The Reserve Bank of India (RBI) has rolled out a series of developmental and regulatory policy measures aimed at strengthening liquidity, boosting financial markets, ensuring better regulation, enhancing financial inclusion, and embracing technological advancements in the financial sector. These measures are spread across six key areas: Liquidity and Financial Markets, Regulation, Communication, Financial Inclusion, Payment Systems, and Fintech. Let’s break down some of the significant changes announced by the RBI.
I. Liquidity and Financial Markets
Reduction in Cash Reserve Ratio (CRR)
One of the major announcements in the RBI’s latest policy measures is the reduction in the Cash Reserve Ratio (CRR) for all banks. The CRR will be cut by 50 basis points (bps) in two phases — 25 bps each — bringing it down to 4% of Net Demand and Time Liabilities (NDTL), effective from December 14 and 28, 2024. This move is expected to release primary liquidity of ₹1.16 lakh crore into the banking system, easing liquidity conditions and potentially lowering borrowing costs for businesses and consumers.
Interest Rates on FCNR(B) Deposits
The RBI has raised the ceiling on interest rates for Foreign Currency Non-Resident Bank (FCNR(B)) deposits to attract more foreign capital. Effective December 6, 2024, banks can offer deposits with a maturity of 1 to less than 3 years at interest rates not exceeding the Overnight Alternative Reference Rate (ARR) plus 400 bps, and for deposits with a tenure of 3 to 5 years, the ceiling is set at ARR plus 500 bps. This measure will remain in place until March 31, 2025, giving banks the opportunity to raise more foreign currency deposits at higher rates.
Expanding the FX-Retail Platform
In a move to enhance transparency and accessibility for foreign exchange transactions, the RBI is expanding the reach of the FX-Retail platform by linking it with Bharat Connect, operated by NPCI. This integration will allow users, including small businesses and individuals, to purchase foreign currency, such as US dollars, directly via apps offered by banks or payment service providers. Initially, the focus will be on enabling the purchase of US dollars, with future expansions planned for other currency exchanges and user categories.
Secured Overnight Rupee Rate (SORR)
The RBI has announced the introduction of the Secured Overnight Rupee Rate (SORR), a new benchmark based on secured money markets, such as basket repo and TREP. This is a step towards improving the credibility and functioning of interest rate benchmarks in India. The SORR will replace the current MIBOR (Mumbai Interbank Outright Rate) benchmark and enhance the development of the interest rate derivatives market in India.
II. Regulation
‘Connect 2 Regulate’ – Open Regulation Initiative
The RBI has launched the ‘Connect 2 Regulate’ program as part of its ongoing RBI@90 commemorative events. This initiative will enable stakeholders to submit their ideas, concept notes, and case studies on regulatory topics. A dedicated section on the RBI’s website will facilitate this engagement, ensuring that the regulatory process remains inclusive and transparent.
III. Communication
Introduction of Podcast Facility
To further enhance public awareness and communication, the RBI is introducing podcasts as an additional medium for disseminating information. This initiative will help explain policy decisions, provide updates, and address public queries in a more accessible format, reaching a wider audience and improving transparency in the RBI’s communications.
IV. Financial Inclusion
Collateral-free Agriculture Loan Limit Enhancement
In a bid to support small and marginal farmers, the RBI has increased the limit for collateral-free agriculture loans from ₹1.6 lakh to ₹2 lakh. This will make it easier for farmers to access credit from the formal banking sector, aiding in agricultural growth and financial inclusion.
V. Payment Systems
Pre-sanctioned Credit Lines through UPI
In a groundbreaking move, the RBI has extended the scope of UPI to include pre-sanctioned credit lines, allowing Scheduled Commercial Banks and Small Finance Banks (SFBs) to offer small-ticket, low-tenor credit products through UPI. This initiative aims to expand credit access to ‘new-to-credit’ customers, especially in underserved areas.
VI. Fintech
Framework for Responsible AI in Financial Sector
As AI and machine learning technologies continue to transform the financial sector, the RBI has proposed the creation of a committee to develop a framework for the responsible and ethical use of AI. This initiative will focus on minimizing risks such as algorithmic bias, data privacy issues, and ensuring transparency in AI-driven financial services.
AI Solutions for Identifying Mule Accounts
The RBI is also leveraging artificial intelligence (AI) to combat digital frauds in the financial sector. The ‘MuleHunter.AI’ initiative is being piloted to identify mule bank accounts that are commonly used to facilitate frauds. This AI-driven solution is already showing promising results in collaboration with public sector banks.
