RBI hiked key policy rates by 25 bps to control inflation

The Reserve Bank of India (RBI) has hiked key policy rates — the repo and the reverse repo a month ahead of its next quarterly review of monetary policy to control inflation and to anchor inflationary expectations. RBI has raised repo rates by 25 basis points each. After this raise now the repo or the rate at which banks borrow from the RBI is increased by 5.50% and the reverse repo (the rate at which RBI sucks up excess liquidity from the banking system) is at 4%.

Finance Minister Pranab Mukherjee while supporting the rate hike has called it as desirable. He said “These measures are desirable given that food inflation has risen and credit situation is tight... It is good that RBI has not raised CRR.”

However RBI was relived from the fact that in recent months the economic recovery is strengthening with the manufacturing sector showing increasing growth, but the central bank is worried about rising inflation. In May, the wholesale price index based inflation has increased to 10.2% which is up from 9.6 per cent in April. The RBI said in a statement explaining the rationale for the rate hike, “Food price inflation and consumer price inflation remain at elevated levels.”

Jahangir Aziz, chief economist at JP Morgan said, “This policy action was long over due. I think to sustain economic growth of 8 per cent and above, we should see more of such rate hikes in the coming months. I expect RBI to raise key interest rates again by 25 bps on the day of the monetary policy review on July 27”.

On the other hand bankers say they don’t see any reason for lending rates to move up. SBI’s Deputy Managing Director and Head of Treasury, Anjan Barua, told an agency “We don't expect upward pressure on lending, deposit rates as credit is still not picking up. We expect liquidity to improve substantially in July. I don't expect a major impact of the rate hike on government bonds and OIS on Monday.”

However many bankers were expecting such mid-cycle policy move from RBI much earlier when the banking system was struggling with a liquidity crunch. “It was considered inadvisable to raise the policy rates,” the RBI said, the credit shortage was a result of sudden increase in government cash balances because of huge realization from 3G spectrum and broadband wireless access auction.

Rupa Rege-Nitsure, chief economist at the Bank of Baroda said, “There is enough empirical evidence that the aggregate demand has sharply risen in sensitive sectors like consumer durables and commercial real estate. We have also seen a continuous rise in non-food inflation. Salaries in the private and corporate sector have risen the HRA in consumer price index has risen. All these factors have the potential to stoke inflation further. Therefore, we expect RBI to raise key interest rates by 75 basis points in this financial year. We can expect a 25 bps rise on July 27”.

C Rangarajan, Chairman, Prime Minister’s Economic Advisory Council said RBI reviewed its policy rates a month earlier due to increased inflationary pressure on the economy. “I expect another round of rate hike in the July policy review,” he told a news agency. This month on 27th RBI will be announcing its next quarterly policy review

IBA committee recommendations on service charges sent to RBI

The Reserve Bank of India (RBI) has been receiving complaints from the customers regarding excessive charges being taken by banks for various services. RBI had asked IBA to suggest guidelines on this. IBA asked its Committee for Customer Service, headed by Standard Chartered Bank CEO Neeraj Swaroop, to prepare a report on this. A sub-committee headed by Union Bank of India Executive Director S Raman was tasked with framing the guidelines.

Committee of the IBA has finally prepared recommendations on the fees that banks should charge for basic services such as issuing a draft, remittances or for stop-payment instructions. The committee has been working on this for some months.

The recommendations will be sent to the Reserve Bank of India. A banker who was on the committee said, "The committee members have agreed on caps on charges for different services and once these are approved by RBI, banks will not charge customers above the caps."

The committee was to give recommendation on 27 items categorized as basic transaction services. The charges included- issuing cheque books and drafts, the committee also looked at charges for cheque return, reviving inoperative accounts, issue of duplicate pass books and other items such as not maintaining the prescribed minimum balance. However the charges for special services such as loans and credit cards were not part of the purview.

At present there is a wide disparity in charges being taken by different banks. For instance, public sector lenders such as the State Bank of India (SBI) customer is required to maintain minimum average balance of Rs 1,000 per quarter in regular savings account. While the account holder of private sector bank such as ICICI Bank and HDFC Bank is required to maintain a minimum balance of Rs 10,000. In foreign banks such as Citibank, Standard Chartered and HSBC account holders are required to maintain minimum balance of Rs 25,000 per quarter.

Private and foreign banks have high penalties for non-maintenance of minimum balance. ICICI Bank and Citibank charge Rs 750 per quarter; SBI, only Rs 75 per year for such non-maintenance.

RBI has instructed banks to prominently display their service charges and fees on their website in an RBI-prescribed format. Before 1997, IBA used to formulate guidelines for service charges and fees, later RBI gave banks a freehand to frame their own charges.

RBI clarifies directives on cheque alteration applicable for NCR

Few days’ back the Reserve bank of India (RBI) had issued directives to bank on alterations on cheques titled ‘CTS-2010 Standards for Cheques’. Due to this directive there was some confusion amongst the people and banks, therefore RBI has given clarification on this matter. RBI said that its recent directive on alterations on cheques is applicable for cheques cleared through the state-of-the-art image-based cheque truncation system (CTS). At present CTS method of clearance of cheques is used in RBI’s clearing house in the National Capital Region (NCR) only that is around Delhi. While in other places mostly MICR method of cheque clearance is used, therefore RBI’s recent directives on alterations in cheques is not applicable for MICR, non-MICR and over the counter (that is cheques used for withdrawing cash) clearances. RBI told the cheque truncation system standards will be effective from 1 December, 2010.


Moreover the norm also stated that ‘‘no changes or corrections should be made on the cheques (other than for date validation purposes, if required). It also said ‘‘for any change in the payee’s name, courtesy amount (amount in figures) or legal amount (amount in words), etc, fresh cheques should be used by customers. This would help banks to identify and control fraudulent alterations.’’

Now as per clarification given by RBI the directives will be applicable only for cheque truncation system clearance in the National Capital Region (NCR), where a pilot project is running. However, originally it was planned cheque truncation system would be implemented in the four metros, and it is yet to be implemented in Mumbai, Kolkata and Chennai.



In the three metro cities, and also at all other RBI clearing houses mostly MICR method for cheque clearance is used. According to RBI’s clarification the directives will not be applicable for banking customers outside of National Capital Region (NCR) so they don’t have to worry about alternations on cheques for now.

Trai, RBI reached an understanding on regulation for rollout of m-banking

In India the number of mobile users is increasing every year. Thus introduction of mobile banking in the country will play an important role in providing banking services to the customers easily and this will also help in government's plans of financial inclusion to speed up.

To ensure smooth roll out of mobile banking in the country the Telecom Regulatory Authority of India (Trai) and the Reserve Bank of India (RBI) have reached an understanding on its regulation.

According to the understanding Trai will deal with all interconnection issues and RBI will look into banking aspects like the maximum amount of transaction per day, know-your-customer guidelines and verification criteria, the official sources told FE.

With this the telecom operators feel relived as they had fear of getting caught in a possible regulatory crossfire although they were excited of the fact about the mobile banking. Such fears of telecom operators had gained dominance due to recent arguments between capital market regulator Sebi and the Insurance Regulatory and Development Authority over regulating unit-linked insurance products. Therefore, to resolve this issue late this week, government circulated an ordinance in favor of Irda.

In mobile banking interconnection is an important aspect as telecom networks have to be connected with bank networks, thus the charges payable on these counts and the number of points of interconnection need to be worked out in a manner which leaves no room for dispute. Trai has been authorized for charges as it has the required expertise in the area.

Trai will also be responsible for setting tariffs which consumers will have to pay for mobile banking access. An official involved in the process said, “The areas of work have been neatly divided between the two regulators and we will work with perfect coordination.”

For telecom operators, mobile banking will bring in more revenue also it will help in expanding banks’ reach in rural areas where mobile telephony has made giant strides. In rural areas you can find mobile users but they don’t have bank accounts.

According to data, every year, country’s largest mobile operator Bharti Airtel alone is making Rs 25,000 crore by way of recharge coupons. When mobile banking is launched, people will be able to withdraw cash and transfer funds using their mobile phones.

The government has already given an approval for the framework for the launch of this facility by the banks. Government and RBI have advised banks to start mobile banking services in rural areas by July 31, and complete the process by the end of next year. The government took action on the basis of the report of an inter-ministerial group led by a committee of secretaries.

The group was headed by the secretary, department of information technology and had representatives from the departments, of financial services, post, rural development, Planning Commission, UID Authority, Trai, RBI, department of telecom and the home ministry.

It is expected mobile banking model will enable rural areas mobile phone users to deposit and draw cash instantly into or from their mobile-linked to no-frills bank accounts through a business correspondent having a mobile phone in the village. The important feature of the proposed framework is that funds remain within the banking system throughout and the intermediary does not have custody of the funds even momentarily.

Reserve Bank Governor D Subbarao in his speech laid stress on mobile banking to be driven by banks, not telecom operators, in view of money laundering and terror financing threats.

RBI Governor D Subbarao was speaking at a Banking Technology Excellence awards function hosted by the Institute for Development and Research in Banking Technology (IDRBT). He said, "The Reserve Bank has a clear preference for the bank-led model."

He said, "Given the growing concerns about money laundering and financing of terrorism, a bank-led model is decidedly safer and more sustainable," and added, although a mobile operator-led model helps in stepping up financial inclusion.

Subbarao said the central bank also wants to offer more services to the village people besides remittance facility, through financial inclusion program, and this will be possible only through banks.

He added, "We want our customers to get minimum services like deposit insurance, access to affordable credit and the payment system which only banks can offer."

The governor told that the RBI acknowledge that mobile telephony will play an important role in the value chain and that it is interested that mobile service providers collaborate with banks to provide value-added services.

Speaking about the use of technology in banking, he said in his priority list, the main focus is on to keep customer information confidential and fully secured as there is increase in cyber crimes, phishing-related frauds, identity fraud and misuse of customer information.

Subbarao said, "We proposed to set up a working group on information security, electronic banking, technology risk management and tackling of cyber frauds."

He added, also by looking at the statistics about financial inclusion he does not get the true picture of the situation.

He explained, "Even where bank accounts are claimed to have opened, verification has shown that a significant portion of these accounts are dormant. Very few conduct any banking transactions and even fewer receive any credit."

However RBI has instructed all domestic commercial banks, public and private, to prepare their own financial inclusion plans.

RBI thinking of deregulating savings bank deposit rates

The Reserve Bank of India is thinking of deregulating savings bank deposit rate. At present this is the only rate which is fully administered.

Dr K.C. Chakrabarty, Deputy Governor, Reserve Bank of India, said on Thursday, “We are in favor of deregulating all interest rates, including savings bank. The direction is very clear. But, the decision will be taken after having adequate debate on the issue.”

Except interest rates of savings deposit accounts, non-resident Indian (NRI) deposits, and export credit, all other interest rates are deregulated. Regarding wide variation in the interest rates on savings bank deposits across banks, Dr Chakrabarty said he does not except wide range variation in savings bank rate after the deregulation. At present all banks are giving 3.5 per cent interest on savings bank deposits.

While speaking on the sidelines of a banking summit he said, “This is a highly competitive market. Prices do not vary much. But what will be the rate, what customers will get, will depend on market conditions.”

Dr C. Rangarajan, Chairman of the Economic Advisory Council to the Prime Minister has also favored deregulation of controlled interest rate structure. He said on the sidelines of a seminar that deregulation of savings deposit rates is matter of time.

According to banker’s deregulation of savings accounts will help in better asset-liability management for banks and this will increase competition amongst banks in offering better price which will benefit savings account holders.

Every individual whether businessman or a common man have savings bank account for non-commercial transactions. Besides doing day-to-day banking transactions people earn 3.5 per cent return on the savings they have done. However banks have put some ceiling on the total number of withdrawals permitted during specific time periods. Banks also insist on certain minimum balance to be maintained in savings accounts. The Deputy Governor point out that the series of interest rate deregulation has been an important component of the reform process which has played an important role in greater efficiency in resource allocation.

In the recent times RBI most important reform on the savings bank deposit front has been the payment of interest on a daily product basis which became effective from April 1. Before this, banks used to calculate interest on savings bank accounts on the minimum balance held during the period from the 10th day to the last day of each calendar month as a result depositors earned much less than the prescribed 3.5 per cent interest on their savings.

RBI authorizes some nationalized and private sector banks to collect income tax

Seeing the increasing rush of income tax payers this year the Reserve Bank of India (RBI) has increased the number of counters as well as authorized nationalized and private sector banks of the city to collect income tax.

Deputy General Manager banking Rajeev Dwivedi told that this year 144 branches of public sector banks including State Bank of India and four branches of private sector banks have been authorized to collect income tax returns and make arrangements for collecting tax by way of cash or cheque. He added, for the convenience of public the list of banks and their branches have been displayed outside the premises of RBI and also at branches of other commercial banks.

He said, at times there has been increase in the income tax payers at RBI counters, thus keeping it in mind additional counters as necessary have been opened in the bank. On the other hand the income tax payers have been asked to deposit their income tax dues in advance well before the last date to avoid inconvenience.

The general manager has advised the masses to take advantage of the above arrangements.