CRR Current Affairs - 2019

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RBI Monetary Policy review: Repo rate lowest since 2010

The Reserve bank of India (RBI) in its bi-monthly monetary policy review reduced repo rate by 25 basis points to 5.75% from current 6.0% with immediate effect. This is RBI’s third cut this year and has reduced Repo rate at lowest since 2010.

Key Highlights

  • With Repo Rate adjusted to 5.75%, consequently Reverse Repo Rate under Liquid Adjustment Facility (LAF) stands adjusted to 5.5% and Marginal Standing Facility (MSF) rate and the Bank Rate to 6.0%.
  • Other revised Rates- Cash reserve ratio (CRR) unchanged at 4%; Retail inflation forecast raised marginally to 3% -3.1% for first half (H1) of 2019-20) and 3.4% -3.7% for second half (H2).
  • GDP Growth Rate: RBI lowered Gross Domestic Product (GDP) growth forecast for financial year 2019-20 to 7% from 7.2% in April Monetary Policy. This is in range of 6.4% to 6.7% for first half (H1) of 2019-20 and 7.2-7.5% for second half (H2) with risks evenly balanced. This lowered forecast was taking into account current weak global demand due to escalation in trade wars and weakened private consumption in rural areas.
  • The six member Monetary Policy Committee (MPC) headed by RBI Governor Shaktikanta Das unanimously decided to reduce policy repo rate and to change stance of monetary policy from neutral to accommodative.
  • MPC Composition: The MPC comprise of Shaktikanta Das, as its Chairman and members including Chetan Ghate, Pami Dua, Ravindra Dholakia, Michael Debabrata Patra, Viral Acharya. The next MPC meeting is scheduled from 5 to 7 August 2019.
  • In an attempt of boosting digital transactions, RBI decided to do away with charges levied on RTGS and NEFT transactions and banks will be required to pass this benefit to their customers.
  • Significance: The reduced repo rate was welcomed by industry body as this rate cut will encourage banks to lower their lending rates for both retail and corporate credits. This is important as reviving business confidence and consumer confidence in economy is need of hour.
  • Way Forward: Although measure will rekindle economic growth and improve business sentiments but credit policy resolution and RBI Governor’s emphasis on faster and higher transfer of rate cuts will be reassured only if done by banks.

Month: Categories: Business, Economy & BankingUPSC

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RBI introduces incremental CRR to manage excess liquidity in banking system

The Reserve Bank of India (RBI) has introduced an incremental Cash Reserve Ratio (CRR) of 100% for fortnight to absorb excess liquidity in the banking system following demonetisation.

CRR is the proportion of deposits that banks have to keep as cash with the RBI (or the central bank). Banks do not earn any interest on CRR balances kept with the RBI.

What RBI decision says?

  • Banks have to maintain 100% CRR for incremental deposits they received between September 16, 2016 and November 11, 2016.
  • The incremental CRR requirement will be temporary measure and it is within RBI’s ‘liquidity management framework’.
  • However, overall CRR requirement will stay at 4%. The incremental CRR will be reviewed on December 9, 2016 or even earlier.

Background

After Union Government announced demonization of old Rs. 500 and Rs. 1,000 notes on November 8, 2016, banks started depositing and exchanging those notes. The deposits in banks had swelled by Rs.3.24 lakh crore between September 16 and November 11, 2016.  The last fortnight of September 2016 saw deposit mobilisation jump by Rs.3.5 lakh crore.

Implications

  • It is intended to absorb a part of the surplus liquidity arising from the return of specified bank notes to the banking system.
  • Thus, it leaves adequate liquidity with banks to meet the credit needs of the productive sectors of the economy
  • It will only have a marginal impact on bank’s cost of funds since it was a temporary measure.

Month: Categories: Business, Economy & Banking

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