Daily Current Affairs for UPSC CSE
- Monetary Policy
- Single Block Multiple Debit Functionality of UPI
- Facts for Prelims
1 . Monetary Policy
Context: The Monetary Policy Committee (MPC) of the Reserve Bank of India recently increased the repo rate by 35 basis points (bps) to 6.25%, and the Standing Deposit Facility stands raised to 6%.
Latest Monetary Policy
- MPC in a majority view decided to withdraw the accommodative stance and increased the repo rate by 35 basis points (bps) to 6.25%, and the Standing Deposit Facility stands raised to 6%.
- Since May, the board has now increased the key rate by 225 bps in FY23.
- A 100 basis points equal one percentage point.
- It also marginally lowered the GDP projection to 6.8% for 2022-23, with the third quarter registering 4.4% growth.
Factors behind the decision
- Inflation- Inflation is expected to be 6.7% this year, with CPI inflation for the first quarter of 2023-24 projected at 5% and the second quarter at 5.4%
- It reduced from a five-month high of 7.41 percent in September, 2022.
- However, the fact that it continued to be above the central bank’s acceptable limit of 2 to 6 percent for a tenth consecutive period prompted RBI to raise the repo rate for the fifth time.
- Rupee and US Fed Rates- Rupee has depreciated due to U.S. Fed’s monetary tightening but rupee has appreciated by 3.2% in real terms even as several other currencies have dropped.
- Ukrain-Russian war has severely affected energy and food prices around the world.
- Though prices have receded somewhat, inflation remains high.
- No country is spared the ill effects of these large shocks, but emerging market economies that are dependent on food, commodities, and fuel imports are the worst hit.
RBI’s assessment of the economy
- Passenger vehicle sales and domestic air passenger traffic growth remained robust and rural demand is recovering.
- The drag from net external demand was further accentuated in October, as merchandise exports contracted over 12% in October.
- PMI for Manufacturing and Services also expanded in November. Both manufacturing and Services PMIs in November are among the highest in the world.
- Construction activity is picking up after the monsoon as shown by high growth of steel and cement output.
- Friend shoring- The practice of relocating supply chains to countries where the risk of disruption from political chaos is low. This has happened specially in the wake of war and Covid-19.
- Liquidity- Overall system liquidity remains in surplus and are likely to improve in the period ahead due to factors, which include moderation in currency in circulation in the post-festive season and higher forex inflows due to the return of foreign portfolio investors.
- The growth of services exports, mainly contributed by technology, business services, and travel, continues to be robust.
- India’s remittances are expected to rise from 89.4 billion dollars in 2021 to over $100 billion this year.
Policy Stances of RBI
- Accommodative Stance
- Accommodative stance means the central bank is telling the market to expect a rate cut anytime
- Usually, this policy is adopted when there is slowdown in the economy.
- Neutral stance
- Neutral stance doesn’t have any particular meaning. This means anything can happen anytime means the RBI would have the flexibility to either increase or decrease the policy rates
- Tight and Calibrated Tightening stance
- Tight – It indicates an impending rate hike
- Calibrated Tightening – RBI would either keep the rates constant or increase the rates.
Monetary Policy Committee
- RBI Act, 1934 provides for an empowered six-member monetary policy committee (MPC) to be constituted by the Central Government.
- The first such MPC was constituted in 2016.
- Governor of the RBI;
- Deputy Governor of the RBI in charge of Monetary Policy;
- one officer of the RBI to be nominated by the Central Board;
- Three people to be appointed by the Central Government
- Governor of the Reserve Bank of India is the ex-officio Chairperson of the committee
- Members hold office for a period of four years or until further orders, whichever is earlier)
- It determines the policy repo rate required to achieve the inflation target.
- The MPC is required to meet at least four times in a year.
- The quorum for the meeting of the MPC: four members.
- Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote.
Direct and Indirect instruments used for implementing monetary Policy
- Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the Liquidity Adjustment Facility (LAF).
- Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF
- Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term repo auctions. Progressively, the Reserve Bank has increased the proportion of liquidity injected under variable rate repo auctions across the range of tenors. The aim of term-repo is to help develop the inter-bank term-money market, which in turn can set market-based benchmarks for pricing of loans and deposits, and hence improve transmission of monetary policy. The RBI also conducts variable interest-rate reverse-repo auctions, as necessitated under market conditions.
- Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks to the banking system
- Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.
- Bank Rate: It is the rate at which the Reserve Bank is ready to buy or re discount bills of exchange or other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes.
- Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India.
- Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to maintain in safe and liquid assets, such as unencumbered government securities, cash and gold. Changes in SLR often influence the availability of resources in the banking system for lending to the private sector.
- Open Market Operations (OMOs): These include both outright purchase and sale of government securities, for injection and absorption of durable liquidity, respectively.
- Market Stabilization Scheme (MSS): This instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through sale of short-dated government securities and treasury bills. The cash so mobilized is held in a separate government account with the Reserve Bank.
2 . Single Block Multiple Debit Functionality of UPI
Context: The RBI in its monetary policy committee (MPC) meeting said it will introduce single block and multiple debits functionality in payments done through the unified payments interface (UPI).
About the new feature
- The capabilities of UPI will be enhanced by introducing single-block-and-multiple-debits functionality.
- Customers using UPI can use the single block feature to block certain amounts in their bank accounts for specific payments.
- A major difference between the mechanism is that at present, there is only single debit transactions functionality for a single block in the UPI.
- In other words, customers can only block one debit transaction in their accounts for their choice of payment.
- But with the new single block and multiple debits feature, customers can block multiple transactions on their account for specific transactions which will in turn make automated payments easier and quicker.
- This feature will significantly enhance the ease of making payments for investments in securities including through the retail direct platform as well as e-commerce transactions.
How does the new functionality work?
- A customer will be able to block an amount for a specific merchant, who can keep debiting from the same blocked amount until it gets exhausted. For example, you can give a mandate to an e-commerce merchant where in a certain amount will be blocked for buying goods and once the goods get delivered, the money will be debited.
- This means that funds remain in the customer’s account till the actual delivery of goods or services. Merchants, on the other hand, will also be assured of timely payments once the goods are delivered, as the mandated amount is already blocked.
- “This new functionality of ‘single-block-and-multiple debits’, will enhance the ease of making payments in the e-commerce space. It will result in a ‘win-win situation’ for both merchants and the customers. The merchants will get assured timely payments, while the customers can pay by blocking the amount in their account, i.e. there is a commitment to pay but the actual amount will be transferred when the actual goods are delivered. In fact, we may see many customers who would prefer cash on delivery, use UPI mandates for payments, in the coming months.
- The single-block-and-multiple-debits functionality can be used for several purposes like:
- E-commerce transactions
- Hotel bookings
- Purchase of securities in the secondary capital market
- Purchase of government securities using the RBI’s Retail Direct scheme.
- The RBI will issue instructions to the National Payments Corporation of India (NPCI), which runs and manages UPI, on this functionality shortly.
- Currently over 70 lakh autopay mandates are handled every month and more than half of Initial Public Offer (IPO) applications are processed using the block feature of UPI.
- This new functionality will be important in building the framework for blocking money for secondary market trades, a mechanism called Application Supported by Blocked Amount (ASBA).
How will the new feature be used for e-Commerce Orders?
- Currently, e-commerce has two major payment options — prepaid (online payment) and postpaid (cash-on-delivery). under the new system, a customer can give a mandate to the merchant whereby a certain amount will be blocked to purchase goods and once the goods are delivered, the money will be debited.
- Since customers will be able to block funds in their accounts for various payments, it will facilitate in making smoother e-payments and increase the efficiency of online checkouts during e-commerce transaction.
- The RBI’s announcement around increasing the capacity of UPI by introducing single block and multiple debits functionality, will enable users to block funds in their account, which can be debited at the time of need. This will make it more convenient to make
- Unified Payments Interface (UPI) was launched by the NPCI in 2016 in conjunction with the Reserve Bank of India (RBI) and the Indian Banks Association (IBA).
- It is an advanced version of Immediate Payment Service (IMPS)- round–the-clock funds transfer service to make cashless payments faster, easier and smoother.
- UPI is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments into one hood.
- UPI is currently the biggest among the National Payments Corporation of India (NPCI) operated systems including National Automated Clearing House (NACH), Immediate Payment Service (IMPS), Aadhaar enabled Payment System (AePS), Bharat Bill Payment System (BBPS), RuPay etc.
- The top UPI apps today include PhonePe, Paytm, Google Pay, Amazon Pay and BHIM, the latter being the Government offering.
- Data from the National Payments Corporation of India (NPCI) noted that transactions through UPI in November 2022 crossed 731 crores in volume, totaling more than Rs 11.90 lakh crores.
- As part of an agreement, India’s UPI will be linked to Singapore’s PayNow.
3 . Facts for Prelims
Liquidity Adjustment Facility-
- A liquidity adjustment facility (LAF) is a tool used in monetary policy, primarily by the Reserve Bank of India (RBI) that allows banks to borrow money through repurchase agreements (repos) or to make loans to the RBI through reverse repo agreements.
- This arrangement is effective in managing liquidity pressures and assuring basic stability in the financial markets.
- The RBI introduced the LAF as a result of the Narasimham Committee on Banking Sector Reforms (1998).
- LAF’s can manage inflation in the economy by increasing and reducing the money supply.
- It does so by increasing the repo rate, which raises the cost of servicing debt. This, in turn, reduces investment and money supply in India’s economy.
- Liquidity adjustment facilities are used to aid banks in resolving any short-term cash shortages during periods of economic instability or from any other form of stress caused by forces beyond their control.
- Various banks use eligible securities as collateral through a repo agreement and use the funds to alleviate their short-term requirements, thus remaining stable.
- The facilities are implemented on a day-to-day basis as banks and other financial institutions ensure they have enough capital in the overnight market