Never reset the repurchase and reverse repurchase

Never before, the country’s monetary policy was made against a peculiar backdrop that prevailed at the time of its formulation.

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(i) Inflation is at a low level

(ii) Foreign exchange reserves of the country are an all time record,

(iii) The rupee is relatively stable and

(iv) The industrial output is distinctly on the rise.

Main Features:

1. Introductions of Full Fledged Liquidity Adjustment Facility (LAF):

The full fledged liquidity adjustment policy will be introduced.

It means that for orderly movement of interest rates in the inter-bank call money market, the Reserve Bank’s support to the market should be through liquidity adjustment facility. Under this facility the Reserve bank would periodically reset the repurchase and reverse repurchase rates of its securities. This facility will be fully introduced in three stages.

2. Development of Financial Markets:

The following measures have been announced for the development of money market and market for Government securities:

(i) Minimum daily requirement of cash reserve ratio balances (CRR) is reduced from 85 percent to 65 percent.

(ii) Minimum maturity of certificates of deposits is reduced to 15 days. The Reserve Bank of India will also repurchase the securities of the State Governments.

(iii) The bank rate is reduced to 7 percent.

(iv) The CRR is reduced to 8 percent.

3. Bank’s Entry into Insurance Business:

Detailed guidelines to banks for entry into insurance business are issued. Banks will be required to obtain prior approval of RBI for entering into insurance area. Banks having minimum net worth of Rs. 500 crore and satisfying other criteria in regard to capital adequacy, profitability, etc. will be allowed to undertake insurance business through joint venture on risk participation basis.

4. Interest Rate Policy:

In the new monetary policy the interest rate policies of the banks have been made more flexible. Banks would have the freedom to offer all loans on fixed or floating rates.

5. Liberalisation of Export Credit Refinance Facilities:

Export credit refinancing facility has been liberalised. The maximum limit of the refinancing has been enhanced from Rs. 25 crore to Rs. 50 crore.

6. Gold Deposit Schemes:

Banks are being permitted to deploy the gold mobilised under the gold deposit scheme by lending it to other nominated banks.

7. Easing the procedure for Financial Institutions to Mobilise the Resources:

The procedure for financial institutions to mobilise the resources has been made more simple. These institutions are given flexibility in the matter of fixing interest rate on term deposits without reference to State Bank of India rates. It has also been decided to simplify the guidelines to financial institutions for raising resources by issuing bonds and other credit instruments.

8. Prudential Measures:

The new monetary policy lays down that more prudential measures will be adopted for supervision and control of the banks. To achieve this objective the following measures will be adopted.

(i) The risk management system adopted by the banks should be made more efficient.

(ii) More transparent policy for advances against shares would be adopted.

(iii) The rules related to capital adequacy ratio should be strengthen.

(iv) The method of Risk Based Supervision of Banks would be adopted. The Reserve Bank would be engaging services of reputed international consultants to draw on other countries experiences in this regard.

(v) Banks will have to more aggressively pursue the recourse to Debt Recovery Tribunals (DRTs) as well as compromise settlement through the Settlement Advisory Committee (SACs). For the recovery of Non-Performing Assets (NPA).

9. Credit Delivery Mechanism:

Banks should improve credit Delivery Mechanism to various sectors like agriculture and small industries. The following measures will be undertaken in this respect.

(a) The short term loans advanced in drought affected areas would be converted into medium term loans.

(b) To promote credit flow to small borrowers, the composite loan limit is being increased from Rs. 5 lakh to Rs. 10 lakh for tiny industries.

(c) The Public Sector Banks would establish at least one specialised small scale industries branch in every district.

10. Universal Banking: The new monitory policy regards the principle of universal banking as a desirable goal. Universal Banking is a system in which financial institutions get themselves converted into a bank. But to establish a universal bank the supervision and prudential measures of the banks are to be liberalised. The financial institutions that seek to be convert itself into a universal bank should seek the prior approval of the Reserve Bank.

11. Technological Upgradation:

The technological upgradation of the banks should be accelerated. The spread and coverage of the Indian Financial Network – INF1NET will soon be extended to cover all the hundred odd commercially important centres in the country. The scope of computerisation of the banking sector will be extended.

In short, we can conclude with Shri G. Srinivasan, ‘The new monetary policy is related to broadening of money market, keeping up of supervision, improving credit delivery system and fostering institutional infrastructure.’