Monetary Mangement

IAS Prelims 2023
  • Several reform initiatives were taken in the banking and insurance sector in 2014- 15. These include allowing banks to raise capital from the market to meet capital adequacy norms by diluting the government’s stake up to 52%, launching of the Pradhan Mantri Jan Dhan Yojana to provide universal access to banking facilities with at least one basic banking account for every household, and notifying of an ordinance to enhance the foreign equity cap in the insurance sector.
  • The Reserve Bank of India (RBI) adopted the new Consumer Price Index (combined) as the measure of the nominal anchor (headline CPI) for policy communication. Policy rates were kept unchanged during the year till January 2015. In view of continuing easing of inflationary pressures, on 15 January 2015 the RBI reduced the policy repo rate under the liquidity adjustment facility (LAF) from 8.0% to 7.75%.
  • During 2014-15, both reserve money (M0) and broad money (M3) decelerated, compared to the previous year. The moderation in M0 primarily reflects adjustments in bankers’ deposits with the RBI following larger year-end accretion in deposits.
  • Deceleration in credit could be attributed to economic slowdown, availability of alternative sources of funds, deterioration in asset quality of banks, especially public-sector banks (PSB), and selling of stressed loans by a few banks to asset reconstruction companies.
  • With a view to ensuring flexibility, transparency and predictability in liquidity management operations, RBI revised its liquidity management framework with effect from 5 September 2014. Its main features are:
  1. assured access to liquidity of 1% of NDTL (excluding export credit refinance) through bank-wise overnight fixed rate repos of 0.25% of NDTL and variable rate fourteen-day term repos;
  2. more frequent auction of term repos (four times) during a fortnight, allowing flexibility to banks to alter their liquidity assessment; and
  3. higher frequency of access to RBI’s overnight liquidity, with the introduction of variable rate overnight repos/reverse repo auctions. Term repo auctions are projected to grow as the main instrument of frictional liquidity management.

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