RBI released its first bimonthly monetary policy

The RBI, in its first bimonthly monetary policy statement kept the key policy rate (repo) unchanged but introduced steps to increase liquidity and contain volatility in the money market. On liquidity moves, Rajan said the primary objective is to improve transmission of policy impulses across the interest spectrum and improve liquidity in the system.

The highlights of RBI monetary policy review are:

* Repo rate unchanged at 8.0% 
* CRR unchanged at 4.0% 
* Increase the liquidity provided under 7-day and 14-day term repos from 0.5% of NDTL to 0.75% 
* Reduce liquidity provided under overnight repos under the LAF from 0.5% of bank-wise NDTL to 0.25% with immediate effect.

POLICY STANCE AND RATIONALE

* There are risks to the central forecast of 8% CPI inflation by January 2015 
* Policy stance will be firmly focused on keeping the economy on a disinflationary glide path that is intended to hit 8% CPI inflation by January 2015 and 6% by January 2016. 
* GDP growth is projected to pick up from a little below 5% in 2013-14 to a range of 5 to 6% in 2014-15 albeit with downside risks to the central estimate of 5.5% 
* Lead indicators do not point to any sustained revival in industry and services as yet, and the outlook for the agricultural sector is contingent upon the timely arrival and spread of the monsoon. 

ASSESSMENT 

* Global growth is likely to strengthen in the rest of the year, with risks tilted to the downside. 
* Domestically, real GDP growth continued to be modest in Q3 of 2013-14 
* In the quarters ahead, the boost provided by robust agricultural production in 2013 may wane. Moreover, the outlook for the 2014 south-west monsoon appears uncertain. 
* Sluggishness in industrial activity, exports and several categories of services underlines the need to revitalize productivity and competitiveness. 
* Excluding food and fuel, however, retail inflation remained sticky at around 8%. This suggests that some demand pressures are still at play. 
* For the year as a whole, the CAD is expected to be about 2.0% of GDP. 
* Inflows, augmented by repayments by public sector oil marketing companies of their foreign currency obligations to the Reserve Bank during March, have led to an increase in reserves. 
* The second bi-monthly monetary policy statement is scheduled on Tuesday, June 3, 2014.

DEVELOPMENTAL AND REGULATORY POLICIES 

In October 2013, the RBI set out a five-pillar framework to guide its developmental and regulatory measures

I. MONETARY POLICY FRAMEWORK 

* Noteworthy progress has been made in implementing measures within monetary policy framework.

II. Banking structure 

* RBI will announce in-principle approval for new licenses after consulting with the Election Commission. 
* RBI will also start working on the framework for on-tap licensing as well as differentiated bank licenses. It will also be open to banking mergers, provided competition and stability are not compromised. 
* Draft framework for dealing with domestic systemically important banks (D-SIBs) is proposed to be issued by end-May 2014. 
* To issue guidelines relating to Basel III Liquidity Coverage Ratio and Liquidity Risk Monitoring tools by end-May 2014.

III. FINANCIAL MARKETS 

* To issue guidelines that would allow banks to offer partial credit enhancements to corporate bonds.
* Proposes to introduce a market making scheme for primary dealers (PDs) by allocating specific securities to PDs and ensuring continuous availability of prices, with a suitable framework for assessing the performance of PDs. 
* Banks and PDs are being advised to strengthen their governance frameworks on benchmark submissions, subject to the supervisory review of the Reserve Bank. 
* RBI will continue to work to ease entry while reducing risk to foreign investors from the volatility of flows. 
* Modalities for allowing FIIs to hedge their currency risk by using exchange traded currency futures in the domestic exchanges are being finalized in consultation with the SEBI. In order to enhance hedging facilities for foreign investors in debt instruments, it is proposed to allow them to hedge the coupon receipts falling due during the next 12 months. 
* Proposed to allow all resident individuals, firms and companies with actual foreign exchange exposures to book foreign exchange derivative contracts up to US$ 250,000 on declaration, subject to certain conditions. 
* Proposes to simplify the know-your-customer (KYC) procedures for opening bank accounts by foreign portfolio investor.

IV. FINANCIAL INCLUSION 

* To overcome the challenge of cash management of Business Correspondents (BC), which is impeding the scaling up of the BC model, the Reserve Bank will collate best practices and issue a fresh set of guidelines to commercial banks. 
* Banks are encouraged to undertake a review of their loan policy governing extension of credit facilities to the MSE sector 
* Proposes to frame comprehensive consumer protection regulations based on domestic experience and global best practices.

V. Improving system's ability to deal with corporate distress and financial institution distress 

* An overhaul of the extant regulatory framework for non-banking financial companies (NBFCs) is underway to align it with several important developments, which have taken place in the financial sector.