RBI Current Affairs

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RBI eases trade credit rules to raise funds from overseas

The Reserve Bank of India eased trade credit norms to raise funds from abroad. As per RBI’s notification, all types of firms can avail trade credit facility now from overseas for import of capital goods. The relaxations in norms allow companies in all sectors to avail trade credit not exceeding $ 20 million up to a maximum period of 5 years for import of capital goods as classified by the Director General of Foreign Trade (DGFT).

Previously, only companies in the infrastructure sector were permitted to raise such trade credits.

However, Banks are not permitted to issue Letters of Credit/guarantees/Letter of Undertaking (LoU) /Letter of Comfort (LoC) in favor of overseas supplier, bank and financial institution for the extended period beyond 3 years.

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RBI directs Banks to end zero interest EMI schemes

In a major blow to the banks and merchant establishments, the Reserve Bank of India has instructed banks to stop offering zero interest EMI (Equated Monthly Installment) schemes for the purchase of consumer goods in a bid to discourage them from offering such schemes or products.

RBI has asked banks to offer uniform interest rates and processing fee on EMI-based credit card schemes for retail products. The RBI also directed banks to terminate their relationships with merchant establishments which levied a fee on customers who make payments for goods and services through debit cards.

Why RBI has instructed banks against offering zero interest EMI schemes?

As per RBI, the very concept of zero per cent interest is non-existent and is only used by banks and others as a camouflage to lure and exploit gullible customers and it is passed on to the customer as processing fee by banks offering zero per cent EMI schemes on credit card outstanding for purchasing retail products. RBI wants banks to follow fair practice which, according to the central bank,  demands the processing charge and RoI (Rate of Interest) charged be kept uniform, product and segment-wise, irrespective of the sourcing channel.

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RBI will use OMOs to ensure liquidity

Giving assurance to the markets, the Reserve Bank of India said that it will take actions, including Open Market Operations (OMOs), to ensure adequate liquidity in the system. The central bank’s assurance follows hardening of yields on government securities after governor Raghuram Rajan raised the repo rate by 25 basis points to 7.50%.

Why there is hardening in yield on government securities/bonds?

The hardening of yields in the government securities market is due to uncertainties around the government borrowing programme for the second half of 2013-14 as well as the prospective effects of banks’ half-yearly account closure, the seasonal pick-up in credit demand, festival-related demand and sluggish deposit growth. There is sudden spike in the yield on the 10-year benchmark government bond which is making the RBI uncomfortable. 

What are Open Market Operations (OMOs)?

Open Market Operations (OMOs) refers to the purchase and sale of the Government securities by the Reserve bank of India from / to public on its account. But in India, as of now the market for government securities is not well developed, still OMO plays very important role.

Here is how OMO works:

  • When RBI sells government security in the markets, the banks purchase them.
  • When the banks purchase Government securities, they have a reduced ability to lend to the industrial houses or other commercial sectors.
  • This reduced surplus cash, contracts the Credit supply.
  • When RBI purchases the securities, the commercial banks find them with more surplus cash and this would create more credit in the system.

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