Page 11 - Banking Finance September 2018

RBI CORNER

RBI hikes interest rates Govt seeks RBI's views on

Reserve Bank of India has again raised the interest rate back to back for the merger of public sector
first time in almost five years to curb inflation
and pre-empt a rout of the rupee as the global banks
trade war escalates. The government has asked the Re-

The central bank's six-member monetary policy serve Bank
committee voted 5-1 to raise policy rates by 25 of India for
basis points to 6.5%. This is the first time since its sugges-
October 2013 that RBI has raised rates in con- tions on
secutive meetings of its rate-setting panel. It raised interest rates by 25 basis specific
points in its June meeting. public sec-
tor banks that could be merged in a
The possibility of another rate hike this financial year remained as RBI governor
Urjit Patel reiterated his intention to stick to the 4% inflation target and indicated bid to achieve synergy.
upside risks to the target because of the larger-than-average increase in minimum "The government has requested the
support price (MSP) for summer-sown crops and volatility in crude oil prices. "We RBI for views as well as suggestions
have been away from the 4% (CPI) target for several months now. And we took regarding specific possible combina-
two steps. One in June and one in August to maximize our chances that we don't tions to achieve scale and synergy for
drift away from 4% and we move towards 4% on a durable basis," Patel said. appropriate consideration," Minister
of State for Finance Shiv Pratap
The MSP hike is the primary factor stoking inflation this year, RBI said. The
government has fixed MSP at 150% of the cost of production of all kharif crops. Shukla said in a written reply in the
"This increase in MSPs for kharif crops, which is much larger than the average Rajya Sabha. The government felt
increase seen in the past few years, will have a direct impact on food inflation there might be various approaches on
and second round effects on headline inflation," RBI said in its policy statement. the merger of PSBs, and the RBI's
views could act as a guiding principle,
RBI also highlighted its concerns over crude oil prices, which remain elevated, a senior finance ministry official said.
despite seeing a slight moderation. The committee also voted to keep its policy
stance neutral, keeping its options open for further rate hikes. One reason for In August last year, the government had
the neutral stance was the potential impact of trade tensions between the US approved a framework for the merger
and China. "Few months of turbulence are now behind us. It looks like this is of PSBs. The Centre had said the
likely to continue. Trade skirmishes evolved into tariff wars. We are possibly at merger proposal should ideally start
the beginning of a currency war," said Patel. from the board of banks and be "solely
based on commercial considerations."
RBI buys Gold for first time in 9 years, says report The government had constituted a
The Reserve Bank of India (RBI) has bought 8.46 tonne of gold in financial year group of ministers, known as an al-
2017-18, the first purchase of yellow metal by the apex bank in almost nine ternative mechanism, for considering
years, a report said. RBI held 566.23 tonne of gold as on June 30, 2018,com- merger proposals from PSBs. Shukla
pared with 557.77 tonne as on June 30, 2017, according to RBI's latest annual said the alternative mechanism had
report for 2017-18. not received any proposal from PSBs
so far. "No timeline has been fixed
"The increase is on account of addition of 8.46 tonne of gold during the year,"
for merger of public sector banks,"
the report said. Last time the apex bank purchased gold was in November 2009,
when it had bought 200 tonne of yellow metal from the International Monetary the minister said in his response.
Fund (IMF). The group of ministers was supposed
to consider proposals from banks, di-
Of 566.23 tonne of gold reserves, 292.30 tonne is held as backing for notes and
is shown as an asset of the Issue Department, and the balance 273.93 tonne is rect banks to examine the proposals
treated as an asset of the Banking Department. The value of gold held as asset for amalgamation, and receive in-
of Banking Department rose by 11.12 per cent to Rs. 69,674 crore as on June puts from the RBI before according
an in-principle approval.
30, 2018,from Rs. 62,702 crore as on June 30, 2017.

BANKING FINANCE | SEPTEMBER | 2018 | 11