In the first bi-monthly Monetary Policy Statement of 2016-17 announced in March 2016 by the Reserve Bank of India, there was a small reduction in the repo rate, against the market’s expectation of a higher cut. “On the basis of an assessment of the current and evolving macro economic situation,” the statement noted, “it has been decided to reduce the policy repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points, from 6.75 per cent to 6.5 per cent.”
Its impact on the stock market was drastic, resulting in the banks’ shares bleeding. The Bank Nifty, is reported to have fallen by 3.06 per cent and the Nifty PSU Bank Index plummeted 5.13 per cent. For improving the liquidity in the banking system, the minimum daily maintenance of the Cash Reserve Ratio (CRR) was reduced from 95 per cent to 90 per cent with effect from the fortnight beginning 16 April 2016. The CRR has been kept unchanged at 4.0 per cent of net demand and time liabilities. The reverse repo rate under the LAF has been adjusted to 6.0 per cent and the marginal standing facility (MSF) rate to 7.0 per cent. The Bank Rate remains at 7.0 per cent aligned to the MSF rate.
Concern about Inflation
The concern about the inflation is specifically expressed in the Policy Statement: “inflation stayed elevated and persistent at or above 5 per cent, indicating a possible resistance level for further downward movements in the headline. The stubborn underlying inflation momentum is unlikely to be helped by the Seventh Pay Commission award and the effects of the one-rank-one-pension (OROP) award, or by the cost-push effect of the increase in the service tax rate. However, rural wage growth as well as the rate of increase in corporate staff costs were moderate.”
Inflation measured in terms of the Consumer Price Index is estimated to be around 5 per cent during 2016-17.
Surge in the total cash in circulation of Rs 60,000 crore is a cause for concern, while the rate of growth of bank deposits has fallen to 9.9 per cent, one of the lowest in recent years. This could be a short-term phenomenon as the state elections are round the corner, it is presumed. With the cost of borrowing coming down, there could be an upward movement in the demand for bank credit. Since the RBI is insisting that the benefit of a reduction in the interest rate should be passed on to borrowers, it may affect banks’ net interest margin, though marginally. This may add to the bankers’ worries of reporting a dent on their interest income, specially when they are required to make larger provisions for the NPAs in FY 2016-17.
Rationalisation of branch authorisation policy
A reference has been made in the policy statement about the necessity of rationalising the branch licensing policy.
In the policy statement it was announced: “with a view to facilitating financial inclusion and providing flexibility on the choice of delivery channel, it is proposed to redefine branches and permissible methods of outreach, keeping in mind the various attributes of the banks and the types of services that are sought to be provided.” All the bank branches having migrated into Core Banking Solutions mode, IT is being effectively used to make the delivery channels user-friendly. What more flexibilities are contemplated are not specified.
Strengthening business correspondent infrastructure
Banks have been given a mandate to reach out to the unreached by adopting the branchless banking model in villages. For reaching out to the unreached, one of the cost-effective schemes introduced by banks under this model is the appointment of Business Correspondents(BC). According to the RBI’s Annual Report of 2014-15, the number of banking outlets in villages under the branchless mode is 504,142 as on March 2015. Since the banks have adopted this mode on an experimental basis, the business correspondents were not properly trained. With the increase in their number, there is a need for streamlining their functions and orientation. The Reserve Bank of India has now proposed to create an online registry covering all BCs to capture basic details including location of fixed point BCs and nature of operations. Reserve Bank would be issuing necessary framework by the end of June 2016.