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Highlights of RBI’s 1st bi-monthly monetary policy of 2022-23; India’s GDP Projected at 7.2% in FY23 

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Highlights of RBI's 1st bi-monthly monetary policy of 2022-23The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) met on April 6-8, 2022 , and release the RBI’s first monetary policy of FY23 which projected India’s gross domestic Product (GDP) growth at 7.2% for the FY23 from 7.8% estimated earlier, with FY23’s Q1 at 16.2%; Q2 at 6.2%; Q3 at 4.1%; and Q4 at 4%. The growth-oriented accommodative stance was also retained.

  • This projection is based on an assumption of crude oil (Indian basket) at $100 per barrel during FY23 and supply chain disruptions due to the ongoing Russia-Ukraine war.
  • RBI has also hiked its Consumer Price Index (CPI) based inflation forecast for FY23 to 5.7% from its earlier projection of 4.5%. It is projected to remain at 6.3% in Q1; 5.8% in Q2; 5.4% in Q3 and 5.1% in Q4.
  • India’s foreign exchange reserves increased by US$ 30.3 billion to US$ 607.3 billion in 2021-22.

The MPC kept the interest rates unchanged for the 11th consecutive time which are as follows:

In the table representation of policy rates, Reserve Ratios of Cash Reserve Ratio (CRR) 4.00% and Statutory Liquidity Ratio (SLR) 18.00% were missing.

Policy Repo Rate4%
Reverse Repo Rate3.35%
Marginal Standing Facility (MSF) Rate4.25%
Bank Rate4.25%

Members of MPC:

Dr. Shashanka Bhide; Dr. Ashima Goyal; Prof. Jayanth R. Varma; Dr. Mridul K. Saggar; Dr. Michael Debabrata Patra; and headed by Shaktikanta Das (RBI Governor).

RBI introduces SDF as the floor to absorb Excess Funds

The RBI has introduced a standing deposit facility (SDF) as an additional tool for absorbing liquidity without any collateral, at an interest rate of 3.75%. The main purpose of SDF is to reduce the excess liquidity of Rs 8.5 lakh crore in the system, and control inflation.

  • It will be available on all days of the week, throughout the year.

Key Points:

i.The introduction of a standing deposit facility (SDF) that was recommended by the Urjit Patel committee in 2014 and enabled through an amendment to the Reserve Bank of India Act in the Finance Bill of 2018.

  • In 2018, the amended Section 17 of the RBI Act empowered the Reserve Bank to introduce the SDF.

ii.The SDF will replace the Fixed Rate Reverse Repo (FRRR) as the floor of the LAF corridor.

iii.FRRR rate which is retained at 3.35% will remain part of the RBI’s toolkit. 

iv.SDF will narrow the liquidity adjustment facility (LAF) to 0.50% from the 0.90%.

v.SDF will remain 0.25% below the repo rate and 0.5% lower than the marginal standing facility (MSF) which helps the banks with funds when required.

Restoration of the Symmetric LAF Corridor

The RBI has restored the LAF corridor to a symmetrical 50 basis points, the position that prevailed before the pandemic. It is done by establishing SDF at 3.75% and MSF at 4.25% . 

  • LAF, also known as the liquidity corridor, essentially indicates the difference between the repo rate and the reverse repo rate.
  • It was introduced in 2000 on the recommendations of Narasimham Committee Report on Banking Reforms.

RBI extends rationalization of risk weight till March next

RBI has proposed to extend the rationalised home loan norms by another year till March 31, 2023. This move will benefit borrowers, and will facilitate higher credit flow for individual housing loans.

Key Points:

i.On October 12, 2020, RBI rationalized the risk weights on individual housing loans by linking them (Loan-to-Value) ratios for all new housing loans sanctioned up to March 31, 2022.

  • Such loans will continue to attract a risk weight of 35% where LTV is less than or equal to 80%, and a risk weight of 50% where LTV is more than 80% but less than or equal to 90%.

ii.The requirement of standard asset provision of 0.25% will also continue to apply to all such loans.

iii.Notably in 2021-22, the growth in housing finance sector raised around 8-10%. 

RBI Increased Limites under HTM of NDTL in SLR Holdings

i.RBI had increased the limits under the held to Maturity(HTM) category from 19.5% to 22% of NDTL(Net Demand and Time Liabilites) of Satutory Liquidity Rate(SLR) eligible securities that are acquired from 1st September 2020 to 31st March 2022.

ii.This particular increase in the HTM limit will be available upto 31st March 2023.

iii.To enable banks to better manage their investment portfolio in FY23, RBI has enhanced the limit of inclusion of SLR eligible securities in the HTM category to 23% of NDTL for securities that are acquired between 1st April 2022 to 31st March 2023(i.e.) FY23.

iv.Even though RBI has currently increased the HTM limits, it also plans to restore the limit to 19.5% from 23% (current) in a phased manner by reducing the limits gradually (i.e.) intends to make the limit to be within
22% as of 30th June 2023,
21% as of 30th September 2023;
20% as of 31st December 2023 and
19.5% as of 31st March 2024.

Discussion Paper on Climate Risk and Sustainable Finance

To facilitate better understanding and assessment of the climate-related financial risks by Regulated Entities (REs), a Discussion Paper on Climate Risk and Sustainable Finance will be published shortly for feedback by RBI.

Need behind this:

Climate change may impact the safety and soundness of individual REs as well as financial stability. Thus, there is a need for REs to develop and implement a process to assess the potential impact of climate-related financial risks in their business strategy and operations.

RBI to set up committee to review customer service standards at banks, NBFCs, payment operators

RBI also proposed to set up a committee to review the customer services offered by RBI-regulated entities such as banks, NBFC (Non-Banking Financial Company) and payment service operators.

  • This proposal is on the lines of RBI’s efforts for strengthening the internal grievance redressal mechanism, internal ombudsman and sectoral ombudsman.
  • This committee will assess the prevailing level of customer service and will suggest measures to improve them.

Point to be noted:

The important committees set up by RBI on customer service over the years include (i) Talwar Committee on Customer Service (1975), (ii) Goiporia Committee (1990), (iii) Tarapore Committee on Procedures and Performance Audit on Public Services (CPPAPS, 2004) and (iv) Damodaran Committee on Customer Service (2010).

RBI Introduces Card-Less Cash Withdrawal Facility Using UPI across All ATMs

RBI proposed to allow interoperability in cardless cash withdrawal transactions at all banks and ATMs (Automated Teller Machines) using the UPI (Unified Payments Interface) facility. At present, the facility of cardless cash withdrawal through ATMs is limited only to a few banks on an on-us basis (for their customers at their own ATMs).

  • This proposal will enhance the ease of transactions, and also reduce fraud such as card skimming, card cloning etc
  • Separate instructions for the same will be issued to National Payments Corporation of India (NPCI), ATM networks and banks shortly by RBI.

Points to be noted:

i.In April 2021, NCR Corporation launched the first interoperable cardless cash-withdrawal (ICCW) solution based on the UPI platform.

ii.UPI clocked 5.04 Bn transactions in March 2022.

RBI to issue cyber resiliency guidelines for Payment system Operators

RBI will shortly release directions on cyber resilience and payment security controls for Payment System Operators. These directions include robust governance mechanisms for identification, assessment, monitoring and management of cybersecurity risks.

  • It will also include information security risks and vulnerabilities and specify baseline security measures for ensuring safe and secure digital payment transactions. 

RBI to lower net worth requirement for operating units to Rs 25 crore

 Bharat Bill Payment System (BBPS), an interoperable platform for bill payments, has seen an increase in the volume of bill payments and billers over the years. To further facilitate greater penetration of bill payments through the BBPS and to encourage participation of a greater number of non-bank Bharat Bill Payment Operating Units in the BBPS, it is proposed to reduce the net worth requirement of such entities from Rs 100 crore to Rs 25 crore.

The next bi-monthly monetary policy of 2022-23 will be organized during June 6-8, where the bank will decide its monetary policy further.

Recent Related News:

i.In exercise of the powers conferred by sub-section (1) read with clauses (b) to (f) of subsection (2) of Section 38 of the Payment and Settlement Systems Act, 2007 (51 of 2007), the Reserve Bank of India (RBI) updated the Payment and Settlement Systems Regulations, 2008.

ii.On March 3, 2022, the Reserve Bank of India (RBI) has exempted the investments made in Umbrella Organization (UO) by Primary (Urban) Co-operative Banks (UCBs) from non-Statutory Liquidity Ratio (non-SLR) holding limits prescribed in Paragraphs 2(i) and 2(iii)(b) of the RBI’s circular ‘Investments in Non-SLR securities by Primary (Urban) Co-operative Banks‘ dated 30th January, 2009.

About Reserve Bank of India (RBI):

i.The Reserve Bank of India was established on April 1, 1935, in accordance with the provisions of the Reserve Bank of India Act, 1934.

ii.The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937.

iii.Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.