & 2009 to maintain high liquidity in the system as a measure to fight the financial slowdown. The excess liquidity causes the bank to lend more and thus interest rates came down.
Repo Rate:
Repo Rate is the rate of interest at which the RBI lends money to banks. This also means that Repo Rate is the RBI’s lending rate to other banks. When RBI reduces the Repo Rate, the banks can borrow more at a lower cost. This contributes to lowering of the rates.
In the Mid-Quarter Monetary Policy Review, September 2010-11 the RBI has hiked the Repo rate by 25 basis points from 5.75 per cent to 6.0 per cent with immediate effect. This means that RBI has increased its lending rate to other banks by .25%. For banks the borrowing from RBI becomes costlier.
Reverse Repo Rate:
Reverse repo rate is the rate at which RBI borrows funds from banks. This is opposite of repo rate. Reverse repo rate is also known as RBI’s borrowing rate.
In the Annual Monetary Policy 2010-11, the RBI has increased the reverse repo rate under the LAF by 50 basis points from 4.5 per cent to 5.0 per cent with immediate effect. . This means that now RBI will provide 0.50% extra interest on the money which it borrows from the banks. An increase in reverse repo rate means that banks earn higher returns by lending to RBI. This indicates a hike in the deposit rates.
Thus we can see that change in Policy rates has a direct impact the lending and borrowing rates of the banks. The consumers get affected accordingly.
Note: There is No Change in Other rates. The key Policy rates are as follows:
|
Policy Rates |
Reserve Ratios |
Lending / Deposit Rates |
|
Base Rate : 6.0% |
CRR : 6% |
Base Rate : 7.5-8% |
|
Repo Rate : 6.0% |
SLR : 25% |
Savings Banks Rate: 3.5% |
|
Reverse Repo: 5.0% |
|
Deposit rates : 6% 7.5% |
Statutory Liquidity Ratio (SLR) :
Statutory Liquidity Ratio is the fraction of liquid assets which a bank has to keep an assured amount of funds. The funds may be in the form of cash, gold, government bonds, etc. In October 2009 Credit Policy the RBI had RBI had hiked the SLR by 100 basis points – from 24 to 25 per cent.
This measure controls bank’s credit expansion and can lead to higher interest rates. In the October 2009 Credit Policy, RBI had hiked the SLR by 100 basis points – from 24 to 25 per cent. It has not been touched by RBI in the Annual Monetary Policy 2010-11.
The Reserve Bank of India (RBI) has projected India’s growth for this fiscal at upward of 8 percent, against 7.2 percent as per the earlier projection, while the annual rate of inflation at the end of March 2011 is projected at 5.5 percent.
Inflation Projection for 2010-11:
WPI (Wholesale Price Index) inflation has been projected 5.5 percent by RBI. The Policy says that Inflationary pressures have accentuated in the recent period & Inflation risk looms large due to domestic demand and price rise in global commodities.
Money Supply:
During 2009-10, money supply (M3) growth decelerated from over 20.0 per cent at the beginning of the financial year to 16.4 per cent in February 2010 before increasing to 16.8 per cent by March 2010, slightly above the Reserve Bank’s indicative projection of 16.5 per cent. For policy purposes, M3 growth for 2010-11 is placed at 17.0 per cent. Consistent with this, aggregate deposits of SCBs are projected to grow by 18.0 per cent. The growth in non-food credit of SCBs is placed at 20.0 per cent. As always, these numbers are provided as indicative projections and not as targets.
Aggregate Deposit projection:
The aggregate deposits of the scheduled commercial banks are projected to grow by 18% in the 2010-11.
Bank rate: Bank rate has been retained at 6 percent.
Motive & Policy Stance of RBI:
It is worth note that in the wake of Global Economic crisis, RBI had adopted a suitable monetary policy from September 2008, to boos market confidence and mitigate the adverse impact of global financial slowdown on Indian Economy. RBI was quite successful in achieving its goals but in the late 2009, the food inflation started soaring and RBI shifted to its first phase of exit from the expansionary monetary policy. The moves of RBI included raising the Key Policy rates and restoring the statutory Liquidity Ratio in October 2009. RBI continued to move on the same track and announced 75 basis points increase in CRR in January 2010. Besides RBI stunned the market by mid-cycle increase of 25 basis points each in the policy repo rate and the reverse repo rate under the LAF on March 19, 2010. The latest policy has the following stance:
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Anchor inflation expectations, while being prepared to respond appropriately, swiftly and effectively to further build-up of inflationary pressures.
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Actively manage liquidity to ensure that the growth in demand for credit by both the private and public sectors is satisfied in a non-disruptive way.
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Maintain an interest rate regime consistent with price, output and financial stability.
Financial Stability Report:
The first Financial Stability Report (FSR) was released by RBI on March 25, 2010. in the Policy statement RBI announces that Financial Stability Reports will be published half yearly. he FSR will assess the strength of the financial sector, with particular focus on banks.
Introduction of Base Rate System:
After indicating the base rate system in Annual Policy Statement of April 2009, RBI had constituted a Working Group on Benchmark Prime Lending Rate. Chairman of this working group was Shri Deepak Mohanty. The objective was to review the present benchmark prime lending rate (BPLR) system and suggest changes to make credit pricing more transparent. Deepak Mohanty group submitted its report in October 2009 and the same was placed on the Reserve Bank’s website for public comments. Based on the recommendations of the Group and the suggestions from various stakeholders, the draft guidelines on Base Rate were placed on the Reserve Bank’s website in February 2010. RBI has now decided to mandate banks to switch over to the system of Base Rate from July 1, 2010. Guidelines on the Base Rate system were issued on April 9, 2010
Interest Rate Futures
RBI had introduced the Interest Rate Futures contract on 10-year notional coupon bearing Government of India security was on August 31, 2009. In the policy statement of 2010-11 RBI announces to introduce Interest Rate Futures on 5-year and 2-year notional coupon bearing securities and 91-day Treasury Bills. (Product design and operational modalities yet to be finalized)