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Mrunal Handout 2 CSP20
Mrunal Handout 2 CSP20
The amount of money held in cash form vary inversely with interest rates. If higher
interest available in Bank Deposits, Bonds etc., people would invest money there instead
of keeping money in liquid form (cash).
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 20
- RBI measures the money supply through indicators: M0,M1,M2,M3,M4
Table 1: *CU: Coins & Currency with Public
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 21
11.4 FACTORS AFFECTING MONEY SUPPLY [M1, M3]
Figure 1: source Latest ES20, although how/why rise/fall: too much PHD poor cost-benefit
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 22
o & It indirectly improves as economy develops, consumption / loan demand
increases, banking penetration improves etc.
o In 1960s = less than 2x, 90s = more than 3x, At present = more than 5x.
Figure 2: source- Economic Survey 2020, zigzag pattern means 'not increasing steadily'.
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 23
- Milton Friedman: American economist whose research on monetary policy made this
subject more popular, he also won a Nobel in Economics in this regard (1976).
- Philip Curve: Inflation ↑ = unemployment _ (and vice versa). मांहगाई बढ़े गी तो बेरोजगारी
घिे गी. मांहगाई कम होगी तो बेरोजगारी बढ़े गी.
- Therefore, stable & moderate inflation is good for the economy. So, RBI tries to keep
inflation with 2-6% CPI (All India) using its bi-monthly monetary policy made by its 6-
member statutory Monetary Policy Committee.
CRR SLR
Full form: Full form:
(नकद कोष अनप ु ात) (वैधाननक तरलता अन प ु ात)
Banks must keep this much deposits (or Banks must keep this much deposits in
balance) with RBI. RBI doesn’t pay interest liquid assets such as cash, gold, G-Sec, T-
on it, except in extraordinary Bills, State Development Loan Bonds and
circumstances like 1999’s Banking other securities notified by RBI.
slowdown.
Bank earns no profit / interest* Some profit*
- CRR: first suggested by the British _________________________________,
economist J.M. Keynes & first 1949
introduced in US Federal Reserves
(=Central Bank of USA).
- Mandated under RBI Act, 1934
RBI can fix any amount of CRR, legally Legally, SLR can’t be more than 40%.
there is no minimum floor or maximum Presently it’s 19.00% of NDTL and will be
ceiling. Presently it’s 4% of total DTL reduced to 18% in 2019-20 in a phased
manner.
Counted on Total Demand and Time On Net Demand & Time Liabilities (NDTL)
Liabilities (DTL) of a Bank. How is it of a bank (ननवल माांग और समय दे यताएँ )
different from NDTL? Ans. NOTIMP4IAS
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 24
CRR SLR
During demonetization, RBI temporarily Associated topics: Liquidity Coverage Ratio
prescribed Incremental CRR of 100% to (LCR) and High Quality Liquid Assets
drain excess liquidity in banks & prevent (HQLA): we’ll study in Pillar1B: Burning
crashing of loan interest rates. How issues in Banking Sector → BASEL-III
exactly did it work? Ans. NOTIMP4IAS norms.
All Scheduled Commercial Banks (SCB) Similar to left cell.
must keep CRR however, RBI may prescribe
separate norms/ slabs for RRBs and
Cooperative Banks
- CRR-SLR are counted on fortnightly basis. If not maintained, bank will have to pay
penalty interest rate to RBI which is linked with Bank Rate.
- CRR-SLR ensure monetary stability of India through two primary functions:
1) CRR assists in money multiplier effect,
2) CRR-SLR provide buffer/protection during a Bank Run (बैंकों में से जमाराशि वापस
लेने की दौड़) i.e. an emergency when every depositor wants to pull out money
from his bank account at once, mainly due to fake news / rumors.
- While in theory CRR/SLR can be used for inflation control but RBI primarily relies on
REPO Rate (=its Policy Rate) to combat inflation, and not CRR/SLR.
🔠❓When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis
points which of the following is likely to happen? (UPSC-Pre-2015)
(a) India's GDP growth rate increases drastically.
(b) Foreign Institutional Investors may bring more capital into our country.
(c) Scheduled Commercial Banks may cut their lending rates.
(d) It may drastically reduce the liquidity to the banking system.
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 25
In other words, if a bank gives more loans to the above 3 sectors, it’ll have to keep
less CRR → more loanable funds → profit to the bank. And more loans → more
business activity → economic growth.
(a) the share of Net Demand and time liabilities (NDTL) that banks have to hold as liquid
assets
(b) the share of NDTL that banks have to hold as balances with the RBI
(c) the share of Net demand and time liabilities that banks have to hold as part of their
cash reserves
(d) the ratio of cash holding to reserves of banks
12.1.2 🐯📢📐 MonPolicy → Quant Tools → Rates → Bank rate (बेंक दर):
Bank Rate MSF Repo Rate
Introduced in RBI Act, 1934** 2011 2000
What is the % Since 2012: Bank Monetary Policy
MSF = Repo% + “x”%
rate? Rate% = MSF% Committee decides
Who can All clients of RBI:
borrow from Only banks bank, non-bank,
the RBI? Union & State Govt
Collateral Bank can pledge securities Yes, G-Sec/T-bill.
**Yes and No
required? from its SLR quota But not from SLR
Loan duration Longer than repo Short term usually overnight to 14 days
Nowadays mainly Emergency borrowing by
Short term
Primary for deciding bank, using their securities
borrowing by all
Utility? penalty on errant from SLR quota subject to
clients of RBI.
banks certain limits.
**RBI Act, 1934: “Bank rate is the standard rate at which RBI buys or rediscounts first
class securities, bills of exchange or other commercial papers.(-NCERT)”
But, since the introduction of the Repo rate in the 2000s, the Bank rate has become a
dormant tool (=not frequently used by RBI for lending or by banks for borrowing).
So, reference books/websites differ in its present operational status e.g. some of them
would say:
o Bank rate requires no collateral and is meant for long term loans.
o Bank rate accepts collateral which can be both GSec/T-bill as well as private
companies’ securities.
So, in the real exam, it depends on which book/web source the examiner has copied the
statement(s) and accordingly you’ve to take a judgement call in ticking the answer.
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 26
®️ LAF-Repo Rate ®️ ®️ LAF-Reverse Repo Rate
(पन
ु : क्रय-अनब
ु ि)
ं (उलट पन ु : क्रय-अनब
ु ि)
ं
The Interest rate at which RBI lends short- It’s the interest rate that clients earn
term loans to its clients, keeping their G- when parking their surplus funds with the
Sec as collaterals. RBI for short periods.
Clients enter into an agreement with RBI Mechanism similar to Repo, RBI gives its G-
to repurchase their G-sec at a future date Sec as a collateral.
at a (higher) pre-determined price.
Banks can’t _ _ _ _ _ _ pledge their SLR-
quota-G-Secs for this borrowing.
- Repo also called ‘Ready Forward Reverse Repo Rate = Repo% MINUS 0.25%
Transaction’.
- Repo Rate is our Policy Rate to control
inflation.
🔠❓Which one of the following is not correct about the Repo rate? (UPSC-CDS-i-2020)
(a) It is the interest rate charged by the Central Bank on overnight loan.
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 27
(b) It is the interest rate paid by the commercial banks on overnight borrowing.
(c) It is the interest rate agreed upon in the loan contract between a commercial bank and
the Central Bank.
(d) It is the cost of collateral security.
12.1.7 🐯📢📁 Market Operations (OMO, MSS): (Inflation → Sell G-Sec, Deflation →
Buy)
I. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ (खुले बाजार की क्रियाए) : RBI buys and sells
Union & State Govts’ securities to control money supply. RBI buying= Money supply
increased/liquidity injected in the market. RBI selling = Money supply
decreased/liquidity absorbed from the market.
II. Market Stabilization Scheme (बाजार क्स्थरीकरण योजना): RBI sells G-sec, T-Bill &
Cash Management Bills (CMB) to suck excess liquidity. While the money thus
collected is not part of Govt.’s borrowing, but Govt. pays interest on it. This
mechanism was enhanced during Demonetization to counter excess liquidity and
crashing of lending rates.
III. Sterilization / Forex Swap: Their primary objective is to control the currency
exchange rate volatility. <More in Pillar#3 >
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 28
IV. Operation Twist (2019): a special type of OMO. Explained in next segment.
🔠❓ 'Open Market Operations' refers to: (Prelims-2013)
🔠❓ Which of the following measures would result in an increase in the money supply
in the economy? (Asked in UPSC-Pre-2012)
1. Purchase of G-Sec from the public by the Central Bank.
2. Deposit of currency in commercial banks by the public.
3. Borrowing by the government from the Central Bank.
4. Sale of government securities to the public by the Central Bank.
Answer Codes: (a) 1 only (b) 2 and 4 only (c) 1 and 3 (d) 2, 3 and 4
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 29
Factor How it determines corporate bond interest rate
Bank deposit Higher the (Bank) deposit interest rate, higher bond interest rate
interest rates needs to be offered to attract households to shift money from
bank savings/FD to corporate bonds.
Yield on G-Sec If G-Sec yield increases, then corporate will have to offer even
higher bond interest rate to attract the investors from G-Sec
investment towards C-Bond investment. (This was primary motive
for Operation Twist)
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 30
12.2.7 🐯📢🗃🧬RBI’s Operation Twist: methodology (2019-Dec)
Since RBI’s existing monetary policy tools had failed to make loans cheaper for corporates
/ boost the economy. So in 2019-Dec, RBI started a “special OMO” wherein:
RBI _ _ _ _→ shorter -term G-Sec (of 1 year & higher tenor) worth ₹10,000 crore
RBI _ _ _ _ → bought longer -term G-Sec (of 10-14 years tenor) worth ₹10,000 crore
(i.e. equal amount as above, so as to keep money supply neutral)
- Since RBI started buying long-term G-Sec, their demand will rise → price will rise →
yield is lowered. The 10YearGSec’s yield lowered from 6.75% to 6.60%
- And we’ve already learned, Corporate bonds are priced (benchmarked) keeping G-sec
yields in mind.
So, Op Twist → Lower G-Sec yield means →
✓ Private companies can borrow money by issuing their (long term) C-Bonds at much
cheaper interest rate than before.
✓ When a private company meets a bank manager to borrow money, it can negotiate the
loan price, “If your bank does not lend me money at this cheaper interest% then I will
issue my own corporate bonds.” → Even the bank lending rates for corporate loans
could be reduced.
✓ Investor of long term G-Sec will feel discouraged to hold the G-Sec till maturity (10-14
years), He will try to sell it to another party/RBI and pull out his money, then he may
park ₹₹ it a Corporate Bond / Bungalow / car / Goa-vacation etc. Thus, it helps boost
the consumption → economy grows.
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 31
the anomaly in the short- and long-term rates ” …. All this is not important for the scope
of competitive exams.
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 32
12.3.1 🙇🏼 Moral Suasion (नैततक दबाव / सलाह) & Publicity (प्रचार)
- Moral suasion meaning applying “Persuasion” without applying punitive measures. RBI
governor tries this tactic via conferences, informal meetings, letters, seminars etc
- Example, RBI-Governor asking banks to transmit repo-rate cuts, open new branches in
rural areas, spread financial literacy, give loans to farmers beyond PSL quota etc.
Similarly, Governor requesting Chief Ministers or Finance Minister to control fiscal
deficit & subsidy leakage to enhance the efficacy of RBI’s monetary policy.
- Publicity: RBI governor could give media statement, speech during university
convocation (दीक्षाांत पदवीदान समारोह ), memorial lectures… “Look I reduced repo rate
but banks are not passing the benefit to customers…and xyz”. By doing so, he can
create an effective public opinion which also pressurizes the banks to stop their
thuggery.
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 33
12.4 🐯📢🌽 PRIORITY SECTOR LENDING (PSL: प्राथममकता क्षेत्र के मलए ऋण मानक)
- 1968: First time RBI used the word “priority sector”: Banks must give 40% of their
loans to 3 priority sectors 1) agriculture 2) small industries 3) exporters by 1985.
- Later, Deposit Insurance and Credit Guarantee Corporation of India (DICGCI) was setup
to facilitate bank lending to the priority sectors. [Will study more about Credit
Guarantee with future handout on Pillar#1D: Financial Inclusion.]
Priority Sector Loans norms updated in 2015 Min.Quota
Weaker Sections (कमजोर वगि): SC, ST, Women, PH, Minorities, Manual __%
scavengers, Artisans, PMJDY Overdrafts upto Rs.10k, NRLM/NULM
beneficiaries (More in Pill#6: HRD →Poverty Removal Schemes)
Agriculture (कृत्ति): (all farmers small and big) 10%
Agriculture: *Marginal Farmer (upto 1ht); *Small farmer (>1 upto 2ht) _%
सीमाांत क्रकसान और छोिे क्रकसान
Micro Enterprises (अनत लघु उद्योग), Khadi-Village industries 7.50%
Above parties, as well as Small & Medium Enterprises, Affordable housing 4.50%
loans to beneficiaries under Pradhan Mantri Awas Yojana, food processing
companies, Vermi compost, biofertilizer, seed production, Exporters,
Student-Education loans (upto Rs.10l), Social Infrastructure (schools,
health care, drinking water, sanitation facilities); Renewable Energy
Projects (wind mills, biomass generators, solar street light, micro-hydel
plants etc.)
Total PSL for SCB and (Foreign Banks with 20 or more branches*). ___
- If foreign bank has less than 20 branches, they’ll also have to give 40% PSL-Quota loans
WEF 31/3/2020, but no internal loan-quotas for weaker section, small farmers, khadi
enterprise etc. for such banks (Afterall, how can they find all such people within 20
branches!)
- If Regional Rural Bank (RRB) or Small Finance Bank (SCB), then above 40% quota +
extra 35% quota (in any PSL-sectors as per given bank’s wish) = _ _ PSL loan-quota.
- PSL quotas are ‘minimum’ and not maximum. So, if bank wishes, it can EVEN give even
30% of its loans to weaker section instead of just RBI mandated 10%.
- PSL applies on Urban Cooperative Banks (UCB) with certain caveats but #PHD-NOT-IMP.
- Bank’s Loans given to Microfinance Agencies for above categories, are also counted in
quota.
- Bank’s Loans given to Non-Banking Financial Company (NBFC) who is lending to
agriculture, housing and Micro-Small enterprises= such ‘indirect loan’ to PSL sectors
will also be counted for bank’s quota.
- Bank + NBFC’s joint lending / co-origination loans to PSL categories are also eligible,
with certain caveats but #PHD-NOT-IMP.
- Micro, Small, Medium Enterprise definition= [Ref Pill 1B-1:Bank Classifn → Mudra]
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 34
- Four kinds of PSLCs traded through RBI’s _ _ _ _ Portal, viz., Agriculture (PSLC-A);
Small and Marginal Farmers (PSLC-SM); Micro Enterprises (PSLC-ME); and General
(PSLC-G).
- PSLC-G (general or overall) is for residual priority sector loans i.e. other than loans to
agriculture and micro enterprises for which separate certificates are available. E.g. if
not given 10% loans to weaker section then Bank could buy this PSLC-G certi for
compliance.
- If an underachiever bank can’t fulfil its PSL-quota through PSL-certificates purchase
then ultimately, it’ll have to deposit PSL-shortfall money to NABARD's Rural
Infrastructure Development Fund (RIDF), SIDBI, or National Housing Bank, MUDRA Ltd.
etc as per the norms decided by RBI from time to time. Under-achiever bank will earn
interest from such deposited money, but it’ll be (usually) linked with Bank-Rate &
their money will be locked-in a long-term project.
** MCQs are usually confined to how can CRR,SLR,Repo & OMO be used
for inflation / deflation control. For rest of the tools you need not
waste time thinking 500-jaat-ke-permutation-combination & PhD.
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 35
a) Market rate of interest is likely to fall.
b) Central Bank is no longer making loans to commercial banks.
c) Central Bank is following an easy money policy.
d) Central Bank is following a tight money policy.
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 36
RBI side (3 members) Govt. Side (3 members)
Their tenure (कायाकाल) tied with their ex-officio job Tenure: 4 years, no re-appointment.
tenure E.g. Shaktikanta’s shakti (powers) will be gone
after his 3-years tenure as RBI-Governor expires, unless
he is reappointed.
RBI Governor & Dy.Gov are selected by Financial Sector They’re selected by Search-cum-
Regulatory Appointment Search Committee (FSRASC) is Selection Committee headed by
headed by Cabinet Secretary (IAS) Cabinet Secretary (IAS)
- Meeting quorum 4 members, incl. Governor. Legally minimum four meetings a year. In
practice, they meet every two months to decide bi-monthly monetary policy updates.
- Repo rate (=Policy rate: मौद्रिक नीनत दर) decided by Majority vote. If tie, then
Governor can vote again for second time as _ _ _ _ vote (ननणाायक मत).
- To ensure transparency / accountability (पारदमशाता / जवाबदे ही): Govt can send message
only in writing. Committee must publish its minutes of the meeting on the 14th day,
and “Monetary policy report” at every 6 months.
- Inflation target decided by Union Government after consulting with RBI Governor.
o Present target: Keep Consumer Price Index (CPI:All India) within 2-6% for _ _ _
_ _ _ (ending at 31/03/2021). [alt. way of saying: 4% +/- spread of 2%]
o Target fail: if inflation not kept in this 2-6% zone for 3 consecutive quarters (=9
months) then Committee must send report to Govt with reasons and remedies.
Asked in UPSC-Pre-2015 Asked in UPSC-Pre-2017
🔠❓ With reference to inflation in India, 🔠❓ Consider following statements
find correct statement: about Monetary Policy Committee:
a) Controlling the inflation in India is the 1. It decides RBI’s benchmark interest
responsibility of the Government of rates.
India only 2. It is a 12-member body including the
b) The Reserve Bank of India has no role Governor of RBI and is reconstituted
in controlling the inflation every year.
c) Decreased money circulation helps in 3. It functions under the chairmanship of
controlling the inflation the Union Finance Minister.
d) Increased money circulation helps in Find Correct Statements:
controlling the inflation (a) 1 only (b) 1 and 2 only
(c) 3 only (d) 2 and 3 only
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 37
Feb- - No change in Repo@6%; Neutral Stance (meaning next time, we may
2018 raise repo, cut repo or keep it unchanged)
- Share market volatility, Advanced Economies recovery= foreign investors'
outflow → weakening of rupee + OPEC-Russia OIL production CUT = crude
oil led inflation.
April- - No change in Repo @6%; Neutral Stance
2018 - Wait and Watch mode because Budget’s pro-farmer-MSP, pro-rural
approach; 7th Pay Commission’s HRA hikes could generate demand-side
inflation.
- IndAS accounting norms for Indian Banks deferred till 1/4/2019
- Payment System data must be stored in India within next 6 months.
- Reiterated that cryptocurrencies / VC are dangerous WRT consumer
protection, market integrity and money laundering. No entity regulated by
RBI shall deal with VC companies, else be ready to “Face Direct Action”.
- RBI’s inter-departmental group to check desirability and feasibility to
introduce a central bank digital currency.
June- - Repo hike 25 bps= @6.25%; Neutral Stance
2018 - There has been a 12% increase in the crude oil price since the April policy.
Crude Oil price rise are 'passed through' because Governments not reducing
custom / excise /state VAT. So, had to fight inflation by raising Repo.
- Will develop a suitable rechargeable device or offline-software/app
mechanism for blind to identify Indian banknotes. → Ultimately in 2020-
Jan, launched _ _ _ _ App developed by _ _ _ _ _ .
Aug- - Rate hike 25 bps= @6.50%; Neutral Stance (meaning next time, either
2018 hold, hike or cut).
- Rupee weakening against dollar, Government’s MSP-hike = more inflation
likely. Had to fight inflation by raising Repo.
- Norms for Co-origination of loans for Bank-NBFC in PSL category.
- MSF-LAF facilities extended to certain cooperative banks.
Oct- - No change in Repo but Stance changed to: Calibrated Tightening
2018 (meaning next time either rate hold or rate hike but no chance of rate
cut)
- RBI still apprehensive of oil prices, rupee strength and inflation, but did not
increase Repo, just wait and watch for now.
Dec- - Urjit’s last policy: No change in Repo; Stance: Calibrated Tightening.
2018 - While Crude oil prices have declined by ~30% since October, so higher
inflation is unlikely. But RBI wants to keep inflation @4 per cent on a
durable basis. So, “calibrated tightening” stance continued.
- Loan rate external benchmarks WEF 1/1/2019.
- RBI to reduce SLR, from 19.5% to 18% at the rate of 25 basis points in each
quarter for BASEL-LCR-HQLA compliance. (More in Pill#1B-2:BASEL)
- Told Banks to keep special facilities for the senior citizen customers since
2017, if not done then be ready for “DIRECT ACTION” via Banking
Ombudsman.
- RBI's own Ombudsman for digital transactions- he'll look into not just banks
but all payment service providers. (Ref: 1A1)
- RBI to setup Ex-SEBI Chairman U K Sinha’s Committee on long-term
solutions for loans to MSME sector. (Ref:4B)
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 38
Feb- - Shakti’s 1st Policy: CPI falling towards 2%, so to prevent deflation, Repo cut
2019 by 25 basis points BPS (6.50% → 6.25%), stance changed to “neutral”.
- Collateral free loans to farmers: limit raised from ₹1l to ₹1.6lakhs
Apr- - Repo cut 25bps (6.25% → 6.00%), stance kept at Neutral.
2019 - Decision not unanimous. Dy. Gov. Viral Acharya fears inflation due to Oil &
El Nino. But, Gov.Shaktikanta Das feels the declined sale of vehicles, air &
sea traffic is pointing to deflationary trend ahead, so rate cut necessary.
- Loan interest rates: External Benchmark mechanism was to be implemented
from 1/4/2019 but decision deferred after bankers’ feedback.
Jun- - Repo Cut 25bps (6.00% → 5.75%), Consequently, the reverse repo rate
2019 @5.50%. MSF and Bank Rate @6%
- Stance: changed from Neutral to accommodative = next time Committee
may decrease the repo rate or keep it unchanged, but, no chances of rate
hike.
- Committee voted unanimously for rate cut because, IMD has predicted 96%
normal monsoon, so high level of food inflation seems unlikely. Fuel prices
rose but overall inflation is offset by falling of other commodities prices.
Thus, CPI inflation remained unchanged at around 3%. Slowdown in trade
and manufacturing due to US-China trade war, and other geopolitical issues.
So cheaper loans required to boost demand and mfg.
measures to promote digital economy
- RBI waives NEFT & RTGS charges. Banks will be required, in turn, to pass
these benefits to their customers.
Aug- - Repo cut _ _ _ (5.75-0.35=5.40); accommodative stance.
2019 - RBI’s _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ (NEFT) will function
24/7 basis on all days, from 2019-December.
- Banks lending to NBFC (who is lending to agro,MSME, housing) will be
counted under Bank’s PSL quota achievement.
- External Loan Benchmark from 1/10/2019.
Oct- - Repo cut 25bps (5.40-0.25=5.15); accommodative stance.
2019 measures to promote digital economy
- We’ll set up an Acceptance Development Fund (ADF: डिक्जिल भुगतान
स्वीकृनत त्तवकास ननचध) as recommended by the _ _ _ _ _ _ _ _ _ _ _
Committee on digital payments.
- We shall identify one district per State/UT, & develop it as 100% digital
payment enabled.
- Large sized Prepaid Payment Instrument (PPI) companies such as Amazon
Pay, Mobikwick etc. will be required to setup Internal Ombudsman (आांतररक
मशकायत ननवारण अचधकारी) to reduce workload of RBI’s digital ombudsman.
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 39
Dec- - No changes in Repo Rate or Stance. (_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ stance)
2019 - heavy unseasonal rains → onions & other vegetables supply disrupted →
price rise.
- Pulses’ area under cultivation is declining → supply declining → price rise.
- Milk became more expensive due to rise in fodder prices.
- 13 states’ Electricity distribution companies (DISCOMs) have increased
Electricity prices.
- So, if repo reduced → inflation problem may worsen.
- At the same time, the economy is facing slowdown, sales are down so, if
repo increased → slowdown may worsen. So, the MPC Committee
unanimously decided to keep repo unchanged.
- Regulatory updates related: Urban Co-operative Banks (UCB), Small Finance
Banks, Semi-closed PPI etc in respective pillars.
Feb- - No changes in Repo Rate or Stance because of reasons similar to Dec-2019.
2020 - CPI Inflation rose to 7.4% in december-2019 (which is outside the statutory
limit of 2-6%) & this inflation rate is highest since 2014-July. So, ideally, RBI
should have increased repo rate to combat inflation but
o 1) December-2019 policy had kept Accommodative stance = repo
couldn’t be increased. It could only be kept same/reduced.
o 2) Union Budget-2020 announced various measures to boost
economic growth so Committee preferred to wait & watch how those
measures impact inflation and growth, before changing repo rate.
RBI announces Measures to promote economic growth::
1. LTRO:_ _ _ _ _ _ _ _ _ _
2. _ _ _ _ Exemption based on (new) loans given for 1) automobiles, 2)
residential housing and 3) MSMEs
RBI announces measures to promote digital economy
1. Regional Rural Banks (RRBs) will be allowed to operate as ‘merchant
Acquiring Banks’ (Ref: 1A).
2. RBI to construct a “Digital Payments Index” (DPI) to capture the growth of
digital payments across India.
Apr- <In April new financial year starts, so more announcements may be there, so more space given>
2020
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 40
Jun-
2020
Aug-
2020
The Reserve Bank of India’s recent directives relating to ‘Storage of Payment System
Data’, popularly known as data diktat command the payment system providers that :
1) They shall ensure that entire data relating to payment systems operated by them are
stored in a system only in India.
2) They shall ensure that the systems are owned and operated by public sector
enterprises.
3) They shall submit the consolidated system audit report to the comptroller and Auditor
General of India by the end of the calendar year.
Find Correct Statement(s): codes: (a) 1 only (b)1 and 2 only (c) 3 only (d) 1,2 and 3 only
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 41
- Guidelines for Foreign Exchange Trading Platform for Retail Participants developed by
Clearing Corporation of India.
- Will setup new committees to review regulatory guidelines for systemically important
Core Investment Companies (CICs).
- Technical guidelines for retail investors to participate in State G-Sec auctions.
- Basel-III standards- Leverage Ratio guidelines: 4% for Domestic Systemically Important
Banks (DSIBs) and 3.5% for other banks.
- Will implement recommendations of Usha Thorat Task Force on Offshore Rupee
Markets.
- Updated norms for non-interest-bearing Special Non-resident Rupee (SNRR) Account.
12.8.2 🔪🤲🏻🏠🛵 Bank’s loan interest rate: External Benchmark (बाहर बेंचमाकि,2019)
MCLR’s #EPICFAIL ultimately forced RBI to order following from 1st October 2019.
1. Banks must link their loan interest rates with “_ _ _ _ _ _ _ _ _ Benchmark + Spread +
Risk premium” system.
2. Individual bank free to pick any one External Benchmark such as
1) RBI repo rate or
2) _ _ _ _ _ _T-bill yield or
3) _ _ _ _ _ _T-bill yield or
4) any other benchmarks by Financial Benchmarks India Ltd.
3. Banks must feed the latest data of external benchmark in above formula, atleast once
every three months.
4. Benefits? Same benefits which MCLR couldn’t fully deliver.
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 42
5. It’s applicable to the new loans given to
1) personal loans (taken for any sudden emergency expenditure)
2) retails loans (home, vehicle, electronics etc)
3) Loans to micro & small enterprises
4) Loans medium enterprises (this 4th category is to be added from 1/April/2020).
ES20: The growth of credit to Micro, Small and Medium Enterprises and Textiles has
been negative in 2019. (In other words, banks have loaned less amount of money to them
compared to the previous year). Only in personal loans, there has been a slight growth.
Related topic: Fixed vs Floating interest loans. Ref Pillar1B-2: burning issues → NPA
(Batch:CSP20) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 43