The Reserve Bank of India decided to keep the policy repo rate at 7.5 per cent in its monetary policy statement, and the cash reserve ratio (CRR) of scheduled banks at 4.0 per cent on Tuesday.
The RBI governor Raghuram Rajan kept the policy rate unchanged until the impact of unseasonal rains on food inflation is decided. He also wanted banks to pass on benefits of previous two rate cut .
“Transmission of policy rates to lending rates has not taken place so far despite weak credit off take and the front loading of two rate cuts. With little transmission, and the possibility that incoming data will provide more clarity on the balance of risks on inflation, the Reserve Bank will maintain status quo in its monetary policy stance in this review,” said the governor.
The decision of doing so has been taken cause of the fears of spike in food prices as the unseasonal rains and hailstorm have impacted rabi crops across North and Western India.
The authorities from RBI stated that, “The RBI will await the transmission by banks of its front-loaded rate reductions in January and February into their lending rates. Transmission of policy rates to lending rates has not taken place so far despite weak credit off take and the front loading of two rate cuts.”
The Reserve Bank of India (RBI) is currently working with other financial sector regulators like Sebi, PFRDA and Irda to develop an interest rate market where mutual funds, pension and insurance funds could participate in securities lending to deepen market based finance and develop an alternate to bank finance.
“IRDA, SEBI and PFRDA too could help development of interest rate markets. For instance, short selling activity could benefit if a wider pool of securities lenders can be developed.
“Insurance and pension funds, mutual funds have significant holdings of Government securities that could be used to lent to short sellers. This would avoid short-squeeze incident we saw a couple of years back, apart from generating income for these entities.
“We are working with regulators to develop a securities lending product that could enable these entities to participate in securities lending,” B.P. Kanungo, Deputy Governor, Reserve Bank of India recently said at FIMMDA meeting in Moscow.
FIMMDA is a representative body of participants in the fixed income market in India.
He said the Indian financial sector which mostly has been a bank-based one needs to develop a robust fixed income market to bring in market discipline, to augment bank finance and indeed free up bank finance for uses that cannot access the market directly.
Development of the fixed income market has been an important objective of the Reserve Bank, the Government, the SEBI and other regulators these many years. Significant progress has been made, yet a lot remains to be achieved.
The Banking regulator is also currently looking at refurbishing some regulations on treatment of cash margins as deposits, payment of interest on such margins, posting of collateral abroad to enable participants to move to global margining standards.
“The risk management at market level is pretty robust, with central counterparty settlement, exchange traded products, trade repositories, legal entity identifier.
But there is scope of improvement at entity-level as far as financial institutions are concerned, which will be tested with introduction of new accounting standards. Some other aspects of regulation – treatment of cash margins as deposits, payment of interest on such margins, posting of collateral abroad – are all under examination to enable participants to move to global margining standards.
Kanungo further said in the next five years the demand for bonds will significantly outstrip the supply.
“It is estimated that five years down the line, the demand for bonds will significantly outstrip the supply,” he said. (IANS)