RBI Surprise Move

4/26/2019

The Reserve Bank of India has come forward to step up liquidity management in efforts to increase the economic impact of its policy of rate cuts. The Reserve Bank of India in a surprise announcement of new open market purchases of Government bonds has took a decision to step in the economy. In an unexpected move the Reserve Bank to purchase a total of 250 billion rupees of Government bonds in the soon coming the month of May with the first auction for 125 billion rupees on May 2. The RBI is sore over that its 2 rapo rate cuts this year totaling 50 basic points have not been followed with moves of similar magnitude by commercial banks. The Banks are reluctant to risk while sitting on a heap of non-performing assets. The RBI said if banks do not lower its interest rates, consumers and business and corporate sectors do not benefit from RBI moves and overall growth impact of rate cut is less than intended that was just an exercise in futility. The RBI announced in open market purchases of Government bonds took the markets by surprise as it come immediately after the Reserve Bank’s second ever 5 billion dollar buy/ swap auction which has resulted in net infusion of nearly 700 billion rupees in the banking system. The swap system was introduced in last month in March to ensure banks had enough liquidity to be comfortable with lowering rates for its customers. Infusing 2-3 billion dollars of durable liquidity monthly is only way for transmission of RBI rate cut to lending rate cut. After April rate cuts the RBI was conscious that the transmission of rate decision have to be appropriate and effected. The State Bank of India the country’s largest lender has only cut its marginal standing facility rate by 5 basic points this year.The RBI has asked the banks to disclose how much it have lent to I.L. and F.S. group and how much of it have it provided for. Normally the RBI does not ask banks to inform details of loans to specific borrowers. But under the given situation in the banks of huge accumulated bad loans in the form of NPA the RBI has deviated and looking deep into NPA that has come out as a massive racket of corruption in the banking system and massive understand dealing putting the economy and financial viability in jeopardy.