Current Affairs – June, 2018

Latest Current Affairs June, 2018 with Current Affairs, news summary on current events of National and International importance of June, 2018 for Banking, SSC, CLAT, UPSC, State PCS, IBPS, Railways and other Competitive Examinations.

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RBI’s Monetary Policy Review: RBI Hikes Repo Rate to 6.25%

On June 6, 2018, the six members Monetary Policy Committee (MPC) of RBI has decided to hike Repo (short term lending rate) to 6.25% from 6.00%. As per the second Bi-monthly Monetary Policy Statement, the current policy rates of RBI would be as follows:

  • Repo Rate: 6.25%
  • Reverse Repo Rate: 6.00%
  • Marginal Standing Facility (MSF) Rate: 6.50%

The recent rise of 25 basis points in key policy rates is for the first time in four and half years since NDA government was formed in May, 2014.

Repo Rate

Repo rate, or repurchase rate, is the rate at which RBI lends to banks for short periods. This is done by RBI buying government bonds from banks with an agreement to sell them back at a fixed rate. When RBI increases Repo Rate, the banks can borrow less at a lower cost and thus need to lend at higher rates. This contributes to hike of the interest rates in markets. When RBI increases the repo rate, the move is generally called a tight monetary policy stance.

Reverse Repo Rate

Reverse repo rate is the rate of interest at which the RBI borrows funds from other banks in the short term. This is done by RBI selling government bonds / securities to banks with the commitment to buy them back at a future date. The banks use the reverse repo facility to deposit their short-term excess funds with the RBI and earn interest on it. RBI can reduce liquidity in the banking system by increasing the rate at which it borrows from banks. Hiking the repo and reverse repo rate ends up reducing the liquidity and pushes up interest rates.

When the RBI increases the Reverse Repo, it means that now the RBI will provide extra interest on the money which it borrows from the banks. An increase in reverse repo rate means that banks earn higher returns by lending to RBI. This indicates a hike in the deposit rates.

Marginal Standing Facility

Marginal Standing Facility is a new Liquidity Adjustment Facility (LAF) window created by Reserve Bank of India in 2011.  MSF is the rate at which the banks are able to borrow overnight funds from RBI against the approved government securities. The rate of interest on MSF is above 100 bps above the Repo Rate.  The banks can borrow up to 1 percent of their net demand and time liabilities (NDTL) from this facility.

Rs. 8500 Crore Bailout Package for Sugar Industry Approved

The Union Cabinet chaired by Prime Minister has approved a Rs. 8500 Crore bailout package for the distressed sugar industry in the country.

Background

India is world’s second largest sugar producer after Brazil with production of around 20-25 million tonnes of sugar every year. The sugar production was 25.13 million tonnes in 2015-16 sugar season (sugar season ~ October to September); 20.2 million tonnes in 2016-17, 25 million tonnes in 2017-18 and is expected to be around 30 million tonnes in 2018-19. Currently, UP is India’s foremost sugar producing state and it is likely to maintain this position for the next two years. Maharashtra is on number 2 in production of both sugarcane as well as sugar.

The bumper harvest of sugarcane has created problem of plenty for already troubled cane farmers, sugar mills as well as governments at centre and state. The sugar mills need to buy cane from farmers at state advised price (SAP) but have to sell their produce at either marginal cost above production or in loss. Thus, higher price purchase of sugarcane but low price sale of sugar in open market creates stress on sugar mills and they are unable to make payments to farmers. This leads to accumulation of arrears.

Government Efforts

Though government decontrolled sugar industry partially in 2013 and allowed them to sell their produce in open market, the sugar industry faces a bizarre problem that price of its raw material (cane) is fixed by state and central governments as State Advised Price (SAP) and Fair and Remunerative Price (FRP) respectively. The government supported cane prices are attractive to farmers, but loss due to any fall in the prices of sugar in open market has to be borne by the sugar industry. Further, absence of infrastructure for ethanol production makes sure that the surplus production of sugarcane is not optimally absorbed.

Current Package

This package announced on June 6, 2018 includes Rs. 4500 crore soft loan for building ethanol production capacity and Rs. 1540-crore production-linked direct payments to cane farmers by sugar mills. Further, government has also hiked import duty on sugar to curb the problem of plenty. Government has also decided to create some kind of stock of sugar.

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