‘Controlling inflation is imperative for sustaining growth'

In a move to introduce more customer-friendly norms, the Reserve Bank India (RBI) on Tuesday proposed to notify banning prepayment penalty on floating rate home loans, as recommended by the Banking Ombudsman recently, while hiking the short-term indicative rate (repo rate) by 25 basis points to tame inflationary pressures.

However, the RBI is of the opinion that by December, 2011, the price rise is likely to come down and another hike may not be warranted.

The RBI is firmly of the view that controlling inflation is imperative for sustaining growth over the medium-term and for increasing the potential growth rate. “The potential growth rate is not a long-term constant; nor is it exogenously determined,” said RBI Governor D. Subbarao while announcing the half-year Monetary Policy Review of 2011-12. “It is critically dependent on policies that create a congenial investment climate and encourage investment activity,” he added.

The challenge for the government and the RBI is to ensure that demand is constrained in the short-term to bring inflation down, but at the same time to encourage supply response so as to improve productivity and expand the potential output of the economy in the medium-term.

While maintaining the inflation rate at 7 per cent for 2011-12, the RBI revised the growth rate projection from 8 to 7.6 per cent. “Elevated inflationary pressures are expected to ease from December, 2011, though uncertainties about sudden adverse developments remain.”

The policy document further said that the RBI will issue the final guidelines on credit default swaps by November-end.

As the banking system prepares to go on to the Basel-III framework requiring higher capital adequacy, the RBI said the draft guidelines for its implementation will be issued by December-end. As regards the micro finance sector, the RBI has given the go-ahead for creating a new category called NBFC-MFIs (NBFC-micro finance institutions). Further, a separate set of guidelines for overseas investment by core investment companies (CICs) in financial and non-financial sector companies will be issued.

The RBI said liberalisation had led to increased pace in the number of branches opened in Tier 3 to Tier 6 centres.

However, it is observed that branch expansion in Tier 2 centres has not taken place at the desired pace. To provide enhanced banking services in Tier 2 centres, it is now proposed to permit domestic scheduled commercial banks (other than RRBs) to open branches in Tier 2 centres (with population 50,000 to 99,999) without the need to take permission from the Reserve Bank in each case, subject to reporting.

In the area of financial markets, four important initiatives have been announced. First, the RBI will issue the final guidelines on the cash settled 5-year and 2-year interest rate futures (IRFs), including the final settlement price by end-December 2011. Second, guidelines on credit default swaps (CDS) will be made effective by end-November 2011. Third, guidelines on short-sale in government securities will be issued by end-December 2011.

Fourth, a Working Group will be constituted to examine and suggest ways for enhancing secondary market liquidity in the G-Sec and interest rate derivatives markets.

Further the RBI will issue the final guidelines on internal rating-based (IRB) approach for credit risk by end-December 2011. A discussion paper will be issued by end-March 2012 on the dynamic provisioning approach for comments.

The RBI said the customer service had always been on top of the central bank's policy agenda. 

Recognising the need for revisiting the issues of customer service in banks, the RBI constituted the Damodaran Committee to make recommendations for improving customer service. The committee has made several recommendations to improve the customer service. 

“We have decided to implement the recommendations of the committee, on which a broad consensus has emerged, as also the action points which were identified by the Indian Banks' Association (IBA) and Banking Codes and Standards Board of India in the last Banking Ombudsmen conference.”

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