Credit Policy Review - April 2016

In line with consensus expectations RBI cut the repo rate by 25 bps from 6.75% to 6.5% and in an unexpected move narrowed the policy rate corridor from +/-100 bps to +/- 50 bps. Thus the MSF (marginal standing facility) rate stands reduced to 7% while the reverse repo rate is adjusted to 6%. As per RBI a narrower corridor will ensure “finer alignment of the weighted average call rate with the repo rate.”

In a major development RBI announced changes in its liquidity framework wherein systemic liquidity would be progressively improved from a deficit of 1% of NDTL (Net demand and time liabilities) to a position closer to neutral. RBI also reduced the minimum daily maintenance of cash reserve ratio (CRR) from 95% of the requirement to 90% for the banks (keeping CRR unchanged) with effect from the fortnight beginning April 16, 2016.

The RBI kept its growth and inflation projections unchanged. It expects GVA (gross value added) growth to rise to 7.6% in FY17 (from 7.3% in FY16) with balanced risks and projects CPI inflation to trend towards the 5% target by March 2017.

“In its forward guidance, the RBI stated that “the stance of monetary policy will remain accommodative. The Reserve Bank will continue to watch macroeconomic and financial developments in the months ahead with a view to responding with further policy action as space opens up.”

Source: First Bi-monthly Policy Statement for the year 2016-17


Conclusion and Outlook

While the repo rate cut in the credit policy review was along expected lines, the proposed changes in liquidity framework are a significant policy regime shift which should have material positive impact on yields going forward.

RBI has reaffirmed that the stance of monetary policy will remain accommodative. It has emphasized that current and past rate cuts need to transmit to lending rates. The introduction of marginal cost of funds based lending rate (MCLR), reduction in small savings rates and the changes in liquidity management framework will improve monetary policy transmission and magnify the impact of the rate cut.

Is Government Making Pro-Employee Changes To EPF?

If you have not made any contribution to your Employee Provident Fund (EPF) account in last 36 months; there’s good news for you. The Government is still going to pay you interest on your balance in the account. This move will be effective from April 01, 2016.

UPA Government had discontinued the practice of paying interest on inoperative accounts from April 01, 2011thinking that it will discourage participants from opting out. There are close to 9 crore dormant accounts with a corpus of over Rs 32,000 crore. Employees' Provident Fund Organisation's (EPFO) manages around Rs 8.5 lakh crore.

Commenting on this news, the Labour Minister Bandaru Dattatreya said, “Now, we have decided to credit interest in inoperative accounts. There will not be any inoperative accounts.” This was a much-needed clarification, which will bring relief to those who change jobs. There’s always a possibility that a person turns his employment and moves to a company that doesn’t qualify to implement the provident fund scheme. In such a case, his account would go inoperative for no fault on his part.

A few more changes
The Government has worked out a proposal to alter the the minimum number of workers criterion for it being compulsory for companies to cover its employees under Employee Provident Fund Scheme. The number is expected to reduce from 20 to 10. As narrated by a senior Government official, such a move will provide social security to about 50 lakh more people working in the organized sector. With this step, total Assets under Management (AUM) of EPFO is expected to go up by Rs 20 lakh crore.

With an aim of providing more leeway to EPFO, the Government also increased the upper limit for investing in Sovereign Securities from 50% to 65%. This may enhance the quantum of investments in G-secs by about Rs 11,000 crore every year. This might provide depth to the Government Securities market.

Experts believe that all of the above changes would make the provident fund scheme more employee friendly and help enhance the social security net to people who are currently not covered. However, you should not depend entirely on Provident Fund for your retirement. Start building a kitty for your retirement from the time you earn your first salary.