RBI keeps policy rates unchanged

Reading Time: 4 minutes

It was an eventful week that went by. The RBI had its bi-monthly meeting to announce its key policy decisions – the most important being its stance on benchmark interest rates – the REPO and reverse REPO rates. Among other things, it also outlined the economic outlook for the future and how it hopes to ween off the threats posed by the current healthcare crisis that grips the world. Before getting to those updates, let’s first look at an RBI policy that many might not have heard of…

Matter of Fact

We all hold currency notes, right? And currency is essentially nothing but paper – one which serves as a medium of exchange. However, currency notes often get mutilated, soiled or damaged. In that case, you could walk into any bank, and ask for an exchange of such notes. Great, isn’t it? But have you ever wondered what happens to the notes after they’re exchanged?

Believe it or not, the RBI has a dedicated policy for dealing with such notes – the Soiled Note Policy. As part of this policy, until 2001, such notes were burnt/incinerated. But because it was not environment-friendly, this policy was scrapped – and instead, these notes started to be shredded and turned into a variety of things – briquettes which could be used as fuel in rural and industrial areas, paper weights, files, calendars, etc. Quite cool, isn’t it? Imagine using calendars or files that were previously valuable currency! 😛

Ever wondered what the RBI does with damaged currency notes? Till 2001, the notes were burnt, but in order to be environment friendly, it is now shredded and turned into briquettes (used as fuel), calendars, files, paper weights, etc.. Click To Tweet

Markets Update

Nifty 50
1.27% ▲
1.15% ▲
Nifty 500
1.80% ▲
Bank Nifty
0.53% ▲

Benchmark indices shrugged off rate cut disappointment to close the week in green.

The Big Picture

  • Last week, the RBI’s Monetary Policy Committee (MPC) kept key interest rates unchanged on fears that inflation could surge in coming months as localized lock-downs continue to disrupt supply chains.
  • The permissible loan-to-value ratio (LTV) on gold loans for non-agricultural purposes was increased to 90% from 75% earlier. The LTV ratio measures the amount of loan granted for every ₹100 worth of gold kept as collateral. Basically, if you keep ₹1,000 worth of gold as collateral with the bank, it will give you a loan worth ₹900. That makes the LTV 90%. Before this, the permissible LTV ratio was only 75%.
  • The move is expected to help households by allowing them to take higher loans against their gold.
  • In a major relief to corporate and retail borrowers, RBI also permitted banks to go for a one-time restructuring of loans that are facing stress due to the COVID-19 crisis. Basically, if a borrower is unable to pay the interest on loans because of the crisis, banks might reduce the interest rate it initially charged, in the hopes that the borrowers can pay comfortably.
  • This measure was taken to preserve the soundness of the Indian banking sector.
  • The India Manufacturing PMI declined to 46.0 in July 2020 from 47.2 in the previous month, below market consensus of 47.8.
  • The India Services PMI increased to 34.2 in July 2020 from 33.7 in the previous month, but below market expectations of 38.8.

Investing Insights

Monetary Policy 101

In tandem with the developments of the week, we thought it would only be fitting to highlight one of our previous blog posts that dives into the finer details of the monetary policy and its far reaching implications. As a concept and policy tool, monetary policy has tremendously evolved over decades, and having a brief understanding helps develop a sense of the economy at large.

Monetary policy is one of two broad policy tools (the other being fiscal policy), that are at the governments’ disposal to keep the health of an economy in check while ensuring a sustainable level of economic development. This write-up explores modern monetary policy and its usefulness in the current scenario. Read it here.

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Naveen K R @https://twitter.com/naveen_khadri

Investment Associate at smallcase Research.

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Tags: customise smallcase manufacturing pmi monetary policy monetary policy committee NIFTY50 rbi reserve bank of india sensex services pmi smallcase smallcases soiled note policy

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