HISTORY AND ORIGIN OF RBI

The Reserve Bank of India (RBI) is India's central banking institution, which controls the
issuance and supply of the Indian rupee. Until the Monetary Policy Committee was established
in 2016, it also controlled monetary policy in India.[6] It commenced its operations on 1 April
1935 in accordance with the Reserve Bank of India Act, 1934.[7]

The original share capital was divided into shares of 100 each fully paid, which were initially
owned entirely by private shareholders.[8] Following India's independence on 15 August 1947,
the RBI was nationalised on 1 January 1949.[9]
The Reserve Bank of India was established following the Reserve Bank of India Act of
1934.[12] Though privately owned initially, it was nationalised in 1949 and since then fully
owned by Government of India

The origins of the Reserve Bank of India can be traced to 1926 when the Royal Commission on
Indian Currency and Finance – also known as the Hilton-Young Commission – recommended the
creation of a central bank for India to separate the control of currency and credit from the
Government and to augment banking facilities throughout the country.

The Reserve Bank of India Act of 1934 established the Reserve Bank and set in motion a series of
actions culminating in the start of operations in 1935. Since then, the Reserve Bank’s role and
functions have undergone numerous changes, as the nature of the Indian economy and financial
sector changed.

There were several causes for the creation of a central bank. Though the rupee was the common
currency, there were several species of rupee coins of different values in circulation. The authorities,
however, endeavored to evolve a standard coin. For many years, the Sicca of Murshidabad was, in
theory, the standard coin, and the rates of exchange of the various rupees in terms of the Sicca rupee
varied, the discount being called the batta.

The Government received enquiries from the Collectors as to the batta they should charge on the
different species they received from zamindars and farmers. The proposed bank was to fix the value,
in Sicca rupees, of the bills it had to issue in return for the money received from the Collectors, on
the basis of the same batta. Thus, the bank was expected to assist in stabilizing inland exchange and
in enforcing the Sicca coin as the standard coin of the Provinces.

origin & History Of The Reserve Bank Of India

Origin Timeline

1926: The Royal Commission on Indian Currency and Finance recommended the creation of a
central bank for India.

1927: A bill to give effect to the above recommendation was introduced in the Legislative
Assembly. But it was later withdrawn due to lack of agreement among various sections of people.

1933: The White Paper on Indian Constitutional Reforms recommended the creation of a Reserve
Bank. A fresh bill was introduced in the Legislative Assembly.

1934: The Bill was passed and received the Governor General’s assent

1935: The Reserve Bank commenced operations as India’s central bank on April 1 as a private
shareholders’ bank with a paid up capital of rupees five crores (rupees fifty million).

1942: The Reserve Bank ceased to be the currency issuing authority of Burma (now Myanmar).

1947: The Reserve Bank stopped acting as banker to the Government of Burma.

1948: The Reserve Bank stopped rendering central banking services to Pakistan.

1949: The Government of India nationalized the Reserve Bank under the Reserve Bank (Transfer of
Public Ownership) Act, 1948

In 1966, Rupee was devaluated for the first time.

In 1969, Nationalization of 14 Banks was a Turning point in the history of Indian Banking.

In 1973, the Foreign Exchange Regulation act was amended and exchange control was
strengthened.

In 1975, Regional Rural Banks started

In 1985, the Sukhamoy Chakravarty and Vaghul Committee reports embarked the era of
Financial Market Reforms in INDIA
In 1991, India came under the Balance of Payment crisis and RBI pledged Gold to shore up
reserves. Rupee was devaluated.

In 1991-92, Economic Reforms became market determined

in 2000, the Foreign Exchange Management Act (FEMA) replaced the erstwhile FERA.

In 2006, Reserve Bank of India was empowered to regulate the money, forex, G-Sec and Gold
related security markets.

In 2007, Reserve bank of India was empowered to regulate payment systems.

Currently, the Bank’s Central Office, located at Mumbai, has twenty-seven departments. These
departments frame policies in their respective work areas. They are headed by senior officers in the
rank of Chief General Manager.
Functions of Reserve Bank of India

1. Issue of Notes —The Reserve Bank has the monopoly for printing the currency notes in the
country. It has the sole right to issue currency notes of various denominations except one rupee
note (which is issued by the Ministry of Finance). The Reserve Bank has adopted the Minimum
Reserve System for issuing/printing the currency notes. Since 1957, it maintains gold and
foreign exchange reserves of Rs. 200 Cr. of which at least Rs. 115 cr. should be in gold and
remaining in the foreign currencies.

2. Banker to the Government–The second important function of the Reserve Bank is to act as
the Banker, Agent and Adviser to the Government of India and states. It performs all the banking
functions of the State and Central Government and it also tenders useful advice to the
government on matters related to economic and monetary policy. It also manages the public debt
of the government.

3.Banker’s Bank:- The Reserve Bank performs the same functions for the other commercial
banks as the other banks ordinarily perform for their customers. RBI lends money to all the
commercial banks of the country.

4. Controller of the Credit:- The RBI undertakes the responsibility of controlling credit created
by the commercial banks. RBI uses two methods to control the extra flow of money in the
economy. These methods are quantitative and qualitative techniques to control and regulate the
credit flow in the country. When RBI observes that the economy has sufficient money
supply and it may cause inflationary situation in the country then it squeezes the money
supply through its tight monetary policy and vice versa.

5. Custodian of Foreign Reserves:-For the purpose of keeping the foreign exchange rates
stable, the Reserve Bank buys and sells the foreign currencies and also protects the country's
foreign exchange funds. RBI sells the foreign currency in the foreign exchange market when its
supply decreases in the economy and vice-versa. Currently India has Foreign Exchange Reserve
of around US$ 360bn.

6. Other Functions:-The Reserve Bank performs a number of other developmental works.

These works include the function of clearing house arranging credit for agriculture (which has
been transferred to NABARD) collecting and publishing the economic data, buying and selling
of Government securities (gilt edge, treasury bills etc)and trade bills, giving loans to the
Government buying and selling of valuable commodities etc. It also acts as the representative of
Government in International Monetary Fund (I.M.F.) and represents the membership of India.
New department constituted in RBI:-
On July 6, 2005 a new department, named financial market department in reserve bank of India
was constituted for surveillance on financial markets.
This newly constituted dept. will separate the activities of debt management and monetary
operations in future. This department will also perform the duties of developing and monitoring
the instruments of the money market and also monitoring the government securities and foreign
money markets.

So it can be concluded that as soon as the our country is growing the role of RBI is going to be
very crucial in the upcoming years.

The Bottom Line

The RBI has efficiently managed the monetary policy, financial system and currency of the
world’s largest democracy and second most populous nation. With the Indian economy steadily
accounting for a greater share of the global economy, the RBI will continue to grow in stature as
one of the world’s leading central banks.
MONETARY POLICY OF INDIA

Monetary policy is the process by which the monetary authority of a country, generally the
central bank, controls the supply of money in the economy by its control over interest rates in
order to maintain price stability and achieve high economic growth. In India, the central
monetary authority is the Reserve Bank of India (RBI). It is designed to maintain the price
stability in the economy. Other objectives of the monetary policy of India, as stated by RBI, are:

 Promotion of Fixed Investment

The aim here is to increase the productivity of investment by restraining non
essential fixed investment.

 Restriction of Inventories and stocks

Overfilling of stocks and products becoming outdated due to excess of stock often
results in sickness of the unit. The main objective of this policy is to avoid over-
stocking and idle money in the organisation.

 To Promote Efficiency
It tries to increase the efficiency in the financial system and tries to incorporate
structural changes such as deregulating interest rates, easing operational
constraints in the credit delivery system, introducing new money market
instruments, etc.

 Reducing the Rigidity

RBI tries to bring about flexibilities in operations which provide a considerable
autonomy. It maintains its control over financial system whenever and wherever
necessary to maintain the discipline and prudence in operations of the financial
system.

INSTRUMENTS OF MONETARY POLICY

Policy Rates Instruments

Qualitative
and Reserve of Monetary
Tools
Ratios Policy
1. Policy Rates and Reserve Ratios

 Repo rate

Repo (Repurchase) rate also known as the benchmark interest rate is the rate at which the
RBI lends money to the commercial banks for a short-term (max. 90 days). When the
repo rate increases, borrowing from RBI becomes more expensive. If RBI wants to make
it more expensive for the banks to borrow money, it increases the repo rate similarly, if it
wants to make it cheaper for banks to borrow money it reduces the repo rate. If the repo
rate is increased, banks can't carry out their business at a profit whereas the very opposite
happens when the repo rate is cut down. Generally, repo rates are cut down whenever the
country needs to progress in banking and economy

 Reverse repo rate (RRR)

As the name suggest, reverse repo rate is just the opposite of repo rate. Reverse Repo rate
is the short term borrowing rate at which RBI borrows money from banks. The reserve
bank uses this tool when it feels there is too much money floating in the banking system.
An increase in the reverse repo rate means that the banks will get a higher rate of interest
from RBI. As a result, banks prefer to lend their money to RBI which is always safe
instead of lending it to others (people, companies etc.) which is always risky. Repo Rate
signifies the rate at which liquidity is injected into the banking system by RBI, whereas
Reverse Repo rate signifies the rate at which the central bank absorbs liquidity from the
banks.

 Cash reserve ratio (CRR)

CRR refers to the ratio of bank's cash reserve balances with RBI with reference to the
bank's net demand & time liabilities to ensure the liquidity & solvency of the scheduled
banks. It determines the share of net demand and time liabilities that banks must maintain
as cash with RBI.

 Statutory liquidity ratio (SLR)

Apart from the CRR, banks are required to maintain liquid assets in the form of gold,
cash and approved securities. Higher liquidity ratio forces commercial banks to maintain
a larger proportion of their resources in liquid form and thus reduces their capacity to
grant loans and advances, thus it is an anti-inflationary impact. A higher liquidity ratio
diverts the bank funds from loans and advances to investment in government and
approved securities. The SLR is determined by a percentage of total demand and time
liabilities. Time liabilities refer to the liabilities which the commercial banks are liable to
 pay to the customers after a certain period mutually agreed upon, and demand liabilities
are such deposits of the customers which are payable on demand.

 Bank rate

It is defined in Sec 49 of RBI Act of 1934 as the ‘standard rate at which RBI is prepared
to buy or rediscount bills of exchange or other commercial papers eligible for purchase'.
When banks want to borrow long term funds from RBI, it is the interest rate which RBI
charges to them. The bank rate is not used to control money supply these days. However
penal rates are linked to bank rate. If a bank fails to keep SLR or CRR then RBI will
impose penalty & it will be 300 basis points above bank rate.

 Liquidity adjustment facility (LAF)

Liquidity Adjustment facility was introduced in 2000. LAF is a facility provided by the
Reserve Bank of India to scheduled commercial banks to avail of liquidity in case of need
or to park excess funds with the RBI on an overnight basis against the collateral of
Government securities. RBI accept application for a minimum amount of Rs.5 crore and
in multiples of Rs. 5 crore thereafter. LAF enables liquidity management on a day-to-day
basis. The operations of LAF are conducted by way of repurchase agreements called
Repos & Reverse Repos.

 Open market operation (OMO)

Open market operation is the activity of buying and selling of government securities in
open market to control the supply of money in banking system. When there is excess
supply of money, central bank sells government securities thereby sucking out excess
liquidity. Similarly, when liquidity is tight, RBI will buy government securities and
thereby inject money supply into the economy.

2. Qualitative Tools

 Margin Requirements or LTV

Loan to Value is the ratio of loan amount to the actual value of asset purchased. RBI
regulates this ratio so as to control the amount bank can lend to its customers. For
example, if an individual wants to buy a car from borrowed money and the car value is
Rs. 10 Lac, he can only avail a loan amount of Rs. 7 Lac if the LTV is set to 70%. RBI
can decrease or increase to curb inflation or deflation respectively.
 Selective Credit Control

Under this measure, RBI can specifically instruct banks not to give loans to traders of
certain commodities e.g. sugar, edible oil, etc. This prevents speculations/ hoarding of
commodities using money borrowed from banks.

 Moral suasion

Under this measure RBI try to persuade bank through meetings, conferences, media
statements to do specific things under certain economic trends. For example, when RBI
reduces repo rate, it asks banks to reduce their base rate as well. Another example of this
measure is to ask banks to reduce their Non-performing assets (NPAs).
URJIT PATEL COMMITTEE REPORT
Urjit Patel Committee is one of the committees formed by RBI to revise and strengthen monetary
policy frame work in India.

Suggestions made by the committee:

1. Control CPI

Monetary policy till now in India always concentrated on controlling WPI. But WPI is not the
right indicator as it does not include the entire nation. It just covers only 60% of the
nation.Target for CPI should be for it to fall from current 10% to 8% within 1 year and then to
6% within 2 years. Subsequently, the RBI should target CPI at 4% +/- 2%.

2. Control Inflation

Monetary policy has been used in the past has been used for multiple targets. But this committee
suggested to concentrate on only one target at a time, the first of them being inflation. Also we
are focusing on inflation since 80’s

3. Why inflation.
The reason behind choosing inflation over other parameters like exchange rate , GDP , IIP etc is
that
• The prices of petrol and onions affects the people the most.
• Also India has the highest inflation amongst the all G20 countries
• India’s inflation has been higher than its competitors which reduces the exports.

4. Define a target:

All these days they just mention in air that we want to increase GDP, reduce inflation, but a
target has not been mentioned. Now the target for inflation has been mentioned as 4% with
allowace of + or - 2%.Depending on the situation

5. Accountability:

It is a decision taken by a group of members and not a single member. They decide how much
should the policy rate be increased or decreased. RBI will be held accountable and government
will not interfere in it.
Monetary policy decisions should be vested in a Monetary Policy Committee (MPC) comprising
the Governor, the Deputy Governor and Executive Director in charge of monetary policy and
two external full-time members. The decisions of the MPC will be by voting. Members will be
accountable for failure to attain the target—failure being defined as inability to attain the target
for three successive quarters.

6.Removal of hindrances
The Central Government needs to reduce the fiscal deficit to 3.0 per cent of GDP by 2016-17.
Administered prices, wages and interest rates are impediments to transmission of monetary
policy and should be eliminated.

7.There should be a remunerated standing deposit facility at the RBI to sterilise excess liquidity.

8.With an independent debt management office, the market stabilisation scheme and cash
management bills should be phased out.

9.All sector specific refinance should be phased out as committed to the Asian Development
Bank in 1992.

10. The real policy rate should be positive. In the first phase the weighted average call rate would
be the operative target and the repo rate would be the single policy rate. The funds available at
the repo rate would be restricted and increasingly liquidity would be provided at the 14 day term
repo; longer-term repo auctions should be introduced.

Interpretation

The recommendations of the committee are surprisingly bold and seek to replicate a format quite
prevalent in many developed markets like USA and ,many European countries . Adopting an
inflation targeting framework the Indian context will require an order of policy discipline that
has been rarely seen in the country so far. Not just that, the targets for CPI seem quite ambitious
as it is very difficult to implement . Also we have index history on the combined CPI since
January 2011 and therefore history of corresponding inflation (year-on-year change in index)
since January 2012. During this almost two year period, there is just one reading below 8% for
CPI. The average inflation during this period has been 9.9%. Even with the recent fall in food
prices, it is quite unlikely that CPI falls below 8 – 8.5% on an average over the next 12 months;
let alone comply with the future targets of 6% and then lower. A lot of complimentary action
needs to be taken on fiscal deficit and supply side reforms, most of which is outside the powers
of the RBI, for these kind of inflation levels to become a reality. However, while the committee
acknowledges the need for this complimentary action, it nevertheless believes that the policy
framework should be adopted even if all pre-conditions have not been met. Doing this will put a
lot of pressure on the central bank and its credibility since, even though recent actions from the
government including on fiscal deficit compression have been positive, large structural reforms
from the government will have to wait at least till the elections are over. Even then, the effects of
such actions will only show in inflation with a substantial lag. In the mean time, the RBI will
have to shoulder accountability with respect to these ambitious inflation targets.

Implications

We would be inclined not to take this report very seriously had it not been commissioned
explicitly (and referred to on multiple occasions) by the RBI Governor himself. Indeed,
clarifying the monetary policy framework is one of the central pillars that Rajan has been
mentioning since taking office. Further contributing to its sanctity is the fact that the Deputy
Governor in charge of monetary policy has chaired the committee. While we still believe that
implementation may take some time and the report may not necessarily get accepted in its
entirety, given its credentials and its context, we have to consider the implications with respect to
its impact on the monetary policy reaction function. Notwithstanding recent murmurs of rate cuts
on the back of falling inflation, it has been our long standing view that there is little scope in
India for a rate easing cycle given its macro-economic imbalances. This view may gain
generalized acceptance, despite CPI inflation falling towards 8 – 8.5% over next few readings,
should the recommendations of the committee get accepted. Hence falling inflation which was
hitherto a large bullish trigger for bonds, may cease to be so if the market starts to believe that
the central bank is explicitly targeting an inflation rate that is even lower. Even so the near term
demand –supply dynamics for bonds remains quite favorable given that the auction supply for
this financial year is almost over and the fact that the RBI has recently shown renewed
propensity to plug liquidity deficits via OMOs. This may cause yields to remain in a range or
even rally further on bond supply cues, market positioning etc. However, a larger near term rally
would be predicted on a explicit assurance that the committee’s recommendations are not likely
to be adopted anytime soon. Furthermore, and given our view that India doesn’t have room for
rate cuts, the bond rally will anyway stall ahead of the fresh supply due from April. Given the
large maturities of government bonds due next year (INR 168,000 crores more than half of which
is due in April and May), it is likely that weekly bond supply starting April will be sizeable.
 INITIATIVES
The following points highlight the eleven main initiatives made by the Reserve Bank of India
(RBI) to reform the banking sector in India. Some of the initiatives are: 1. ATMs 2. Debit Card
3. Credit Card 4. Implementation of Centralised Funds Management System 5. Certification and
Digital Signatures 6. Committee on Payment Systems 7. Multi-application Smart Cards and
Others.

Initiative # 1. ATMs:
Automated Teller Machines (ATMs) have paved the way for introducing an alternative banking
channel which facilitate low cost banking transactions. In order to avoid the huge crowed at the
bank branches, ATMs provided easy and faster facility for with-drawing cash and deposit of
cheques through the use of ATM cards provided by the banks to its customers.

In recent times, public sector banks in India are also opening their ATM chains following the
foot-steps of private banks.

Initiative # 2. Debit Card:

The debit card service is meant for withdrawals against the balance already available in the
designated account. It is the card Holder’s obligation to maintain sufficient balance in the
designated account to meet withdrawals and service charges.

ATM cards are also gradually becoming popular as debit cards which are mostly used for
purchase of goods and services. Such cards are known as ATM-cum-Debit card. For the security
of the customer, the card holder is initially allotted a computer generated 4 digit PIN (Personal
Identification Number).

Debit card can also be used for shopping at any of the VISA or MAESTRO merchant
establishments (MEs) in India. MEs shall include shops, stores, restaurants, hotels and
commercial establishments etc. These merchant establishments (MEs) must have point of sale
(POS) electronic terminals at which the customer can use his debit card through the PIN to make
purchases by debiting his account with the bank.

At the time of purchase, the customer must be physically present along with his debit card. On
presentation of the debit card, the card will be swipe by the merchant on an Electronic Data
Capture Terminal for authorization. After a successful authorization, a hold for the transacted
amount will be placed on the customer’s, account. Finally, the account will subsequently be
debited for the transacted amount.

Initiative # 3. Credit Card:

Internet banking provides the customer the facility credit card to its customers. With the help of
this Credit Card, the customer can not only pay their credit card bills online but also get a loan on
their cards. Not just this, the customer can also apply for an additional card, request a credit line
increase and in case the card is lost one can report lost card online.

Initiative # 4. Implementation of Centralised Funds Management System:

The centralised funds management system (CFMS) provides for a centralised viewing of balance
positions of the account holders across different accounts maintained at various locations of RBI.

While the first phase of the system covering the centralised funds enquiry system (CFES) has
been made available to the users, the second phase comprising the centralised funds transfer
system (CFTS) was made available by the middle of 2003. So far, 54 bank have implemented the
system at their treasuries/funds management branches.

Initiative # 5. Certification and Digital Signatures:

The mid-term Review of October 2002 indicated the need for information security on the
network and the use of public key infrastructure (PKI) by banks. The Controller of Certifying
Authorities, Government of India, have approved the Institute for Development and Research in
Banking Technology (IDRBT) as a Certification Authority (CA) for digital signatures.

Consequently, the process of setting up of registration authorities (RA) under the CA has
commenced at various banks. In addition to the negotiated dealing system (NDS), the electronic
clearing service (ECS) and electronic funds transfer (EFT) are also being enhanced in terms of
security by means of implementation of PKI and digital signatures using the facilities offered by
the CA.

Initiative # 6. Committee on Payment Systems:

In order to examine the entire gamut of the process of reforms in payment and settlement
systems which would be culminating with the real time gross settlement (RTGS) system, a
Committee on Payment Systems. (Chairman: Dr. R.H. Patil) was set up in 2002.

The Committee, after examining the various aspects relating to payment and settlement systems,
submitted its report in September 2002 along with a draft Payment Systems Bill.

The draft Bill provides, inter alia, a legal basis for netting, apart from empowering RBI to have
regulatory and oversight powers over payment and settlement systems of the country. The report
of the Committee was put on the RBI website for wider dissemination. The draft Bill has been
forwarded to the Government.

Initiative # 7. Multi-Application Smart Cards:

Recognising the need for technology based payment products and the growing importance of
smart card based payment flows, a pilot project for multi-application smart cards in conjunction
with a few banks and vendors, under the aegis of the Ministry of Communications and
Information Technology, Government of India, has been initiated.

The project is aimed at the formulation of standards for multi-application smart cards on the
basis of inter-operable systems and technological components of the entire system.

Initiative # 8. Special Electronic Funds Transfer (EFT):

As indicated in the mid-term Review of October 2002, national EFT (NEFT) is being introduced
using the backbone of the structured financial messaging system (SFMS) of the IDRBT. NEFT
would provide for movement of electronic transfer of funds in a safe, secure and quick manner
across branches of any bank to any other bank through a central gateway of each bank, with the
inter-bank settlement being effected in the books of account of banks maintained at RBI.

Since this scheme requires connectivity across a large number of branches at many cities, a
special EFT (SEFT) was introduced in April 2003 covering about 3000 branches in 500 cities.
This has facilitated same day transfer of funds across accounts of constituents at all these
branches.

Initiative # 9. Electronic, Money Transfer (EMT):

Electronic money Transfer is a simple online system developed for online transfer of money
from one account to another account at same or different destination within a short time or
maximum within a day.

Initiative # 10. National Settlement System (NSS):

The clearing and settlement activities are dispersed through 1,047 clearing houses managed by
RBI, the State Bank of India and its associates, public sector banks and other institutions. In
order to facilitate banks to have better control over their funds, it is proposed to introduce
national settlement system (NSS) in phased manner.

Initiative # 11. Real Time Gross Settlement System (RTGS):

As indicated in the mid-term Review of October, 2002, development of the various software
modules for the RTGS system is in progress. The initial set of modules was delivered by June
2003 for members to conduct tests and familiarization exercises. The live run of RTGS was
started by the end of 20

CURRENT SCENARIO

 Present Governor of RBI: Shaktikanta Das

Financial Statement of the RBI :-

 The Reserve Bank of India (RBI)in consultation with the government of India has set the
limits for Ways and Means Advances (WMA) for the first half of the financial year
2019-20 (April 2019 to September 2019) at Rs.75000 crore.

Ways and Means Advances (WMA):

♦ WMA is the temporary loan facility provided by the RBI to the Centre and State
governments
♦ The WMA scheme was introduced in 1997 to meet any temporary mismatches in the
receipts and payments of the government
♦ The WMA needs to be vacated after 90 days
♦ The interest rate for WMA was charged at the repo rate 6.25%
♦ The limits for WMA are decided by the RBI and in consultation with the
Government of India

 The Reserve Bank of India (RBI) has slashed the key interest rate, repo rate by 25 basis
points or 0.25 per cent to 6 per cent and has decided to maintain the neutral policy
stance.“Given further moderation in inflation expectations as estimated by RBI, rate cut of
25 bps is entirely appropriate,” said finance secretary Subhash Chandra Garg. “This
should help in sustaining India’s growth to 7.2-7.3 per cent in Financial Year’20.”
 The reverse repo rate, too, was lowered from 6% to 5.75%.
 The bank rate was fixed at 6.25%.
 RBI expects economic growth to be in the range of 6.8-7.1 per cent in the first half of the
current financial year and in the range of 7.3-7.4 per cent in the second half with “risks
evenly balanced”.

 Inflation is likely to remain benign in the short term. Assuming a normal monsoon in
2019, the RBI lowered its CPI inflation projection to 2.4 per cent in the fourth quarter of
2018-19.

 For the first half of the current financial year 2019-20, RBI expects inflation at 2.9-3.0
per cent, and 3.5-3.8 per cent in the second half.

 RBI to issue a fresh circular for Banks on how to tackle NPAs since the Supreme Court
has struck down the February 2018 circular which gave lender banks six months to
resolve their stressed assets or move under the Insolvency Code against private entities
who have defaulted in loans worth over Rs 2000 crore.

The Bad loan divergence practice was mandated by RBI to improve the transparency in
asset classification. Now RBI has brought changes to the bad loan divergence rule. The
reason for this is that some banks, on account of low or negative net profit after tax were
forced to disclose divergences even where the additional provisioning assessed by
the RBI was small. This was contrary to the regulatory intent that only material
divergences should be disclosed.

Changes brought in by the RBI in NPA Disclosure Norms:-

1)Banks are required to disclose divergence when the additional provisioning for NPAs
assessed by RBI exceeds 10% of the reported profit before provisions and contingencies
for the reference period, instead of the earlier rule of 15% of the published net profits
after tax.

2) The norms on divergence on gross non-performing assets (NPAs) continue to be a

material divergence of 15% has left unchanged.

 Reserve Bank of India injects long-term liquidity worth USD 5 billion into the banking
system through a dollar-rupee buy-sell swap for tenure of three years on April 23, the
second such auction within a month.
 Earlier on March 26, the central bank had bought USD 5 billion through similar swap
auction in a bid to ease liquidity ahead of elections.
"In order to meet the durable liquidity needs of the system, the RBI has decided to inject
Rupee liquidity for a longer duration through long-term foreign exchange Buy/Sell swap
in terms of its extant Liquidity Management Framework,"

 The Reserve Bank of India (RBI) is set to issue guidelines within two months for
thefintech companies to test their new products on a small group of users before scaling
up.

A Sandbox is a framework set up by a regulator that allows FinTech start-ups to

conduct live experiments in a controlled environment under supervision.

Regulatory sandbox will provide a well-defined space for the companies to develop
new products. It allows for experimenting with their products and fintech solutions. In
case of failure, the consequences would be contained and the reasons will be analyzed for
betterment. The RBI's working group on FinTech and digital banking in 2017 had
recommended that a regulatory sandbox/innovation hub be introduced within a well-
defined space and duration to experiment with FinTech solutions, where the
consequences of failure can be contained and reasons for failure analyzed.

 The Reserve Bank of India (RBI) on Thursday relaxed the provision that Foreign
Portfolio Investors (FPI) can't have an exposure of more than 20% of its corporate bond
portfolio to a single corporate.

In April 2018, the government had restricted an FPI’s investment in a single corporate
bond to 50 per cent of the bond issue.

Moreover, the exposure to any single corporate group was mandated to not exceed 20 per
cent of an FPI's overall corporate bond portfolio. They were allowed to invest in debt
papers with less than three-year maturities, provided the total investment in debt papers
maturing within a year did not exceed 20 per cent of the portfolio.

An RBI press release said, "While the provision was aimed at incentivizing FPIs to
maintain a portfolio of assets, further market feedback indicates that FPIs have been
constrained by this stipulation. In order to encourage a wider spectrum of investors to
access the Indian corporate debt market, it is now proposed to withdraw this provision. A
circular to this effect will be issued by mid-February, 2019."