RBI : Annual Monetary Policy 2010-11

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.

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.

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.

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.

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:

1. Anchor inflation expectations, while being prepared to respond appropriately, swiftly and effectively to further build-up of inflationary pressures.
2. 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.
3. 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)