RBI adopts new CPI as key measure of inflation

The Reserve Bank of India (RBI) Governor, Raghuram Rajan, on Tuesday, said that the central bank had adopted the new Consumer Price Index (CPI) (combined) as the key measure of inflation.

Earlier, RBI had given more weightage to Wholesale Price Index (WPI) than CPI as the key measure of inflation for all policy purposes.

“Some recommendations of Urjit R. Patel Committee report have been implemented, including adoption of the new CPI (combined) as the key measure of inflation,” said Dr. Rajan, while addressing a press conference here to announce the first bi-monthly monetary policy for 2014-15.

This also includes explicit recognition of the glide path for disinflation, transition to a bi-monthly monetary policy cycle, progressive reduction in access to overnight liquidity at the fixed repo rate, and a corresponding increase in access to liquidity through term repos, and introduction of longer-tenor term repos as well as, going forward, term reverse repos.

Following on the recommendations of the high-level advisory committee chaired by Bimal Jalan, and after consulting the Election Commission, the RBI will announce in-principle approval for new bank licences.

“Immediately after, and using the learning from the licensing exercise as well as building on its previously-released discussion paper on banking structure, the Reserve Bank will work to giving licences more regularly, that is virtually “on-tap”. It will also set out categories of differentiated bank licences that will allow a wider pool of entrants into banking,” Dr. Rajan added.

Inflation Indexed Bonds

To expand investor demand for inflation-indexed bonds, Dr. Rajan said, “design changes, improving their attractiveness to the general public are being worked out.”

In order to expand the market for corporate bonds, banks would be allowed to offer partial credit enhancements to them. He also said that the feasibility of limited re-repo/re-hypothecation of “repoed” government securities was being explored.

The RBI, he said, would continue to work to ease entry costs for foreign investors. It would also strive to reduce risk for investors and the volatility of flows. Towards this end, the RBI Governor said that modalities for allowing foreign portfolio investors (FPIs) to hedge their currency risks through exchange-traded currency futures were being worked out in consultation with the Securities and Exchange Board of India (SEBI). Further, he said that FPIs would be allowed to hedge their coupon receipts falling due during the next 12 months.

To encourage longer-term flows and reduce volatility, FPI investments in G-Secs would, henceforth, be permitted only in dated securities of maturity of one-year and above, and existing investment in T-bills would be allowed to taper off on maturity/sale. Any investment limits vacated at the shorter end would be available at longer maturities, “so that overall FPI limits will not be diminished.”

Inclusion and customer protection

To enlarge the banking correspondent (BC) base, Dr. Rajan said that the inclusion of new entities, as well as a relaxation of existing distance restrictions, was being considered.

The RBI Governor further said that banks should not levy penal charges for non-maintenance of minimum balance in ordinary savings bank account and inoperative accounts, “but instead curtail the services accorded to those accounts until the balance is restored.”

He said that the RBI would frame comprehensive consumer protection regulations based on domestic experience and global best practices. In the interest of their consumers, banks should consider allowing their borrowers the possibility of prepaying floating rate term-loans without any penalty. “Banks should also not take undue advantage of customer difficulty or inattention.”

To tackle distress in the system, Dr. Rajan said that the comprehensive framework to help banks reduce their non-performing assets (NPAs) even while putting distressed projects back on track would be effective from Tuesday. “We will monitor progress, and make any needed adjustments to ensure it operates smoothly.”