Repo, reverse repo rates kept unchanged under LAF at 8 per cent and 6 per cent, respectively
Bank rates unchanged at 6 per cent
GDP projections lowered to 7.5-8 per cent for FY09
Inflation to be brought down to 7 per cent by March 2009
BACKGROUND
On October 11, RBI had cut CRR, the percentage banks are required to park with RBI, by 2.5 percentage points — from 9 per cent to 6.5 per cent — to inject Rs 100,000 crore liquidity into the system
It reduced the repo rate, the rate at which RBI lends short-term funds to banks, by 100 basis points to 8 per cent on October 20
The rupee depreciated by 18.9 per cent against the US dollar, by 0.4 per cent against the euro and by 1.1 per cent against the pound sterling
KEY OBJECTIVES
To bring inflation down to 5 per cent at the earliest from the double-digit number
Medium-term inflation target 3 per cent
To modulate the monetary overhang generated by the sustained expansion of money supply since 2005-06
Moderate rate of money supply to 17 per cent in 2008-09
STANCE OF MONETARY POLICY FOR THE MID-TERM REVIEW:
In the context of several complex and compelling policy challenges, governments, central banks and financial regulators around the world are responding to the crisis with aggressive, radical and unconventional measures to restore calm and confidence to the markets and bring them back to normalcy and stability.
Ensure a monetary and interest rate environment that optimally balances the objectives of financial stability, price stability and well-anchored inflation expectations, and growth;·
India’s financial sector is stable and healthy. All indicators of financial strength such as capital adequacy, ratios of non-performing assets (NPA) and return on assets (RoA) for our commercial banks, which account for 88 per cent of banking assets, are robust
In the wake of the stress on our financial markets as a result of the global financial crisis, the immediate challenge for the Reserve Bank was to infuse confidence by augmenting both domestic and foreign exchange liquidity. Accordingly, the Reserve Bank has taken a series of measures since mid-September, 2008
The measures taken since mid-September 2008 have substantially assuaged liquidity stress in domestic financial markets arising from the contagion of adverse external developments.
Continue with the policy of active demand management of liquidity through appropriate use of all instruments including the CRR, open market operations (OMO), the MSS and the LAF to maintain orderly conditions in financial markets.
In the context of the uncertain and unsettled global situation and its indirect impact on the domestic economy in general and the financial markets in particular, closely and continuously monitor the situation and respond swiftly and effectively to developments, employing both conventional and unconventional measures.
Emphasise credit quality and credit delivery, in particular, for employment-intensive sectors, while pursuing financial inclusion.
KEY OVERALL ASSESSMENT
Aggregate supply conditions in the Indian economy have shown resilience in the second quarter of 2008-09 in the face of a deteriorating global macroeconomic and financial environment. There are, however, growing indications that the underlying economic cycle is in tune with the global economic developments and that domestic economic activity is straddling a point of inflexion.
Aggregate demand conditions continue to be mainly investment-driven, although some slackening, which set in during the first quarter of 2008-09, appears to have become broad-based.
Reflecting the aggregate demand pressures, key monetary and banking aggregates – money supply, deposit and non-food credit growth – have been expanding during the year at rates that are significantly elevated, relative to indicative trajectories given in the Annual Policy Statement of April 2008.
The developments in monetary conditions resulted in a tightening of liquidity conditions in domestic financial markets through the second quarter of 2008-09
Signs of deterioration in the fiscal situation appear to be adding to aggregate demand pressures in the economy
Since the First Quarter Review of July 2008, global economic prospects have weakened further. The global economy is facing the deflationary effects of the financial crisis. There is increasing evidence that the slowdown in the US is spreading via the trade and financial channels across the world.
The international financial system is gripped by extreme risk aversion in the wake of spectacular failures among the world's largest financial institutions, including several credited with history.
In the overall assessment, global economic conditions have worsened and the future has turned highly uncertain. The broadening slowdown of economic activity in the advanced economies is beginning to impact the macroeconomic prospects of emerging economies, with those reliant on exports and on global financial markets likely to be the most vulnerable.
Interest rate ceilings on FCNR(B) and NR(E)RA deposits were increased by 50 basis points each, i.e., to Libor/Swap rates minus 25 basis points and to Libor/Swap rates plus 50 basis points, respectively, effective from September 16, 2008.
These ceilings were increased further by 50 basis points each, to Libor/Swap rates plus 25 basis points and Libor/Swap rates plus 100 basis points, respectively, effective from October 15, 2008.
FINANCIAL MARKETS
RBI announced special market operations (SMO) on May 30, 2008, on an ad hoc basis, which were conducted through designated banks in oil bonds held by public sector oil marketing companies. The SMO was terminated, effective August 8, 2008, but taking into account the continuing uncertain global situation and the potentially adverse implications for domestic financial markets, RBI announced on October 15, 2008, that it has decided to reinstitute a similar facility when oil bonds ecome available.
A special 14-day repo for a notified amount of Rs 20,000 crore was announced on October 14, 2008, which was further extended to be conducted on a daily basis up to the cumulative amount of Rs 20,000 crore, to enable banks to meet the liquidity requirement of mutual funds.
Banks were allowed to avail themselves of additional liquidity support exclusively for the purpose of meeting the liquidity requirements of mutual funds to the extent of up to 0.5 per cent of their NDTL.
Government of India 7 per cent Savings Bonds, 2002, the 6.5 per cent Savings Bonds, 2003 (non-taxable), and the 8 per cent Savings Bonds, 2003 (taxable) schemes were allowed for pledge or hypothecation or lien of these bonds as collateral for obtaining loans from scheduled banks.
Interest rate futures (IRFs) contracts as recommended by the Working Group on Interest Rate Futures to be launched in early 2009 along with the supporting changes in the regulatory regime.
Access to NDS-OM through the Constituent SGL (CSGL) route further extended to investors such as other non-deposit taking NBFCs, corporates and FIIs.
CCIL to operationalise a clearing and settlement arrangement for OTC rupee interest rate derivatives on a non-guaranteed basis within a month, and on a guaranteed basis within three months.
Indian entities allowed to invest in overseas unincorporated entities in the oil sector up to 400 per cent of their net worth as on the date of the last audited balance sheet.
The ECB policy modified, effective October 22, 2008. ECBs up to $500 million per borrower per financial year permitted for rupee expenditure and/or foreign currency expenditure.
A system of monitoring unhedged exposures of SMEs by banks on a regular basis being put in place.· ECB borrowers permitted either to keep proceeds offshore or to remit to India for credit to their rupee accounts with AD Category-I banks in India, pending utilisation for permissible end-use.
AD Category – I banks allowed to convey ‘no objection’ under the Foreign Exchange Management Act (FEMA), 1999 for the creation of charge over immoveable assets and financial securities and issue of corporate or personal guarantees on behalf of the borrower in favour of the overseas lender to secure ECBs under automatic/approval route.
The limit of $100,000 enhanced to $300,000 for making remittances for imports where the import bills/documents were received directly by the importer from the overseas supplier.
The limit for advance remittance for import of goods without bank guarantee/stand-by letter of credit increased from $1 million or its equivalent to $5 million or its equivalent.
The limit for advance remittance for import of services without bank guarantee enhanced from $100,000 to $500,000 or its equivalent.
Banks allowed to borrow funds from their overseas branches and correspondent banks up to a limit of 50 per cent of their unimpaired tier-I capital as at the close of the previous quarter or $0 million, whichever is higher, as against the existing limit of 25 per cent.
The exchange-traded currency futures started trading on the National Stock Exchange (August 29, 2008),the Bombay Stock Exchange (October 1, 2008) and the Multi Commodity Exchange – Stock Exchange (October 7, 2008).
Final guidelines liberalising the procedure and achieving greater transparency regarding branch/liaison offices of foreign entities in India to be issued by end-December 2008.
CREDIT DELIVERY
Banks allowed to classify 100 per cent of the credit outstanding under General Credit Cards (GCC) and overdrafts up to Rs 25,000 (per account) granted against 'no-frills' accounts in rural and semi-urban areas as indirect finance to agriculture under the priority sector.
Consequent upon announcements made in the Union Budgets for the years 2007-08 and 2008-09, public sector banks, RRBs and rural co-operative banks advised to grant interest rate subvention of 2 per cent per annum to farmers in respect of short-term production credit up to Rs 3 lakh.
RBI to provide a sum of Rs 25,000 crore as the first instalment under the Agricultural Debt waiver and Debt Relief Scheme 2008 as temporary liquidity support under Section 17(3-B) and Section 17(4-E) of the RBI Act to scheduled banks and the NABARD, respectively, till November 3, 2008.
RRBs to be allowed greater flexibility in opening new branches as long as they are making operational profits and their financials are improving.
PRUDENTIAL MEASURES
An approach paper on the supervision of financial conglomerates to be finalised by end-November 2008.
Working Group constituted to study and recommend a suitable supervisory framework for activities of SPVs/trusts set up by banks and to submit its report within three months.
An approach paper on appropriate model of risk-based supervision to be finalised by mid-December 2008.
An appropriate supervisory framework including a revised off-site surveillance system for overseas operations of Indian banks to be finalised by end-November 2008.
Indian banks with overseas presence and branches of foreign banks functio-ning in India have migrated to Basel II Framework with effect from March 31, 2008 and remaining banks are required to migrate to the Basel II framework with effect from March 31, 2009.
Guidelines related to liquidity risk management to be significantly revised.
Stress-testing norms to be upgraded.
INSTITUTIONAL DEVELOPMENTS
The Payment and Settlement Systems Act, 2007 and the Payment and Settlement Systems Regulations, 2008 notified and have come into effect from August 12, 2008.
Operating guidelines for mobile payments issued for adoption by banks under Section 18 of the Payment and Settlement Systems Act, 2007 with effect from October 8, 2008.
Working Group constituted to suggest measures including the appropriate regulatory and supervisory framework to facilitate emergence of umbrella organisation(s) for the UCB sector to submit its report by end-December 2008.
Existing exemption to Non-scheduled UCBs in Tier I regarding maintaining SLR not to exceed 7.5 per cent of NDTL with effect from October 1, 2009 and the exemption to be withdrawn effective from April 1, 2010.
Non-scheduled UCBs in Tier I to maintain SLR in the form of Government and other approved securities not less than 7.5 per cent of their NDTL by September 30, 2009 and 15 per cent of their NDTL by March 31, 2010.
Current prescription of holding SLR in Government and other approved securities not less than 15 per cent of their NDTL in respect of non-scheduled UCBs in Tier-II to continue up to March 31, 2010.
From March 31, 2011 onwards all UCBs (non-scheduled and scheduled) to maintain SLR in Government and other approved securities up to 25 per cent of their NDTL.
Final guidelines regarding prudential norms for non-deposit taking systemically important non-banking financial companies (NBFC-ND-SI) dated August 1, 2008 issued.
