Repo Rates & Reverse Repo Rates

In a situation like what we face in the Indian economy Today, with Food Inflation at its all time peak, RBI is toying with the idea of containing physical money supply from the system.

One of the Tools which RBI uses is the Repo and the Reverse repo Rates manipulation and it operates this way:

Repo is a facility extended by RBI to the Banks to borrow short term against its gilt securities. Any increase in the Repo rates dampens the enthusiasm of Banks to borrow against such securities and any decrease in it influences Banks to borrow.

Repo rates are characterised by sale followed by purchase of securities. When securities are sold to RBI, more money is released and the opposite effect takes place when Reverse Repo rates are applied by RBI when it sells its securities to Banks and follows it up with purchase on maturity.

Repo and Reverse Repo thus help the RBI control money supply.If it wants to squeeze it, RBI will increase both the repo and the reverse repo rates, and does the opposite if it wants to increase the money supply in the economy.

Green Money Transfer - Through Mobile Phones

Now, Funds Transfers between Two Individuals for settlement of financial transaction is made possible through the Mobile Cell Phones outside of Banks' Network of Branches.

This facility is a Boon to Rural India's vast population who are dependent on Banks' Branch network available in the vicinity of the villages to carry out such cash transactions.

Corporation Bank and Tata Indicom have tied up for such cash transactions to be put through these Mobile Cellphones to cater to the needs of rural India.

Reserve Bank of India has permitted Banks to operate these Money Transfers through Mobile Phones with a Limit of Rs.5000/- per transaction to start with. For further details on the operative part of the scheme can be accessed from these Links:

http://prashantnepayments.blogspot.com/2009/11/product-launch-corporation-bank-green.html

http://www.paymate.co.in/green/

http://www.tata.com/article.aspx?artid=48AbTWkt4WI=

Bharti/MTN transaction, and India's problem of capital controls

Bharati / MTN deal of $23 billion fell through on the question of Dual currency Listings and Capital Account Convertibility issues which the Government of India could not possibly decide on in a hurry. But this important capital control issue needs to be addressed by the Government sooner than later in view of the FDI inflows into Indian capital markets and also India being one of the leaders of emerging markets which has fairly withered the recessionary storm than the developed economies of the world. Here is a link from Dr.Ajay Shah's blog on this issue.

Ajay Shah's blog: Bharti/MTN transaction, and India's problem of capital controls

BC Model for Financial Inclusion

Reserve Bank of India Working Group has recommended the following new entities for appointment of Business Correspondents (BCs) for banks in rural and semi-urban areas;suggests New Entities for BC- RBI Working Paper.

RBI press release dated 19th Aug 2009 states that business correspondence model is vital for financial inclusion and suggests new entities for BCs.The RBIlink is appended:

http://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/IEPR278RWGBC.pdf

Cash Withdrawals @ Point Of Sale

The Reserve Bank Of India under the Payments & Settlements System Act,2007 has circulated among all system providers/scheduled commercial banks to permit cash withdrawals through Debit Cards at POS terminals at different Merchant Establishments alongside the existing ATM centres as the transactions at POS/member Establishments are steadily increasing in the country.

The Bank Boards have to place these proposals to give effect to this guidelines from RBI and the limit upto which cash can be withdrawn is presently fixed at Rs.1000.00. The relevant circular of RBI dt 22nd July 2009 is apended.

RBI/2009-10/105

DPSS.CO.PD.No. 147/02.14.003/ 2009-10

22nd July 2009

To

All System Providers (VISA / MasterCard / American Express),

All Scheduled Commercial banks

Dear Sir,

Cash Withdrawal at Point-of-Sale (POS)

Presently cash withdrawal facility using plastic cards is available only at Automatic Teller Machines (ATMs). As on May 31, 2009, number of ATMs and POS terminals in the country stood at 44,857 and 4,70,237 respectively. The use of debit cards at Point-of-Sale (POS) terminals at different merchant establishments has been steadily increasing. As a further step towards enhancing the customer convenience in using the plastic money, it has been decided to permit cash withdrawals at POS terminals. To start with, this facility will be available for all debit cards issued in India, upto Rs.1000/- per day.

2. The conditions subject to which this facility is being extended is given in the annex(given above)

3. Banks may obtain the approval of their Board of Directors for offering this facility. The note put up to the Board should incorporate the product profile, risk perceived by the bank and the risk mitigation measures.

4. This circular is being issued in exercise of the powers conferred on the Reserve Bank under Section 18 of the Payment and Settlement Systems Act, 2007 (Act 51 of 2007).

Yours faithfully

(G.Padmanabhan)

Chief General Manager

Tackling the menace of Fake Notes

As we hear from the media the MENACE OF FAKE NOTES being circulated alongside the real currency notes,RBI has released the final report of High Level RBI Group suggested steps to check the menace of Fake Notes on 12th August 2009.The copy of the press note can be accessed at this link:

http://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=21174

RBI has initiated several steps to curb this menace - the latest being the promotion of use of Cards and Electronic means of payment and installation of Note Detectors at places where large volume of cash transactions are conducted.

Further, RBI may disincentivise the use of Cash as it has to be recognised that processing of cash involves Cost that has to be recovered. the complete report can be accessed at this link:

http://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=554

new security for credit card payments

VERIFIED BY VISA MASTER SECURE CODE NEW SECURITY FOR CREDIT CARD PAYMENTS

To make online shopping safer, the RBI has made it mandatory, from 1st August onwards, for all online transactions to have an extra level of authentication. The ‘extra’ level, is a password that you will have to enter after entering your credit/debit card details while making online payments. You will require this ‘extra password’ for transacting on any website in India, including Rediff. This new technology is called VBV – Verified by Visa or MSC – MasterCard SecureCode.
Please visit your Credit/Debit Card issuing bank’s website to get verified by Visa / Master Card secure code. Click to select your bank and register now:
•HDFC Bank •ICICI Bank •Citibank •HSBC Bank •Standard Chartered
•State Bank of India •Axis Bank •ABN Amro •Deutsche Bank •Karur Vysya Bank

Date: Feb 18, 2009
Credit/Debit Card transactions-Security Issues and Risk mitigation measures

RBI/2008-2009/387

RBI / DPSS No. 1501 / 02.14.003 / 2008-2009February 18, 2009

The Chairman and Managing Director / Chief Executive Officers
All Scheduled Commercial Banks including RRBs /
Urban Co-operative Banks / State Co-operative Banks /.
District Central Co-operative Banks

Madam / Dear Sir

Credit/Debit Card transactions-
Security Issues and Risk mitigation measures

The use of Credit/Debit Cards has been increasing in the country. We have been reviewing various options to enhance the security of online card transactions. After extensive consultations with banks/card companies, it has been decided as under:

2. It would be mandatory to put in place with effect from August 01, 2009:

i) A system of providing for additional authentication/validation based on information not visible on the cards for all on-line card not present transactions except IVR transactions (for which separate instructions will follow).

ii) A system of "Online Alerts" to the cardholder for all 'card not present' transactions of the value of Rs. 5,000/ and above.

3. Banks are advised to strictly adhere to the instructions and time discipline indicated in this circular. Non-adherence to the directives shall attract penalties prescribed under the Payment and Settlement Systems Act 2007 (Act 51 of 2007).

4. This directive is issued under section 18 of Payment and Settlement Systems Act 2007, (Act 51 of 2007).

5. Please acknowledge receipt.

Yours faithfully

(G. Padmanabhan)
Chief General Manager

High Value Cheques in Clearing

The RBI's chennai clearing house has written to their Head Office,Mumbai seeking approval to ENHANCE the minimum threshold limit of rupees one lakh to rupees ten lakhs under RTGS for High Value cheques presentation with effect from 1st May 2009 and the same is APPROVED.

This will further take the Banks away from the physical cheques handling and SHIFT the customers to make use of the NEFT /EFT machanism under the commuterised environment.

RBI Mumbai has notified through their Press Release dated 29th April 2009.

Interest Payment on Savings Bank Accounts

Reserve Bank of India by their Notification dated 24th April 2009, has instructed all the Banks to start payment of interest on Savings Bank Accounts on domestic resident accounts and on NRO/NRE Rupee Acccounts on a DAILY Product Basis with effect from 1st April 2010.

Though Indian Banks Association was reluctant to comply with this suggestion earlier, Reserve Bank of India has thought it fit to implement this change in procedure as it feels now that computerisation of Bank Branches will be able to handle this effectively.

RBI's Annual Policy for 2009-10

RBI Annual Policy Statement for the Year 2009-10

Highlights

GDP growth for 2008-09 is projected to be in the range of 6.5 to 6.7 per cent

Repo rate under the Liquidity Adjustment Facility (LAF) reduced by 25 basis points from 5.0 per cent to 4.75 per cent with immediate effect.

Reverse repo rate under the LAF reduced by 25 basis points from 3.5 per cent to 3.25 per cent with immediate effect.

The Bank Rate has been retained unchanged at 6.0 per cent.

The cash reserve ratio (CRR) of scheduled banks has been retained unchanged at 5.0 per cent of net demand and time liabilities (NDTL).

 Special Term Repo Facility: Extension

The Reserve Bank introduced a special 14-day term repo facility for banks in September 2008 through relaxation in the maintenance of SLR to enable them to meet the liquidity requirements of mutual funds (MFs), non-banking financial companies (NBFCs) and housing finance companies (HFCs).

It has been proposed:

To extend the time for availability of this special term repo facility to banks up to March 31, 2010, and to conduct these 14-day term repo auctions on a weekly basis.

Other Observations

Special Refinance Facility Extension - Special refinance facility was introduced to provide funding to scheduled commercial banks (excluding regional rural banks) up to 1.0 per cent of their net demand and time liabilities (NDTL) as on October 24, 2008 at the repo rate. It is proposed to extend this special refinance facility up to March 31, 2010.

Monetary Projection - Money supply (M3) growth for 2009-10 is placed at 17.0 per cent. Consistent with this, aggregate deposits of scheduled commercial banks are projected to grow by 18.0 per cent. As always, these numbers are provided asindicative projections and not as targets

Inflation Projection - The WPI inflation is expected to be in the negative territory in the early part of 2009-10. Keeping in view the global trend in commodity prices and domestic demand-supply balance, WPI inflation is projected at around 4.0 per cent by end-March 2010.

Policy Stance

According to RBI, on the basis of the above overall assessment, the stance of monetary policy in 2009-10 will broadly be as follows:

 Ensure a policy regime that will enable credit expansion at viable rates while preserving credit quality so as to support the return of the economy to a high growth path.

Continuously monitor the global and domestic conditions and respond swiftly and effectively through policy adjustments as warranted so as to minimise the impact of adverse developments and reinforce the impact of positive developments.

 Maintain a monetary and interest rate regime supportive of price stability and financial stability taking into account the emerging lessons of the global financial crisis.

Source: RBI press release

Setting up ATMs without Licensing by RBI

The RBI has lifted the licensing procedure for setting up of ATMs by Banks in India with immediate effect.As we all know that since April 1st 2009, free cash withdrawals from any ATM anywhere in India was permitted by RBI. This will facilitate Foreign Banks especially to setup ATMs freely swiftly anywhere if the Bank finds a good location. This will improve the visibility for every bank and benefit the depositors the most and the Banks will also benefit from cost cutting and long waiting for opening a fullfledged branch.

G-20 Summit

 Outcome of the just concluded G - 20 Summit meeting of world leaders in London,U.K. was a mixedbag with competing interests at play and complete success on every issue that confronts the nations was too much to expect.However, broadly the summit agreed on the following:

1) To triple the funds available to IMF to overcome resourse crunch at a time the demand from both developed and the developing economies are huge.

2) To ELEMINATE TAX HAVENS a very notable agreement which will stop the hot and spurious  money destabilising vulnerable economies of the world.

3) Agreeing on tighter measures on financial sector regulations especially in US/European countries.

4) Agreeing on keeping the MARKETS OPEN and provided us$259 billion help to ensure that outcome.

However, the most important negative outcome of the summit itself is the failure on INTERNATIONAL STIMULUS PACKAGE to revive the world economies.The argument put forth by the developing economies seems to be that the present meltdown is the creation of the US and few european economies.

The overall opinion of the West seems to be that the SOLUTION lies in the collective international package and that is the way going forward... 

CASH THROUGH ATMs

Good news for a large  number of ATM users .With effect from 1st April 2009, Depositors can withdraw cash from any of the Banks ATM machines anywhere in India without any charges as per recent RBI's Notification.

However,credit card users will have to pay an uniform chargeof  Rs.20/- per transaction for cash withdrawals through any ATM slot machine.