Repo Rate Unchanged, Alternative Investment Uptick, Continuous Clearing of Cheques, and More This was the 50th meeting of the Monetary Policy Committee which kept the repo rate unchanged while making new announcements

On Thursday, the Reserve Bank of India announced the decision to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50 per cent. The last change in the key rate was in February 2023 when the apex body hiked the repo rate by 25 basis points to 6.50 per cent from 6.25 per cent. The rate is the rate at which banks deposit money with RBI.

Subsequently, the standing deposit facility (SDF) rate remains unchanged at 6.25 per cent while the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent.

"The MPC decided to keep the policy repo rate unchanged at 6.50 per cent in this meeting. The commitment of monetary policy to ensure price stability would strengthen the foundations for a sustained period of high growth. Hence, the MPC reiterated the need to continue with the disinflationary stance of withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth," said Shaktikanta Das, Governor, Reserve Bank of India.

Additionally, he flagged a big worry for banks as retail money finds its way into alternative investment routes. "It is observed that alternative investment avenues are becoming more attractive to retail customers and banks are facing challenges on the funding front with bank deposits trailing loan growth. As a result, banks are taking greater recourse to short-term non-retail deposits and other instruments of liability to meet the incremental credit demand," Das said. For the uninitiated, alternative investment refers to a financial asset that falls outside traditional categories such as equity, income, or cash.

This may potentially expose the banking system to structural liquidity issues. Das advises that banks should focus more on mobilizing household financial savings.

Recently, Das highlighted households increasingly choosing capital markets over traditional banks for investing or storing their savings, "While bank deposits continue to remain dominant as a percentage of the financial assets owned by the households, their share has been declining, with households increasingly allocating their savings to Mutual Funds, Insurance Funds, and Pension Funds."

Post the CrowdStrike-Microsoft outage and WazirX hack, he hinted that banks and financial institutions must build appropriate risk management frameworks in their IT, cybersecurity and third-party outsourcing arrangements to maintain operational resilience. "The outage demonstrated how a minor technical change, if it goes haywire, can wreak havoc on a global scale. It also showed the fast-growing dependence on big-techs and third-party technology solution providers," he said.

The governor also announced the establishment of a new cheque-clearing mechanism which will see cheques be cleared within a few hours on the day of presentation, "This will speed up cheque payments and benefit both the payer and the payee."