30-Sep-2022: RBI hikes Repo Rate by another 50 basis points to 5.9%

Repo Rate hiked to 5.90%

The repo rate, the rate at which RBI lends money to commercial banks, has been hiked by 50 basis points again. Considering the prevailing adverse global environment, resilience in domestic economic activity, uncomfortably high inflation level, the RBI has hiked the policy repo rate by 50 basis points, to 5.40%.

Consequently, the standing deposit facility (SDF) rate stands adjusted to 5.65% and the marginal standing facility (MSF) rate and the Bank Rate to 6.15%. The Monetary Policy Committee has decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth, stated RBI Governor Shaktikanta Das.

Additional Measures:

The Governor announced a series of four additional measures, as given below.

1. Discussion paper on Expected Loss-Based Approach to be released for loan-loss provisioning by banks: Banks currently follow incurred-loss approach, where provisions are made after stress has actually materialized, this is to be replaced by a more prudent approach which requires banks to make provisions based on assessment of probable losses.
2. Discussion paper on securitization of Stressed Assets Framework (SSAF) to be released: Revised framework for securitization of stressed assets was issued in Sep 2021, it has now been decided to introduce a framework for securitization of stressed assets, this will provide alternate mechanism for securitization of NPAs in addition to existing ARC route.
3. Internet banking facility for customers of Regional Rural Banks: RRBs are currently allowed to provide internet banking facility to customers subject to fulfillment of certain criteria, to spread digital banking in rural areas, these criteria are being rationalized, revised guidelines to be issued separately.
4. Regulation of offline payment aggregators: Online Payment Aggregators (PAs) have been brought under the purview of RBI regulations since March 2020. It is now proposed to extend these regulations to offline PAs, who handle proximity/ face-to-face transactions. This measure is expected to bring in regulatory synergy and convergence on data standards.

Growth Projection – 7.0% for 2022-23

The Governor informed that the central bank’s growth projection for the Indian economy for 2022-23 is projected at 7.0 per cent with Q2 at 6.3 per cent; Q3 at 4.6 per cent; and Q4:2022-23 at 4.6 per cent, with risks broadly balanced.

The growth for Q1 of 2023-24 is projected at 7.2 per cent.

Against the current challenging global environment, economic activity in India remains stable, stated the RBI Governor. "While real GDP in first quarter of this year turned out to be lower than expectations, it is perhaps the highest among major global economies", he added.

Inflation

Inflation inched up to 7.0 per cent in August from 6.7 per cent in July, stated the RBI Governor. Global geopolitical developments are weighing heavily on the domestic inflation trajectory, he said.

The RBI Governor stated that monetary policy has to carry forward its calibrated action on policy rates and liquidity conditions consistent with the evolving inflation growth dynamics. It must remain alert and nimble, he stated.

5-Aug-2022: RBI hikes Repo Rate by another 50 basis points to 5.4%

Repo Rate hiked to 5.40%

The repo rate, the rate at which RBI lends money to commercial banks, has been hiked by one half of a percent. Considering the prevailing adverse global environment, resilience in domestic economic activity, uncomfortably high inflation level, the RBI has hiked the policy repo rate by 50 basis points, to 5.40%.

The Monetary Policy Committee of the RBI came to this judgement since it felt the need to keep inflation and inflationary expectations under check. “Sustained high inflation could destabilize inflation expectations and harm growth in the medium term”, the RBI Governor Shaktikanta Das said, delivering the Monetary Policy Statement online. The Governor’s address can be watched here: https://youtu.be/2VXCSN9Ypes.

Additional Measures

The Governor announced a series of five additional measures, as given below.

1. Encouraging Standalone Primary Dealers to further Develop Financial Markets

Standalone Primary Dealers (SPDs) will now be able to offer all foreign exchange market-making facilities as currently permitted to Category-I Authorized Dealers, subject to prudential guidelines. This will provide customers with a wider set of market makers to manage their foreign currency risk. This will also increase the breadth of the forex market in India.

SPDs will also be permitted to undertake transactions in the offshore Rupee Overnight Indexed Swap market with non-residents and other market makers. This measure will supplement a similar measure announced in February this year for the banks. These measures are expected to remove the segmentation between onshore and offshore OIS markets and improve price discovery.

The measures are being taken, considering the role of SPDs in developing financial markets.

2. Managing Risks and Code of Conduct in Outsourcing of Financial Services

There has been an increasing trend of outsourcing of financial services by regulated entities. Considering this, the RBI is going to issue a draft Master Direction on Managing Risks and Code of Conduct in Outsourcing of Financial Services for public comments. This is being done to strengthen the risk management framework and harmonize and consolidate the existing guidelines.

3. Bharat Bill Payment System to be open to NRIs as well

The Bharat Bill Payment System (BBPS), an interoperable platform for standardized bill payments, will now be able to accept cross-border inward bill payments. This will thereby enable NRIs as well to use the system to pay their bills for utility, education and other such services, on behalf of their families in India. This will thus greatly benefit senior citizens.

4. Credit Information Companies to be brought under Reserve Bank Integrated Ombudsman Scheme (RB-IOS) 2021

To make the RB-IOS more broad-based, Credit Information Companies (CICs) are being brought under the RB-IOS framework. With this, we get a cost-free alternative mechanism for redressal of grievances against Credit Information Companies.

Further, these companies will now need to have their own internal Ombudsman (IO) framework. The Governor informed that this will strengthen the internal grievance redress mechanism by CICs themselves.

5. MIBOR Benchmark Committee to be set up

The RBI has decided to set up a committee to undertake an in-depth examination of the issues relating to development and use of interest rate derivatives, including the need for transitioning to an alternative benchmark for Mumbai Interbank Outright Rate, and suggest the way forward. The study is being done in view of recent international efforts to develop alternative benchmark rates.

No change in Growth Projection – 7.2% for 2022-23

The Governor informed that the central bank’s growth projection for the Indian economy remains unchanged, at 7.2% for the current financial year, with Q1 at 16.2 per cent; Q2 at 6.2 per cent; Q3 at 4.1 per cent; and Q4 at 4.0 per cent. Real GDP growth for Q1:2023-24 is projected at 6.7 per cent

On inflation, the Governor explained that monetary policy should persevere further in its stance of withdrawal of accommodation to ensure that inflation moves close to the target of 4.0 per cent over the medium term, while supporting growth. The Governor informed that RBI reiterates its commitment to maintain price and financial stability to place our economy on a sustainable path of growth.

25-Feb-2019: Banks may set repo rate as benchmark

Most commercial banks in India are likely to select RBI’s repo rate as the external benchmark to decide their lending rates, from April 1. The repo rate is the key policy rate of the Reserve Bank of India (RBI).

The banking regulator had asked the banks to move to an external benchmark for loan pricing from April 1, a move expected to improve monetary transmission as lenders had, in the past, been found reluctant to reduce lending rate.

Banks had four options from which to choose the external benchmark: the repo rate, the 91-day treasury bill, the 182-day T-bill or any other benchmark interest rate produced by the Financial Benchmarks India Private Ltd (FBIL).

According to some bank chiefs, the repo rate is the most stable one as compared to the other options. At present, the repo rate is 6.25%.

The marginal cost of fund based lending rate (MCLR) is currently the benchmark for all loan rates. Banks typically add a spread to the MCLR while pricing loans for homes and automobiles.

For the new benchmark, the central bank has mandated that the spread over the benchmark rate — to be decided by banks at the inception of the loan — should remain unchanged through the life of the loan, unless the borrower’s credit assessment undergoes a substantial change and as agreed upon in the loan contract.

If the lending rates are linked to the repo rate, any change in the repo rate will immediately impact the home and auto loan rates, since RBI has mandated the spread to remain fixed over the life of the loan.

Many banks have opposed the move to shift to a new external benchmark for loan pricing on grounds that their cost of funds are not linked to these benchmarks and that without a fall in the costs, it would not be possible to change the rates.