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Economic Survey 2016-17 Analysis : Financial Developments

Athar Imam Raza

The Government has amended the Reserve Bank of India Act, 1934 and the amended Act provides for inflation target to be set by the Government in consultation with the RBI, once in every five years and further provides a statutory basis for the constitution of an empowered Monetary Policy Committee (MPC).

Monetary Management and Financial Intermediation

Monetary Policy Committee

  • The Monetary Policy Committee is empowered with the chore of fixing the benchmark policy interest rate i.e. repo rate, which controlling effect of inflation within the target level.
  • The Central Government can convey its views regarding the inflation in writing and the RBI is mandated to the necessary information to the MPC so that they can make their decision precisely.
  • The MPC has six members with one vote each out of which three will be nominated the government and other three will be from RBI itself. The MPC is headed by the present RBI governor.
  • Earlier, a technical advisory constituted by the RBI consisted of the top ranked RBI officials, including the deputy Governors and the governor and the external advisors give their suggestions but the governor’s decision was final.
  • As per the modified monetary policy framework, the Government has fixed the inflation target of 4 per cent with forbearance level of +/- 2 per cent for the period beginning on 5th August 2016 to March 31, 2021.
  • The MPC, in its latest meeting held on December 7, 2016, while maintaining an accommodative policy stance did not change the policy rate while in its first meeting on October 4, 2016, the policy rate was reduced by 25 basis points to 6.25 per cent.
  • At present, the reverse repo rate under the Liquidity Adjustment Facility (LAF) remains 5.75 per cent and the Marginal Standing Facility (MSF) rate is 6.75 per cent.
    In April 2016, RBI refined its monetary policy framework with the objective of meeting short-term liquidity needs through regular facilities; frictional and seasonal mismatches through fine-tuning operations and more durable liquidity by modulating net foreign assets and net domestic assets in its balance sheet.

Questions on Economic Development

Liquidity situation

Yield on Government bills/ securities

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Banking Sector

Credit growth

Measures to strengthen the corporate bond market

  1. Commercial banks are allowed to issue rupee-denominated bonds overseas (masala bonds) for their capital needs and also for financing infrastructure and affordable housing;
  2. Banks allowed increasing the partial credit enhancement they provide for corporate bonds to 50 per cent from 20 per cent. This move will help lower-rated corporate to access the bond market;
  3. The brokers registered with the Securities and Exchange Board of India (SEBI) and certified as market makers in the corporate bond market permitted to carry out repo / reverse repo contracts in the corporate debt securities. This measure will make corporate bonds fungible and thus improve turnover in the secondary market;
  4. Permitting primary dealers to act as market makers for government bonds, to give further boost to government securities by making them more accessible to retail investors; and
  5. In order to make simplified access to the foreign exchange market for hedging in over the counter (OTC) and exchange-traded currency derivatives, the RBI has allowed entities uncovered to exchange rate risk to undertake hedge transactions with simplified procedures, up to a limit of US$30 million at any given time.

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