The document summarizes the Reserve Bank of India's Monetary Policy Statement for 2010-2011. It notes that while India's economy is recovering rapidly from slowdown, inflationary pressures are rising. The policy stance must now focus on curbing inflation while still supporting growth. The statement reviews global economic conditions, domestic macroeconomic trends, and outlines the RBI's monetary policy approach and measures to balance growth and inflation.

1. Reserve Bank of India
Monetary Policy Statement 2010-11
By
Dr. D. Subbarao
Governor
The Monetary Policy for 2010-11 turnaround after the crisis induced
is set against a rather complex economic slowdown evidences the resilience of our
backdrop. Although the situation is more economy and our financial sector.
reassuring than it was a quarter ago, However, this should not divert us from
uncertainty about the shape and pace of the need to bring back into focus the twin
global recovery persists. Private challenges of macroeconomic stability
spending in advanced economies and financial sector development.
continues to be constrained and inflation 3. This statement is organised in two
remains generally subdued making it parts. Part A covers Monetary Policy and
likely that fiscal and monetary stimuli is divided into four Sections: Section I
in these economies will continue for an provides an overview of global and
extended period. Emerging market domestic macroeconomic developments;
economies (EMEs) are significantly Section II sets out the outlook and
ahead on the recovery curve, but some projections for growth, inflation and
of them are also facing inflationary monetary aggregates; Section III explains
pressures. the stance of monetary policy; and Section
2. India’s growth-inflation dynamics IV specifies the monetary measures.
are in contrast to the overall global Part B covers Developmental and
scenario. The economy is recovering Regulatory Policies and is organised into
rapidly from the growth slowdown but six sections: Financial Stability (Section
inflationary pressures, which were I), Interest Rate Policy (Section II),
triggered by supply side factors, are now Financial Markets (Section III), Credit
developing into a wider inflationary Delivery and Financial Inclusion (Section
process. As the domestic balance of risks IV), Regulatory and Supervisory
shifts from growth slowdown to inflation, Measures for Commercial Banks (Section
our policy stance must recognise and V) and Institutional Developments
respond to this transition. While global (Section VI).
policy co-ordination was critical in 4. Part A of this Statement should be
dealing with a worldwide crisis, the exit read and understood together with the
process will necessarily be differentiated detailed review in Macroeconomic and
on the basis of the macroeconomic Monetary Developments released
condition in each country. India’s rapid yesterday by the Reserve Bank.

2. Part A. Monetary Policy
I. The State of the Economy
Global Economy production (IIP) recorded a growth of 17.6
per cent in December 2009, 16.7 per cent
5. The global economy continues to
in January 2010 and 15.1 per cent in
recover amidst ongoing policy support and
February 2010. The recovery has also
improving financial market conditions.
become more broad-based with 14 out of
The recovery process is led by EMEs,
17 industry groups recording accelerated
especially those in Asia, as growth
growth during April 2009-February 2010.
remains weak in advanced economies.
The sharp pick-up in the growth of the
The global economy continues to face
capital goods sector, in double digits since
several challenges such as high levels
September 2009, points to the revival of
of unemployment, which are close to
investment activity. After a continuous
10 per cent in the US and the Euro area.
decline for eleven months, imports
Despite signs of renewed activity in
expanded by 2.6 per cent in November
manufacturing and initial improvement in
2009, 32.4 per cent in December 2009,
retail sales, the prospects of economic
35.5 per cent in January 2010 and
recovery in Europe are clouded by the
66.4 per cent in February 2010. The
acute fiscal strains in some countries.
acceleration in non-oil imports since
6. Core measures of inflation in November 2009 further evidences
major advanced economies are still recovery in domestic demand. After
moderating as the output gap persists and contracting for twelve straight months,
unemployment remains high. Inflation exports have turned around since October
expectations also remain well-anchored. 2009 reflecting revival of external
In contrast, core measures of inflation in demand. Various lead indicators of service
EMEs, especially in Asia, have been sector activity also suggest increased
rising. This has prompted central banks economic activity. On the whole, the
in some EMEs to begin phasing out their economic recovery, which began around
accommodative monetary policies. the second quarter of 2009-10, has since
shown sustained improvement.
Domestic Economy
9. A sharp recovery of growth during
7. The Reserve Bank had projected
2009-10 despite the worst south-west
the real GDP growth for 2009-10 at 7.5
monsoon since 1972 attests to the
per cent. The advance estimates released
resilience of the Indian economy. On
by the Central Statistical Organisation
the demand side, the contribution of
(CSO) in early February 2010 placed
various components to growth in 2009-10
the real GDP growth during 2009-10 at
was as follows: private consumption
7.2 per cent. The final real GDP growth
(36 per cent), government consumption
for 2009-10 may settle between 7.2 and
(14 per cent), fixed investments
7.5 per cent.
(26 per cent) and net exports (20 per cent).
8. The uptrend in industrial activity The monetary and fiscal stimulus
continues. The index of industrial measures initiated in the wake of the
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3. global financial crisis played an important 12. Growth in monetary and credit
role, first in mitigating the adverse impact aggregates during 2009-10 remained
from contagion and then in ensuring that broadly in line with the projections set out
the economy recovered quickly. in the Third Quarter Review in January
10. However, the developments on 2010. Non-food bank credit expanded
the inflation front are worrisome. steadily during the second half of the year.
The headline inflation, as measured by Consequently, the year-on-year non-food
year-on-year variation in Wholesale Price credit growth recovered from its intra-year
Index (WPI), accelerated from 0.5 per cent low of 10.3 per cent in October 2009 to
in September 2009 to 9.9 per cent in 16.9 per cent by March 2010. The increase
March 2010, exceeding the Reserve in bank credit was also supplemented by
Bank’s baseline projection of higher flow of financial resources from
8.5 per cent for March 2010 set out in the other sources. Reserve Bank’s estimates
Third Quarter Review. Year-on-year WPI show that the total flow of financial
non-food manufactured products (weight: resources from banks, domestic non-bank
52.2 per cent) inflation, which was (-) 0.4 and external sources to the commercial
per cent in November 2009, turned sector during 2009-10 at Rs.9,71,000
marginally positive to 0.7 per cent in crore, was higher than the amount of
December 2009 and rose sharply Rs.8,34,000 crore in the previous year.
thereafter to 3.3 per cent in January 2010 13. Scheduled commercial banks
and further to 4.7 per cent in March 2010. (SCBs) raised their deposit rates by
Year-on-year fuel price inflation also 25-50 basis points between February and
surged from (-) 0.7 per cent in November April 2010 so far, signalling a reversal in
2009 to 5.9 per cent in December 2009, the trend of reduction in deposit rates. On
to 8.1 per cent in January 2010 and further the lending side, the benchmark prime
to 12.7 per cent in March 2010. Despite lending rates (BPLRs) of SCBs have
some seasonal moderation, food price remained unchanged since July 2009
inflation remains elevated. following reductions in the range of
11. Clearly, WPI inflation is no longer 25-100 basis points between March and
driven by supply side factors alone. The June 2009. However, data from select
contribution of non-food items to overall banks suggest that the weighted average
WPI inflation, which was negative yield on advances, which is a proxy
at (-) 0.4 per cent in November 2009 rose measure for effective lending rates, is
sharply to 53.3 per cent by March 2010. projected to decline from 10.8 per cent in
Consumer price index (CPI) based March 2009 to 10.1 per cent by March
measures of inflation were in the range of 2010. The Base Rate system of loan
14.9-16.9 per cent in January/February pricing, which will replace the BPLR
2010. Thus, inflationary pressures have system with effect from July 1, 2010, is
accentuated since the Third Quarter expected to facilitate better pricing of
Review in January 2010. What was loans, enhance transparency in lending
initially a process driven by food prices rates and improve the assessment of
has now become more generalised. monetary policy transmission.
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4. 14. Financial markets functioned of active liquidity management measures
normally through the year. Surplus such as front-loading of the borrowing
liquidity that prevailed throughout the calendar, unwinding of securities under
year declined towards the end of the year the market stabilisation scheme (MSS)
consistent with the monetary policy and open market operation (OMO)
stance. The Reserve Bank absorbed about purchases.
Rs.1,00,000 crore on a daily average basis
17. The Union Budget for 2010-11
under the liquidity adjustment facility
has begun the process of fiscal
(LAF) during the current financial year up
consolidation by budgeting lower fiscal
to February 12, 2010, i.e., before the first
deficit (5.5 per cent of GDP in 2010-11 as
stage of increase in the cash reserve ratio
(CRR) came into effect. During February compared with 6.7 per cent in 2009-10)
27- March 31, 2010, the average daily and revenue deficit (4.0 per cent of GDP
absorption of surplus liquidity declined to in 2010-11 as compared with 5.3 per cent
around Rs. 38,200 crore reflecting the in 2009-10). As a result, the net market
increase in the CRR, year-end advance tax borrowing requirement of the Central
outflows and higher credit demand from Government in 2010-11 is budgeted lower
the private sector. However, as the overall at Rs.3,45,010 crore as compared with that
liquidity remained in surplus, overnight in the previous year.
interest rates generally stayed close to the 18. Historically, fiscal deficits have
lower bound of the LAF rate corridor. been financed by a combination of
15. The large market borrowing by the market borrowings and other sources.
Government put upward pressure on the However, in 2009-10 and 2010-11,
yields on government securities during reliance on market borrowings for
2009-10. However, this was contained by financing the fiscal deficit increased in
active liquidity management by the relative terms. The large market
Reserve Bank. Lower credit demand by borrowing in 2009-10 was facilitated by
the private sector also cushioned the yield. the unwinding of MSS securities and
Equity markets generally remained firm OMO purchases, as a result of which fresh
during the year with intermittent issuance of securities constituted 63.0 per
corrections in line with the global pattern. cent of the total budgeted market
Resource mobilisation through public borrowings. However in 2010-11, almost
issues increased sharply. Housing prices the entire budgeted borrowings will be
rebounded during 2009-10. According to funded by fresh issuance of securities.
the Reserve Bank’s survey, they surpassed Therefore, notwithstanding the lower
their pre-crisis peak levels in Mumbai. budgeted net borrowings, fresh issuance
16. During 2009-10, the Central of securities in 2010-11 will be
Government raised Rs.3,98,411 crore (net) Rs.3,42,300 crore, higher than the
through the market borrowing programme corresponding figure of Rs.2,51,000 crore
while the state governments mobilised last year. The large government borrowing
Rs.1,14,883 crore (net). This large in 2009-10 was also facilitated by sluggish
borrowing was managed in a non- private credit demand and comfortable
disruptive manner through a combination liquidity conditions. However, going
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5. forward, private credit demand is expected the corresponding period last year.
to pick up further. Meanwhile, inflationary Consequently, on a balance of payments
pressures have also made it imperative for basis (i.e., excluding valuation effects),
the Reserve Bank to absorb surplus foreign exchange reserves increased by
liquidity from the system. Thus, managing US$ 11 billion as against a decline of US$
the borrowings of the Government during 20 billion during the corresponding period
2010-11 will be a bigger challenge than it a year ago. Foreign exchange reserves
was last year. stood at US$ 279 billion as
on March 31, 2010. The six-currency
19. The current account deficit during trade-based real effective exchange rate
April-December 2009 was US$ 30 billion (REER) (1993-94=100) appreciated by
as compared with US$ 28 billion for the 15.5 per cent during 2009-10 up to
corresponding period of 2008. Net capital February as against 10.4 per cent
inflows at US$ 42 billion were also depreciation in the corresponding period
substantially higher than US$ 7 billion in of the previous year.
II. Outlook and Projections
Global Outlook commercial real estate is declining.
Growth Growth in the euro area, on a quarter-on-
quarter basis, was 0.1 per cent in Q4 of
20. In its World Economic Outlook 2009. It may remain moderate in 2010
Update for January 2010, the International because of the ongoing process of balance
Monetary Fund (IMF) projected sheet adjustment in various sectors,
that global growth will recover from (-) 0.8 dampened investment, low capacity
per cent in 2009 to 3.9 per cent in 2010
utilisation and low consumption. Though
and further to 4.3 per cent in 2011.
exports are improving and the decline in
Organisation for Economic Co-operation
business fixed investment is moderating,
and Development’s (OECD) composite
several euro-zone governments are faced
leading indicators (CLIs) in February
with high and unsustainable fiscal
2010 continued to signal an improvement
imbalances which could have implications
in economic activity for the advanced
for medium and long-term interest rates.
economies. Three major factors that have
contributed to the improved global In Japan, improved prospects on account
outlook are the massive monetary and of exports have been offset by the
fiscal support, improvement in confidence levelling off of public investment and rise
and a strong recovery in EMEs. in unemployment.
21. US GDP rose by 5.6 per cent on 22. Amongst EMEs, China continues
an annualised basis during Q4 of 2009. to grow at a rapid pace, led mainly by
However, household spending remains domestic demand. Malaysia and Thailand
constrained by high unemployment at have recovered to register positive growth
9.7 per cent. Though business fixed in the second half of 2009. Indonesia
investment is turning around and housing recorded positive growth throughout
starts are picking up, investment in 2009.
5

6. Inflation business expectation index (BEI) showed
seasonal moderation from 120.6 in Q4 of
23. Globally, headline inflation rates
2009-10 to 119.8 in Q1 of 2010-11, it was
rose between November 2009 and January
much higher in comparison with the level
2010, softened in February 2010 on
of 96.4 a year ago. The improved
account of moderation of food, metal and
performance of the industrial sector is also
crude prices and again rose marginally in
reflected in the improved profitability in
some major economies in March 2010.
the corporate sector. Service sector
Core inflation continued to decline in the
activities have shown buoyancy,
US on account of substantial resource
especially during the latter half of
slack. Inflation expectations in advanced
2009-10. The leading indicators of various
countries also remain stable. Though
sectors such as tourist arrivals,
inflation has started rising in several
commercial vehicles production and
EMEs, India is a significant outlier with
traffic at major ports show significant
inflation rates much higher than in other
improvement. A sustained increase in bank
EMEs.
credit and in the financial resources raised
Domestic Outlook by the commercial sector from non-bank
Growth sources also suggest that the recovery is
gaining momentum.
24. The Indian economy is firmly on
the recovery path. Exports have been 26. On balance, under the assumption
expanding since October 2009, a trend of a normal monsoon and sustenance of
good performance of the industrial and
that is expected to continue. The industrial
services sectors on the back of rising
sector recovery is increasingly becoming
domestic and external demand, for policy
broad-based and is expected to take firmer
purposes the baseline projection of real
hold going forward on the back of rising
GDP growth for 2010-11 is placed at 8.0
domestic and external demand.
per cent with an upside bias (Chart 1).
25. Surveys generally support the
Inflation
perception of a consolidating recovery.
According to the Reserve Bank’s quarterly 27. Headline WPI inflation, which
industrial outlook survey, although the moderated in the first half of 2009-10,
Chart 1: Projection of GDP Growth for 2010-11
10
GDP Growth (%)
9
8
7
6
2010-11
2009-10
2005-06
2006-07
2007-08
2008-09
Baseline Projection 50 Per cent CI 70 Per cent CI 90 Per cent CI CI - confidence interval
6

7. firmed up in the second half of the year. It of seasonal moderation in food prices,
accelerated from 1.5 per cent in October overall food inflation continues at an
2009 to 9.9 per cent by March 2010. The elevated level. It is likely that structural
deficient south-west monsoon rainfall shortage of certain agricultural
accentuated the pressure on food prices. commodities such as pulses, edible oils
This, combined with the firming up of and milk could reduce the pace of food
global commodity prices from their low price moderation. Second, the firming up
levels in early 2009 and incipient demand of global commodity prices poses upside
side pressures, led to acceleration in the risks to inflation. Third, the Reserve
overall inflation rate – both of the WPI Bank’s industrial outlook survey shows
and the CPIs. that corporates are increasingly regaining
their pricing power in many sectors. As
28. The Reserve Bank’s baseline the recovery gains further momentum,
projection of WPI inflation for March the demand pressures are expected to
2010 was 8.5 per cent. However, some accentuate. Fourth, the Reserve Bank’s
subsequent developments on both supply quarterly inflation expectations survey for
and demand sides pushed up inflation. households indicates that household
Enhancement of excise duty and inflation expectations have remained at an
restoration of the basic customs duty on elevated level.
crude petroleum and petroleum products
and the increase in prices of iron ore and 30. Going forward, three major
coal had a significant impact on WPI uncertainties cloud the outlook for
inflation. In addition, demand side inflation. First, the prospects of the
pressures also re-emerged as reflected in monsoon in 2010-11 are not yet clear.
the sharp increase in non-food Second, crude prices continue to be
manufactured products inflation from 0.7 volatile. Third, there is evidence of
demand side pressures building up. On
per cent to 4.7 per cent between December
balance, keeping in view domestic
2009 and March 2010.
demand-supply balance and the global
29. There have been significant trend in commodity prices, the baseline
changes in the drivers of inflation in recent projection for WPI inflation for March
months. First, while there are some signs 2011 is placed at 5.5 per cent (Chart 2).
Chart 2: Projected Path of Y-o-Y WPI Inflation
15.0
12.5
Inflation Rate (%)
10.0
7.5
5.0
2.5
0.0
Mar-11
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
-2.5
Mar-10
Jun-10
Sep-10
Dec-10
Baseline Projection 50 Per cent CI 70 Per cent CI 90 Per cent CI CI - confidence interval
7

8. 31. It would be the endeavour of the policy purposes, M3 growth for 2010-11
Reserve Bank to ensure price stability and is placed at 17.0 per cent. Consistent with
anchor inflation expectations. In pursuit this, aggregate deposits of SCBs are
of these objectives, the Reserve Bank projected to grow by 18.0 per cent. The
will continue to monitor an array of growth in non-food credit of SCBs is
measures of inflation, both overall and placed at 20.0 per cent. As always, these
disaggregated components, in the context numbers are provided as indicative
of the evolving macroeconomic situation projections and not as targets.
to assess the underlying inflationary
pressures. Risk Factors
32. Notwithstanding the current 35. While the indicative projections of
inflation scenario, it is important to growth and inflation for 2010-11 may
recognise that in the last decade, the appear reassuring, the following major
average inflation rate, measured both in downside risks to growth and upside risks
terms of WPI and CPI, had moderated to to inflation need to be recognised:
about 5 per cent from the historical trend First, uncertainty persists about the pace
rate of about 7.5 per cent. Against this and shape of global recovery. Fiscal
background, the conduct of monetary stimulus measures played a major role in
policy will continue to condition and the recovery process in many countries by
contain perception of inflation in the range compensating for the fall in private
of 4.0-4.5 per cent. This will be in line demand. Private demand in major
with the medium-term objective of 3.0 advanced economies continues to be weak
per cent inflation consistent with India’s due to high unemployment rates, weak
broader integration into the global income growth and tight credit conditions.
economy. There is a risk that once the impact of
Monetary Aggregates public spending wanes, the recovery
process will be stalled. Therefore, the
33. During 2009-10, money supply
prospects of sustaining the recovery hinge
(M 3) growth decelerated from over 20.0
per cent at the beginning of the financial strongly on the revival of private
year to 16.4 per cent in February 2010 consumption and investment. While
before increasing to 16.8 per cent by recovery in India is expected to be driven
March 2010, slightly above the Reserve predominantly by domestic demand,
Bank’s indicative projection of 16.5 significant trade, financial and sentiment
per cent. This was reflected in non-food linkages indicate that a sluggish and
credit growth of 16.9 per cent, above the uncertain global environment can
indicative projection of 16.0 per cent. adversely impact the Indian economy.
34. Keeping in view the need to Second, if the global recovery does gain
balance the resource demand to meet momentum, commodity and energy prices,
credit offtake by the private sector and which have been on the rise during the last
government borrowings, monetary one year, may harden further. Increase in
projections have been made consistent global commodity prices could, therefore,
with the growth and inflation outlook. For add to inflationary pressures.
8

9. Third, from the perspective of both markets, are getting increasingly
domestic demand and inflation concerned about the external sector
management, the 2010 south-west dynamics.
monsoon is a critical factor. The current 36. Our exchange rate policy is not
assessment of softening of domestic guided by a fixed or pre-announced target
inflation around mid-2010 is contingent or band. Our policy has been to retain the
on a normal monsoon and moderation in flexibility to intervene in the market to
food prices. Any unfavourable pattern in manage excessive volatility and
spatial and temporal distribution of disruptions to the macroeconomic
rainfall could exacerbate food inflation. situation. Recent experience has
In the current context, an unfavourable underscored the issue of large and often
monsoon could also impose a fiscal volatile capital flows influencing
burden and dampen rural consumer and exchange rate movements against the
investment demand. grain of economic fundamentals and
Fourth, it is unlikely that the large current account balances. There is,
monetary expansion in advanced therefore, a need to be vigilant against the
economies will be unwound in the near build-up of sharp and volatile exchange
future. Accommodative monetary policies rate movements and its potentially
in the advanced economies, coupled with harmful impact on the real economy.
better growth prospects in EMEs 37. The resumption of the process of
including India, are expected to trigger fiscal consolidation has been a significant
large capital flows into the EMEs. While positive development. This will help avoid
the absorptive capacity of the Indian crowding out of private sector credit
economy has been increasing, excessive demand and facilitate better monetary
flows pose a challenge for exchange rate management. However, the overall size of
and monetary management. The rupee has the government borrowing programme is
appreciated sharply in real terms over the still very large and can exert pressure on
past one year. Pressures from higher interest rates. Going forward, fiscal
capital flows combined with the prevailing consolidation has to shift from one-off
rate of inflation will only reinforce that gains to structural improvements on both
tendency. Both exporters, whose prospects tax and expenditure sides, and focus
are just beginning to turn, and producers, increasingly on the quality of fiscal
who compete with imports in domestic consolidation.
III. The Policy Stance
38. In the wake of the global economic economy and ensured that the economy
crisis, the Reserve Bank pursued started recovering ahead of most other
an accommodative monetary policy economies. However, in view of the rising
beginning mid-September 2008. This food inflation and the risk of it impinging
policy instilled confidence in market on inflationary expectations, the Reserve
participants, mitigated the adverse impact Bank embarked on the first phase of exit
of the global financial crisis on the from the expansionary monetary policy by
9

10. terminating some sector-specific liquidity can complicate the inflation outlook
facilities and restoring the statutory and impair inflationary expectations,
liquidity ratio (SLR) of scheduled particularly given the recent escalation in
commercial banks to its pre-crisis level in the prices of non-food manufactured
the Second Quarter Review of October items. Despite the increase of 25 basis
2009. points each in the repo rate and the reverse
39. The process was carried forward repo rate, our real policy rates are still
by the second phase of exit when the negative. With the recovery now firmly in
Reserve Bank announced a 75 basis points place, we need to move in a calibrated
increase in the CRR in the Third Quarter manner in the direction of normalising our
Review of January 2010. As inflation policy instruments.
continued to increase, driven significantly Second, inflationary pressures have
by the prices of non-food manufactured accentuated in the recent period. More
goods, and exceeded the Reserve Bank’s importantly, inflation, which was earlier
baseline projection of 8.5 per cent for driven entirely by supply side factors, is
March 2010 (made in the Third Quarter now getting increasingly generalised.
Review), the Reserve Bank responded There is already some evidence that the
expeditiously with a mid-cycle increase pricing power of corporates has returned.
of 25 basis points each in the policy repo With the growth expected to accelerate
rate and the reverse repo rate under the further in the next year, capacity
LAF on March 19, 2010. constraints will re-emerge, which are
40. The monetary policy response expected to exert further pressure on
in India since October 2009 has prices. Inflation expectations also remain
been calibrated to India’s specific at an elevated level. There is, therefore, a
macroeconomic conditions. Accordingly, need to ensure that demand side inflation
our policy stance for 2010-11 has been does not become entrenched.
guided by the following three major Third, notwithstanding lower budgeted
considerations: government borrowings in 2010-11 than
First, recovery is consolidating. The quick in the year before, fresh issuance of
rebound of growth during 2009-10 despite securities will be 36.3 per cent higher than
failure of monsoon rainfall suggests that in the previous year. This presents a
the Indian economy has become resilient. dilemma for the Reserve Bank. While
Growth in 2010-11 is projected to be monetary policy considerations demand
higher and more broad-based than in that surplus liquidity should be absorbed,
2009-10. In its Third Quarter Review in debt management considerations warrant
January 2010, the Reserve Bank had supportive liquidity conditions. The
indicated that our main monetary policy Reserve Bank, therefore, has to do a
instruments are at levels that are more fine balancing act and ensure that while
consistent with a crisis situation than with absorbing excess liquidity, the
a fast recovering economy. In the government borrowing programme is not
emerging scenario, lower policy rates hampered.
10

11. 41. Against this backdrop, the stance ∑ Actively manage liquidity to ensure
of monetary policy of the Reserve Bank that the growth in demand for credit
is intended to: by both the private and public
sectors is satisfied in a non-disruptive
∑ Anchor inflation expectations,
way.
while being prepared to respond
appropriately, swiftly and effectively ∑ Maintain an interest rate regime
to further build-up of inflationary consistent with price, output and
pressures. financial stability.
IV. Monetary Measures
42. On the basis of the current (NDTL) effective the fortnight
assessment and in line with the policy beginning April 24, 2010.
stance as outlined in Section III, the
47. As a result of the increase in the
Reserve Bank announces the following
CRR, about Rs. 12,500 crore of excess
policy measures:
liquidity will be absorbed from the system.
Bank Rate
48. The Reserve Bank will continue to
43. The Bank Rate has been retained monitor macroeconomic conditions,
at 6.0 per cent. particularly the price situation, closely and
take further action as warranted.
Repo Rate
Expected Outcomes
44. It has been decided to:
49. The expected outcomes of the
∑ increase the repo rate under the
actions are:
Liquidity Adjustment Facility (LAF)
by 25 basis points from 5.0 per cent (i) Inflation will be contained and
to 5.25 per cent with immediate inflationary expectations will be
effect. anchored.
Reverse Repo Rate (ii) The recovery process will be
sustained.
45. It has been decided to:
(iii) Government borrowing requirements
∑ increase the reverse repo rate under
and the private credit demand will be
the LAF by 25 basis points from 3.5
met.
per cent to 3.75 per cent with
immediate effect. (iv) Policy instruments will be further
aligned in a manner consistent with
Cash Reserve Ratio
the evolving state of the economy.
46. It has been decided to:
First Quarter Review of Monetary
∑ increase the cash reserve ratio (CRR) Policy 2010-11
of scheduled banks by 25 basis points
50. The First Quarter Review of
from 5.75 per cent to 6.0 per cent of
Monetary Policy for 2010-11 will be
their net demand and time liabilities
announced on July 27, 2010.
11

12. Part B. Developmental and Regulatory Policies
51. The global financial crisis has maintain financial stability. This process
underscored the importance of pursuing has now become more intensive with a
financial sector policies in the broader focus on drawing appropriate lessons from
context of financial stability and to serve the global financial crisis and putting in
the interests of the real economy. A major place a regulatory regime that is alert to
lesson is that no indicator or action is possible build-up of financial imbalances.
foolproof, which points to the need for The focus of the Reserve Bank’s
continuous monitoring, regular review of regulation will continue to be to improve
processes, proactive oversight and the efficiency of the banking sector
pre-emptive actions. Thus, periodic while maintaining financial stability.
assessment of regulatory comforts and Simultaneously, it will vigorously pursue
effective supervision are critical elements the financial inclusion agenda to make
for developing the financial sector on a financial sector development more
sound footing. inclusive.
52. Over the last several years, the 53. A synopsis of the action taken on
Reserve Bank has undertaken the past policy announcements together
wide-ranging financial sector reforms to with a list of fresh policy measures is set
improve financial intermediation and out below.
I. Financial Stability
Financial Stability Report stability standpoint. The FSR observed
that the banks remained well-capitalised
54. As announced in the Annual Policy
with higher core capital and sustainable
Statement of April 2009, the Reserve Bank
financial leverage. Further, stress tests for
established a Financial Stability Unit in
credit and market risk confirmed banks’
August 2009 for carrying out periodic
resilience to withstand high stress. The
stress testing and for preparing financial
FSR also emphasised the need for
stability reports.
evolving a stronger supervisory regime for
55. The first Financial Stability Report systemically important non-deposit taking
(FSR) was released on March 25, non-banking financial companies
2010. This Report is an attempt at (NBFCs-ND-SI) and strengthening the
institutionalising the focus on financial monitoring and oversight framework for
stability and making it an integral part of systemically important financial
the policy framework. The first FSR conglomerates. Overall risk to financial
makes an assessment of the strength of the stability was found to be limited.
financial sector, with particular focus on However, the recent financial turmoil has
banks, and has raised some concerns, clearly demonstrated that financial
including rising inflation, high stability cannot be taken for granted, and
government borrowings and likely surge that the maintenance of financial stability
in capital flows, from the financial requires constant vigilance, especially
12

13. during normal times to detect and mitigate forward, the Financial Stability Reports
any incipient signs of instability. Going will be published half-yearly.
II. Interest Rate Policy
Base Rate: Introduction Group and the suggestions from various
stakeholders, the draft guidelines on Base
56. As indicated in the Annual Policy
Rate were placed on the Reserve Bank’s
Statement of April 2009, the Reserve Bank
website in February 2010.
constituted a Working Group on
Benchmark Prime Lending Rate 57. In the light of the comments/
(Chairman: Shri Deepak Mohanty) to suggestions received, it has been decided
review the present benchmark prime to mandate banks to switch over to the
lending rate (BPLR) system and suggest system of Base Rate from July 1, 2010.
changes to make credit pricing more Guidelines on the Base Rate system were
transparent. The Working Group issued on April 9, 2010. It is expected that
submitted its report in October 2009 and the Base Rate system will facilitate better
the same was placed on the Reserve pricing of loans, enhance transparency in
Bank’s website for public comments. lending rates and improve the assessment
Based on the recommendations of the of transmission of monetary policy.
III. Financial Markets
Financial Market Products Regulation of Non-Convertible
Interest Rate Futures Debentures (NCDs) of Maturity of Less
than One Year
58. The Interest Rate Futures contract
on 10-year notional coupon bearing 59. As indicated in the Second Quarter
Government of India security was Review of October 2009, the draft
introduced on August 31, 2009. Based guidelines on the regulation of
on the market feedback and the non-convertible debentures (NCDs)
recommendations of the Technical of maturity of less than one year
Advisory Committee (TAC) on the Money, were placed on the Reserve Bank’s
Foreign Exchange and Government website on November 3, 2009 for
Securities Markets, it is proposed: comments/feedback. The comments/
feedback received were examined and also
∑ to introduce Interest Rate Futures on deliberated by the TAC on the Money,
5-year and 2-year notional coupon Foreign Exchange and Government
bearing securities and 91-day
Securities Markets. Accordingly, it is
Treasury Bills. The RBI-SEBI
proposed:
Standing Technical Committee
will finalise the product design ∑ to issue the final guidelines on
and operational modalities for the issuance of NCDs of maturity less
introduction of these products on the than one year by end-June 2010.
exchanges.
13

14. Introduction of Credit Default Swaps ∑ to permit the recognised stock
(CDS) exchanges to introduce plain vanilla
60. As indicated in the Second Quarter currency options on spot US Dollar/
Review of October 2009, the Reserve Rupee exchange rate for residents.
Bank constituted an internal Working 63. The risk management and
Group to finalise the operational operational guidelines will be finalised by
framework for introduction of plain the RBI-SEBI Standing Technical
vanilla over-the-counter (OTC) single- Committee.
name CDS for corporate bonds for
Separate Trading for Registered Interest
resident entities subject to appropriate
and Principal of Securities (STRIPS):
safeguards. The Group is in the process
Status
of finalising a framework suitable for the
Indian market, based on consultations with 64. As indicated in the Annual Policy
market participants/experts and study of Statement for 2009-10, the draft
international experience. Accordingly, it guidelines on stripping/reconstitution of
is proposed: government securities prepared in
∑ to place the draft report of the internal consultation with market participants were
Working Group on the Reserve placed on the Reserve Bank’s website on
Bank’s website by end-July 2010. May 14, 2009 for comments and feedback.
Taking into consideration the feedback
Guidelines on Forex Derivatives received on the draft guidelines, the final
61. As indicated in the Second Quarter guidelines on stripping/reconstitution of
Review of October 2009, the draft government securities were issued on
guidelines on OTC foreign exchange March 25, 2010. The guidelines, which
derivatives were placed on the Reserve came into effect from April 1, 2010, will
Bank’s website on November 12, 2009 for enable market participants to strip/
public comments. The feedback received reconstitute eligible Government of India
from stakeholders and industry dated securities through the negotiated
associations was discussed in the meeting dealing system (NDS) subject to certain
of the TAC on the Money, Foreign terms and conditions.
Exchange and Government Securities
Corporate Bond Market
Markets. On the basis of the discussions,
it is proposed: 65. In the recent period, the Reserve
Bank initiated several measures to develop
∑ to issue final guidelines by end-June
the corporate bond market as detailed
2010.
below:
Introduction of Exchange-Traded
(i) To facilitate settlement of secondary
Currency Option Contracts
market trades in corporate bonds
62. Currently, residents in India are on a delivery versus payment-1
permitted to trade in futures contracts in (DVP-1) basis on the Real Time Gross
four currency pairs on two recognised Settlement (RTGS) system,
stock exchanges. In order to expand the the National Securities Clearing
menu of tools for hedging currency risk, Corporation Limited (NSCCL) and
it has been decided: the Indian Clearing Corporation
14

15. Limited (ICCL) have been permitted years under the held to maturity
to maintain transitory pooling (HTM) category.
accounts with the Reserve Bank.
Investment in Unlisted Non-SLR
Further, guidelines have been issued Securities
to all Reserve Bank regulated entities
to mandatorily clear and settle all 67. In terms of extant instructions,
OTC trades in corporate bonds using banks’ investments in unlisted non-SLR
the above arrangement with effect securities should not exceed 10 per cent
from December 1, 2009. of their total investments in non-SLR
securities as on March 31 of the previous
(ii) To facilitate the development of an year. Since there is a time lag between
active repo market in corporate bonds, issuance and listing of security, banks may
the guidelines for repo transactions in not be able to participate in primary issues
corporate debt securities were issued of non-SLR securities, which are proposed
on January 8, 2010. The guidelines, to be listed but not listed at the time of
which came into force with effect subscription. In view of the above, it is
from March 1, 2010, will enable repo proposed that:
in listed corporate debt securities
rated ‘AA’ or above. Fixed Income ∑ investment in non-SLR debt securities
Money Market and Derivatives (both primary and secondary market)
Association of India (FIMMDA) is by banks where the security is
working on the development of proposed to be listed on the
reporting platform and also on the Exchange(s) may be considered as
Global Master Repo Agreement to investment in listed security at the
operationalise the repo in corporate time of making investment.
bonds. 68. If such security, however, is not
Non-SLR Bonds of companies engaged in listed within the period specified, the same
infrastructure: Valuation will be reckoned for the 10 per cent limit
specified for unlisted non-SLR securities.
66. At present, banks’ investments in In case such investment included under
non-SLR bonds are classified either under unlisted non-SLR securities lead to a
held for trading (HFT) or available for sale breach of the 10 per cent limit, the bank
(AFS) category and subjected to ‘mark to would not be allowed to make further
market’ requirements. Considering that investment in non-SLR securities (both
the long-term bonds issued by companies primary and secondary market, including
engaged in infrastructure activities are unrated bonds issued for financing
generally held by banks for a long period infrastructure activities) till such time the
and not traded and also with a view to limit is reached.
incentivising banks to invest in such
Financial Market Infrastructure
bonds, it is proposed:
Reporting Platform for Certificates of
∑ to allow banks to classify their
Deposit (CDs) and Commercial Papers
investments in non-SLR bonds
(CPs)
issued by companies engaged in
infrastructure activities and having a 69. Although there is a large CD and
minimum residual maturity of seven CP market, there is currently little
15

16. transparency in the secondary market regulation, surveillance and transparency
trades. In order to promote transparency purposes, it is necessary to extend the
in the secondary market transactions for existing reporting arrangement in respect
CDs and CPs, it is proposed: of IRS to all OTC interest rate and forex
derivatives. Accordingly, it is proposed:
∑ to introduce a reporting platform for
all secondary market transactions in ∑ to set up a Working Group consisting
CDs and CPs. of members of the Reserve Bank, the
CCIL and market participants to work
70. FIMMDA has been requested to
out the modalities for an efficient,
start work on developing a platform single point reporting mechanism for
similar to its existing platform for all OTC interest rate and forex
corporate bonds. Eventually, once the derivative transactions.
reporting system stabilises, a settlement
mechanism similar to the one introduced Revision of Repo Accounting: Status
for the OTC corporate bonds may be put 72. As indicated in the Annual Policy
in place. Statement of April 2009, the revised
Reporting of OTC Derivative guidelines for accounting of repo/reverse
Transactions repo transactions were issued by the
Reserve Bank on March 23, 2010. The
71. The issue of transparency and the revised accounting guidelines capture
need for information repositories for the economic essence of repo as a
transactions in OTC derivatives have collateralised lending and borrowing
assumed sharper focus in the post-crisis instrument and not as outright sale and
scenario. In India, centralised reporting of purchase. The revised accounting
OTC trades in interest rate derivatives guidelines have been made applicable to
[interest rate swap (IRS)/forward rate market repo transactions with effect from
agreements (FRAs)] commenced in April 1, 2010. These accounting norms
August 2007 on the Clearing Corporation will, however, not apply to repo/reverse
of India Limited (CCIL) platform. To repo transactions conducted under the
capture the trade data pertaining to all Liquidity Adjustment Facility (LAF) with
OTC derivative transactions for the Reserve Bank.
IV. Credit Delivery and Financial Inclusion
Credit Flow to the MSE Sector ∑ to mandate banks not to insist on
collateral security in case of loans up
Credit Guarantee Scheme for MSEs to Rs.10 lakh as against the present
73. Following the recommendations of limit of Rs.5 lakh extended to all units
the Working Group (Chairman: Shri V. K. of the micro and small enterprises
Sharma) on credit guarantee scheme of the (MSEs) sector.
Credit Guarantee Fund Trust for Micro High Level Task Force on MSMEs
and Small Enterprises (CGFTMSE), it is
74. A High Level Task Force was
proposed: constituted by the Government of India
16

17. (Chairman: Shri T.K.A. Nair) to consider Co-operative Credit Institutions
various issues raised by micro, small (Chairman: Prof.A.Vaidyanathan) and in
and medium enterprises (MSMEs) and consultation with the state governments,
draw up an agenda for action. The Task the Government of India had approved a
Force submitted its Report on January 30, package for revival of the short-term
2010 to the Government of India. The Task rural co-operative credit structure. As
Force recommended several measures envisaged in the package, so far 25 States
having a bearing on the functioning of have entered into Memoranda
MSMEs, viz., credit, marketing, labour, of Understanding (MoU) with the
exit policy, infrastructure/technology/skill Government of India and the National
development and taxation. In particular, Bank for Agriculture and Rural
it recommended that: (i) all scheduled Development (NABARD). Fourteen
commercial banks should achieve a 20 per States have made necessary amendments
cent year-on-year growth in credit to to their respective Co-operative Societies
micro and small enterprises to ensure Acts. As on December 31, 2009, an
enhanced credit flow; (ii) any shortfall in aggregate amount of about Rs.7,000 crore
the achievement of sub-target of 60 per was released by the NABARD as
cent for lending to micro enterprises of Government of India’s share under the
the total advances granted to the micro and package to primary agricultural credit
small enterprises, would also be taken into societies (PACS) in 11 States.
account for the purpose of allocating
Financial Inclusion through Grass-root
amounts for contribution to rural
Co-operatives
infrastructure development fund (RIDF)
or any other Fund with other financial 77. There is a need for better
institutions as specified by the Reserve understanding of the grass-root level
Bank, with effect from April 1, 2010; and rural co-operatives, which can play a
(iii) all scheduled commercial banks more effective role as vehicles of
should achieve a 15 per cent annual financial inclusion. Besides, a large
growth in the number of micro enterprise number of PACS, large adivasi multi-
accounts. purpose co-operative societies (LAMPS)
and farmers’ service societies (FSS), a
75. Banks are urged to keep in
number of thrift and credit co-operative
view the recommendations made by the
societies have been set up under the
Task Force and take effective steps to
parallel Self-Reliant Co-operative
increase the flow of credit to the MSE
Societies Acts in some States. There is a
sector, particularly to micro enterprises.
need to understand the operations of
The Reserve Bank will monitor the
these co-operative societies with
performance of banks in this regard.
reference to their membership profile,
Rural Co-operative Banks management structure, range of services
being offered by them, savings mobilised
Revival of Rural Co-operative Credit from members/non-members, percentage
Structure of non-borrower members, credit
76. Based on the recommendations extended to tenant farmers, oral lessees
of the Task Force on Revival of Rural and agricultural labourers to appreciate
17

18. the strengths of the well-functioning over 2,000. The Reserve Bank will discuss
societies and their potential as an FIPs with individual banks and monitor
effective vehicle of financial inclusion. their implementation.
It is, therefore, proposed:
Business Correspondents: Relaxations
∑ to constitute a Committee
79. Under the extant guidelines on the
comprising representatives from the
business correspondent (BC) model, only
Reserve Bank, the NABARD and a
certain select categories of individuals are
few State Governments to study the
permitted to be engaged as BCs. With a
functioning of well-run PACS,
view to providing more flexibility to
LAMPS, FSS and thrift and credit co-
banks, it is proposed:
operative societies set up under the
parallel Self-Reliant Co-operative ∑ to permit banks to engage any
Societies Acts to gather information individual, including those operating
on their working and assess their Common Service Centres (CSCs), as
potential to contribute to financial BC, subject to banks’ comfort level
inclusion. and their carrying out suitable due
diligence.
Financial Inclusion Plan for Banks
80. Operational guidelines to banks in
78. With a view to increasing banking this regard will be issued separately.
penetration and promoting financial
inclusion, domestic commercial banks, 81. Furthermore, a suggestion has
both in the public and private sectors, were been received from various quarters to
advised to take some specific actions. consider ‘for profit’ companies (other than
First, banks were required to put in place NBFCs) as BCs of banks. Keeping in view
a Board-approved Financial Inclusion the ramifications of the suggestion, it is
Plan (FIP) in order to roll them out over proposed:
the next three years and submit the same ∑ to prepare a discussion paper on the
to the Reserve Bank by March 2010. subject which will be placed on the
Banks were advised to devise FIPs Reserve Bank’s website. Based on the
congruent with their business strategy and feedback, a final view will be taken
to make it an integral part of their in the matter.
corporate plans. The Reserve Bank has
deliberately not imposed a uniform model High Level Committee on Lead Bank
so that each bank is able to build its own Scheme
strategy in line with its business model 82. On the basis of the
and comparative advantage. Second, recommendations of the High Level
banks were required to include criteria on Committee on Lead Bank Scheme
financial inclusion in the performance (Chairperson: Smt. Usha Thorat), the State
evaluation of their field staff. Third, banks Level Bankers’ Committee (SLBC)
were advised to draw up a roadmap by convenor banks were advised on
March 2010 to provide banking services November 27, 2009 that the lead banks
in every village having a population of should constitute a sub-committee of the
18

19. District Consultative Committees (DCCs) ∑ to expand the terms of reference of
to draw up a roadmap by March 2010 to the Working Group to also review the
provide banking services through a pros and cons of inclusion of bank
banking outlet in every village having a lending to micro-finance institutions
population of over 2,000. Such banking (MFIs) under priority sector lending.
services need not necessarily be extended The Group is expected to submit its
through a brick and mortar branch but Report by end-June 2010.
through any of the various forms of
Urban Co-operative Banks
information and communication
technology (ICT)-based models, including Establishment of New Urban
through business correspondents (BCs). Co-operative Banks
Based on the other recommendations of 84. Taking into account the systemic
the Committee, the lead banks/scheduled financial health of urban
commercial banks were advised on co-operative banks (UCBs), it was
March 2, 2010 to (i) strengthen various decided in 2004 not to set up any new
fora under the Lead Bank Scheme; UCBs. With a view to improving the
(ii) discuss specific issues enabling and financial soundness of the UCB sector,
inhibiting financial inclusion in the SLBC/ memoranda of understanding (MoU) were
DCC machinery; (iii) set up separate signed with all State Governments.
sub-committees to work intensively on Following the consolidation, the financial
specific issues; and (iv) prepare district condition of the UCB sector has improved
credit plans/annual credit plans linked considerably and UCBs have also been
with the business plans of the banks. For allowed to enter into new areas of
this purpose, it is proposed: business. With a view to increasing the
∑ to put in place an appropriate coverage of banking services amongst
monitoring mechanism of the working local communities, it is proposed:
of the SLBCs/DCCs. ∑ to set up a Committee comprising
Priority Sector Lending Certificates: all stakeholders for studying
Working Group the advisability of granting new
urban co-operative banking licences
83. In pursuance of the announcement under Section 22 of the Banking
made in the Second Quarter Review of Regulation Act, 1949 [as applicable
October 2009, a Working Group on to co-operative societies (AACS)].
Introduction of Priority Sector Lending
Certificates (PSLCs) (Chairman: Liberalisation of Off-site ATMs by
Shri V. K. Sharma) was constituted by the UCBs
Reserve Bank in November 2009 to 85. Under the extant policy of branch
examine the pros and cons of the authorisation, UCBs, which are
recommendation made by the Committee well-managed and meet the regulatory
on Financial Sector Reforms (Chairman: criteria, are required to submit annual
Dr. Raghuram G. Rajan) relating to PSLCs business plans, based on which centres are
and make suitable recommendations on its allotted to them according to their choice
introduction and their trading in the open for opening of branches. Centres where
market. In this context, it is proposed: UCBs desire to open off-site ATMs are
19

20. also required to be included in their annual to follow for their dealing with individual
business plan. In order to further improve customers.
the banking infrastructure, it has been 89. However, within the domain of
decided to liberalise the approach to necessary freedom to banks to choose
setting up of off-site ATMs by UCBs. the types of services to be offered to the
Accordingly, it is proposed: customers and related costs, concerted
∑ to allow well-managed UCBs to set efforts need to be made to further
up off-site ATMs without seeking d e v e l o p a c r e d i b l e a n d e ff e c t i v e
approval through the annual business f u n c t i o n a l s y s t e m o f a t t e n d i n g to
customer complaints. In particular,
plans.
banks’ internal structure needs to be
86. Detailed guidelines in this regard made functionally effective and scaled
will be issued by mid-May 2010. up to attend to not only basic customer
needs, but the special needs of
Customer Service
disadvantaged groups such as
87. The issue of ‘treating customers pensioners and small borrowers,
fairly’ is assuming critical importance as including farmers. Though there exists
the experience shows that consumer’s a tiered mechanism for customer
interests are often not accorded full grievance redressal in the banks, its
protection and properly attended to. e ff i c a c y i n t e r m s o f a t t e n d i n g t o
Customer service in the banking industry customer complaints is far from
is increasingly becoming important as satisfactory. Taking into account all
these considerations, it is proposed:
banks are privileged institutions and
banking is a special public utility service. ∑ to set up a Committee to look into
The Reserve Bank and the Banking banking services rendered to retail
Ombudsman’s offices have been receiving and small customers, including
several complaints regarding levying of pensioners. The Committee will also
excessive interest rates and charges on look into the system of grievance
certain loans and advances. redressal mechanism prevalent in
banks, its structure and efficacy, and
88. The Reserve Bank has, over the suggest measures for expeditious
years, undertaken a number of initiatives resolution of complaints. The
for ensuring fair treatment to customers. Committee will also examine the
This has taken the form of both regulatory international experiences in this
fiats (such as reining in of recovery agents, regard.
introduction of comprehensive display ∑ to further strengthen the mechanism,
board, banking facilities for the visually for implementing the Reserve Bank’s
challenged, rationalisation of service guidelines on customer service,
charges on collection of outstation through on-site and off-site
cheques and free use of ATMs) as also inspections.
moral suasion and class action. The Code ∑ to require banks to devote exclusive
of Bank’s Commitment to Customers was time in a Board meeting once every
introduced in July 2006 to set a minimum six months to review and deliberate
standard of banking practices for banks on customer service.
20

21. V. Regulatory and Supervisory Measures for
Commercial Banks
Strengthening the Resilience of the implementation of enhancements and
Banking Sector revisions to Basel-II framework finalised
by the Basel Committee in July 2009.
90. In December 2009, the Basel
Accordingly, the Reserve Bank issued
Committee on Banking Supervision
guidelines to banks in February 2010.
(BCBS) had issued two consultative
These guidelines require banks to make
documents for public comments. The
specified valuation adjustments for
document on ‘Strengthening the
various risks/costs in their portfolios
Resilience of the Banking Sector’ contains
including derivatives, which are subject
proposals for raising the quality,
to ‘mark to market’ requirement and also
consistency and transparency of the
for illiquidity of these positions. These
capital base, enhancing risk coverage,
guidelines also permit banks to follow any
prescribing leverage ratio and containing
recognised models/methods for computing
pro-cyclicality. The second document on
the amount of valuation adjustment. In
‘International Framework for Liquidity order to ensure that a consistent
Risk Measurement Standards and methodology is adopted by banks for the
Monitoring’ focuses on measures for purpose, it is proposed:
further elevating the resilience of
internationally active banks to liquidity ∑ to constitute a Working Group with
stress across the globe as well as members from the Reserve Bank,
increasing international harmonisation of FIMMDA, the IBA and a few banks
liquidity risk supervision. The Basel to recommend an appropriate
Committee is presently undertaking a framework in this regard.
Quantitative Impact Study (QIS) of these Convergence of Indian Accounting
proposals. The QIS will form the basis for Standards with International Financial
calibrating reforms proposed in the above Reporting Standards
two documents to arrive at an appropriate
92. As part of the efforts to ensure
level and quality of capital and liquidity.
convergence of the Indian Accounting
The fully calibrated set of standards is
Standards (IASs) with the International
expected to be developed by end-2010
Financial Reporting Standards (IFRSs),
with the aim of implementation by
the roadmap for banking companies and
end of 2012. Ten large Indian banks are non-banking financial companies
participating in the QIS. (NBFCs) has been finalised by the
Working Group on Valuation Ministry of Corporate Affairs in
Adjustment and Treatment of Illiquid consultation with the Reserve Bank. As
Positions per the roadmap, all scheduled
commercial banks will convert their
91. In the Second Quarter Review of opening balance sheet as at April 1, 2013
October 2009, it was proposed to issue in compliance with the IFRS converged
appropriate guidelines to banks for IASs.
21

22. 93. However, with regard to UCBs and preparing banks and other entities to
NBFCs, a gradualist approach is adhere to the roadmap.
considered appropriate. The roadmap
envisages UCBs having net worth in Infrastructure Financing
excess of Rs. 300 crore and NBFCs which 95. With a view to meeting the
are part of NSE-Nifty 50 and BSE-Sensex increasing financing needs of
30 as well as those NBFCs having net infrastructure development, the Reserve
worth in excess of Rs.1,000 crore to Bank has taken a number of measures to
converge with IFRSs in tandem with the facilitate adequate flow of bank credit to
time schedule given for scheduled this sector. In order to give a further thrust
commercial banks. UCBs having net to infrastructure financing by banks, some
worth in excess of Rs. 200 crore but not further measures are felt necessary.
exceeding Rs. 300 crore and other listed
96. In terms of extant instructions,
NBFCs as well as unlisted NBFCs having
rights, licenses and authorisations of
a net worth in excess of Rs. 500 crore shall
borrowers, charged to banks as collateral
convert their opening balance sheets as on
in respect of project loans (including
April 1, 2014 in compliance with the IFRS
infrastructure projects) are not eligible for
converged IASs. Remaining UCBs,
being reckoned as tangible security for the
unlisted NBFCs not falling in the above
purpose of classifying an advance as
categories and regional rural banks
secured loan. As toll collection rights and
(RRBs) need to follow only the notified
annuities in the case of road/highway
IASs which are not converged with IFRSs.
projects confer certain material benefits
94. Considering the amount of work to lenders, it is proposed:
involved in the convergence process, it is
∑ to treat annuities under build-operate-
expected that banks and other entities
transfer (BOT) model in respect of
concurrently initiate appropriate measures
road/highway projects and toll
to upgrade their skills, management
collection rights, where there are
information system (MIS) and information
provisions to compensate the project
technology (IT) capabilities to manage the
sponsor if a certain level of traffic is
complexities and challenges of IFRSs. The
not achieved, as tangible securities
implementation poses additional
subject to the condition that banks’
challenge as certain aspects of IFRSs,
right to receive annuities and toll
especially the standards on financial
collection rights is legally enforceable
instruments, are under review and would
and irrevocable.
take some time before they are finalised.
In order to facilitate smooth migration to 97. Till June 2004, the Reserve Bank
IFRSs, it is proposed: had prescribed a limit on banks’ unsecured
exposures. As a step towards deregulation,
∑ to undertake a study of the
the above limit was withdrawn to enable
implications of the IFRSs
banks’ Boards to formulate their own
convergence process and also to issue
policies on unsecured exposures. The
operational guidelines as appropriate.
provisioning requirement for unsecured
∑ to disseminate information through sub-standard exposures, however, was
learning programmes with a view to increased to 20 per cent consequent to the
22

23. withdrawal of limits on banks’ unsecured the one-mode presence criterion. The
exposures (the provisioning requirement WOS was to be treated on par with the
for secured sub-standard exposures stands existing branches of foreign banks for
at 10 per cent). In view of certain branch expansion in India. No foreign
safeguards such as escrow accounts bank, however, applied to establish itself
available in respect of infrastructure as a WOS or to convert to a WOS during
lending, it is proposed that: the first phase.
∑ infrastructure loan accounts classified 99. When the revision of presence of
as sub-standard will attract a foreign banks in India was due in April
provisioning of 15 per cent instead of 2009, the global financial markets were
the current prescription of 20 per cent. in turmoil and there were uncertainties
To avail of this benefit of lower surrounding the financial strength of
provisioning, banks should have in banks around the world. Accordingly, the
place an appropriate mechanism to Annual Policy Statement of April 2009
indicated the intent to continue with the
escrow the cash flows and also have
current policy and procedures governing
a clear and legal first claim on such
the presence of foreign banks in India and
cash flows.
to review its roadmap after due
Presence of Foreign Banks consultation with the stakeholders once
98. In February 2005, the Reserve there was greater clarity regarding
Bank had released the ‘roadmap for stability and recovery of the global
presence of foreign banks in India’ laying financial system.
out a two-track and gradualist approach 100. While global financial markets
aimed at increasing the efficiency and have been improving, various
stability of the banking sector in India. The international fora have been engaged in
first track was the consolidation of the setting out policy frameworks
domestic banking system, both in the incorporating the lessons learnt from the
private and public sectors, and the second crisis. Some of the lessons from crisis are
track was the gradual enhancement of to avoid organisational structures which
foreign banks in a synchronised manner. become (i) too big to fail and (ii) too
The roadmap was divided into two phases, complex to fail. Furthermore, while there
the first phase spanning the period March is a realisation that as international
2005 – March 2009, and the second phase agreement on cross-border resolution
beginning after a review of the experience mechanism for internationally active
gained in the first phase. In the first phase, banks is not likely to be reached in the
foreign banks wishing to establish near future, there is considerable merit
presence in India for the first time could in subsidiarisation of significant
either choose to operate through branch cross-border presence. Apart from easing
presence or set up a 100 per cent the resolution process, this will also
wholly-owned subsidiary (WOS), provide greater regulatory control and
following the one-mode presence comfort to the host jurisdictions. Drawing
criterion. Foreign banks already operating lessons from the crisis, it is proposed:
in India were also allowed to convert their ∑ to prepare a discussion paper on the
existing branches to WOS while following mode of presence of foreign banks
23

24. through branch or WOS by September conglomerates and better insulation of a
2010. bank from the reputational and other risks
of the subsidiaries/affiliates within the
Licensing of New Banks group. The Committee on Financial Sector
101. The Finance Minister, in his Assessment (CFSA), in its report issued
budget speech on February 26, 2010 in March 2009, observed that given the
announced that the Reserve Bank lack of clarity in the existing statutes
was considering giving some additional relating to the regulation and supervision
banking licenses to private sector players. of financial holding companies, the
NBFCs could also be considered, holding company structure as prevalent in
if they meet the Reserve Bank’s the US for financial conglomerates is not
eligibility criteria. In line with the above currently in use in India. The Committee
announcement, it is proposed: noted that the absence of the holding
company structure in financial
∑ to prepare a discussion paper conglomerates exposes investors,
marshalling the international depositors and the parent company to
practices, the Indian experience as risks, strains the parent company’s ability
also the extant ownership and to fund its own core business and could
governance (O&G) guidelines and restrict the growth of the subsidiary
place it on the Reserve Bank’s business. Considering the complexity of
website by end-July 2010 for wider the issues involved and implications of the
comments and feedback. BHC/FHC model for the financial system
in general and banking system in
102. Thereafter, detailed discussions
particular, it is proposed:
will be held with all stakeholders on the
discussion paper and guidelines will be ∑ to constitute a Working Group with
finalised based on the feedback. All the representatives from the
applications received in this regard would Government, the Reserve Bank, the
be referred to an external expert group for SEBI, the IRDA and the IBA to
examination and recommendations to the recommend a roadmap for the
Reserve Bank for granting licenses. introduction of a holding company
structure together with the required
Introduction of Bank Holding legislative amendment/framework.
Company (BHC)/Financial Holding
Conversion of Term Deposits, Daily
Company (FHC) in India
Deposits or Recurring Deposits for
103. The Reserve Bank placed a Reinvestment in Term Deposits
Discussion Paper on Holding Companies 104. As per extant guidelines, banks
in Banking Groups on its website in should allow conversion of term deposits,
August 2007 for public comments. The daily deposits or recurring deposits to
feedback received on the Discussion Paper enable depositors to immediately reinvest
underscored the need for introduction of the amount lying in the aforesaid deposits
bank holding companies (BHCs)/financial with the same bank in another term
holding companies (FHCs) in India to deposit. Banks are required to pay interest
ensure an orderly growth of financial in respect of such term deposits without
24

25. reducing the interest by way of penalty, of the major objectives of SREP is
provided that the deposit remains with the to evaluate whether the capital maintained
bank after reinvestment for a period longer by the bank is adequate keeping in
than the remaining period of the original view its risk profile and to determine the
contract. On a review of the extant supervisory capital ratio (SCR). The
regulatory norms and in order to facilitate SCR would be determined for each bank
better asset-liability management (ALM), separately. Under this framework,
it is proposed: the adequacy of the risk management
and internal control framework
∑ to permit banks to formulate their own
of banks would be subjected to
policies towards conversion of
in-depth assessment. In order to
deposits.
strengthen the supervisory process, it is
Compensation Practices proposed:
105. It was indicated in the Second ∑ to implement the SREP framework
Quarter Review of October 2009 that in for banks from the inspection cycle
line with the steps taken by global 2010-11 as an integral part of the
community, particularly the initiatives Annual Financial Inspection (AFI) of
taken by G-20 nations, the Reserve Bank banks.
would issue guidelines to private sector
banks and foreign banks with regard to Cross-border Supervision
sound compensation policy. Accordingly, 108. As indicated in the Mid-Term
it is proposed: Review of October 2008, an Internal
∑ to issue comprehensive guidelines Working Group (Chairman: Shri S.
based on Financial Stability Board Karuppasamy) examined the legal
(FSB) principles on sound position on cross-border supervision
compensation practices by end-June arrangements and also explored the
2010. feasibility of executing memoranda of
understanding with overseas supervisors.
106. The guidelines will cover effective
Subsequent to the submission of the
governance of compensation, alignment of
recommendations of the Group, the
compensation with prudent risk-taking Reserve Bank has comprehensively
and disclosures for whole time directors reviewed its existing practices for
(WTDs)/chief executive officers (CEOs) cross-border supervisory co-operation.
as well as risk takers of banks. With a view to ensuring effective
Implementation of Pillar 2 of Basel II cross-border supervision and supervisory
co-operation, it is proposed:
107. All commercial banks, including
foreign banks in India, migrated to ∑ to enter into bilateral MoU with
the Basel II framework by March 31, overseas supervisory authorities
2009. The Reserve Bank has developed within the existing legal provisions,
a framework to conduct the Supervisory consistent with the Basel Committee
Review and Evaluation Process (SREP) on Banking Supervision (BCBS)
in banks under Pillar 2 of Basel II. One principles.
25

26. Information Technology and Related from such transactions. Accordingly, it is
Issues: Enhancement to the Guidelines proposed:
109. Information technology (IT) risk ∑ to set up a Working Group on
assessment and management are required information security, electronic
to be made a part of the risk management banking, technology risk management,
framework of a bank, while internal audit/ and tackling cyber frauds.
information system audit needs to
independently provide assurance that the Credit Information Companies:
IT-related processes and controls are Grant of Certificate of Registration
working as intended. Given the increased 110. In April 2009, the Reserve Bank
incidents of cyber frauds in banks in the had issued in-principle approval
recent period, it is necessary to improve to four entities to set up credit
controls and examine the need for a information companies. Out of
pro-active fraud risk assessment and the four companies, Experian Credit
management processes in commercial Information Company of India Private
banks. With the increase in transactions Ltd. and Equifax Credit Information
in electronic mode, it is also critical to Services Private Ltd. have been granted
examine the legal implications for banks Certificate of Registration (CoR) to
arising out of IT-related legislations and commence the business of credit
other legislations such as IT Act 2000, information on February 17, 2010 and
IT Amendment Act 2008 and Prevention March 26, 2010, respectively. The
of Money Laundering Act, 2002 and also applications of the remaining two
steps that are required to be taken to companies for grant of CoR are under
suitably mitigate the legal risks arising consideration.
VI. Institutional Developments
Non-Banking Financial Companies stakes in group companies and also do not
Core Investment Companies (CICs): carry on any other financial activity [i.e.,
Regulatory Framework Core Investment Companies (CICs)]
justifiably deserve a differential treatment
111. The regulatory framework for in the regulatory prescription applicable
NBFCs has evolved in the recent past with to NBFCs-ND-SI. In order to rationalise
particular focus on inter-connectedness the policy approach for CICs, and based
and systemic risk. Under this approach, on feedback received from such
access to public funds has been perceived companies, it is proposed to:
as a systemic issue necessitating close
regulation and monitoring of NBFCs, ∑ treat CICs having an asset size of
including systemically important non- Rs.100 crore and above as
deposit taking NBFCs (NBFCs-ND-SI). systemically important core
However, companies which have their investment companies. Such
assets predominantly as investments in companies will be required to register
shares not for trading but for holding with the Reserve Bank.
26

27. 112. The CICs fulfilling minimum functioning of SCs/RCs, additional
capital and leverage criteria will be given disclosures relating to assets realised
exemption from maintenance of net owned during the year, value of financial
fund and exposure norms applicable to assets unresolved as at the end of
NBFCs-ND-SI. They would be required the year, value of SRs pending
to submit annual certificate from their redemption, among others, are being
statutory auditors regarding compliance prescribed.
with the prescribed norms. Draft
114. Detailed guidelines will be issued
guidelines will be placed on the Reserve
by April 30, 2010.
Bank's website by April 30, 2010 for
public comments. Guidelines on Change in or Takeover of
the Management of the Business of the
Securitisation Companies/Reconstruction Borrower by the SCs/RCs
Companies set up under the SARFAESI
Act, 2002: Changes in Regulations 115. The draft guidelines on change in
or takeover of the management of the
113. The guidelines and instructions
business of the borrower by the SCs/RCs
issued to the Securitisation Companies/
were placed on the Reserve Bank’s
Reconstruction Companies (SCs/RCs)
website for public comments. The
have been reviewed by the Reserve Bank
guidelines define the eligibility conditions
in consultation with these companies.
and the grounds based on which SCs/RCs
Accordingly, it is proposed to make
may exercise the powers. The guidelines
the following modifications to the
provide for setting up of an Independent
guidelines:
Advisory Committee (IAC) to evaluate
∑ SCs/RCs can acquire the assets either the proposals of the SCs/RCs regarding
in their own books or directly in the the change in or taking over of the
books of the trusts set up by them. management of the business of the
∑ The period for realisation of assets borrowers. Based on the feedback
acquired by SCs/RCs can be extended received and recommendations of the
from five years to eight years by their External Advisory Committee, it is
Boards of Directors, subject to certain proposed:
conditions. Asset/Security Receipts ∑ to issue the final guidelines by April
(SRs), which remain unresolved/not 30, 2010.
redeemed as at the end of five years
or eight years, as the case may be, will Payment and Settlement Systems
henceforth be treated as loss assets. Payment System Vision Document
∑ It will be mandatory for SCs/RCs 2009-12
to invest an amount not less than 116. Keeping in view the significant
5 per cent of each class of SRs issued developments in payment systems and the
under a particular scheme and Reserve Bank’s responsibility with regard
continue to hold the investments till to regulation and supervision of payment
the time all the SRs issued under that systems, the ‘Vision Document’ for the
class are redeemed completely. period 2009-12 was released on February
∑ With a view to bringing transparency 16, 2010. The scope of the ‘Vision
and market discipline in the Document’ has been enhanced to ensure
27

28. that all the payment and settlement organisation for operating and managing
systems operating in the country are safe, retail payment systems, has the envisioned
secure, sound, efficient, accessible and role to look at future innovations in the
authorised. retail payment space in the country.
Membership to the Committee on Payment Effective December 14, 2009, NPCI has
and Settlement Systems taken over operations of the National
Financial Switch (NFS) from Institute for
117. The Committee on Payment and Development and Research in B a n k i n g
Settlement Systems (CPSS), constituted Technology (IDRBT). NPCI is also
under the aegis of the Bank for expected to take the lead role in rolling
International Settlements (BIS), was out the proposed CTS project at Chennai.
recently broadened to include India and
also nine other countries as members. The Phased Discontinuation of High Value
Reserve Bank is also represented on three Clearing
Working Groups of the CPSS set up for 120. It has been the endeavour of the
drawing up standards/guidelines towards Reserve Bank to migrate from paper-based
efficient functioning of the payment and payments to electronic payment systems
settlement systems and supporting market by creating the appropriate technological
infrastructure across the world. infrastructure. As a step towards
Standardisation of Security Features on encouraging migration of paper-based
Cheque Forms high value payments to more secure
electronic modes, it was decided
118. Cheques continue to be a
to discontinue high value clearing (HVC)
predominant instrument for retail
in a phased and non-disruptive manner by
payments. To act as a deterrent to cheque
March 31, 2010. This process has been
frauds and to bring about uniformity
completed as per schedule.
across cheques issued/used by the banking
industry, it was decided to examine the Enhancements in National Electronic
need for standardisation of security Funds Transfer System
features on cheque forms. A Working
Group was accordingly constituted and 121. To further strengthen the National
based on its recommendations and the Electronic Funds Transfer (NEFT) system
industry’s feedback, cheque truncation in terms of availability, convenience,
system (CTS)–2010 Standard efficiency and speed, significant
with benchmark specifications for enhancements were introduced in the
security features on cheques and field operational procedures and process flow,
placements on cheque forms has been effective March 1, 2010. These included:
prescribed. (i) increasing the operating window by
two hours on weekdays and one hour on
Operationalisation of National Payments Saturdays; (ii) introducing the concept of
Corporation of India hourly settlements; (iii) shortening the
119. The National Payments time window for return of uncredited
Corporation of India (NPCI), set up in transactions; and (iv) enabling positive
December 2008 as an umbrella confirmation to the remitter through SMS
28

29. or e-mail about the time and date of actual 125. To further encourage the
credit of funds to the beneficiary’s account development of other mobile-based
with the destination bank. The concept of products, non-bank entities were also
positive confirmation to the remitter is permitted in August 2009 to issue
perhaps unique across all retail electronic mobile-based, semi-closed prepaid
payment systems world-wide. payment instruments, up to Rs.5,000.
122. As at end-March 2010, over Non-bank entities can issue such
66,500 branches of 95 banks had instruments for facilitating payment for
participated in NEFT and the volume of goods/services and m-commerce
transactions processed increased with a transactions.
record volume of 8.3 million transactions 126. The Reserve Bank believes that
in March 2010. given the penetration levels of mobile
Directions to Intermediaries and Payment telephony in India, this could become an
Aggregators important medium for achieving financial
inclusion in the country. However, this
123. The use of electronic/online
calls for focused efforts by the banks to
modes of payments for purchase of goods
partner with mobile service providers.
and services and also for making payments
Co-operation rather than competition
for other utilities is increasingly gaining
between these two important stakeholders
popularity in the country. The increase in
the electronic/online mode of payment is the critical need of the hour. Recently,
involves the use of intermediaries such as an Inter-Ministerial Group constituted by
aggregators and payment gateway service the Government of India, has made
providers. In order to ensure the safety of important recommendations for financial
such transactions, detailed guidelines were inclusion through a bank-led model using
issued in November 2009. the infrastructure already set up by mobile
service providers. The Reserve Bank is
Mobile Banking in India examining the recommendations of the
124. The use of mobile phone channels Group.
for initiation and execution of banking Automated Data Flow from Banks
transactions has been gaining significance
the world over. The significance of this 127. As the policy and decision-making
channel has been recognised by the processes are becoming more information
Reserve Bank. Accordingly, regulatory intensive, it is imperative to ensure quality
guidelines for enabling mobile banking of data and their timely submission.
were notified in October 2008. The With a view to ensuring accuracy and
transaction limits were further relaxed in integrity of data flow from the banking
December 2009. Banks were also system to the Reserve Bank, a Core Group
permitted to enable small value consisting of experts from banks, the
transactions up to Rs.1,000 without Reserve Bank, IDRBT and the IBA has
end-to-end encryption. Currently, this been constituted for preparing an Approach
channel is used to settle on an average 1.9 Paper on Automated Data Flow (a straight-
lakh transactions of average value 12 crore through-process) from the core banking
in a month. solution (CBS) or other IT systems of
29

30. commercial banks to the Reserve Bank. It from the Reserve Bank and major
is expected that the Approach Paper would commercial banks has been constituted
be ready for circulation among banks by for preparing the basic approach towards
end-August 2010. a next generation RTGS system,
RTGS Upgradation both from the business and IT
128. The current RTGS system perspective.
has been in operation for nearly six Second Quarter Review
years and there is a need to initiate
steps for replacing it with a new 129. The next review of the
system having improved functionalities Developmental and Regulatory Policies
in view of advancement in will be undertaken as part of the Second
technology. Accordingly, a Working Quarter Review of Monetary Policy on
Group comprising representatives November 2, 2010.
Mumbai
April 20, 2010
30