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Sixth Bi-Monthly Monetary Policy Statement, 2014-15 By Dr. Raghuram G. Rajan, Governor on FEBRUARY 3 2015--important for interviews
Monetary and Liquidity Measures
On the basis of an assessment of the current and evolving macroeconomic situation, it has been decided to:
  • keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 7.75 per cent;
  • keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL);
  • reduce the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from 22.0 per cent to 21.5 per cent of their NDTL with effect from the fortnight beginning February 7, 2015;
  • replace the export credit refinance (ECR) facility with the provision of system level liquidity with effect from February 7, 2015;
  • continue to provide liquidity under overnight repos of 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system through auctions; and
  • continue with daily variable rate term repo and reverse repo auctions to smooth liquidity.
Consequently, the reverse repo rate under the LAF will remain unchanged at 6.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 8.75 per cent.

Part B: Developmental and Regulatory Measures
18. Developmental and regulatory measures are put in place by the Reserve Bank
periodically within the organising framework of the five-pillar approach announced in
October 2013 in the Second Quarter Review of Monetary Policy for 2013-14. The
measures set out in this part of the statement emphasise broadening and deepening
financial markets; fortifying banking structure; and dealing with stress in banking
assets by putting projects back on track.
I. Financial Markets
19. The Reserve Bank reduced the eligibility limit for foreign exchange remittances
under the Liberalised Remittance Scheme (LRS) to USD 75,000 in 2013 as a macroprudential
measure. With stability in the foreign exchange market, this limit was
enhanced to USD 125,000 in June 2014 without end-use restrictions, except for
prohibited foreign exchange transactions such as margin trading, lotteries and the like.
On a review of the external sector outlook and as a further exercise in macro-prudential
management, it has been decided to enhance the limit under the LRS to USD 250,000
per person per year. Furthermore, in order to ensure ease of transactions, it has also
been decided in consultation with the Government that all the facilities for release of
exchange/ remittances for current account transactions available to resident individuals
under Schedule III to Foreign Exchange Management (Current Account Transactions)
Rules 2000, as amended from time to time, shall also be subsumed under this limit. 6
20. With a view to meeting the emerging needs of foreign direct investment in various
sectors with different financing needs and varying risk perceptions as also to offer the
investor some protection against downside risks, it has been decided in consultation with
the Government of India to introduce greater flexibility in the pricing of
instruments/securities, including an assured return at an appropriate discount over the
sovereign yield curve through an embedded optionality clause or in any other manner.
Guidelines in this regard will be issued separately.
21. The investment limit in Government securities by foreign portfolio investors (FPIs),
registered with the Securities and Exchange Board of India (SEBI) is currently capped at
USD 30 billion of which USD 5 billion is reserved for long term investors. The limit on
investment in Government securities is now fully utilised. As a measure to incentivise
long term investors, it has been decided in consultation with Government to enable
reinvestment of coupons in Government securities even when the existing limits are fully
22. FPIs are currently permitted to invest in Government securities with a minimum
residual maturity of three years. No such condition has been stipulated for their
investments in corporate bonds. To harmonize requirements, it is decided in consultation
with Government that all future investment by FPIs in the debt market in India will be
required to be made with a minimum residual maturity of three years. Accordingly, all
future investments within the limit for investment in corporate bonds, including the limits
vacated when the current investment by an FPI runs off either through sale or
redemption, shall be required to be made in corporate bonds with a minimum residual
maturity of three years. Furthermore, FPIs will not be allowed to invest incrementally in
short maturity liquid/money market mutual fund schemes. There will, however, be no
lock-in period and FPIs shall be free to sell the securities (including those that are
presently held with less than three years residual maturity) to domestic investors.
Detailed operational guidelines will be issued by end-February 2015.
23. In the first bi-monthly monetary policy statement for 2014-15, the Reserve Bank
announced the implementation of the recommendations of the Committee on Financial
Benchmarks (Chairman: Shri P. Vijaya Bhaskar). The Bank has issued guidelines on the
governance framework for benchmark submitters on April 16, 2014. The Fixed Income
Money Market and Derivatives Association (FIMMDA) and Foreign Exchange Dealers
Association of India (FEDAI) have since issued the Code of Conduct for benchmark
submitters. An independent company named ‘‘Financial Benchmarks India Pvt. Ltd”,
jointly floated by FIMMDA, FEDAI and Indian Banks’ Association (IBA) for administration
of the rupee interest rate and foreign exchange benchmarks, has been incorporated. As
a further step towards strengthening the benchmark-setting methodology, it has been
decided to work out the necessary infrastructural and transitional arrangements for
shifting the overnight Mumbai Inter-Bank Offer Rate (MIBOR) from the existing polling
based system to transaction based system of the Clearing Corporation of India Ltd.
(CCIL) by April 2015.
24. In order to develop the money and Government securities markets, cash settled
10-year interest rate futures (IRF) contracts were permitted to be introduced by stock
exchanges in December 2013. A cash settled IRF contract on 10-Year Government of
India (GoI) Security was launched in January 2014 and has received an encouraging
response. In order to provide market participants with greater flexibility to hedge their
interest rate risk, it has been decided to permit stock exchanges to introduce cash settled
IRF contracts on 5-7-Year and 13-15 year Government of India Securities. Detailed
operational guidelines will be issued by end-March 2015.
25. In June 2014, FPIs were permitted to participate in the exchange traded currency
derivatives (ETCD) market. Simultaneously, the regulatory regime for participation of
domestic entities in the ETCD market was modified with the objective of bringing about
parity between the ETCD and over-the-counter (OTC) markets. With a view to providing 7
greater flexibility to both FPIs and domestic participants in the ETCD market, it has been
decided that:
• domestic entities and FPIs will henceforth be allowed to take foreign currency
positions in the USD-INR pair up to USD 15 million per exchange without having
to establish the existence of any underlying exposure. In addition, they shall be
allowed to take foreign currency positions in EUR-INR, GBP-INR and JPY-INR
pairs, all put together up to USD 5 million equivalent per exchange, without
having to establish the existence of any underlying exposure. Domestic entities
and FPIs who want to take a position exceeding the above limits in the ETCD
market will have to establish the existence of an underlying exposure.
• for domestic participants who are importers of goods and services, the limit up to
which they can take appropriate hedging positions in ETCD markets will be
determined as 100 per cent of the higher of the (i) average of their last three
years’ imports turnover or (ii) the previous year’s turnover, instead of 50 per cent
at present.
• documentation and other administrative requirements for hedging on the ETCD
markets are also being rationalised.
Detailed operational guidelines will be issued by end-March 2015.
II. Restructuring
26. At present, implementation of large projects is complex and unforeseen events
may cause delays in project implementation, leading to failure in achieving the originally
envisaged date of commencement of commercial operations (DCCO). The Reserve
Bank has allowed vide circulars dated March 31, 2010 and May 30, 2013, certain
flexibility with regard to loans to projects under implementation, wherein DCCO of the
projects under implementation along with repayment schedules for such loans are
allowed to be shifted to a certain extent without adversely affecting the asset
classification of such loans. However, in the case of projects which have been stalled
primarily due to inadequacies of the current promoters/management, a change in
ownership and management may be required to revive the project. In this context, the
new promoters/developers may require additional time to revive/complete the stalled
projects. In order to facilitate change in ownership and revival, it has been decided to
provide further flexibility by allowing a further extension of the DCCO of such projects
where a change of ownership takes place, without adversely affecting the asset
classification of loans to such projects, subject to certain conditions. Operating guidelines
in this regard will be issued shortly.
27. According to Section 19(2) of the Banking Regulation Act 1949, banks are
allowed to hold shares in a company, whether as pledgee, mortgagee or absolute owner,
up to an amount not exceeding thirty per cent of the paid-up share capital of that
company or thirty per cent of their own paid-up share capital and reserves, whichever is
less. Banks can also acquire shares of a borrowing company by way of conversion of
debt into equity, following prudential guidelines on restructuring of advances by banks
and financial institutions, subject to conditions mentioned therein. However, the
acquisition of shares of listed companies by conversion of debt or by any other means is
required to conform to the Issue of Capital and Disclosure Requirements (ICDR)
Regulations and the Substantial Acquisition of Shares and Takeovers (SAST)
Regulations. Very often, the share prices of companies whose debt is being restructured,
in accordance with the stipulations of ICDR Regulations are found to be not in
consonance with their intrinsic value. This results in upfront allocation of disproportionate
share of loss on restructuring to banks. In view of the above, the Reserve Bank is
consulting with the SEBI for waiver, under certain specific circumstances, of the
requirement of compliance with the ICDR and SAST Regulations, for conversion of debt
into equity. Detailed guidelines will be issued within three months. 8
28. Under the Framework for Revitalising Distressed Assets in the economy, banks
were allowed in February 2014 to reverse the excess provision on sale of non-performing
assets (NPAs) to securitisation companies/reconstruction companies when the cash
received (by way of initial sale consideration and/or redemption of security receipts/passthrough
certificates) is higher than the net book value (NBV) of the asset, with a view to
incentivising banks to recover appropriate value in respect of their NPAs, subject to
certain conditions. This dispensation was, however, available on a prospective basis, i.e.,
only with regard to NPAs sold on or after February 26, 2014. On a review and based on
banks’ representations in this regard, it has now been decided to extend the above
dispensation to NPAs sold prior to February 26, 2014 also. Detailed guidelines to this
effect will be issued shortly.
III. Banking and Financial Structure
29. Currently, banks are allowed to offer differential rates of interest on deposits on
the basis of tenor for deposits less than ` one crore and on the basis of quantum for
deposits of ` one crore and above. Banks are, however, not permitted to differentiate on
the basis of any other parameter of the deposit contract. Furthermore, all deposits
accepted from individuals and Hindu undivided family (HUF) up to ` one crore are
callable i.e., have the facility of premature withdrawal. This results in asset-liability
management issues, especially under the Liquidity Coverage Ratio (LCR) requirement
under the Basel III framework. It is, therefore, proposed to allow non-callable deposits.
Callability in a deposit will then be a distinguishing feature for offering differential rates on
interest on deposits. Detailed guidelines will follow shortly.
30. The final guidelines on payments banks and small finance banks as differentiated
banks were placed on the Reserve Bank’s website on November 27, 2014 and
clarifications on the queries were released on January 1, 2015. The last date of receipt of
applications was February 2, 2015. 72 applications for Small Finance Banks and 41
applications for Payments Banks were received up to the deadline for submission
yesterday. This number excludes applications that might have been received at other
venues. As stated in the guidelines, two External Advisory Committees (EACs) will
evaluate the applications received for setting up of small finance and payments banks
and thereafter make their recommendations to the Reserve Bank. The EACs for small
finance banks and payments banks will be chaired by Smt. Usha Thorat, former Deputy
Governor, Reserve Bank of India and Dr. Nachiket Mor, Director, Central Board of the
Reserve Bank, respectively.
31. The first bi-monthly monetary policy statement for fiscal year 2015-16 is
scheduled on Tuesday, April 7, 2015.
Sangeeta Das
Press Release : 2014-2015/1619 Directo

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