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Key expectations from RBI's Monetary Policy Committee meet this week

A reduction in the Repo rate from current 6.25% to at least 6% will incentivise credit growth and improve private sector investment

Hari Hara Mishra | April 3, 2019 | Updated 12:12 IST
Key expectations from RBI's Monetary Policy Committee meet this week

The first bi-monthly Monetary Policy Committee (MPC) in FY 2019-20 begins on April 2, 2019.  A week back, Federal Open Market Committee (US) in its last bi-monthly meeting changed its stand and announced that there will be no rate hike this year, after announcing previously that two rate hikes will be appropriate in 2019. The Federal Reserve - US Central Bank - reduced expectations on GDP and inflation and forecast a higher unemployment outlook. The forthcoming MPC is expected to take the changed scenario in the largest economy of the world. This MPC assumes special significance as it comes close to the General Elections. Market is keenly watching to see it both in terms of rate decision, if any, and policy guidelines relating to regulation and macroeconomic assessments.

Against this background, a few expectations from the Banking and ARC Sectors are enumerated below:

1. Reduction in Cash Reserve Ratio (CRR) from 4% to 3%

Banks have to maintain CRR with the RBI for contingencies though they do not get any interest on these. At present it is 4%, and there has been no change in the last six years.


  • Over the years, the banking regulations have been scaled up, Basel III is implemented with more rigour and systemic risks have been addressed. Besides, as a first fall back, banks already maintain Statutory Liquidity Ratio (SLR) of 19.5% which are invested in 100% safe Government Securities.

  • Historically, thanks to proactive intervention by authorities, there has never been a crisis of confidence in the safety and soundness of banks to meet their obligations.
Reduction in CRR by 1% will release over Rs 1 lakh crore back to the banking system, and transmission will be across the board and swift.

2. Reduction in Repo rate by at least 25 basis points


  • Indian economy grew at 6.6% during Oct- Dec 2018, the slowest in the last five quarters
  •  Inflation outlook is benign; consumer inflation at 2.57% is much below RBI inflation target of 4%
  • Slowdown of export growth to 2.4% in February 2019
  •  In the last five weeks, the rupee has turned to Asia's best performing currency
  •  In the recent March meeting, the Fed has started being dovish and markets do not expect any further hike in 2019
A reduction in the Repo rate from current 6.25% to at least 6% will incentivise credit growth and improve private sector investment.

3. Reduction in minimum investment required by ARCs in Security Receipts (SRs) from 15% to 5%


  • The Government of India has liberalized FII/FPI investment, allowing 100% in each tranche of Security Receipts (SRs) issued by Asset Reconstruction Companies (ARCs) subject to directions/guidelines of the RBI. This was made effective from May 12, 2005.  However, in terms of an earlier RBI notification dated August 05, 2014, issued to SC/RCs, ARCs have to invest a minimum of 15% in each class of SRs. This is an anomaly. So while the government allows 100% in SRs, in practice it cannot be more than 85% because of another RBI guideline.
  • Besides, nowadays most of ARC sale transactions are in 100% cash, and banks do not have any risk in their books. In such a scenario, if an eligible investor wants to pump in money, the role of an ARC is similar to that of an Asset Manager. SEBI Guidelines for Alternate Investment Fund (AIF) prescribes only 2.5% investment by the manager.
With these factors in mind, in the cases where banks get 100% clean cash exit while selling bad loans to ARCs, the minimum stipulation of investment by ARCs may be reduced from 15% to 5%.

4. ARCs may be permitted to subscribe to equity and extend interim finance for cases under IBC


ARCs are institutional entities created under a central legislation SARFAESI Act to resolve NPAs. However, in terms of current regulations, they cannot invest in equity (other than through debt conversion) and cannot extend finance to a sick unit (without first acquiring the debt).

It is suggested that for cases under IBC where ARC is a resolution applicant, they may be permitted to invest in equity or extend need-based finance to stressed assets for a successful turnaround.

(The Author is an honorary advisor to Assocham on ARC and Banking. Views personal)

Also read: RBI to unveil this fiscal's first bi-monthly policy decision for 2019-20 on April 4

Also read: Economists call for at least 25 bps rate cut by RBI

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