LAST POLICY BY A GOVERNOR, EVER?

By Ruma Dubey

The last policy of Raghuram Rajan as RBI Governor was surely not a symbolic or token one. He has ensured that the benefits of what he does today, continues to percolate down to us, long after he is gone. With 28 days left of his tenure, he is sure to make the most of it , which is excellent news for India.

Three takeaways from the policy. Firstly, tinkering with interest rate alone is not what makes a Credit Policy. By keeping the rates unchanged but by infusing liquidity to the banks, indirectly, the Governor has ensured that lower rates finally come down to the customers. He has taken a proactive step to ensure that the system does not get burdened when the FCNRs come up for redemption in Oct-Dec. Thus by acting before the redemption, he has taken steps to prevent any major disruptions. The Governor feels that once all the bank clean-ups happen and liquidity passes down, there will be more transmission of lower interest rates.

Secondly, the reality of Monetary Policy Committee (MPC) could dawn on us, as early as the next policy in October. The Governor said that he hoped that the next policy will be presented by the MPC. And the Governor said that apart from the Governor and Deputy Governor on the MPC, it has nominated Michael Debabrata Patra as the third member from RBI.

The new MPC is to be a six-member panel that is expected to bring “value and transparency” to rate-setting decisions. It will feature three members from the RBI — the Governor, a Deputy Governor and another official — and three independent members to be selected by the Government. This is similar on the lines of US Federal Reserve wherein the MPC will meet four times a year to decide on monetary policy by a majority vote. And if there’s a tie between the ‘Ayes’ and the ‘Nays’, the RBI governor gets the deciding vote.

The third big takeaway is that the RBI is indeed clued in to the way customers get harassed when it comes to KYC and scamster emails, purporting to be coming from RBI. The RBI has confirmed that KYC has been simplified considerably in the recent past. Giving an example, the Governor said , “for instance, if you move, your new address can be self-certified and you do not need proof of new address. If your branch does not know these simplified norms, please go to the RBI webpage and point it out to them. You will be doing a public service.”

The RBI has also categorically warned people to stay away from scam emails. The Governor said, “if you get an email from me or any future governor promising to transfer a large sum of say Rs.50 lakh to you if only you send a small transaction fee of Rs.20,000 to a specific bank account, delete the email. The reality is such emails are not from me and the RBI does not give out money directly to ordinary citizens, even though we print plenty of it. While the emails usually contain very convincing reasons why you have been chosen to receive money, ask yourself why I cannot simply deduct Rs.20,000 and send you Rs. 49.8 lakh. If you think for a moment, you should not fall prey to such emails.”

It’s a pity that this is the last we see or hear Mr.Rajan as RBI Governor.

A quick look at the highlights of the policy:

To keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.5 per cent;

To keep cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL).

To continue to provide liquidity as required but progressively lower the average ex ante liquidity deficit in the system from one per cent of NDTL to a position closer to neutrality

The reverse repo rate under the LAF will remain unchanged at 6.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 7.0 per cent.

Inflation projections as given in the June bi-monthly statement, i.e. of a central trajectory towards 5 per cent by March 2017 with risks tilted to the upside, are retained.

The GVA growth projection for 2016-17 is retained at 7.6 per cent, with risks facing the economy at this juncture evenly balanced.

The stance of monetary policy remains accommodative and will continue to emphasise the adequate provision of liquidity.

As regards the management of the imminent FCNR(B) redemptions, the Reserve Bank has been frontloading liquidity provision through open market operations and spot interventions/deliveries of forward purchases.

RBI to continue with both domestic liquidity operations and foreign exchange interventions that should also enable management of the FCNR(B) redemptions without market disruptions.

With a view to further front-loading the provision of liquidity, it has been decided to conduct an open market purchase auction on August 11, 2016.

The fourth bi-monthly monetary policy statement will be announced on October 4, 2016.