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Stance remains accommodative to promote growth while ensuring inflation remains within the +/-2% band of the CPI target of 4%.
Cut in Repo not transmitted in Lending rate
Surge in CPI
Although headline inflation has surged beyond the band (given the sharp spike in onion prices), it is expected to temper over the next few weeks considering the softening of onion prices given improved availability. However, going forward, inflation needs to be closely tracked given the cost push impact of
* upward revision in mobile pricing,
* revised pharmaceutical & drug prices, and
* new emission norms
Future monetary policy has scope for substantial action given the weak economy (despite improvement shown by high frequency indicators) and potential for rising inflation. The Monetary Policy has also put in place several developmental and regulatory policies to
* Kick start growth
* Reinforce monetary transmission
* Broaden & deepen financial markets, and
* Improve payments and settlements
Key measures undertaken are enumerated below:
Liquidity Management, Monetary Transmission & Credit Flows
* Elaborate Revised Liquidity Management Framework
* From February 15, 2020, 1 year & 3 year Long Term Repo Operations (LTROs) amounting to a total of INR 1,00,000 cr for improving monetary transmission at a reasonable cost are to be undertaken. This is being done to assure the banking system of a durable liquidity environment.
Incentivizing Bank Credit to productive sectors that have a multiplier effect on the economy.
Banks’ incremental retail loans from the end of January 30, 2020 extended to the automobile, residential housing and MSME sectors till July 31, 2020 to be exempt from computation for maintenance of CRR. This facility is expected to provide a short-term stimulus to the above-mentioned sectors and the economy at large since these have multiplier effects.
Banks, automobile & manufacturing sector are expected beneficiaries.
Lending to Medium sized Enterprises to be linked to external benchmarks effective April 1, 2020 in line with the MSME. This is expected to drive monetary transmission significantly given the positive impact of the same on the MSME segment
Extension of One Time Restructuring of MSME advances to December 31, 2020 to significantly benefit the MSMEs which have become stresses (but still remain standard).
Extension of date of commencement of commercial operations of commercial real estate projects (DCCO) which have been delayed due to reasons beyond the control of promoters will enable maintenance of status of these advances without downgrades.
RRBs to benefit as they are allowed to act as merchant acquiring banks. Financial Market regulations
* All Interest Rate Derivative (IRD) market makers to recognize all transactions undertaken, whether or not they are back to back, in their India books.
* Improvements in Margin requirements of OTC Derivatives has been proposed through legislation with respect to netting of financial transactions in the Union Budget. In response, directions for Variation margin (VM) will be issued by March 2020 and for Initial Margin (IM) by June 2020.
* Inter-operability of Depositories for G-Secs is to be made operational by July 2020
Digital Payments Index to be launched from July 2020 onwards to capture the extent of digitization of payments effectively
RBI to put in place a framework for establishing an SRO (Self-Regulatory Organization) for Digital Payments eco-system with a view to fostering best practices on (a) security, (b) customer protection & (c) pricing, among others. The SRO will serve as a 2-way communication channel between players and the regulator
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